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With early Tuesday’s abrupt evacuation of Zuccotti Park, the City of New York has managed—for the moment—to dislodge protesters from Wall Street. But it will be much harder to turn attention away from the financial excesses of the very rich—the problems that have given Occupy Wall Street such traction. Data on who is in the top 1 percent of earners further reinforces their point. Here’s why.
Though the situation is often described as a problem of inequality, this is not quite the real concern. The issue is runaway incomes at the very top—people earning a million and a half dollars or more according to the most recent data. And much of that runaway income comes from financial investments, stock options, and other special financial benefits available to the exceptionally rich—much of which is taxed at very low capital gains rates. Meanwhile, there has been something closer to stagnation for almost everyone else—including even for many people in the top 20 percent of earners.
This may seem counterintuitive at first. After all, analysts have long painted a picture of growing inequality over the past few decades in which the top quintile’s share of the national income has risen while the share of the other 80 percent has fallen. But almost all the gains for the top 20 percent was for the top 1 percent. And half of that is accounted for by a tiny group within the top percent—those earners in the top 0.1 percent. Meanwhile, for the four quintiles below the 80 percent level, the share of total income fell significantly. For those from the 80th to the 99th percentile, the share rose only slightly (a little more rapidly as you go higher up).
In other words, Occupy Wall Street’s claim that “We are the 99 percent” is dead on right.
So it’s worth knowing who is in that group of very rich with runaway incomes. Several news reports in recent weeks have cited a seminal 2010 study that uses IRS tax returns to find out who belongs to the top 0.1 percent. The authors deserve mention because they are often left out when their results are cited: Jon Bakija of Williams College, Adam Cole of the US Treasury, and Bradley Heim of Indiana University. This was not a Treasury study, however, but a private if scholarly one.
One key finding of the study is that three out of five of those in the top 0.1 percent of tax filers are executives or managers of financial and non-financial companies. Overall, more are from non-financial companies. Does this partly exonerate Wall Street, suggesting it is really Main Street where the problem lies?
In fact Bakija, Cole and Heim’s analysis shows the opposite: it turns out that much of the increase in wealth of non-financial executives was also tied to the rise in stock prices. Keeping in mind that stocks options appear as wages in the data, it seems Wall Street itself was often a main source of income growth for “non-financial” managers as well. (Lawyers were another large category of tax payers in the top 0.1 percent, and though there is not direct data for this, one can fairly assume that many of those in corporate firms made a lot of money from the booming business on Wall Street.)
Next, think about how these executives managed their businesses. If they wanted a big pay check they had to orient their strategies to push up their stock prices — that is, often to appeal to the financial fads and fashions of the day. These strategies typically have included cutting labor costs and R&D in order to boost short-term profits. This delighted their advisers on the Street. Stock investors soon loved nothing better than consistent increases in quarterly profits, and not coincidentally, stock options accounted for an ever-growing proportion of executive pay over the past thirty years. We used to say once that Wall Street worked for business, but over the past thirty years business has come to work for Wall Street.
It is just as interesting to explore the factors that the authors found out probably did not cause the surge at the top. Economists typically posit sophisticated technologies (often related to digitalization) as a source of growing inequality: because these technologies require better educated and smarter workers, those who have mastered them are rewarded handsomely. But there was no surge at the very top in other nations like Japan or in Western Europe, which also adopted the same technologies.
Similarly, some have argued that globalization led to higher incomes at the top because skilled workers can sell themselves globally at ever higher salaries. Again, however, such skilled workers have not seen a surge at the very top in Europe or Japan.
One reason for the discrepancy between the US and other countries is that boards of directors in the US are especially willing to give their CEOs and other high level executives big raises and generous stock options. Lucian Bebchuk of Harvard has done a lot of research on this so-called “governance” issue. Meantime, as Bebchuk’s work shows, shareholder influence over executive compensation is far too weak. And there is also the issue of culture itself. America—with its admiration for the self-made man—tolerates high remuneration for the men and women at the top and lower wages in the middle and the bottom. Culture likely matters.
But when we put it all together, compensation tied to stock options along with unusually high profits by financial firms, much of which was passed on to their executives, seems to be the overriding factor. This is probably now the main driver of what we call income inequality in America and what we should more accurately call runaway incomes at the very top.
One other major point requires some attention. This runaway at the top is different from other periods of great inequality, like the late 1800s. Back then, the Robber Barons may have kept money due to monopoly advantages and their power over workers. All the while they were adding to GDP by building oil and steel giants, railroads, and mass production companies from chewing gum to cars.
Today’s people at the top exploit workers in somewhat different ways. There is constant pressure to keep wages down by CEOs in order to push up stock prices. This is the modern-day Robber Baron equivalent. Corporate takeover and leveraged buyouts have had the same effect: they build up cash flow by cutting expenses in order to pay off the debt they took on for their huge acquisitions. This is how Wall Street helps creates a culture in which it is considered okay for a company to fire workers while giving its CEO a giant raise.
But much else of what happens on Wall Street has nothing to do with the real economy, except to waste hundreds of billions of misdirected savings that are plowed back into useless speculation and casino-like gambling by the very rich on trades among themselves. As we have seen, it was this kind of reckless trading that fueled the credit crisis and the collapse of investment houses like Lehman in 2008. The way to deal with this is more serious regulation, including restrictions on the amount of leverage buyout artists and privatizers are allowed to take on. And since we are talking about outrageously high incomes at the very top, higher taxes on the highest earners also make very good sense because much of that income was not reflecting real contributions to the economy—in fact, it was arguably doing just the opposite.
So Occupy Wall Street is right: the financial firms are much to blame for runaway incomes at the top. Yet understanding the nature of inequality in America should place the focus where it truly belongs, on the other 99 percent. Wages have by and large stagnated in America. The real problem is that America’s job machine is broken. Wall Street is partly but not entirely responsible for this. And policies to adjust this—persistent fiscal stimulus, substantial public investment in infrastructure and industry, a lower dollar to the yen, a higher minimum wage, and direct job creating programs like the New Deal’s Works Progress Administration—are what’s needed. If we do not begin to develop such policies, we will not have only the problem of runaway incomes for the few at the very top, but a large and growing part of the population—some of which is highly skilled and educated—that is cut off from the economy altogether.
November 16, 2011, 12:25 p.m.
What kind of jobs program would people be willing to join? Many of these people are out of work because they cannot find employment in their chosen field or at their desired salary. Believe it or not there are job openings - just not at the level of pay or doing the tasks they want to do. What would a jobs program do for a large group of self-entitled people with largely inapplicable degrees? I would imagine most of them would not do the ditch-digging type work most of the New Deal Programs provided.Furthermore, raising the minimum wage will decrease the amount of jobs available, not increase it.
What is public investment in industry? Like Solyndra? Like the renewable fuel industry? Why are we going to encourage more money to be wasted on inefficient, practical industries?
At the end of the day the social welfare state of Europe is crumbling into abyss because it is impractical and because it is not affordable. Why are we trying to construct it here?
The voices in your head come from Fox News and Archie Bunker re-runs.
Jobs programs-look at all the money we pissed away in Iraq and Afghanistan. We privatized the logistics jobs to companies like Halliburton, Dick Cheney's joint. They hired east Asians to do the jobs that could have gone to American civil forces or formerly done by soldiers. Keynesian stimulus for Indonesia and the Phillipines, stimulus for Dick Cheney, nothing for American workers.
The New Deal included a number of jobs that educated people could be trained for quickly. Today the greatest need but the least will is for forensic accounting-imagine the money the Treasury would have if the IRS could audit people, the FBI could prosecute white collar crime, the EPA could punish polluters. Obama won't do it and the GOP won't do it.
Public investment in industry has always been hit or miss, but it has been successful at raising the GDP and giving people jobs. Ever since WWI, when the government took over the railroads, it has required a progressive government to repair the damage caused by the perverse incentive structure of financialized capitalism. Nuclear industry, hydroelectric power, shipbuilding, electronics, internet, cell phones, computers-all government investments. Railroads got land grants. So your point is pretty much toast.
Capitalism is a powerful engine that can be harnessed to do good work or can explode on the racetrack killing spectators. It needs a harness and fences to do good, and it doesn't belong everywhere because it is inappropriate or ineffective in many cases.
Europe's troubles have little to do with the social safety network and everything to do with the corruption of underregulated capital-cronyism, lack of transparency, control fraud by regulators who go through the revolving door into industry, tiered justice systems that punish the poor or politically weak and let crooks run amok. Just like America.
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With early Tuesday's abrupt evacuation of Zuccotti Park, the City of New York has managed-for the moment-to dislodge protesters from Wall Street. But it will be much harder to turn attention away from the financial excesses of the very rich-the problems that have given Occupy Wall Street such traction. Data on who is in the top 1 percent of earners further reinforces their point. Here's why.
Though the situation is often described as a problem of inequality, this is not quite the real concern. The issue is runaway incomes at the very top-people earning a million and a half dollars or more according to the most recent data. And much of that runaway income comes from financial investments, stock options, and other special financial benefits available to the exceptionally rich-much of which is taxed at very low capital gains rates. Meanwhile, there has been something closer to stagnation for almost everyone else-including even for many people in the top 20 percent of earners.
This may seem counterintuitive at first. After all, analysts have long painted a picture of growing inequality over the past few decades in which the top quintile's share of the national income has risen while the share of the other 80 percent has fallen. But almost all the gains for the top 20 percent was for the top 1 percent. And half of that is accounted for by a tiny group within the top percent-those earners in the top 0.1 percent. Meanwhile, for the four quintiles below the 80 percent level, the share of total income fell significantly. For those from the 80th to the 99th percentile, the share rose only slightly (a little more rapidly as you go higher up).
In other words, Occupy Wall Street's claim that "We are the 99 percent" is dead on right.
So it's worth knowing who is in that group of very rich with runaway incomes. Several news reports in recent weeks have cited a seminal 2010 study that uses IRS tax returns to find out who belongs to the top 0.1 percent. The authors deserve mention because they are often left out when their results are cited: Jon Bakija of Williams College, Adam Cole of the US Treasury, and Bradley Heim of Indiana University. This was not a Treasury study, however, but a private if scholarly one.
One key finding of the study is that three out of five of those in the top 0.1 percent of tax filers are executives or managers of financial and non-financial companies. Overall, more are from non-financial companies. Does this partly exonerate Wall Street, suggesting it is really Main Street where the problem lies?
In fact Bakija, Cole and Heim's analysis shows the opposite: it turns out that much of the increase in wealth of non-financial executives was also tied to the rise in stock prices. Keeping in mind that stocks options appear as wages in the data, it seems Wall Street itself was often a main source of income growth for "non-financial" managers as well. (Lawyers were another large category of tax payers in the top 0.1 percent, and though there is not direct data for this, one can fairly assume that many of those in corporate firms made a lot of money from the booming business on Wall Street.)
Next, think about how these executives managed their businesses. If they wanted a big pay check they had to orient their strategies to push up their stock prices-that is, often to appeal to the financial fads and fashions of the day. These strategies typically have included cutting labor costs and R&D in order to boost short-term profits. This delighted their advisers on the Street. Stock investors soon loved nothing better than consistent increases in quarterly profits, and not coincidentally, stock options accounted for an ever-growing proportion of executive pay over the past thirty years. We used to say once that Wall Street worked for business, but over the past thirty years business has come to work for Wall Street.
It is just as interesting to explore the factors that the authors found out probably did not cause the surge at the top. Economists typically posit sophisticated technologies (often related to digitalization) as a source of growing inequality: because these technologies require better educated and smarter workers, those who have mastered them are rewarded handsomely. But there was no surge at the very top in other nations like Japan or in Western Europe, which also adopted the same technologies.
Similarly, some have argued that globalization led to higher incomes at the top because skilled workers can sell themselves globally at ever higher salaries. Again, however, such skilled workers have not seen a surge at the very top in Europe or Japan.
One reason for the discrepancy between the US and other countries is that boards of directors in the US are especially willing to give their CEOs and other high level executives big raises and generous stock options. Lucian Bebchuk of Harvard has done a lot of research on this so-called "governance" issue. Meantime, as Bebchuk's work shows, shareholder influence over executive compensation is far too weak. And there is also the issue of culture itself. America-with its admiration for the self-made man-tolerates high remuneration for the men and women at the top and lower wages in the middle and the bottom. Culture likely matters.
But when we put it all together, compensation tied to stock options along with unusually high profits by financial firms, much of which was passed on to their executives, seems to be the overriding factor. This is probably now the main driver of what we call income inequality in America and what we should more accurately call runaway incomes at the very top.
One other major point requires some attention. This runaway at the top is different from other periods of great inequality, like the late 1800s. Back then, the Robber Barons may have kept money due to monopoly advantages and their power over workers. All the while they were adding to GDP by building oil and steel giants, railroads, and mass production companies from chewing gum to cars.
Today's people at the top exploit workers in somewhat different ways. There is constant pressure to keep wages down by CEOs in order to push up stock prices. This is the modern-day Robber Baron equivalent. Corporate takeover and leveraged buyouts have had the same effect: they build up cash flow by cutting expenses in order to pay off the debt they took on for their huge acquisitions. This is how Wall Street helps creates a culture in which it is considered okay for a company to fire workers while giving its CEO a giant raise.
But much else of what happens on Wall Street has nothing to do with the real economy, except to waste hundreds of billions of misdirected savings that are plowed back into useless speculation and casino-like gambling by the very rich on trades among themselves. As we have seen, it was this kind of reckless trading that fueled the credit crisis and the collapse of investment houses like Lehman in 2008. The way to deal with this is more serious regulation, including restrictions on the amount of leverage buyout artists and privatizers are allowed to take on. And since we are talking about outrageously high incomes at the very top, higher taxes on the highest earners also make very good sense because much of that income was not reflecting real contributions to the economy-in fact, it was arguably doing just the opposite.
So Occupy Wall Street is right: the financial firms are much to blame for runaway incomes at the top. Yet understanding the nature of inequality in America should place the focus where it truly belongs, on the other 99 percent. Wages have by and large stagnated in America. The real problem is that America's job machine is broken. Wall Street is partly but not entirely responsible for this. And policies to adjust this-persistent fiscal stimulus, substantial public investment in infrastructure and industry, a lower dollar to the yen, a higher minimum wage, and direct job creating programs like the New Deal's Works Progress Administration-are what's needed. If we do not begin to develop such policies, we will not have only the problem of runaway incomes for the few at the very top, but a large and growing part of the population-some of which is highly skilled and educated-that is cut off from the economy altogether.
November 16, 2011, 12:25 p.m.
What kind of jobs program would people be willing to join? Many of these people are out of work because they cannot find employment in their chosen field or at their desired salary. Believe it or not there are job openings - just not at the level of pay or doing the tasks they want to do. What would a jobs program do for a large group of self-entitled people with largely inapplicable degrees? I would imagine most of them would not do the ditch-digging type work most of the New Deal Programs provided.Furthermore, raising the minimum wage will decrease the amount of jobs available, not increase it.
What is public investment in industry? Like Solyndra? Like the renewable fuel industry? Why are we going to encourage more money to be wasted on inefficient, practical industries?
At the end of the day the social welfare state of Europe is crumbling into abyss because it is impractical and because it is not affordable. Why are we trying to construct it here?
The voices in your head come from Fox News and Archie Bunker re-runs.
Jobs programs-look at all the money we pissed away in Iraq and Afghanistan. We privatized the logistics jobs to companies like Halliburton, Dick Cheney's joint. They hired east Asians to do the jobs that could have gone to American civil forces or formerly done by soldiers. Keynesian stimulus for Indonesia and the Phillipines, stimulus for Dick Cheney, nothing for American workers.
The New Deal included a number of jobs that educated people could be trained for quickly. Today the greatest need but the least will is for forensic accounting-imagine the money the Treasury would have if the IRS could audit people, the FBI could prosecute white collar crime, the EPA could punish polluters. Obama won't do it and the GOP won't do it.
Public investment in industry has always been hit or miss, but it has been successful at raising the GDP and giving people jobs. Ever since WWI, when the government took over the railroads, it has required a progressive government to repair the damage caused by the perverse incentive structure of financialized capitalism. Nuclear industry, hydroelectric power, shipbuilding, electronics, internet, cell phones, computers-all government investments. Railroads got land grants. So your point is pretty much toast.
Capitalism is a powerful engine that can be harnessed to do good work or can explode on the racetrack killing spectators. It needs a harness and fences to do good, and it doesn't belong everywhere because it is inappropriate or ineffective in many cases.
Europe's troubles have little to do with the social safety network and everything to do with the corruption of underregulated capital-cronyism, lack of transparency, control fraud by regulators who go through the revolving door into industry, tiered justice systems that punish the poor or politically weak and let crooks run amok. Just like America.
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November 18, 2011, NYTimes.com
Tackling Income Inequality By LAURA D'ANDREA TYSON Laura D'Andrea Tyson is a professor at the Haas School of Business at the University of California, Berkeley, and served as chairwoman of the Council of Economic Advisers under President Clinton.
The Occupy Wall Street protesters have focused attention on rising income inequality in the United States, and they are right to do so.
Today's Economist Perspectives from expert contributors. .Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich's "Aftershock" and Raghuram Rajan's "Fault Lines").
According to a recent report by the Congressional Budget Office, rising income inequality is a long-term trend that began in the late 1970s and strengthened during the last two decades. The report confirms the protesters' belief that the rising gap between the income of the top 1 percent and the income of everyone else is a major factor behind escalating inequality.
In the last 20 years, inequality has been largely a story of a small elite – not just the top 1 percent, but the top 0.1 percent – pulling away from everyone else in every source of household income: labor income, capital income and business income.
The top 1 percent's share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson's "Winner-Take-All Politics").
Why have incomes of those in the top 1 percent soared? Their occupations provide some clues. From 1979 to 2005, nonfinancial executives, managers and supervisors accounted for 31 percent of the top 1 percent, medical professionals for 16 percent, financial professionals for 14 percent and lawyers for 8 percent.
Together, executives, managers, supervisors and financial professionals accounted for 60 percent of the increase in the top 1 percent's income, with a widening compensation differential between those in the financial sector and those in other sectors of the economy after 1990.
Superstar athletes, actors and musicians, often portrayed among the super-rich, accounted for about 3 percent of the top 1 percent from 1979 to 2005, far less than the less glamorous people (mostly men) who lead and advise America's businesses.
Researchers have identified several reasons for the rapid growth in incomes for the occupations that make up most of the top 1 percent, including "winner take all" technical innovations that have changed the labor market for superstars in all fields; increases in business size and complexity; a growing premium for highly specialized skills; changes in the forms of executive compensation, including the rise of stock options and weaknesses in corporate governance; and the increasing size of the financial sector.
All of these factors have played a role, but there is no definitive evidence on their relative significance.
Growing inequality in labor compensation played a major role in increasing income inequality between the top 1 percent and the rest of the population from 1979 to 2007. Over the period, however, both the growing inequality in business income, including income from small firms, partnerships and S corporations, and in capital income in the form of dividends, interest and capital gains, as well as the rising share of these forms of income in household income, played a more significant role, especially after 2000.
According to the Congressional Budget Office, from 2002 to 2007 more than four-fifths of the increase in income inequality was the result of an increase in the share of household income from capital gains, with the remainder the result of an increase in other forms of capital income.
Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed - and volatile - source of household income.
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Do you agree with this?:Entrepreneurship and inequality, by Joshua Gans: So I was reading Felix Salmon's account of a debate here in Toronto between Paul Krugman and Larry Summers. ... I was struck by this passage.
Summers also tried to defend inequality, at least in part, by saying that "suppose the United States had 30 more people like Steve Jobs" - that, he said, would be a good thing even as it increased inequality. "So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage."Now there is nothing new in this view. It is an argument for inequality that reminds me of Ted Baxter (from the Mary Tyler Moore Show) who intended to have six children in the hope that one of them grows up to solve the population problem. The inequality version is that we accept inequality in the hopes of getting the fruits of entrepreneurship.
So no one disagrees with encouraging entrepreneurship. ... But when we link it to inequality in this way we are asking ... whether the poor (or middle class) are happy outsourcing knowledge creation and are each willing to pay a bit to see that happen.
Seen in this light, the problem of inequality is a design problem. This is something that Jean Tirole and Glen Weyl have recently investigated. They ask a related question: when is it a good idea to confer entrepreneurs with market power (as a reward)? The answer turns out to be, when the government does not know much about the nature of demand for innovative products. In this world, by exposing entrepreneurial rewards to what they can get through monopoly pricing, we screen for innovations that maximize the gap between innovative benefits and innovative costs. The implication here is that if we outsourced innovation to creative geniuses, we would do it in a way that allows them to charge high prices.
But does that carry over when there is real inequality? Let's face it, the actual products Steve Jobs produced were not priced for the poor. The best we can say is that when they were imitated the poor received some benefits (which may also be arguable). So is it really the case that poorer people would be willing to be taxed more (by government or through monopoly pricing) in order to bring out more people like Steve Jobs? Instead, the Steve Jobs argument is surely one for a lateral wealth transfer from those with wealth - innovators or not - to be more concentrated amongst those who innovate. It is inequality in talent and skill and its mismatch to wealth that drives the argument not inequality in wealth.
It takes a village to make an iPad.
Jesse said...
Has Mr. Summers ever taken a course in logic?
Superior merit can result in inequality. But so can fraudulent redistribution of wealth and gaming the system and many other things that are not desirable.
"Where you have the concentration of power in a few hands, all too frequently men with the mentality of gangsters get control."
Lord Acton
And plenty of that has taken place under Mr. Summers watch.
Even intelligent and well educated men can be bullies and thugs at heart. Morality is not necessarily a gift of intelligence, alas.
eightnine2718281828mu5:.
I'l take 10 Dennis Ritchies over 30 Steve Jobs any day.
Rune Lagman:
"suppose the United States had 30 more people like Steve Jobs"
How do we know that there aren't thousands (millions) of Steve Jobs's out there, that doesn't succeed because their opportunities are derailed by inequality. How successful would Steve Jobs have been without Steve Wozniak? Without The Woz, the first Apple would have remained "dream-ware".
Steve Jobs (Apple), Bill gates (MicroSoft), Larry Page (Google), and co. were all beneficiaries of opportunities provided by higher education provided by the California university system being affordable to almost anyone.
They were successful because "society" (we) provided the means (education) and the opportunity. Inequality limits opportunity to fewer people. The less people with opportunity, the less innovation.
JeffF said... Summers ought to learn a bit about Job's early life.
He was adopted by a middle class family (machinist and accountant), went to California public schools, at the time among the best in the nation.
He is a product of the much less unequal society of mid 1900's America, not of the vastly more unequal society of today.
If we want more Steve Jobs's we need to ensure that every kid has a chance to learn and grow and excel, not ensure that after the tiny minority of them who excel ridiculously become fantastically absurdly rich soon after they become incredibly rich.
Summers ought to have talked about Gates, son of a wealthy lawyer who went to the most expensive private high school in Washington state. He actually is the product of wealth and privilege, at least personally.
Dirk:
The problem is not so much with the Steve Jobs of the world getting rich, as with the idea that 50 years from now that his Great Grandkids will be among the very wealthest and most powerful in the country. That is creeping feudalism. Also does nayone really think that Jobs would have sat on his hands and done nothing if his marginal tax rate were 39% rather than 35%? After all when he and Woz got together in the garage, the marginal tax rate was a lot higher than 39%.
Devin
...in reply to Dirk... This is a point that should be made much more loudly!
Looking at the list of today's richest people shows two important things: -Inheritance is still the best "industry" for producing massive wealth. If conservatives are serious about encouraging hard work, they should support steps that eliminate this welfare class. -Most of the companies that produced these mega-billionaires (Apple, Berkshire Hathaway, Microsoft, Oracle, Wal-Mart, etc.) were established in an era when top marginal tax rates were north of 70%...so much for high taxes killing entrepreneurship
Greg:
So Summers' remark is wrong at least three ways.
If Jobs was one in a million, then there are 300 just like him in the USA.
If Summers meant "imagine if there were 30 more companies like Apple", then inequality would reduce thanks to millions having higher incomes than before.
At a deeper level, Summers is talking about the incentives and barriers to social mobility. Inequality is a barrier, not an incentive.
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Tyler Cowen:
Whatever Happened to Discipline and Hard Work?, by Tyler Cowen, Commentary, NY Times: ...The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth. ...In short, the traditional, pro-wealth cultural vision has a great appeal for me. But I must admit that it is showing some wear and tear, which may partly be why the criticisms made by the demonstrators at Zuccotti Park have so much resonance.
The first problem is that higher status for the wealthy can easily lead to crony capitalism. ...
The second problem is that many conservatives have become so attached to their cultural vision that they have ceded sound, technocratic reasoning to the left and center. For instance there is a common willingness among conservatives to defend the Bush tax cuts, even though the evidence does not show much of an economic payoff. ...
The third problem is that the pro-wealth cultural vision may be overly optimistic about human willingness to embrace the idea of responsibility. ...
The counterintuitive tragedy is this: modern conservative thought is relying increasingly on social engineering through economic policy, by hoping that a weaker social welfare state will somehow promote individual responsibility. Maybe it won't.
For one thing, today's elites are so wedded to permissive values - in part for their own pleasure and convenience - that a new conservative cultural revolution may have little chance of succeeding. Lax child-rearing and relatively easy divorce may be preferred by some high earners, but would conservatives wish them on society at large, including the poor and new immigrants? Probably not, but that's often what we are getting.
In the future, complaints about income inequality are likely to grow and ... higher income inequality will increase the appeal of traditional mores - of discipline and hard work - because they bolster one's chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.
It remains to be seen how many of us are up to its demands.
I am not a sure as he is that as inequality continues to increase, people will adopt conservative values rather than wondering why the playing field needed for those conservative values to express themselves has become increasingly unfair. And if they do conclude it's unfairness rather than values that is at the root of the growth in inequality, their reaction may be different.
(Also, my view of what is behind society's problems is also quite different from Tyler's. I suppose this makes me one of the "academics on the left" who "seem more comfortable focusing on the very real offenses of plutocrats and selfish elites," but I'll note that Tyler seems quite comfortable focusing on the problems posed by "today's elites" himself, i.e. the impediment they pose to the cultural values he'd like to see take hold. The comments on wealth and crony capitalism are also not far from complaints about plutocracy. We on the left have values that we believe in every bit as much as conservatives, but those values differ from those held by conservatives in important ways and that will naturally lead us to focus on different aspects of these problems. The fact that we talk about issues such as crony capitalism and powerful elites does not mean we have abandoned those values any more than it means Tyler has abandoned his values when he raises these issues himself. All it says is that the path to reach these values differs from the path preferred by conservatives.)
anne:
In the future, complaints about income inequality are likely to grow and ... higher income inequality will increase the appeal of traditional mores - of discipline and hard work - because they bolster one's chances of advancing economically. That means more people and especially more parents will yearn for a tough, pro-discipline and pro-wealth cultural revolution. And so they should.
It remains to be seen how many of us are up to its demands.
-- Tyler Cowen
[Really, this passage needs to be read several times over. I am still not sure I understand just how ridiculous this is, but the re-reading is fun.]
The poorer we are made the harder we will work for the rich no matter how little chance there is of being rich also. Is that it?
Ben Brennan:
The way I see it, there are three major drivers of wealth inequality:
1.) Dependence on oil in all aspects of production, forcing firms to cut wages in order to maintain profits.
2.) Decline of unions, decreasing labor's ability to bargain for hire shares of profit.
3.) Increasing healthcare costs, which cause firms to spend more on providing health benefits eroding wages.
Ironically, the political party taking steps to address these is the Democratic party, while the Republican candidates have all been proposing policies that would only exacerbate them even more.
Kosta:
Mr. Cowan is missing the boat here.
"The United States has always had a culture with a high regard for those able to rise from poverty to riches. It has had a strong work ethic and entrepreneurial spirit and has attracted ambitious immigrants, many of whom were drawn here by the possibility of acquiring wealth."
This is true, however what Mr. Cowan has failed to acknowledge is that it is becoming more and more difficult to get ahead in the United States. It is not just the inequality of wealth which is driving the protests, but it is also the inability of the vast majority of the populace to access that wealth, no matter their work ethic and entrepreneurial spirit. The U.S.'s intergenerational mobility and economic mobility have been decreasing for the last 30 years, and lags most of its peers. This inequality isn't about "work ethic", it's about an unfair system.
RW:
Cowen appears to be proceeding from "what everyone [he knows] knows" -- e.g., American values, entrepreneurship = "pro-wealth" (whatever that is), "pro-wealth = responsibility (wtf?), values are "eroding" -- which reduces to an article on Cowen's angst and little more.
Frankly I prefer de Tocqueville.
But if Cowen is to be taken seriously then an estate tax of 100% on everything above $5 mil or so would take care of the problem ...for the wealthy and everyone else (de Tocqueville thought of that one too).
Tracy:
That is the one thing Conservatives don't want. In their value system wealth equals merit, so they believe in protecting the rich and have little regard for the poor. They rationalize the rest of their arguments like Cowen above, but wealth = merit is the foundation of their belief system. Everything else is window dressing.
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FT Alphaville
In "The Broken Contract", his essay in the latest edition of Foreign Affairs, New Yorker staff writer George Packer argues that the source of widening US inequality is to be found when…
Organized money and the conservative movement seized the moment back in 1978 to begin a massive, generation-long transfer of wealth to the richest Americans.
Economic accounts of rich-world income inequality tend to emphasise structural factors: technological change, free movement of capital, cheap consumer goods made in Asia, increased returns to high skill levels, and so on. "Although those factors played a part, they have not been decisive. In Europe, where the same changes took place, inequality has remained much lower than in the United States," Packer writes.
For Packer, lobbying is key. In 1978, three union-backed "reform bills" were brought up for a vote in Congress, and despite Democratic control of the White House and of both houses, each failed. This marked the turning point: political spending by business was no longer "disinterested" and whereafter lobbying and campaign spending increased exponentially, Packer argues.
How and why this happened are explored in Jacob Hacker and Paul Pierson's recent book, Winner-Take-All Politics. Their explanation, in two words, is organized money. Business groups launched a lobbying assault the likes of which Washington had never seen, and when it was all over, the next era in American life had begun.
Organized money did not foist these far-reaching changes on an unsuspecting public. In the late 1970s, popular anger at government was running high, and President Jimmy Carter was a perfect target. This was not a case of false consciousness; it was a case of a fed-up public. Two years later, Reagan came to power in a landslide. The public wanted him.
The transfer continued in good economic times and bad, under Democratic presidents and Republican, when Democrats controlled Congress and when Republicans did. For the Democrats, too, went begging to Wall Street and corporate America, because that's where the money was. They accepted the perfectly legal bribes just as eagerly as Republicans, and when the moment came, some of them voted almost as obediently. In 2007, when Congress was considering closing a loophole in the law that allowed hedge fund managers to pay a tax rate of 15 percent on most of their earnings-considerably less than their secretaries-it was New York's Democratic senator Charles Schumer who rushed to their defense and made sure it did not happen. As Bob Dole, then a Republican senator, said back in 1982, "Poor people don't make campaign contributions."
Packer is too keen to reject structural causes. "The same changes" didn't take place to the same extent in Europe, at least outside the UK, for several reasons: ideology, stronger union power, more generous social safety nets, and different sources of comparative advantage (less services-dependent).
And while we agree with most of the points Packer makes, the essay is also a missed opportunity to cite the growing literature about inequality's impact on the macroeconomy. When the likes of Rajan, Roubini and Wolf are warning of the dangers caused by disparities in wealth and income, there's a chance to persuade those who might not otherwise agree that vast inequality is bad per se.
Furthermore, "organised money" didn't appear overnight, as Dwight Eisenhower, among others, noted.
But at the risk of looking for turtles all the way down, there's no hiding the staggering rise of money in US politics over the last three decades.
A paper released Monday by economists from Harvard Business School and the International Monetary Fund quantifies lobbying and makes an important finding: barriers to entry are high, therefore surprisingly few firms are able to directly influence the political process.
The authors first use several databases on lobbying expenditures by public companies to size the overall market. Then they perform a neat natural experiment looking at how firms reacted to the dramatic decline in 2004 of the H1-B visa cap, which meant fewer high-skilled foreigners could work in the US. Did affected firms lobby against it? If so, which ones?
Here are some facts mentioned in the paper:
– Total lobbying expenditure outnumbers campaign contributions by a factor of nine.
– Only 10 per cent of the sampled publicly traded firms lobbied at least once between 1998 and 2006.
– The probability that a firm lobbies in the current year given that it lobbied in the previous year is 92 per cent.
– Average (mean) yearly lobbying spend for active firms is $475,000.
– The average firm that lobbies is four times bigger by revenues and twice as big by assets as the average firm that does not.This leads the authors to hypothesise that (i) few firms lobby, (ii) lobbying status is strongly associated with firm size, and (iii) lobbying status is highly persistent over time. And it turns out that their natural experiment supports these ideas:
Using a panel data set of 171 major firms over 2001-2006 with detailed information on lobbying activities, we find that firms dependent on high-skilled immigration adjusted their lobbying behavior towards immigration-specific issues in response to the shock. While the response was very áexible among firms already lobbying, we do not find adjustments on the extensive marginó i.e., firms that were not lobbying on any issue prior to the shock did not start lobbying in response to the shock.
The authors go on to explain the high costs of entry for firms wishing to lobby: not only hiring lobbyists but also the time it takes to "build relationships" with lawmakers.
This is only one study and one natural experiment doesn't prove a broader point. However, we suspect it fits with how things actually work in Washington.
This concentration of power can't ultimately be good for anyone save for the firms themselves and K-street. The voices lawmakers hear don't reflect an accurate sample of affected people, and if politicians and lobbyists can predict who will kick up a fuss then it inclines politics to be depressingly predictable and transactional. Regulatory capture becomes commonplace. It took us a long-time to reach an open-access social order and it's not a good idea to give it up.
When it's folks from the IMF and HBS making these points, and not just New Yorker staff writers, it might be time to do look again at them rules.
Related links:
Lobbying looks like a risky business – FT
The cost of the revolving door – FT AlphavilleThis entry was posted by John McDermott on Thursday, November 10th, 2011 at 16:16 and is filed under Capital markets. Tagged with income inequality, lobbying, lobbyists. Edit this entry.
mutant_dog:
Of course a writer from the New Yorker has a certain perspective, which I would describe as liberal. But, that aside, it's an arms race. Look who's lobbying set up the 1978 rise of business-as-lobbyers - the unions (as the article says). Is not every interest is entitled to a voice, Mr Packer ?
I am reminded of a moment in the Internet bubble, circa 1998. Asked how government was affecting their business, one prominent entrepreneur said that, essentially, the US government was irrelevant. As I recall the flow of events, a couple of months later some committee launched some investigations, and soon, the giants of personal computing (most notably Microsoft) engaged DC themselves with a new found interest in.. lobbying.
The Beast will not be ignored. Nor can one do so safely.
As to income inequality, I am agnostic. It is real, it is growing; but I'm not convinced that government action is its cause. If the argument is that government inaction is causative, I would protest that if redistribution of the people's money is the best idea on the table, may it be piously wished that the inaction continue, virtuously.
Which, by the way, is why American liberals are painted as socialists. Obviously, they are not; they are redistributionists; but that doesn't have the same punch to it.
labantall
A couple of points
a) this applies just as much on this side of the pond. Inequality may have started increasing under Thatcher, but it continued apace under Blair and Brown - and if the latest IDS figures are correct, shows no sign of slowing up. IIRC, venture capitalists in the UK pay 10% tax when they unload the firm to some sucker - entrepreneurs relief.
b) to be fair, this is hardly characteristic of "conservative" movements. The interests of conservatives and of business are by no means identical.
c) mass immigration into the UK and US since the 1970s will also have been a factor. Depressing wages at the lower end of the scale has a deadening influence on wages quite a way up. Combine that with an attack on the wages of some middle-class professions (engineering, IT) via H1B visas in the States and imported ICT staff in the UK and there's quita an overall impact.
d) the policies of the US and UK over the last fifteen years have been neatly defined :
US : "Invade The World, Invite The World, In Hock To The World" (blogger Steve Sailer)
UK : "Globalisation In One Country" (academics Paul Hirst and Grahame Thompson)
perny:
The problem is rarely lobbyists in the OECD countries due to relatively high transparency. Even from a conceptual perspective, there is nothing intrisically wrong with lobbying in a democracy, especially if it is all recorded.
The problem in some of these countries, but particularly the US, is the other side of the coin: political campaign finance. The US has some extremely loose or even non-existent laws about who can donate how much to whom at the non-federal levels. This is what has enabled such extreme (relative to many other OECD) political and regulatory capture by private wealth interests.
In contrast, in Germany, for example, party financing is extremely highly regulated at every level of granularity - from donations, individuals, politicians, whole parties - and has been so since the end of World War II (for obvious reasons). There have been scandals, just like other countries, but due to clear rules and associated sanctions, strong penalties are rarely avoided and the public often metes out its own justice in votes for that party due to the public transparency of rule breaking.
The UK has made noises in the past about fully cleaning up its political financing, but everytime new sensible rules are proposed, they never get anywhere because it requires the politicians to agree to them, in effect bind themselves. So, here, while we never suffer so openly from corruption as in the US, our laws have developed gradually by scandal, which of course still leaves some serious gaps.
philip seaton
Options In the Us, lobbyists share the same fate as lawyers. Polls show that 85% of the population distrust lawyers in general, while the same 85% believe their lawyer is capable, honest, and committed. The same bi-polar approach exists to lobbyists.
In a society where there is multi-layer government which increasingly takes a greater role in individuals lives, lobbyists represent constituents interests, and those lobbyists are subjectively judged by the individual's attacment to the cause for which the lobbying is being done.
Why is that objectionable?
perny
The problem is rarely lobbyists in the OECD countries due to relatively high transparency. Even from a conceptual perspective, there is nothing intrisically wrong with lobbying in a democracy, especially if it is all recorded.
The problem in some of these countries, but particularly the US, is the other side of the coin: political campaign finance. The US has some extremely loose or even non-existent laws about who can donate how much to whom at the non-federal levels. This is what has enabled such extreme (relative to many other OECD) political and regulatory capture by private wealth interests.
In contrast, in Germany, for example, party financing is extremely highly regulated at every level of granularity - from donations, individuals, politicians, whole parties - and has been so since the end of World War II (for obvious reasons). There have been scandals, just like other countries, but due to clear rules and associated sanctions, strong penalties are rarely avoided and the public often metes out its own justice in votes for that party due to the public transparency of rule breaking.
The UK has made noises in the past about fully cleaning up its political financing, but everytime new sensible rules are proposed, they never get anywhere because it requires the politicians to agree to them, in effect bind themselves. So, here, while we never suffer so openly from corruption as in the US, our laws have developed gradually by scandal, which of course still leaves some serious gaps. 7.Report Mike13 | November 10 7:33pm | Permalink | Options In Europe there are some 15,000 lobbyists. Considering that 13,000 have spent $3.5 billion (in a suprisingly unfree "lobbying market" as your post points out), we might be looking at 3 bn euro spent in Europe to influence government decisions
watch jouralists pretending to be lobbyists (offering money to parliametarians to buy amendments): http://www.alter-eu.org/videos?page=1
Rik
The transfer of wealth is imho mainly caused by the fact that labor is now available all over the world and capital can easily move all over the world. It is much cheaper to hire labor in China cs than in say the US or Europe. US cies were the first ones really to outsource, Europe is further behind. Also the 'worldlanguage' facilitates that. There are not many Indians who speak German and probably just a handful that speak Finnish. Europe also had the advantage that part of the production could be transferred to Eastern Europe, often leaving the main factory in tact. But Europe is following. It is becoming more and more a worldmarket and production is done where it is the cheapest. So it is probably a trend we will see continue.
Setting it straight with higher taxation will also only partially work. And becomes also more and more difficult. Companies and also high end jobs can more easily be tranferred abroad. So not only wage competition but also tax competition and living cost competition.
Around 1978 only very few companies were really able to transfer manufacturing abroad (3rd World) and very few places you could set up a working quality manufacturing base. Now it is half of the world.
It goes even further now as the before manufacturing hubs have become markets in their own right. Often better equipped to adress demand of their local tastes.
Of course there are some other issues. Lobbying might be one and a dubious one. The main reason however is globalisation.
Imho it will give a constant downward pressure on wages and tax rates for many years to come. Protectionism imho will not work. Likely the main trend to set this right will be wage rises in countries like China (so we have some years to go). 9.Report Nobby | November 10 6:21pm | Permalink | Options I've experienced this a few times - particularly when it comes to tax codes and accounting rules in the US. You find that the fine details create a very different effect than the overarching stated intentions, often creating loopholes for tax lawyer, accountant and bankers to exploit. Of course, these are complex so only the large corporations and highest earners have the scale to make it worth doing.
However, to my mind the greatest example of bare faced abuse was the insertion of a clause protecting Eli Lilly from lawsuits in the Homeland Security Act.
http://www.cbsnews...s/main532886.shtml
Legal Tender
Who do you think wrote the Obamacare legislation? Nancy Pelosi?
All legislation in the US is written by lobbyists and campaign contributors. Congress (well, really Pelosi's staff rather than a Pelosi herself) is just a well-paid middle man between the law and the moneyed interests (be they unions or corporations).
If you want to change this system make regulations and tax policy simplistic and efficient. Reagan actually did this. Then the politicians and lobbyists added layers of complexity over the succeeding decades in return for cash and votes.
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October 28, 2011 | NYTimes.com
Rajat Gupta was rich by almost any standard. He just wasn't rich compared with many of the people who surrounded him. He knew it, and he didn't seem to like it.
More than a few of his friends and colleagues had tens or even hundreds of millions of dollars. They included his fellow board members at Goldman Sachs, the alumni of McKinsey & Company - a firm that Mr. Gupta ran and that paid him a few millions of dollars a year - who then made fortunes on Wall Street and, perhaps most important, his friend Raj Rajaratnam, the hedge-fund manager sentenced to 11 years in prison for insider trading. Mr. Gupta, who was indicted Wednesday for passing along corporate secrets to Mr. Rajaratnam, has proclaimed his innocence.
What seems beyond doubt, however, is that he was envious of the wealth that his peers were amassing. In that way, Mr. Gupta is a symbol of a different kind of income inequality from the one at the heart of the Occupy Wall Street protests, where demonstrators proclaim themselves part of the "other 99 percent" and criticize the top 1 percent of earners.
Mr. Gupta was surely part of the 1 percent. But seems to have felt as if he was part of the other 99 percent of that 1 percent.
You don't have to sympathize with him to see how his envy could have affected the choices he made - orienting his post-McKinsey career around making money, handing over large chunks of his money to Mr. Rajaratnam and, at least according to prosecutors, going to great lengths to curry favor with Mr. Rajaratnam.
Such envy extends well beyond people accused of committing crimes. The inequality among the rich is a major force pushing many graduates of the country's top colleges to Wall Street and drawing middle-aged professionals from other lines of work to finance.
Consider the numbers. Three decades ago, a taxpayer at the cutoff for the top 0.01 percent of earners - that is, in the top 1/10,000th - was making about 10 times as much as someone at the cutoff for the top 1 percent, according to research by the economists Emmanuel Saez and Thomas Piketty.
Since then, the top 1 percent has done very well, nearly doubling its income in inflation-adjusted terms, which is a far bigger raise than most households have received. Yet the very rich have done vastly better: someone at the cutoff for the top 0.01 percent now makes 30 times as much as someone at the top 1 percent, according to the latest numbers.
To someone making a few million dollars a year, these very rich - rather than the median-earning American - are often the relevant benchmark. "Most families are trying to keep up with the Joneses," as Catherine Rampell wrote in a post here earlier this year. "And in dollar terms, the rich are falling far shorter of their respective Joneses than the middle-income and lower-income are."
Selected comments
Jim Mirick Minneapolis
The greed that fuels this is so almost beyond comprehension that it boggles the mind. But it is us, through our Congress, that makes the laws that allow this to happen -- the whole fetid mess of it. Occupy Wall Street is beginning to make more and more sense to me. WE are responsible for electing Congress, we should step up and severely adjust the outlook of our representatives. And we should hold these people up to constant public ridicule until it becomes socially impossible for them to behave this way.Focus-on-Solutions TexasMisguided greed fuels the tea party movement to think that by demanding cuts to the lower class they will benefit. What they do not realize is that they are voting themselves into the poor class and guaranteeing that the gap widens more and more. They are asking to make the competition in this top 1% more intense as government has less and less ability to protect the common people from this bunch who will take everything for themselves.Rudy NCYes, voters control everything. It was what the Federalists feared most about the Constitution, that some day the common people would figure out how to vote based on what politicians actually did instead of what they promised to do. Our current crop of millionaire politicians are all about protecting themselves, their class, their large donors, and the rest of the top 1%.
.. And the Republican Party wants to reduce"..regulations that shackle business.." and I suppose they have in mind less SEC regulation. The fact of the matter is with the small SEC force having to deal with an investment market in the US whose index has risen 10 fold in 20 years, more complex and computer transactions in place, the business of ferreting out illegal trades, use of non-public information is very, very hard. If anything the SEC capabilities need to be reinforced with more personnel and computer tracking schemes.Finally the penalty for transgressions must be nominally very high to be an effective deterrent, including fines that may exceed several times the actual gains rather than just the gains.
Patty California
One of the reasons why we 99%ers aren't more angry at the 1% is that most of us don't live in close proximity with them.seattlesh:Imagine moving in next to a 0.1% family (i.e. a family in the top tenth of a percentile bracket, above 99.9% of all other Americans). Private jets landing at private airports where there are no lines at all. A $50,000 shopping trip in Milan to cheer up a daughter whose pet died. A vacation at Disneyland Hong Kong for a son whose best friend dumped him. A complete interior remodeling of the family vacation home on Ibiza, because that's how the Mrs deals with spring cleaning fever.
Imagine events like this happening all the time to these hypothetical 0.1% neighbors of yours, and you have to hear about them knowing that your uncle or your cousin has been out of work for well over a year.
Hal Horvath mostly from Austin, TXThis type of envy is incomprehensible for most of us. We may envy a neighbors new car but to think that a man with untold millions could possible feel in need is just plain sick. Maybe if he sits in a cell long enough he will have time to reflect upon the lunacy of it all. It might help if Lloyd Blankfein is in the cell across from him in full sight.
But readers likely understand that insider-trading is only the old-style form of how-to-get-rich-by-taking-other-peoples'-money. The widespread anger in the populace is in part that people who only push money in circles, so to speak, can get quite wealthy. Not investment like Buffett, but simply manipulation of assets -- new forms of front-running, new forms of fraud, etc.LOUIS ADESSA NEW YORK, NYIn those roiling sixties "eat the rich" was a catch phrase. No self respecting cannibal would touch these people. Spoiled beyond comprehension, protected by those deluded enough to think that a"free" market and smaller government is the answer to our societal woes. Nope, it's these guys. Remember Defarge.Tim TexasAt least he was human - envy is a common frailty. Even acquiring wealth well beyond your ability to spend will do nothing to quench envy.lydgate Virginia
My heart just bleeds for those poor folks making only a few million dollars a year. How ever do they endure it?
trader NY
What most people don't understand is how these super rich make their money. All the money comes from people putting money into mutual funds, 401K plans, etc. Don't you people get it? The super rich is getting 1-7% cuts of those money.R. Law FloridaAn excellent explication, David, which also illustrates how a feeding frenzy can develop in the CEO class which over-runs any sense of reason or need or performance, instead being driven by one-up-manship.Bluerain Queens, NYCTruth to tell, this top fraction of the 1% is the problem, not just plain millionaires - this top fraction of the 1% are most plugged into lobbyists and the financial industry who service them and exist by making fees from their excess cash.
Millionaires and even most billionaires are not the issue, since most realize the economy only works if money circulates, and most realize they are only custodians of dollars, not actual owners, since dollars come and dollars go.
The problem is the financial services industry built up to service the excess cash of this fraction of 1% and their lobbyists, who work to make sure their contracts are renewed by making the CEO's richer.
The last 30 years prove there is no such thing as ' enough ' when the speed limits and safe-guards are removed. Recommend Recommended by 4 Readers .
The man was an orphan from Calcutta, and came from nothing.Ratna Houston, TexasI would think that that experience would teach a person about the importance of relative wealth. Recommend Recommended by 2 Readers .
And, republican politicians and their supporters think that this skewed-and-very-skewed-and-getting-more-skewed wealth distribution is EVIDENCE that the US is a great country. The 0.01% will hire the 0.99% as hedge fund managers and together the 1% will hire the rest of us as housekeepers, chauffeurs and gardeners. Sounds like a plan.Sam Concord, NHHubris and ate - again. Cry me a river. Amazing just how twisted are the perspectives of these envious rich.C. Marcus New OrleansGerry L OregonJim Mirick, they will just live behind walls when it reaches that point - either prison walls like Mr. Gupta or the walls of fortresses like the rest of them.
It has occurred to me that there are two personality types that are at work here: Enough and More. The latter cannot understand how the Enough people think and will always want More, no matter how much they have. I don't know how this can ever be resolved. Recommend Recommended by 1 Readers .KPS NJMr. Leonhardt - Seems like your interpretation and analysis is misguided. I assume your chmarks foerformance and earnings are that of your colleagues' at NYT and not the NYT delivery person. While I agree that Mr. Gupta may be greedy (from the middle class perspective), his own benchmark for progress were likely his peers, just like for us. Your analysis appears corrupted by your own envy of the top 1%!Sachi Mohanty IndiaIt's all quite relative. Financial crimes, white collar crimes, insider trading.What about political corruption? The endemic, repetitive, non-stop lying? The false justifications of wars? Wasteful expenditures?
Not all those are non-criminals just because they have not been proved to be criminals. Becoming a millionaire/billionaire must involve cutting corners smartly at some point - with the rarest exceptions.
Enforce. Tighten. Punish. But perhaps ... don't be judgmental.
.Irv Ballan Boynton Beach FL
Doug G San FranciscoBilly Rose, who was once the largest stockholder in AT&T, was asked why he keeps trying to amass further riches. "It's the way we keep score."
Rajat Gupta by all accounts, has more money than he can ever spend. He may be keeping score, but he left his morality behind.
Seattlesh -- I think you are missing the broader perspective.When you compare yourself to others, do you look at other Americans or other humans. Median household income in the US is about $46,000. In Nigeria it is $900. If you are a typical American, you earn 46 times more than a typical Nigerian. The Nigerian family would look at the average Occupy or Tea Party family and say "What on Earth do they have to complain about". If a Nigerian family can live and attain a modicum of happiness on $900, how can we possibly need as much as $46,000?
It is truly all relative -- as much so for a 1%er looking at a .1%er as it is for the typical American family.
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October 22, 2011 | Economist's View
When this column appeared appeared on MSN.com, it got over 500 comments (it was originally published here). I didn't read them, the 73% thumbs down (plus the email I received) was enough to tell me what the comments probably said, and a few people who did read them said I shouldn't bother -- for the most part they hated it.Here's the unedited version:
Raise Taxes on the Wealthy: It's the Fair Thing to Do: Many economists worry that making societies more equal through income redistribution lowers economic growth. This "big tradeoff" between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable.The Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy.
The economy did grow after the tax cuts, but the rate of growth was unremarkable, especially for jobs, and there's little evidence that the Bush tax cuts caused large increases in output growth as promised. In fact, there's little evidence that they had any effect at all.
And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.
This is not the only way in which the distribution of income has become disconnected from productivity. While some argue that those at the top of the income distribution earn every cent they receive, and hence deserve to keep all of it, there is plenty of evidence that the income of financial executives, CEOs of major corporations, etc. exceeds the value of what they contribute to society by a considerable margin. That holds true even without the financial crisis, but how, exactly, can we justify the extraordinarily high income of this group when the result of their actions was to ruin the economy?
If those at the top of the income distribution receive far more than the value of what they create, and those at lower income levels receive less, then one way to correct this, at least in part, is to increase taxes at the upper end of the income distribution and use the proceeds to protect important social programs that benefit working class households, programs that are currently threatened by budget deficits. This would help to correct the mal-distribution of income that is preventing workers from realizing their share of the gains from economic growth.
And there is another reason why taxes on the wealthy should go up. Someone has to pay taxes, and the question is how to distribute the burden among taxpayers. Many believe, and I am one of them, that progressive taxes are the most equitable way to do this. In particular, the last dollar of taxes paid should cause the same amount of sacrifice for rich and poor alike.
There has been an attempt to make it appear that taxes are mostly paid by the wealthy, e.g. the deceptive claim that half the people pay no taxes is part of this. But taxes are less progressive than before the Bush tax cuts, and when all taxes at all levels of government are taken into account "the U.S. tax system just barely qualifies as progressive." Making taxes more progressive would, in my view, make them more equitable.
We face a choice between cutting key benefits for the middle class and creating an ever more unequal society, or raising taxes on the wealthy to preserve the social programs that lower income households rely upon. We hear that raising taxes is unfair, and that tax increases will harm economic growth. But there's nothing unfair about correcting the mal-distribution of income that we've seen in recent decades, or about making sure the burden from paying taxes is more equitable than it is now. And there's no reason to fear that economic growth will be lower if taxes are increased. Cutting taxes on the wealthy during the Bush years didn't stimulate growth and raising taxes back to the levels we've had in the past – times when growth was quite robust – won't have much of an effect either.
The claim that there is a tradeoff between equity and efficiency was a key part of the argument for tax cuts for the wealthy, but the tradeoff didn't materialize. We sacrificed equity for the false promise of efficiency and growth, and society is now more unequal than at any time since the early part of the last century. It's time to reverse that mistake.
Posted by Mark Thoma on Saturday, October 22, 2011 at 12:42 AM in Economics, Equity, Taxes
Selected comments
Min
"Many economists worry that making societies more equal through income redistribution lowers economic growth."PaineThis sounds like a half-truth, one focused on the role of competition as motivation. Cooperation plays a role in growth, as well. But without going into that, consider this sports analogy.
Suppose that we have two rival teams that play against each other several times, say, 10 times. Compare these two different ways of scoring the games. In one, scores are carried over between games. After 8 games, one team or other will often have a huge lead that will be very difficult to overcome. In the other way, scores are not carried over, and each team starts each game even for that game. (The payoff for winning a single game is 1/10 that of winning the series in the other way of scoring.) Which way will provide more motivation to the players? It is obvious that starting each game even provides more motivation. Under the first way, with the carry over, the greater the inequality at the start of each game, the less is the expected value of each unit of energy exerted by the players. So the less energy the players will expend, the less work they will do.
It seems plausible that there is an optimal level of inequality in a society for economic growth and the well being of its members. That is likely for other reasons, as well as motivation.
"This "big tradeoff" between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue."
I do not particularly think of socialist countries as egalitarian, in practice. To the extent that they were in the 20th century, I think that it was more likely that widespread poverty made people equal than the other way around. I think that a fruitful comparison is between modern capitalist societies and the societies that preceded them, feudal societies. Was not the transition to capitalism marked by reducing the inequality between townspeople and the aristocracy? Would the emerging capitalist societies have experienced as much growth without increasing equality? In our current economic crisis, does inequality not suppress growth?
reply to Min... Min I like your analogy But I think it models something else about market economies Not distribution of income from production for the marketMinreply to Paine... Thanks, Paine. :)PaineAs for analogies, I was not intending my sports story as an analogy of a complex economy. My point was that motivation in competition is positively related to equality. You need inequality of payoffs to have competition in the first place, but too much inequality stifles motivation, stifles work, and stifles growth.
reply to Min... ExactlyMinAnd too much competition can stump progress too
reply to Paine... Right. :)DrDickreply to Min... It is also the case that there are numerous exogenous features in the economies of the communist and formerly communist countries (centralized planning, excessive defense spending, etc.), which had nothing to do with creating or maintaining equality, but rather reflected other factors, such as efforts to radically modernize what had been 18th century feudal economies.Minreply to DrDick... Yes, you are right. :)Darryl FKA RonI think that your point about modernizing feudal economies has a good bit to do with the question of equality. The workers may have been relatively equal among themselves, but they remained serfs in relation to the State and the Party. The system was still based on inequality.
reply to Min... The tax incentive (differential of after tax returns of capital over equal time periods) for capital gains over dividends and interest tilt the game towards deals and trades (e.g.,LBO equity expansion, hedge funds, high-volume trading) rather than production of services and goods. So, the competition we get is focused on capital arbitrage and speculation rather than production. The search for growth markets and cheap labor to offset the decline of internal investment in our economy has sent an increasing amount of production offshore. The inequality is a result of the turn in the use of capital away from domestic production and labor. Redistributing wealth might boost agregate demand, but it will not alter the mis-allocation of capital to speculation nor the further advancement of wealth consolidation and (directly) offshoring. The inflationary side effects of our dilemna will help some as the dollar devalues, but less than one might hope. Having our MNCs assets nationalized offshore would help more and it may happen in some countries eventually, but not soon enough.Darryl FKA Ronreply to Darryl FKA Ron... Recall that one of the hallmarks of Reagonomics was the lapse of enforcement on merger constraints based on the belief that competition is inefficient. Of course, that is ludicrous, but so is thier argument against progressive taxation reducing competition. Both are just tactics to efficiently consolidate wealth and power.acerimusduxFunny that would get such a reaction, but I guess you never know, if something gets circulated around the wrong e-mail lists or websites, it can get bombarded with an unrepresentative sample.PaineI think you went easy on them though. You point out that trickle down didn't work, but you never even dared to quite suggest that just maybe, too much inequality might also be bad for growth.
This always seemed a rather obvious argument to me. I don't know why so many people prefer simple answers where one thing must be always good or always bad, whether it's taxes, regulation, or inequality. Don't we teach our kids that the world is a little more complicated than that when we read them Goldilocks? They learn that some things in the world can be either too hot, or too cold, or just right.
And this seems to be true much of the time in economics as well. I suspect that deficits can be too high or too low, that inflation can be too high or too low, that interest rates can be too high or too low, that the ratio of savings to consumption can be too high or too low, and yes, that for maximal growth, it might be that inequality can also be too high or too low.
That's not a model in any way, but I'm not sure why it shouldn't be the default assumption, absent evidence otherwise, that economics works like most everything else in the natural world. We are really dealing with dynamic natural systems here. And, if this is an ideological belief, then any bias there seems almost by definition to be one towards centrism and moderation. Unless there is reasonable evidence to support it, I generally see no reason to prefer any extreme.
reply to acerimusdux... A market economy is not a natural systemkioOptimal paths are institutionally dependent
Ie subject to specific context
To suggest the fairway is bounded on both sides by hazards Really tells us very little we need know
Like how wide is this fairway.........THIS fairway
To raise taxes is a fair thing to do. No doubt. But worthless. The reason CEOs get highest incomes is not their physical work. It is the fate of companies they run. Even an infinitesimal difference between CEOs grows with time and one company wins and the other fails. CEO is the first candidate to be fired when a company does not peform well and a better candidate is sought for with a higher salary - becasue s/he must be better. To say " exceeds the value of what they contribute to society by a considerable margin" is a wrong message. CEOs contribute to personal incomes of owners and partly employees. Therefore, there exists an inherent feed back between CEO income and taxes - higher taxes will be compensated by increasing incomes. It would not be fair to request owners and employees to lose money and jobs for the overall social prosperity. This is the mechanism like survival of the fittest.rogerreply to kio... You are surely being sarcastic here, eh? "CEO is the first candidate to be fired when a company does not perfrom well and a better candidate is sought for with a higher salary - becasue s/he must be better."PaineCould you fit more misinformation into one sentence? I don't think so. There are two errors here, that correspond to the two clauses of the sentence:
"CEO is the first candidate to be fired when a company does not perfrom well..." This is of course nonsense. Take any year, and any set of layoffs you want. The most noticible thing is that the CEO is the last person to be let go of. Not that the CEO can hold on forever - but most of the time, upper management finds that the company has to lose value for a considerable period of time before the days of the 'golden parachutes' appear. Here's a list of the biggest layoffs of 2008 in the U.S. http://247wallst.com/2008/12/20/the-lay-off-kin/
1. Citigroup announced 73,000 layoffs in 2008. Vikram Pandit, who was CEO in 2008, received 10.8 million dollars. Citigroup kept cratering in 2009-2010, and took approximately 2.5 trillion dollars in emergency loans from the Fed. And citi kept Vikram Pandit. In 2011, Vikram was given a 23 million dollar retention package. http://timesofindia.indiatimes.com/business/international-business/Citigroup-gives-232m-retention-award-to-CEO-Vikram-Pandit/articleshow/8435825.cms 2. Bank of America. In 2008, Bank of America bought Merrill Lynch and fired 35,000 people. How did the CEO of Merrill Lynch do? Well, in 2007, the year before Merrill Lynch nearly went bankrupt and was saved by Bank of America, John Thain, the CEO who spent a million making his office pretty, made 83, million dollars. And he made 10 million dollars on his mismanagement in 2008, when BoA bought the company. I think any of the 35,000 people who were fired would have liked 10 million dollars as a firing present. Maybe we should try that. I could go on and on, but why bother? This statement is bunk. But how about the smart CEO idea? Bunk too. In a labor market that is notoriously closed, and in which bidding is by insiders, there is, of course, no incentive to bid anyways but up. This explains the economics of CEO compensation much better than the comical idea that CEOs are smart, or have any special intelligence at all. If we simply automated much of the decision making now made by CEOs, using expert programs - which are used, for instance, to explore for oil - we would have the same level of corporate governance, in which companies tack roughly to their sector. A nice case of failing upward is provided by Home Depot's former CEO, Robert Nardelli. At Home Depot, Nardelli showed that he was amazingly smart and successful - as long as the housing bubble lasted. Then he showed he was amazingly clueless and unsuccessful - but he wanted the same amount of money, of course. Finally the board fired him. The story is here: http://www.msnbc.msn.com/id/16469224/ns/business-us_business/t/out-home-depot/
What happened next is the classic clueless CEO story. What is a guy like Nardelli, who nearly sank his company, to do? Why leap onto another company, like a homeless tick thirsty for blood. Leap he did to Chrysler in 2008. He was going to show that he had the talent to work against the tide, that being a ceo didn't just mean averaging what your sector was doing. Funny, though - out he went again in 2009:http://www.businessweek.com/autos/autobeat/archives/2009/04/chryslers_narde.html
Nardelli is not at fault - the vast overpayment of CEOs is at fault. Really, corporate taxes should be revamped to make a better system 'sweeter' - any company that pays its CEO more than 90 times its lowest salaried employee should be subject to very big tax surcharges, progressively tailored to take more and more out of the company that puts more and more of the company in the CEO's pocket. This would begin to restore the balance. CEOs grow ever dumber as they get paid more - the best ones must be made to stay hungry.
reply to kio... A profusion of confusions. That unfortunately alibi the biggest monsters in our system Of free range limited liability corporate folliesanneThe tower trolls in the executive suites
reply to kio... Even an infinitesimal difference between CEOs grows with time and one company wins and the other fails. CEO is the first candidate to be fired when a company does not perform well and a better candidate is sought for with a higher salary - because s/he must be better.Whatever[This is comically absurd. What is the point beyond comedy though of just making stuff up?]
reply to kio... You are either a CEO yourself, or on of his brown nosers.denimWhen this column appeared appeared on MSN.com, it got over 500 comments (it was originally published here). I didn't read them, the 73% thumbs down (plus the email I received) was enough to tell me what the comments probably said, and a few people who did read them said I shouldn't bother -- for the most part they hated it.Matt YoungYou should realize that there are armies of privately funded sock puppets that monitor key words on mainstream news websites and portals like MSN.com and Yahoo.com. The purpose of these sock puppets' "comments" is to inject noise and doubt into the dialogue. This is a standard Bernaysian PR opinion manipulation technique. Since the comments are clearly not a statistical random sample, any analysis and application to the general population is questionable. http://www.gallup.com/poll/149567/americans-favor-jobs-plan-proposals-including-taxing-rich.aspx
reply to denim... I'm a sock puppet!Painereply to Matt Young... No Matt Just a sockJessereply to Paine...PaineArgyle or Tennis?
reply to Jesse... Argyle for sure And God bless him for itLee A. Arnoldreply to denim... I read through about 150 of the comments, and there seems to be a LOT of astroturf. Much of it is stylistically rather similar: Short and catchy, smart but avoids Marks' main points, hits the same memes without any further substance. I'll bet if you did a prose analysis, you'd find about 10 or 20 people generated most of it. I would imagine that the big PR firms have blog-comment management divisions, (or else they aren't very thorough at what they do, which is unlikely.) This isn't surprising. Political power is kept by swaying opinion. Letter writing to newspapers has been managed before. Every election time, we have found this stuff showing-up even in these threads. As soon as you engage them, they tend to disappear, or pop-up under another name.Darryl FKA Ronreply to Lee A. Arnold... The simplest explanation is usually the best. There are a bunch of idiots in the world among which there is not a whit of difference in their addled disfunctional delusional minds. It may be no coincidence that many of these occupy space in southern states, such as my own dear Virginia. There are many fine people in the South, but it still has more than its share of cretins.Blissex"You should realize that there are armies of privately funded sock puppets that monitor key words on mainstream news websites and portals like MSN.com and Yahoo.com."denim:Maybe, but also there are a number of unpaid volunteers that do that.
Because the attitude that the middle and upper classes are being exploited by the welfare queens and the strapping young bucks is *very* common. The politics of "F*ck YOU! I got mine" are very common. There are quite a number of people who think that Mozillo, Fuld and Cayne are just winners who did whatever it took and would have done the same if they had the opportunity and cannot really criticize those winners for what they did.
Pious dogoody liberals are not that popular, especially among female middle/upper class middle/older aged voters who own property and are relatively safe and just want the government to give them more tax free capital gains, not more welfare to the parasites.
There has been a very large change in the massive irish/jewish/italian groups: when they were working class (mostly male) factory workers they thought that the middle and upper classes owning those factories were exploiting them and the lower classes; now that they have become stock and property owning (mostly female) middle classes they think that the lower and working classes are exploiting them and the upper classes.
Mr. Messina/Cohen/Collins in their youth thought that the bosses and landlords were exploiters, and wanted wages up and rents down; Mrs. Messina/Cohen/Collins in her dotage think that the minorities and the poor are exploiters, and want wages down and rents up.
This change has profoundly altered the nature of USA politics. The comments above are the result, and so is the massive shift to the right of the Democratic party, as a large part of their historical ethnic base has moved from tenant to landlord, from worker to rentier, and many of those have moved to the hard Republican right too.
My usual quotes from Grover Norquist:
http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11699
"The 1930s rhetoric was bash business - only a handful of bankers thought that meant them. Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that". And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, "We're sorry about the seals and everything but we really got to get the stock market up."http://www.enterstageright.com/archive/articles/0903/0903norquistinterview.htm
"The growth of the investor class--those 70 per cent of voters who own stock and are more opposed to taxes and regulations on business as a result -- is strengthening the conservative movement. More gun owners, fewer labor union members, more homeschoolers, more property owners and a dwindling number of FDR-era Democrats all strengthen the conservative movement versus the Democrats."reply to Blissex... True, volunteers can comment too. But my real point was that an analysis on comments of one's article is not a statistically sound method of determining what the general public's opinion is on the issue. The example of Dr. Thoma's article proves my point. He says 73% of the 500 commenters did not like the idea he proposed. But Gallup says 66% of their independent statistical sample approve of a similar idea. http://www.gallup.com/poll/149567/americans-favor-jobs-plan-proposals-including-taxing-rich.aspxBlissexreply to denim... I was just trying to explain how comes that so many comments were hostile -- there are genuinely many people who think that the upper and middle classes are being brutally exploited by the working and lower classes.PaineAs to statistical soundness there can be many reasons why comments on the article are not statistically sound (e.g. most commenters may be outrage by its perceived immorality).
Anyhow "Gallup says 66% of their independent statistical sample approve of a similar idea" is a well know but not very important factoid; what matters is not what a representative sample of American residents say, but whom is nominated and elected by a majority of swing voters and campaign donors in marginal districts.
Majority-critical of voters and campaign donors and especially swing ones in marginal districts are very much to the right of the general population, and the 50% of those eligible to vote who don't vote and the 95% who don't support their candidates with donations don't matter much.
reply to Blissex... Predominately Female? As anne would say "Evidence please !"Minreply to Blissex... Grover Norquist: "Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that"."BlissexWell, thank goodness! (In a way.) Now that the big corporations have stolen from their workers' retirement funds, the workers won't be saying that anymore.
reply to Min... "the big corporations have stolen from their workers' retirement funds"BlissexThat shoe hasn't dropped yet. There is still more time for extend and pretend, as much as 5-10 years.
The really big issue as Karl Denninger has noticed is that debt (including private debt) is already way larger than GDP and has been growing faster than GDP, and debt interest payments are also growing faster than GDP. Most of that debt is owed to pension funds, private or public. Good luck.
reply to Blissex... "There has been a very large change in the massive irish/jewish/italian groups: when they were working class (mostly male) factory workers they thought that the middle and upper classes owning those factories were exploiting them and the lower classes; now that they have become stock and property owning (mostly female) middle classes they think that the lower and working classes are exploiting them and the upper classes."Matt YoungBefore the Civil Rights Act the Democrats were the party of the enemies of the yankee elites (bosses and landlords) and of blacks: the irish/jewish/italian working class and the southern racists. The irish/jewish/italian working class would vote to support segregation (which also reduced competition for good jobs from colored workers), and the southern racists would vote for unions and welfare for white non yankee workers.
Then around 1960-1970 something tremendous happened, and most colored voters started to vote Democrat, and most italian/jewish/irish middle classes and southern racists started voting Republican.
"Mr. Messina/Cohen/Collins in their youth thought that the bosses and landlords were exploiters, and wanted wages up and rents down; Mrs. Messina/Cohen/Collins in her dotage think that the minorities and the poor are exploiters, and want wages down and rents up."
That is about the 1930-1970 period and then the 1980-2020 period, very clearly different in the graph of income distribution by decile that is often published.
The US look an feel patent system gave Apple executives the power to send armed police into convention halls and confiscated Android tablets. A multi-billion dollar service to Apple executives, adding billions to their wealth.MinThose police are backed up by the Socialist Defense Network, paid for by the middle class, and in service of wealthy global traders.
Pipeline executives get right of eminent domain in the US.
The very wealthy get insider treatment from government. Policing cost for their wealth in local communities goes up, mostly proportional to wealth. The middle class pays for the security of their factories.
They run Timmmy's Socialist Banking network with middle class guarantees. All socialism for the wealthy. Much of it made possible in the anti-democratic US Senate.
The problem is that progressives have too many middle class sacraments on the line and are in a weak position to negotiate trade offs.
reply to Matt Young... "Those police are backed up by the Socialist Defense Network, paid for by the middle class, and in service of wealthy global traders."ilsmYou mean Capitalist Defense Network, right?
When the capitalists own the gov't, socialism and capitalism are so hard to distinguish! ;)
reply to Min... Socialism is when the government and means of production work for the general welfare and domestic transquility (from the US C preamble).BlissexFascism is when the government and means of production are owned for the 1%.
OWS is fighting fascism.
Woody Guthrie would be there.
I have been reading quite a few of the comments on MSN and they seem mostly genuine, even if many predictably are of the welfare queen/strapping young buck type (what pious dogooders might call "pettily selfish"), and some contain very important points:Paine
- "(Incidentally when Liberals raise hopes and disappoint people, watch out. Remember WATTS, NEWARK, DETROIT...this is next. Then you get Nixon and Reagan again. Saw it before.)"
- Apart from PATCO the other thing that triggered a mass switch of the newly-prosperous irish/jewish/italian middle classes to hard right attitudes were the minority riots. This poster obviously still remembers them vividly. They generated so much fear and revulsion.
reply to Blissex... Blissex How about a less cautioning And a little more recipe - ingDavid AndersonYou make strong points about goo goo folly In particular kulack loathing of holier then thou liberal educated affluent types Like the wind surfer candidate john Kerry-tree
If the commplaint is that all taxes from all levels of government are less progressive than the federal level alone -- why propose to tax the wealthy more at the federal level in the interests of equity? Not that I buy the premise, but....Painereply to David Anderson... Wax headed gibberishJesseThe federal net is widest net Hardest to evade avoid and avert
If we could tax wealth at the UN level it would be best
Imagine that
An elite team of tax extractors circling the planet in blue helicopters
One world Paranoia needs some Fuel
reply to Paine...MinA single world currency would do the job nicely.
Money creation without offsetting gains in value is the most pernicious of taxes.
reply to Jesse... "Money creation without offsetting gains in value is the most pernicious of taxes."BlissexActually, it is the most gentle of taxes. It reduces the relative financial wealth of the rentier class without coercion. And indeed, there are offsetting gains, generally to society as a whole, but also individuals. Who gets the gains is a political question, not a question of taxation per se.
reply to David Anderson... Taxes at local levels are actually regressive, and conservative interests want to make them even more regressive, essentially switching to per-head/household fees instead of mostly flat-percentage consumption etc. taxes.JSTIdeally local taxes should be progressive too, and income related instead of consumption or head/household related, so they would be anticyclical too instead of hugely procyclical.
But changing tax profiles at the federal level to counter that is by far the easiest and quickest solution, and it also compensates across states and municipalities, as it is about individuals rather than areas, avoiding special cases like areas with fewer than average high income or areas with higher than average low income residents.
But this logic while economically and financially sound completely runs against the conservative plan to partition the country into mostly-rich very low tax localities and mostly-poor very high tax localities, with no federal (or state) level fiscal union among them.
What really horrifies conservatives is the case of vicious mobs of beastly parasitic poor (mostly colored) voters electing commissars of the people with a mandate exploit brutally the scattered few hard working deserving rich (mostly white) voters among them, and fiscal and electoral segregation is their way to avoid that.
The image that comes to mind is that arising from the common story of hard working (white) exploited suburban families struggling to get to the end of the month and yet save for their children university fees on 250k/year, while (colored) overlord families feast daily on t-bone steaks BBQs in their CRA funded mansions with scores of Cadillacs parked in front of them, while their kids vandalize dorms in the top universities they got in for free with affirmative action bursaries.
Professor Thoma,PaineI think there is an important argument here that needs to be made, for both economic and marketing purposes, which your article omits. I think particularly from the stand point of the latter this likely accounts for the negative response you received.
The trade-off between growth and equity is not neccessarily an inverse relationship over the whole domain of tax policies. I posit that it is instead quadratic, and that the opposite extreme also limits growth.
To start with the basic "left extreme" which is commonly acknowledged now, if we distribute wealth too much it will remove capital from those who use it most productively and also create problems with incentives. People often draw the contrast with the experience of communism, and rightly so, but they take it too far in thinking this trade-off exists over the whole domain of possible redistributive outcomes.
We need also to consider the other "right" extreme though, which could be analogized to a fuedal aristocracy or caste system to parallel with the communism story. If we allow social mobility to deteriorate to the point where opportunity is largely dictated by which parents you happen to be born to, then we will waste an immense amount of human capital which will harm growth.
What people don't realize is that the "redistribution of wealth" or rather public investment through progressive taxation, was fundamental to our nation's early success and supported by many founding fathers, even Jefferson believed in progressive taxation whom the libertarians herald as a demi-god these days. This opportunity afforded by progressive taxation was the public education system which improved social mobility. We need to emphasize this, public investment for opportunity from progressive taxation, not direct wealth redistribution, teaching a man how to fish and giving him the equipment, rather than a fish each day.
So the point of progressive taxation is not to "punish the rich" or "reward the lazy" as conservative pundits often proclaim, but rather to afford the children of the less wealthy an equal opportunity to succeed as those of the rich, or quite frankly a less disequal opportunity if we are being realistic. As Warren Buffett once said, failing to enact progressive taxation in this way is like "choosing our olympic athletes by selecting the children of the previous olympic athletes" (he was referring to the estate tax. We should probably note that inequality was very high at the onset of the great depression as well (though I don't want to make too much of that one factor among the confluence of triggers).
I think we need to frame the argument this way (although leaving out the language of domains and quadratics), since it is a very important point from a purely economic stand point, and a much more effective arguing stand point against today's increasingly unsympathetic rhetoric. Arguments of liberal morality will be rejected out of hand by conservatives because their moral philosophy is simply quite different (without placing judgement on this here). They believe everyone has opportunity and plenty succeed from squalor. We need to point out however that much of that rags to riches success relates to publically funded opportunities such as education, which have been jeopardized in part by the starve the beast tactics of tax cuts for the upper incomes, with the likely direct effect of lower social mobility and increasing inequality. We do not want equality of outcomes as in communism, but we do not want radically unequal opportunity as in the days of monarchies and aristocracies.
reply to JST... Boil this entire field of cabbage down to some sour kraut. Too many paragraphs can spoil the snackMinAnd comments are snacks not five course meals
But I must say It's fine cabbage you grow at that
Even if we find ourselves "positing" Where mere mentioning might do Very few weeds
reply to JST... "If we allow social mobility to deteriorate to the point where opportunity is largely dictated by which parents you happen to be born to,"BlissexThat has already happened in the U. S. We are no longer the land of opportunity. Social mobility is greater in Europe.
The American Dream is alive and well -- in Denmark!
reply to Min... "The American Dream is alive and well -- in Denmark!"BlissexBut Denmark is the best example of a vicious Communist tyranny! They have 50% of GDP paid in tax.
If you go around Denmark you immediately notice the consequences: the frequent patrols by tax police with their machine guns and polished jackboots; the squads of high income workers being marched by commissars of the people from the "enemy of the state" camps they are locked into at night to work into nationalized banks and real estate brokers; the barefoot children of businessmen desperate to sell matches at street corners trying to make some more money with which to pay their parent's tax bills; the dilapidated houses and infrastructure; the look of fear and despair on most people; the special blocks for hereditary welfare recipients with their well maintained, vast homes, the frequent deliveries of fresh t-bone steaks, the cadillacs parked outside.
Denmark is just the best example of how a high tax Communist tyranny makes life so miserable for most of the population to benefit a few exploitative welfare recipients.
:-)
"argument here that needs to be made, for both economic and marketing purposes, which your article omits."PaineAs to marketing an article with a title containing the words "spread the wealth" seems designed to trigger anti-socialist feelings.
Mark Thoma's article title will be quoted many times to prove that all liberals are about is socialism and the gulag, STEALING OTHER PEOPLE's PROPERTY.
As to:
"So the point of progressive taxation is not to "punish the rich" or "reward the lazy" as conservative pundits often proclaim, but rather to afford the children of the less wealthy an equal opportunity to succeed as those of the rich"
That's the usual kissing of the babies as an excuse for whatever. But most Real Americans don't see why the children of the American poor should be more deserving of equality of opportunity than the children of the Afghani poor, and they doubt very much that American liberals want to use progressive taxation to give poor Afghani children the same opportunities as poor American children.
There are compelling arguments for progressive taxation are far more practical and far less hypocritical than kissing the babies, for example:
- Taxation profiles are voted upon democratically, and paying taxes is entirely voluntary. If you don't like what your fellow citizens want to pay in taxes, take personal responsibility and move to another country that offers you a better deal.
- The goal of taxation is simply to raise money/suppress private demand for whatever % of GNP a country wants to spend via the State, and therefore something like that same % may be desirable to raise in taxation, and most of that % is made by the richest taxpayers.
- Most non-income-tax revenue is raised by regressive taxes, so to achieve a flat tax take income taxes should be progressive.
- It is a proven fact that even fairly high levels of progressivity in taxation have little impact on the economy *either way*, with data showing that periods of highly progressive taxation in general had a better economy than those with less progressive taxation, whether it is correlation or causation.
- Progressive taxation represents a weak form of insurance against misfortune: if your income drops, you pay a lower percentage. That is a very compelling even for the rich, for many of which income is highly volatile, and for the middle classes, for many of which their current high paying job would be difficult to find again.
reply to Blissex... Stealing property becomes recovering stolen goods if you have a sound theory of Capitalist exploitationBlissexPopularize the notion of exploitation of the real producers
Profit as theft
reply to Paine... Paine, the problem is that the current dominant politics is that welfare and even insurance is theft.JesseThe story used to be that the irish/jewish/italian working classes used to think that they and the lower classes were exploited by the bosses and landlords with the complicity of the middle classes.
Now that those ethnic blocks are largely stock and real estate rentiers and think they are middle class, they feel exploited by the lower and working classes and feel class solidarity with their bosses and landlords.
That is a phenomenal switch in attitudes that has radically changed the nature of both the Democratic and Republican parties.
You cannot wish it away with "Popularize the notion of exploitation of the real producers" because most middle class voters really think that they and the upper classes are the real producers and the lower and working classes are the exploiters.
reply to Blissex...rogerOr it could be that generational rage against corruption has a particularly long lag time.
But once it gains traction it is like a tsunami.
Is the ocean receding yet?
reply to Jesse... Myself, I think it can be boiled down to the appeal to self interest, full stop. The majority has the muscle. Why not: pay less, get more. How do do it - - tax the wealthy. I'm a big fan of raising the marginal rates to above 50 percent, following Michele Bachman's suggestion - who told Fox news that she favored the same kind of tax percentages as we had under Reagan. Me too! Back to the Reagan era is a good transitional program.Minreply to roger... "Back to the Reagan era is a good transitional program."George N. Wells, CPIMBack to Eisenhower!
I like Ike! :)
The context and language of the issue has created an emphasis that looks away from what most Americans perceive as the real issue: The IRS Code is deeply flawed.PaineThe underlying issue isn't really rich versus middle verrsus poor; the issue is that the IRS code is being used as a political tool to advance social/political agenda and to hand out favors to supporters. There seems to be at least one attachment to each-and-every bill that goes through Congress that makes subtle, but significant, changes to the IRS code. And the verry legislators who complain about the complexity are the authors (or vehicles) for most of the complexity they deride.
Do these changes effect behavior of the people? Yes they do. When Congress eliminated the deductions for personal credit interest, the banking industry came up with the home equity loan. When the top marginal rates were halved, executives calculated that it was okay to take the profits normally invested in the company andgive themselves higer salaries and bonuses. These are only two easy examples -- there are a lot more.
From my perrspective what is needed is a Presidential/Congressional commission that will re-draw the entire IRS code along with a provision that any changes to the code must be presented in a stand-alone bill. I'm not holding mybreathas I know that the ability to give preferential status to cerrtain types of income/expense is a favorite tool of the politcal class and they will not give that up easily.
reply to George N. Wells, CPIM... All the libertarian gibberish about tax rentsBlissexMisses the great burden shift From corporate to payroll taxes
reply to George N. Wells, CPIM... "When the top marginal rates were halved, executives calculated that it was okay to take the profits normally invested in the company andgive themselves higer salaries and bonuses."PaineI reckon that switch happened mostly because of the change in policy towards making hostile takeovers easier.
If hostile takeovers are difficult, most management will be able to count on a long tenure and their main incentive is empire building rather than profit maximization, will loot their company slowly, and they will also be more generous to their workers (buy them off).
If hostile takeovers are easy, most management are terrified of losing their jobs to a raider, and will squeeze their company as hard as they can to get (theoretical) earnings out and thus be a difficult takeover target, or even have the high share price to take over other companies, and they will also be afraid of having a short tenure and will loot their company as fast as they can.
There is a very clear difference across countries as to these two policy choices and their consequences.
I suspect that once hostile takeovers are easy then business execs will lobby hard to have marginal tax rates, especially on capital gains, to be reduced, in order to make the most of the loot they extract as fast as possible from their employers.
Not to add to the negative reaction This column produced at msnbcJulioBut a few distinctions might help here
The scrutiny is on high annual incomes Why not life time incomes? Wealth is a stock not a flow at least add up the flows to arrive at the bade for your progressive rate structure
Ie life time income averaging
Corrected for changes in the price level of course
The bulk of the presentation relies on two trends that no longer run in rough parallel
Value added per hour and wages rates per hour This is not about distribution But about payment for value of output Even correcting for depreciation and divergence in wage bundle prices versus producer bundle prices and several other changes We still find the wage share ie the primary producers' share in income Is declining Taxes ought not correct this unless we have a policy To the producer goes the value of her product
We don't have such a social norm Even if we should
Taxes to provide for public goods Obviously has a very different complexion Then taxes that fund a transfer system
Finally
The production system hardly needs household savings to fund investment in new facilities
That is a mere happenstance of our history at this point
We could easily fund these operations thru a credit system backed by taxes Dedicated to servicing the accumulated debt
One side shot Socialist systems demonstrated a poor record Of total factor productivity growth Not rate of raw accumulation Ie. Cost Value of investments growth
Too many points I know But ...how can I say this?
Not Mt's best effort here And on a huge huge huge subject for all us social progressives
reply to Paine... "Ie life time income averaging" I haven't thought about lifetime, but income averaging for several years would be a game-changer IMO -- you have ev to create producat the conservatives talk about, yet once you have your bundle, you start paying higher taxes.Min"To the producer goes the value of her product
We don't have such a social norm Even if we should "
But we do. With a grotesque definition of "value" as whatever you can get.
reply to Paine... "Wealth is a stock not a flow at least add up the flows to arrive at the bade for your progressive rate structure"bmzOne's tax burden is proportional to one's wealth, not one's income. A fair tax, then is one that proportional to wealth. That's the flat tax to have.
Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Prior to 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses(which excludes Medicare and Social Security) have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them "back" as income tax reductions, heavily weighted to the wealthy–who didn't create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%'s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout. These taxing games have transferred billions of dollars from the 99%'s payroll taxes to subsidize the wealthy's income taxes.Blissexreply to bmz... "Like Reagan before him, Bush took those excess payroll tax receipts and gave them "back" as income tax reductions, heavily weighted to the wealthy–who didn't create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds."jonboinARThe other big change that enabled this was to bring the OASDI trust funds onto the USA balance sheet at the moment they were about to swing into huge surplus.
It turns out that this plan (because it was a long term plan to destroy the New Deal) has been applied also to private corporations (with "contribution holidays" to corporate pensions plans when the Fed goosed asset prices up with bubbles, and closure of the pension plans when the bubbles bust) and most interestingly as to local government pension plans, as the Atlanta Fed research department observes:
http://macroblog.typepad.com/macroblog/2011/10/state-and-local-fiscal-fortunes-follow-the-money-collected.html
which I have already discussed in a previous comment:
http://economistsview.typepad.com/economistsview/2011/10/signs-that-the-fed-will-ease-further.html#comment-6a00d83451b33869e20162fbcfb755970d This was a fully intentional plan to then
reply to bmz... This comment really needs to be "cross-posted" into that MSN comment thread as a direct answer to the "raising taxes on marginal incomes is socialistic redistribution" meme. This shows that the redistribution that caused all the trouble was the redistribution of the middle class' SS savings into the pockets of the wealthy. Raising taxes on the wealthy does something to correct THAT redistribution.Chris RyanIt's the right thing to do by taxing the rich at a higher rate. I really doubt it will make a difference to rich, but will to the government and the economy as a whole.DrDickI would argue that the available historical evidence also fails to support the contention that higher taxes impede economic growth, while low taxes stimulate it (Eisenhower vs Bush & Reagan). Empirical logic also suggests this construction is false, since the economy is driven by demand and the working classes always create more demand than the wealthy.Jessereply to DrDick...MinI think enforcing the law with respect to white collar crime is something too often overlooked in these discussions.
Even with higher taxes, the incentives to game the system and engage in various frauds are fatally attractive to a resilient and powerful minority.
reply to Jesse... "I think enforcing the law with respect to white collar crime is something too often overlooked in these discussions."DrDickIt is not overlooked by all. Some people ignore it on purpose. They believe, like Alan Greenspan, that the market polices itself.
reply to Min... I think you are being rather too generous here. Always ask yourself in these situations, "Qui bono?" You generally find that those who ignore enforcement are on that list, at least in the longer term.Main Street MuseThe problem with the article is how the argument is framed. I'm all for raising taxes on the wealthy, but not necessarily for using tax reform for "making societies more equal through income redistribution." It's been my understanding that taxes are levied to fund the operations of necessary government agencies.MinThose in favor of raising taxes on the rich should not talk about penalizing the rich and successful for their wealth and success. The debate should be focused on how to bring our massive debt in line, and thus should focus on how we got here, and how we can address the massive debt our governments find themselves in.
Income inequity has risen dramatically in recent years, in part due to terrible tax policy that favored the rich. Thus the pendulum needs to swing back, in order to help a deficit problem that is strangling our nation to death.
"Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially."
As I remember, this is a misrepresentation of Bush's rhetoric. It was Reagan, not Bush, who loved the "rising tide" analogy. Bush, on the other hand, focused his message on alleviating the tax burden on ALL citizens. In retrospect, it seems the tax Bush reform was not truly equitable in alleviating the tax burden for all, but his rhetoric was never about helping the rich keep more of their money - the Bush administration was very clever to use sharply focused messaging, which, in this area, focused on helping the middle class. This was being debated during a recession when money was tight and most families I knew wanted to keep more of their own money, rather than send it off to the US Treasury as taxes.
"We face a choice between cutting key benefits for the middle class and creating an ever more unequal society, or raising taxes on the wealthy to preserve the social programs that lower income households rely upon."
That sentence quoted above is a mish-mash and needs further exploration. What key benefits do the middle class rely on? For me, education is a very key benefit and thanks to government deficits in all sectors of government (local, state, federal), education is being slashed, slashed, slashed in ways that are pennywise and pound-foolish. Because by reducing investment in education, we will become less able to compete in a fiercely competitive global market.
Also in that sentence, it seems as if the "middle class" are also the "lower income households" so reliant on social programs. Is that how the middle class perceives itself? I think not. Using language like that is likely to set off a typical middle class reader of MSN.
The real debate should focus sharply on the dramatic increase in income inequity in the US as the result of recent tax policy. We've seen the incomes of the wealthy rise dramatically , versus the stagnant incomes of the middle class.
Recent tax policy has not helped the middle class - that's a key point to argue, and that's not argued well in the MSN piece.
Also, we had a massive federally funded bailout of the wealthiest sector of our economy, the financial sector. As we see those same bailed out banks give themselves massive bonuses each year, we see the federal debt skyrocket.
How is it that the neediest sector can pull down such profit? One way was to create an enormous drain on US monies through federally funded welfare program for the wealthy. And as the bailed out banks pay themselves handsomely, their business behaviors led us off a cliff and into the steepest recession in decades, with the highest unemployment in decades and the greatest income inequity in decades.
So the debate is not about using taxes to create income equity. It's using taxes to address real flaws in our system that created massive inequity in the first place.
reply to Main Street Muse... "Those in favor of raising taxes on the rich should not talk about penalizing the rich and successful for their wealth and success."rogerIndeed. A flat tax on wealth would spread the tax burden equitably, without penalty. :)
"The debate should be focused on how to bring our massive debt in line, and thus should focus on how we got here, and how we can address the massive debt our governments find themselves in."
Our gov'ts do not just find themselves in debt. They are in debt on purpose. Going into debt is how they inject money into the economy, for their citizens to use without having to take on personal debt. That is how we have set things up. We could do things differently. For instance, the Treasury could reduce the gov't debt by minting trillions of dollars in platinum coins and depositing them in the Fed. To do that would cause howls from Wall Street, because doing so would reduce what they get in interest payments on risk-free investments. The Treasury does not want to upset Wall Street, so they won't do that.
The real debt burden is the one on private individuals and households. Best to take care of that debt through restructuring rather than bankruptcy. But it is taking us a long time to get that done.
reply to Min... "The real debt burden is the one on private individuals and households."Main Street MuseExactly! A tax on the rich that simply paid for the deficit would a, be no fun, and b, have no real political support - although people might mouth a bit about the deficit, it can be raised for long periods of time - 00s, I'm looking at you - and nobody cares. But if you harness raising taxes on the rich with lowering taxes on the rest, suddenly you have some self interest in the game. The more that is felt, the more that the tax becomes likeable - save to the wealthy. Myself, I'm for limiting wealth period, as the only way to keep a republic from becoming a plutocracy. It is unthinkable that the government would have 'loaned' 16 trillion dollars at one percent or less interest to the investor class if that class had not successfully used their money to acquire political power.
It is always a matter of a power struggle. There's no peace. When class war is declared over, you know its a prelude to the weaker class losing.
reply to Min... "Going into debt is how they inject money into the economy, for their citizens to use without having to take on personal debt."MinIt was my understanding that consumers, in recent years, have taken on astronomical personal debt, in part due to stagnant wages and higher prices for things like health care and college tuition, etc. Here's McKinsey on this topic ( http://www.mckinsey.com/mgi/publications/us_consumers/ ):
"Between 2000 and 2007, U.S. households nearly doubled their outstanding debt to $13.8 trillion-an unprecedented amount in both nominal terms and as a ratio of liabilities to disposable income (138 percent)."
Post-crash, consumers are spending less on acquisition of new things and more on paying down their debt (resulting in loss of demand for goods and services.) However, is this because the government is going into debt to help them? Or because the crash scared some sense of fiscal responsibility into the American consumer?
Is having Treasury mint "trillions of dollars in platinum coins" really the best way to address government debt? Isn't that heightening the risk of inflation?
reply to Main Street Muse... "It was my understanding that consumers, in recent years, have taken on astronomical personal debt, in part due to stagnant wages and higher prices for things like health care and college tuition, etc."economoniumThat they have. The same kind of thing happened in the run up to the Great Depression. Now, like then, there is not enough money in circulation. Rodger M. Mitchell ( http://rodgermmitchell.wordpress.com/ ) has identified a pattern in U. S. recessions and depressions: First, the gov't reduces its debt, taking money out of the economy. Second, the private sector increases the money supply by borrowing and lending, leading to an oversupply of money. Third, the crash, ushering in a recession or depression. In our current circumstances, there is still a lot of private debt. But the money that corresponds to it is being hoarded. Not enough money is being spent or lent.
"Is having Treasury mint "trillions of dollars in platinum coins" really the best way to address government debt? Isn't that heightening the risk of inflation?"
I don't know what the best way is. What I do know is that the way we do it now subsidizes creditors who buy Treasuries. What I know is that the way we do it now allows fear mongers to terrorize the electorate, so that people believe that we cannot afford to do what needs to be done, so that we waste time debating the debt and deficit instead of facing our real problems.
As for inflation, moderate inflation is our friend. If you look at a graph of the British pound or Spanish dollar, you see that for centuries up until the Industrial Revolution inflation was minimal. Inflation ("debasement" of the currency) was mainly used to pay for war. But with the Industrial Revolution inflation rose dramatically. It is a hockey stick graph. Modern economies require increasing money supplies to fuel growth. Problems occur with too rapid inflation on the one hand. But too little inflation is worse, on the other. Inflation now would help relieve the pressure on our current debtors. Most people think of inflation as bad, because they think of prices, not wages. Inflation causes both to rise. :) The fact that wages have not, in recent decades, kept up with the rest of the economy is mainly political.
DrDick is on the money. Show me one period in US history when lower taxes on the rich stimulated economic growth without some sort of correction event. In fact, Henry Ford had it right: if you pay your workers more they can afford your product. And if they can't afford your product....well that's not exactly stimulatory is it?BlissexSheer numbers favor the lower classes in economic spending activity. The upper classes spend for sure, but 3% of the population can't make up for the activity nor the sheer economic mass of the other 97%. But trying to get through to these people is like chewing one's way through a bowling ball. They continue to buy this utter rubbish and vote against their own self-interest. What else can explain tea party types with no hope of funding their own retirement and buying their own medical care for 20 years afterwards falling all over themselves to vote for people trying to take these benefits away from them? It's just crazy but there you have it. The arguments here are academic so I expect debate. But when a 55 year old with 20k in the bank and no pension plan is telling me how we should cut back on SS and follow the Paul plan for Medicare I just don't know what to say. It's ludicrous.
reply to economonium... "a 55 year old with 20k in the bank and no pension plan is telling me how we should cut back on SS and follow the Paul plan for Medicare I just don't know what to say. It's ludicrous."economoniumI think that is a crazy sort of intellectual honesty, as I think that most Real Americans like that are aware and self-loathing losers.
During their younger years they bought so much into the idea that winners do whatever it takes, and losers deserve to lose (thinking that they would be winners because they had figured that secret to success).
So when they find themselves 55 in that situation they feel that:
- If they had the opportunities for cheating and stealing on a grand scale that Wall Street had they would have done the same, so they cannot criticize Wall Street for being a conspiracy of embezzlers, but only celebrate that team for winning.
- They are losers and losers don't have any rights, even if it is themselves, and they invoke punishment on themselves to expiate their loserdom though suffering.
Put another way, lots of people who buy into MLM schemes and Ponzi schemes have much the same attitude when they realize that they have been used.
reply to Blissex... Spare me your "intellectual honesty" because my actual intellectual honesty tells me that government's sole purpose is to protect people (even if it's from their own stupidity) and serve common societal good.JesseThere is nothing intellectually dishonest with saying that, yes, Social Security and Medicare are worthy programs, help the elderly stay out of poverty, and we should pay for it even if it means higher taxes for those of us fortunate to make more.
It is YOU I submit that is being intellectually dishonest in even suggesting that this country will, at any time, refuse medicare care to those that need it, or money to keep people fairly comfortable in old age. THAT is the height of intellectual dishonesty. It's more honest to admit there is no general will for this and just tax people more. I find your comment absolutely repugnant both economically and as an American. You, sir, are anti-American and it's about time we all called you out on it.
reply to economonium... "It is YOU I submit that is being intellectually dishonest in even suggesting that this country will, at any time, refuse medicare care to those that need it, or money to keep people fairly comfortable in old age. THAT is the height of intellectual dishonesty. It's more honest to admit there is no general will for this and just tax people more."DrDickPass the cat food.
reply to economonium... Frankly, I have a rather darker view of my fellow citizens than you do. There is a considerable distance between what I think is right and what I think is politically possible. I do indeed think that it is possible that this country could indeed refuse Medicare coverage or other paid for services to a needy portion of the population, though I do not think that we are there yet.Jessereply to Blissex...BlissexPeople so in thrall to propaganda that they are incapable of independent thought often do remarkably stupid and self-destructive things.
It is much easier to follow than to think.
reply to Jesse... There is some "false consciousness" indeed, but I think that there is self-loathing too. Maybe the advertising got them to buy into the mini-objectivist point of view as hopeful John Galts, but once they bought into it and 20-30-40 years later discovered that they were not John Galt but serfs, they simply cannot switch ideology and condemn themselves.economoniumThat's one of the consequences of selling your soul. If you corrupt yourself with the dream to be a really bad person (in your own view!) and then you find out that you haven't gut the guts and skill and luck for that, it becomes hard to renege on the whole discourse.
reply to Blissex... Honestly you have to be pretty twisted to justify your position. If if I could parse your response here, which I cannot for the life of me, I find it amazing that you'll try to justify your position here by twisting and convoluting logic.GeorgeKFact: this country will not allow medical care to be refused to people who cannot afford it.
Fact: this country will not have old people homeless, unable to have heat or utilities, and unable to buy quality food.
So, having
at and knowing that 90% of people won't save enough for their old age to be able to pay those bills for 20 years or more on their own, what do we do about it? And ignoring the facts is intellectual dishonesty. People won't do this unless forced. And who has the ability to force it? And who has the resources?MinSo stop being an idiot and start talking reality and solutions, not telling me why the world should be different than it is. It isn't and that's what we have to deal with.
reply to economonium... "Fact: this country will not allow medical care to be refused to people who cannot afford it."mrrunangunPartly true. Emergency room care is available to all.
"Fact: this country will not have old people homeless, unable to have heat or utilities, and unable to buy quality food."
False.
reply to economonium... The last 30 years havn one great rolling back of the progress made from 1932-68. Question is why that has occurred in good times and bad, Dem or GOP supremacy.MarkJessePlease remember the Rt wing has scores of trolls on their payroll to write negative comments. Besides Anne will always be available with the pertinent data to discredit their talking points.
bob mcmanusPerhaps the answer to over accumulated capital is not only to reform the taxation system to be more equitable and progressive based on the benefits received from the system, but to also provided relative higher wages to labor, through various means including the reform of the international trade regime.
I would posit that current fiscal policy including taxation greatly favors the accumulation of capital from arbitrage and rents rather than labor.
"So, as The Limits to Capital implies without quite stating, the special allure and danger of an elaborate credit system lie in its relationship to class society. If more capital has been accumulated than can be realised as a profit through exchange, owing perhaps to 'the poverty and restricted consumption of the masses' that Marx at one point declared 'the ultimate reason for all real crises', this condition can be temporarily concealed, and its consequences postponed, by the confection of fictitious values in excess of any real values on the verge of production. In this way, growth and profitability in the financial system can substitute for the impaired growth and profitability of the class-ridden system of actual production. By adding over-financialisation, as it were, to his model of overaccumulation, Harvey means to show how an initial contradiction between production and realisation later 'becomes, via the agency of the credit system, an outright antagonism' between the financial system of fictitious values and its monetary base, founded on commodity values. This antagonism then 'forms the rock on which accumulation ultimately founders'. In social terms, this will take the form of a contest between creditors and debtors over who is to suffer more devaluation."
How Much Is Too Much? - Benjamin Kunkel
http://www.lrb.co.uk/v33/n03/benjamin-kunkel/how-much-is-too-much
and
http://www.macrobusiness.com.au/2011/10/marx-vs-capital-vs-you/
Fair? FAIR?BlissexGeneral Theory, Ch 24, Sentence One:
"THE outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes. The bearing of the foregoing theory on the first of these is obvious."
The entire point and purpose of the GT is to show while there may be "social and psychological justification for significant inequalities of incomes and wealth" there are no economic justifications, on the contrary, inequality is the major cause on unemployment.
"Thus our argument leads towards the conclusion that in contemporary conditions the growth of wealth, so far from being dependent on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it." ...GT
Has Thoma read the GT or did he learn his New Keynesianism from Lucas and Mankiw?
"New Keynesianism from Lucas and Mankiw?"Fred C. DobbsWhether you do this or not determines whether you are in or out.
Also, it is actually Lucas and Samuelson (you are giving too much credit to Mankiw as an opinion leader). And Samuelson changed many of his ideas in later decades (IIRC he for example conceded on the outcome of Cambridge Capital Controversy).
(Meant to post this HERE, I think.)MinFlat tax = 'Fair Tax', so even if it's a fraud (which I doubt), at least it's not 'unfair', TECHNICALLY.
If taxation = representation, then everybody ought to pay the same AMOUNT, no?
(I.e., not the same RATE.)
But wait, the Wealthy have more political power than the 99%, so maybe they ought to pay more in taxes after all.
'National unemployment has lingered above 8 percent for longer than 28 straight months. Congress, meanwhile, is a club that consists of 245 millionaires. Based on 2009 data, there are currently 66 in the Senate and 179 in the House (among current voting members). So while just 1 percent of Americans are millionaires, 66 percent of senators are millionaires, as are 41 percent of House members.'
http://www.cbsnews.com/8301-503544_162-20075586-503544.html
-----
Based on Cain-sian logic, it would seem that House members should pay tax rates of 41%, and Senators should pay 66%.
------------
(It follows that when none of our Representatives or Senators are millionaires, they'd pay NO TAXES! This idea should get some traction.)
reply to Fred C. Dobbs... "Flat tax = 'Fair Tax', so even if it's a fraud (which I doubt), at least it's not 'unfair', TECHNICALLY."Fred C. DobbsThe tax burden is proportional to wealth. A fair tax is a flat tax on wealth. Right, Steve Forbes? ;)
Karl Marx famously wrote the following:John M'From each according to his ability, to each according to his needs!'
This arguably motivates the curiously American notion that all progressive income taxation (& redistribution) is bad.
Wikipedia: The complete paragraph containing Marx's statement of the creed in the 'Critique of the Gotha Program' is as follows:
In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor, has vanished; after labor has become not only a means of life but life's prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly-only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!'
(The Gotha Program was the platform of the nascent German Social-Democratic Party - which is still going strong in Germany & which Marx evidently held in some comtempt.)
What do they even mean by efficiency, anyways? In order to figure out whether a choice is more or less efficient, we have to have some sense of what that means.MinSecond, is efficiency always a good thing? Redundancy is inefficient, but often a good thing for insurance in case something fails. A single larger jet engine on a commercial aircraft may be more efficient at using fuel than two smaller engines (or four still smaller engines). Nevertheless, with anything resembling current designs, Boeing is not going to make a single-engine commercial aircraft. If one engine goes out, the aircraft can still fly on the other engine to a suitable landing point. (Most commercial twin-engine aircraft these days are allowed to fly up to three hours on one engine before landing.)
reply to John M... "What do they even mean by efficiency, anyways?"luvguvShaking your right hand while slipping their left hand into your pocket. ;)
"And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before."anneI am not for the rich or against the poor, or anything like that. But I am against deceptive illogical arguments. You KNOW that technology is the main reason worker productivity has increased. You are deliberately implying that workers have been working harder, hoping no one will notice the deception.
reply to luvguv... "And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before."anneYou are deliberately implying that workers have been working harder, hoping no one will notice the deception.
[I know that reading can be awfully hard, but do try to learn how, or is the point ceaseless meanness?]
reply to luvguv... "I am not for the rich or against the poor, or anything like that...."chriss1519Of course you are, so why not be at least a little honest?
reply to luvguv... Indeed. Why should a worker who uses technology earn any salary at all?annereply to chriss1519... Indeed. Why should a worker who uses technology earn any salary at all?luvguv[Really, really funny.]
reply to anne... if technology has made a worker more productive, why do you give the credit to the worker? They didn't invent or create the technology. You are just being patronizing to workers by pretending they deserve credit for things they did not do.rogerAnd I am a person who works, by the way. I don't want credit for things done by someone else.
reply to luvguv... This is a hugely odd statement. Technology can shift labor, true. But it doesn't necessarily diminish it. The rise of the internet means that many laborers go home, and then answer email and work on files late into the day, on their private time. This is called: working more. It is also called: working for free. Companies depend on this kind of surplus labor. So give me an instance of a technology that is implemented by a business in which the laborers who are surplus are not let go of, but just allowed to hang around and collect their salaries...MinThis view of technology is so child-like that I think you actually believe it.
reply to luvguv... "I am not for the rich or against the poor, or anything like that. But I am against deceptive illogical arguments. You KNOW that technology is the main reason worker productivity has increased. You are deliberately implying that workers have been working harder, hoping no one will notice the deception."ken melvinThere is no reason that increased productivity should benefit only the capitalist. Given sufficient competition, it should benefit the consumer. Failing that, there is no reason at all that it should benefit capital over labor, or vice versa. There are, instead, good reasons that they should share the benefits equally. A modern, developed economy is largely consumer driven. Who are the consumers? Mostly the workers. They are the ones upon whom the economy rests. Henry Ford understood that, which is why he understood that reducing wages during the Great Depression was a bad idea.
reply to Min... We can agree that investors are entitled to a return on their investment; fair enough. What about labor; are investors entitled a return on the labor that goes into a product? Suppose the labor and capital content of the final product are both 50% and that the profit margin is 20%. Should one-half this twenty per cent go to labor in the form of higher wages or bonuses? Why should all or most claim thereto lie with the shareholders? At 10% they have already gotten their twenty per cent return on investment. Have not the workers made the investment of their labor and are they not entitled to the return thereon?luvguvDrDick"I do not particularly think of socialist countries as egalitarian, in practice. To the extent that they were in the 20th century, I think that it was more likely that widespread poverty made people equal than the other way around. I think that a fruitful comparison is between modern capitalist societies and the societies that preceded them, feudal societies. Was not the transition to capitalism marked by reducing the inequality between townspeople and the aristocracy? Would the emerging capitalist societies have experienced as much growth without increasing equality? In our current economic crisis, does inequality not suppress growth?"
WHAT?? Capitalism reduced inequality of OPPORtUNIty, allowing everyone to compete with or without being born an aristocrat. It was the freedom to compete that resulted in growth. You must KNOW this, how could you not? There was NOTHING in early capitalism to create artificial equality through redistribution.
reply to luvguv... What color is the sun on your planet? We currently have a GINI coeficient greater than Cameroon and Ivory Coast, while those socialistical demons in Finland have the lowest GINI and greatest rate of social mobility in the world (closely followed by the other quasi-socialist Scandinavian countries).luvguvreply to DrDick... They are not socialist in Finland. And your comment has no relationship to what Thoma said or to my comment. So your planet must be far out there.DrDickreply to luvguv... It directly addresses the issue of equality of opportunity, which (measured by intergenerational mobility) is lower in the US than in any other developed country except the UK. As Domhoff has shown, it has never exceeded 5-10% per generation since 1900, except for the immediate post WWII period.DrDickreply to luvguv... I should also add that the comment about Finland was snark, not that I expect you to understand that. It is in fact the most socialist of the quasi-socialist Scandinavian countries. My point here was that equality of opportunity in the modern world is inversely related to the degree to which a country is actually capitalist.Minreply to luvguv... "There was NOTHING in early capitalism to create artificial equality through redistribution."luvguvNor did I make such a claim. :)
"There has been an attempt to make it appear that taxes are mostly paid by the wealthy, e.g. the deceptive claim that half the people pay no taxes is part of this. But taxes are less progressive than before the Bush tax cuts, and when all taxes at all levels of government are taken into account "the U.S. tax system just barely qualifies as progressive." Making taxes more progressive would, in my view, make them more equitable."DrDickThis is deliberately deceptive. Is it true, or not, that taxes are mostly paid by the wealthy? It's probably true, and you are just pretending to show otherwise.
reply to luvguv... If the rich do pay the most in absolute dollars, it is because the control all the wealth and income ( http://sociology.ucsc.edu/whorulesamerica/power/wealth.html ). as a proportion of income or wealth, they do not pay as much as the working classes. If you want to understand the nature of economic inequality, go read Emmanuel Saez ( http://elsa.berkeley.edu/~saez/ ).Fred C. Dobbsreply to luvguv... But the rich do pay a lot. More income tax than anyone else, actually. The issue is that the government needs more revenue, and they obviously could afford to pay more.DrDickTheir response is, of course, the guv'mint ought not to be so greedy, after all. They would prefer not to pay more & they have the political power to make things go their way.
reply to Fred C. Dobbs... The Willie Sutton school of fundraising: go where the money is. It is also the case that while the rich (sometimes) pay more income tax, they pay far less proportionately in FICA, sales, gasoline, and the million other taxes we all pay. Even on income tax, 1/4 of the top 1% pay a lower rate than may in the middle classes.luvguvreply to Fred C. Dobbs... "But the rich do pay a lot. More income tax than anyone else, actually. "Darryl FKA RonSo why was that deceptively not mentioned in Thoma's post? I am not trying to defend the "rich." I am trying to defend logic and honesty.
reply to luvguv... Probably because the rich pay proportionally less than people with far less money and this is what the fairness discussion is about, much less that the rich disproportionately benefit from the rule of law, infrastruture and the ponzi pecking order of society (i.e., the rick benefit from the work of all below them in society, but especially those working for the companies they own or invest in). Economic theory is not required to understand this, just high school algebra will do.Fred C. Dobbsreply to luvguv... The point needs to be made, over & over, that more guv'mint revenue is necessary, and the best place to get it from is the rich, who really won't miss it that much.MinEven though they already pay a lot, they can more easily afford to pay more than the 99% can.
reply to luvguv... "So why was that deceptively not mentioned in Thoma's post? I am not trying to defend the "rich." I am trying to defend logic and honesty."rogerThe question is not the absolute amount of taxes, but the tax burden, which is relative to wealth. When you consider all taxes, the tax burden on the wealthy is relatively light.
reply to Fred C. Dobbs... Actually, as a percentage, their share of income tax payment has gone down considerably. In 1920, after the income tax had been running for almost a decade, the very wealthy paid 80 percent. The next tier paid the rest. The middle class household was entirely exempt. Of course, during the twenties, other tax sources went down - tariffs, which used to supply the federal government with 75 percent of its revenues, and indirect sales taxes. Corporation taxes and income taxes became the main pillar of government finance. We need: a., more tariff revenue; b., to return income tax to what it was meant to be, a tax on the wealthiest only; c., more corporate taxes. It was a good system. The gradual dismemberment and transformation of the tax system has not been good for the vast majority.Fred C. Dobbsreply to roger... If (about) 50% of people pay no income tax at all, 'their share of income tax payment has gone down considerably' also.ilsmIt's about increasing revenues, and the best way to do that is by taking from the rich to give to the poor.
The folks who don't want more of their rents, and wealth taxed want the war machine because they clip Boeing coupons and it is their money put into t-bills and rolled back through the treasury federal reserve CON.anne"Taxes are the price we pay for a civilized society" -- Oliver Wendell Holmes Jr.
"The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government" - Teddy Roosevelt
The lesson of the Soviet Union collapse was in large part the impediments from keeping up with the US war profiteers.
The US spends 20% of its government outlays for making things that might blow things up if anyone had things like the US' war machine.
No one has anything like the US war machine.
In fact it is being used to watch over protestors in the former Yugoslavia..............
The lesson of 2003 tax cuts:
Borrowing money from folks who have no better use is just taxing future citizens, who may not have resources because the society went the way of the soviets.
The war machine is a millstone around the US' neck dragging it down.
What would the rentiers do if there were not a mutlti-trillion dollar hole in which to put their excess greenbacks?
The war machine is a millstone around the US' neck dragging it down....DrDick[Yes.]
reply to anne... Just as it did the Soviet Union. No economy can sustain the level of military spending we currently have.Minreply to DrDick... Historical tidbit: Genghiz Khan attempted to invade Japan, and failed when a storm (divine wind = kamikaze) sank his ships. For fifty years the Japanese central gov't maintained a state of military preparedness for another invasion, thus bankrupting itself.Fred C. Dobbsreply to anne... Clearly, we got into a mode of heavy defense spending c. WW2 and never, never looked back.SandwichmanAfter all, it's how we got out of the Great Depression. And now you want US to give that up?
Economists have no damn business talking about efficiency and equity. At least, that is, mainstream, neo-classical economists have no damn business talking about those things because they abandon any coherent discourse for addressing those issues when they embrace mechanistic quantitative "equilibrium" models. Both efficiency and equity are qualitative, evolutionary judgments for which a biological analogy is more suitable than a mechanistic one.kieviteA. C. Pigou, in fact, inadvertently demonstrated the futility of the marginalist doctrine, as pointed out by J.A. Hobson in 1914 and confirmed by Alfred Marshall himself. You can still use the marginalist analysis to examine some technical issues having to do with, say, international trade and finance. But the tools are inapplicable to issues of equity and efficiency.
The "equity-efficiency tradeoff" has precisely as much analytical purchase as a fart in the bathtub.
It's funny that the USSR is cited as an example of extreme equality. In no way this is true.frank reveloWhile on nominal scale salaries were in the range from 60 rubles to 600 rubles ($600 per month to $6000 per month in comparable to the USA dollars buying power), the people at higher income bracket had access to free or almost free services which where were unavailable to "common folks". One common perk was almost free vacations in best places for the family. Another was access to foreign goods at highly discounted prices via special network of "distribution centers" which were closed for non nomenklatura. Tickets to difficult to obtain performances in theaters were also the privilege of nomenklatura. Foreign tourists trips generally were available only to immediate members of nomenklatura facility, such as wifes, daughters, etc. Common people can't travel abroad.
Also places were nomenklatura lived (Moscow and capitals of republics such as Kiev, Minsk, etc) were generally better provided and has better infrastructure such as roads, public transport, housing, etc then other towns. Dramatically better in Moscow.
I would say that the USSR was example of very high inequality with nomenklatura (top 1% in the USA terms) enjoying standard of living of the USA middle class, while "lower classes" existed on the level which was just slightly above subsistence. It was very difficult not to be hungry if you get $600 a month and do not grow your own food.
There was substantial underground economy with barons of underground getting astronomical profits like 5000-10000 rubles a month ($50K-$100K a month). Among them were popular singers, musicians, owners of underground business (often furniture or clothing), diplomats, sailors, contrabandists who brought foreign good to the USSR, sellers of tropical fruits from Caucasus and Central Asia, etc)
Another interesting observation is that the miserable pay that the USSR engineers, teachers and scientists (often around $1200 a month) used to get did not kill creativity. Looks like creative people are creative in any circumstances. It's just their mode of existence. So all those talks about high taxes killing incentives for entrepreneurs and inventors and innovators should be viewed with some skepticism.
You really can't bring up fairness and then limit yourself to a single country. If fairness requires redistributing from rich Americans to poor Americans, then fairness should also require redistributing from Americans and other rich countries to poor countries.save_the_rustbelt said... A healthy labor market is the first best way to distribute incomes, but this does not seem to be a possibility, at least not in this discussion.Fact is, Americans don't care about fairness. Never have and never will. Nor do humans in general care about fairness. It is possible to sell redistribution to rich Americans on Rawlsian grounds. In an egalitarian society, the rich don't have to worry so much about the consequences of loss of wealth, either by themselves or by their descendents. In an egalitarian society like Denmark, hitting bottom isn't nearly as painful as in the United States, and it is much easier to bounce back up into the middle class after recovery. You can also sell redistribution as a way of preventing tyranny. It is also arguable that egalitarian societies are less prone than oligarchies to group-think driven policy disasters. But forget arguing for redistribution on the grounds of fairness.
As for the person who says Americans will never let people die for want of medical care, nonsense. If and when we once again face a shortage of labor, you can be sure that poor people will be left to bleed to death in the street for want of ambulance services. And if they make their way to a hospital, they will be left to bleed to death in the emergency room for want of doctors. The laws will be changed, if necessary, so that hospitals can be sued for not providing care, especially if they can come up some excuse like not enough doctors on duty. This is how things were for poor people a few decades back, and probably how they are now for poor people in places like Detroit or poor rural areas.
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Economist's View
Nouriel Roubini says inequality is a destructive force:
The Instability of Inequality, by Nouriel Roubini, Commentary, Project Syndicate: This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets... While these protests have no unified theme, they express in different ways the serious concerns of the world's working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites. ...The problem is not new. Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct. ...
Even before the Great Depression, Europe's enlightened "bourgeois" classes recognized that, to avoid revolution, workers' rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net. The push towards a modern welfare state accelerated after the Great Depression... by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.
Thus, the rise of the social-welfare state was a response ... to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased. Three decades of relative social and economic stability then ensued, from the late 1940's until the mid-1970's, a period when inequality fell sharply and median incomes grew rapidly.
Some of the lessons ... were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe's social-welfare model. Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone's sovereign-debt crisis now.
But the laissez-faire Anglo-Saxon model has also now failed miserably. To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states. Even an alternative "Asian" growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.
Any economic model that does not properly address inequality will eventually face a crisis of legitimacy. Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.
I made similar points here: Why a Working-Class Revolt Might Not Be Unthinkable (and to some extent, more recently here: Why America Should Spread the Wealth, and a bit further back here: Redistribute Income to Grow Economy). And Jeff Sachs weighs in with Occupy Wall Street and the Demand for Economic Justice.
Selected comments
Devin:
Why does this have to be so hard? Very high top marginal tax rates do the trick nicely. Ronald Reagan provided the clearest explanation that I've heard. He said when he was acting, all the big stars did two movies a year and then stopped...because then the taxes were too high.
So did Hollywood stop making movies because Ronnie wasn't available? Heck no, there were plenty of other actors available whose performance was barely distinguishable from the top starts. (Hell, many who became stars probably got their start because an established star wasn't interested in another project.) As long as the demand is there, businesses will find a way to deliver the goods, high taxes and all.
When the top rates are really high, those at the top will be far less interested in moving from a $50 million income to a $100 million income, which creates opportunities for somebody else. And despite what the far-right loonies would like you to believe, those currently raking in all the cash are hardly irreplaceable masters of the universe. The next person in line will probably do the job just as well, maybe better.
When the extremely affluent are disincentivized from hoarding all the income, then opportunities "trickle down" to everybody else. And judging by the historical evidence of growth rates during periods (and in nations) with high top marginal rates on the very wealthy, this form of trickle down has the distinct advantage that it actually works.
Min:
I was surprised last week to see Ann Coulter compare the Occupy Wall Street movement with the prelude to the French Revolution (among other things). As a Royalist, she was alarmed, but I think that she is on to something. ;) Economic inequality in this country has become oppressive, and the people will not stand for that.
ilsm:
In Age of Reason; Thomas paine said that ancestory or heredity does not make one worthy of governing.
Same can be said for inheritance, and accumulation of gambling gains from socialized risk, connections to treasury and reserve leniency.
DrDick:
As Santayana observed, those who are ignorant of history are doomed to repeat it. Our oligarchic masters have very short memories and are generally profoundly ignorant.
kthomas:
"Thus, the rise of the social-welfare state was a response ... to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased."
Now this reminds me of a high-school US history teacher I had. He was not a nice man, coached the Basketball and Football teams, and was generally a remote and dismissive man. He did, however, make a very important point one day, quite similar to this. He drew an "ideological" line on the board. Yes, chalk board. On the far left, Communism as we knew it exemplified by the Soviets and Red China, especially. On the far right, was laisze faire capitalism. Random members of the class were asked to place a check where they thought America was located ideologically on the line.
As I recall, of the 12+ students that marked the board, the median ended up being just a we bit to the left of middle mark. We then discussed how we came to these conclusions, and more importantly where we felt the United States would be ideologically over time, we estimated 50 years. (This was the 80's, so date me.) The direction was towards the left, and that was based on historical factors and not personal beliefs of the students, some of whom were far left, others far right. When we pointed out the Social Sec and Medicare, Great Society, etc. programs and we asked our teacher why these apparently socialist programs were proposed and enacted, since there was obviously so much biased, as we saw it, in our culture against anything resembling socialism/Communism.
This man was a die-hard conservative and a Korean War vet, and his answer was very similar to Dr Roubini: These programs were as much meant to stave off Communism as any bullet, tank, air force fighter jet, guided missle, or battle ship ever did.
bob mcmanus:
I am curious if anyone has modeled this redistribution.
For instance, changing the 1%'s share from 40% of income to 20% of national income, moving national income from capital to wages, and doing it in say five years would create how much wage inflation, price inflation, and how would it affect capital and equity markets? This sort of thing.
Try doing it in thirty years and it would be reversed by Republicans.
Major redistribution is not going to happen, and I think Thoma, DeLong and Krugman would be among those who would stop it.
I mean, Thoma and Krugman need to be asked if they would approve of 10% wage inflation a year, for ten years.
I know we need a whole new set of Fed governors.
bakho:
in reply to bob mcmanus... That would mean raising the min wage less than $1 /h for the next 3 years. Some wage inflation, huh?
Not all transfers need to be made in wages. Some transfers can pay for education and health care.
Edward Lambert:
The Key word in the title is instability. Even now the economy is still unstable. It is bubble ready because of too much wealth at the top. When an economy produces bubbles so easily as our economy has for the past two decades (dot.com bubble and housing bubble), you know that inequality has reached unstable conditions.
What is so hard to understand about that?
ken melvin :
in reply to Edward Lambert...
This financial/bubble crap is the only economy we have.
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As this says, everyone expected Republicans to block President Obama's jobs bill, but it's still disappointing to see the "you're on your ownership socety" in action:No Jobs Bill, and No Ideas, Editorial, NY Times: It was all predicted, but the unanimous decision by Senate Republicans on Tuesday to filibuster and thus kill President Obama's jobs bill was still a breathtaking act of economic vandalism. There are 14 million people out of work, wages are falling, poverty is rising, and a second recession may be blowing in, but not a single Republican would even allow debate on a sound plan to cut middle-class taxes and increase public-works spending.The bill the Republicans shot down is not a panacea, but independent economists say it would have a significant and swift effect on the current stagnation. Macroeconomic Advisers ... said it could raise economic growth by 1.25 percentage points and create 1.3 million jobs in 2012. Moody's Analytics estimated new growth at 2 percentage points and 1.9 million jobs. ...
The Republicans offer no actual economic plans, only tired slogans about cutting regulations and spending, and ending health care reform. The party seems content to run out the clock on Mr. Obama's term while doing very little. On Tuesday, Mr. Obama's campaign manager, Jim Messina, accused Republicans of trying to "suffocate the economy" in hopes that the pain would work to their political advantage. They are doing little to refute that charge. ...
Selected comments
beezer:
In 2010 the public got snookered, plain and simple. Ideological Tea Partiers, tailored by Oligarchs, successfully portrayed Democrats as wild eyed Socialists who wanted to destroy health care for seniors (using 'death panels' if necessary to accomplish their evil goals.)
It worked very well indeed. Even after Republican budgets obviously went after senior health care AND social security, weakening their initial portrayal of Democrats used so successfully in 2010, Republicans remain steadfast.
Obama needs to take even more wind out of this particular sail and portray Republicans for what they are: Do nothings. The jobs drumbeat needs to be louder and more frequent. Down here in muni land, the land of unemployment and neighborhoods made unsafe by police, firefighter and teacher layoffs, this message is finally beginning to resonate.
There is no real remedy until 2012, so more economic damage and hardship is likely. The President must never again relent. If he remains steadfast, the public will force its will in his favor.
Min:
"Obama needs to take even more wind out of this particular sail and portray Republicans for what they are: Do nothings."
The Reps are not do nothings, they are obstructionists. Their base has already recovered economically, and are making money and getting bonuses. The lack of recovery of the rest of us suits them fine, because they can use that to attack unions and education and pursue their Starve the Beast strategy. Despite their rhetoric, they do not really want jobs for Americans.
John M:
This would be an excellent time for President Obama to get back on the campaign trail, use the bully pulpit, etc. and go all out against the Republicans. But we wouldn't be in this position if President Obama hadn't betrayed us and poked his base in the eyes the past three years.
We still need primary challengers. Here's a rather long list of Presidential candidates: http://www.thegreenpapers.com/P12/candidates.phtml
DrDick:
Can we dispense with the notion that the Republicans are concerned with anything other than raw power and ruling (not governing)? They have clearly become economic terrorists in the pursuit of these goals (I can think of no more appropriate label for their behavior on the debt ceiling and their other threats to shut down the government unless they get their way).
William J McKibbin:
The US has apparently "thrown in the towel" on the long-term unemployed -- those unemployed still left in the ring are on their own -- their remaining choices are dire: a) destitution (or charity); b) marry (into wealth); c) steal; d) emigrate; or e) suicide -- this is America!
Min:
"Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of idle capital" and "the struggling masses, who produce the wealth and pay the taxes of the country," and, my friends, the question we are to decide is, upon which side will the Democratic party fight -- upon the side of "the idle holders of idle capital," or upon the side of "the struggling masses"? That is the question which the party must answer first, and then it must be answered by each individual hereafter. The sympathies of the Democratic party, as shown by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that if you will only legislate to make the well-to-do prosperous their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous their prosperity will find its way up through every class which rests upon them."
-- William Jennings Bryan, Cross of Gold speech
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March 8, 2011
The Street's bull market over the last two years has seriously enriched only the wealthiest 5 percent of Americans who hold the lion's share of stock. While their earned income starts at $210,000, their unearned income – dividends and capital gains - now puts them considerably above that.
Shouldn't the shopping of the top 5 percent spur lots of new jobs? Not really. While the top 5 percent are spending more, they're not spending all that much as a proportion of their earnings. The rich sock away a bigger share of their income than everyone else. After all, being rich means you already have most of what you want.
Moody's Analytics estimates that the shopping of America's richest 5 percent now accounts for 35.5 percent of all U.S. consumer spending. Just think how much more spending would be going on - and jobs thereby created - if more Americans shared in Wall Street's gains.
The remaining 95 percent of Americans are still holding back from the malls because they're worried about their jobs, their falling wages, their higher health-care deductibles, and their dropping home values. And as long as they continue to hold back, this recovery will be painfully slow
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November 6, 2010
In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie.
Damon Winter/The New York Times
But guess what? You no longer need to travel to distant and dangerous countries to observe such rapacious inequality. We now have it right here at home - and in the aftermath of Tuesday's election, it may get worse.
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
C.E.O.'s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.
That's the backdrop for one of the first big postelection fights in Washington - how far to extend the Bush tax cuts to the most affluent 2 percent of Americans. Both parties agree on extending tax cuts on the first $250,000 of incomes, even for billionaires. Republicans would also cut taxes above that.
The richest 0.1 percent of taxpayers would get a tax cut of $61,000 from President Obama. They would get $370,000 from Republicans, according to the nonpartisan Tax Policy Center. And that provides only a modest economic stimulus, because the rich are less likely to spend their tax savings.
At a time of 9.6 percent unemployment, wouldn't it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.
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February 16, 2011 | CNN(via Yahoo Finance)
Are you better off than your parents?
Probably not if you're in the middle class.
Incomes for 90% of Americans have been stuck in neutral, and it's not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed.
In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.
Meanwhile, the richest 1% of Americans -- those making $380,000 or more -- have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust. Experts point to some of the usual suspects -- like technology and globalization -- to explain the widening gap between the haves and have-nots.
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Economist's View
Claude Fischer argues that the "education gap may well keep widening for quite a while":
Degree inequality, by Claude Fischer, Berkeley Blog: It is now generally understood that economic inequality has expanded greatly since about 1970. ... Now the debate has shifted to what – if anything at all – should be done about inequality. ... Less discussed is the widening college degree gap. Yet its implications go considerably beyond money, to widening differences in life experiences and ways of life. ...Payoffs Having a bachelor's degree has always paid off – and having an additional degree or two has also paid handsomely. But this has become truer and truer. In Hout's words, "The correlation between education and economic fortunes in the United States has never been higher." ...
This education-income connection cycles back: Having more money means more education for the children ... in the best ... schools...
In addition..., Americans ... with B.A.s are less likely to be unemployed. They are healthier... The college-educated have more stable family lives. ...
Importantly, the connection between higher education and the good things in life is not, as some contend (famously Herrnstein and Murray in The Bell Curve), simply because smart people go further in school and smart people do well in life. Research shows that being in school longer – whatever is happening in and around the classroom – improves young people's chances of doing well in most areas of life. Moreover, it is the marginal students, the ones who barely get into college, who benefit most from a college education.
Different worlds Even is more happening along the education gap: Increasingly, college graduates marry college graduates and live among college graduates. Increasingly, Americans group by education and their ways of life diverge by education. ...
What is less clear, although certainly plausible, is that this widening separation carries along with its economic and social divisions, a widening gap in values and ways of life: two different Americas, largely propelled by public investments in higher education. Campuses ... grew enormously in the 1950s and 1960s and satisfied the growing demand. The United States had more college graduates than anyone. But... Now, as President Obama noted in his State of the Union, "America has fallen to ninth in the proportion of young people with a college degree." He went on to propose a goal: "By the end of the decade, America will once again have the highest proportion of college graduates in the world." (Good luck!)
Further expanding the proportion of our college-educated would do much – for the college-educated, for the national economy, and perhaps to shrink the education-wealth-culture gap. ... Where the funds to invest would come from right now is another matter. We are not in the economic climate of the '50s and '60s, nor in its political climate. Public higher education is shrinking. The education gap may well keep widening for quite a while.
I hope that somehow access to higher education can be at least maintained, and hopefully enhanced, but it's hard to see that happening in the face of declining state support and rising tuition.
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There is a war underway. I'm not talking about Washington's bloody misadventures in Afghanistan and Iraq, but a war within the borders of the United States. It's a war fought on the airwaves, on television and radio and over the Internet, a war of words and images, of half-truth, innuendo, and raging lies.
I'm talking about a political war, pitting liberals against conservatives, Democrats against Republicans. I'm talking about a spending war, fueled by stealthy front groups and deep-pocketed anonymous donors. It's a war that's poised to topple what's left of American democracy.
The right wing won the opening battle. In the 2010 mid-term elections, shadowy outside organizations (who didn't have to disclose their donors until well after Election Day, if at all) backing Republican candidates doled out US$190 million, outspending their adversaries by a more than two-to-one margin, according to the Center for Responsive Politics.
American Action Network, operated by Republican consultant Fred Malek and former Republican Senator Norm Coleman, spent $26 million; the US Chamber of Commerce plunked down $33 million; and Karl Rove's American Crossroads and Crossroads GPS shelled out a combined $38.6 million. Their investments in conservative candidates across the country paid off: the 62 House seats and six Senate seats claimed by Republicans were the most in the postwar era - literally, a historic victory.
Knocked out of their complacency, no longer basking in the glow of Barack Obama's 2008 victory, wealthy Democrats are now plotting their response. Left-wing media mogul David Brock plans to create an outside group dubbed American Bridge in response to Rove's Crossroads outfits that will fight in the trenches of 2012 campaign spending. Many more outfits like Brock's will surely follow, as liberal and centrist Democrats brace for a promised $500 million onslaught by the Chamber of Commerce and others of its ilk.
Even the Barack Obama administration, which shunned outside groups in 2008, has opened the door to a covert spending war. The Democrats will now fight fire with fire. "Is small money better? You bet. But we're in a fucking fight," Democratic strategist and fundraiser Harold Ickes told me recently. "And if you're in a fistfight, then you're in a fistfight, and you use all legal means available."
The endgame here, of course, is non-stop war. No longer will outside groups come and go every two years. Now, such groups will be running attack ads, sending out mailers, and deploying robo-calls year-round in what is going to become a perpetual campaign to sway voters and elect friendly lawmakers. "We're definitely building a foundation," was how American Crossroads president Steven Law put it.
This is what nowadays passes for the heart and soul of American democracy. It used to be that citizens in large numbers, mobilized by labor unions or political parties or a single uniting cause, determined the course of American politics. After World War II, a swelling middle class was the most powerful voting bloc, while, in those same decades, the working and middle classes enjoyed comparatively greater economic prosperity than their wealthy counterparts. Kiss all that goodbye. We're now a country run by rich people.
Not surprisingly, political power has a way of following wealth. What that means is: you can't understand how the rich seized control of American politics, and arguably American society, without understanding how a small group of Americans got so much money in the first place.
That story begins in the late 1970s and continues through the Obama years, a period in which American policy has been so skewed toward the rich that we're now living through the worst period of income inequality in modern history. Consider the statistics: 50 years ago, the wealthiest 1% of Americans accounted for one of every 10 dollars of the nation's income; today, it's nearly one in every four. Between 1979 and 2006, the average post-tax household income (including benefits) of the wealthiest 1% increased by 256%; the poorest households saw an increase of 11%; middle-class homes, 21%, much of which was due to the arrival of two-job families.
Tax guru David Cay Johnston recently crunched new Social Security Administration data and discovered an even starker divide. On the one hand, the number of Americans earning a steady income declined by 4.5 million between 2008 and 2009, and the average wage in the US dipped by 1.2%, to $39,055. On the other hand, the average wage among Americans earning more than $50 million per year was $91 million in 2008 and $84 million in 2009.
Harvard University economist Lawrence Katz put the situation Americans now find themselves in this way:
"Think of the American economy as a large apartment block. A century ago - even 30 years ago - it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most."
Let's call those select few in the penthouse the New Oligarchy, an awesomely rich sliver of Americans raking in an outsized share of the nation's wealth. They're oil magnates and media tycoons, corporate executives and hedge-fund traders, philanthropists and entertainers.
Depending on where you want to draw the line, they're the top 1%, or the top 0.1%, or even the top 0.01% of the population. And when the Supreme Court handed down its controversial Citizens United decision in January, it broke the floodgates so that a torrent of anonymous donations from this oligarchic class could flood back down from the heights and inundate the political lands below.
The Thirty-Year War
How did we get here? How did a middle-class-heavy nation transform itself into an oligarchy? You'll find answers to these questions in Winner-Take-All Politics, a revelatory new book by political scientists Jacob Hacker and Paul Pierson. The authors treat the present figures we have on American wealth and poverty as a crime scene littered with clues and suspects, dead-ends and alibis.
Unlike so many pundits, politicians, and academics, Hacker and Pierson resist blaming the usual suspects: globalization, the rise of an information-based economy, and the demise of manufacturing. The culprit in their crime drama is American politics itself over the past three decades. The clues to understanding the rise of an American oligarchy, they believe, won't be found in New York or New Delhi, but on Capitol Hill, along Pennsylvania Avenue, and around K Street, that haven in a heartless world for Washington's lobbyists.
"Step by step and debate by debate," they write, "America's public officials have rewritten the rules of American politics and the American economy in ways that have benefited the few at the expense of the many."
Most accounts of American income inequality begin in the 1980s with the reign of president Ronald Reagan, the anti-government icon whose "Reaganomics" are commonly fingered as the catalyst for today's problems. Wrong, say Hacker and Pierson. The origins of oligarchy lay in the late 1970s and in the unlikely figure of Jimmy Carter, a Democratic president presiding over a congress controlled by Democrats. It was Carter's successes and failures, they argue, that kicked off what economist Paul Krugman has labeled "the Great Divergence".
In 1978, the Carter administration and congress took a red pen to the tax code, slashing the top rate of the capital gains tax from 48% to 28% - an enormous boon for wealthy Americans. At the same time, the most ambitious effort in decades to reform American labor law in order to make it easier to unionize died in the senate, despite a 61-vote Democratic supermajority. Likewise, a proposed Office of Consumer Representation, a $15 million advocacy agency that was to work on behalf of average Americans, was defeated by an increasingly powerful business lobby.
Ronald Reagan, you could say, simply took the baton passed to him by Carter. His 1981 Economic Recovery and Tax Act (ERTA) bundled a medley of goodies any oligarch would love, including tax cuts for corporations, ample reductions in the capital gains and estate taxes, and a 10% income tax exclusion for married couples in two-earner families. "ERTA was Ronald Reagan's greatest legislative triumph, a fundamental rewriting of the nation's tax laws in favor of winner-take-all outcomes," Hacker and Pierson conclude.
The groundwork had by then been laid for the rich to pull definitively and staggering ahead of everyone else. The momentum of the tax-cut fervor carried through the presidencies of George H W Bush and Bill Clinton, and in 2000 became the campaign trail rallying cry of George W Bush. It was Bush II, after all, who told a room full of wealthy donors at an $800-a-plate dinner - "Some people call you the elites; I call you my base" - and who pledged that his 2001 tax cuts would be a boon for all Americans. They weren't: according to Hacker and Pierson, 51% of their benefits go to the top 1% of earners.
Those cuts will be around a lot longer if the GOP has its way. Take Republican Congressman Dave Camp's word for it. On November 16, Camp, a Republican from Michigan, said the only acceptable solution when it came to the Bush-era tax cuts was not just upholding them for all earners, rich and poor, but passing more such cuts. Anything in between, any form of compromise, including President Barack Obama's proposal to extend the Bush cuts for the working and middle classes but not the wealthy, was "a terrible idea and a total non-starter".
Why should you care what Dave Camp says? Here's the answer: in January, he's set to inherit the chairman's gavel on the powerful House Ways and Means Committee, the body tasked with writing the nation's tax laws. And though most Americans wouldn't even recognize his name, Camp's message surely left America's wealthy elites breathing a long sigh of relief. You could sum it up like this: fear not, wealthy Americans, your money is safe. The policies that made you rich aren't going anywhere.
Tear down this law
Where rewriting the tax code proved too politically difficult, demolishing regulations worked almost as well. This has been especially true in the world of finance. There, a legacy of deregulation transformed banking from a relatively staid industry into a casino culture, ushering in an era of eye-popping profits, lavish bonuses, and the "financialization" of the American economy.
April 6, 1998: it's a useful starting point in the story of financial deregulation. On that day, two well-known Wall Street denizens, Citicorp and Travelers Group, agreed to a historic $140 billion merger. The deal required much lobbying, but eventually the chiefs of these banks won an exemption from the Glass-Steagall Act, the New Deal-era law walling off commercial banks from riskier investment houses. The resulting institution, dubbed Citigroup, would be the largest supermarket bank in history, a marriage of teller windows and trading desks, customer banking and high-stakes investing - all suddenly under one deregulated roof. It would prove an explosive, if not disastrous, mix.
The merger stirred visions of a future in which the US would dominate the planet financially. All that stood in the way was undue regulatory red tape. At least that's the way free marketeers like then-Republican senator Phil Gramm of Texas saw it. Gramm, who as an aide to presidential candidate John McCain infamously called America a "nation of whiners", was, in fact, the driving force behind two of the most influential pieces of deregulation in recent US history.
In 1999, president Clinton signed the Gramm-Leach-Bliley Act, a bevy of deregulatory measures that obliterated Glass-Steagall. In December the following year, Gramm quietly snuck the 262-page Commodity Futures Modernization Act into a massive $384 billion spending bill. Gramm's bill blocked regulators like the Securities and Exchange Commission (SEC) from cracking down on the shadowy "over-the-counter derivatives" market, home to billions of dollars of opaque financial instruments that would, years later, nearly demolish the American economy.
As presidents, both Bill Clinton and George W Bush wrapped their arms around financial deregulation. As a result, in a binge of financial gluttony, Wall Street grew fat in ways never previously seen. Between 1929, the year the Great Depression began, and 1988, Wall Street's profits averaged 1.2% of the nation's gross domestic product; in 2005, that figure peaked at 3.3% as industry bonuses soared ever-higher. In 2009, bad times for most Americans, bonuses hit $20 billion. So much wealth in so few hands. Nothing explains the rise of the new American oligarchy more starkly.
Of course, it's not just what politicians did that helped create today's oligarchy, but what they failed to do. A classic example: in the 1990s, the Financial Accounting Standards Board (FASB), a private American accounting regulator, set its sights on a loophole big enough to drive a financial Mack truck through.
Until then, stock options included in executives' skyrocketing pay packages - potentially worth tens of millions of dollars when exercised - were valued at zero when issued. That's right: zero, zilch, nada. When the FASB and the SEC tried to close the loophole, however, big business leapt to its defense. An avalanche of money went into the pockets of an army of K Street lobbyists and leviathan business trade associations. In the end, nothing happened. Or rather, everything continued happening. The loophole remained.
Citizen United's brave new world
Hacker and Pierson ably guide us through 30 years of "winner-take-all" policymaking, politicking, and - from the point of view of the wealthy - judicious inaction. They offer an eye-opening journey across the landscape that helped foster the New Oligarchs, but one crucial vista appeared too late for the authors to include.
No understanding of the rise of our New Oligarchs could be complete without exploring the effects of the Supreme Court's January Citizens United decision, which set their power in cement more effectively than any tax cut ever could. Before Citizens United, the rich used their wealth to subtly shape policy, woo politicians, and influence elections. Now, with so much money flowing into their hands and the contribution faucets wide open, they can simply buy American politics so long as the price is right.
There's no mistaking how, in less than a year, Citizens United has radically tilted the political playing field. Along with several other major court rulings, it ushered in American Crossroads, American Action Network, and many similar groups that now can reel in unlimited donations with pathetically few requirements to disclose their funders.
What the present Supreme Court, itself the fruit of successive tax-cutting and deregulating administrations, has ensured is this: that in an American "democracy", only the public will remain in the dark. Even for dedicated reporters, tracking down these groups is like chasing shadows: official addresses lead to PO boxes; phone calls go unreturned; doors are shut in your face.
The limited glimpse we have of the people bankrolling these shadowy outfits is a who's-who of the New Oligarchy: the billionaire Koch Brothers ($21.5 billion); financier George Soros ($11 billion); hedge-fund CEO Paul Singer (his fund, Elliott Management, is worth $17 billion); investor Harold Simmons (net worth: $4.5 billion); New York venture capitalist Kenneth Langone ($1.1 billion); and real estate tycoon Bob Perry ($600 million).
Then there's the roster of corporations who have used their largesse to influence American politics. Health insurance companies, including UnitedHealth Group and Cigna, gave a whopping $86.2 million to the US Chamber to kill the public option in the healthcare bill, funneling the money through the industry trade group America's Health Insurance Plans. And corporate titans like Goldman Sachs, Prudential Financial, and Dow Chemical have given millions more to the chamber to lobby against new financial and chemical regulations.
As a result, the central story of the 2010 midterm elections isn't Republican victory or Democratic defeat or Tea Party anger; it's this blitzkrieg of outside spending, most of which came from right-leaning groups like Rove's American Crossroads and the US Chamber of Commerce. It's a grim illustration of what happens when so much money ends up in the hands of so few. And with campaign finance reforms soundly defeated for years to come, the spending wars will only get worse.
Indeed, pundits predict that spending in the 2012 elections will smash all records. Think of it this way: in 2008, total election spending reached $5.3 billion, while the $1.8 billion spent on the presidential race alone more than doubled 2004's total. How high could we go in 2012? $7 billion? $10 billion? It looks like the sky's the limit.
We don't need to wait for 2012 to arrive, however, to know that the sheer amount of money being pumped into American politics makes a mockery out of our democracy (or what's left of it). Worse yet, few solutions exist to staunch the cash flow: the DISCLOSE Act, intended to counter the effects of Citizens United, twice failed in the senate this year; and the best option, public financing of elections, can't even get a hearing in Washington.
Until lawmakers cap the amount of money in politics, while forcing donors to reveal their identities and not hide in the shadows, the New Oligarchy will only grow in stature and influence. Left unchecked, this ultimate elite will continue to root out the few members of congress not beholden to them and their "contributions" (see Wisconsin's Russ Feingold) and will replace them with lawmakers eager to do their bidding, a congress full of obedient placeholders ready to give their donors what they want.
Never before has the United States looked so much like a country of the rich, by the rich, and for the rich.
Andy Kroll is a reporter in the D.C. Bureau of Mother Jones and an associate editor at TomDispatch.com. You can email him at akroll (at) motherjones.com.
Copyright 2010 Andy Kroll
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The Atlantic
This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that "the World is dividing into two blocs-the Plutonomy and the rest":
In a plutonomy there is no such animal as "the U.S. consumer" or "the UK consumer", or indeed the "Russian consumer". There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the "non-rich", the multitudinous many, but only accounting for surprisingly small bites of the national pie.Some of what I've learned is entirely predictable: the rich are, as F. Scott Fitzgerald famously noted, different from you and me.
What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth.
The rise of the new plutocracy is inextricably connected to two phenomena: the revolution in information technology and the liberalization of global trade. Individual nations have offered their own contributions to income inequality-financial deregulation and upper-bracket tax cuts in the United States; insider privatization in Russia; rent-seeking in regulated industries in India and Mexico.
... ... ....
Meanwhile, the vast majority of U.S. workers, however devoted and skilled at their jobs, have missed out on the windfalls of this winner-take-most economy-or worse, found their savings, employers, or professions ravaged by the same forces that have enriched the plutocratic elite. The result of these divergent trends is a jaw-dropping surge in U.S. income inequality.
The clincher, Peterson says, came from the wife: "She turns to me and she goes, 'You know, the thing about 20'"-by this, she meant $20 million a year-"'is 20 is only 10 after taxes.' And everyone at the table is nodding."As with the aristocracies of bygone days, such vast wealth has created a gulf between the plutocrats and other people, one reinforced by their withdrawal into gated estates, exclusive academies, and private planes.
To grasp the difference between today's plutocrats and the hereditary elite, who (to use John Stuart Mill's memorable phrase) "grow rich in their sleep," one need merely glance at the events that now fill high-end social calendars. The debutante balls and hunts and regattas of yesteryear may not be quite obsolete, but they are headed in that direction. The real community life of the 21st-century plutocracy occurs on the international conference circuit.
Critiques of the super-elite are becoming more common even at gatherings of the super-elite. At a Wall Street Journal conference in December 2009, Paul Volcker, the legendary former head of the Federal Reserve, argued that Wall Street's claims of wealth creation were without any real basis. "I wish someone," he said, "would give me one shred of neutral evidence that financial innovation has led to economic growth-one shred of evidence."
At Google's May Zeitgeist gathering, Desmond Tutu, the opening speaker, took direct aim at executive compensation.
"I do have a very real concern about capitalism,"
he lectured the gathered executives.
"The Goldman Sachs thing. I read that one of the directors general-whatever they are called, CEO-took away one year as his salary $64 million. Sixty-four million dollars."
He sputtered to a stop, momentarily stunned by this sum (though, by the standards of Wall Street and Silicon Valley compensation, it's not actually that much money). In an op-ed in TheWall Street Journal last year, even the economist Klaus Schwab-founder of the World Economic Forum and its iconic Davos meeting-warned that "the entrepreneurial system is being perverted," and businesses that "fall back into old habits and excesses" could "undermin[e] social peace."
drewfromct:
"No one here is interested in a return to feudalism.
Not the prospective serfs, anyway."
On the contrary, there are all too many poor deluded souls among us who cheer the New Feudalism because they naively believe that they will be among the royals.
They are no more than a mass of clucking chickens cheering on the rise of the next Col. Sanders.
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Raghuram Rajan, the IMF's former chief economist, argues that the subprime debt build-up was an attempt – "whether carefully planned or the path of least resistance" – to disguise stagnating incomes and to buy off the poor.
"The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly," he said.
Bank failures in the Depression were in part caused by expansion of credit to struggling farmers in response to the US Populist movement.
Extreme inequalities are toxic for societies, but there is also a body of scholarship suggesting that they cause depressions as well by upsetting the economic balance. They create a bias towards asset bubbles and overinvestment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.
The switch from brawn to brain in the internet age has obviously pushed up the Gini count, but so has globalization. Multinationals are exploiting "labour arbitrage" by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs across in America and Europe.
More subtly, Asia's mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.
Yes, we can still hope that this is a passing phase until rising wages in Asia restore balance to East and West, but what it if it proves to be permanent, a structural incompatibility of the Confucian model with our own Ricardian trade doctrine?
There is no easy solution to creeping depression in America and swathes of the Old World. A Keynesian `New Deal' of borrowing on the bond markets to build roads, bridges, solar farms, or nuclear power stations to soak up the army of unemployed is not a credible option in our new age of sovereign debt jitters. The fiscal card is played out.
So we limp on, with very large numbers of people in the West trapped on the wrong side of globalization, and nobody doing much about it. Would Franklin Roosevelt have tolerated such a lamentable state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?
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