Rhode Island’s Redistributive Mindset
In a recent piece in National Review (“Beyond Tax Cuts”), Reihan Salam mentioned a study by economists Alberto Alesina and George-Marios Angeletos called “Fairness and Redistribution” (PDF). As Salam summarized:
Their argument was that our beliefs about fairness shape our beliefs about redistribution. If you believe that the system works and that hard work is rewarded, you will favor low taxes and low levels of redistribution. If, in contrast, you believe that the system is broken and corrupt and that only insiders and cronies are rewarded, you will favor high taxes and high levels of redistribution.
Alesina and Angeletos conducted their study by comparing the attitudes towards fairness and redistribution in the United States and Europe. They note that while pre-tax income inequality is higher in the United States than Europe, the latter spends a greater portion of their GNP towards redistributive programs as well as having a much more intrusive regulation regime. They note that the difference is based on “social perceptions regarding the fairness of market outcomes and the underlying sources of income inequality.”
According to the World Values Survey, 60 percent of Americans to 29 percent of Europeans believe that the poor could become rich if they just tried hard enough; and a larger proportion of Europeans than Americans believe that luck and connections, rather than hard work, determine economic success.
Further, they determined that “the belief that luck determines income has a strong and significant effect on the probability of being leftist” and that, in the United States, “individuals who think that income is determined by luck, connections and family history rather than individual effort, education, and ability, are much more favorable to redistribution”.
Rhode Islanders seem to believe it is more important to be lucky, “who you know,” than to be good. And the state government and the various advocacy agencies and outlets continue to perpetuate this perception into reality. For, as Alesina and Angeletos conclude, it is possible for both the European (Rhode Island) and American philosophies to be right.
In the one…taxes are higher, individuals invest and work less, and inequality is lower; but a relatively large share of total income is due to luck, which in turn makes high redistribution socially desirable. In the other…taxes are lower, individuals invest and work more, and inequality is higher; but a large fraction of income is due to effort rather than luck, which in turn sustains the lower tax rates…
…from the perspective of the median voter: the one with lower taxes is superior. This is both because there are fewer distortions, more investment, and more aggregate income and because income inequality originates relatively more in ability than in luck. Poorer agents, however, may prefer the high-tax equilibrium, as it redistributes more from the rich to the poor. Also, the high-tax equilibrium provides more insurance against the risk of being born with little talent or willingness to work and may be preferred behind the “veil of ignorance” (that is, before the idiosyncratic shocks are realized).
In Rhode Island, then, it makes sense for individuals to follow the “European” model. It’s been this way for at least 70 years, so why stop now? And, as Alesina and Angeletos conclude, history is very much destiny unless politicians exhibit the fortitude to change the minds of the people.
[R]eforms of the welfare state and the regulatory system may need to be large and persistent to be politically sustainable. In practice, this means that policymakers need to persuade their electorates that, although such reforms may generate rather unfair outcomes in the short run, they will ultimately ensure both more efficient and fairer outcomes for future generations.
So the question is: are there enough Rhode Islanders concerned about the future? Or are they more worried about “getting theirs” in the here and now?
ADDENDUM: Alesina and Angeletos explain the historical antecedents that led to how redistribution and fairness are defined or prioritized in America and Europe. Basically, the structure of European society–ie; class differences–has acted as a brake on upward mobility “at least since medieval times.”
At the time of the extension of the franchise [voting], the distribution of income was perceived as unfair because it was generated more by birth and nobility than by ability and effort. The “invisible hand” has frequently favored the lucky and privileged rather than the talented and hard-working. Europeans have thus favored aggressive redistributive policies and other forms of government intervention. In the “land of opportunity [the United States],” on the other hand, the perception was that those who were wealthy and successful had “made it” on their own. Americans have thus chosen strong property protection, limited regulation, and low redistribution, which in turn have resulted in fewer distortions, more efficient market outcomes, and a smaller effect of “luck.” Today, the “self-made man” remains very much an American “icon”; and Americans remain more averse to government intervention than Europeans.
As Salam summarizes, these basic attitudes have served to perpetuate the systems already in place:
The irony is that a system in which the state plays a larger role in the economy is a state in which rent-seeking behavior is more pronounced. So a belief in the unfairness of the system often becomes a self-fulfilling prophecy. If the United States really is sliding into crony capitalism, as Thomas Frank and other liberals have forcefully argued, the solutions on offer from the Left — which promise a bigger, more active government — create new opportunities for privileged insiders to make large fortunes by trading on their political connections.