Wealth Inequality vs Income Inequality

Posted on April 13, 2014 by jackheidel

The Yale Economist and Nobel Prize winner, Robert Shiller, has an article in today’s New York Times, “Better Insurance Against Inequality”, proposing that “taxes should be indexed to income inequality so that they automatically become more progressive – meaning that the marginal tax rate for the highest income people will rise – if income equality becomes much worse.”
We do know, of course, that income inequality is steadily increasing in the U.S. It is in fact essentially folklore that the top 1% of Americans is collecting a larger and larger share of the national income. Furthermore the French economist, Thomas Piketty, has recently shown that there is also “a relentless widening of disparity in wealth”.
Our democratic political system will surely respond in some way to this increasing gap between the rich and the poor. It is important to our future wellbeing to respond in a constructive manner. Today’s top tax rate of 39.6% is already very high and Mr. Shiller admits that the top rate would have to rise well over 75% in his plan.
Our biggest economic problem today is a stagnant economy. We badly need faster economic growth, in order to put people back to work and to bring in more revenue to shrink the deficit. Today what we need is lower tax rates, to put more money in the hands of people who will spend it, including potential entrepreneurs who will invest it in new businesses. Raising tax rates to address rising income inequality is therefore self-defeating as an economic strategy.
Rather let’s tax people’s financial assets after they have earned their money. A 1% wealth tax with a relatively high $10,000,000 personal exemption would bring in approximately $200 billion per year. $200 billion per year would enable us to pay down our deficit at a much faster rate as well as having a lot left over to begin an extensive infrastructure renewal program (for example)!

Considering a Wealth Tax for the U.S.

Posted on March 18, 2014 by jackheidel

What should a country do when it has

Massive accumulated debt and annual deficits predicted to grow indefinitely.
A rapidly growing population of retirees heavily dependent on expensive entitlement programs such as Social Security and Medicare.
A national Congress which is unwilling to make significant spending cuts for fear of offending powerful constituent groups.
Growing income inequality and wealth inequality.
A stagnant economy and high unemployment which makes inequality worse.
An inefficient income tax system which does not take in enough tax revenue to pay the bills.

The best response by far is to implement broad-based, pro-growth, tax reform. I have often discussed how to make major changes to our current income tax system. I have also described an attractive way to introduce a consumption tax, the so-called Graetz Plan.
Another way to reform taxes is to introduce a wealth tax. The economist Ronald McKinnon has described a way to do this in a Wall Street Journal column, “The Conservative Case for a Wealth Tax”. His plan is to implement a federal wealth tax in addition to the federal income tax. It would consist of a flat tax of about 3% imposed on household wealth in excess of a $3 million exemption which would exclude 95% of the population. In addition to bringing in a significant amount of new revenue each year, which is its principal objective, it would serve the purpose of making a flatter, pro-growth, income-tax system more palatable to people who are concerned about inequality, and therefore to a much wider audience.
The economics journalist, Daniel Altman, recently reported in the New York Times, “To Reduce Inequality, Tax Wealth, not Income” that American household wealth totaled more than $58 trillion in 2010. The most recent issue of Forbes Magazine reports that there are now 492 billionaires in the U.S. with a total wealth of $2.3 trillion. A 2% tax on the wealth of just these billionaires alone would raise $46 billion. A 0.5% tax on the wealth of all Americans would raise $290 billion annually. These examples show that a “moderate” wealth tax could bring in a significant amount of new tax revenue which would make a big dent in shrinking our annual deficit.
We have to do something and do it quickly. The problem will occur when interest rates return to their normal level as they surely will before long. When this happens, interest payments on our national debt will sky rocket. It’s going to be painful regardless, but let’s try to head for the softest landing we can manage!

Wealth Inequality I. What Is It?

Posted on March 13, 2014 by jackheidel

The subject of income inequality has generated much interest and concern in recent months. Now we will also be hearing a lot about wealth inequality, based on the highly credible new work, “Capital in the Twenty-First Century” by the French economist, Thomas Piketty. The New York Time’s Eduardo Porter, summarizes the basic message in his recent column “A Relentless Widening of Disparity in Wealth”, which is clearly displayed in the two charts below.
The value of private capital as a percentage of national income worldwide has been growing steadily since about 1950 and Mr. Piketty predicts that this trend will continue indefinitely. The trend is equally true, not only in the U.S., but also in other developed countries as is illustrated in the chart. It happens because the income from wealth, i.e. return on investment, typically grows faster than wages and GDP.
As Mr. Porter says, “It means future inequality in the United States will be driven by two forces. First of all, a growing share of national income will go to the owners of capital. Of the remaining labor income, a growing share will also go to the top executives and highly compensated stars at the pinnacle of the earnings scale.”
This trend has now been in effect ever since 1870, with the exception of the period between World War I and World War II, when a massive amount of wealth was destroyed. The forces of globalization and growth of technology are contributing to both types of inequality, especially in the developed world (see my post of January 23), and these forces will almost surely continue unabated. So the wealth and income inequality gaps are just going to keep getting worse.
How much inequality can exist in a democracy? The number of losers (the low income, the poor, and even the struggling middle class) will gradually get bigger and bigger and will become more and more frustrated and express their discontent at the ballot box. This threatens the future of capitalism and free enterprise, the economic principles on which our way of life is founded.
Something has to be done! Stay tuned for my next post!

Trash Talk from the New York Times

Posted on March 6, 2014 by jackheidel

The Budget Committee of the House of Representatives has just issued a report “The War on Poverty: 50 Years Later”, providing an excellent summary of federal antipoverty programs and their cost at the present time (budget year 2012). Highlights are:

The federal government spent $799 billion on 92 different programs to combat poverty
Over $100 billion was spent for 15 different food aid programs
Over $200 billion was spent on cash aid
Over $90 billion spent on education and job training (over 20 programs)
Nearly $300 billion spent on healthcare
Almost $50 billion spent on housing assistance

The report also points out that many low-income households face very high effective marginal tax rates, approaching 100%, if any members are employed, because making more money means losing welfare benefits. This discourages low-income individuals from working at a time when the labor-force participation rate has fallen to a 36-year low of 62.8%.
Here’s the situation: we have a rapidly growing federal budget with huge deficit spending (see above chart), a stalled economy with low labor-force participation, and an inefficient welfare system which encourages people not to work. Surely our goal should be to motivate welfare recipients to become productive citizens by returning to the workforce. So doesn’t it make sense to revamp our welfare system to be more efficient as well as to create more incentives for recipients to get and hold a job?
Apparently this does not make sense to the New York Times. Two days ago they ran an editorial “Mr. Ryan’s Small Ideas on Poverty”, castigating Paul Ryan for “providing polished intellectual cover for his party to mow down as many antipoverty programs as it can see.” The editorial goes on to say that “it’s easy to find flaws or waste in any government program, but the proper response is to fix those flaws, not throw entire programs away as Mr. Ryan and his Party have repeatedly proposed. . . . For all their glossy reports, Republicans have shown no interest in making these or any other social programs work better.”
Putting it as charitably as possible, the NYT is being unhelpful. It is a beacon of progressive thought for millions of Americans. But it is apparently unwilling to give any credence to a sincere effort by fiscal conservatives to reform a major government program to make it operate more efficiently and effectively.

Where Have All the Raises Gone?

Posted on March 4, 2014 by jackheidel

In yesterday’s New York Times an editorial asks the question “Where Have All the Raises Gone?”, pointing out that wages for college graduates have been stagnant since 2001 (see the chart below.) A report referred to in the NYT editorial suggests that as the information technology revolution has matured, employer demand for cognitive skills has waned and so some college graduates have had to take lower paying jobs, displacing less educated lower skilled workers in the process. This makes sense and, of course, new hiring has slowed down even more as a result of the recession.
The question then becomes, what, if anything can government do to counteract and overcome this trend? According to the NYT, “what’s needed to raise pay are policies like a higher minimum wage, trade pacts that foster high labor and regulatory standards, and more support for union organizing.”
Of course there is another point of view and it is expressed very well in yesterday’s Wall Street Journal by Mortimer Zuckerman, the Chairman and Editor-in-chief of U.S. News and World Report, “Fight Inequality With Better Paying Jobs”. Mr. Zuckerman declares that “income inequality isn’t so much the problem as income inadequacy. A more robust economy, stoked by growth-oriented policies from Washington, would help produce the jobs and opportunities that millions of Americans need to climb the economic ladder.” He suggests that what is needed is:

Lower corporate tax rates so that American multinational companies will bring their foreign earnings back home.
Get healthcare costs under control (Obama Care doesn’t do this).
Cut back on unnecessary regulations to encourage more business investment.
Train more skilled workers. The National Federation of Independent Businesses reports that 38% of its members have job openings they can’t fill.
Restore H1-B visa levels to the higher levels of earlier years – 195,000 per year compared to only 65,000 today. Skilled immigrants start many new businesses and this is the biggest source of new job creation.

In other words there are lots of things the federal government can do to boost the economy. As Mr. Zuckerman says, “The political system is failing us. Washington doesn’t seem to be listening as our political parties are focused more on ideological conflict than the good of the country.”

Should We Be Optimistic or Pessimistic about Our Country’s Future?

Posted on March 2, 2014 by jackheidel

Last month the Congressional Budget Office issued the report “The Budget and Economic Outlook: 2014 to 2024”, giving an updated prediction on economic performance. It predicts continued slow growth of GDP leveling off in the next few years at a rate of about 2.2% per year. The public debt (on which we pay interest) will be 74% of GDP this year and increase to 79% of GDP by 2024. Federal revenues will grow this year to 17.5% of GDP while federal spending will be 20.5% of GDP. The problem is that the gap between revenue and spending will get worse as indicated by the chart below.
CBO estimates that interest rates on three month Treasury bills will rise from 0.1% today to 3.7% in 2018, and higher in subsequent years, which means that interest payments on our public debt will increase dramatically as shown in the chart below. Inflation is predicted to average about 2% over this time period. Unemployment will slowly drop to 5.8% in 2017 and not reach 5.5% until 2024.
In an article two days ago, an economics reporter for the New York Times, Floyd Norris, writes that this is “A Dire Economic Forecast Based on New Assumptions”. Mr. Floyd argues that it is unlikely that we will continue to have both anemic growth and high interest rates at the same time. Of course, if the economy does grow more quickly, then government revenues will also grow faster which will slow down the growth of the debt. But CBO predicts that our recovery from the Great Recession will continue to be tortuously slow.
The problem is that when interest rates do go up, as they will sooner or later, interest payment on the national debt will rise quickly, as shown in the CBO chart. This is going to happen and will be unpleasant to deal with. Are we going to have slow growth in the meantime, with high unemployment along with it, and then also have expensive debt payment later? This is indeed a pessimistic prospect!
We have a continuum of choices:

Do nothing until the big crunch hits in a few years (like Greece)
Cut spending dramatically, including for entitlements (politically infeasible)
Raise taxes dramatically (also politically infeasible)
Both cut spending and raise taxes (perhaps doable as we get closer to the big crunch)
Grow the economy faster which would both lower unemployment and raise revenue

I know what my choice is, how about you?

Let’s Devolve Federal Programs Back to the States!

Posted on February 4, 2014 by jackheidel

Yesterday’s New York Times has an article “Battles Looming Over Surpluses in Many States”, pointing out that “unexpectedly robust revenues from taxes and other sources are filling most state coffers, creating surpluses not seen in years and prompting statehouse battles over what to do with the money.” For example, in Kansas, Governor Sam Brownback is calling for full day kindergarten for all students.
This raises a larger issue. The states are recovering from the Great Recession and have lots of money. We know that states spend money far more efficiently than the federal government, because states have constitutional requirements to balance their budgets. On the other hand, the federal government is hemorrhaging red ink at a frightening rate which will just keep getting worse indefinitely until strong measures are taken. It has taken on far too many responsibilities and spends money very inefficiently.
All of this suggests an obvious course of action to turn around a very bad situation. We should devolve as many federal programs as possible back to the states. Here are three good ones to start with:

Medicaid costs the federal government about $250 billion per year with another $150 billion being paid for by the states. The problem is that federal support is a fixed percentage of what the states spend. This makes Medicaid a very expensive program with no limit on the cost to the federal government. A good way to solve this problem is to “block grant” Medicaid to the states and let each state figure out the best way to spend its own federal allotment. Annual increases in the size of federal block grants could be tied to the rate of inflation in order to limit their growth.
Education spending at the federal level is a $100 billion per year (not counting student loans) item. Just at the K-12 level alone there are over 100 individual programs to which states and school districts have to apply for funds separately. Wouldn’t it make far more sense to “block grant” education funds back to the states so that this large sum of money can be spent more effectively and efficiently by targeting it at the biggest needs in each state?
Job-Training costs the federal government $18 billion per year for 47 different programs. Again it would be so much more sensible to block-grant job training funds to the states and measure effectiveness by the number of workers hired.

There really are relatively simple ways for the federal government to operate more effectively and at much lower cost. We need national leaders who are committed to getting this done.

Does Free Trade Increase Inequality?

Posted on February 2, 2014 by jackheidel

Several days ago, David Bonior, a former Congressman from Michigan, wrote in the New York Times about “Obama’s Free-Trade Conundrum”. “The President cannot both open markets and close the wage gap.” There is an “academic consensus that trade flows contribute to between 10 and 40 percent of inequality increases.” This happens because “there is downward pressure on middle-class wages as manufacturing workers are forced to compete with imports made by poorly paid workers from abroad.”
But there is another point of view, provided, for example, by the report “NAFTA at 20: Overview and Trade Effects”, prepared by the Congressional Research Service about a year ago. “U.S. trade with its NAFTA partners has more than tripled since the agreement took effect (in 1993). (Canada and Mexico) accounted for 32% of U.S. exports in 2012. 40% of the content of U.S. imports from Mexico and 25% of U.S. exports from Canada are of U.S. origin. In comparison, U.S. imports from China are said to have only 4% U.S. content.” In other words, NAFTA at least has been a huge success.
Being able to trade with others is the foundation of private enterprise. Foreign trade is simply an extension of domestic trade. To limit trading opportunities with other countries would be a huge barrier to economic growth and therefore to future prosperity as well.
But at the same time we do want a more equal society as well as well as a more prosperous one. The key to resolving this “conundrum”, as Mr. Bonior puts it, is to address “opportunity inequality” as well as “income inequality.”
It is estimated that each billion dollars in U.S. exports provides employment for about 5000 workers. Nebraska, for example, exported $12.6 billion worth of goods and services in 2012 which translates into 63,000 jobs.
More jobs and better jobs are what create economic opportunity. One way to create more jobs and better jobs is to promote foreign trade by removing as many trade barriers as possible. Hopefully Congress and the President can work together to get this done!

What Is the State of the U.S. Economy?

Posted on January 28, 2014 by jackheidel

On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”. The charts below do show the basic trends all moving in the right direction. But is this good enough?
The unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009. And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high. In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars. As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever! Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign. But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt? Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are? Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes! In fact, this is what my blog is all about. Just read some of the other recent posts and let me know if you disagree with what I am saying!

A Global Perspective on Income Inequality II. Where Are the Jobs?

Posted on January 26, 2014 by jackheidel

My last post on January 23 shows vividly what the challenges are in restoring the American middle class to the prosperity which existed up until the Great Recession hit in late 2007. The problem, of course, is the gale strength force of globalization which is lifting up low wage workers all over the developing world and creating huge competition for the many low-skilled workers in the United States.
In today’s New York Times, the former Obama Administration car czar, Steven Rattner, writes about “The Myth of Industrial Rebound” in the United States, explaining why manufacturing jobs are coming back much more slowly than other jobs. “Manufacturing would benefit from the same reforms that would help the broader economy: restructuring of our loophole-ridden corporate tax code, new policies to bring in skilled immigrants, added spending on infrastructure and, yes, more trade agreements to encourage foreign direct investment.”
The above chart shows the huge decline in manufacturing jobs relative to other parts of the economy such as the education and health sector as well as the professional and business sector. Of course, these more rapidly growing service sectors are the ones benefitting from the information technology revolution. In manufacturing, on the other hand, the low skill jobs are going overseas while the high skill jobs, using technology such as robots, are much fewer in number.
Conclusion: in order to increase manufacturing jobs in the U.S., we better government policies, as outlined above by Mr. Rattner. But we also need to recognize that there aren’t going to be as many high skilled manufacturing jobs in the future. We are going to need much better K-12 and post-secondary educational outcomes to prepare the middle class for the high skilled service jobs which will predominate in the future.

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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