Pre-distribution and Post-distribution

Note: This is an outline of thoughts rather than some type of persuasive argument – in time I should make an effort to flesh out all the little bits in this, but it is just a run down of my current general thoughts.  Take it as such and feel free to provide constructive feedback 😉

Anyone who reads this who also read my writing pre-2014 will remember that I was a strong post-distributionalist when it comes to social insurance policy.  To the point where the term pre-distribution (or predistribution) did not appear on TVHE when I did a search.

Since then the economic environment has changed and I have spent more time considering these issues.  So have my views changed?  Let’s consider the issue.

Tl;dr No, but I think the terminology can be used more clearly. With regards to redistribution – if our concern is the distribution of income alone pre-distributionalist policies are indirect and inefficient.  But pre-distribution policy prescriptions have relevance when discussing issues of transition – which is essentially insurance from shocks, and the provision of job/income security (as apart from a security net).  Such insurance can be costly, but is still worth discussing in this frame. Furthermore, if we stretch the term pre-distribution far enough it becomes ridiculous – sure the whole study of economics concerns the distribution of income, but the name is used for a subfield for a reason.

Definitions

Contrary to Wikipedia pre-distributionalist policies are not new.  Until the reforms of the Fourth Labour government in New Zealand, New Zealand social policy was heavily pre-distributionalist.  Now this, from the bat, suggests to me that my definition of pre-distributionalism (which is based on reading of welfare and tax policy history in Australiasia and Scandanavia where this term can be used to differentiate from tax-transfer policies) may differ from modern discussions (which I have not read).  That is fine by me but I will try to be clear on issues below so it is obvious what I am talking about.

So what is pre-distributionalism as I discuss it here?  I have always interpreted it as stating that a pre-distributionist redistributes the means and structures for generating income prior to trade occurring, rather than redistributing the income generated from trade (post-distribution).  In both cases the purpose of this policy is then to redistribute income to deal with some perceived inequity in society.

A post-distributionalist policy would be something like an unemployment benefit, while a pre-distributionalist policy would refer to a government guaranteed job at a given wage rate for a worker in an industry that is fading away.  A post-distributionalist policy would be to provide a family benefit for those with children, while a pre-distributionalist policy would be to influence wage rates in industries where parents tend to work to increase their market incomes.  Both are redistributing income and providing a form of income security – but the incentives, costs, and benefits differ.

Now I’ve heard that pre-distributionalism can be steered away from the line that it is redistributional – instead stating that they are preventing inequalities from occurring at the source.  I dislike this, as it makes the success of pre-distributionalist policies untestable – if income inequality was to fall they would claim success (through redistribution) and if it didn’t they would claim that the underlying inequality they were dealing with was dealt with by definition.  If there is a “non-income” type of inequality we are targeting, then any dichotomy between pre and post-distributionalist policies is false, as the only real point of post-distributionalist policies is to change the distribution of income.  Note:  Many “inequalities” are in fact unobservable or are justifiable.

But this cuts to the heart of the issue – if we are going to evaluate policies we actually need to define what the aim of the policy is.  In this way I would argue that we can split policy targets into three when it comes to setting these policy schemes:  The first two are static – the level and dispersion of income/final goods and services.  The third is dynamic, in the face of shocks who bears the risk.

You may argue there is a fourth string – that the structure of returns are efficient and equitable!  If that is where pre-distributionalists are referring to then all they are saying then the entire term is pointless for two reasons – as it refers to all policies that are not tax and benefit policies, and refers to their final evaluation rather than a description of their distributional properties!  Note:  Post-distributionalists don’t get off scott-free here for jumping too quickly to welfare evaluation – this is a whole other kettle of fish though.

So yes these policies influence the distribution of income, but the distribution is not the “purpose” of them – instead they are targeting some other equity or efficiency principle.  This is the same category error people make with monetary policy and financial stability.

What do I mean – yes we should talk about the distributional impact of all policies, but the “target” of all policies shouldn’t be focused on its impact on the distribution of income … or even worse some undefined inequality that we will just say is solved as a result of our pet policy 😉 .

Note:  If someone was to say “I think competition policy is more relevant to welfare than something that merely targets reducing the observed inequality in incomes” I would say “yup”.  But by saying you are a type of “distributionalist” you are stating that the primary concern of your discipline is the distribution of income.  Also remember that someone who focuses on post-distributionalist policies doesn’t disavow other policies – they just aren’t trying to move every potential policy recommendation into their field of research …

The distribution of income 

What is the distribution of income?  We can think about it in the following way – we have some characteristics (I’m male, 32, eat poorly, have experience working as an economist, and like to argue far too much) and the market offers us a set of potential jobs given these characteristics.  They offer different combinations of income, work satisfaction, and leisure – we then fall into one in some way.  On top of that if we are endowed with resources we can save them in some way where there is a set of risk-reward opportunities for our saving – these generate income.

Nice.

So the distribution of income depends on endowments (savings, characteristics) and the return on offer for these.

Nothing in this about the fairness generating the process – and the process itself is very much a function of policy.  However, after we have introduced a series of policies that give a “structure of returns that are efficient and equitable” is the outcome just?  Maybe, but maybe not – due to insufficient information about the income generating process or due to luck.

As a result, we in turn justify redistribution.

Redistribution of income

If all we care about is income alone, then post-distributionalist policies get us where we want to go with certainty – in that way, they give us greater income security and horizontal equity over the population as a whole.

For example a job guarantee may offer an individual greater income security than the existence of a safety net – but if those guarantees are in areas that are unprofitable this is really a benefit payment from society.  By making broader society bear the risk that the job has value you creating uncertainty about the required tax.  Furthermore as this person has a higher guaranteed income than people with otherwise identical characteristics by virtue of having this job, there is horizontal inequity.

Furthermore, we can do a better job of targeting with post-distribution – as at this point we have “observed” things such as luck, or the product of unobserved characteristics (observed income).  As a result, redistribution that will have been missed by pre-distribution gets picked up by post-distribution – but this does not happen the other way.

In terms of efficiency it is often assumed that post-distributional policies are superior to pre-distributional policies.  After all, job guarantees keep people working in roles where they are producing little, while a social safety net clearly demarcates the difference between work and benefit income – incentivising people to look for roles where their work is valued.

Job schemes in New Zealand helped to hold down the reported unemployment rate in New Zealand through the 1970s and early 1980s, but they were incredibly wasteful – in most cases providing people differential benefit levels for not doing much.

But this does ignore something – people were still going to a job, a job they did not believe would disappear.  And that leads us into another separate issue.

Economic security

Now, post-distributional policies are sufficient for economic security when shocks are only very small – they provide a safety net, and people are relatively fluidly able to move being job types.  Such policies are set given considerations of relative status and equity already and so there is no need to consider more active intervention.

But technological change, globalisation, and the GFC (which arguably helped to speed up some of these changes) imply a situation where the return to the skills people have has changed significantly – with some people rewarded for training in areas that are complementary to technological change while others have seen their income and job prospects disappear.

We should not want to make the past reappear.  Technological change and globalisation generate wealth.  But, arguably, we may believe that such a change is only fair if the losers are compensated by the winners – if the compensation we discuss for Kaldor-Hicks efficiency actually takes place.

Now this is an issue I find incredibly difficult.  This is an area I do not envy policy makers.  We cannot just tax the winners from globalisation and give income to those who, in the absense of change, would have been better off as:

1. We don’t have sufficient information
2. If we view it in too static a sense, it may excessive mute incentives for people to develop skills that suit the new reality
3. Income isn’t the only issue that matters – pride in having a task you perform well and the status that gives you in your community are also important, and are lost.

As a result, arguably a potential pareto improvement from a policy involves both pre and post-distributionalist policies.  Furthermore, the cost-benefit analysis of such policy changes needs to count such transitional shocks.

Now, this is already how economists generally consider such issues.  Look at this article by Benje Patterson from 2013.

A generation of workers in Southland’s labour market have become institutionalised in the Tiwai environment.  Subsidised power led to the creation of well-paid positions and accrual of skills that would not have otherwise been demanded by the wider labour market.  This artificial disjoint would leave some former Tiwai employees with a tricky transition into comparably paying employment should the smelter close.

Parallels can be drawn between the current situation for Tiwai’s employees and car assembly workers left jobless in the late 1990s. Both industries flourished because of some form of government intervention.  Tiwai survives because of preferential power pricing, while New Zealand’s car assembly industry only ever existed due to sizeable import tariffs on cars.

Not surprisingly, when the government decided to withdraw these protective motor vehicle tariffs in 1998, domestic assembly plants could not compete with the price of imported vehicles and were forced to shut down.  These closures left thousands of car assembly workers jobless.  As with Tiwai, many of these assembly workers had dedicated a large proportion of their working life to an industry whose labour demands were quite different to those of New Zealand’s broader labour market.  However, despite this disjoint, additional support from the government to help with their transition into other employment was not forthcoming.  The government gave a mere $400,000 of funding for communities affected by car assembly job losses on top of normal social support and employment assistance.

I find this lack of additional support somewhat callous.  Car assembly workers had acquired a specific skillset on the understanding that society wanted to support the industry, as a result, the government’s decision to remove car industry tariffs essentially boiled down to changing an implicit social contract.  The government should have recognised its role in the problem and gone out of its way to assist these workers’ reintegration into the labour market.  It was a change in government policies that undermined the value of the human capital these workers had developed – which suggests that as a matter of fairness, these workers should be compensated for that loss.

Pre-distributionalist policies (at least the ones that make sense) occur within the scope of compensation for an economic shock.  These are positive sum games where some of the people involved have lost out – if we want to make sure people in society are still willing to play these games, we have to ensure that they aren’t (and don’t feel) taken advantage of.

If this is the crux of the discussion around pre-distributionalism then it is worth talking about.

If pre-distributionalism is really about power structures and competition policies using different terminology then that is nice and all, but I don’t see the need when a clearly communicated prior literature on these issues already exists – and requires absolutely no conflict with post-distributionalist policy.