Category Archives: redistribution

The Oracle of Omaha Speaks on American Progress

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“In the years of growth that certainly lie ahead, I have no doubt that America can both deliver riches to many and a decent life for all. We must not settle for less.”            Warren Buffett, Time Magazine, January 15, 2018

As the readers of this blog know well, the two main topics I discuss are: 1) our massive debt, now 77% of GDP (for the public part on which we pay interest), the highest it has been since WWII, and predicted by CBO to get much worse without major changes in current policy, and 2) slow economic growth, averaging just 2% of GDP annually ever since the end of the Great Recession in June 2009.  Naturally I am always interested to relate the views of others to my own.


In the current issue of Time,  Mr. Buffett makes the simple argument that, with .8% growth in population each year (births minus deaths plus immigration), 2% GDP growth overall leads to 1.2% annual growth of GDP per capita.  This means that in just 25 years, or one generation, our current $59,000 GDP per capita will increase to $79,000 GDP per capita. This is very impressive.  The problem, of course, is that the average GDP per capita is not evenly distributed.
Here are the two most common political reactions:

  • Democratic. 2% growth is creating plenty of GDP per capita. It just needs to be distributed more evenly by raising taxes on the wealthy and spending it on more generous welfare programs for the less fortunate.
  • Republican. We can do better than 2% annual growth. If growth could be increased to 3% per year or maybe even just 2.5%, then the labor market will stay tight and produce more jobs and better paying jobs. Everyone will prosper, not just the well-off.

Conclusion. I greatly admire Warren Buffett. He is right about many things.  But I think we can do better than 2% annual growth.

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A Recovery Stymied by Government?

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Why has the recovery from the Great Recession of 2007 – 2009 been so slow?  Many mainstream economists blame structural problems in the economy such as more global competition for business and technological progress which replaces people by machines.  Other economists blame greatly increased government regulation since 2009 such as the Affordable Care Act in healthcare, The Dodd-Frank Act for finance and many new regulations from the Environmental Protection Agency.
CaptureThe economist Casey Mulligan, writing in yesterday’s Wall Street Journal, “A Recovery Stymied by Redistribution”, makes a case that government programs designed to alleviate the effects of the recession have made it deeper and more prolonged.  Such actions include:

  • Long-term unemployment insurance
  • Looser restrictions on food stamps which do not require recipients to seek work
  • Mortgage assistance programs which set mortgage payments at “affordable” levels
  • New rules for consumer bankruptcy with special emphasis on current earnings

Mr. Mulligan’s point is that all of these new programs, like taxes, reduce incentives to work and earn.
But, by definition, structural effects are endemic and can’t be overturned.  Also, some government reaction to the financial crisis, in order to prevent recurrence, was inevitable.  And it is natural for the government to be responsive to the human misery caused by the recession.  All of these points of view help us understand what has happened but don’t provide much guidance for boosting economic growth going forward.
The Great Recession was fundamentally caused by the bursting of the housing bubble which destroyed trillions of dollars of wealth for tens of millions of Americans.  The recovery won’t speed up until many more millions of consumers feel comfortable in spending more money. We need to put more money in their pockets.
A very good way to accomplish this, as I have been saying over and over again, is through fundamental tax reform.  The idea would be to lower individual income tax rates for everyone, and pay for this by closing the loopholes and deductions which primarily benefit the wealthy.  This will put big bucks in the hands of the two-thirds of Americans who do not itemize their deductions. Since these are the middle and lower income wage earners whose wages have been stagnant for many years, they will spend this new income in their pockets thereby giving the economy a big boost.
Let’s do it!

Redistribution, Inequality and Growth

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Most people agree that income inequality and wealth inequality are increasing in the U.S. Likewise anyone who’s paying attention is aware of our slow rate of GDP growth, averaging 2.2% per year, since the end of the recession five years ago.  Is there a connection between inequality and slow growth?  Maybe!
CaptureFirst of all, it is important to note that income inequality in the past 30 years has been greatly offset by federal taxes and transfer programs as shown in the October 2011 chart (above) from the Congressional Budget Office.
Capture1Secondly, the Economist discusses this situation in the article “Inequality v growth”.  The economists Jonathan Ostry, Andrew Berg and Charalambos Tasangarides have shown (see above chart) that a large amount of redistribution affects growth more negatively than a smaller amount of redistribution.
Economists generally agree that the recovery has been slowed down by a lack of demand by consumers for more goods.  So the recovery should speed up as less affluent consumers feel secure enough to spend more money.  Two things, to start with, can make this happen.  One is a restoration of the housing market so that homeowners have more equity (which can be borrowed and spent).  Another way to accomplish this is with government redistribution programs, such as food stamps and Medicaid, for low income people.
But there is an even better way to put money in the hands of people who will spend it, and at no cost to the government.  I am talking about broad based tax reform, whereby tax rates are lowered for everyone, offset by closing tax loopholes and shrinking deductions, which primarily benefit the wealthy.  For the two-thirds of taxpayers who do not itemize deductions, and who tend to be the less affluent, such a tax rate cut will put money in their pockets, most of which they will spend.
Such a tax program as this would be a direct shift of resources from the wealthy to everyone else, thereby lessening inequality.  It would stimulate the economy, creating millions of new and higher paying jobs, and thereby increasing tax revenue and lowering the deficit.  Win, win, win, win!