Taking From The Poor And Giving To The Rich
Governments are implementing protectionist policies with the noble rhetoric of protecting local industry. This amounts to a scam.
A few days ago, the Indian government announced that it was raising import tariffs on 19 ‘non-essential items’ to reduce its current account deficit, and arrest the decline of the Rupee. This reason is daft: despite all the hype around it, the decline of the rupee is not a problem, and the government should not intervene.
But the trend is real. Across the world, governments are implementing protectionist policies with the noble rhetoric of protecting local industry. This amounts to a scam they are pulling on their own people. Like most government interventions in the market, import tariffs amount to redistributing wealth from the poor to the rich.
You heard that right: not a redistribution from rich to poor, but the other way around.
Consider what a tariff does. It makes imports more expensive, and thus reduces competition for local manufacturers. They have less incentive to innovate and give consumers better value for money. So a good that costs Rs 10 before tariffs may cost Rs 12 after protectionist measures kick in. Everyone who buys it, therefore, is losing a national Rs 2. Where does this money go? To the inefficient manufacturer who is benefiting from this government policy.
So why don’t consumers protest? Reason 1: as this loss is notional, they don’t even realise that it has happened. Reason 2: the amount is so little that, well, why bother? If 100 million consumers lose Rs 2 each, chances are none of them will care about it. But if five manufacturers share Rs 200 million between them, they will care. It will make sense for them to create an interest group that lobbies (or bribes) government on their behalf and contributes to the coffers of political parties.
Public choice economists refer to this phenomenon as Concentrated Benefits and Diffused Costs. The benefits are spread among a few players and are large enough for them to lobby for those policies. The costs are dispersed among so many that they amount to very little for each citizen – and are often invisible.
I’d spoken in my last column about the interplay between Power and Money.
Those that come to power need money to get there, and those that give the money want a return on investment. Where does this RoI come from? It is coerced from the common citizen by the state, usually without her being unaware of it.
In an ideal world, the fundamental role of the state is to protect the rights of its citizens. In the real world, the fundamental task the state focuses on is redistributing wealth from the poor to the rich.
Tariffs are just one example. Any action by the government that reduces the level of competition in the marketplace does this. All licensing requirements do this, for example. Most regulations on the market do this, especially those that require costly compliance, diverting resources towards a rent-seeking state that could have been better spent on creating value for consumers.
Often the redistribution happens to benefit the most important interest group of all: the party in power. The hundreds of crores that ruling parties spend, in the governments they run, amount to exactly this. So does the patronage they dole out to the vote banks they are trying to cultivate.
It is true that the existence of government itself amounts to Concentrated Benefits and Diffused Costs. We all pay taxes (diffused costs); the state spends that money (concentrated benefits). There is no way around this, for we need the state to protect our rights. But beyond that protection, everything else amounts to this perverse redistribution.
What can we do about this as citizens? None of us are incentivised to argue against one policy at a time: how many people will take out morchas because Rs 40 is stolen from each of us every year to keep Air India afloat? But if we were to get a larger sense of what we lose every year, not just what we give as taxes but all the notional losses we incur from government action, like the Rs 2 in the example above, might we not care a little more?
Maybe then the solution to this problem would be more obvious: keeping the power and scope of government so limited that it is not able to take from the poor and give to the rich.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.