A reader reminded me of this 2011 Vanity Fair article, where Joseph Stiglitz argues that growing income inequality will harm future US economic growth.
“What matters, [some people] argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong……..
First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets — our people — in the most productive way possible.
Second, many of the distortions that lead to inequality — such as those associated with monopoly power and preferential tax treatment for special interests — undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.
Third, and perhaps most important, a modern economy requires ‘collective action’ — it needs government to invest in infrastructure, education, and technology……. America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead. None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs.”
There are obvious flaws in Stiglitz’ argument. First, he equates income inequality with unequal opportunity. These are two different concepts. Michael Jordan might earn more income than me, but this does not necessarily indicate unequal opportunity. Even with the same opportunity I am unlikely to ever succeed as a basketball player. Equal opportunity is important in maximizing economic growth but will not achieve equal outcomes.
Distortions associated with monopoly power and unequal treatment of taxpayers both promote inefficiency. But we must be careful not to “put the cart before the horse.” Increasing taxes on the rich will not eliminate these distortions. We need to eliminate monopoly power and unequal treatment of taxpayers to promote greater economic efficiency — not greater income equality.
I have no argument against increased investment in infrastructure, education, and technology, but it is a stretch to blame under-investment in this area on the wealthy. There are a multitude of other interests, including defense and welfare, that have diverted funds away from investment in these areas. Economic growth benefits us all — the interests of the wealthy are generally aligned with those of their fellow citizens. In fact, as a group, top income earners benefit more from economic growth than any other group and are unlikely to act against their own self-interest.
No doubt there are interest groups who argue for lower taxes or favorable treatment of specific industries, just as there are interest groups that argue for increased welfare payments to retirees. What needs to be addressed — in the interests of greater economic efficiency and equity — is the amount of influence these interest groups exert over political decisions.
Economists often confuse arguments for greater efficiency with arguments for greater equity. Stiglitz tries to draw a line from greater equity to greater efficiency. Unfortunately most of the evidence points to the opposite. Societies, like the UK in the 1960s and 1970s and Sweden in the 1970s and 1980s, who focused on greater equity, ended up damaging economic efficiency and growth — harming the very people their policies were intended to help.
As Ross Gittins argues, we need to achieve both efficiency and equity. My suggestion is twofold. Start by designing a tax system based on efficiency, where we maximize economic output while minimizing costs of tax collection. This requires greater simplicity, removal of progressive tax rates, and elimination of favorable treatment for specific industries and/or voting blocs. Complexity increases costs as well as creating opportunities for tax avoidance.
When we have maximized tax revenues through increased output and efficient collection, we can then focus on equity when deciding how tax revenues are spent. Redressing the imbalances of income inequality is unachievable. Instead concentrate on ensuring equal opportunity for all. Long-run investment in education, additional support for disadvantaged students, increased spending on infrastructure, and on research will have payoffs in terms of economic efficiency. And an efficient economy will benefit everyone.
The “size of the pie” really does matter but how it is shared will also make a difference to future growth.
All very well, but look at the historical top marginal tax rate in the US. It was lowest at 25% just before the great depression and again just before the GFC at 35% (really more like 15% if loopholes are included). All this prevarication mimics Milton Friedman’s trickle down theory which merely told the wealthy what they wanted to hear and fooled the hoi polloi. When the super rich suck the money out of the system the average Joe can no longer afford to buy the products he is employed to make. Then he is encouraged to borrow against his house till that runs out and then you have a GFC.
First, be careful with comparing the top marginal tax rate. A million dollars then (1925) was worth a lot more than it is today.
Second, what you seem to be saying is that economic growth does not benefit the average working family. If that is the case then there would have been no advancement in living standards since the industrial revolution.
Come on Colin, the first sentence of your reply is irrelevant and as for the second sentence, I never argued against economic growth. Think how mad we have become. Mitt Romney claims he will reduce the deficit by lowering taxes for the rich. Last time national debt was so high after the war in the US the top marginal tax rate was 90%. Why didn’t that destroy the economy? Makes sense if you owe money you must save and pay it off. In spite of all the fiscal inbalances the world is still capable of massive overproduction and may find some way of working through this muddle. there is one glimmer of hope, we have not so far erected the trade barriers that made the last depression so bad. My point is that the people who make policy and influence public opinion just coincidentally introduce policies that make them even richer, never ever that would make them poorer. Galbraith said that the rich given the choice between sharing their wealth and fighting to the death to conserve it will choose the latter every time. That is the real meaning of a conservative, I suppose.
I think the better definition of a conservative is someone who wants efficient and fair government. A liberal is someone who wants a fair and efficient government. It is all a matter of what you see as the priority. Not all conservatives are high-income earners and not all liberals are welfare “bludgers”.
Apologies, my research shows that only 500 were paying the top marginal rate in 1950 but by 1980 or thereabouts 500,000. At times I have paid 40% top tax rate, didn’t bother me, I can’t understand the obsessive need to avoid tax. Dick Smith said it best don’t waste time trying to avoid tax use the time to make money. When George Bush announced his war and reduced taxes for the wealthy Dick Cheney, responded “Deficits don’t matter, Reagen proved that.” Well “Those that the gods wish to destroy they first send mad.” We are now living through this madness.
“My point is that the people who make policy and influence public opinion just coincidentally introduce policies that make them even richer, never ever that would make them poorer.” We seem to agree that undue influence of the elite over government policy will harm both economic efficiency and social equity.
You keep making the mistake of quoting top marginal rates from earlier eras and comparing them to the current. Compare the current tax tables to those of 1925 to 1935 after adjusting incomes by CPI or the GDP deflator and you will find we are paying more tax now than we were then. Simply because of “bracket creep.”
I prefer Kerry Packer’s view: “Pay your taxes but don’t tip them — they’re not doing that good a job.”
Deficits do matter and should only be permitted during a war or banking crisis (to counteract a deflationary spiral).
Your charts, your cash flow indicators and general comments are becoming more required reading for me by the day.
UK and Sweden governments of the 60/70’s might have damaged growth, but it certainly pales into insignificance compared to our near depression of the last 5 years (and perhaps another 5 to come)of Western economies, caused by the philosophy of unbridled greed, having its roots in the Reagan/Thatcher era.
By the way, when looking to increase the size of the pie, don’t look to the laissez-faire aproach. On the face of it, authoritarian regimes do a better job at it. The Nazies in the 1930’s had double digit growth rates at 1.1% inflation, resulting in astonnishing economic gains for their citicen ( Niall Ferguson:”The War of the world”) and the recent growth rates of China, another authoritarian state achieves very simmilar results, albeit at higher inflation rates.
Don’t get me wrong, I don’t want to promote dictatorship for the good of the economy; just making the point that the capitalistic laissez-faire aproach has at times caused great hardship and still lags in efficiency to other approaches.
Only because the Comunists botched it, doesn’t mean there are no alternatives to hard-nosed capitalism
The root causes of the current GFC are easy money policy over the last 50 years and Nixons removal of the gold standard in the early 70s.
History shows that capitalism is responsible for most advancement in living standards since the Industrial Revolution. Centrally planned economies simply fail to deliver in the long run. Only when China shifted away from central planning has its economy boomed.
Concentrating on efficiency before equity may help growth, but also results in a more unequal income distribution which is hard to redresss – witness America and the Philippines today where there are extremes of income and wealth which all attempts to mitigate are strongly resisted. Hence efficiency and equity need to be pursued together otherwise political power will concentrate with the better off.
Yes. But design the tax system around efficiency and spending programs around equity. That way you achieve the best of both.
Reducing the political power of interest groups is also important — to separate economic and political power — but that is a political process and cannot be achieved by taxation.
What you have to break is the link between economic wealth and political power. Otherwise interest groups start winning concessions and special treatment that not only enhance their wealth but destroy (economic) efficiency.
Colin, Colin…you surprise me.
First, you seem to deliberately misinterpret Stiglitz. He spoke against ‘growing’ income inequality, not inequality per se. It is only common sense that all human beings are not endowed with the same capabilities and, therefore, their attainments will not be equal. But any society that allows this inherent inequality to worsen over time due to unequal opportunities is bound to result in a concentration of wealth and power among a small elite. As a result, it will promote the undue influence of that elite over government (and governance) in a manner detrimental to democracy. I shall be hugely surprised if you can’t see this is very much the case with the US.
Second, ‘growing’ income inequality does shrink opportunities. Your Michael Jordan argument rests on inherent differences in human capabilities. One could turn it around and ask: had Michael Jordan been growing up in the present times with his un/underemployed parents living on social security and food stamps, would he have become the star he was or will he be tending bars to support his family? In other words, even an inherently capable person, when denied the opportunity to develop his/her potential for reasons of economic survival, will not achieve that potential under an elite ruling class bent on enriching only itself.
Third, by the same token, the present ruling class in the US has narrowed its economic interests to a few selected activities, such as financial skulduggery, warmaking and the outsourcing of manufacturing to low labor-cost countries. Unsurprisingly, the self-interest of this class is best-served by furthering the growth of its choices. These are not consistent with what is good for the rest of the population. By their very selectiveness, the elite diminish the opportunities for the majority. After all, not everyone has the inherent capability to become a financial whiz kid or soldier, even though most are quite capable of working in factories in one capacity or another. The disproportionate share of low level jobs (in entertainment and health care) in whatever new employment that is being created speaks for itself.
I agree with you on the incompatibility between efficiency and equity. Economic efficiency depends on freedom in the market place whereas social equity requires a distortion of that freedom. As with all extremes, neither a totally free market based on the law of the jungle, nor a truly egalitarian society as communism envisioned misguidedly is achievable. Every society strives for the ‘right’ balance between the two and only a very few seem to have struck it. For that reason, am with you on the argument that the size of the pie does matter, as does its sharing.
I think Stiglitz is talking about current inequality (which is admittedly high and needs to be addressed):
I would argue that growing inequality is primarily caused by “undue influence of that elite over government” rather than “unequal opportunity”. If we eliminate the tax loopholes and concessions to special interest groups — creating a level playing field — we will enhance economic efficiency.
I still believe that the US is the “land of opportunity” compared to the closed economies of Europe, Russia and elsewhere. But still more can be done to improve opportunities for the disadvantaged.
“Unsurprisingly, the self-interest of this class is best-served by furthering the growth of its choices.” — We seem to agree that we need to break the undue influence of the elite over government.
“Economic efficiency depends on freedom in the market place whereas social equity requires a distortion of that freedom.” I have a sightly different view of this: economic efficiency is essential to achieve growth and improve social equity. What we have to guard against is allowing the concentration of wealth to exert undue influence over government thereby destroying economic efficiency while furthering their own self-interest.
http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html?pagewanted=all
People deserve just reward for their skills and work so there is nothing wrong with income inequality per se. The article by Joseph Stiglitz serves to point out how extreme that inequality is and that it is getting more extreme over time. (1% with 40% of the wealth etc)
Why is this characteristic of industrial economies?
The answer is in the taxation system which favours the super-rich. A welter of tax legislation is directed to fining labour and capital for working. Meanwhile taxes on land (like municipal rates) are miniscule and this privileged treatment of real estate
1) pushes prices above realistic levels 2) transfers taxes paid by low income wage earners to owners of land (eg their taxes pay for infrastructure that increases the value of surrounding land). Tax policy – working through the land market – redistributes income from the poor to the rich.
The basic principle re land value tax is that the product of the individuals work or savings belongs rightfully to that individual and should not be taken for community funds. In contrast the value of land (and of other gifts of nature such as the minerals in the land, clean air, clean water, the electro-magnetic spectrum, the human genome) is due to the activity of the community and is the appropriate revenue source for community funds, in the case of land by means of a broad-based land value tax. This was one of Ken Henry’s recommendations. John Howard said “I do not deny that all taxes, with the exception of those on economic rent and inherited wealth, have some employment and economic growth effects.” AFR 10/12/91 p15.
The taxation system needs to change from taxes being levied on what you produce to being levied on the value of resources you consume. What could be fairer than that? When these economic rents are not collected for the community that created them, they are capitalised into the land value and this is the origin of the extreme and socially damaging inequality of wealth distribution.
It is also the cause of the boom and bust of the business cycle. A British economist, Fred Harrison, has detected a regular 18 year cycle driven by the land market. In his book “The Power in the Land” published in 1983, he predicted the recession of 1992. In “Boom Bust the Depression of 2010” published in 2005, he predicted the peak of the property market in 2007 and the subsequent recession. He also wrote letters to the relevant treasurers recommending land value taxation to stabilise the property market well before the crises, but was ignored. His books are available as e-books and are worth reading, if only if the knowledge can help time your own investment decisions. The FAQ section of prosper.org.au has a lot of information about LVT.
Income tax was invented by British PM William Pitt in 1799. He had the economic information from Adam Smith (Wealth of Nations) to go with economic rent but he sided with the powerfu l- the landed aristocracy- and the poor paid the price. A labourer was paying half his income in tax by 1833 and living in slums. Will any of our politicians do better than William Pitt?
Land taxes are difficult to implement because every piece of land has to be valued and assessed for taxes. This is open to unfair practices and distortions — farmers for instance lobbying to reduce taxes/valuations on farmland. This makes collection expensive and complex — the exact opposite of what is needed. I agree that the emphasis should swing from taxes on income to taxes on consumption. They are far easier to measure and collect and minimize avoidance while encouraging saving.
Land is already valued for the council rating system so a federal land tax would have no set up costs in that regard. Australia has had the Henry tax review and in recent years the UK and New Zealand have also had tax reviews. All three advocated land value tax. It is a tax that is beneficiary pays, not user pays and is on unearned income, not earned income.
No doubt there are lobby groups and challenges to valuations but that can hardly be a serious objection when compared to the costs of administering the current tangle of about 125 taxes that punish work and capital, and the costs of pursuing tax avoidance. BAS and GST are an administrative impost on business people forcing them to use their own time as tax collectors.
The very wealthy are those best placed to use legal means of tax evasion such as tax havens and managed investment schemes. Land cannot be hidden or moved overseas. The wealthy would prefer to remove a tax they cannot avoid and replace it with a higher GST. GST is regressive – a person on $20,000 pays the same as someone on $20 million.
How is a GST going to prevent the next Global Financial Crisis? A land value tax stabilises the property market preventing speculative booms.
“Land is already valued”. That — to the best of my knowledge — applies only to urban areas. And are these values fair and comparable? And how often will they be reviewed? Values fluctuate over time. What you are proposing is a complex system that is difficult and costly to apply.
Land taxes can be highly regressive. If a retired pensioner lives in a home that has been rezoned for high-rise apartments, their tax assessment could be higher than their income. Likewise the owner of a sheep station or cotton farm in drought years could find their tax assessment is higher than their income.
Consumption taxes are difficult to avoid and would put tax havens out of business if they were to replace income taxes. GST is not regressive — a person on $20,000 pays the same percentage as someone on $20 million. It is just not progressive. The only way that a GST can be regressive is if you spend more than your income.
Land throughout Australia is valued annually including all of the about 95% rural land. That is the responsibility of the Valuer General’s department in each state. In Qld for example, there are 19 offices throughout the state doing all 58 rateable local government areas in Qld. Local government rating on the unimproved value has been in place since 1890 legislation by Sir Samuel Griffith, then Premier in a coalition government of liberals and conservatives. Further land value tax at state or federal level would use this existing system. I would be interested to know where you got your information that this is a source of great cost and problems to make the current ATO administration of taxes on work and production less onerous by comparison? Is your comment just supposition? Googling produced no evidence of great cost or dispute.
Regarding the effect on the elderley of land value tax note the recent “turning grey into gold” report on older Australians economic potential. http://epsa.treasury.gov.au/EPSA/content/publications/grey_gold/downloads/grey_gold.pdf
The report advised state and territory governments to replace stamp duty on housing with an annual land tax. It said that the current tax system encourages older Australians to lock all of their wealth into their home, leaving them with one large asset but little cash. If they try to shift into cheaper more age-appropriate housing to free up some of that wealth, stamp duties lie in wait for them.
In 2009, the Treasurer Ken Henry, also advised the government to replace stamp duties with a simple land tax. Everyone needs land whether for housing or business. Because land can’t be hidden, land taxes can’t be evaded. This is precisely why the wealthy oppose these taxes so vocally: they know that, no matter how good their accountants are, they will be forced to pay up.
This is the setting in which the housing industry claims as “fact” that a GST on food is more efficient than making wealthy property owners share the community generated windfall gains that flow to land. They want all taxes on housing replaced with a new and broader GST. This is part of a global trend to switch taxes off wealth and place them on the under- educated poor with the regressive GST. A 10% tax on a $2 icy-pole hits the disposable income of someone on $20,000 harder than a millionaire. Such effects are not included in the housing industry modelling. Nor is the housing industry raising the issue of broader GST on the elderley low income person with higher costs for food and other essentials.
Over the years the raising of land tax thresholds has reduced the effectiveness of land taxes. Rising land prices have followed the rising land tax threshold increases, as economic law dictates.
Land tax is simply a counterweight to mortgage debt.
If two parcels of land are offerred for sale and one has a land tax liability attached to it, the rational buyer will pay less for that location. This infers less mortgage debt for the consumer and less profit for the developer and the banks. Such a tax replaces a lifetime of bank interest payments with a lower land tax paid to government.
However such a tax is seen as a threat to profits and think tanks are generously funded to deflect attention from this progressive tax.
Land tax is naturally progressive. Those earning higher incomes generally live in more valuable locations that are well serviced with parks, schools and natural beauty. This means their land values are higher. Land taxes with yearly valuations take this into account.
But we are told it is fairer to tax the core foods that so many survive on.
I appreciate the time you have taken to reply, but please keep them short and pithy else you and I will be the only two who will read it.
Your arguments regarding regressive/progressive taxes are hard to follow. The wealthy live in properties with higher land values but the wealthy also consume more and pay more GST. So why does this make land tax better than GST? The same applies to your icy-pole example: someone on $20,000 buys a $2 lolly while a millionaire is likely to spend far more than $2 on a treat.
Performing valuations on individual land holdings is far more work than applying a flat tax on all consumption. And valuation of land requires individual assessment which is far more open to distortion and abuse.
You say “the only way a GST can be regressive is if you spend more than your income.” In practical application a GST is regressive because it impacts more the less income you have. For example a single unemployed person on Newstart gets $12,807 per year. It is recognised that is hardly adequate to cover food and shelter and leaves nothing to cover the costs of transport and making themselves presentable for job interviews. A GST on food or other essentials would cause more hardship to that person.
In the middle income group are couples whose combined household income may be $100,000 or more but their rent or mortgage repayments leave little discretionary income. Because of their numbers and age these wage earners are the demographic paying most of the tax collected by income tax and have the biggest mortgages in relation to income. The nation also relies on them to produce the next generation of Australians. The father’s income is not sufficient when the mother ceases work or reduces work time to care for young children. After tax, mortgage and essential insurances there can be as little as $16,000 a year left for two adults and their children to live on. A GST would make them even poorer and further reduce their capacity to provide care and educational opportunity to their children. Can you seriously advocate increasing their grocery bill with more tax?
The more discretionary income you have, the less GST would impact on you. If you are rich enough to be buying yachts and helicopters you may pay more dollars in GST but it would hardly have any effect on your lifestyle.
You have expressed concern that the elderly would be adversely affected by land value tax being used for government revenue. Is not it therefore rather contradictory not to have as much concern for the impact of GST on the poor and middle income groups who make up the majority of the population?
If tax on land was increased from the current about 2-3% to about 6% over a few years, with corresponding reduction in income tax how would it effect the population? Site rent cannot be passed on to the tenant because the landlord is already charging the market price. (Ricardo’s Law of economics). The welfare recipient poor who rent would not be affected. Lobby groups with vested interest will tell you differently.
Any increase in tax on the mortgaged homeowner would be offset by lower income tax, possibly a greater reduction than the increased land tax. The wealthy generally own more and better land (eg according to “The Committee for Sydney” 22% of Sydneysiders own 55% of homes) so the tax is progressive in that they will pay correspondingly more tax. As they are likely to also be advantaged by reduced income tax and have diversified investments they are not likely to suffer any hardship. The very wealthy would still have their acreages and yachts.
Some of the unused or poorly used land (such as that in developers land banks) attracting a higher holding charge (the land tax) would come on the market, lowering land price and enabling purchase by those who wanted to use it, stimulating building, employment and the economy. The unemployed on Newstart would be more likely to get a job and the wealthy could make more money from productive enterprise instead of land banking.
Re your comment on costs, property owners are a smaller number of people to collect from and because land cannot be hidden detecting tax avoidance would not be a cost.
Municipal rates may well be subject to corruption re zoning decisions but that is due to bad government. Most of the multitude of councillors probably do not understand the tax and individual councillors may themselves be part of lobby groups to manipulate rates as it is anathema to speculators. Because lobby groups with vested interest and some political parties campaign against land tax does not prove it is wrong.
I agree these posts have been too long for readers and I am not sure if you have read much of them either! Thanks for the opportunity to comment.
You may be interested in this http://techtv.mit.edu/videos/20213-the-continued-economic-decline-of-the-west a July 2012 presentation at the London School of Economics by Jon Moynihan. It is not about land tax although property tax is mentioned at the end. It is long but watchable and interesting.
You argue that removal of a progressive tax is regressive. My view is that it restores neutrality.
You argue that a land tax has a low implementation/collection cost and is equitable. My view is that it is costly and inequitable. Land values fluctuate constantly and are open to manipulation. A consumption tax is far simpler to measure and enforce.
If the goal is to tax each person according to their ability to pay, then consumption is more closely linked to income than land holding.
If all landlords incur an increase in costs, they are likely to pass this on to their tenants. Your interpretation of Ricardo’s Law is obviously different to mine.
These distributive arguments are still framed within the obsolescent model of the national economy that increasingly has more political (in voting democracies) than economic salience. If one thing is clear, it is that business interests formerly built on and wedded to prosperous USA or G8 domestic middle classes have long since begun placing big bets on emerging and less demanding middle classes around the world. Despite political candidate rhetoric about the US middle class, business thinks it’s tapped out and has moved on to greener pastures, primarily in China and the other BRICs.
I think you write off the US economy too quickly. One of the primary reasons for the lack of competitiveness is the maintenance of an unfair exchange rate that gives China/Japan a massive trade advantage. If they had to repatriate the more than $2 triillion of US Treasuries purchased in order to suppress their exchange rates, the tables would soon be turned.
When ever I read articles and reply’s like these I am like most ordinary folk who think it is all a bunch jargon.
First tax codes. We all know that governments are spending more than they are earning , so they have to spend less or earn more ( increase taxation as they sold there businesses a long time ago ). So who should pay more and or receive less?
Second ,we should invest more in education. Does this mean we don’t have enough university educated people or the ratio of government/students funds used in the education industry should be adjusted?
Third “efficiency, and maximizing out put ” does this mean more widgets per worker per hour?
Fourth, Increased infrastructure spending. In the US the average piece of food travels 1500 miles from grower to consumer
If food was closer to its market then maybe we would not need so many roads.
Fifth Spend more on technology. Do you mean invest in making making thing’s faster , cheaper or clever robots to remove
more people from the work force
So please be more specific about what we should change and who has to carry the the can. Otherwise you are just spouting a lot of meaningless phrases and statistic while kicking the can to the next generation to deal with.
I enjoyed your post but often issues are not as black or white as they first seem. Taking government spending — one of the main reasons for deficits is because tax revenues have fallen because of the recession. So we have to try and restore tax revenues by promoting recovery rather than raising tax rates. To do this we need to focus on a more efficient tax system, with fewer loopholes and concessions and more encouragement for new business.
Education includes raising literacy levels among the disadvantaged as well as improving the quality and quantity of graduates — more engineers and less lawyers.
Efficiency means allowing the capitalist system to do what it does best — create well-regulated markets with minimal intervention (interference with price signals).
Technology means making things cheaper, faster and more automated. If you don’t, you won’t be making anything at all — simply importing them from Asia. We are entering an age of fierce international competition. It is time we all recognized that.
Apologies for the lack of specifics but I will try to expand on these ideas over time.
Colin
First you are excused more specific’s , if you could avoid the the use of economic’s 101 phrases such as ” interference with price signals. What needs to be discussed is why the basic theories of Adam Smith no longer work. The Central Banks across the planet have emptied their respective tool bags. All they have left is a hammer and a bag of nails to fix interest rates at about zero give or take a bit
In simple terms the theory say’s that the price will bring supply and demand into balance period. All the other chat from economists is just waffle.
So please tell me why , when there is demand and supply that the worlds economy is such trouble.
Chris, The good news is that Adam Smith and capitalism still works. The bad news is that it has been hijacked by a fractional reserve banking system. Fractional reserve banking is not essential for capitalism to thrive. All that is needed is financial intermediaries to channel savings into investment. Early German industrialization was successfully funded by equity-funded banks rather than the British/French deposit-based system. Apologies for the econ 101 “price signals” comment but we forget how much market interference there is by government/central banks. Take housing/interest rates for instance. Central planning is spreading its tentacles across the economy and combined with fractional reserve banking is the root cause of our current malaise.
Well said. I would favor retaining contributions to charities and presently tax-exempt organizations, then a country-wide sales tax. That’s all.
Rick Lane
Dallas
Consumption taxes like sales tax are a good starting point.
In other words, more of the same and we keep it going under the system/society flounders. Get rid of progressive taxation, grow the pie and we all get wealthy together living in a new economic utopia. Wonderful stuff except its not supported by real world experience. Only Austrian School economists working in thinktanks supported and paid for by the elite. I’m not surprised that your analysis would be warmly received by those well-off among us but would hardly cut it as a valid argument for a first-year undergraduate. And you offer this as a rebuke of Nobel Prize winner Joseph Stiglitz.
The level of inequality is cause for concern but I find Stiglitz’ arguments unsound. My suggestion is that greater equity can be achieved by focusing on economic efficiency and equal opportunity.
This is a very important and interesting article from Vanity Fair, and I understand and appreciate your comments. In regards to this:
I believe power to the 1 percent (maybe 1-5 percent), is partly caused by the creation of mutual funds, created back in the 60’s, where individual investors give up their stock voting rights to the fund managers who vote to install people to the board of directors of companies, especially the compensation committees, that their fund owns; many of which serve on other boards. In other words it is the “good old boys (wasps) network” Back in the mid 1950’s when I entered the work force as an apprentice machinist, the rule of thumb was that the CEO of a company made about 50 times the salary of a common worker, today it ranges up to many thousands of that value. Nobody is worth that kind of money. I haven’t heard any theory as to the effect of mutual fund’s voting rights on corporate officer’s wages, along with the many other influences the mutual fund managers have on corporate operation. If the wages and corporate profits are not distributed to the average workers, then there will be nobody to buy the products produced; a “catch 22” situation.
Excellent post. “Passive shareholders” have certainly contributed to the problem of companies being run for the benefit of management rather than for the benefit of shareholders.
Alex
Your points are well made and I agree that if we want to get the economy moving again, then we have to put money into the hands of the demand drivers. However if you want people to read your point’s as opposed to hitting the delete button, you need to learn the art of economical word use.
Thanks Chris, I know you are right. I found it hard to be brief because the concept of economic rent is from the classical economists, particularly Henry George, which people are now unfamiliar with so in expounding it one has to start from the beginning.