I appreciate Will Wilkinson's taking the time to reply to my post, seeing as my post was regarding something he wrote back in mid-June. I call this a "semi-reply" because I actually agree with a lot of what Wilkinson wrote. But I'm going to make the case for preemptive redistribution as a response to very high levels of income inequality anyway, because I think Wilkinson takes a too narrow view of institutions in advanced countries. Institutions are dynamic, not static. People's desire to capture the state, on the other hand, is unwavering. First, the things we agree on. I agree that to justify preemptive redistribution, you have to be certain that absent redistribution, inequality-exacerbating state capture will occur. For the record, I don't think U.S. inequality is anywhere near the level required to justify preemptive redistribution. I was just trying to point out that a blanket assertion that income inequality is benign unless it was produced by some inefficient or unfair mechanism is logically false. Institutions can be altered by the wealthy to unfairly exacerbate inequality even if those wealthy people amassed their fortunes by completely legitimate means, and without the aid of unfair institutions. I take it that Wilkinson agrees with this as a theoretical proposition, since saying that the argument for preemptive redistribution faces "a high bar" implies that the argument could, in theory, get over that bar. Now the things we disagree on. If I understand Wilkinson correctly, he questions the direction of the causality—that is, he doesn't thinks high income inequality is likely to cause state capture in advanced countries. Here's Wilkinson:
[I]t doesn’t follow that because state capture and political predation generally cause high levels of income inequality that high levels of income inequality cause state capture and political predation. To make that inference requires a lot of supporting assumptions, most which strike me as false.This runs against all the evidence, and is actually inconsistent with some of Wilkinson's other arguments. 1. Income Inequality → Inequality-Exacerbating Institutions First of all, there's considerable historical evidence that high levels of income inequality lead to high levels of inequality in political power, which the wealthy then use to institutionalize high income inequality. This was one of the main findings in Engermann and Sokoloff's famous papers:
There are a variety of mechanisms through which the extent of inequality in a society might affect the character of institutions that develop. ... When political power or influence is concentrated among a small segment of the population, that group is able to shape policies or institutions to its advantage. We expect members of such elites to act in their interest, for example, by inducing the government to make investments and provide services they favor while being assessed for a less than proportionate share of the costs, or to define and enforce property and other sorts of rights in ways that treat them in a preferential manner. Some activity of this sort is present in all societies, as the distribution of political influence is never entirely equal, and those with more resources generally fare better in the competition over influencing the government. But the extent and ultimate impact of such activity can vary even across nominal democracies.The institutions were the mechanisms that exacerbated and prolonged the high levels of income inequality, but those particular institutions only existed because of the high levels of income inequality in the first place. Engermann and Sokoloff's results have been replicated by, among others, Bourgnuignon and Verdier (2000) and Easterly (2002). Easterly specifically addresses the direction of the causality:
[This] paper finds high inequality to be a large and statistically significant hindrance to developing the mechanisms by which economic development is achieved. These results are robust to a number of checks. ... The failure to find a significant effect of reverse causality from income to middle class share suggests that the inequality-development relationship much studied in the literature has the causality running from inequality to development.The natural response to this argument is to point out that advanced countries have institutionalized political equality through democracy. However, high levels of income inequality can often overwhelm nominal democratic political equality. Engermann and Sokoloff explain:
In a situation where there was relative political equality, however, economic inequality—as reflected in the relative scarcity of factor in somewhat elastic supply—might lead to institutions that greatly advantaged that scarce factor. Hence, economic inequality can sometimes ... exert more of an influence on the way institutions evolve than political inequality per se.In fact, the weight of the empirical evidence shows that the distribution of income in the U.S. closely tracks the distribution of political power, and that the causality runs from income inequality to political inequality. Larry Bartels has demonstrated that politicians are disproportionately responsive to rich voters, and not for benign reasons. Bartels found "surprisingly strong and consistent evidence that the biases ... in senators' responsiveness to rich and poor constituents are not primarily due to differences between rich and poor constituents in turnout, political knowledge, or contacting." I trust that Wilkinson wouldn't deny that in the U.S., in general, the more money you have, the more political power you have. As the historical evidence, shows, high levels of income inequality has led to the institutionalization of income inequality through state capture before. Tell me why it can't happen again. 2. Capture The concept of "capture" is poorly defined in the economics literature. In George Stigler's classic definition, capture occurs when "regulation is acquired by the industry and is designed and operated primarily for its benefits." Wilkinson seems to conflate capture with rent-seeking. Rent-seeking refers to the process of capturing the state. Just because the process of capturing the state isn't costly to the public doesn't mean that the subsequent effects of capturing the state won't be costly to the public. Industries spend their own money to capture the state; they then change the rules of the game to extract rents from the public. Wilkinson admits that capture occurs. He just doesn't think that rich people will band together to capture the state and change the rules of the game to further increase income inequality. But collective action isn't a prerequisite to capture. If just a few super-wealthy individuals band together to alter the institutions and exacerbate inequality, the result is still the same. All rich people don't need to be in on it. And if the object is to change the rules of the game to exacerbate income inequality, then the rich people who aren't in on it won't have a huge incentive to put their resources behind a campaign to oppose changing the rules. So what matters isn't the ability of the rich to coordinate; what matters is the political power of the rich relative to the general public. Once the rich have enough political power relative to the general public, we move beyond slight alterations to regulations, and into changing the rules of the game. But more importantly, once you've admitted that capture occurs, and that the rich have a greater ability to capture the state than the general public, then you can no longer claim that income inequality is benign unless it was produced by some unfair or inefficient mechanism. Now, you may say, "the solution is institutional reform, not preemptive redistribution." But my reply would be this: please tell me what institutional reform will make government immune to being influenced by money. It's never been done before in the history of the world, so while this kind of institutional reform may be the first-best option, I'm not holding my breath. In the meantime, if income inequality gets high enough that this kind of state capture is possible, then regardless of the mechanism that produced the income inequality, preemptive redistribution is justified. Like it or not, we live in a second-best world. Regarding preemptive redistribution, Wilkinson asks, "Why not suppose instead that when taxes on the wealthy rise, the wealthy become more interested in controlling the government?" This misses the point. Raising taxes on the wealthy would make them more interested in controlling the government, but the point is that it would reduce their ability to control the government. So that's my argument for preemptive redistribution. Again, I don't think U.S. income inequality is anywhere near high enough to justify preemptive redistribution. I just think that to focus solely on the mechanisms producing income inequality is to blind yourself to economic history, the empirical literature on capture, and frankly, reality.