Redistribution, Inequality and Growth

Posted on May 22, 2014 by jackheidel

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!
First 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.
Secondly, 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!

What Is the Best Way to Boost the Economy and Create More Jobs?

Posted on May 20, 2014 by jackheidel

The publication of two new books is causing a reevaluation of the financial rescue and its aftermath, e.g. “The Case Against the Bernanke-Obama Financial Rescue”. The two books are “Stress Test” by Timothy Geithner, former Treasury Secretary, and “House of Debt” by the economists Atif Mian and Amir Sufi.
Mr. Mian and Mr. Sufi maintain that the government’s response to the financial crisis should have focused less on saving the banking system and more on the problem of excessive household debt. They discovered in their research that, during the housing bubble, less affluent people were spending as much as 25 – 30 cents for every dollar of increase in housing equity. When the bubble burst, and housing prices started to fall, these borrowers cut way back on spending which caused many businesses to lay off employees. The authors propose setting up a government program to help borrowers decrease what they owe in underwater mortgages.
Five years after the end of the Great Recession it would still be very helpful to speed up our lagging economy. Here are three different possible ways to do this:

The Keynesians say the best way to stimulate the economy is with more government (deficit) spending. For example, spending several hundred billion dollars a year on infra-structure would create hundreds of thousands, if not millions, of new construction jobs. I think this is a good idea, but only if it’s paid for with a new tax (e.g. a carbon tax or a wealth tax).
The Mian/Sufi plan, as described above, would alleviate mortgage debt problems for millions of middle class homeowners who are still under water, encouraging them to spend more money which would in turn boost the economy. The problem is that the M/S plan creates a moral hazard for mortgage holders unless it’s paid for by mortgage insurance which would raise costs for borrowers.
Broad-based tax reform, with lower tax rates for everyone, paid for by closing loopholes and limiting tax deductions for the wealthy, would automatically put more income in the hands of the two-thirds of tax payers who do not itemize deductions. These middle class wage earners would tend to spend this extra money thereby boosting the economy.

The point is that there very definitely are ways to boost the economy, some better than others, and it should be a top priority of Congress and the President to get this done.

A Rescue That Worked But Left a Troubled Economy

Posted on May 13, 2014 by jackheidel

The occasion of the publication of Timothy Geithner’s book “Stress Test,” giving his version of the financial crisis, has led to a number of newspaper articles looking back at the Great Recession and its aftermath. The New York Times’ economics reporter David Leonhardt has such an analysis “A Rescue That Worked, But Left a Troubled Economy” in today’s NYT.
“The Great Depression created much of modern American government and reversed decades of rising inequality. Today, by contrast, incomes are rising at the top again, while still stagnant for most Americans. Wall Street is flourishing again.”
“The financial crisis offered an opportunity to change this dynamic. But the (Dodd-Frank) law seems unlikely to transform Wall Street, and the debate over finance’s huge role in today’s economy will now fall to others. Should the banks be broken up? Should the government tax wealth? Should the banks face higher taxes?”
In my opinion, the real problem is not our financial system but the strong headwinds which are slowing down the economy.

Globalization of markets which creates huge pressure for low operating costs.
Labor saving technology which also puts downward pressure on wages.
Women and immigrants having entered the labor market in huge numbers, and therefore greatly increasing the labor supply.

The loss of wealth in the Great Recession also means that even people with good jobs have less money to spend. What we sorely need is faster economic growth to create more jobs and higher paying jobs. How do we accomplish this?

The best way to boost the economy is with broad-based tax reform to achieve the lowest possible tax rates to put more money in the hands of the working people who are the most likely to spend it. Such lower rates can be offset by closing the myriad tax loopholes and at least shrinking, if not completely eliminating, tax deductions which primarily benefit the wealthy.
Lowering corporate tax rates, again offset by eliminating deductions, providing a huge incentive for American multinational companies to bring their profits back home for reinvestment or redistribution.

With millions of unemployed and underemployed workers, reviving our economy with a faster rate of growth should be one of the very top priorities of Congress and the President. Survey after survey show that this is what voters want. Why isn’t it happening?

The Growth Deficit

Posted on May 1, 2014 by jackheidel

I am a fiscal conservative, as well as a social moderate, which means that I don’t fit very easily into a standard mold. I am non-doctrinaire, non-ideological and mostly nonpartisan. I vote for candidates from both major parties as well as independents. I prefer a balanced government with neither party in complete control.
My most direct sources of information on fiscal and economic issues are the Wall Street Journal and the New York Times, both of which I read assiduously on a daily basis. When these two newspapers disagree on a particular issue, then I usually decide that the truth lies somewhere in between.
Our biggest national problem right now, in my opinion, is the stagnant economy. In today’s WSJ, the lead editorial, “The Growth Deficit”, clearly describes how bad the situation is. Since the Great Recession ended in June 2009, our rate of GDP growth has averaged 2.2% per year. This compares with a 4.1% annual rate of growth for all post-1960 recovery periods.
Such a slow rate of growth causes all sorts of problems. First of all, it explains why our unemployment rate is still so high at 6.7% after five years of recovery. This means that between 15 and 20 million people are still unemployed or underemployed. Such a large human toll means a huge increase in government welfare expenses for food stamps, unemployment insurance, etc. Higher unemployment also means less tax revenue collected by the federal government. This translates into much larger deficit spending, adding to the already massive national debt.
There are lots of things which can be done to increase growth, for example:

Lowering tax rates on individuals to put more money in the hands of the 2/3 of Americans who do not itemize deductions on their tax returns. They’ll spend this extra income and create more demand! Pay for this by closing loopholes and deductions, which are used primarily by the wealthy. Besides stimulating the economy, this will simultaneously address increasing income inequality.
Lowering tax rates on corporations to encourage multinationals to bring their foreign profits back home for reinvestment or paying dividends. Again, balanced by eliminating deductions enjoyed by privileged corporations.
Relax regulatory burdens on small businesses where most new jobs are created.
Reform immigration procedures by boosting the number of H1-B visas to attract more highly skilled, and entrepreneurial, foreign workers.
Grant trade promotion authority to the President to speed up new trade agreements.

We should be clamoring for our national leaders to be acting on these fronts. A strong economy is the very backbone of our success as a nation!

Saving the System

Posted on April 29, 2014 by jackheidel

I seldom use the New York Times sociological columnist, David Brooks, as a source for my blog posts because I am focused primarily on economic and fiscal issues. But his column today, “Saving The System,” is highly pertinent to my message.
“All around, the fabric of peace and order is fraying. The leaders of Russia and Ukraine escalate their apocalyptic rhetoric. The Sunni-Shiite split worsens as Syria and Iraq slide into chaos. China pushes its weight around in the Pacific. … The U.S. faces a death by a thousand cuts dilemma. No individual problem is worth devoting giant resources to. But, collectively, all the little problems can undermine the modern system.”
In addition to all of these pesky worldwide problems, our free enterprise economic system is under siege. Wages have been largely stagnant since the early 1970s and income inequality is growing as the top 1%, and perhaps the top 10 or 15% as well, do much better than everyone else. And just lately we have also learned from the French economist, Thomas Piketty, that wealth inequality has been growing steadily ever since about 1950 and is likely to get substantially worse in the future.
In other words, western civilization is under threat in more ways than one. What are we going to do about it? At the risk of oversimplifying, I believe that the single best thing we can do is to undertake fundamental tax reform to make our economy stronger. Cut everyone’s tax rates and pay for it by closing loopholes and deductions which primarily benefit the wealthy.

Lower tax rates will put more money in the hands of the two thirds of Americans who don’t itemize their tax deductions. These are largely the same people with stagnant wages and so they will spend this extra income they receive.
The resulting increase in demand will put millions of people back to work and thereby increase tax revenues which will help balance the budget. This shift of income from the wealthy to the less wealthy will reduce income inequality.
Although harder to implement politically, a low (between 1% and 2%) wealth tax on financial assets above a threshold of $10 million per individual, would be a highly visible way to address wealth inequality. The substantial sum of revenue raised by this method could be used to fund national priorities as well as paying down the deficit.

I don’t want to leave the impression that I consider this program to be a panacea for strengthening our country. But it would help and we need to make some big changes to maintain our status as world leader.

Trickle-Down Monetary Policy and What to Do About It

Posted on April 27, 2014 by jackheidel

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe.”
Ludwig von Mises, Austrian economist, 1881 – 1973

The economist/investor John Mauldin writes a weekly newsletter, “Thoughts from the Front Line” (http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/140426_TFTF2.pdf) which offers good general insight. In the latest issue Mr. Mauldin writes “For all intents and purposes we have adopted a trickle-down monetary policy, one which manifestly does not work and has served only to enrich financial institutions and the already wealthy. Now I admit that I benefit from that, but it’s a false type of enrichment, since it has come at the expense of the general economy, which is where true wealth is created.”
Mr. Mauldin also quotes the economist William White, “When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. … With ultra-loose monetary policy, governments have no incentive to act. But if we don’t deal with this now, we will be in worse shape than before.”
What then should government do? The best single thing is to develop a concentrated focus on boosting the economy. This would put millions of people back to work and raise salaries for the entire workforce. Tax revenue would rise and both public and private debt would be paid down more quickly.
The way to do this is with fundamental, broad-based tax reform. This means lowering tax rates for both individuals and corporations, paid for by closing loopholes and shrinking deductions. This would have the effect of taking from the rich and giving to the poor, i.e. putting more money in the hands of those who are most likely to spend it, thereby creating more demand leading to faster economic growth.
It’s not that hard to figure out!

Is America Falling Behind?

Posted on April 24, 2014 by jackheidel

Yesterday’s New York Times has a very interesting article, “U.S. Middle Class No Longer World’s Richest”, demonstrating that from 1980 -2010 the median wage in many other developed nations has grown faster than in the U.S. The chart below does show that the U.S. median wage is still growing but just not as fast as elsewhere.
The authors suggest three reasons to explain what is happening:

Educational attainment in the U.S. is growing more slowly than in the rest of the industrialized world.
A larger portion of business profits in the U.S. is going to top executives meaning less for middle and low income workers.
There is a higher degree of income redistribution (through taxation) in Canada and Western Europe than in the U.S.

The data presented in this article is more elaborate but nevertheless consistent with what other studies are showing. We are still on top but we need to make some major changes in order to stay there. For example:

Most states have adopted the national Common Core curriculum for K – 12 schools. In today’s highly competitive global environment, this will enable a more rigorous evaluation of educational attainment between the states and should, therefore, improve overall academic achievement.
The best way to raise salaries for middle and low-income workers is to boost economic output overall. Fundamental tax reform, with lower tax rates for everyone, offset by closing loopholes and lowering deductions for the wealthy, will put more money in the hands of the people most likely to spend it. This will increase demand and make the economy grow faster.
As a highly visible way of addressing economic inequality in the U.S., institute a relatively small, i.e. 1% or 2%, wealth tax on the assets of individuals with a net worth exceeding $10 million. This would raise up to $200 billion per year which could be used for an extensive infrastructure renewal program, creating lots of jobs and further boosting the economy, with a lot left over to devote to shrinking our massive federal deficits.

A program like this encourages everyone to work hard and reach their highest potential, including accumulating as much wealth as they are able to. But the people at the very top, i.e. the superrich, will be required to give back a little bit more in order to benefit the entire country.

The Resurrection of Karl Marx II. Let’s React But Not Overreact!

Posted on April 22, 2014 by jackheidel

This morning’s Wall Street Journal has a book review by the New York fund manager, Daniel Shuchman, “Thomas Piketty Revives Karl Marx for the 21^st Century” of Thomas Piketty’s new book “Capitalism in the Twenty-First Century.” As I recently discussed, Piketty makes the simple observation that income from wealth, i.e. investment income, grows faster than income from wages or GDP.
He then provides a large quantity of data showing how this has played out since the end of WWII. He plausibly predicts that the value of private capital as a percentage of national income will continue to grow indefinitely into the future.
This much is straightforward. The question is how we should react to a steadily increasing and very large concentration of wealth in the hands of a small percentage of people. Mr. Piketty’s own idea is, for example, to establish an 80% tax rate on incomes starting at “$500,000 or $1,000,000” in order “to put an end to such incomes.” Mr. Shuchman attempts to discredit Mr. Piketty by focusing in on such socialistic views for dealing with the problem rather than discussing the intrinsic merit of Piketty’s basic thesis about the buildup of great wealth in the first place.
My own view is that Mr. Piketty has clearly identified a weakness of capitalism and that it behooves supporters of free markets and private initiative to address this problem in a constructive way, for example, as follows.
We need fundamental broad-based tax reform, i.e. lower tax rates in exchange for closing loop-holes and lowering deductions, in order to boost the economy and create more jobs. As part of a major tax overhaul, we could also establish a relatively small wealth tax, of about 1% or 2%, on assets over $10,000,000, which would raise as much as $200 billion per year. This much money could be used to begin a large scale program of infrastructure renewal as well as leaving a lot left over to make significant payments on reducing our annual deficit.
Such an overall plan would address both income inequality and wealth inequality in a highly visible manner while simultaneously helping our economy.

Is Capitalism in Crisis?

Posted on April 17, 2014 by jackheidel

The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”. His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy. Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:

Technology has eliminated lots of low skill and medium skill jobs in the U.S.
Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing. This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process. How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks. He also agrees that socialism has proven to be unsuccessful where it has been tried. He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within. The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

Global Warming Is For Real II. How Do We Move Forward?

Posted on April 15, 2014 by jackheidel

The Intergovernmental Panel on Climate Change has just issued a new report, reported in yesterday’s New York Times, “Climate Efforts Falling Short, U.N. Panel Says”. The IPCC is saying that an intensive effort is needed in the next 15 years to prevent the global average temperature from rising more than 3.6 degrees Fahrenheit (2 degrees Celsius) above the preindustrial level. Since the U.S. and China are the biggest emitters of carbon, it is critical for the U.S. to show leadership on this issue.
One dramatic piece of evidence that global warming is real is the rapidly shrinking size of the artic polar ice cap measured at the end of each summer. In a previous post last December 8, I took note that at least 29 U.S. companies “are incorporating a price on carbon into their long range plans.” I also noted a report from the Congressional Budget Office which estimates that a tax on energy companies of $20 to emit a ton of CO₂ would raise $120 billion a year and raise the cost of gasoline by 10 to 15 cents per gallon.
The scene is clearly set. There is a serious threat to life on earth. We have a good estimate of what it will take to meet the threat and a specific time window for responding. We also know the approximate cost of a sensible plan for doing so. Can our democratic political system be moved to action?
A large energy tax like this will take a bite out of the economy. An attractive way of building support would be to make it part of broad based tax reform designed to stimulate the economy with lower individual and corporate rates offset by closing loopholes and eliminating deductions. In fact a carefully assembled package might be able to reduce carbon emissions, stimulate the economy (with lower tax rates) and raise revenue to pay down the deficit, all at the same time!
Is this too much to hope for?

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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