Addressing Income Inequality Through Consumer Law: the Van Loo Argument

by Jeff Sovern

Income inequality causes numerous problems for the United States, including lower economic growth. Probably the most widely-mentioned solution to income inequality is taxation, But Rory Van Loo of Boston University argues that consumer law also poses a potent weapon against income inequality in his paper, Consumer Law As Tax Alternative. One intriguing aspect of this creative paper is that it offers consumer advocates another argument for some consumer law interventions, in that some consumer laws can now be justified on the ground that they combat income inequality, as well as with more traditional arguments.  The paper attempts to quantify the amount that some consumer laws could contribute to reducing income inequality, finding that they could reduce income inequality by more than a trillion dollars. Here is the abstract:

The law and economics paradigm has traditionally emphasized tax and transfer as the best way to achieve distributional goals. This Article explores an alternative. Well-designed consumer laws—defined as the set of consumer protection, antitrust, and entry barrier laws that govern consumer transactions—can make markets more efficient and lessen inequality. Policymakers and scholars have traditionally ignored consumer laws in redistribution conversations in part because consumer laws examine narrow and siloed contexts—deceptive fees by Visa or a proposed merger between Comcast and Time Warner Cable. Those are different microeconomic fields, whereas redistribution is dominated by macroeconomics. Even millions of dollars in reduced credit card fees seem trivial compared to the trillion-dollar growth in income inequality that has sparked concern in recent decades. This Article synthesizes the fragmented empirical literature quantifying inefficiently higher prices across diverse markets—called overcharge. To my knowledge, it is the first to conclude that consumer law-related inefficiencies plausibly overcharge more than a trillion dollars, or over ten percent of all that consumers spend. It also analyzes which households pay and earn income from that overcharge. Consumers outside the top one percent likely pay significantly more of their expenditures toward overcharge. A static simulation also indicates that removing consumer overcharge could bring the share of income earned by the top one percent of households from its current level—twenty percent of all income—to about where it was in 1980, when the top one percent earned ten percent of all income. Moreover, this massive redistribution would be driven by laws making markets more competitive, rather than tax increases that distort markets. If the empirical literature currently available is right, consumer law merits serious consideration as an alternative to tax.

0 thoughts on “Addressing Income Inequality Through Consumer Law: the Van Loo Argument

  1. Rory V says:

    Ted F.’s statement that somehow there is an “extensive empirical literature showing that most government consumer interventions . . . make poorer consumers worse off” reads off in light of the fact that there is very little empirical literature examining the distributional effects of such interventions on the spending and income side–both of which are necessary to consider. In any case, the quality of the empirical research is more important than the quantity. But if the article omits rigorous empirical studies not conducted by advocacy groups, email suggestions would be helpful.
    Additionally, Ted F.’s comment indicates at least some agreement with one of the main points of the article. If there are laws making low- and middle-income consumers worse off, their repeal provides an option for progressive redistribution (and maybe a better one than achieving similar goals through tax). Many such laws are mentioned in the paper.
    Finally, the article does not get into arbitration and class actions, but clearly the amount transferred to attorneys must be considered in any comprehensive distributional analysis of consumer class actions.

  2. Ted F says:

    Paper transparently fails to consider the extensive empirical literature showing that most government consumer interventions, like the Durbin Amendment, restrictions on payday lending, and the CFPB’s anti-arbitration rule, make poorer consumers worse off.
    Given current class action law transfers wealth from lower- and middle-class consumers to wealthy attorneys, Van Loo should look elsewhere to reform.

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