Redistribution Shift: The Hidden Cost of Redistribution

How redistribution naturally induces more demand for it and deter its own supply.

This essay is about a second-order cost of redistribution that is systematically underestimated. I call it the The Redistribution Shift.

The Redistribution Shift

Let’s say that as a matter of policy, we take money from a [contributing group] and give it to a [recipient group].

Then, there will be a knock-on effect: the [contributing group] will tend to shrink and the [recipient group] will tend to expand.

This is The Redistribution Shift. It can largely be understood in terms of induced demand and tax deadweight loss.

The Redistribution Shift can be good or bad. It can be overcome or embraced. It all depends on the situation.

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If we take money from the active population and give it to retirees, then the active population will be pushed to shrink and there will be more retirees.

If we take money from employed people, and give it to unemployed people, there will be more unemployment.

If we take money from people measuredly abled, and give it to people measuredly disabled, the measured abled population will shrink and the measured disabled population will expand.

If we take money from the middle class, and give it to poor people, the middle class will face a shrinking pressure and the poor population will expand.

If we take money from successful companies, and give it to failing companies, companies will be less incentivised to avoid failing.

If we take money from native citizens, and use it to subsidise immigrants, there will naturally be more immigration.

If we take money from rich people, and give it to everyone else, rich people will get less and less money to their private name in the jurisdiction that is taxing them.

How does it work?

The Redistribution Shift manifests itself in many ways. Some are good, some are bad.

The Margin

Usually, it works by changing the behaviour of people at the margin.

What this means is that whilst there are many people who are firmly contributors or recipients, there are also many who are at the edge.

People who are hesitating about moving out of a country, old people who are hesitating about working one more year, unemployed people who are hesitating about staying unemployed for longer before taking a better job offer.

By taking money out of people, or giving it out to others, the balance tilts for many people. And this keeps happening for as long as the redistribution is on.

Examples of the Margin

The Redistribution Shift works by making more people identify as recipients. Most categories form a spectrum, like being disabled. The more money is taken from abled people and given to disabled people, the more people at the edge will decide to categorise themselves as disabled, and will present to their doctors as such.

This is pernicious. Whilst this makes the lives of recipients better, this constantly incentivises people to see and present themselves as recipient. I have written about some cultural ramifications of this problem in “The Responsibility of the Weak”.

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The Redistribution Shift works by making it more bearable to be part of a recipient group. The more money someone gets when they are unemployed, the more bearable it is to be unemployed. And the more people at the edge will decide to stay unemployed. A similar effect is at play with retirement, where more people will decide to retire earlier the more beneficial it is.

This is good, but unsustainable. Recipients are usually recipients for a reason. Making their life more bearable is good. But whilst this works well for short-term emergencies, growing the share of the population who takes more than they give doesn’t work: money always comes from someone.

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The Redistribution Shift works by making the contributors leave. People can be rich enough to easily move out and get, if not citizenship, residency in other countries. Many of them have a breaking point, past which they will decide to stop paying and leave.

This is unsustainable. It is ok to quash some contributions or push contributors out: sin taxes are a useful governance tool. But constantly reducing the size of the contributing population doesn’t work: money must come from someone.

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The Redistribution Shift works through fraud. The more money is taken from healthy people and given to sick people, the more people will fake being sick. The same is true for veteran benefits, or any type of benefits in general.

This is quite bad. Fraud should not be encouraged.

Direct Impact

Sometimes, the Redistribution Shift works in very direct ways. Rather than by impacting people at the margin, it directly impacts contributors or recipients in bulk.

Here are a few examples.

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The Redistribution Shift works by preventing deaths. For instance, the Redistribution Shift increases the number of disabled and homeless people by preventing their deaths.

This is very good. People must survive and thrive, and if redistribution can help with it, it’s good.

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The Redistribution Shift works by changing demographics. Child benefits are specifically about helping poor people with having children, taking money from richer contributors. Immigration benefits are specifically about attracting (when it’s economically useful) or hosting (when it’s socially good) foreign people.

This can quickly become dangerous. Sometimes, people start intending to change demographics through redistribution. It is an admitted goal of many communists that they want redistribution high enough to dismantle rich people as a class. It is an admitted goal in many ethnic conflicts to “redistribute” money from one ethnicity to another in order to pressure them.

What should we do?

When I talk about the Redistribution Shift with people, they often ask me if it means that we should stop all redistribution policies.

This sounds to me like a very extreme reaction to merely pointing out one unintended consequence of a very natural type of policy.

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In general, political discourse is extremely immature. Arguments are treated as soldiers.

Any case that a policy has a cost or a benefit is taken as being for or against it.

This makes sense when this is applied to politicians (or any influencer) spreading their message to audiences in the millions. They rarely care about the technical merits of their case.

But in actual political debates, treating arguments as soldiers is utterly stupid.

All policies have pros and cons, and we must be aware of them to make the correct choices.

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So, what should we do?

We should be aware of the knock-on effects of any policy. Sometimes, it is worth paying them, sometimes, it is not. Sometimes, they can even cleverly and cheaply be neutralised or bypassed.

However, when we ignore them, we can easily underestimate their cost or get screwed over by some easily foreseeable problem.

In the context of redistributive policies, here are a few principles that I think are worth keeping in mind.

Redistributive policies work against themselves. After a redistributive policy is passed, people change their behaviour in ways that will accentuate the need for redistribution and make it less sustainable. Thus, it is important to design them well and take into account second-order effects.

I am sceptical of “incentives” in general. I wrote an entire essay entitled “Incentives is Astrology for nerds”.

But national economic policy is one of the few cases where incentives do matter, because people will react, at the very least at the margin. (This is a variant of the Lucas critique.)

Redistributive policies are clearly good when they’re about de-risking. De-risking policies basically amount to strongly regulated insurance programs. For instance, this involves helping with sickness, with accidents, or with punctual unemployment.

In all of these cases, the redistribution policy is net positive. There is a clear demand for insurance there, from almost all of the productive population, and it can make sense to use the power of the state to benefit from economies of scale at the national scale whilst ensuring that nothing nefarious is happening.

Redistributive policies require a lot of trust. Trust in people not to fraud, trust that recipients are grateful, and trust in the government to catch fraud. Absent these, resentment towards the recipients will accumulate, and contributors will explicitly try to avoid contributing.

The level of trust that is required is very high. It is having contributors answer nicely to “If a random person from your polity came and asked you for money because they were retired / unemployed / sick, how much would it take for you to trust them and give them money?”

We do much too little to ensure this level of trust.

Redistributive policies require some give-and-take. To avoid resentment, beyond trust, it is important for contributors to get something out of giving. Otherwise, they’ll try to get out of it and their population will shrink.

This doesn’t need to be much. We humans can be motivated by mere recognition and gratefulness. Most of us work hard for our money, and giving it to others is commendable. So getting thanked for the giving often goes a long way.

We do much too little there too. We very often do the opposite, motivating redistribution not based on kindness and solidarity, but guilt and coercion.

Trying to directly change demographics is a big no-no. Possibly, a more enlightened society might be able to not screw it up. It might carefully investigate the pros and cons, the second-order effects, the impacts on the culture and the civility norms, etc. But no society is there.

In the meantime, I am quite wary of policies like mass immigration, or the renewed interest in technology-based eugenics. They are extremely hard to reverse with far-reaching consequences, far beyond our collective ability to form informed consent over.

Conclusion

Redistribution is a touchy topic.

But it is a very important one. Many people now understand the Government primarily as a Great Redistribution Machine, whose job is to decide who gets the money from whom.

And to some extent, they are right. I rarely see advocacy for Healthcare, Social Security and Public Education as great investment projects, but instead only as redistribution programmes motivated on grounds of fairness and equality.

These spending categories represent an extremely large share of Governments’ budgets. In 2022, it was roughly 50% of it in the US (at the federal level) and in the UK.

This is why it is important to think very clearly about redistribution.

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Here, I only mention one dynamic among many. This is not a condemnation of redistribution as a whole.

However, I believe it is a very interesting dynamic. I view the lack of foresight around redistribution as a potent example of a much deeper intellectual failure.

The failure to internalise that others react to what we do.

I’ll write more about it later :)

On this, cheers, and have a nice day!