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Left-wingers should be the real supply-siders
This post is pure provocation, take it as you will.
The left often stresses how wealthy people have superior opportunities in life. They can save more, avoid debt, buy better educations, they have a better chance to start a company, and so on. Furthermore this is seen as unfair. Right?
To put the point in simple quantitative terms, equity yields an average of about seven percent, while holding debt claims yields a bit over one percent. Most poor people don't hold much equity, or for that matter they tend to take out debt rather than hold it. Smart rich people stock their portfolios with equity quite heavily. So on average rich people get richer. That is even more unfair. Right?
OK, to oversimplifiy the numbers just a bit, rich people earn -- at least -- six to seven times more on their money than do poor people. Many of the poor earn negative rates of return.
The contemporary left often seeks to remedy this unfairness, but in the meantime it is true true true. Right?
So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms -- at least -- than if that dollar had been given to the poor.
"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.
Now trickle-down effects from rich people are possibly quite slight. If a rich person creates a dollar's worth of investment, the consumer surplus and wage-boosting effects from those investments won't be more than 25 cents on the dollar, right? That means poor people get...
Well, it depends upon your assumptions. But how do you feel about this claim?
"I favor redistribution from the rich to the poor. It will make the poor better off for a few decades, but no more. After that point, the poor are worse off, forever, and by more each year."
Um...oops.
The more you emphasize the unfair differences between the capabilities of the rich and the poor, the more easily you fall into this trap. Redistribution is good for the poor only in the short run, and we haven't even considered the traditional negative incentive effects on the rich.
Supply-side economics doesn't have to be about assuming unrealistically large elasticities of substitution on the part of the wealthy. The real supply side story is about how different social classes use resources in different ways and to achieve different rates of return.
Right?
Posted by Tyler Cowen on April 2, 2007 at 06:34 AM in Economics | Permalink
Comments
Right!
Posted by: Ned at Apr 2, 2007 7:31:39 AM
""The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point."
If the rich people's economy has doubled six times, it's 64 times larger, isn't it?
Posted by: Mike Spenis at Apr 2, 2007 7:45:11 AM
Perhaps by receiving redistributed money, the poor will stop being poor? This may then change their behavior if their behavior is caused by being poor and not the other way around.
Posted by: Rob at Apr 2, 2007 7:55:17 AM
John Rawls would have to agree, though this would be a repugnant conclusion for him. In other words, the difference principle leads to...a 20% flat tax...and a MacArthur Genius Grant to Richard Epstein.
Posted by: Rue Des Quatre Vents at Apr 2, 2007 7:56:30 AM
I'll second what Mike Spenis said...
Doesn't this sort of thinking assume there is no mobility between classes? Isn't there at least some chance that dollars redistributed to a poor person will allow that person to climb out of poverty? And if so, they might eventually earn six to seven times more on all their money, not just on the dollar that was redistributed to them.
In other words, who says the relative numbers of rich and poor people are constant over time? Various folks might argue about the likelihood, but it seems at least theoretically possible that redistribution might have some effect on the number of poor in the future, and wouldn't it benefit the overall economy quite a bit to decrease the number of people earning a low or negative rate of return?
An economy in which everyone is earning returns of seven percent, pie-in-the-sky fantasy though it may be, is certainly a stronger economy than one in which only half the people are earning seven percent.
Posted by: judgement at Apr 2, 2007 7:58:31 AM
"I favor redistribution from the rich to the poor. It will make the poor better off for a few decades, but no more. After that point, the poor are worse off, forever, and by more each year."
Ah, but that's only if you assume that what makes the poor better off is the absolute level of wealth. Having recognized that focusing on absolute levels is a losing political strategy given economic growth over the long term, lefties now focus on relative levels and claim that status and 'positional goods' are really what matter to people. So the poor are made better off not when their incomes rise and they can afford more goods and services (which lefties tend refer to, with disdain, as 'fast food and cheap gadgets from China')-- no, they are made better off when the gap between themselves and the rich shrinks, regardless of how many iPods, cell phones, flat-screen TVs, restaurant meals, and vacations to Cancun the lower classes can afford. According to the left, the all important economic game is status, and it really is zero sum. The absolute level of wealth of a society (above a fairly low basic level) is unimportant.
Shorter version -- the Russian peasant in the joke who wishes for his neighbor's cow to die understands the importance of status and positional goods ;)
Posted by: Slocum at Apr 2, 2007 8:00:55 AM
The evidence suggests that the share of income accruing to the bottom quintile stays constant as the economy grows. See Dollar, D and A Kraay (2002) ‘Growth is good for the poor’, Journal of Economic Growth, vol 7, no 3, pp 195–225 at http://ideas.repec.org/p/wbk/wbrwps/2587.html. That makes your argument even stronger.
Posted by: Grumpy Old Economist at Apr 2, 2007 8:00:59 AM
I'm sure many would argue that once people have enough food and shelter, wealth is only important relative to your neighbors. The higher the difference in wealth within a population, the greater the unhappiness of the people. To the extent that this can be achieved without people feeling their freedoms are restricted by the state, I would probably agree.
Posted by: James at Apr 2, 2007 8:05:59 AM
I suspect the politics of envy - and the focus on relative levels of poverty by people outside a small group of left wing intellectuals - only gains appeal when both absolute inequality increases and when social mobility slows down.
Posted by: Chris Stiles at Apr 2, 2007 8:15:16 AM
"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.
The rich people's economy has gone up 64 times in 60 years, as Mike Spenis pointed out above.
The poor people's economy has doubled once in 60 years.
So the difference is 32 times the original difference, not 6 times or 64 times.
Posted by: billswift at Apr 2, 2007 8:20:19 AM
Judgement:
No one ever got out of poverty through governmental programs of wealth redistribution.
I have heard of plenty of folks who financed a business or education through debt - credit cards, loans, and the like, but it seems as if we would have heard of someone taking that welfare check and starting a business with it...
Posted by: anne at Apr 2, 2007 8:22:43 AM
Grumpy Old Economist, a single paper is hardly enough to conclude that "the evidence suggests" something.
The Dollar and Kraay paper is an international study, so the econometric result that growth is distribution-neutral is an average result for all the countries in the world, and not necessarily applicable to the US economy, especially since it's quite obvious that in real terms, growth in the US has not been distribution-neutral.
For a good critique and discussion of the D&K conclusion, try "Looking beyond Averages" by Martin Ravallion. He notes that growth in the income share of the poorest 20% usually depends on the starting level of inequality.
http://ideas.repec.org/p/wbk/wbrwps/2558.html
Posted by: Matthew Collin at Apr 2, 2007 8:44:01 AM
One response (and, incidentally, the one that Rawls would probably give) would focus on the political effects of such inequality. That is, how can one buttress the increased inequality from having a negative effect on other possible political reforms?
This is nothing like a full argument, but it strikes me as something like what a left response might be.
The bad thing about this site is the almost total lack of differences of opinion.
Posted by: ryan at Apr 2, 2007 8:49:35 AM
Anne:
"No one ever" is a pretty strong statement... I'm not saying it happens every day, just that it's possible.
Someone doesn't need to start a business with their welfare check - how about just buying their kids breakfast so the kids are able to pay attention in school and are less likely to drop out and become thugs?
There may well be more better ways to spend government money than on wealth redistribution, but that doesn't imply that every single dollar spent on welfare is a dollar down the drain.
Posted by: judgement at Apr 2, 2007 8:49:54 AM
The argument depends on the assumption that economic growth depends on the growth of tangable assents not on the health and educational level of people (workers). This is contrary to the evidence that wages (marginal productivity of labor) are very dependent on education, and that ill health lowers income. The non-rich spend a large fraction of their income on their childern who will be the work force in 20 years. This is also investment.
Posted by: joan at Apr 2, 2007 8:58:40 AM
One must make the assumption that simply acquiring more income (w/o earning it) changes behavior; many poor people habitually cling to behaviors that keep them poor. Suddenly rich by freakish chance - from lottery winnings on ill advised long-term ticket buying - the lucky poor find themselves poor again in a few short years.
Finally, draconian redistribution of wealth just delays the inevitable - the rich shelter their money and take it out of circulation protecting it from government confiscation. The poor benefit when the rich can freely make more money without being penalized. When was the last time you saw a poor man hire another poor man and pay him well? Rich people pay others to paint their homes, landscape their yards, in addition to other jobs that others do for themselves.
As a an elementary school teacher, I would gladly accept the rich getting richer so that they can buy bigger homes and pay more property tax to fund a higher than usual rise in my salary.
Posted by: Mike at Apr 2, 2007 9:01:34 AM
Well duh.
Posted by: josh at Apr 2, 2007 9:23:08 AM
When I see a bit of disingenuous economic slight-of-hand like this, I usually think to myself, "What would Prof. Cowen say?"
In this case, I have to think, "What would Prof. Cowen say, if he were being sincere?"
I think he's being insincere because the logic of this argument leads to regressive taxation. And while Prof. Tabarrok may be comfortable with that conclusion, Prof. Cowen is on record as saying that ideal tax policy is at least slightly progressive.
I suspect that the real Prof. Cowen, not the provocateur who posted this, is skeptical that tax policy, at the current margin, can have a very large effect on growth. At the current margin, the growth rate is almost purely a function of technological advances, and that's something that tax policy cannot effect (again, at the current margin).
Posted by: The Other Brock at Apr 2, 2007 9:25:21 AM
There is also a right-wing argument for redistribution. Assume you are a right-winger who believes that greed is good and that making the rich richer is your #1 goal. Also assume that free markets, free trade, and low taxes are good for growth.
But assume also that you pay attention to history. You'll notice that income inequality frequently leads to the election of politicians committed not just to redistribution but to absurdly hamfisted and counterproductive ways of achieving redistribution. Not just farm subsidies and union rules, but nationalization of industries, trade protections for the least productive industries, wage and price control boards, and, in some countries, military coups. and that's not to mention that income inequality can lead to higher security costs for the rich by increasing crime and rioting.
A good, rich-people-loving right-winger will therefore support a sufficient level of redistribution to preserve popular support for property rights and limited government. Furthermore, most large US corporations understand this, and that is why they often raise wages to preempt the formation of unions and why they embrace affirmative action.
In other words, the welfare state is the price Europe pays for not being Communist. And Chavez and Morales are the price Latin America pays for excessively fast economic liberalization.
Posted by: DK at Apr 2, 2007 9:32:43 AM
Well, these are moral hand-wavy arguments, which are important to some degree, but the most important thing is whether the evidence backs Tyler up. I assume he didn't pull those numbers out of nowhere... but for example, the argument critically depends on how much income gains at the top trickle down.
Also, as someone else mentioned (rather derisively), the gap between rich and poor is also important. If an entire class of rich people can afford 1000x what poor people can, you may get a lack of interaction between rich and poor-- the poor people don't fit into the rich people's world. I think this lack of interaction is dangerous-- it undermines people's shared consciousness as Americans. On the other hand, encouraged interaction of some kind (like, heavily incentivize rich people to come in and help set up businesses or something) may directly address the problem in ways that income redistribution only does indirectly.
I would prefer it if more rich people felt that they had a moral obligation to help poor people improve their economic and overall well-being. This could be something as simple as volunteer work, or something more like management consulting for the corner shops.
To me, a really stratified economy yields a more stratified society, which is a bad thing. This is true even if in the counterfactual (income redist), the poor have less absolute income.
Posted by: mk at Apr 2, 2007 9:40:03 AM
So let me see if I get this right, you are claiming that the past few years where the top few percentile of income get virtually all the gains and the great bulk of the middle class experience stagnating real incomes is the optimal economic outcome. While an era like the 1960s when everyone, including the wealthy and the middle class both experienced rapid real economic gains is a suboptimal economic environment.
That sounds about like I would expect from someone who always claims that anything that improve the returns to labor always makes the working poor worse off.
According to the WSJ even the top officials in the Republican party are coming to the realization that this is poor policy.
Posted by: spencer at Apr 2, 2007 10:04:12 AM
Does this take into account that the "trickle down" doesn't just apply to income? Rich people's buying power provides new valuable goods and services, which I guess is benefit in the form of consumer surplus. If the rich people's economy cures cancer, a poor person benefits almost exactly as much as the rich.
If I were a poor person, even if my pay never increased in real terms, I'd be happy that rich people were investing and making new technology available. (That assumes, of course, that the rate of inflation used for the calculation didn't take all this into account.)
Posted by: Phil at Apr 2, 2007 10:13:48 AM
Does anyone believe in redistribution of wealth, as a pure goal, anymore? I'm not a left-winger, but I think that stuff went out with the Berlin wall.
I think the more interesting arguments, the ones I've had sympathy with as a conservative, revolve around giving everyone a fair start in life, and an adequate safety net along the way.
We want (I think!) good enough public education (&etc.) to ensure mobility, and to prevent rigid wealth stratification.
We don't want one's ending lot in life to have been a birth-lottery from the beginning.
Posted by: odograph at Apr 2, 2007 10:14:53 AM
"I would prefer it if more rich people felt that they had a moral obligation to help poor people improve their economic and overall well-being. This could be something as simple as volunteer work, or something more like management consulting for the corner shops."
Unfortunately, I feel this is easier said than done. I just see vast social discrepancies and misunderstandings impeding any good intentions of the rich trying to help the poor. I mean, who likes to feel like they are being patronized? This idea of moral superiority over the poor will only intensify the social division between the wealthy and the poor. No one likes to be helped by someone who feels that they are better than thou and ergo, going to, out of their gracious heart, help you out. I am not saying that is how the rich feel (well at least all of them) but that maybe, just maybe, that is how the poor will take this “moral obligation to help poor people.”
Posted by: Brooke at Apr 2, 2007 10:17:25 AM
I'm sincerely confused. Is this post a late April Fools joke? When people hold debt the returns *to them* are only 1% on average, but the debt that they hold is necessarily invested by someone. There is no reason to expect the returns to the economy from holding debt to exceed those from holding equity. Your proposal would result in more money flowing into equity from debt, an equity bubble, increased equity volatility in the long term, and potentially the eventual elimination of the equity premium, nothing more.
Posted by: michael vassar at Apr 2, 2007 10:22:30 AM
As MK pointed out I assume that these numbers have a source.
Standards of living are driven by capital spending and Tyler seems to believe that investment is done by the wealthy. But if you look at the actual data partnerships, s-corps, individuals and other entities subject to th individual tax code only account for about 11% of nonresidential capital spending in the US economy. Even non-profit account for 7%,and that is more then half of what the "wealthy" invest. Some 82% of capital spending is done by corporations and I know Tyler will claim that corporations are owned by the wealthy so that it is still the wealthy.
But Tyler insist on ignoring the economic fact of life that corporations exist and continuing to depend on his simple perfect competition model that describes the world of 1800 of small scale farmers and retailers to the modern world of monopolistic competition and/or imperfect competition. No wonder he gets results that only exist in his fantasy world.
Supply side economics claims that if we use government deficit to give money to the investor class it will lead to greater investment that makes everyone better off. Keysenian or liberal economics says if we use government deficit to support middle class consumption it will increase demand so that corporations become more
profitable and make greater investment and thus make everyone better off.
Guess what, the evidence is overwhelming that the supply side or trickle down policy does not lead to the greater investment the supplysiders claim while the Keynesian policy appears to work as advertised.
Posted by: spencer at Apr 2, 2007 10:24:30 AM
DK,
You are making my head hurt by focusing on reality rather than economic theory.
Something very under appreciated by any libertarian is the fact that essentially all of our increase in the standard of living in the last 100 years is the result of the focus on the living conditions of poor people.
Many things don't make economic sense to build or make unless many millions of people use them. By building and making these things, you stumble on improvements that cannot occur on paper or theory, or on the first pass.
I've thought about this before in the context of trickle down economics. For example, you can give a rich guy $1M or 20 families $50K. Its the same amount of money in our economy. Who stimulates the economy more? It's pretty clear when put in these terms. Who better incentivizes business owners to make products and create services that will raise our standard of living? Its pretty clear.
I think we are running into the difference between economic growth and increasing our standard of living. They are not the same, and many people confuse them.
Posted by: mickslam at Apr 2, 2007 10:25:35 AM
I think what a lot of people are missing here (IMHO) is the idea that the left isn't *that* concerned with pure redistribution of wealth. Rather, I think that the left is really concerned with equalizing opportunity. Yes, this will require some redistribution, but it takes the form of education, healthcare, and a saftey net rather than lump sum payments.
Posted by: eriks at Apr 2, 2007 10:32:42 AM
So, left-wingers should be the real right-wingers?
Not sure what that means right-wingers should be...
Posted by: Chris at Apr 2, 2007 10:35:23 AM
Olasky's book on welfare would suggest that your theory applies when redistribution from the rich to the poor is involuntary. It would seem that a rejoinder to your theory would be that when private institutions handle redistribution, there is more care taken to ensure long-term results--probably out of a more genuine concern for the human person and a desire to spend welfare money more efficiently than does (say) FEMA.
Posted by: chris at Apr 2, 2007 10:48:32 AM
Nice post. So what is it that really lies behind being a leftist?
Posted by: Daniel Klein at Apr 2, 2007 10:49:51 AM
I agree that redistribution of wealth does not appear to be a good way to either reduce poverty or reduce inequality (whichever one happens to care about).
However, one wonders why the poor are such lousy investors, and whether some program to teach them to invest more wisely (or to invest at all!), to manage their debt better, to plan their consumption better, and to learn how to get better jobs and start better businesses wouldn't have a much more lasting effect than redistribution, for a far lower price tag.
Posted by: Mr. Noah at Apr 2, 2007 11:27:19 AM
The left often stresses how wealthy people have superior opportunities in life. They can save more, avoid debt, buy better educations, they have a better chance to start a company, and so on. Furthermore this is seen as unfair. Right?
Wrong. And it's not a good sign to start your post with an inaccurate assumption about what people on the left believe. Many on the left (who are not "leftists" my dear Mr. Klein) are not appalled by the fact that people with more money do better in life. We are appalled by the fact that people without money have so little opportunity to better their own situation. No one on the left (and Marxists are not "the left") belives that the solution to this is to take money from the hands of wealthy people and put it in the hands of poor people. We believe that the super-rich should be denied the ability to skew government in their favor (witness the Bush administration) and that government should largely be responsible for programs and services that give the poor or the disabled or the discriminated against a chance to better themselves and their families.
Only someone who is trapped in a world of theory can sincerely make the argument Cowen does here at the same time that we've watched inequality drastically worsen in the last six years.
Posted by: Xanthippas at Apr 2, 2007 11:30:49 AM
Is this an April's fools joke?
Mickslam has it right.
Where do you get the numbers from? (7 to 1 return to equity! Really! If that is so why isn't the stock market worth say 6 times more than it is. Survival bias anyone). If your assumptions were correct than there would be ENORMOUS differences in growth rate per capita according to the degree of inequality. Last I heard there was no indesputable systematic difference.
And aren't you forgetting the proven high returns to human capital investment - i.e. the opportunity cost of NOT redistributing! The problem is you are thinking that everything of value is measured in dollars of GDP.
Posted by: reason at Apr 2, 2007 11:33:25 AM
"For example, you can give a rich guy $1M or 20 families $50K. Its the same amount of money in our economy. Who stimulates the economy more?"
Asking the question that way does not actually yield a clear answer, and is a really stupid way of framing the question, anyway. After all, short-run stimulation does not yield as much (or maybe not any) long-term growth as capital formation. Saving is a key to growth.
It's not about deciding who gets the money, it's about creating the right incentives for a good social order. That certainly includes some government intervention, but Tyler is right that redistributive leftists underthink the beneficial cumulative effects of capital formation, or at least discount those gains very highly.
"And aren't you forgetting the proven high returns to human capital investment - i.e. the opportunity cost of NOT redistributing! "
Actually, human capital investment and redistribution are two different things, and redistribution may actually lower human capital investment. There are useful government interventions in human capital formation, but they're quite a bit more specific (and probably far more paternalistic) than straight-up redistribution.
Posted by: Keith at Apr 2, 2007 11:50:54 AM
"I think this lack of interaction is dangerous-- it undermines people's shared consciousness as Americans. On the other hand, encouraged interaction of some kind (like, heavily incentivize rich people to come in and help set up businesses or something) may directly address the problem in ways that income redistribution only does indirectly."
I wonder if this is true. Positional good are most powerful in whatever your day-to-day social group is. The university professor may or may not care about getting a $100,000 car, but heaven help the world if his rival gets the nicer corner office and gets the his grad students nearby places to work.
Posted by: Sebastian Holsclaw at Apr 2, 2007 11:55:10 AM
Timeout.
Tyler_Cowen, wouldn't the lefty try to cut you off at your original premise? He would argue that the the
6+ percent earned in equities does not correspond to actual economic growth, but just taking a bigger share
from others without generating real advancement.
Posted by: Person at Apr 2, 2007 12:35:54 PM
spencer writes:
But Tyler insist on ignoring the economic fact of life that corporations exist and continuing to depend on his simple perfect competition model that describes the world of 1800 of small scale farmers and retailers to the modern world of monopolistic competition and/or imperfect competition. No wonder he gets results that only exist in his fantasy world.
Clearly, spencer is as concerned with the unequal distribution of straw in the world as he is with the distribution of wealth and status. I, too, am concerned, so let me contribute my own redistributive effort, insignificant as it might be:
Guess what, the evidence is overwhelming that the supply side or trickle down policy does not lead to the greater investment the supplysiders claim while the Keynesian policy appears to work as advertised.
Got it. Deficit spending in a bad economy works as advertised, and deficit spending in a good economy works as advertised.
Posted by: mobile at Apr 2, 2007 12:43:41 PM
A few more things:
- Someone else mentioned it already, but what about the ripple effects of giving a poor person money? Surely they pay for goods and services, right? Are those ripple effects believed to be less than in Tyler's situation where we give the rich person the money?
- Would we achieve the same beneficial results that Tyler alludes to if we gave poor people their payouts in the form of shares of an S&P index fund? And let's say we also say you're only allowed to withdraw your money at a certain rate.
Posted by: mk at Apr 2, 2007 1:35:24 PM
The point was made here
Does Atlas Shrug?
The Economic Consequences of Taxing the Rich
Joel B. Slemrod
Posted by: jcm at Apr 2, 2007 1:52:26 PM
I thought the main objection to supply-side economics is that it really doesn't pay for itself, or that it is more a matter of favoring a progressive taxation system, not redistribution.
Unless I'm missing something, this post presumes redistribution is the only objection to supply-side.
Posted by: Dean Moriarty at Apr 2, 2007 2:13:54 PM
Consumption is the destruction of wealth. If you give $1 million to a saver or investor, they will look to create more wealth, i.e. get rich. If 20 people take $50,000 each and spend it on non-productive assets, they are destroying wealth.
Look at the immigrants who come to America just as poor as everyone else, yet rise to the top. They work hard and save. Encourage more working and saving by abolishing first the capital gains tax, taxes on interest and dividends, and hopefully income taxes altogether. The "progressive" tax system is anti-progress, not withstanding the Orwellian name.
Posted by: Matt at Apr 2, 2007 2:18:57 PM
Smart and responsible people have a tendency to marry other smart and responsible people who, generally, have smart and responsible children. Genetics and parenting skills are powerful variables.
First, if one is poor, responsible and smart, one wonders what barrier is preventing that person from making some gains overtime albeit slower than the average middle class fellow who strives for the same proverbial brass ring. Certainly with so many ubiquitous federal programs available one begins to wonder. Most people who are labeled as poor don't remain in that group forever. So what is this guy's problem? Why is he making that "rich/poor gap" grow bigger? He just chooses not to close the gap - too much work and effort for him - his "poor" American lifestyle covers his stunted ambition just fine. The left has to let go of this guy don't ya think? My dad, like his dad, was poor, smart, and responsible. He succeeded without a government program. My father closed the gap.
Second, most of the time, dumb and irresponsible people have a tendency to marry or shack up with dumb and irresponsible people resulting in, most of the time, dumb and irresponsible children. Their lot in life is not determined by the omniscient economic theory of liberals, hard-ass conservatives, or bad luck - it's their poverty of values that result in the same said gap turning into a hell-hole. These folks just can't close the gap - no genetics or moral motivation. Just ask any first generation Asian or African legal immigrant in this country what barriers to success s/he faces in the United States - I'll bet ya that the response is "the sky is the limit" when compared to what they left - but you won't hear liberals talking about their achievements.
Third, the 12 million or so illegal immigrants, of which many are illiterate in their own language, increase the "rich/poor" gap artificially by increasing the numbers of people who don't want to close the gap or just can't. For those who close the gap, they have chosen to and many without a government program.
Finally, the angst of liberals is nothing more than a power play - to alarm the electorate in voting for them. During the eight years of the Clintons, poverty was rarely talked about - it was as if it disappeared. It returned, however, just like clock work when Bush was elected. If a Democrat is elected in 2008, the gap will be "closed" within one year only to return when a Republican is reelected.
Posted by: Mike at Apr 2, 2007 2:26:37 PM
The problem with TCs analysis is that it assumes the returns are constant for the rich and poor. But if the poor become rich their returns change. More here
Posted by: Karl Smith at Apr 2, 2007 2:37:48 PM
I do love this blog. Tyler, I can really imagine having some fun conversations with you and many of the posters here. I come across pretty harsh here, but in the real world, I joke much more and say things with much more empathy behind them.
Keith,
"It's not about deciding who gets the money, it's about creating the right incentives for a good social order"
This was one of my points. Many families spending money create the right incentives for a good social order, far more than one guy spending $1M, as I mostly think that people are good and spend with some amount of wisdom. In any case, bad actors will only be able to spend a fraction of this money on foolish purchases. This money being spent will incentivize business people to provide the products and services these families need.
Now do I believe in complete redistribution? No, but between the facts that completely free market economies tend to be overthrown by leftists and simply don't grow that fast(see south america for this), then the fact that our economy has thrived dispite 50 years of rightist propraganda that we are on the road to surfdom, and that communist revolutions only happen when people think they are getting screwed, and that the increase in our standard of living is almost entirely due to inventions that benefit people that are not rich, well, I think there are serious reasons to tend to benefit middle class/poor people in the tax regime. The incentives formed by this tendency will form a good social order that maximizes the risk adjusted returns AND the absolute returns to our economy.
The other part of my point was that this money spent by families would benefit the standard of living of all of us more than $1M spent by a single person due to the improvement effects that I mentioned in my earlier response.
And I think my answer does yield a clear answer. Simply ask yourself how much growth that $1M in the hands of 20 families will provide vs. 8% from the equity returns. Thats probably 3-4 new cars a year, substantial improvement of an almost full block of homes, clothes for kids, retirment savings, probably a few business started, all of these things.
Posted by: mickslam at Apr 2, 2007 2:57:01 PM
Supply-side economics should in principle mean focusing on policies to shift out
aggregate supply, not just tax cuts for the rich or deregulation.
That means there has long been a left-wing supply-side economics, although it has
never been labeled as such. It is the proposal to increase spending on crucial
infrastructure, transportation, alternative energy, even education, and so forth.
Of course, in practice much of this ends up getting pork barreled into waste.
Posted by: Barkley Rosser at Apr 2, 2007 3:14:26 PM
Mike,
Genetics? You grossly misunderstand the function of our genes if you think that genes are why people who don't plan for the future give birth to other people who don't plan for the future. Parenting you're right about, but the mention of genetics gives a whiff of...eugenics.
Secondly, everyone appreciates the anecdote about your dad and his dad, but in truth everybody can think of someone else who works just as hard and yet doesn't succeed, because they get sick, because they're laid off from a well-paying job, because they can't afford an education, etc., etc. Anecdote begets anecdote.
Lastly, exactly why is it that legal immigrants work hard, but illegal immigrants don't? First of all, illegal immigrants work just as hard as legal immigrants. But legal immigrants have considerably more opportunity, thanks to their legal status, which accords them the ability to take out business loans to open their own businesses. Your argument is basically one about race and class, and you make basic assumptions about both which can't be borne out. I have a feeling that many illegal Mexican immigrants, if given the opportunity, would open their own businesses and increase the prosperity of their children. I could be wrong, but the current approach doesn't appear to be working.
Also, you plainly ignore the fact that income inequality has increased considerably and at a faster rate during the Bush administration. So it's not all just talk.
Lastly, it's absurd to talk about the poor "closing the gap." The poor, even if they race with all their might to better their positions, cannot keep up with the wealthy who are getting rich at a faster rate than ever before.
Posted by: Xanthippas at Apr 2, 2007 3:24:46 PM
"No one ever got out of poverty through governmental programs of wealth redistribution."
>>.
I'd like to see some empirical data to support that. I mean, if you truly mean "no one," then I could pretty much disprove that hypothesis with a few personal anecdotes, based solely on friends of mine who survived through college/vocational school as single-moms on food stamps, medicaid, and student loans. These women are now WELL above the poverty line. Oh, and the EITC helped them CONSIDERABLY along the way....
Posted by: Dean Moriarty at Apr 2, 2007 3:33:30 PM
Spending welfare money with a thought to the future is usually prohibited under the terms of welfare. There was a case in Chicago some years back wherein a woman managed to squirrel away enough from her ADC check to send her daughter to college. When the government found out, the money was confiscated. Until the reforms the Gingrich congress pushed thru under Clinton, welfare was explicitly configured to sustain, not end, poverty.
Posted by: triticale at Apr 2, 2007 3:33:48 PM
Big flaw in argument: assumes that investment decisions are exogenous and static. What if they are endogenous and dynamic? Income redistribution might lead to higher social welfare -- we can't tell from this argument alone that social welfare is maximized with the given model. So the argument is flawed without more info on the model and assumptions -- you don't have enough to draw a conclusion.
Posted by: AK at Apr 2, 2007 3:42:50 PM
At some point in time, we're going to have to realize people making $120/yr or a little bit less isn't "poor."
There are 3 things one must do to stay out of poverty:
1. Finish HS.
2. Don't get married until after age 20 - and stay married.
3. Don't have a kid until after you're married, and not due the next week.
Of course, I remember when we got the rebate wayyy back around 01-02, "the poor" spent theirs on tatoos, according to an article I read.
I bought a purse.
Posted by: Sandy P at Apr 2, 2007 3:47:18 PM
Xanthippas,
Eugenics? Who said anything about eugenics? The fact is smart people have smart children. Responsible parents, usually, rear responsible children. Rare is the case when high school drop-outs have children who have high IQs - to ignore that is just plain silly.
Athletic parents have coordinated children who excel at sports, too. My dad can't dunk a basketball and neither can I. I don't have the genetics - too short! No matter how hard I try... lift all the leg weights I can - it ain't gonna happen. Five generations of brown eyed parents isn't going to yield blue eyed children anytime soon. That's science, not eugenics.
Read my paragraph on illegal immigration, again: "For those who close the gap, they have chosen to and many without (the help of) a government program."
You just can't find it in your intellectual being to believe that some people are satisfied by the trappings of poverty - certainly, you wouldn't choose that life style, but there are many that do and like it sans the trappings of hard work and sacrifice - in the language of this site: opportunity costs.
Are you really under the impression that everyone wants to compete with the super-wealthy? As an elementary school teacher, I can tell you that I couldn't care less how much my neighbor makes, because my values tell me it just gets in the way of living and creates unwarranted anxiety. This conversation is about the left making everyone think rich is $50 thousand a year. Okay, so there's more people who make $250k a year or more? So what, does that mean someone else can't or won't be able find a job? -make $45k like me? It's not a zero sum game and there isn't finite pile of money. For crying out loud - get a job!
Bush had to deal with Clinton's f aux economy, ie. the crash of the internet speculation dot coms and scandals and schemes fomented during his last four years (Eron, etc.) - and 9/11. When one compares unemployment, quarterly/yearly growth figures, and inflation to Clinton's years in office, it is comparable or better. In fact, let's be real, presidents don't control the economy - more times than not they just need to get out of the way. At least, I can give Clinton credit for doing that most of the time.
Life is nothing but a river I go fishing in...if you don't throw a line in and check your bait from time to time...you won't catch anything. Stop making excuses for life.
Posted by: Mike at Apr 2, 2007 4:25:24 PM
SandyP.,
You're right, of course. It's always the liberal who thinks teachers are underpaid.
When I tell people what I earn as income, many people respond, "Oh, I thought you people made like $10 per hour or something..."
Many "rich" liberals depend on the largess of government: grants, professorships, teachers, non-profits, etc. Like my former wife said, "I can't imagine living on a teacher's salary".
How could she buy a 40" plasma television, or a Blueberry on that? Healthcare or a big T.V.? Cigs or diagpers? Beer or books?
I'm mean, aren't I?
Posted by: Mike at Apr 2, 2007 6:00:10 PM
OK, let's assume efficient capital allocation. I can choose to borrow from poor people at a cost of capital at 1 percent, and from rich people at a cost of capital at 6 percent. Tell me again why I should borrow from rich people?
Posted by: Dan Karreman at Apr 2, 2007 6:04:54 PM
Without thinking this through carefully, isn't there a fallacy of composition here? The argument applies to a marginal dollar. So if we (whoever this "we" is - I can never work that out) reassign one marginal dollar at a time repeatedly, we'll end up being like Dennis Moore, stealing from the poor and giving to the rich (in their own best interests of course) over and over again until they've got nothing left except sub-prime loans. And any new money should go to the rich of course.
But policy decisions are not about the marginal dollar. The real question then becomes, does an equitable society generate growth as much as an inequitable society, and the answer is "sometimes, depending on lots of other things".
Posted by: tom s. at Apr 2, 2007 7:30:22 PM
"However, one wonders why the poor are such lousy investors,..."
Uhhhh...maybe because they have nothing to invest?
Posted by: Kathy at Apr 2, 2007 9:02:11 PM
Matt,
My point is that genetics has nothing to do with it. Some people may be born stupid; that doesn't mean they can't work hard and progress in our society.
Actually, my intellectual being accepts perfectly that there are people who are satisfied with being poor and living off of welfare checks. It's not un-liberal to think that some people are happy just skating by and taking advantage of whatever the system gives them. The point however, is that our current system does not provide opportunities to people who want to do otherwise. People who want to work hard but get sick don't make it. People who want to work hard but can't save don't make it. People who work hard in a particular field and acquire experience and knowledge, but then get laid off, lose their 401k, their health insurance and their savings, don't make it.
Actually no, I'm not under the impression that everyone wants to compete with the super-wealthy. Nor am I under the impression that everyone deserves to live as the super-wealthy do. But the fact that some people accumulate vast sums of wealth, then proceed to use that wealth to influence politicians to lower their tax burden, shelter their income overseas, invest in corporations that do the same, and basically do everything they can to acquire yet more wealth without necessarily benefitting society, while people who want to work hard get laid off, lose their health insurance and their savings, is quite frankly, obscene.
To take this to another level, the fact of the matter is that I'm not at all interested in living in a country where a tiny percentage of Americans control a significant percentage of the wealthy in this country, and the only time it "trickles down" is when they deign to use it to provide jobs to Americans as opposed to people living overseas. I'm also not interested in living in a society where people who work hard can find themselves bankrupted by medical expenses at any point in life, including in retirement, or find themselves unable to find another job for want of an education they can't afford, etc., etc. I respect the integrity of your argument, but in fact I think recent events indicate most Americans agree more with me.
Success in life is partly a moral issue, yes, so I understand your point in general that people should work hard and earn their success. But it's not only a moral issue for those who must work to succeed. It is a moral issue for our country to provide those who want to succeed with opportunity, and it is a moral failing when we do not. Simple as that.
Posted by: Xanthippas at Apr 2, 2007 9:12:36 PM
Sorry to the Matts on this thread...I meant Mike.
(I even previewed that comment...sigh.)
Posted by: Xanthippas at Apr 2, 2007 9:14:10 PM
let's take it a bit further: take everything (literally, until they starve to death) from poor, and let the remaining rich build the super economy!
Posted by: mike_tchk at Apr 2, 2007 10:50:48 PM
Excuse the blatant generalization.
Many liberals appear to believe in faith based economics. It is bad luck, and only bad luck if someone is poor. It is good luck, and only good luck, if someone is middle class or above.
Life skills and financial knowledge are rarely, if ever given the attention they need. No doubt you can have insurance problems, or get hit by a bus, or have a sick kid put a whammy on your finances. There is no doubt that lack of life skills or financial skills can grow what should be a minor problem into a finacial disaster. There is also no doubt that lack of financial knowledge and life skills can create a financial disaster even without a triggering bad event.
I think everyone would be better off if
1. More attention was focused on improving the financial knowledge and life skills of the less well off so they would be better able to have a decent quality of life and become more well off.
2. Less attention was focused on using taxes to punish those who have been responsible about earning and saving money.
How do we improve financial awareness and life skills?
Posted by: TJIT at Apr 2, 2007 11:13:59 PM
One other point.
The leveling influence of technolgy and increased buying power is chronically ignored or not understood by those who maintain income inequality as one of their primary policy concerns.
Money does not matter as much as it used to
Posted by: TJIT at Apr 3, 2007 12:02:24 AM
I wonder about the math on this one. As a practical matter, if the poor get money, they use it to pay debt (which in practice means giving it to the rich). If the rich get money, some good part of it they spend paying the poor (for services, etc.). We don't really have two separate economies where money given to rich or poor can only be spent within their economic class.
Posted by: David Hardy at Apr 3, 2007 12:20:13 AM
Doesn't this sort of thinking assume there is no mobility between classes? Isn't there at least some chance that dollars redistributed to a poor person will allow that person to climb out of poverty? And if so, they might eventually earn six to seven times more on all their money, not just on the dollar that was redistributed to them.
For some reason I never bookmark the page with these stats on Census Bureau's website, so you'll just have to trust me. Or not. But the percentage of folks of folks who manage to move out of the lowest income group (quintiles I think) and highest income group from census to census has been the same for the last several decades, about 85% (e.g., in 1990 it was 86% of the lowest and 84% of the highest). At the same time the percentage of households that fall below the poverty line has been steady at about 14%. So when we're talking about the persistently poor—those who remain in the lowest income group from one census to the next—is 14% of 14%, or just under 2% of our population. This does not a "class" make.
To my mind, this level of churn between incrome groups over time means that speaking of "the rich" or "the poor" as some type of static class of people is, at best, sophism. The individual reality of poverty cannot be usefully studied in the aggregate because there is no aggregate, no static group of people persistently identifiable as "the poor" or "the rich."
I think everyone would be better off if1. More attention was focused on improving the financial knowledge and life skills of the less well off so they would be better able to have a decent quality of life and become more well off.
I want to start a political party that does just that, that goes out into communities teaching personal financial management and entrepreneurship. Very ethical and non-political with no selling. Give a man a fish and he'll vote for you once. Teach a man to fish and he'll vote for you forever.
yours/
peter.
Posted by: peter jackson at Apr 3, 2007 1:09:52 AM
If the rich are so good at influencing politicians, why do they make themselves pay such high taxes? If they actually could decide that sort of thing taxes would be more regressive than a head-charge.
Another thing: underconsumption is never a problem. I sometimes wonder if people have ever heard of the broken window.
Posted by: TGGP at Apr 3, 2007 1:13:13 AM
Money does not matter as much as it used to
Power's still in vogue.
Posted by: perianwyr at Apr 3, 2007 1:22:29 AM
Ok, I'm skipping alot here, but I just want to address the people who are aptly defending the left-side redistribution scheme. And I see their point: a poor but financially brilliant kid just needs his big break, say, and the government gives it to him. With that extra money, he's able to make it big! Redistribution isn't about screwing the rich, but spreading the opportunities.
But real redistribution is blanket. You take from a rich minority and spread it thin over a poor minority. The smart poor kid doesn't get a couple thousand dollars to make his start at business, but a couple of 20s to get some extra food with.
Furthermore, the rich guy, who already has connections, portfolios and companies, can be making those returns RIGHT NOW... and he can HIRE the smart kid, if he FINDS the smart kid, which is more likely to happen if the smart kid is looking at rich people, rather than the government, for his money.
I think the best thing the government can do is encourage money makers to make money, encourage social mobility and entrepeneurship so that smart poor kids can make big bucks with big ideas, and then stop with the rich-guilt. If a poor smart kid makes lots of money and becomes a rich smart kid, he shouldn't have to feel bad about it. He should feel successful!
Posted by: Daniel at Apr 3, 2007 1:36:29 AM
No one on the American political spectrum cares about the poor. When was the last time a candidate won an election based upon a platform of helping the needy? The left champions the middle class, not the poor.
Posted by: Trieu Truong at Apr 3, 2007 1:44:21 AM
I favor redistribution from the rich to the poor. It will make me better off because it will get me re-elected in november.
Posted by: john doe politician at Apr 3, 2007 2:35:53 AM
I'm fairly well off. Most of my money doesn't go back into the economy very directly at all. I buy stocks and bonds, a little gold, etc. Some of those investments aren't even in this country. I bought some rental property some years back, so I put some money into the economy when I pay for painting and plumbers and so on. A relatively small percentage of my net worth goes into the economy in the form of buying goods and services. I'm not extravagant and as my net worth has increased faster, my spending hasn't come close to keeping pace.
It's been a long time since I was a member of the "working poor," putting myself through college and eating a lot of ramen and peanut butter and so on. But back then, every last cent that came into my pocket was spent very quickly on the goods and services I needed.
For those reasons, the argument about "trickle down" effects makes little sense to me.
Furthermore, the rate at which I'm taxed is lower than that of some of my middle-class relatives. A lot of the increase in my net worth is cap gains and dividends, not only taxed at a lower rate but not taxed at all until the gains are realized. And the bulk of that is from assets I never intend to sell and don't anticipate having any need to sell, so if the estate tax isn't reinstated I'll be able to pass those assets on to my children without those gains *ever* having been taxed.
You'll understand then if I don't join in on the whining about "redistribution of wealth."
Posted by: bob at Apr 3, 2007 3:13:15 AM
Kathy:
""However, one wonders why the poor are such lousy investors,..."
Uhhhh...maybe because they have nothing to invest?"
Ummm... I am a Czech and I was born and raised in a lower-income neighbourhood in Ostrava, a city with decaying heavy industry and rampant unemployment. Since we were all living in tower blocks of flats, it was easy to know what your neighbours were doing - in fact, the walls were thin enough to hear any louder conversation.
Most of the people in my block were poor. Most of them had, from time to time, quite a lot of money in their hands - pure luck, inheritance, welfare programs.
You could easily separate the poor ones from the lower middle class by the decisions the groups made. The poor's decisions were usually very bad: the most typical reaction to any financial windfall was to rush into a hypermarket and buy everything in sight (expensive food & alcohol, electric appliances; but never books), until nothing was left to spend.
I had more than a few conversations with those people, regarding the way how money should be handled. Their attitude was hopeless. No respect for education, no long-term thinking ... and yes, they had nothing to invest because the very idea of an investment was very unpopular with them.
Posted by: Marian Kechlibar at Apr 3, 2007 3:49:32 AM
Wrong.
I think this article and the discussion below are off point for three main reasons. First the returns of 7% for equities and 1% for debt are not realistic (Actually I think they are completely bogus). Secondly, the discussion of supply-side economics is severly lacking (if not non-existent). Lastly, I think the whole framing of income distribution in static class terms is misleading.
Has anyone challenged the 7% return for equities and 1% return for bonds? What time period were these returns earned? Are those returns going to persist going forward? Those numbers don't pass my personal sniff test. In fact, current investment practice is to expect long term risk-adjusted returns for different investments to be equal. If one sector has a higher expected return when adjusted for risk then the price of those assets will be bid higher, bringing expected return down until it is the same on balance when adjusted for return as other possible investments. In the example above, bonds could return 1% but only have 1% annual volatility while stocks could return 7% but have 7% annual volatility. If that was not the case, one of the thousands of hedge funds out there would use leverage and the ability to go short one asset class or the other to make a better risk adjusted return. This idea of a return on capital to a "class" of people tells me more about the author than anything about investing.
Also, the whole point of supply side economics is that lower marginal tax rates on capital and income lead to higher supplies of both. Higher supplies of capital lead to higher marginal productivity of labor and higher wages. Higher supplies of labor lead to higher marginal productivity of capital. This is a virtuous cycle that leads to greater real growth, higher incomes and faster capital/wealth accumulation. The greater the capital accumulation of an economy, the greater the average income. This is supply side economics.
As an interesting aside, one reason for the stagnation of real incomes in the lower quintiles could be the massive illegal immigration from lower capital countries. Think about it, you have 20 million immigrants coming to this country with little or no savings (capital). They compete for low skill jobs which drives down wages in those jobs/industries because for the existing stock of capital the supply of labor has increased dramatically.
Income distribution is a hot button issue. I don't think Tyler's post makes the issue any less hot. Left wingers - if they actually cared about the citizens at the bottom of the income distribution - should be supply-siders. If wages at the lower end of the economic spectrum are determined by the amount of capital stock available then left wingers should be behind proposals to lower taxes on capital. Remember the maxim - Tax something and you get less of it. But left-wingers always want to punish capital accumulation. Oil companies earning outsized profits - the left winger says take it from them. Drug companies making money on a blockbuster cholesterol drug - raise their taxes. Who then will invest in these sectors or any other hot sector if they think the government will just confiscate their returns? Where will the money come from to invest in shale oil or tar sands? Who will invest in deep water drilling?
Many comments were made about upward mobility through education, or through hard work and thrift. I think these comments are spot on. Distributing citizens into "classes" does not actually capture the dynamics at work when discussing how income is distributed among the competing factors in the economy. Most people start out near the bottom of the income ladder and climb upwards as they gather skills and experience. How do we make the process of skill accumulation proceed more efficiently without destroying incentives for savings/capital accumulation? How can we create incentives for greater capital accumulation so the average real wage rate can increase? In other words, how do we make the pie bigger so everyone gets a bigger slice, versus fighting over the pie and having much of it get ground underfoot in the scrum.
Tyler's post was very dissappointing on many levels. Better luck next time.
Kevin Spires
Houston, TX
Posted by: Kevin Spires at Apr 3, 2007 10:00:05 AM
Let me posit a slightly more realistic position.
Growth is the key to welfare in the long run. Right?
China is growing the most rapidly of any large nation. Right?
Therefore, we should adopt all of China's policies. Obvious, right?
Posted by: theCoach at Apr 3, 2007 11:02:42 AM
This explains how reducing tax rates increases tax revenues, reduces wealth concentration, improves family life, improves the entrepreneurial climate and lowers demand for government social services.
If the tax rate on Monday was 100% and the tax rate on Tuesday was 10% would you report for work on Monday? Would you work harder on Tuesday? What tax rate would make you show up for work on Wednesday, Thursday and Friday? Will your tax rate at which you are willing to work be the same as everyone else's? If you would stay home Monday and would go to work on Tuesday you understand Voodoo economics.
Voodoo economics says tax revenues increase when tax rates go down. How does this happen? It happens because high tax rates cause a decrease in economic activity. Rewards for taking business risks are lower under high tax rates. Lower tax rates stimulate economic activity. Rewards for taking business risks are higher when tax rates are lower.
This concept can be demonstrated graphically. The basic concept is taken from the Laffer curve. The horizontal axis is tax rate, zero to one hundred percent and the vertical axis is tax revenues. Tax revenues are derived from the tax rate times the tax base. At zero tax rate tax revenues are zero. At 100 percent tax rate tax revenues are again zero. No one can afford to go to work if all their compensation is forfeited to taxes. There is no economic activity to tax, so no tax receipts.
However we do have a point where we have tax revenue and a tax rate greater than zero and less than 100%. So the question is what is the shape of the curve that connects the three points? For the sake of the illustration assume the current tax rate is about 30% and the revenues are about 1/4 the height of the vertical axis. There are three possible basic revenue curve shapes, depending on the slope of the line through this non zero revenue point. The slope can be positive, negative or zero. Proponents of raising tax rates to increase tax revenues say the slope is positive, proponents of Voodoo economics say the slope is negative. No one makes a case the slope is at zero.
What does real world experience reveal of the true shape of the revenue curve? Empirically tax rate reductions have yielded growing economies, In the 1920's low tax rates stimulated the economy. In the depths of the 1930’s depression tax rate increases to 99% on incomes greater than $60,000 increased the unemployment rate from 25% to 35%. In the early 1960’s John Kennedy stimulated economic growth with tax rate cuts. Gerald Ford lowered tax rates and the stock market boomed. In the 1980’s Ronald Reagan lowered tax rates from previous levels and the economy again boomed. George H. W. Bush raised tax rates and was rewarded with a recession that cost him his reelection. In the 1990’s Republicans forced Bill Clinton to reduce tax rates on capital gains and the economy boomed again. (note that income will be taken at the lowest tax rate possible) George W. Bush pushed for tax rate decreases that have pulled a 9-11 shocked economy back into growth. Tax receipts have recently reached record levels, and in some recent months even exceeded expenditures. These examples suggest that the correct shape of the curve is negative slope at our current tax rate.
Examples can be seen in other countries, low flat tax rate Estonia is booming after suffering decades under Soviet communism. Ireland has gone from being the poorest country in Western Europe (with a high tax rate) to one of the richest (with a low tax rate) Why? low tax rates have attracted investment. Russia itself has seen tax revenues jump after implementing a low rate flat tax after high tax rates failed to provide revenues. Many other countries from the former Eastern block have implemented low flat taxes and these countries economies are showing far better growth than the Western Europe high tax rate economies that are mired in low growth and high unemployment. Recently it has been pointed out the US has created over 50 million new jobs since the 1980's (when tax rates were lowered) where high tax rate (and larger population) Western Europe has created only 4 million new jobs, and most of these are government jobs.
The following graphs show the three slope possibilities at a tax rate of 30%, with the added reciprocal curve above the revenue curve being the size of the tax base, ie the size of the economy. Note that with all slope scenarios the slope of the economy is negative, that is, the higher the tax rate the less economic activity there is to tax.
**
*
What does this decreasing size of economy with increased tax rates mean to you? It means little or no job creation, and certainly lower overall employment. There must be economic activity to have jobs and the level of economic activity can be a good proxy for the number of jobs in the economy. The following graph uses the size of the economy as a proxy for the number of jobs.
*
Compare the number of jobs in the economy with the size of the available workforce. The size of the available workforce remains basically constant independent of the number of jobs available. Where there are more available workers than available jobs, as under high tax rates, there is downward pressure on wages paid to workers. Where there are more jobs available than workers in the workforce employers must pay more to attract workers, wages are bid upwards. So would you rather look for work under high tax rates or low tax rates?
Another overlooked effect of high tax rates is wealth concentration. High tax rates are said to be needed to tax from the rich and give to the poor to redistribute incomes. But high tax rates actually concentrate wealth. How? Under high tax rates jobs are few, workers plentiful, and compensation is low. The employer can pay far less than the value of the workers contributions and pocket the difference between the compensation paid and the value the worker generates for the employer. With large numbers of employees getting paid far less than the value of their contributions the employer can still profit greatly even if the tax rate is high, the net after taxes is still large.
Under low tax rates jobs are plentiful and employers must pay more to retain valuable employees. Because employers are forced to pay a higher percentage of the value of the employees’ contributions to the employee there is less wealth concentration. Wealth created by the business enterprise will be more evenly spread among the creators of the wealth. Employers will earn less from each employee, but will pay a lower tax rate and may not suffer as much damage to their net as one might expect.
There are a variety of other effects of higher wages stimulated by low tax rates.
1. Capital investments will be made to increase productivity. Productivity increases correlate strongly with increased living standards. Productivity growth also moderates inflation.
2. Low paying jobs often lead to two income earner families which expands the active workforce. With each worker earning more, fewer families will need two income earners. More families will have a single income earner with a stay at home parent. This could have a cascade effect on the job market in that this will reduce the active labor force, potentially forcing wages even higher. And a stay at home parent usually means good things for children.
3. More jobs = less government assistance needed. With more jobs available, the whole of the work force that wants to work should be able to find a job, the chronically poor and last hired minorities could find a job. This should reduce the demands on a variety of governmental assistance programs, including unemployment programs, welfare, medicaid, social security.
4. Workers with more disposable income can accumulate wealth and join the investor class or start their own businesses.
So the big question is where are we on the tax curve now? Most certainly we are on a point on the negative slope and decreasing tax rates will increase revenues and increase the size of the economy. How far should tax rates be reduced? Should they be reduced to the zero slope point (the highest point on the revenue curve) on the curve? This would maximize revenue to the government, but this is not the point where standards of living would be the highest, or where the fewest people would require governmental assistance. The goal should not be to maximize government, but to maximize the standards of living for the population of the country. This would indicate lower tax rates, to the left of the zero slope point, where economic activity is highest are desired.
Posted by: Dirk at Apr 3, 2007 11:54:27 AM
"OK, to oversimplifiy the numbers just a bit, rich people earn -- at least -- six to seven times more on their money than do poor people. Many of the poor earn negative rates of return."
This has got to be a day late. Almost all poor people carry some debt. The return to them on paying off that debt is much greater than 1%. This also frees the capital for other uses, so it benefits the economy similarly.
In general, you seem to be confusing the fact that the poor don't hold many investments with the quality of those investments. Other than debt reduction, the poor will usually spend their money on good and services, not investments.
Of course, this produces a return for the economy as well, idiots (see below) nonwithstanding.
"Consumption is the destruction of wealth."
Yes, we would all be so much richer if everyone stopped consuming so much. *idiot*- take a macroeconomics class. Imagine a world where we're all saving & not buying anything. Sound good? Now, imagine what your job is supposed to be in that world (ie where you earn the income that you save so carefully). Get the idea?
"The fact is smart people have smart children....Athletic parents have coordinated children who excel at sports, too....That's science, not eugenics."
It's actually not science- it's uninformed opinion. Facts would be associated with data, not an anecdote about how neither you nor your dad can dunk.
"Many liberals appear to believe in faith based economics. It is bad luck, and only bad luck if someone is poor. It is good luck, and only good luck, if someone is middle class or above."
Howdy Mr.Strawman!
"But the percentage of folks of folks who manage to move out of the lowest income group (quintiles I think) and highest income group from census to census has been the same for the last several decades, about 85%..."
Does this take into account age? Because a lot of people will be poor (working their way through law school) and then rich (lawyer), but that may not have any bearing on income track of a kid who drops out of high school to take care of his younger siblings, gets married & has kids young, and ends up working two jobs to make ends meet.
That is, there really are people who are poor and stay poor. Just as there really are people who are rich and stay rich- (income is a poor tracking tool insofar as the truly rich are defined by wealth, not income. In fact, they may use various dodges to reduce their 'income' bc of tax liability, without reducing their spending power).
I never cease to boggle at people who raise this sort of argument- do they genuinely think that many (or any!) of the the folks in the McMansions will be living in the slums next year, and vice-versa?
"Left wingers - if they actually cared about the citizens at the bottom of the income distribution - should be supply-siders"
If supply-side economics had not been tried and failed, it might be interesting (Reagan's cutting taxes reduced federal income tax receipts- his raising of SS contributions balanced this out by the late 80s). When a theory makes a prediction (eg that Clinton's tax hike would wreck the economy) and that prediction turns out to be completely wrong, it's time for a new theory.
Dirk- if you cherry-pick your examples to the point of absurdity, then you still can't demonstrate that the Laffer Curve is negative. Eg you mention Clinton cutting capital gains taxes, but fail to mention his income tax increase. Or claiming that Bush's tax cuts in 2001 didn't have any effect until 2003-4, but then produced a boom. Basically, when you see a tax cut, you look forward in history until you find growth, and then claim that the growth was caused by the tax cut.
Also, you fail to understand even the basics of your own position- you claim that "tax cuts stimulated growth" means that we're on the negative side of the Laffer Curve. At *any point* on the Laffer Curve tax cuts should stimulate growth (with some caveats). In negative territory tax cuts should *increase tax revenues*. Reagan cut income taxes, and federal income tax revenues declined. Clinton raised income taxes, and federal income tax revenues increased.
Evidence says that we are nowhere near the negative side.
Posted by: Carleton Wu at Apr 3, 2007 1:57:27 PM
Mr. Wu,
I would suspect that your parents aren't idiots - genetics are powerful - unless, of course, you have an idiot savant uncle somewhere in your lineage, but I doubt that. My opinion is buttressed by facts; you just don't like the implication of them. The nurture vs. genes debate turned in my favor a long time ago. Naturally, smart people fail all the time because of the same reasons that not so bright people fail but that's not the point.
I was around in my late twenties when Reagan was around and read extensively on the real effects of his tax policies - for and against - it worked. You either have a selective memory or reading list.
The economy grew despite Clinton's tax hike - and remember, the Republicans controlled both houses shortly thereafter. Republicans mitigated much of Clinton's exigencies. Reagan did not have that luxury, of course, and the economy grew despite the Democrats. In fact, the economy grew despite the Democrats in both cases. That is not prima facie evidence for your argument against supply-side economics.
Good luck!
Posted by: Mike at Apr 3, 2007 7:15:15 PM
For the same reason, I favor affirmative action and preferential school admissions: it keeps the dim minorities perpetual children, while whites and Asians zoom irretrievably past them.
Posted by: Jack at Apr 4, 2007 9:11:11 AM
The argument made here is not correct. Return to equity has average just under 7% over the long run. But this doesn't mean that national wealth or GDP has grown by anything like that. Over the long run per capita GDP in the US has grown by about 2%. Capital accumulation in the S&P500 index (defined as accumulated retained earnings in constant dollars) has also run about 2%. Earnings yield (defined as the reciprocal of P/E) has averaged about 7% over the long run. Not surprisingly total return to equity is roughly equal to earnings yield. Growth in *wealth* is the increase in the *value* of the equity (the real stock index value) and has run at about 2% in real terms. Not surprising, growth in the value of equity is roughly equal to the rate at which earnings are retained. That is, capital accumulation reflects the rate at which capital is retained (not distributed to investors as dividends).
Supply side economics argue that if you give more money to investors you will get more wealth accumulation. This is nonsense. Wealth accumulation is fixed by the rate at which economic development takes place (new innovations are developed and implemented) and this seems to follow a 2% speed limit over the long run in advanced economies like the US. If investors have more money they will simply bid up the price (P/E) of equity--reducing the long-term return to equity. Since Reaganomics began return to equity has fallen from 10-12% to about 5%. Return to debt will also fall (from 4-5% in the early 1980's to about 2% now). With returns to equity and debt falling we should expect other asset classes returns to fall as a result of rising price. A good example is real estate.
The effect of supply side policies is not to increase wealth accumulation or economic growth, but rather to produce asset bubbles. There have been three times when capital gains taxes were reduced to 20% or lower: in the early 1920's, the early 1980's and the lat 1990's. Following each a speculative equity bubble formed which was followed by a spectacular market collapse. If supply side type policies continue we should expect to see increased financial instability, possibly leading to something like the Great Depression.
Wealth redistribution from rich to poor for a few decades will boost returns to equity, reduce debt levels and promote economic stability.
Posted by: Mike Alexander at Apr 4, 2007 9:11:27 AM
Growth is the key to welfare in the long run. Right?
China is growing the most rapidly of any large nation. Right?
Therefore, we should adopt all of China's policies. Obvious, right?
theCoach, I think you are misapplying Tyler's logic.
With his logic, we should just mail every dollar in America to China, and wait for it to trickle back to us in a few decades.
I'm really shocked that it took as long as it did for someone to make Person's point, because I think it's really obvious--the rich are making a good chunk of that money from the poor. If the poor had more money, they wouldn't be in such terrible debt to the rich, or so desperately in need of capital that the rich set the terms of all contracts.
If you really wanted to maximize growth, you'd soak the rich in tax hikes and spend the money to educate developing world children. Maybe some food, clean water, and micro-credit while we're at it. Think of all the billions of brains out there that are going to complete waste in poverty.
Posted by: Consumatopia at Apr 4, 2007 11:07:05 AM
"...from the poor"? Please, tell me who the "poor" are? I'm a teacher. Am I poor in your world? I thought this conversation was about the bottom 20 - 15%%. What do you mean by debt here?
My wife stays at home with our 3 kids; we own a house valued by the market @ $350k; we have over $100k in retirement so far; I put in 11% of my income in a self-directed 401a with another $150/month in another investment, two cars, etc. BUT - we have "good" debt! Please, enlighten me about what poor is in this country. If you are poor in this country, you've got a problem that goes beyond supply-side economics.
You liberals need to write an extra check with your tax returns. Don't wait for me!
Posted by: Mike at Apr 4, 2007 11:28:26 AM
Shorter DK: "If we just pay the bribes, then people won't steal from us."
Appalling.
Posted by: Billy Beck at Apr 5, 2007 1:21:28 PM
"Growth is the key to welfare in the long run. Right?
China is growing the most rapidly of any large nation. Right?
Therefore, we should adopt all of China's policies. Obvious, right?"
China's national savings rate is at a whopping 47% too, despite the fact that many of the mainland provinces are extremely poor and lack basic necessitites such as clean drinking water. Meanwhile the US, which is about 5% of the world population and consumes 25% of the world's goods and services, has a negative national savings rate.
The thing you have to remember is that China is an industrializing nation, whereas the US is already industrialized and is currently sending many companies overseas. In the global economy, we are transitioning towards a R&D nation now. Wealth isn't trickling down, it's trickling out and being redistributed globally, not nationally, via jobs. The problem is that we're lagging in education (no offense to educators- it's a policy thing) and failing to equip our nation's workforce for the R&D movement.
Most higher ed. programs geared toward the working poor (WIA, Voc. Rehab., etc.) guide students toward short-term technical/certificate programs in order to get them back into the workforce ASAP, usually at a very modest income level. It's a band-aid on a recurring wound. Instead, we should be offering incentives and support for those who take the long road towards fields such as Engineering or Finance or Medicine. THAT would be a redistribution of wealth. However, those options are only available to the working poor if they're willing to quit working (most can't afford to concentrate solely on education), or accumulate massive student debt; and so we're back to square one.
Posted by: Policy Watcher at Apr 7, 2007 4:38:07 AM
If smart big money is so astute at investing then:
1) Why do actively managed stock market mutual funds almost always get beat by index funds?
2) As the level of inequality has increased why haven't the log plots by Ray Kurzweil of technological progress shown increased rates of technological progress? Why haven't the astute rich investors made such better choices that technological advances accelerated?
3) Also, if the division of labor from global trade has provided such a huge benefit then why hasn't more global trade increased the rate of technological progress?
Posted by: Randall Parker at Apr 8, 2007 12:54:58 PM
Relative poverty is not important.
I'm poorer than the average, and yet I want more money to me, not less money for the rich, that would not make me better off, and even the rich people are human beings, I want nothing bad to them.
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