What Would James Buchanan Say About Inequality?

As many of you can see from my recent blog posts, I have decided to jump in the inequality debate (albeit with a focus for the subnational Canadian levels) by trying to assert which part of all inequalities should we be really worried apart. In response to my point that some of all the inequalities observed (a large part in my opinion) are not morally offensive, many reply that even those inequalities might create more “undesirable” inequality because (in the words of Miles Corak) “outcomes influence process“.

To a fan of public choice theory like myself, this theoretical argument has some appeal. The logic goes that the richest of the rich will be able to lobby more efficiently for policies that might create more inequality of the “undesirable” kind. Rich voters are often part of certain interest groups. These groups ask, amongst other things, for trade tariffs, entry regulations, subsidies, bailouts and obtain government contracts. So the argument that past outcomes (read: all inequalities) shape the process that will lead to future outcomes (read: more inequalities). And the vicious circle goes on.

The problem I have with this interpretation is that of the root of causation and the direction. I don’t believe that the link goes from inequality to government lobbying, but the reverse where government lobbying leads to more inequality. This forces me to return to a re-read of the late James Buchanan on inequality:

Are there any reasons for believing that the political order will generate a more nearly equaldistribution of income than a free market would generate (as seems to be commonly assumed)? What “rules” of political order are likely to generate more “equitable” outcomes? (…) But distributions are not chosen. Social outcomes, with their distributional characteristics “built in,” emerge from a complex interaction of individual agents, each pursuing his own ends and each connected to others under a set of prevailing rules.

In short, the rules of the game will define the levels of inequalities, both ethical and unethical. If you change the rules, not the inequalities, you will change the game.

If the rules of the game are that the Federal Reserve bails out bankers who took considerable risks at the expense of taxpayers, of course you will get more inequality. This was well-emphasized by Tyler Cowen in his survey piece when he pointed out that banking strategies were only sustainable under credible commitments from federal authorities that these banks would be bailed out and/or protected from assuming the totality of the risks they assumed. This grew profits beyond the social optimum point and attracted workers (of the most productive brand) into this industry which was bubbling.  The same can apply to managers of automobile companies who lobbied for bailouts after decades of poor managerial decisions but who still obtained large bonuses, severance packages and payment plans. Because of their wealth and influence, bankers and managers were well-placed politically to lobby Congress, the Federal Reserve and other political decision-makers in their favour.

Then, the solution to these morally reprehensible inequalities is not to redistribute the income of these richer individuals but to stop the root causes of these inequalities! The public choice argument in the inequality debate is to change the rules of the game, not to redistribute the fruits of the badly played game.  If James Buchanan was still alive, I would expect him to say that ending the commitment to too-big-to-fail would stop incentivizing the distribution of income in favour of politically connected financial executives.

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