For a nation to tax itself into prosperity…..Winston Churchill pic.twitter.com/rWNfZ924PE
— Colin Twiggs (@Colin_Twiggs) September 29, 2014
Amir Sufi: Who is the Economy Working For? The Impact of Rising Inequality on the American Economy
Amir Sufi, professor of Finance at the University of Chicago, testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Economic Policy. His statement titled “Who is the Economy Working For? The Impact of Rising Inequality on the American Economy” makes interesting reading.
“Only 76% of Americans aged 25 to 54 currently have jobs, compared to 80% in 2006 and 82% in 1999…..How did we get into this mess?”
The gist of his argument is:
“Richer Americans save a much higher fraction of their income, ultimately holding most of the financial assets in the economy: stocks, bonds, money-market funds, and deposits. These savings are lent by banks to middle and lower income Americans, primarily through mortgages.”
…And collapse of the housing market caused disproportionate harm to the middle and lower-income groups.
It is true is that middle and lower-income groups have a higher percentage of their wealth invested in their homes and are also far more exposed to mortgages than richer Americans. The source of funding for these mortgages, however, is not the wealthy — who are primarily invested in growth assets such as stocks — but the banks who create new credit out of thin air. The collapse of the housing market caused disproportionate hardship to middle and lower-income Americans because their wealth is concentrated in this area. The rich suffered from a collapse in stock prices, but the market has recovered to new highs while housing remains in the doldrums. That is one of the causes of rising wealth inequality.
Where I do agree with Amir is that credit growth without income growth is a recipe for disaster.
“A tempting solution to our current troubles is to encourage even more borrowing by lower and middle-income Americans. This group of Americans is likely to spend out of additional credit, which would provide a temporary boost to consumption. But unless borrowing is predicated on higher income growth, we risk falling into the same trap that led to economic catastrophe.”
The graph below compares credit growth to growth in (nominal) disposable income:
The ratio of credit to disposable income rose from 2:1 during the 1960s to almost 5:1 in 2009.
There is no easy path back to the stability of the 1960s. A credit contraction of that magnitude would destroy the economy. But regulators should aim to keep credit growth below the rate of income growth over the next few decades, gradually restoring the economy to a more sustainable level.
The worst possible policy would be to encourage another credit boom!
Is a Hard Life Inherited? | NYTimes.com
Nicholas Kristof writes in the New York Times:
ONE delusion common among America’s successful people is that they triumphed just because of hard work and intelligence. In fact, their big break came when they were conceived in middle-class American families who loved them, read them stories, and nurtured them with Little League sports, library cards and music lessons. They were programmed for success by the time they were zygotes.Yet many are oblivious of their own advantages, and of other people’s disadvantages.
….This crisis in working-class America doesn’t get the attention it deserves, perhaps because most of us in the chattering class aren’t a part of it.
There are steps that could help, including a higher minimum wage, early childhood programs, and a focus on education as an escalator to opportunity. But the essential starting point is empathy.
Read more at Is a Hard Life Inherited? – NYTimes.com.
A compassionate conservative: Arthur C. Brooks
Bill Moyers interviews the American Enterprise Institute’s president Arthur C. Brooks on how to fight America’s widening inequality.
“The problem is we have a bit of a conspiracy between the right and left to have people now who are tending to be more part of the machine…We need a new kind of moral climate for our future leaders.”
Bill Moyers seems a bit light on the economics of the Walmart situation. Raising the minimum wage would reduce welfare payments to Walmart employees, but WMT is a rational entity with the primary goal of maximizing profits and shareholder value. An increase in the minimum wage would increase the appeal of automation and result in a reduction in staff numbers, causing an increase in unemployment, or alternatively WMT will pass on the additional cost in the form of increased prices to consumers, causing a rise in inflation. The only sustainable long-term solution is not an easy one: to increase economic growth and employment so that market-driven wage rates rise. Interference with the pricing mechanism in a market — whether through legislated minimum wages, price controls or Fed interest rates — is misguided and unsustainable. It may defer but also amplifies the original problem.
One-size-fits-all alcohol policies fail to help problem drinkers |IEA
From the Institute of Economic Affairs:
The cornerstone policies of Britain’s alcohol strategy are failing to reduce heavy drinking amongst the most vulnerable. New research from the Institute of Economic Affairs outlines the significant flaws of advertising bans, licensing restrictions and higher taxes, which not only fail to help problem drinkers, but punish the majority of responsible consumers.
The government and health campaigners have long favoured policies which aim to reduce per capita alcohol consumption to reduce heavy and harmful drinking. This outlook is based on a blunt model devised in the 1950s, and ignores countless studies which have demonstrated that particular subgroups drink at extremely varied levels. Attempting to reduce a national average ignores the obvious: that heavy drinking amongst a minority drastically pushes up the average.
In Punishing the Majority, authors John Duffy and Christopher Snowdon examine how a relatively small number of drinkers consume a disproportionately large amount of alcohol, with close to 70% of alcohol consumed by one fifth of the population. Using several examples, the authors show the extent to which per capita consumption depends on the drinking patterns of a minority.
The paper calls for politicians and campaigners to wake up to the complex reasons behind problem drinking. Instead of favouring political interventions on price, availability and advertising, the health lobby should pursue harm-reduction and rehabilitation.
Richard Epstein on Thomas Piketty | IEA
Excellent critique by Richard Epstein, Professor Emeritus of Law and Senior Lecturer at the University of Chicago Law School, of the thesis and policy recommendations of French economist Thomas Piketty from his recent book, Capital in the Twenty-First Century.
With voluntary bargaining, one can assume that both parties will benefit from the transaction: they are unlikely to enter into a bargain where there is not at least some benefit for themselves. What Epstein does not address is crony capitalism, where special interest groups (either corporations or unions) may influence government to act (or fail to act) in a way that benefits the group at the expense of the whole. Wal-mart profits, for example, may rise as a result of China’s suppression of the yuan/dollar exchange rate, but the same exchange rate may cause the loss of manufacturing jobs and exports, and depress wages.
The inequality debate | Thomas Piketty and Ryan Bourne IEA
The inequality debate: Thomas Piketty and Ryan Bourne, of the Institute of Economic Affairs.
One mistake Piketty makes: he uses a marginal tax rate of 80% in the US in the 1920s and 1930s on incomes over $1 million to justify higher taxes on incomes over $1 million today. This fails to consider inflation. Adjusted for the CPI, an income of $1m in 1920 equates to an income of $12m today.
High marginal tax rates in the 1920s in the US were introduced to pay back war debt from WWI. They had the opposite effect of that intended and reduced tax collections. Treasury secretary Andrew Mellon subsequently increased tax collections by reducing maximum tax rates, with the famous quip: “73% of nothing is nothing.”
The inequality debate | Richard Epstein
Professor Richard Epstein on the inequality debate and related issues in the US.
3 Reasons to be suspicious of the inequality debate
My concerns with the inequality debate are twofold:
- The poor are seldom rescued from poverty by redistribution. Raising taxes on the rich to bolster welfare payments increases dependence of the latter on government. While this may be a sound political strategy to garner votes, dependence on handouts robs people of their self-respect and foments other social issues. The welfare system should focus more on assisting the disadvantaged to become independent: teaching skills, improving access to higher education, and providing support for those striving to achieve autonomy.
- Progressive taxes on the rich foster resentment at the unequal treatment and encourage tax evasion/avoidance. Raising income taxes also acts as a disincentive to produce further income. Any tax acts as a disincentive, but income taxes are particularly inefficient as the following chart from the Henry Review shows. Taxes collected from raising income tax rates often fall short of expectations, with higher taxes acting as a handbrake on economic growth. Past attempts at taxes on wealth, on the other hand, have proved largely impractical.
Marginal welfare loss is the loss in consumer welfare per dollar of revenue raised for a small increase in each tax (the extent of compensation required to restore consumer satisfaction reflects the distorting effect of the tax on the economy). Taxes at the top of the graph are the most inefficient in terms of outcomes, while those at the bottom achieve the greatest net benefit.
I should explain that my attitude to welfare is shaped by my own experience. My mother was widowed when I was four and faced the daunting prospect of raising children on her own. She went back to work and, because of her circumstances, was offered a partial interest rate subsidy (on a mortgage) by the local municipality. This enabled her to build a modest home and raise four children, who (apart from myself) grew up to make a useful contribution to society. Without assistance, I shudder to think how we would have fared. But I appreciate that the help offered was to restore our independence, rather than foster ongoing dependency and a sense of entitlement.
When I hear President Obama talk of the top 1%’s share of “our income” or their share of “our nation’s wealth” I do a double-take. It is not “our” income or wealth, but “theirs”. We have not earned it and have no claim to the income or assets of others other than that they pay their fair share of taxes. And shifting a disproportionate share of taxes onto them is just as misguided and immoral, in my opinion, as exploiting the less fortunate. For an economy to succeed you need a healthy partnership between the haves and have-nots, where both will benefit from prosperity. Not like the present tug-of-war, with abuses and mistrust on both sides. Raising taxes would drive a further wedge between the two sides rather than restore trust and cooperation. We need to seek a win-win outcome, rather than an outcome where all of us will lose.
In my opinion the inequality debate and higher taxes are a red herring, designed to distract the public from the real issue: globalization and the insidious partnership between large corporations and their Asian suppliers. Globalization opened up new export markets for corporations while lowering input costs through access to cheap labor. On its own, globalization is manageable, but politicians turn a blind eye to currency manipulation by Asian exporters like China. By saying much but doing little, they allow a continual drain of jobs to offshore markets. Many corporations silently welcome a weak RMB because it lowers the cost of imports while enabling others to make offshore investments and acquisitions cheaply with the strong Dollar.
Corporate profits as a percentage of GNP have soared…
…while manufacturing workers suffer from a shrinking job market and lower wages.
If you want to fix inequality, don’t raise taxes. Instead, reduce progressive tax rates while closing many of the loopholes to create a level playing field. But, most importantly, end currency manipulation to ensure that the Dollar trades at a fair, market-clearing rate. That should help regain international competitiveness, go some way to revive a struggling manufacturing sector…
… and restore jobs lost over the last two decades.