StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



Inequality: A Problem?

15 Dec 2009
Posted by Bruce Bartlett

Normally, when one reads a proudly left-wing magazine like The American Prospect one expects to read vocal denunciations of inequality. So there's a certain man-bites-dog quality to a recent article by Dalton Conley, dean of social sciences at NYU and card-carrying liberal. He argues that those on the left should stop worrying so much about inequality per se--its costs are overstated, as well as the benefits of greater equality. Instead, he argues, liberals should concentrate more on helping the poor and less on beating up on the rich.

At the risk of getting Conley's membership in the liberal club revoked, I think he is right. I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn't impose any actual costs on anyone as long as the pie is not fixed. Of course, were that the case it would be different. Gains by the wealthy would necessarily come at the expense of everyone else.

Implicitly, liberals tend to believe the pie is fixed. But, generally speaking, it isn't. A rising tide does tend to lift all boats even if those at the top get lifted a lot more. But Conley is also right to ridicule the view, common among many conservatives, that enriching the wealthy somehow automatically benefits the poor. That's obviously nonsense. But neither does it follow that there is no limit to how much we can soak the rich without average people suffering some of the consequences. We really don't want the rich spending all their time figuring out how to hide their wealth from the tax man or engaging in conspicuous consumption; we'd rather that they invested their wealth in businesses that will increase their wealth but also create jobs and income for the rest of us, too.

For this reason, I have always been more sympathetic to programs that aid the poor than other conservatives. It's not so much that it's the right thing to do as that it's a necessary price that has to be paid to maintain democracy, open markets, private property, a stable currency and a tax system that doesn't punish success too much. To be sure, there is a heavy price to be paid when social welfare programs go too far. But at the same time I don't think the social Darwinist, Randian state in which people are left to die if they don't work is the one that maximizes growth or well-being for the producer class.

Where I think the left is mostly wrong about inequality is in thinking that taxes level the playing field. But the only way taxes really create equality is by discouraging the rich from earning income. The nation is not enriched when this happens. In fact, it is undoubtedly the case that the distribution of wealth today is vastly more equal than it was a year ago. But who wouldn't turn back the clock if they could even if it meant that the wealthy would benefit disproportionately? It's also worth noting that almost all of our data on income distribution are based on before-tax income, so by definition taxes don't equalize income.

I think we should simply give up trying to redistribute income on the tax side and accept that it can only be done meaningfully on the spending side. This would require both the right and left to give up some of their pet ideas. The left would accept that the only purpose of the tax system is to raise revenue and the right would accept that a fairly extensive social welfare state is here to stay. In essence, conservatives would raise the revenue and liberals would spend it. That's more or less the way it works in Europe, where conservatives accepted the welfare state in return for having it financed conservatively through a value-added tax. Liberals accepted this regressive form of taxation in return for conservatives accepting the legitimacy and permanence of the welfare state.

Over the years, I have asked a number of liberal friends if they would take this deal. They would get a pot of net new government spending of some amount--say 1% of GDP--to spend any way they like to help the poor. But in return, they would have to let me have a low-rate, consumption-based tax system and I would agree to raise taxes enough to pay for the additional spending. It seems like a free lunch to me, but I've never found a liberal willing to even consider the deal. They are too wedded to maintaining steeply progressive tax rates on income as a matter of equity.

I wonder, would Prof. Conley take my offer?

I think I would find the

I think I would find the argument presented here more convincing if the equality gap was measured solely in terms of income. However, in my opinion the equality gap is more complex. I think the top one percent of households are not only gaining a bigger share of the income pie, but a bigger share of the power and influence pies as well.

I am of the belief that this accumulation of power and influence in the hands of a relatively small segment of the population poses the real threat to representative government.


Power

The question of power is legitimate. But my observation is that it's much easier to get money if you have power than it is to get power if you have money.


Mr Bartlett, I'm really glad

Mr Bartlett,

I'm really glad you wrote this article, it is timely and just the subject we need to be discussing.

You always write from a thoughtful and interesting perspective, a rarity on the right today, but I must take issue with one of your claims in this article.

You claim that it is liberals who view that the pie is "fixed". I happen to think today that it is most EVERYBODY on the right and only MOST on the left who hold that view. Here's why; The "debt" based money system we have (fiat) is fundamentally and operationally different from a commodity backed money system and it is the conservatives who are yelling the loudest about our national "debt" and how it has to shrink. Well, shrinking the national debt/deficit will only shrink the pie. The national "debt" is no debt at all, in the sense that the deficit/debt terrorists want you to believe. The deficit/debt is a measurement of new money injected into the system. Many are stuck in a gold standard paradigm world (especially conservatives) that doesn't exist and it is KILLING our economic potential unnecessarily. I thank you for steering the discussion in this direction, this is the direction it needs to go. I think if you examine it just a little closer though you will find it is the conservatives who are most into pie shrinking. I think maybe a better phrase is, acting like the money supply is a zero-sum game.

Now, debt within the private sector is meaningful and this is where income inequality of a severe magnitude can be harmful. When too many people owe money to too few people the freedoms of the indebted are lessened and the goals of each become diametrically opposed. In general people who owe money prefer inflation, people who are owed money prefer deflation.

I hope your article can help turn our conversation about debt around. National debt is not inherently bad, it is a measurement. Personal debt is bad and puts debtors/indebted at odds with each other.


As a BIG L liberal (and an

As a BIG L liberal (and an economist I might add), I have never thought that the pie is always the same size. Rather, I have seen three issues with large concentrations of wealth. First, wealthy people do not just invest in productive things that expand the pie. They invest in plenty of things to deny access to the pie. During the 1880s, the barons of Alabama lobbied successfully for a prisoner-lease program that effectively gave them access to free if not dirt cheap labor. Now, middle class people do not have the organization (read MONEY) to do these things. But rich people do. So this kind of extreme thing can lead to a power distribution that is not good for the country. When I look at Mexico, and the power structure that exists there, I am not sure I want to go down that path.

The other problem I have is that I do not believe labor markets adjust like the neo-classical paradigm suggests it should. So when I see a large deviation from the "norm", I have to scratch my head and say "What is going on here?" It may be nothing bad, but......

Finally, I see an accountability problem. What is the WORST thing that could happen to a Donald Trump. He has been in and out of bankruptcy several times but I see no material loss. The rules are different once you get to a certain point. There is no downside no matter how badly you screw up. Every CEO of GM over the last 40 years has left the company worse off than his predecessor but still hauled in the big money.

I love Bartlett and think he is a great addition to this blog. But I do see things differently than he does on this one.


I agree with Bruce Bartlett.

I agree with Bruce Bartlett. Although I agree with the first commenter that the subject is complex, I think that Bruce is right that the stance of the left originates in a reactionary social preference as opposed to an intellectually disciplined inquiry. As a result, the left tends to engage in stereotyping, caricaturing and demonizing what is in reality a heterogeneous group. I think that elements of the second comment above support this observation.

I would also note that the progressive agenda has moved well beyond merely "helping the poor" to funding historically middle class entitlements which, given the size of the latter group, is impossible.


Growth and Inequality

By odd coincidence I was thinking about the relationship between productivity growth (GDP per hour worked) and income inequality recently. Of course many factors influence productivity growth but there does seem to be a general misperception that there is some sort of tradeoff between growth and inequality. I even remember during the 2008 presidential campaign when Obama said to Charlie Gibson that he would "sacrifice a dollop of growth for a dollop of fairness."

The problem is of course that there's no evidence there is such a tradeoff, at least among advanced nations. In fact macroeconomists have struggled for years to explain why it is that productivity growth seems to be negatively correlated with income equality and not positively as many classical models suggest it ought to be.

Using a historical example, the period from 1947 to 1973 was the golden age of of productivity growth in the United States. It averaged about 2.8% per year. At that pace, the output of the average worker was set to double about every 25 years, allowing roughly comparable increases in national living standards. This was also an era of unparalled income equality in the US, when the top 1% often had as little as an 8% share of national income.

From 1973 through 2008, however, productivity growth took a nosedive, with the average rate dropping to just 1.55%. At that pace, the output of the average worker was set to double about every 45 years. by 2007 the share of national income accruing to the top 1% reached 23.5%, a level only exceeded by that in 1928.

In my opinion the current macroeconomic thinking on why inequality reduces productivity growth can be summarized by the following. (Warning: this might get a little wonkish.)

Central to all of the explanations is that inequality causes some kind of market failure (incomplete markets). That is, for some reason, a “commodity” is not being priced for the market, so that the marginal benefit of the commodity to society does not reflect the cost of providing it. There are two main strands of thinking in this regard. One relates to capital and the other relates to human capital.

1) Decreasing Returns and Credit Constraints
When there are decreasing returns to capital and there is credit rationing, individual wealth need not converge to a common level, and the aggregate level of output may be affected by its distribution. Credit rationing arises when, at the going rate of interest, there exist individuals who could profitably invest borrowed funds and repay with interest, but lenders are unwilling to lend to them in full. When this particular market failure arises, it typically drives less wealthy, but potentially wealthy borrowers out of the loan market, leading to an inefficient allocation of resources, underinvestment and reduced productivity.

2) Short Run Human Capital Externalities
The thinking here is that an individual worker’s output depends on the average level and equality of human capital in the economy as well as his/her own schooling. Moreover aggregate productivity is a decreasing function of the dispersion of human capital. Because household investment in human capital accumulation is subject to idyosyncratic shocks, inequality persists over time and creates a drag on long run productivity growth.

So do I think we should try to increase productivity growth by returning to the policies of the 1950s and 1960s? (What Levy and Temin called the "Treaty of Detroit", namely more progressive taxation, higher minimum wages, and more unionization.) Well, not exactly. In fact I think I agree with Bruce. It probably is better to try to address inequality on the spending side than on the taxation side. A little Europeanization, in the form of more spending financed by a low-rate, consumption-based tax system, just might be what the economist ordered.

Here’s a small sample of relative productivity (US=100). Needless to say all of these countries have a much more egalitarian income distribution than the US, all have had much faster productivity growth than the US, and a few in fact now lead the US in productivity:

Norway
1970: 91.5
2008: 132.7

Ireland
1970: 47.1
2008: 106.2

Belgium
1970: 78.4
2008: 101.8

Netherlands
1970: 81.3
2008: 101.7

France:
1970: 67.7
2008: 98.2

Germany:
1970: 68.9
2008: 92.8

"Trickle-up economics" anyone?


edit

In the second paragraph:

"....seems to be negatively correlated with income equality and not positively.." should of course read "....seems to be negatively correlated with income inequality and not positively...."

That is all.


"I have never understood how

"I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn't impose any actual costs on anyone as long as the pie is not fixed."

Sit down with a calculator and you will understand , unless you're one of those who are paid to "not understand".

Real , per-capita GDP grows forever at , say , 3% annually. In other words , the "pie is not fixed".

Income share of the top 1% grows at 6% annually , also forever.

After enough time has passed , the top 1% have ALL OF THE INCOME. The other 99% are slaves.

Do the math Mr. Economics Expert , aka Mr. Propaganda Expert.


Bag of lies

"To be sure, there is a heavy price to be paid when social welfare programs go too far." Make that corporate welfare. Talk about tax payer funded bonuses for incompetent bankers. Talk about billion dollar subsidies for the oil industry. Yes we are paying a heavy price but not for social welfare programs. Anything but.

"They would get a pot of net new government spending of some amount--say 1% of GDP--to spend any way they like to help the poor. But in return, they would have to let me have a low-rate, consumption-based tax system and I would agree to raise taxes enough to pay for the additional spending."

What you are suggesting, in other words, is that the middle class gets soaked through a regressive tax system, the poor get a few crumbs from the table of the rich, and the rich are left alone to continue amassing their obscene heaps of unearned money. Yeah, *that* sounds like a great deal. One really wonders why liberals aren't singing Hallelujah.


My objection to Mr.

My objection to Mr. Bartlett's point is that in a mass affluent society like America, the overwhelming majority of goods are manifestly positional. To paraphrase Gore Vidal, it is not enough that I succeed, others cannot succeed somewhat more.


Economic Incentives Mr. Bartlett?

Another point that should be obvious but that hasn't been fully articulated I think.

Economists are fond of talking about incentives. A system in which the rich get richer without any verifiable merit on their part is by definition inefficient. This is what we have seen happening (once again, incompetent bankers getting rich through economically and socially destructive trading and investment practices are an indicative example but not the only one). Economists should actually be the first to oppose unmerited wealth, not on grounds of social justice but of economic efficiency.

Why isn't this happening? Because most economists have come to accept a lazy and convenient version of the efficient market hypothesis that biases them against even considering the possibility of systemic inefficiency. This hypothesis is not supported by either theory or empiric data. It is just a convenient fiction. For example the rise in CEO pay from 40 times average to 1000 times average pay since the 1960s has nothing whatsoever to do with just rewards and efficient markets. It is due to non-market mechanisms that determine CEO pay. Economists, if they took their own theory the least bit seriously, should be on the barricades about this. Instead many of them invent laughable excuses to hide the obvious.


"Economic rationality"

"I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged."

This argument is a central assumption of classic economic theory, which defines "rational" economic actors as only caring about their own outcomes. But, economists being economists, they tend not to distinguish whether this is supposed to be a normative argument -- the way the world should be -- or a descriptive argument -- the way the world is. And I think you are doing the same here.

I leave it to religious scholars to debate the normative argument, but as a psychologist and former investment banker who teaches behavioral economics to MBAs, the answer to your puzzlement is very simple: there is copious evidence from both experiments and survey studies that humans care just as much, if not more, about relative outcomes. So you are welcome to say "I think this is ethically inappropriate", or you are welcome to say "I myself don't care" but to claim that this preference is somehow beyond rational explanation is completely unsupported.


Yes, people care about the distribution of outcomes

But this doesn't mean Mr. Barlett's contention is incorrect.

For example, Charness and Rabin's experiments (2002) have shown people care about efficiency (maximizing total welfare) and helping the poor. They DO NOT care about reducing inequality per se. More specifically, the people in these experiments would not have cared if 1% of people get more rich at nobody's expense.

Not that it matters, but Rabin is about as left as you get for an economist.

More generally, just because people care about other people's outcomes (i.e. neoclassical assumptions about behavior don't hold) it doesn't follow that they care about inequality.


Mobility

While I've been on BB's side for most of his posts, this one struck me as being wrong. First I think the comment on Growth and Inequality hit it on the head. Concentration of wealth not seen since before the Depression can't be a good thing. Another factor to consider is the shrinking opportunities for the rest of society to join that upper 1% as income mobility rates have nosedived in the past couple of decades. According to a Krugman piece on the Nation a couple years back: "America was once a place of substantial intergenerational mobility: Sons often did much better than their fathers. A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people.

Now for the shocker: The Business Week piece cites a new survey of today's adult men, which finds that this number has dropped to only 10 percent. That is, over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence." Increased wealth concentration leading to increased barriers to the rest of us having a chance. Sounds like the perfect recipe for disaster.


Mobility

In addition to implicitly treating the economic pie as fixed, so that the gains of those at the top necessarily come at the expense of the rest, I think lberals also tend to assume that the same people basically constitute the "wealthy" year after year. Yet there is enormous turnover among the Forbes 400. I bet there are a goodly number of people on the list last year who aren't on it this year. There is a great deal of mobility throughout the income spectrum and generationally. There may not be as much as conservatives believe, but I think that the left implicitly believes there really isn't any at all.


"Misperceptions about income inequality"

By Robert Gordon (of such radical institutions as the NBER business cycle dating committee and CBO):
~~~

Misperceptions About the Magnitude and Timing of Changes in American Income Inequality

NBER Working Paper No. 15351 .
Issued September 2009

The rise in American inequality has been exaggerated both in magnitude and timing ... This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure.

Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993.

This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986...

Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor.

Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities...


US 2009: low mobility, high inequality.

The last comment is puzzling. Data have been cited to show how low mobility has fallen in the US and Bartlett responds by saying the left should give more credit to mobility. Mr. Bartlett, mobility is depressingly low in the US, lower not coincidentally than in more egalitarian societies. That is an empirical observation and it is pathetic how Bartlett simply ignores it, as he seems to ignore all inconvenient facts.

Another reason for ordinary people to be concerned about wealth concentration is the influence that money has on the political system. The richer the rich become the more opportunity they have to rig the system to their own advantage (which may partly explain low mobility). This happened during the gilded age and it happens now. Of course the rich are acting in their own interest, what else would you expect? And they have opportunity to do so, a lot more than the poor or the middle class. If Bartlett doesn't know this, he must live on a different planet.


It's consumption that matters for welfare, and...

... the data are clear that "consumption inequality" both (1) is nowhere near as large as income inequality, and (2) has not widened as income inequality has.

E.g, the NY Times:
~~
"We wanted to see whether this rise in income inequality had in fact given rise to an increase in consumption inequality," Professor Krueger said. "We were fairly surprised that it hadn't."...

A common measure of how spread out the income distribution is (the standard deviation of the log of after-tax labor income) increased 20 percent, while the same measure for consumption rose only 2 percent.

... consider the ratio between the top and bottom. In 1972-73, the top 10 percent of earners made about five times as much as the bottom 10 percent. In 1997-98, they made more than nine times as much -- a sharp increase that, again, barely shows up in spending. The top 10 percent of households spent about three times as much as the bottom 10 percent in 1972-73, a ratio that inched up to 3.35 in 1997-98.

These results are particularly striking because the income figures include only wages and government benefits. Spending, by contrast, can come from all sources of money, including the stock market returns and other investment income enjoyed mostly by the wealthiest Americans...

It is hard to see the effects of increasing income inequality in how people actually live. In a theoretical model that fits the trends of the last two decades, the economists propose an explanation: Permanent income differences have increased just a little, while short-term fluctuations have increased a lot. What looks like increasing income inequality turns out to be mostly increasing income instability...
~~~
Several things going on here, to name three (beyond the obvious progressive taxes-and-transfers):

First, people smooth their consumption over their lives. E.g.: The low-income folk in the income tables include young, future-rich doctors and lawyers who as young adults borrow against their future income -- and also old, rich, retired doctors and lawyers drawing down their savings from their top-income years, with consumption from savings not included in income. So consumption is much more steady than income in their own lives -- without the peaks an valleys that create inequality in the income tables. (Even as intra-personal income inequality is rising!)

Second, as you note, income certainly does artificially spike for many individuals -- they take a retirement payout, sell a home or property, cash an investment, and go up into the "top" income category in the tables for one year, then back down to where they were -- without changing their consumption level (or real income level) much at all.

Third, rising income inequality is in part a statistical artifact of a healthy growing economy. Average income rises with age and for each generation the top level for higher than the previous, as national income rises. Thus if one just tallies up a count of individuals at each income level (the older/richest of one generation against the youngest/poorest of the next) the top will always be rising from the bottom. But if one instead looks within the same age cohorts, the distribution is much narrower. (If within age cohorts income were exactly equal for all, overall income inequality would still increase.)

But hey, the good news is that knocking a third off the stock market and having a Great Recession surely pushes the rich down, reducing inequality.

And of course the 20th Century's golden age of income equality resulted from the 17 years of the Great Depression and World War II (conscription, wage controls, a generation of wealth wiped out) which surely did level-down the upper income levels and start everyone off from the bottom working up again in the post-war years.

Krugman has pined for those lost days of equality created by the New Deal...

"The Great Compression [of income] didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s ..."

Just think how easy it was to create those good days, in that remarkably short period of time!

For anyone who wants to do it again, there's the New Deal's formula.


Elites are leading us into prosperity?

Evidence demonstrates that periods of less inequality were periods of higher growth. Consumption-based taxes account fora good portion of state and local revenues. They are not absent. The payroll tax is patently regressive

The effective rate of taxation from all sources is virtually flat, being slightly lower at the low end and the upper end.

If you want a low rate, broad-based tax, what about a VAT paid at the business level? Value added, after all, is Gross receipts minus purchased inputs, a very easy number to get in any company's accounting.

"A rising tide tends to lift all boats,even if those at the top get lifted a lot more" demonstrates very little knowledge of what has happened in the postwar period. When the tide has risen most, the lower ranges have risen more relative to the upper. When it has risen least, the gap has widened


"Third, rising income

"Third, rising income inequality is in part a statistical artifact of a healthy growing economy. Average income rises with age and for each generation the top level for higher than the previous, as national income rises."

This is complete nonsense. The increase in average CEO pay from 40 times to 1000 times worker pay has little to do with managers getting older (or perhaps workers getting younger?). It has to do with a class of people working diligently to further each other's interests, to the detriment of the rest, and having the power to do so effectively.

Apart from the fact that US income inequality has remained low during the post war period of strongest growth up to about 1980. The rise in inequality coincides with lower growth rates. Reality has always been the worst enemy of right wing economic superstition.

"But hey, the good news is that knocking a third off the stock market and having a Great Recession surely pushes the rich down, reducing inequality." Ignoring your attempt at sarcasm, it will only reduce inequality if it pushes the rich down more than the poor. Whether that will happen will be shaped by policy. The dot com crash did reduce inequality somewhat but by 2006, new record levels had been reached. Whether this happens again will depend in part on who gets policymakers' attention: failed bankers clamoring for corporate welfare, or the unemployed. At the moment it's the bankers who are winning.


CEO pay and a growing economy

This is complete nonsense. The increase in average CEO pay from 40 times to 1000 times worker pay has little to do with managers getting older (or perhaps workers getting younger?)

Not quite complete nonsense. First, I was talking about income deciles there, but if you want to focus on CEOs...

The growth in CEO pay has very closely tracked the growth of the size of the corporations they are responsible for. For instance:

"The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period."

Of course, this increase in the size of corporations is a result of the growing economy. So there is a factor of the managers growing older -- as their businesses grow, each generation's top managers will have pay exceeding the previous.

The top moves up from the bottom on the income scale again as a normal function of a growing economy. But within age cohorts, the spread is a lot less than in static pictures, and by consumption (which, again, is what really counts) the spread is a lot less yet.

But why just talk about CEOs? It always puzzles me why the left keeps going off about how much more CEOs make than the average worker, but never goes off about how much more the average baseball utility infielder (who now makes over $1 million a year) gets paid compared to the average worker, or how much more Kevin Costner and Brad Pitt do, or how much more Katie Couric does.

Where's the outrage about them?

CEOs at least have to work evenings and weekends for 30 years in real productive businesses to get the job.

In the NBA the average salary now is over $5 million for kids just out of school (not that most ever went to class) to run around in shorts playing a schoolyard game.

Where's the outrage from the left??? Doesn't that dwarf the social injustice committed by CEOs?

Now, one might say that the ever-bigger mega-salaries going to those NBA kids and the rest are just the logical consequence of a growing economy and them gettting the competitive rate for serving ever-larger markets ... but then you might have to say the same thing about CEOs.

(Are NBA players and TV newsreaders and actors "a class of people working diligently to further each other's interests, to the detriment of the rest, and having the power to do so effectively"?

Well, to the extent they have agents and unions and lawyers, they sure try to be. Though the "power" that lets them do it is the competitive market.)

The left has been beating the "class warfare" drum to try to sweep elections for my whole life -- it's never come close to working and there's no sign of it ever doing so in the future.

The reason is the merits of the case: income inequality itself is greatly exaggerated (as per Prof. Gordon) ... it's consumption that matters for welfare and social justice, and consumption inequality is nothing like the popularly exaggerated income inequality picture ... and when a few people (pro athletes, newsreaders, movie stars, CEOs) get mega-bucks for serving huge markets, people don't mind.

Inequality will become a real political issue in the US when the working class guys in the bar turn an NBA game on the TV, are outraged by those illiterate millionaire kids running around in their shorts, and grab their pitchforks to rush out in a mob to burn down the arena. (Instead of rooting for the home team and complaining that the owner didn't pay its players enough to improve it.)

And believe me, if that didn't happen here in NYC with Isiah's Knicks, it ain't ever gonna happen.


Bruce Bartlett Needs To Find Some New Liberal Friends

Stephen Gordon of 'Worthwhile Canadian Initiative' has been advocating this for some time. So have I:

http://economics.about.com/b/2009/12/16/bruce-bartlett-needs-to-find-som...

That's two liberals right there. But since we're Canadians, we might not count.


Does the deal work either way?

BB: "Over the years, I have asked a number of liberal friends if they would take this deal. They would get a pot of net new government spending of some amount--say 1% of GDP--to spend any way they like to help the poor. But in return, they would have to let me have a low-rate, consumption-based tax system and I would agree to raise taxes enough to pay for the additional spending."

Have any conservative friends been interested in taking the reciprocal deal?


Dammit!

I have been planning to write on this subject for some time now. I think this will have to be priority number one for Obama's second term - only a politician not thinking about re-election would undertake this project, but come 2013, it will be unavoidable. BTW - there has to be some progressivity in the tax system, otherwise you run into the "you can't get blood out of a stone" factor. But basically I agree - revenue raising and not redistribution ought to be the sole objective of the tax system.


DOD Budget

It's always amazing to me that every essay about the New Grand Strategy & National Sacrifice NEVER discusses a single penny of the Defense Dept budget that might be misguided imperial overreach, wasteful, or part-and-parcel of the ineffectiveness (that the right-wing maintains) that is Govt Industrial Policy. Until any Grand Strategy addresses the 800lb Gorilla that is the Defense Dept budget, all of it is dancing around the margins. Why exactly is the US maintaining bases in Europe and Japan and about 100 other countries again? An a priori assumption that the Defense Dept requires no sacrifice at all or that practical cost-saving efficiencies can't be found there to the benefit of the Grand Strategy is simply absurd.


Peter Lindert book on this topic

The economic historian Peter Lindert has a wonderful book, "Growing Public", that elaborates on why the European social welfare state works. His book is an attempt to figure out how the Western European countries can successfully have such a large government share of GDP without destroying their economies. And his answer is a somewhat more elaborate version of Bruce Bartlett's points above: (1) The European countries maintain a low marginal tax rate on capital; (2) much of the welfare state spending is productive spending on infrastructure, education, and job training. Low marginal tax rates on capital and redistributional spending that is productive help keep Western Europe competitive.

I suspect more liberals would accept this "deal" if they more fully understood the relative redistributional effects of taxes vs. public spending. There are many public spending programs that are vastly more redistributional than even the most progressive tax system.

On the other hand, as Zathras said, I think that U.S. conservatives would be even less inclined than U.S. liberals to take this deal.


I'd certainly take this deal

Note that a VAT plus a demogrant is more progressive than a flat tax (which of course is progressive to a degree, given the zero bracket). Having a zero bracket instead of a demogrant amounts to phasing down the demogrant for low-income people.


Defense spending

Why exactly is the US maintaining bases in Europe and Japan and about 100 other countries again?

Well, one reason is that if the US had left the Pacific after WWII and told those guys "you're all on your own, as long as you don't bother us again", the Japanese would surely have rearmed to be able to face their good friends the Soviets/Russians, Chinese, Koreans, etc., as they all faced each other over the empty open sea, only this time with nukes. And after they all rushed to fill that vacuum, we'd a been re-arming again soon enough too, when we remembered how that worked out the prior time.

I'm the last person on this planet to defend the economic efficiency or benefit of military spending. I consider it a deadweight loss economically, directed as inefficiently as any other government spending, and as fully subject to capture by interest groups.

But that said, people who reflexively bash the cost of the global reach of the US military rarely if ever consider the cost of the alternative.

As the US has become the dominant world military power, military spending as a pct of GDP, both in the US and world-wide among all nations, has fallen steadily to an historic low. This is good!

If alternatively over the post-WWII generations we had told the rest of the world, "we're not paying your military costs to let you free ride on us, you're all going to pay your own", well, they would have. And as he who pays the piper calls the tune, they'd have all played to their own tunes regardless of us.

The Japanese would have re-armed independently and been sailing around the Pacific with a nuke-armed fleet, the Germans would have rearmed, everyone would have. The US military hegemony the French hate wouldn't exist. And everybody's military spending would be so much the higher for it, which would be bad. (Not to mention how that arrangement has worked out on the merits in the end many prior times, with other large economic costs resulting).

Today the Japanese are near pacifists and the Europeans have gotten so soft from free riding under the protection of the US military umbrella that in their worst tiff they could barely manage an open-handed slap against each other.

Considering their thousand-year historical records, this is not a benefit? And as it has occurred US military spending has steadily fallen from over 14% of GDP in the 1950s to about 4% today. Is all that such a failure? And that fallen-to-4% is hardly what's threatening our future national solvency.

In sum, the alternative to US military hegemony was not a world where military spending would be even lower than today's, one of doves and flowers decorating old rifles, but instead one of multi-polar military competition with spending higher all around than today. (There are a few realms in which monopoly is good and competition is bad.)

And US military spending at very near its 70-year low in GDP terms is not the thing threatening to bust the budget -- even gutting it would come nowhere near to covering the unfunded social spending promises that we just keep adding and adding to.


Um, Mr Bartlett is engaging

Um, Mr Bartlett is engaging in sleight-of-hand here. The "deal" in Europe typically involves progressive income taxation that is a bit *steeper* than in the US, PLUS a VAT.

If Mr Bartlett wants an example of what steep progressive income tax rates were like, he should consult the 1940-60s. Such awful times to be rich, weren't they?

He should be glad that no one appears to be considering revising income tax rates more than to revive roughly the structure of the 1990s, another oppressive time to be rich....

But, we will have a VAT in this country sooner rather than later, which will allow us not to return to the tax rates that preceded Reagan. The rich should be grateful for that.


My view on taxes

Why not just shift taxation to how income was made, rather than the amount of it?

The overwhelming majority of the benefit from the existence of the U.S. government goes to high finance & other well connected interests. It is obvious that this bleeds us dry. Yet the tax code is designed so the less your income has anything to do with an actual market (and thus the less productive it is) the more loopholes & outright handouts you get. Within the assumption that the U.S. government continued to exist, the just thing to do would be to scrap the entire current tax code, replacing it with one that taxes stock transactions, profit from natural resource extraction, & land value (so that the people who really benefit from the State are the ones paying for it). Do that, then replace the entire ineffectual social aid bureaucracy with a generous Citizens Dividend.


The income tax can never go away

I entirely agree with you in the need for the implementation of an American VAT, but it simply does not raise enough money to replace corporate and income taxes. Government revenue in this country, even in the anemic 2009 fiscal year when revenues were only 15% of GDP, were 2.5 trillion. A 20% VAT, even assuming consumption remained at 70% of GDP- which it wouldn't, would only raise about 1.2 trillion dollars when fully implemented. If the U.S. is going to substantially increase revenues for these social programs and debt management then it needs to have a VAT *and* keep its current income taxes. I didn't see you advocating for the abolition of the income tax, Bruce, but you also didn't mention that even with a VAT income taxes would still raise most of government revenues.


Do the Right Thing

Except it is the right thing to do.

The welfare of your fellow man is more important than any other concern save for your own safety. Make sure you are economically and physically secure in the world and then devote your remaining energies to others. There is no greater calling or higher moral code.


Perhaps you should meditate on the phrase "bid up the price of"

The argument that one should be indifferent to inequality as long as those at the lower end don't loose out reflects a failure to really think about the nature of monetary wealth.

Think of the following hypothetical example:

In a given area (say New York) there is one rich person and 1000 "lower wealth" people. All of them want to be able to have a weekend place at (say) the Hamptons.

At Time-0 the rich person has a large summer place, taking up (say) 10% of the available space in the Hamptons while the remaining 1000 people share (and compete for parts of) the 90%.

Suddenly, the rich person acquires some extra money, enough to add an extension to his/her summer house - taking it up to 15% of the available space.

Now only 85% of the geographic site remains for the 1000 "lower wealth" people to share ... so each now gets a smaller lot (or pays more for the same size lot as the prices of land get "bid up").

Clearly under that scenario, thought the "lower wealth" people didn't loose out in cash terms, in terms of their actual living standard they clearly did.

Though overly simplified, this example reflects a great deal of what actually happens in the real world ... and thus stands as a counter-argument to your position.

Looking forward to hearing/reading your response.

Regards,

SamB




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