Negative Consequence 5: Arbitrary Redistributions

A different negative of many government policies is arbitrary redistributions of income. Reasonable people can disagree about how much governments should transfer to the poor and whether government should redistribute from richer to poorer more generally (such as via progressive income taxation). But when the redistribution is random, or from low to high income, or just among people of similar income, it is all cost and no benefit.

Interventions cause arbitrary redistributions for two reasons. Many government policies aim to redistribute, but in stupid ways. Agricultural subsidies seek to help farmers, but this is not a sensible goal since most farmers are not poor. Tariffs, quotas and other trade restrictions are meant to protect certain industries, but this is a bad objective since market forces rather than political connections should determine which industries thrive and which fail. Bailouts for particular companies, such as General Motors in 1970s or the airlines after 9/11, are further examples.

Government also causes arbitrary redistribution even when policy has defensible objectives. Consider government construction projects, whether for housing, schools, roads, or hospitals. Governments typically contract out for this work. Some firms get the contracts and others do not. In principle government could auction off the work to the most efficient supplier, but in practice this is messy. Thus some companies – not necessarily the deserving ones – get rich. This redistribution, moreover, is avoidable. Vouchers for education, for example, would mean governments do not need to build schools at all.

Examples of businesses that benefit from government intervention are numerous: firms that make air pollution scrubbers for manufacturing plants; data processing firms that process Medicare claims; financial services firms that administer private accounts; psychometrics firms that design high-stakes tests; advertising firms that run anti-drug media campaigns; security firms that sell scanning equipment to the Transportation Safety Administration.

The fact that some firms benefit from government largesse does not by itself make the interventions undesirable. But it encourages businesses to engage in unproductive effort to win these pots of money, and even worse to promote creation of these windfalls in the first place. Thus the scope for “rent creation” and “rent seeking” is one more reason for caution in creating government programs in the first place.