The Year in Ideas: Pre-Distribution

On any measure it has been a big political year, from David Cameron’s surprise majority to Jeremy Corbyn’s remarkable insurgency. But what were the big ideas?

Pre-distribution. Ed Miliband was mocked for using the term in 2012 but it always felt like one of his more substantive themes. The argument was that policy should ‘focus on market reforms that encourage a more equal distribution of economic power and rewards even before government collects taxes or pays out benefits’.

In 2015, this idea it was road-tested not by a Labour Government, but by George Osborne in his Summer Budget. The Chancellor announced cuts tax credits – framed by some on both Left and Right as ‘subsidies’ to employers – while introducing a National Living Wage and an apprenticeship levy. The State would do less to redistribute wealth, aiming instead to tackle inequality by shaping the way markets work.

It is easy to forget that this announcement was lauded by many commentators at the time. It was seen to have outmanoeuvred the Opposition, saved the Government money and reflected people’s own desire for people to earn their own money rather than rely on Government hand-outs. In practice, though, life proved more complicated.

In fact, the evidence that tax credits subsidise employers in the literal sense of the word is quite thin. Perhaps employers should pay more, but this does not mean that most would pay more in the absence of these benefits. The result is that, despite the announcement that tax credits will now be protected, the governments’ role in topping up wages will diminish under Universal credit. Some families may make up some of the difference by working more hours but the likelihood is that many will be worse off than they would have been under the existing system.

You might say it has therefore been a rocky year for pre-distribution – adopted as the antithesis to the clunky and imperfect Tax Credits system. But we shouldn’t give up on the synthesis. There are notable differences between countries in their levels of inequality before taxes and transfers – implying policy can make a difference to this.

Moreover, if the predictions about robots replacing jobs are accurate, then pre-tax inequality is set to grow unless something significant happens.  This demonstrates the importance of education, training and retraining, something that the apprenticeship levy ought to help address.  But it also raises the question of where people draw their income from.

The simplest and best explanation of what I mean here is in this paper by Harvard academic Richard Freeman, entitled ‘Who Owns the Robots Rules the World’. He writes:

As companies substitute machines and computers for human activity, workers need to own part of the capital stock that substitutes for them to benefit from these new “robot” technologies. Workers could own shares of the firm, hold stock options, or be paid in part from the profits. Without ownership stakes, workers will become serfs working on behalf of the robots’ overlords. Governments could tax the wealthy capital owners and redistribute income to workers, but that is not the direction societies are moving in. Workers need to own capital rather than rely on government income redistribution policies.

Whether it would be better for employees to own shares in their own firms, or to have their risk diversified by investments in other companies is an open question. But the key point is that policy-makers should persevere with the pre-distribution idea – and be prepared to broaden it out to consider returns to capital, not just labour.