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Predistribution – an alternative path to more widespread economic prosperity?

The eternal question for the labour movement is always how to enhance what was offered to the last generation and move on from the old limitations of their ideal economic model. The post war consensus saw the formation of welfare states that effectively used redistribution to provide public services and benefit payments. These programs proved a great success and while some aspects of it were rolled back following the shift towards neoliberalism, the majority has been accepted.

However, this approach also has its limits. Public spending in countries like Finland and France already exceed 50% of their GDP, and simple arithmetic prevents expansion of this share to the same degree as in the past.

This is not to say new forms of taxation cannot be levied, nor that the welfare state is not worth fighting for, just that expansions to the welfare state in the heaviest social democracies have diminishing returns when compared to the great strides made during the post-war consensus. New guiding economic strategy is needed to continue to make economics more just. 

The structure of the economy itself is a barrier to distributive justice, a barrier redistribution works around not against. According to OECD data, the UK’s tax and benefit system is more redistributive than most industrialised countries. In fact, it does as much to reduce inequality as the tax-benefit systems of famously egalitarian countries like Sweden, Norway and Denmark.

Yet the UK has the seventh-highest income inequality after tax and benefits have been taken into account because it starts with the fourth most unequal distribution of income before this redistribution happens.

Another issue that has developed is a decoupling of productivity and wage compensation with the wage share of the economy dropping. The percentage of income that goes to capital rather than wages has increased in this period and new economic ideas are needed to help narrow this gap in an increasingly globalised world where capital has become more mobile.

Predistribution might be an optimal answer to solving these problems. It’s a term coined by Jacob Hacke, a Yale political scientist, which means “to focus on market reforms that encourage a more equal distribution of economic power and rewards even before governments collect taxes or pays out benefits”.

One of the most obvious ways to do this is by raising wages through strengthening unions, which wouldn’t necessarily even require government intervention. In a research paper published by the IMF, the economists Michael Kumhof and Romain Rancière argue that the best way of significantly flattening pre-tax inequalities is to raise the bargaining power of wage-earners. This could be done via strengthening collective bargaining agreements, which are arrangements where unions negotiate wages with employers on behalf of workers for an entire sector instead of firm-by-firm basis.

One potential advantage of these policies is their longevity. Take the reforms of Tony Blair, who undoubtedly helped low earners in the UK via a number of redistributive policies, only for many of those policies to be reversed by David Cameron. A significant policy that remained was the creation of the minimum wage. 

However, it may not be possible to see the wage share of income increase to its historical levels. It’s easier for capital to move to a lower wage country than before if wages are increased. Technology that replaces work with robots and algorithms is moving the economy towards a more capital intensive direction. So instead of just increasing the share of wages by the expense of capital, a more equal distribution of capital might become an increasingly viable path for more widespread prosperity. 

One example distributing capital more equally is the Inclusive Ownership Funds suggested by Labour in 2019, that would slowly shift 10% of company shares into an employee managed fund with the dividends would be paid to the employees, up to a 500£ per employee. Earnings above the £500 would be paid to the state. Other examples include child trust funds, where each newborn is given a savings account that is propped with funding from the government and the recipient gets access to it at a later age. Distributing capital ownership could also take the form of social wealth funds, by which governments buy shares in companies and channel the profits back to public coffers. 

Redistribution and predistribution are not mutually exclusive. While redistribution enjoys more attention, political parties don’t focus enough in restructuring the foundations of markets towards more equal direction. It is time they did.

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