Tom Maguire, in Just One Minute, has some extended meditations on Paul Krugman's New York Times Magazine article, "For Richer." His main point: he wants a way to separate out bad wealth (effete coupon-clipping heirs, corporate looters, robber barons, monopolists standing athwart the process of creative destruction yelling "stop!") from good wealth (industrial statesmen, bold entrepreneurs, and brilliant applied scientists). In short, what do the rest of us get in exchange for allowing our richest top one-ten thousandth of the population to receive 2.5 percent of pretax income (as they do today) rather than 0.5 percent of pretax income (as they did thirty years ago)?
On the economic side, think of the concentration of wealth at the very top as an investment by the rest of us in "incentives" to encourage faster growth. Then one back of the envelope answer is that such an increase in relative wealth at the very top would be worthwhile for the rest of us only if this concentration, all by itself, boosted economic growth by at least 0.2 percentage points per year--which is a very high hurdle indeed. In short, I'm with Krugman on this.
On the political side, there is the fact that money talks loudly, and politicians raising funds are very sensitive to the policies wished for and the problems felt by those who can contribute large amounts of money to their campaigns. Quintuple the relative wealth of the top one-ten thousandth, and you close to quintuple their influence on public policy. Is this a bad thing? Probably. More than two and a quarter centuries ago, Adam Smith opined that you did not want merchants and manufacturers ruling a country because each of them had a strong particular interest in some growth-harming monopoly or trade restriction. (Instead, Adam Smith thought that the English government of the time--rule by landowners--was almost perfect. You see, the level of rents received by landlords is strongly correlated with overall economic development, hence landlords are a progressive ruling class whose class interest is aligned with the public interest in economic development.) I suspect that our plutocrats are not tomorrow's entrepreneurs, but instead a mixture of yesterday's entrepreneurs, corporate looters, feckless heirs, and politically well-connected operators.
Posted by DeLong at October 26, 2002 09:48 AM | TrackbackWhat level of incentive is necessary? There was plenty of achievement during the great compression without these extremes of wealth and income concentration.
It's not a very convincing argument. Some incentive is needed, but clearly not this much.
Posted by: Ian Welsh on October 26, 2002 10:05 AMI've long been suspicious that the income distribution figures are misleading, particularly over long time frames. Today's top ten-thousandth seem to be mostly those who are cashing in options or selling a company. The list looks, at my short perusal, highly dynamic from year to year -- ie, somebody in it one year may well not be the next. Which has three possible consequences:
* the income figures are capturing capital formation in ways that they may not have been historically. So historical comparisons are misleading.
* there may an arational motivating effect, sort of like the lottery. (No strictly rational person would play a lottery that makes money; yet millions do -- which many governments use to create public wealth.)
* the plutocracy may be a less monolithic and more dynamic group than Krugman et al imagine.
Posted by: John Browning on October 26, 2002 10:39 AMHmmm.. I have often found economic history, and the comparisons it allows, a good cure when dealing with contemporary puzzles. But I think the lottery effect is a likely one (20% of the population think that they are in the top 1% by income, and another 19% expect to be--go figure...). Against that, however, is a much more telling feature of human behavior. What matters is not the absolute score, but our relative standing. It is the possibility of doing better than the Jones' (and the Smiths and the Browns etc.) that gives joy and serves as an incentive. Absolute payoffs matter much less...
Posted by: Roland Stephen on October 26, 2002 10:51 AMI'm sorry: I don't quite understand the figure about having the distribution of wealth to the top 0.01% boost growth 0.2% to be good for the bottom 99.99% of the population: wouldn't it benefit us if it simply permenantly raised the LEVEL of national income (not the growth rate) by 0.2%?
Still, a rather long shot, given that if, as you point out, plutocrats use the government for trade protection, subsidies, etc (as, quite evidently, they do), it probably lowers the level of national income, but I don't understand why it would have to be 0.2% growth every year to be worth it to the bottom 99.99%.
Julian Elson
Posted by: Julian Elson on October 26, 2002 10:55 AMProf; Thanks very much for the link, and the "think". I am racing around on other stuff, but may have a profound response to follow.
I do get a kick out of the Adam Smith and the landlords comment. It brings back memories of some poli-sci class where we discussed arguments that only property owners should vote. Which, man I am groping now, may have been in the early Colonial laws as well.
Now, John Browning "options exercise" and the lottery: I was leaning that way more strongly before I got ahold of the working paper. The authors do adjust for capital gaiins, and present income fractiles both with and without capital gains. However, they are working off of IRS data, and I don't know enough to know exactly how the instant cash out of options is reported (exercise and sell). However, the authors certainly identify the problem.
I am still back and forth on this. Look, playing centerfield for the NY Yankees is, historically, a highly compensated position. However, it is not a hereditary one. Unless non-founding CEO's can pass the job to their heirs (unlikely?), then, here in the land of opportunity, anyone can grow up to become President, or, even better, President of a company. So in that respect, we are all lottery players. And the point that currently, high incomes come from "effort" rather than dividends and interest should encourage the rest of us.
Regards,
Posted by: Tom Maguire on October 26, 2002 12:05 PMOh, for heaven's sake. I was having so many problems with Blogger that I "upgraded" to Blogger-Pro. Now, where I once saw my long post, I see a file called [BigBody]. But of course, the help functions are down.
Well, this is a reminder - if it ain't broke, don't fix it. And, if you think its broke, remember, it could always be worse.
Regards,
Posted by: Tom Maguire on October 26, 2002 12:18 PMOK, I think we are back. That upgraded "random word generator" is well worth the monthly fee.
Regards,
Posted by: Tom Maguire on October 26, 2002 12:42 PM'I've long been suspicious that the income distribution figures are misleading, particularly over long time frames. Today's top ten-thousandth seem to be mostly those who are cashing in options or selling a company. The list looks, at my short perusal, highly dynamic from year to year -- ie, somebody in it one year may well not be the next.'
The wealth numbers aren't much more encouraging; the top ten shuffles around a lot, but the very, very rich stay very, very rich.
Posted by: Jason McCullough on October 26, 2002 01:47 PMOK, Greenspan on productivity growth:
The source is "More Optimism", a bit below on this site, or check the headlines on the right.
Indeed, high growth of productivity over the past year merely extends recent experience. Over the past seven years, output per hour has been growing at an annual rate of more than 2-1/2 percent, on average, compared with a rate of roughly 1-1/2 percent during the preceding two decades. Although we cannot know with certainty until the books are closed, the growth of productivity since 1995 appears to be among the largest in decades.
Our nation has had previous concentrated bursts of technological innovation. In those instances, business practices slowly adapted to take advantage of the new technologies. The result was an outsized increase in the level of productivity spread over a decade or two, with unusually rapid growth rates observed during the transition to the higher level.
For example, as the benefits that attended the development of the electric dynamo and the internal combustion engine more than a century ago became manifest in both the capital stock and the organization of production, the growth of labor productivity surged. From an average annual rate of 1-3/4 percent in the late nineteenth and early twentieth century, it jumped to a 3-3/4 percent rate in the decade following World War I. Subsequently, productivity growth returned to a 1-3/4 percent pace. Then, for the quarter century following World War II, productivity growth rose to an average rate of 2-3/4 percent before subsiding to a pace of 1-1/2 percent annually from the mid-1970s to the mid-1990s.3
Arguably, the pickup in productivity growth since 1995 largely reflects the ongoing incorporation of innovations in computing and communications technologies into the capital stock and business practices. Indeed, the transition to the higher permanent level of productivity associated with these innovations is likely not yet completed.
SO, can we hope for an improvement of 0.2% in GDP growth? If so, Greed is Good!
OK, and why did we do so well for the quarter-century after WWII, and then fade?
Regards,
Posted by: on October 26, 2002 02:44 PMOne should also worry about the distribution of column-inches in the New York Times. I think that in order to get a large share of column inches in the New York Times, one should be required to produce more "good" column inches, consisting of economic analysis, and less "bad" column inches, consisting of rhetorical excess.
Posted by: Arnold Kling on October 26, 2002 03:30 PMThe wealthy tend to stay wealthy. Wealth and income are two different things. Also remember that the standard Forbes lists do not include those who inherited their wealth, and are thus incomplete. You're just as rich if daddy gave you your money as you are if you got it from stock options.
Posted by: Ian Welsh on October 26, 2002 04:10 PMThis is not exactly the point at issue re the Krugman article, but I'm wondering if anyone else was struck by the similarity between Krugman's "nostalgia" for the 50s and 60s (i.e., as a period of relative income equality based on acceptance of the "value" that preservation of a middle class was essential) and the nostalgia of the right wing for the same period (as a period when "family values" were not yet corrupted by the licentiousness of the 1960s and 70s).
Krugman doesn't mention the conservative nostalgia for that period, but a synthesis of his and their views provides a fruitful way for democrats to change the discussion of "values."
The irony is that the 1950s family values that the William Bennetts of the world love to revere were the result of the economic values that their arch-nemesis Krugman describes so well. Why were families more intact, with moms able to raise kids, with fewer divorces, etc.? Perhpas because they were, relatively, wealthier, and obscene disparities of income did not arrive until the advent of Reagan. It wasn't because religion was stronger, or because "under god" was added to the pledge, or because Ike was President. It was because people could get by with one parent working, and could afford housing, and schools weren't starved by parsimonious state and local governments.
Posted by: Peter Janovsky on October 26, 2002 07:28 PMAs of May 1 2002, Aviation Week's Aerospace 25 stock index has climbed past the level at witch is was trading in May 2001 and compared favorably to the 5,4 % decline for Standard & Poor's 500. Nothrop, Boeing and General Dynamic all reported better then anticipated earnings for the second quarter in 2002. Did they earned it? NO, in a real market economy they would not have reported better figures then other companies. But they profited because of increases in weapons spending and homeland security. People in the defence industry are indeed people with "bad wealth". They use there wealth, and thus there power, to become even more wealthy (and powerfull), wichever the cost (war against Iraq, rising inequality. This is why government should promote a real market economy, and fight "crony capitalism". I think "crony capitalism" (bad wealth) is rampant in the US (Enron is nothing compared to the real crony capitalists of the defense industry). But I wish that Krugman would make this difference between a market economy and crony capitalism. Because now he's sounding more and more like Noam Chomsky.
Posted by: Ivan janssens, Belgium on October 26, 2002 07:48 PMAs of May 1 2002, Aviation Week's Aerospace 25 stock index has climbed past the level at witch is was trading in May 2001 and compared favorably to the 5,4 % decline for Standard & Poor's 500. Nothrop, Boeing and General Dynamic all reported better then anticipated earnings for the second quarter in 2002. Did they earned it? NO, in a real market economy they would not have reported better figures then other companies. But they profited because of increases in weapons spending and homeland security. People in the defence industry are indeed people with "bad wealth". They use there wealth, and thus there power, to become even more wealthy (and powerfull), wichever the cost (war against Iraq, rising inequality). This is why government should promote a real market economy, and fight "crony capitalism". I think "crony capitalism" (bad wealth) is rampant in the US (Enron is nothing compared to the real crony capitalists of the defense industry). But I wish that Krugman would make this difference between a market economy and crony capitalism. Because now he's sounding more and more like Noam Chomsky.
Posted by: Ivan janssens, Belgium on October 26, 2002 07:48 PMFirst a short note, then a long disquisition on why Krugman would be well advised to get over the 1950s.
Short note: Making money in the defense industry is "bad wealth" if you think that the United States either does not need a defense industry or does not deserve to be effectively defended. That's a possible view, I suppose, but I suspect it's held by a higher proportion of continental Europeans than Americans. Nor, if one grants this value system, is it clear why militaristic America should have had a more robust economy than non-militaristic Europe.
Long disquisition:
It is easy to notice fools, spoiled children, and thugs with money, and probably a sign of mental health to be offended by them. The problem, if the last few centuries of economics means anything, is that it is much easier to tell a Henry Ford from a Samuel Insull with 20-20 hindsight than at the time that both are flourishing. At the time they're both equally obnoxious to "enlightened" folk. And the idea that a Ford may be far more constructively revolutionary than any communist wannabe isn't obvious until well after the fact.
Furthermore, while some people who inherit wealth are lazy, not all are by a long shot. It isn't particularly easy even to keep money in America, and it's damn difficult to multiply an inherited fortune in the way that William Gates III did.
More generally, inherited wealth is the basis of any kind of civilization. If any of us reading this Web log had to start from *exactly* the level of wealth that our grandparents had had, or even our parents had had, we'd have had an awfully tough row to hoe. Having had some of that wealth handed to us by being born in the First World rather than by being born in a particular family doesn't really change the fact that, in either case, there's absolutely nothing "fair" about our having had a better life than our forebears.
So when we're arguing about the evils of inherited wealth, please let's at least try to keep it clear what we can and cannot say with a straight face. We can say, "I think the moral benefits of taxing money from one set of parents to everybody's children is great enough to justify the government's doing so at gunpoint." And it may well even, up to a point, be true -- to argue that it's not, you have to be a pretty hard-core libertarian. But it seems untenable to pretend that there's something inherently wrong about inheriting wealth. All of us reading this Web log have inherited a fortune, by the standards of most of the human race through out history, and I'm for my own part glad of it.
Finally, and most generally, I boggle at reading how glorious the 1950s were because everybody was just like everybody else and nobody really expected to do better than anybody else. As far as I can tell, the 1950s were a wretched period to be more intelligent than normal, or to be in any way not an Organization Man. And that was inevitable. What can unchained intelligence do, but threaten a social atmosphere based on the idea that "dynamic conformity" is a rousing slogan rather than a laughable oxymoron?
To have static equality, it's not enough to have an 80% tax bracket for the most successful. You also have to punish anybody, either legally or through social ostracism ("blacklist", anyone?) who upsets the system by being unwilling to be properly docile or mediocre. And you have to have pretty tight (unacknowledged) controls who gets to say what and how people are broken into being adult members of society. You have to have loyalty oaths. You have to draft people into the armed services rather than having an all-volunteer force, so that being a soldier is a booby prize rather than a mark of excellence and pride. You can't let enclaves like Silicon Valley form; they virulently threaten equality. You can't let women work at the same jobs as men unless your taxes are so punitive that the economic advantage of two high-earners marrying is completely nullified; otherwise you get the successful marrying the successful, which of course drives inequality, so keep those women out of law and medicine and tax hell out of them if they do marry.
And, most of all, you sure as hell can't have the sort of *acceptance* of 'questioning authority' that's become commonplace today, and has been augmented by the rise of the Web. A society that wants to adhere to Eisenhower-era conformity can't tolerate letting teenagers read _The Nation_ or _Salon_ or about a hundred dissenting web logs or anything else they like, just by having a Web browser in a public library. You can't have somebody like Brad DeLong "teaching the young that the worse is the better part" by writing with great learning and eloquence about how we might be able to build a real Utopia for humankind, through being willing to take unprejudiced thought for both our heritage and the difficult attempt at economics as a science.
If you let people imagine exciting things, they'll want to *do* them, and if they want to *do* them, how do you keep everybody happy with a system where the economic -- and sexual, social, or generally non-economic -- rewards are pretty constant no matter how hard you try to excel?
Read _The Organization Man_; read _The Hidden Persuaders_; compare their mental atmosphere the with one we live in; and ask yourself if I'm wrong to say that Krugman is well-meaning but horribly misguided. The 1950s are indeed gone. But that's a *good* thing.
Posted by: Erich Schwarz on October 26, 2002 10:02 PMFrankly, one can get into trouble getting nostalgic for any decade (e.g., 70s---remember the sex, forget the stagflation; 90s--remember Clinton's good qualities, forget his bad ones). What is important is that people could get homes, college educations, etc. in the 50s and 60s, whereas those things require enormous amounts of debts or being a family headed by 2 working professionals. The marginal tax rates in the 50s for the rich were sky high, yet we still had growth and didn't run a deficit. FDR's folks (many of whom stuck around with Truman) were great visonaries in thinking through the next stspes for teh American economy after WWII. they made missteps (e.g., a housing policy that created suburban sprawl) but nonetheless were more far-sighted than the idiots running Washington now. We have a depressing distribution of income and right wing ascendency right now, should that make us consider our current times better than the age of the GI Bill & McCarthy? Obviously, Erich only knows the 50s from books.
Posted by: Rich on October 27, 2002 09:05 AMWow, go Erich!
OK, Prof DeLong has offered his estimate of a 0.2% GDP growth differential as his threshold of acceptability:
"such an increase in relative wealth at the very top would be worthwhile for the rest of us only if this concentration, all by itself, boosted economic growth by at least 0.2 percentage points per year"
OK, it is just a "back of the envelope" effort - I infer that he discounted the alternative scenarios at 10% for thirty years, probably mentally (the old “divide an annuity by 10”, which works in this context for reasons that may not be immediately obvious).
Slugging it out by changing the discount rate to 5% changes the GDP growth differential to 0.15%, but that is not going to be mind-changing by itself: I don't have a solid case for a differential of precisely 0.17%.
However, I think another key adjustment will be for a point many of us have hit on: income mobility. Prof DeLong's calculation assumes a permanent “we-they” division. However, it can very plausibly be argued that, metaphorically, each of us is holding a lottery ticket, if not in our name then for our children.
Frankly, I think Prof DeLong's career is on a stunning upward trajectory (mine is on a fairly distinctive trajectory as well, but let's focus on the good news). But if not the Prof himself, then his kids, or mine, could go on to achieve fame and fortune in their own right, or by marriage.
So, what is that lottery ticket worth? Well, I brought the kids into the mix by extending the calculation to fifty years. Them I tried some scenarios:
(1) - everyone is famous for fifteen minutes, and everyone has an equal chance of making the transition to the super rich. Doesn't mean we all do; this is still the top one-ten thousandth we are talking about. But we have one chance in ten thousand of "changing sides". Land of opportunity!
(2) - Be serious; it's not that easy. Oh, fine, make it one chance in a hundred thousand. Some attitude! What are you, a Red Sox fan?
And, in either case, the transition is a one time event. One chance to change, and no back-sliding. I tried a transition at thirty years, for the next generation, and fifteen years, for the youngsters reading this.
So, 50 year horizon, 10% discount rates. Base growth is 3% per annum, for anyone verifying this. Those of you familiar with the power of compounding and discounting are not expecting much. And you won't be surprised.
GDP Growth Increment
Transition
1/10,000 : 30 yrs - 0.15% 15 yrs - 0.11%
1/100,000 30 yrs - 0.161% 15 yrs - 0.157%
Hmm, now to check 5% - a real interest rate, no inflation premium; seems plausible.
GDP Growth Increment
Transition
1/10,000 30 yr - 0.07% 15 yr - 0.04%
1/100,000 30 yr - 0.098% 15 yr - 0.095%
Hmm. This could be a point in my favor. The lower level in these examples is 0.04%, which is, I suppose as a matter of opinion, not much of a hurdle.
Or not. Frankly, if someone has a table-pounding argument that one form of societal organization is predictably better than the other by 0.15% per annum, then this is relevant. Otherwise, I would say, look, 0.05% - 0.2%, who cares? If the recent productivity surge is real and long-lasting, we do way better than 0.2%. If not, well, ooops. Time will tell.
The key issues seem to be elsewhere. Certainly bad things can happen if we slide towards a materialistic culture dominated by plutocrats whose self-interest is hopelessly out of alignment with "the rest of us". However, there are plenty of ways for a society to go sour. Prof DeLong has posted extensively on problems in Europe, and the problems in Japan are well known. I would say that egalitarianism can certainly run amuck as well, and the evidence abounds.
In fact, what most strikes me about Prof. Krugman's article is his praise (through Galbraith) of corporations as operating like socialist republics. I would feel a lot better about the Golden Era of income compression if it had not ended so badly, as it did in the 70's. I would feel a lot more optimistic about these "equality of income" countries in Europe if a plausible case could be made that what they are doing is working, and could work here.
In any case, other issues seem to be more important, and sort of get lost in this "income inequality" fractile analysis:
Income Mobility: Saez and Piketty did yeoman work compiling these income series. But, what have they done for us lately? A society is more likely to be considered "fair" if everyone has a chance to advance. This is not addressed directly in this fractile analysis.
Where's the floor: Does society have an adequate "safety net"?
There is no obvious reason that high income inequality cannot coexist with the other two, or that compressed incomes cannot exist separately from the other two.
So, big, finish: What do the Democrats want? In the 90's we had a tax increase (in '93) on higher incomes, fiscal moderation, budget surpluses, low interest rates, a strong bond market, rising employment, and innovation. Good for workers, good for bonds, good for stocks. In the same period, income inequality spiked. Oh, dear. If the goal is to achieve general long term prosperity without anyone actually getting rich, well, good luck.
Regards,
P.S. Can't wait to see if those tables come out in a readable format.
'Short note: Making money in the defense industry is "bad wealth" if you think that the United States either does not need a defense industry or does not deserve to be effectively defended.'
No, making money in the defense industry is "bad wealth" because it's a completely non-competitive industry where virtually all profit comes from revolving-door connections with government. Congressman forcing the Pentagon to buy weapons it doesn't want comes to mind.
Posted by: Jason McCullough on October 27, 2002 11:31 AM...what do the rest of us get in exchange for allowing our richest top one-ten thousandth of the population to receive...?
I was unaware of my "allowing" anyone besides myself and those in my immediate sphere to "receive" anything.
Brad, do YOU allow Bill Gates to have his income? Or Warren Buffett? Or Jay Rockefeller?
"On the political side, there is the fact that money talks loudly, and politicians raising funds are very sensitive to the policies wished for and the problems felt by those who can contribute large amounts of money to their campaigns. Quintuple the relative wealth of the top one-ten thousandth, and you close to quintuple their influence on public policy. Is this a bad thing? Probably. "
Here's the question: how do you stop that?
One of the things I've been noticing is that the tax increases always fall heavily disproportionately on the upper middle class. This may be because my parents are in the upper middle class, but there you are. Nonetheless. We have family friends who earn millions of dollars every year who pay a much smaller percentage of their income to taxes than my parents do. As my mother said in talking about this, it's certainly not fair that someone who makes 30K per annum pay more taxes than they do. . . but it's also not fair that someone who makes $10 million a year pays less taxes than they.
And yet I literally cannot think of a way to reform it that has any chance of passing. The major reforms would never get by either party:
1) Ending the regressivity of the payroll tax (the AARP would have a baby cow)
2) Eliminating the corporate income tax and equalizing the treatment between income and capital gains (everyone would have a cow)
3) Eliminating the myriad deductions that the very rich can afford to take advantage of (some, like tax-free munis can't be changes, and the rest are handouts from congress to their contributors on both sides of the aisle.)
Campaign finance, reform, ironically, seems likely to make the problem worse, as parties are going to be depending on their high-net-worth individuals like never before.
You can't just keep increasing taxes if they always fall on the upper end of the middle class; that well's almost squeezed dry. My parents, one of whom is self employed, enjoy an effective tax rate of well over 50% -- not 50% marginal, mind you, but 50% absolute. How much more can you get out of them before they decide to give up? the Laffer Curve is going to kick in at some point. And an income tax increase is going to have at best a marginal effect on anyone above their income range, unless corporate earnings start moving back into dividends, as the very wealthy will just shift income into tax-preferred forms. Yet raising the capital gains tax without altering corporate taxation will have a chilling effect on the investment we're going to need to support the coming demographic disaster.
In short, how do you set up a tax code that actually achieves what we want -- steadily progressive taxation of income so that the poor pay a little and the rich pay a lot -- when the political incentives all run the wrong way. Meaningful reform is either too easy to demagogue, or offends powerful interest groups the politicians need to get elected. So how do we bell the cat?
Posted by: Jane Galt on October 27, 2002 11:45 AMSome comments on Erich Schwartz’s post:
“Short note: Making money in the defense industry is "bad wealth" if you think that the United States either does not need a defense industry or does not deserve to be effectively defended. That's a possible view, I suppose, but I suspect it's held by a higher proportion of continental Europeans than Americans.”
In fact, there is a strong argument to be made that an arms industry that sells outside the U.S. is not in the U.S.’s best interests. There is also a strong argument that the U.S. is overarmed, with, for example, more than 50% of the military naval tonnage in the world.
“and it's damn difficult to multiply an inherited fortune in the way that William Gates III did.”
I’d be very surprised to find out that it is harder than starting without inherited wealth.
“Furthermore, while some people who inherit wealth are lazy, not all are by a long shot. It isn't particularly easy even to keep money in America, and it's damn difficult to multiply an inherited fortune in the way that William Gates III did.”
In fact it is quite easy to keep money in America. The great fortunes made in the 19th century still exist today and are doing just fine, thank you.
“there's absolutely nothing "fair" about our having had a better life than our forebears.”
We aren’t concerned with being fair to the long dead – only with the living. Irrelevant argument.
“But it seems untenable to pretend that there's something inherently wrong about inheriting wealth.”
Well, since everything else you said was wrong, this doesn’t logically follow. But, in fact, no one is suggesting that one shouldn’t be able to inherit any wealth. What is being suggested is that it is not unreasonable to tax very large estates. I work in the estate preservation business and let me assure you that almost no estates are destroyed by taxation. I can’t, in fact, think of any, though I’m sure someone could find a case if they worked hard enough. There are many ways to protect your estate AND even if you didn’t your heirs would still be left with enough to live on for the rest of their lives. Somehow my heart does not bleed for them and given the strong arguments against hereditary plutocracy and the need for tax income I find that the argument for Estate Taxes is stronger than the argument for the highly regressive taxes that have been emphasized over the last thirty years.
“To have static equality, it's not enough to have an 80% tax bracket for the most successful. You also have to punish anybody, either legally or through social ostracism ("blacklist", anyone?) who upsets the system by being unwilling to be properly docile or mediocre. And you have to have pretty tight (unacknowledged) controls who gets to say what and how people are broken into being adult members of society. You have to have loyalty oaths. You have to draft people into the armed services rather than having an all-volunteer force, so that being a soldier is a booby prize rather than a mark of excellence and pride. You can't let enclaves like Silicon Valley form; they virulently threaten equality. You can't let women work at the same jobs as men unless your taxes are so punitive that the economic advantage of two high-earners marrying is completely nullified; otherwise you get the successful marrying the successful, which of course drives inequality, so keep those women out of law and medicine and tax hell out of them if they do marry”
Er, you are aware that all you are doing is listing what you think the qualities of the 50’s are and assuming that they are causative? Most of these aren’t economic factors, so the onus is on you to make a strong case that they were causative.
Comments on Tom Maguire’s post:
“However, I think another key adjustment will be for a point many of us have hit on: income mobility. Prof DeLong's calculation assumes a permanent “we-they” division. However, it can very plausibly be argued that, metaphorically, each of us is holding a lottery ticket, if not in our name then for our children.”
In fact, I am aware of no credible study that finds significant mobility, other than structural, between social classes. Most people won’t move more than two deciles above or below the socioeconomic class of their parents, in relative terms.
“Or not. Frankly, if someone has a table-pounding argument that one form of societal organization is predictably better than the other by 0.15% per annum, then this is relevant. Otherwise, I would say, look, 0.05% - 0.2%, who cares? If the recent productivity surge is real and long-lasting, we do way better than 0.2%. If not, well, ooops. Time will tell.”
Unfortunately GDP growth is not so much the question. If the majority of the benefits of GDP growth go to the top decile, and the majority of those to less than ½ of 1% then it’s a problem. And the fact of the matter is that GDP growth during the Great Compression was excellent, better than the growth since then. And it raised all boats, the rich got richer and the poor got richer too. It really is hard to argue against that. On the other hand, most of the growth of the last 30 years simply has not raised all boats and it has raised them very unequally. So there is a strong argument to be made for a society that raises all boats equally while not significantly damaging, and probably helping, economic growth.
“In fact, what most strikes me about Prof. Krugman's article is his praise (through Galbraith) of corporations as operating like socialist republics.”
Hmmm? They took care of their employees, they made profits and they didn’t enrich the leaders. I suppose the greed model is preferable then? Screw the employees, overstate your profits and grossly enrich the leaders?
'And yet I literally cannot think of a way to reform it that has any chance of passing. The major reforms would never get by either party:'
I imagine treating capital gains as ordinary income would fix this up real quick.
Posted by: Jason McCullough on October 27, 2002 01:00 PM'And yet I literally cannot think of a way to reform it that has any chance of passing. The major reforms would never get by either party...'
I imagine treating capital gains as ordinary income would fix this up real quick.
The GOP would no more stand idly by for a tax hike on capital than the Democrats would readily allow a cut in the minimum wage.
Posted by: George Zachar on October 27, 2002 01:10 PMSo I went back and read Saez & Piketty. Great paper. They did take capital gains out of their calculations. So part of what I posted earlier about mixing up income and capital is, er, wrong. But their conclusions actually emphasize the importance of distinguishing income from capital/wealth -- and make Krugman even less comprehensible than he was before.
Specifically, Saez & Piketty argue that "there has been a strong trend of deconcentration of wealth over the 20th century". The fact that the share of income accruing to the very top has returned to roughly the level of the early twentieth century belies a dramatic change in the composition of that income. In 1929, 70% of the income of the top 0.01% came in the form of dividends, coupons and other "capital income". Only 10% was wages, and 20% was partnerships and other "entrepreneurial income". In 1998, by contrast, only 20% of the income of the top 0.01% came as dividends and other capital income. 45% was wages and 35% partnerships and entrepreneurial income.
So, with all respect to our esteemed host, Brad DeLong's suspicion that today's plutocrats are "a mixture of yesterday's entrepreneurs, corporate looters, feckless heirs, and politically well-connected operators" would seem to be, er, misguided. These are CxOs, law partners and etc. (OK, so maybe CxO, law partner and "corporate looter" are synonymous, but let's leave that aside for the moment.) Good, bad or both, this is not your grandfather's plutocracy. Nor should they invoke your grandfather's policy response.
If Saez & Piketty are right that increasing inequality is the result of changing social norms -- ie, people think it's OK for the rich to be richer -- then a political movement dedicated to making them less rich is ultimately self-defeating. It's not what people want. It also misses the real issues
In a very real sense, today's plutocracy has already had social approval for its incomes. As CxOs, their compensation has been approved by boards, and as partners by their peers. They do not stand as an institution unto themselves, like their predecessors, dependent only on their own capital. Their incomes are the product of the institutions that pay them. So trying to make the "plutocracy" a separate and demonizable group -- as Krugman seems to be trying to do -- is deeply misguided. Any policies that effect them will also effect the institutions on which they are dependent, which are also the institutions that bind them to the rest of us.
The good news here is that worries about increasing inequality creating decreasing democracy would seem to be overdone. Alfred Sloane from GM and Robert McNamara from Ford were highly influential even when they weren't paid that much. The political influence of CxOs and other heads of institutions might be too much, or too little, but it probably isn't much related to their personal income.
The harder questions, though, concern what, if anything, governments can and should do about income inequality in its 21st-century form. Corporate looting is clearly bad, and the need to ensure transparent accounting seems obvious to all bar the Bush administration. But for every Ken Lay there is also a Jack Welch, who made a lot of other people, his shareholders, rich even as he enriched himself. It would be a foolhardy -- and wrong -- politician or economist to to generalize about how much anybody and everybody can earn. Unless there is a clear case that the institutions now governing the income of top earners are systematically failing -- which is the argument that Krugman etc really should have addressed themselves to -- then it's hard to see what the macro-issue is here, beyond nostalgia and envy.
Posted by: John Browning on October 27, 2002 02:23 PMJohn Browning's posts are precisely the reason we need to worry about a new american plutocracy.
I am not interested in being part of a benign as opposed to a malicious plutocracy. I am interested in a democracy where there is a role for government in assuring that the voices of all classes of people are distinctly heard. Leaving those who are not rich to such charity as the rich see fit to extend, is anti-democratic.
Franklin Roosevelt significantly extended American democracy and we must not allow the principles of New Deal fairness to be further eroded.
Posted by: on October 27, 2002 02:50 PMWell, yes, that's true, it would probably equalize treatment a little. It would also make it very hard for companies to raise capital, as it would put the effective taxation on savings above that on consumption, as dividends and capital gains would then be taxed twice. It would also tend to bias corporate capital raising towards debt, which would be even more heavily tax favored than it is now, which is probably not on net a good thing for the economy, since it would increase the risk of corporate bankruptcy in time of depression. So in order to recoup some extra income (although given the wide range of tax-advantaged investments, I find it hard to imagine we'd raise all that much more), we slow the pace of investment, and increase the volatility of our economy. You also have to consider that it would remove one of the primary tax advantages to the government of the 401(k) plan, which might harm its legislative constituency.
Meanwhile, it won't pass, because both the heavy hitter contributors and the corporate constituencies of both parties would go ballistic. The folks who can afford to toss a thousand bucks a pop at every Democratic or Republican candidate are going to be down in Washington double quick if you tell them they can't arrange their finances advantageously.
Posted by: Jane Galt on October 27, 2002 03:53 PMGiven the political and social problems that seem likely to prevent redistribution of wealth in the short term, it seems that what we're doing is waiting for society to change back to how it was in terms of social mores to the WW2-mid-70s era. The question is, what if it doesn't? What I think we need is a backup plan, looking at the alternatives to the restoration of the 1960s and trying to figure out the second-best solutions accompyaning them. Here are some possibilities I'm trying to think of:
Julian Elson
Posted by: Julian Elson on October 27, 2002 04:58 PMIf I may respond to some of Ian's comments:
Ian said:
Unfortunately GDP growth is not so much the question. If the majority of the benefits of GDP growth go to the top decile, and the majority of those to less than ½ of 1% then it’s a problem.
Prof. DeLong said:
On the economic side, think of the concentration of wealth at the very top as an investment by the rest of us in "incentives" to encourage faster growth. Then one back of the envelope answer is that such an increase in relative wealth at the very top would be worthwhile for the rest of us only if this concentration, all by itself, boosted economic growth by at least 0.2 percentage points per year--which is a very high hurdle indeed. In short, I'm with Krugman on this.
So, one of you thinks that GDP growth IS the question. If I get a deciding vote, I vote with the Prof. My pont was that by allowing for income mobility, the 0.20% hurdle might be reduced to 0.05%.
I said:
In fact, what most strikes me about Prof. Krugman's article is his praise (through Galbraith) of corporations as operating like socialist republics.”
Ian replied:
"Hmmm? They took care of their employees, they made profits and they didn’t enrich the leaders. I suppose the greed model is preferable then? Screw the employees, overstate your profits and grossly enrich the leaders?"
After adjusting the overload on my Strawman Detector, I would say this - the rest of my comment about 70's style corporations was that, however well intentioned, they failed. Chrysler bankrupt, Jimmy Carter's "national malaise", and so on.
Secondly, I dispute that the entire story of American prosperity from 1980 to the present is one of corporate looting. Otherwise, yes, the current corporate model has, with a few exceptions such as Enron, seemed to create jobs and deliver products in a way that was not happening in the 70's.
Anyway, several qustions about the non-repeatability of the 50's to the 70's have been raised.
(1) Immediately after WWII, most industrialized nations other than the US were devastated. US steel and autoworkers did not face significant foreign competition until roughly the 60's.
(2) Immigration into the US was below trend in the 50's and 60's.
Now, unless you have a secret plan to devastate the rest of the world, can someone please explain how we can pay US steelworkers or autoworkers a wage comparable to the wage they received when they faced no significant competition? Should we blame the decline of the UAW on "the plutocrats", or the Japanese?
Or, if the Great Compression was an historic anomaly caused by the Great Depression and WWII, how do you propose to get back to it?
"Er, you are aware that all you are doing is listing what you think the qualities of the 50’s are and assuming that they are causative? Most of these aren’t economic factors, so the onus is on you to make a strong case that they were causative."
To reiterate just one point out of an long post: not letting women hold men's jobs is, simultaneously: (1) an economic variable, (2) also a social variable, and (3) a major element in social inequality, since we now have marriages in which people are assorted by their individual socioeconomic status -- M.D.s marrying other M.D.s, J.D.s marrying other J.D.s, etc. etc.
There is no way in hell that we could have had that in the 1950s. Women didn't go to med school, law school, or business school; they weren't meeting their future spouses at the office as equals and their marrying didn't generally double household income while reducing shared living expenses.
If you want to really get serious about egalitarianism, you've got to reverse that trend somehow. And reversing that trend would not merely mean adopting 1950s tax codes; it'd also require adopting 1950s social norms. Otherwise those evil two-earner couples become a huge disaffected voting bloc ready to vote Republican. (In fact, they did; remember 1980 and 1984?)
I really don't think you can extricate 1950s economics from 1950s sociology. But if you want to try, by all means do go ahead and try. Just don't blame me when you "mysteriously" lose to the Republicans.
Other people besides myself have pointed out that the period between 1982 and 2002 can hardly have been nothing but corporate looting, and that abandoning the "dynamic conformity" ethos had something to do with the rise of wealth; also that the last decade was both a period of inmproved prospects for the poor and nonwhite *and* of rising inequality of income. If I'm completely wrong, it's at least a delusional state shared by others.
But maybe I'll just quote the best line in this thread: "If the goal is to achieve general long term prosperity without anyone actually getting rich, well, good luck."
Posted by: Erich Schwarz on October 27, 2002 11:35 PM>>In fact, what most strikes me about Prof. Krugman's article is his praise (through Galbraith) of corporations as operating like socialist republics<<
This one's been worrying me, and it's been worrying me since I read 'get rich'.
As an economic theorist I'm a great admirer of Paul Krugman, but there's something here that I can't fit together. It's the use of galbraith. One of the first Krugman books I read was Development, Geography and Economic Theory, and I was struck by the strong negative on Galbraith. In fact, at the start of the book he singles out Galbraith (along with Lester Thurow) as the kind of 'pop' economist who has a big following among the 'uneducated' public, but is virtually ignored by 'real' economists.
On page 77 of my copy of this book you can read:
>>Consider, for example, the repeated efforts of heterodox economic thinkers to find alternatives to the rational, profit maximizing firm - like John Kenneth Galbraith's claim that the modern corporations are in the hands, not of their stockholders, but of a "technostructure" driven by bureaucratic imperatives. Did these attempts lead anywhere? Surely the answer is no: once you get past the impressive-sounding neologisms, theories like Galbraith's make few useful predictions; and what he claimed as deep insights, like the insulation of managers from stockholders, turned out to be fragile observations that ceased to be true almost as soon as he made them<<
Krugman, significantly enough wrote this in 1995, the year of the Netscape IPO.
>>I'm wondering if anyone else was struck by the similarity between Krugman's "nostalgia" for the 50s and 60s (i.e., as a period of relative income equality based on acceptance of the "value" that preservation of a middle class was essential) and the nostalgia of the right wing for the same period (as a period when "family values" were not yet corrupted by the licentiousness of the 1960s and 70s)<<
Yes someone has. And it seems to go deeper than this, since he and his arch enemy George W seem to share a common lack of enthusiasm for the 'new economy', something which sets Brad apart from both of them. And this topic ties-in with pints in a lot of the posts about the different types of wealth creating activities. If you look at the details a lot of the Bush related specifics seem to be directed to Texas-style 'old economy' activities (or even agriculture) and precious few to East or West Coast technology related sectors. Put another way, one 'internet age' Guru - Manuel Castells, never stopped celebrating Cisco, while it seems Paul can't stand them.
On another level all of this is just a re-run of the standard growth versus equality arguments which have been around for a very long time. It depends what you value more. Personally I think money is greatly overvalued (but then as Christine Keeler said of Profumo, he would - since he hasn't got any).
But seriously folks, what we really have is time, and there does seem to be some sort of trade-off between worrying about all that money and having the time to think.
In fact reflecting on this has finally allowed me to make some sense of that optimal control stuff that we are forced to learn in order to try and make some sense out of contemporary economics, since I can now see that in a situation of volatile inflation/deflation switchovers, and financial crashes the optimal saddle-path trajectory for the consumer/saver is to operate a continuous stream of expenditure/stream of earnings adjustment in order to pass smoothly through the middle, nicely avoiding all those savers/debtors problems that the rich and famous are sure to get bogged down in.
Posted by: Edward Hugh on October 28, 2002 02:36 AMBrief point in re: Jane's post.
Since the Lawson era, the UK has had a system in which capital gains are taxed at the same marginal rate as ordinary income and in which dividends are not double-taxed.
Posted by: Daniel Davies on October 28, 2002 03:44 AMReading Krugman's article made me think of Peter Singer's criterion for judging a society. His question is: how are those least well off treated?
The current economic system seems to make it difficult for anyone to have a purpose except in the economy. For those in the middle, the private life of family and community have suffered because of the struggle to maintain income and a standard of living.
Among those least well off, these problems are compounded by failing or marginal schools and health care, and a very active program of imprisonment for drug offenses.
If less inequality would address this social condition, I would be all for it.
Posted by: Tom Loria on October 28, 2002 06:10 AMJohn Browning:
“If Saez & Piketty are right that increasing inequality is the result of changing social norms -- ie, people think it's OK for the rich to be richer -- then a political movement dedicated to making them less rich is ultimately self-defeating. It's not what people want. It also misses the real issues.”
Er, no. In fact waves of reform tend to come after plutocratic periods. It’s the norm and they are often quite successful. The idea that people approve is also questionable, people don’t have the power to do anything about it at this time nor do most people realize how bad the situation is. It is quite clear that the rich have bought government and government has rewarded them. Furthermore corporate governance has broken down – members of the board are generally picked by the CEO and give him the compensation he asks for because he controls their jobs and compensation. It’s a nice relationship as long as you’re one of the people involved. The problem is that too many shares are now owned by mutual funds and pension funds and other entities that have a policy of pretty much always voting for management.
John Browning again: “In a very real sense, today's plutocracy has already had social approval for its incomes. As CxOs, their compensation has been approved by boards, and as partners by their peers. They do not stand as an institution unto themselves, like their predecessors, dependent only on their own capital. Their incomes are the product of the institutions that pay them. So trying to make the "plutocracy" a separate and demonizable group -- as Krugman seems to be trying to do -- is deeply misguided. Any policies that effect them will also effect the institutions on which they are dependent, which are also the institutions that bind them to the rest of us.”
Ah yes. The rich have given approval to the rich to make themselves richer. That’s, well, rich. They are, in fact, a separate group, by and large. And no, any policies that effect them need not hurt the institutions that they are dependent on.
John Browning again: “The good news here is that worries about increasing inequality creating decreasing democracy would seem to be overdone. Alfred Sloane from GM and Robert McNamara from Ford were highly influential even when they weren't paid that much. The political influence of CxOs and other heads of institutions might be too much, or too little, but it probably isn't much related to their personal income.”
Uh, excuse me? This doesn’t need rebuttal. It is to laugh. It is quite clear that money has directly bought influence and power and a great deal of it. If you aren’t aware of this, it is because you don’t want to be aware of it. The corruption in Washington is so odious that it stinks to heaven.
Posted by: Ian Welsh on October 28, 2002 06:55 AMI said (referring to compression companies): "Hmmm? They took care of their employees, they made profits and they didn’t enrich the leaders. I suppose the greed model is preferable then? Screw the employees, overstate your profits and grossly enrich the leaders?"
Tom Maguire says: “After adjusting the overload on my Strawman Detector, I would say this - the rest of my comment about 70's style corporations was that, however well intentioned, they failed. Chrysler bankrupt, Jimmy Carter's "national malaise", and so on.”
Hmm, perhaps you should recalibrate your strawman detector for bearing up under the weight of your own arguments. The economic problems of the 70’s do not destroy the fact that for 25 years those general policies worked (are you seriously arguing that we are better positioned to handle such an oil shock today than we were then?). And it does not negate the fact that they worked better than the policies of the last thirty (or if you wish, 20 years). During that time period income rose for all groups, including the rich. Wealth rose for all groups. Social indicators rose for all groups. Benefits were divided relatively evenly, percentagewise. That’s a pretty good record and better than the more recent record. But, no one is saying go back to the identical policies. Obviously we would try to learn from the mistakes made in that time period. But equally obviously we should note that those policies worked better than the more recent policies have (or will, this downturn is going to get a lot worse before it gets better, imo.)
Tom Maguire again: “Secondly, I dispute that the entire story of American prosperity from 1980 to the present is one of corporate looting. Otherwise, yes, the current corporate model has, with a few exceptions such as Enron, seemed to create jobs and deliver products in a way that was not happening in the 70's.”
No one has said that the entire story of “American prosperity” from 1980 to the present is one of corporate looting. But reliable estimates do indicate, for example, that corporate profits were overstated by about 10% during the 80’s and by 25% or more during the 90’s. Fortune 500 jobs declined precipitously, the income and wealth of the poor and middle class stagnated, social indicators started drifting south, taxes became more regressive and… but why go on? The facts are all there if you’re willing to see them.
Now as for your points about immigration and relative US strength after the War. Points are taken. First – immigration, the easy one. Just don’t let so many people in. It’s really not hard you know. It’s a political choice that can be made if there is the political will to do so. Of course, as long as business owners only get a slap on the wrist for hiring illegals and as long as computer businesses are given access to special visas to drive down domestic wages, and so on, it is clear for whose benefit immigration policy is being run.
Second, US industrial strength after the war. Is this what caused high wages? Or was it productivity growth combined with a tax structure and social mores that encouraged the increased wealth created by productivity gains to be spread throughout the population? I’d argue it’s the second. As long as productivity growth continues wages should continue to rise – but for many segments of the population they haven’t. That’s because of distribution, not because things haven’t gotten better (though they have gotten better slower).
The fact of the matter is this: productivity growth over the last 20 years has basically sucked and most of those gains have gone to the rich while we have had declining social health, corrupted politics and increased levels of unemployment. I would suggest that those who defend the policies of the last 20 years are the ones who bear the burden of proof, not those who think they were misguided.
I'm going to post something from an acquaintance of mine: Bill Welch. It's not entirely on topic, having come from a discussion on changes in family structure, but it is generally on topic and very interesting:
"Of course the decline of family income is one result of the disintegration of the traditional family. It is, uh, impressive on some level that there are people who would challenge this.
As women entered the labor force again in the 1970s in large numbers, and this time with proper legal standing but still at lower wages than men, the cost of labor went down and productivity went up for businesses and to some extent in the faux professional classes of government workers, doctors, lawyers, etc., who are not self employed.
Women always represented found money to businesses and government because women could be had for a song compared to what men were paid.
The evidence of this is middle class and working class wage stagnation from around 1973 to the late middle 1990s. Women and government workers are the only clearly definable groups whose wages increased by significant margins in that period, a period in which nonprofessional males experienced zero income growth.
The most obvious exception to generic and group results is the public sector where the hilarious chimera of wage parity created millions of jobs for life without any particular controls for people couldn't have been driven out of those jobs at gunpoint, raises or no raises. To some extent the financial services sector also exceeded the norm in those years.
Next...
It is absurd, absolutely absurd to attempt to connect the economic effects of nuclear family meltdown on the working class and the petit bourgeoisie with the efffects of nuclear family meltdown on the wealthy.
And here is the obvious piece of the puzzle that so many missed by such wide margins. The rich are different. They have more money. And the answer is.... investment income.
A single mother four paychecks from sleeping in the street is in a little different situation than a single mother living off investment income.
And spare me the jazz about the miracle of the 401k. Enron put that baby to rest. 401ks have lost 40% of their value since 1998 as an average according to BusinessWeek.
Finally, retirement funds are not the same as disposable income, income the wealthy put into high risk ventures that can eat the money or pay 10,000%.
There is not now and there never shall be any correlation between the economic effects of any social behavior on the rich and other people. There is no relationship on which to base such comparisons. "
Posted by: Ian Welsh on October 28, 2002 07:16 AMOk, probably my last word on this argument. The fact of the matter is that those who believe that high inequality is good for the economy and for companies need to explain some things. The onus is on them to explain these things.
1) Is there any statistically significant correlation between executive compensation and corporate performance? Do the highest earning CEO's, for example, have the companies with the best earnings, debt ratios and so on? (Don't use the stock market, because not only were we just in a bubble but that bubble was manipulated by faulty accounting of the worst kind.) At what point does the law of diminishing returns kick in? That is, at what level does paying them more not lead to better performance. Is there any correlation at all beyond a certain point?
2) Why is it that as income inequality has increased all social health indicators (that I know of) have gone negative?
3) Explain why the reduced demand that results fromt he poor and middle class getting a smaller percentage of gains is offset by the rich getting more. Please be sure to explain how all that money going into the bubble of the 90's was useful and could not have been more useful if it had been in the hands of those who would have either spent it or invested it in primary investment and not in the secondary market.
3) Justify salaries in the financial services sector based upon performance by those in that sector.
Until Americans realize that most of them will always be wage earners, that most of them will never strike it rich and that the money buys influence and that influence is used to buy economic preferment at an extraordinary rate of return things will continue to get worse. The housing bubble is going to burst and it is going to take the economy with it. The new bankruptcy law, bought and paid for by the credit card companies (especially MBNA who was kind enough to give the sponsor refinancing that you or I would never get) will only make things worse. For years the US has been starving consumers and running up consumer debt. The piper is about to be paid and you are going to see a collapse on the demand side that will be nothing short of awe-inspiring. And the rich, who have taken the bulk of all economic gains in the last 20 years, are not going to spend you out of it. But they'll be fine, so why should they?
Posted by: Ian Welsh on October 28, 2002 07:39 AMTom Loria: Peter Singer used the "condition of the least well off" criterion? I was under the impression that Peter Singer supported a slightly updated version of a cardinal utilitarian SWF that summed preferences, assigning weightings by the "intensity of preference." (I've found this slightly deceptive: it sounds like cardinal utilitarianism in effect, but pretending to be ordinalist in line with modern standards of rigor and the horrible unfashionable-ness of cardinalism.) I seem to remember hearing, for example, that Peter Singer thought that, for example, euthanizing some people might be acceptable if the intensity of preference of the individual in question for life over death is less than the sum of the of preferences of the people who would benefit. This is not just a logical inference from his philosophy: I'm fairly sure he himself advocated this idea.
Are you sure that you aren't thinking of Rawls when you speak of that criterion? He was the most famous in applying that criterion.
Well, I'm not well versed in the ways of Singer, so I'm not sure, but I *thought* that he was more in favor of judging things through the good of everyone rather than the good of some particular segment, such as the least well off.
Julian Elson
Posted by: Julian Elson on October 28, 2002 07:42 AMI will admit to not reading every word of every post, but I have to tip my hat to Jane Galt. Rather than go on about how somebody (Krugman) who admires the greater income equality of an earlier era must also admire its bad features, or prattle on about incentives in a way that doesn't really address incentives, she gets down to brass tacks. It is almost certainly possible to imagine policies which tend toward less income inequality most of the time (even if during periods of extreme economic fulmination like the 1990s nothing can stop the winners from outpacing the losers) which do not have an important effect on incentives. Incentives are far from an all-or-nothing prospect. To the extent that I can tell from outside the heads of the truly innovative, their efforts at innovating don't seem all that affected by their tax rate, within reasonable limits. The problem is that the battle over policy is not, as Jane's post fully emphazies, fought on the field of innovation, productivity and progress. It is fought in a political landscape where money seems to have grown ever more important.
I think, however, that a hopeless shrug is not the right response. Krugman's article, and other efforts like it, can feed an effort to overcome the influence of the AARPs and corporate lobbiests of the world, though a whole lot more feeding is necessary.
By the way, I have recently read on a reasonably intelligently written libertarian web log that success is largely the result of luck and hard work. Similar sentiments are hinted at in posts here. There lies a huge divide on issues of social fairness. I wonder, with all the money and hot air spent on influencing political outcomes purely for gain, how anyone can hold that view. I's sure those who do are equally baffled at the notion that Bill Gates got where he is by any means other than, well, luck and hard work. I can only think of one answer to that view. Is hard work at winning a Congressman's vote in favor of my future wealth the sort of hard work that ought to be rewarded? That seems to be Krugman's point. I don't think he is advocating wearing the fashions of the 1950s or arranging our society to breed conformity, as some posts suggest.
Posted by: K Harris on October 28, 2002 07:49 AMIan: Hmm, I worry that, with so many rebuttals going on, your workload will increase exponentially. In which case, we can predict an internet crash sometime this afternoon.
Anyway, to help get you back to an "arithmetic" growth, I will just take a few points.
You said:
"The economic problems of the 70’s do not destroy the fact that for 25 years those general policies worked (are you seriously arguing that we are better positioned to handle such an oil shock today than we were then?)."
Well, we may get an empirical answer to the oil shock question soon enough. But, yes, I am arguing that. Energy usage as a percent of GDP is, I am recalling, about half of what is was in the 70's. The world also has, again, I am guessing, a better diversity of suppliers. I am thinking of the North Sea, Alaska, and Russia when I say that.
Back to you:
"Fortune 500 jobs declined precipitously (from the 80's on)"
Well, I enjoy visiting the Museum of Natural History with my kids to see the dinosaur exhibit. Total employment has risen quite nicely during the 80's and 90's.
You again:
"First – immigration, the easy one. Just don’t let so many people in. It’s really not hard you know. "
Oh, serious parting of the ways. My peculiar brand of compassion does not stop at the border - that "give me your tired, your poor, your huddled masses yearning to breathe free" really works for me. Worked for my grandfather, too, who came from Ireland and tarred roofs until he got drunk and fell off of one. Oh, I'm kidding, he died of cirrosis, but I don't know the circumstances. Sort of an "income mobility" story.
Anyway, I think it is a good thing for the world that the US can take in immigrants and provide them jobs. I am much less impressed by the Euro approach - from what I read in the papers, France takes in immigrants and puts them on welfare. That works. Not. Of course, with European style unemployment, what else can they do? Well, keep immigrants out. And complain about the US not providing enough foreign aid. Oh, don't get me started. Anyway, the Republican Party kicked Pat Buchanan out and Gephardt has dropped his anti-immigration stance, so the political will in this country is not present. Excellent!
Sorry, mini-tirade. Next:
"Second, US industrial strength after the war. Is this what caused high wages? Or was it productivity growth combined with a tax structure and social mores that encouraged the increased wealth created by productivity gains to be spread throughout the population? I’d argue it’s the second. "
Hmm, your following post argues that the entry of woman (and I will add, ethnics and immigrants) into the workforce affected these stats.
You are excerpting someone else, so it gets tricky to tell the players without a scorecard. Hmm, maybe a really cool site would allow text in multile colors. Next Generation! Anyway:
As women entered the labor force again in the 1970s in large numbers, and this time with proper legal standing but still at lower wages than men, the cost of labor went down and productivity went up for businesses and to some extent in the faux professional classes of government workers, doctors, lawyers, etc., who are not self employed.
Women always represented found money to businesses and government because women could be had for a song compared to what men were paid.
The evidence of this is middle class and working class wage stagnation from around 1973 to the late middle 1990s.
Well, then, I agree with you - norms changed, and wages suffered. In tennis, this is what I call Irish doubles - we are both on the same side of the net, and where is the opponent? I am presuming that you do not want to expel woman from the work force, of course.
You, big finish:
"The fact of the matter is this: productivity growth over the last 20 years has basically sucked and most of those gains have gone to the rich while we have had declining social health, corrupted politics and increased levels of unemployment. "
Well, unemployment in 1980: 7.5% when Reagan was elected (down from what I see as a peak of 9% in 1975, or a shorter term peak of 7.8% in July 1980. Subsequent peak of 10.8% in Dec '82, and then, away we go - complete social collapse.
And today, we may (or may not) be ending a recession where unemployment peaked at 6%. C'mon, give Clinton some credit for handing over a sound economy. We won't believe you, since the Nasdaq peaked in Mar 2000, but still.
Unemployment time series:
http://www.economagic.com/em-cgi/data.exe/fedstl/unrate
Regards,
Ian: Hmm, I worry that, with so many rebuttals going on, your workload will increase exponentially. In which case, we can predict an internet crash sometime this afternoon.
Anyway, to help get you back to an "arithmetic" growth, I will just take a few points.
You said:
"The economic problems of the 70’s do not destroy the fact that for 25 years those general policies worked (are you seriously arguing that we are better positioned to handle such an oil shock today than we were then?)."
Well, we may get an empirical answer to the oil shock question soon enough. But, yes, I am arguing that. Energy usage as a percent of GDP is, I am recalling, about half of what is was in the 70's. The world also has, again, I am guessing, a better diversity of suppliers. I am thinking of the North Sea, Alaska, and Russia when I say that.
Back to you:
"Fortune 500 jobs declined precipitously (from the 80's on)"
Well, I enjoy visiting the Museum of Natural History with my kids to see the dinosaur exhibit. Total employment has risen quite nicely during the 80's and 90's.
You again:
"First – immigration, the easy one. Just don’t let so many people in. It’s really not hard you know. "
Oh, serious parting of the ways. My peculiar brand of compassion does not stop at the border - that "give me your tired, your poor, your huddled masses yearning to breathe free" really works for me. Worked for my grandfather, too, who came from Ireland and tarred roofs until he got drunk and fell off of one. Oh, I'm kidding, he died of cirrosis, but I don't know the circumstances. Sort of an "income mobility" story.
Anyway, I think it is a good thing for the world that the US can take in immigrants and provide them jobs. I am much less impressed by the Euro approach - from what I read in the papers, France takes in immigrants and puts them on welfare. That works. Not. Of course, with European style unemployment, what else can they do? Well, keep immigrants out. And complain about the US not providing enough foreign aid. Oh, don't get me started. Anyway, the Republican Party kicked Pat Buchanan out and Gephardt has dropped his anti-immigration stance, so the political will in this country is not present. Excellent!
Sorry, mini-tirade. Next:
"Second, US industrial strength after the war. Is this what caused high wages? Or was it productivity growth combined with a tax structure and social mores that encouraged the increased wealth created by productivity gains to be spread throughout the population? I’d argue it’s the second. "
Hmm, your following post argues that the entry of woman (and I will add, ethnics and immigrants) into the workforce affected these stats.
You are excerpting someone else, so it gets tricky to tell the players without a scorecard. Hmm, maybe a really cool site would allow text in multile colors. Next Generation! Anyway:
As women entered the labor force again in the 1970s in large numbers, and this time with proper legal standing but still at lower wages than men, the cost of labor went down and productivity went up for businesses and to some extent in the faux professional classes of government workers, doctors, lawyers, etc., who are not self employed.
Women always represented found money to businesses and government because women could be had for a song compared to what men were paid.
The evidence of this is middle class and working class wage stagnation from around 1973 to the late middle 1990s.
Well, then, I agree with you - norms changed, and wages suffered. In tennis, this is what I call Irish doubles - we are both on the same side of the net, and where is the opponent? I am presuming that you do not want to expel woman from the work force, of course.
You, big finish:
"The fact of the matter is this: productivity growth over the last 20 years has basically sucked and most of those gains have gone to the rich while we have had declining social health, corrupted politics and increased levels of unemployment. "
Well, unemployment in 1980: 7.5% when Reagan was elected (down from what I see as a peak of 9% in 1975, or a shorter term peak of 7.8% in July 1980. Subsequent peak of 10.8% in Dec '82, and then, away we go - complete social collapse.
And today, we may (or may not) be ending a recession where unemployment peaked at 6%. C'mon, give Clinton some credit for handing over a sound economy. We won't believe you, since the Nasdaq peaked in Mar 2000, but still.
Unemployment time series:
http://www.economagic.com/em-cgi/data.exe/fedstl/unrate
Regards,
Re: Taxation, IRS forms, capital gains versus income
All for my benefit and that of John Browning:
Saez and Piketty take capital gains separately. However, I have learned this:
Taxation of Employee Stock Options
There are two types of stock options – Incentive Stock Options (ISO’s) and Non Qualified Stock Options (NQSO’s). ISO’s have more favorable tax opportunities than NQSO’s. If you are holding both ISO’s and NQSO’s and are contemplated a same day sale of a portion of your shares, you should sell your NQSO’s first to maximize the capital gain treatment in the future.
Taxation of NQSO’s - When you exercise an NQSO, you are taxed on the spread between the option price and the market value of your shares at the date of exercise. You pay income tax at ordinary rates on this spread whether you sell your shares or hold them. This is considered compensation and is also subject to payroll taxes (egg FICA and Medicare). Future appreciation is taxed at capital gain rates (generally 20%) if you hold the shares for more than one year from date of exercise.
Taxation of ISO’s - ISO’s are not subject to regular income tax at the time of exercise. You will be able to receive long term capital gain rates on your entire gain if you sell your shares at least one year after they are exercised and two years after grant date. However, you may incur Alternative Minimum Tax (AMT) if ISO’s are exercised and not sold in the same tax year.
http://www.kbassociates.com/stock.htm
Oh, great. Now, is there a compensation guru who has a sense of just how common, and significant, the NQSO's might be? Otherwise, we are back to the muddy waters John identified near the top.
I am thinking of Peter Singer. His new book "One World: The Ethics of Globalization" covers his views on the topic.
Singer's views on living and dying are difficult for me, also.
Posted by: Tom Loria on October 28, 2002 10:38 AM'Taxation of ISO’s - ISO’s are not subject to regular income tax at the time of exercise.'
If I remember correctly, the options of corporate executives are almost entirely incentive, and therefore taxed at the capital rate, while those of everyone else are non-incentive, and taxed at the income rate.
'If you want to really get serious about egalitarianism, you've got to reverse that trend somehow. And reversing that trend would not merely mean adopting 1950s tax codes; it'd also require adopting 1950s social norms. Otherwise those evil two-earner couples become a huge disaffected voting bloc ready to vote Republican. (In fact, they did; remember 1980 and 1984?)'
I fail to see how this would drive gains in the top 1% of incomes or some fraction thereof (the real source of the inequality we're talking about), where it's almost all capital income. Do decamillionare business owners only marry other decamillionare business owners?
'As an economic theorist I'm a great admirer of Paul Krugman, but there's something here that I can't fit together. It's the use of galbraith.'
Perhaps the difference between the older and the younger?
Posted by: Jason McCullough on October 28, 2002 01:23 PMI've said most of what I wanted to and don't feel like going into any further point-by-point rebuttals. Readers may judge as they choose.
Let me make a couple simple predictions - things are going to get worse next year - a lot worse. And employment figures are going to be revised negatively.
Oh, and Krugman is going to continue to have more of his predictions come true than not.
Cheers,
Ian.
>>To reiterate just one point out of an long post: not letting women hold men's jobs is .....a major element in social inequality, since we now have marriages in which people are assorted by their individual socioeconomic status -- M.D.s marrying other M.D.s, J.D.s marrying other J.D.s, etc. etc.
There is no way in hell that we could have had that in the 1950s. Women didn't go to med school, law school, or business school; they weren't meeting their future spouses at the office as equals and their marrying didn't generally double household income while reducing shared living expenses<<
I thought the following from a piece about China in today's FT might interest you Erich:
>>The power behind China's emergence as the workshop of the world resides within people like Liu Hongmei, a 19-year-old with ruddy cheeks and a floral headscarf who recently stepped off a bus in the booming southern city of Zhuhai.
She has come from an impoverished village in the central province of Hunan, motivated by her parents' entreaties to earn enough to pay for her brother's schooling and by her own insight that her marriage prospects would improve if she managed to save something.
"If you want to marry a man with money, you have to have money yourself," she says. "The dragon accompanies a dragon, the phoenix a phoenix and the son of a poor rat will forever dig holes."<<
http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1035389374356
Actually there's a serious point here somewhere. This US centric debate is missing something quite important that is happening elsewhere in the planet. Or let me put this another way. Could it not be that a large part of US growth in the ninetees can be accounted for by labour force growth (read immigration) and the knock-on effect of this on capital formation (see eg Dale Jorgensen on this), and the other part (that mysterious Multi Factor Productivity), well couldn't the enormous issuing of collective IOU's in the former of dollar bill exports have something to do with this. I think it's important to remember that one day these debts may need to be paid back.
Posted by: Edward Hugh on October 28, 2002 10:57 PM"I wonder, with all the money and hot air spent on influencing political outcomes purely for gain, how anyone can hold that view."
Most of us in America hold that view because most of us are too busy *doing* things and trying to better ourselves through our own effort. The time and energy it takes to actually *do* things does not leave much surplus energy -- or inclination -- for Marxist whingeing.
Posted by: Erich Schwarz on October 29, 2002 03:38 AM"Rather than go on about how somebody (Krugman) who admires the greater income equality of an earlier era must also admire its bad features..."
OK, I've offended you. But was my point *wrong*? Do you really believe that you can have the social changes we've had in America since 1959 and *not* have it strongly affect the political economy of the U.S.? Conversely do you really believe that those social changes were thermodynamically reversible -- that, having gone from the era of the Organization Man to the era of cyberpunk millionaires, we're really going to be likely to be able to roll back that sociology enough that 1950s-style egalitarianism is an option?
I'm honestly curious.
Krugman either has some wonderfully robust belief that U.S. economics operates in a vacuum, independent of U.S. sociology, or, he's amazingly sanguine -- for a professed liberal -- about our ability to socially engineer "turning the clock back" in social values. Normally I expect that degree of paleo-confidence from social conservatives who want to reintroduce 1950s norms of sexual shame, not from liberals who want to reintroduce 1950s norms of economic shame. Normally, in either case, I may be emotionally sympathetic, but am also practically skeptical.
Posted by: Erich Schwarz on October 29, 2002 03:46 AM>> 'Taxation of ISO’s - ISO’s are not subject to regular income tax at the time of exercise.'
If I remember correctly, the options of corporate executives are almost entirely incentive, and therefore taxed at the capital rate, while those of everyone else are non-incentive, and taxed at the income rate.<<
Just for the record, if wandering from the original subject, anybody who exercises a significant amount of ISOs relative to his/her other income will owe AMT for the year of exercise, even if no regular income tax applies.
The AMT is generally 28% -- but the big trap for ISO exercisers is that the AMT applies on the exercise date valuation even if the stock goes down in value while you still hold it (if you do so after year-end). Thus, one can have a big taxable gain on ISOs under AMT rules even when under normal tax rules one would have a loss.
Over the last couple of years in particular there've been lots of true horror stories about people owing more AMT on their ISO "gains" than their shares wound up worth in total, often winding up in bankruptcy court in the process.
Of course, it was their own stupid fault for not shelling out a couple hundred bucks to a tax professional to learn how to protect their many thousands in ISO gains from the tax man, as with appropriate steps this sorry fate is entirely avoidable.
OTOH, there's nothing like having a transparent tax system -- and compared to the AMT, the estate tax look like the waters in a clear sylvan lake.
BTW, 50 posts and nobody admits even an innocent little longing to be a "bad plutocrat"? Well, I do. I only wish...
Posted by: Jim Glass on October 31, 2002 12:52 PM