Economic ideology: Are the times a-changin?

It is pretty clear that if the U.S. economy is to be rebalanced so as to adequately fund health care, education, other social services and infrastructure, the direction of fiscal policy must be reversed. And the key element of the needed reversal is a reevaluation of taxes on the rich – certainly the 1 percent, maybe the 5 percent or 10 percent. There is no other source of additional funds to turn to, and increased starvation of public services would be harmful to the whole country.

But standing in the way of any rethink of taxation has been the view of economists that the disincentive effects of higher tax rates would outweigh the advantages. In the extreme case proposed by Arthur Laffer and depicted in his famous chart on a dinner napkin, increases in tax rates would reduce the tax base to such an extent that the amount of tax collected would actually drop. This kind of "analysis," which influenced President Reagan and his advisors, continues to influence economists to this day, and more importantly justifies the knee-jerk opposition of so many politicians (and voters) to tax increases. John Maynard Keynes remarked, in the concluding notes of his "General Theory," that "the ideas of economists and political philosophers, both when they are right and when they are wrong , are more powerful than is commonly understood…Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back."

While Keynes concluded, in the final sentence of his book, that "it is ideas, not vested interests, which are dangerous for good or evil," we don't need to argue about the relative dangerousness of these two influences in the tax arena. What we have suffered from in the decades since 1980 is a massive right-wing conspiracy of both the economic ideologues and the vested interests. The debate has gotten so distorted that it has become very difficult politically to argue for higher tax rates; the arguments in favor of increasing taxes generally run along the lines of further reducing tax rates, while closing tax loopholes.

But now perhaps the times they are a-changin. Exhibits A and B are articles by economics heavy hitters including Peter Diamond of M.I.T. and Emmanuel Saez of Berkeley. In a National Bureau of Economic Research working paper titled "Optimal Taxation of Top Labor Incomes : a Tale of Three Elasticities," Saez and two co-authors conclude that "socially optimal top tax rates might possibly be much higher than what is commonly assumed." And Diamond and Saez, in an article in the American Economic Association's Journal of Economic Perspectives (http://www.aeaweb.org/articles.php?doi=10.1257/jep.25.4.165), conclude that "very high earners should be subject to high and rising marginal tax rates on earnings."

An interesting feature of these findings is that they are quite extreme in the sense that they argue for the "optimality" of much higher effective tax rates than are currently in effect. This makes room for "directional" changes that move in the direction of "optimality" without necessarily going as far as the levels indicated by these studies. Generally, it is wise to apply pragmatic "reasonableness" tests to economic policies, including tax policies. It simply doesn't seem reasonable, even to somebody like Warren Buffett who is one of them, for multi-millionaires or billionaires to pay income taxes at an effective rate of below 15 percent. On the other hand, there is some upper level – 60%? 80%? --beyond which marginal tax rates would seem unreasonable. One can never please everybody, but there is a wide range of rates that might seem reasonable to a vast majority of Americans.

There are several factors that enter into the assessment of "reasonableness" when it comes to tax rates and fiscal policy as a whole. One is what alternatives to proposed tax increases are available. Another is the state of the country: How bad is the decline in education standards? How underfunded is road and railway infrastructure? The answers to questions of this kind will influence how much people are willing to push on the taxation front, how much they will regard as "reasonable."

Let's see how the debate develops. Hopefully, the times they are a-changin.

Don’t Forget the Small Local Producers

Currently, I am on assignment in the small seaport of Bogilasco ITALY where I see a few of the 99% in their 20’ fishing boats gathering barely enough fish daily to support their families. Because of past over-fishing plus commercial fishing by multinational fishing factory ships in “international waters” in the Mediterranean, these locals survive because they retain their placing by passing their fishing boat storage sites from generation to generation. No one new to the community can join or hope to compete because the price of entry is too high.

> movie

The market conditions are tough. The large commercial boats set the price of seafood so low that these folks sell in town to a local market of people who want the catch of the day, as well as wanting to support the local community.

There are many small producers out there, surviving near the bottom of the income distribution, like family farmers, artisans and craftspeople, small builders and repair and maintenance people such as plumbers and electricians. They add to the richness and diversity of the economy, but how will they fare in the future? They will survive, I believe, if we as consumers recognize the value of what they provide, such as organic produce and local foodstuffs, and a large variety of other goods and services. By supporting them, we can enrich our communities and ourselves.

Inequality & Markets

There's a really interesting forum on inequality in the current issue of the Boston Review. (Well, a really interesting article, but I'll get to that in a moment...)

The lead article, written by David Grusky, puts forward a nicely reasoned argument that

Judging by current legislative proposals and Democratic Party rhetoric, there is an emerging case that our main response to inequality should be to increase tax rates for the well off.

but that

If we're serious about reducing inequality, we ought not to stop there.

I couldn't agree more.

He goes on to ask

[W]hy we reflexively assume that tax-based redistribution is the est way to take on inequality. This assumption only makes sense insofa as the institutions that generate wages and other income are treated as sacrosanct.

The set-up is pretty good, no? (And, coincidentally, quite similar to our own conclusions!)

The rich get richer…and demand languishes

In today's New York Times Steven Rattner reports on new data showing that 93 percent of the increase in U.S. personal income from 2009 to 2010 went to the top 1 percent of taxpayers, as the economy was just beginning to dig its way out of the financial crisis. This is not chicken feed; the increase in the economic pie that he is talking about is $288 billion. Just think what a stimulus it would have been to the economy if 93 percent of this income gain had gone instead to ordinary working families who would have spent most of the money on consumer goods and services, leading in turn to greater employment, further wage gains, and so on. And meanwhile the 1 percent, who were already having a hard time trying to figure out how to spend their money, wouldn't be pouring this windfall into already glutted investment markets, risking the inflating of new asset bubbles.

Meanwhile, Chairman Bernanke of the Federal Reserve is complaining about the sluggish growth of the economy. Unless economic growth picks up, he reminds us, it will be inadequate to reduce unemployment. Why is it so hard for economists to connect the dots? Why are our tax and wage policies so out of whack? How can the Fed be expected to provide so much stimulus through monetary policy, which in current circumstances must feel like pushing on a string?

Another trillion dollar burden

Student loans have topped a trillion dollars, says the NYT today. Just another trillion dollar mortgage against the future…and a deterrent against college education. No way to go.

Alan Krueger, welcome to the hood!

In today's New York Times columnist Eduardo Porter describes how the President's chief economist, Alan Krueger, sees the light, if only with one eye: he acknowledges that inequality can be "Too Much of a Good Thing". Up until recently, he preferred the term "income dispersion" to inequality! 

About

Why target inequality? And why now, in 2012? Because inequality – the gap between the 1 percent and the 99 percent, or more realistically the top 10 or 20 percent of the population and the other 80 or 90 percent who are struggling to make ends meet– has in recent years increased to a level not seen since the late 1920s. And – not coincidentally, we believe – economic instability has likewise become more prevalent and more painful. The Great Recession that began around 2008 and has given way to sluggish growth is reminiscent of the Great Depression that began in 1930 and finally ended only with the outbreak of World War II in 1939. Occupy Wall Street has taken up the call against inequality and brought the word to the center of economic debates. And 2012 is an election year, in which President Obama will be struggling for re-election against a Republican nominee whose proposed policies are more likely to increase inequality than to reduce it.
When the U.S. economy is not delivering full employment, and when financial instability can upend the best laid plans of working families to live in affordable housing or fund their retirement, something must be done. We are starting this blog in 2012 as one small effort to oppose the Republican call for austerity. We don't believe that belt-tightening is the way to solve the current crisis. On the contrary, our view is that increased spending by working families and state and local governments is what will pull the economy out of its slump.
This home page contains the first section of a paper we have written, "How to Unblock the Economy by Reducing Inequality," and the full paper is contained in the page titled "Read the Paper." Please read the paper and comment. We will try to respond as thoroughly as we can in future posts, and we encourage the interchange of ideas among our readers.