“Predistribution” is enjoying a surge of interest on the left. Unlike the more conventional idea of redistribution, or reallocating wealth through taxes, predistribution aims to reshape the income landscape by way of regulation before taxes even come into play. The approach seeks to transform earnings distribution right at their market source.

Yale political scientist Jacob Hacker has been an academic proponent of the approach. Former Fed Vice Chair Alan Binder has given it recent publicity in an op-ed in the Wall Street Journal. President Biden’s revision of the executive order on regulatory review provides a legal example by including an authorization for OMB to consider the distributional consequences of regulations to advance equity.

Specific iterations of predistribution are common elements of partisan discourse and come up regularly in various state and federal legislative packages. Examples include raising the minimum wage, requiring companies to provide parental leave, strengthening union bargaining rights, regulating pay to assure “equal” pay for “equal work,” and mandating corporate governance “reform” by requiring workers to sit on corporate boards of directors.

Predistribution, however, is a terrible prescription for addressing economic inequality. It distorts market signals, discourages productivity, and often provides benefits to households that are not below the median income, let alone below the poverty line. 

Even worse than predistribution’s economic effects are its political ones. It allows the state to intervene in the market while making it harder for citizens to evaluate the costs of those policies. Redistribution through taxation imposes a tangible cost on many citizens who are likely to resist excessive burdens. But predistribution does not impose such concrete and visible costs. Indeed, policies, such as the minimum wage and parental leave, may seem to offer a free lunch because their costs are largely invisible.

Moreover, predistributionary policies create a faction of citizens who have a personal stake in expanding them. Labor unions, for example, advocate for predistribution using the pretext of “workers’ rights.” Government bureaucracies also favor predistribution, because it provides an excuse to expand. When it comes to the leadership of bureaucracies and unions, you can be sure these commitments to predistribution translate to one thing at the ballot box: they vote left.

The Knowledge Problem

The problems of predistribution have been plaguing Western democracies for some time now. In The Road to Serfdom, originally published in 1944, Friedrich Hayek argued that government interference with the market led to the loss of freedom and even self-government. Sadly, his warnings about the dangers of predistribution remain as salient today as they were eighty years ago.

Hayek’s greatest contribution to economics is his recognition that a central problem for social arrangements, including economic ones, is gathering knowledge. No centralized authority has the information to make efficient decisions about the allocation of resources. The market, in contrast, captures dispersed information as millions of people make decisions about what to produce and buy.

Minimum wage laws are an excellent example of a mistaken attempt by the government to claim it knows better than the market. Wage markets vary significantly and depend on locality and industry. Mandating a wage overlooks these local conditions and leads to inefficiencies and mismatches. The result is unemployment and reduced working hours. California’s minimum wage law for restaurants, for instance, reduced both employment and working hours, contributing to California’s higher unemployment rate. It has increased most substantially the costs of previously low-cost meals consumed by those of modest means.

Beyond the economic dislocation of the minimum wage, it imposes social costs that a centralized authority cannot easily calculate. Some industries, such as fast food restaurants, have played important roles in employing young people and instilling in them the discipline and responsibility that allows them to climb the economic ladder. Precisely because they are inexperienced, young people do not have as high a value on the job. A minimum wage will price them out of the market with long-term social costs. Americans’ work ethic will only decline further.

Similarly, various industries and localities face different costs and demands for parental leave. Small businesses with few workers may have great difficulty offering parental leave, because they cannot easily replace anyone on their team for an extended period. The market takes this into account with the result that the decision of an individual business to offer parental leave better reflects the inevitable tradeoff of offering that benefit as opposed to other benefits, including a higher wage. The optimal balance between parental leave and other employment benefits is uncertain, and government-imposed mandates restrict the discovery process that helps to find it.

The Slide into Serfdom

Hayek also emphasized how such government regulations reduced economic freedom and our prosperity. If employees have votes on corporate boards and greater leverage because of union power, entrepreneurs will not be able as easily to reorganize their workforce to meet new demands. These outside forces will create a more uncertain corporate future, increasing the cost of capital. A higher cost of capital deters risk-taking. Thus, with the loss of economic freedom, the innovation that improves the lot of everyone declines.

These regulatory interventions also require central planning and enforcement. For instance, enforcing minimum wage, parental leave law, and monitoring businesses to make sure they follow the regulations that provide the union’s greater power requires a substantial bureaucracy. A law that mandates equal pay for equal work would necessitate a bureaucratic apparatus to evaluate all jobs. It would rival in size and scope of that for price controls.

Moreover, Hayek emphasized that one intervention usually leads to another as the consequences of the initial intervention create problems that the government then tries to avoid. It is this slippery slope that allows society to slide toward serfdom.

Thanks to this dynamic, predistribution will cascade into more government distortions and restrictions. For instance, a national minimum wage will lead employers to cut staff, reduce hours, and introduce more automation. As the unemployment and underemployment rates rise, the government will come under pressure to stem these deleterious effects by regulating automation and subsidizing work. The result is that wages do not reflect their value on the market, and businesses become more dependent on and regulated by the state.

Parental leave will impose excessive costs on small businesses because they lack a large staff to take over the functions of employees on leave. Thus, legislators will feel pressure to subsidize small businesses, leading to arbitrary classifications of what is a small and what is a large enterprise and further distortions.

Increasing union power raises the costs of products on the market, making it harder for companies to compete. As a result, the government will come under pressure to limit competition. Increasing regulation is a mechanism for doing this, since small start-ups must pay a higher cost per sale to comply with regulations than larger more established regulations. Foreign companies will gain an advantage from increased union power because the United States has no authority to increase union power in foreign countries. As a result, tariffs and non-tariff trade barriers will increase. Some such developments will happen because companies will specifically lobby for them. But more insidiously, legislators will come to sense the pervasive need for such measures to keep unionized companies competitive.

More generally, the groups of concentrated interests that the government creates through central planning—unions and bureaucrats, among others—become a force for more central planning because their leaders benefit from it.

Power Struggle

These effects of predistribution policies are predictable. They are not a bug but a feature of these plans for a more intrusive state. As Jacob Hacker suggests, one purpose of these policies is to create “countervailing powers” to those who would press for more laissez-faire policies. He argues that these countervailing forces will create more democratic control of the economy.

But the claim that these countervailing forces will empower the majority is false. For instance, greater union power will result in more power for concentrated interests that will win out of the diffuse interests of the majority. Police unions frustrate attempts to discipline bad police officers and thus greatly contribute to the distrust of an institution that ought to be a bulwark of social order. Teachers’ unions frustrate experiments in education and competition that could help children. Even unions in the private sector drive up the price of goods for the diffuse majority of consumers.

Some argue that these powers are necessary to balance those of big corporations. However, unions and large companies often work together for protectionism and subsidies that are not in the public interest. Large corporations acting alone are relatively weak in politics because they lack the foot soldiers that unions bring, but together they are a powerful force for corporatist policies.

In The Road to Serfdom, Hayek recognized that opposition to interferences with market mechanisms did not properly translate into opposing all regulations. Regulation for externalities, like pollution for instance, reinforces rather than undermines the market, by forcing businesses to pay for the full cost of their actions. Nor did Hayek oppose a social safety net for the needy.

But these principles prevent them from becoming steps to serfdom. Externalities provide a limited justification for regulation, whereas changing the distribution of citizens’ earnings is potentially limitless. Focusing on the needy through a safety social safety net has two limits. Redistribution is targeted to a narrow class and the payments are visible. Predistribution is not targeted and does not show up in the tax burden.

In contrast, predistribution has no logical stopping point, because it is neither aimed at externalities nor the needy. Instead, it is a relentless engine of interference with private action, stifling the spontaneous order that guides true human progress. While it may not immediately lead to the fascism or socialism that Hayek feared—thanks to America’s robust constitutional liberty—it would undoubtedly produce a society that is more stagnant and more conflict-ridden. Citizens would become government supplicants, lobbying for a piece of the surplus rather than free individuals fostering growth and innovation themselves.