The Growing Danger Of Dynastic Wealth

A boy takes a picture of a car at an auto show of rare and luxury vehicles on Sept. 18, 2011 in Westport, Connecticut. (Photo by Spencer Platt/Getty Images)

On September 18, 2017, Robert Reich writes on Moyers & Company:

This post originally appeared at Robert Reich’s blog.

White House National Economic Council director Gary Cohn, former president of Goldman Sachs, said recently that “only morons pay the estate tax.”

I’m reminded of Donald Trump’s comment that he didn’t pay federal income taxes because he was “smart.” And billionaire Leona Helmsley’s “only the little people pay taxes.”

What Cohn was getting at is how easy it is nowadays for the wealthy to pass their fortunes to their children, tax-free.

The estate tax applies only to estates over $11 million per couple. And wealthy families stash away dollars above this into “dynastic” trust funds that escape additional taxes.

No wonder revenues from the estate tax have been dropping for years even as wealth has become concentrated in fewer hands. The tax now generates about $20 billion a year, which is less than 1 percent of federal revenues. And it applies to only about two out of every 1,000 people who die.

Now, Trump and Republican leaders are planning to cut or eliminate it altogether.

There’s another part of the tax code that Cohn might also have been referring to — capital gains taxes paid on the soaring values of the wealthy people’s stocks, bonds, mansions and works of art when they sell them.

If the wealthy hold on to these assets until they die, the tax code allows their heirs to inherit them without paying any of these capital gains taxes. According to the Congressional Budget Office, this loophole saves heirs $50 billion a year.

The estate and capital gains taxes were originally designed to prevent the growth of large dynasties in the US and to reduce inequality.

They’ve been failing to do that. The richest 1 tenth of 1 percent of Americans now owns almost as much wealth as the bottom 90 percent.

Many of today’s super rich never did a day’s work in their lives. Six out of the ten wealthiest Americans alive today are heirs to prominent fortunes. The Walmart heirs alone have more wealth than the bottom 42 percent of Americans combined.

Rich millennials will soon acquire even more of the nation’s wealth.

America is now on the cusp of the largest intergenerational transfer of wealth in history. As wealthy boomers expire, an estimated $30 trillion will go to their children over the next three decades.

Those children will be able to live off of the income these assets generate, and then leave the bulk of them — which in the intervening years will have grown far more valuable — to their own heirs, tax-free.

After a few generations of this, almost all of the nation’s wealth will be in the hands of a few thousand families.

Dynastic wealth runs counter to the ideal of America as a meritocracy. It makes a mockery of the notions that people earn what they’re worth in the market, and that economic gains should go to those who deserve them.

It puts economic power into the hands of a relative small number of people who have never worked, but whose investment decisions will have a significant effect on the nation’s future.

And it creates a self-perpetuating aristocracy that is antithetical to democracy.

The last time America faced anything comparable to the concentration of wealth we face now, occurred at the turn of the last century.

Then, President Teddy Roosevelt warned that “a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” could destroy American democracy.

Roosevelt’s answer was to tax wealth. The estate tax was enacted in 1916 and the capital gains tax in 1922.

But since then, both have been eroded. As the rich have accumulated greater wealth, they have also amassed more political power, and they’ve used that political power to reduce their taxes.

Teddy Roosevelt, a Republican, helped create a movement against dynastic wealth. Trump and today’s congressional Republicans will not follow in his footsteps. I doubt even today’s Democrats would do so if they had a chance. Big money has become too powerful on both sides of the aisle.

But taxing big wealth is necessary if we’re ever to get our democracy back, and make our economy work for everyone rather than a privileged few.

Maybe Gary Cohn is correct that only morons pay the estate tax. But if he and his boss were smart and they cared about America’s future, they’d raises taxes on great wealth. Roosevelt’s fear of an American dynasty is more applicable today than ever before.

The Growing Danger of Dynastic Wealth

 

President Donald J. Trump Puts Americans First In Tax Relief

On September 27, 2017, President Donald J. Trump issue the following statement in reference to “America’s First Tax Relief Plan”:

“If we want to renew our prosperity, restore our opportunity, and reestablish our economic dominance – which is what we should be doing – then we need tax reform that is pro-growth, pro-jobs, pro-worker, pro-family, and, yes, pro-American.” – President Donald J. Trump

An America First Tax RELIEF PLAN: President Donald J. Trump, the House of Representatives Ways and Means Committee, and the Senate Finance Committee are proposing vital tax relief to strengthen the middle class, grow the economy, and unleash America’s economic comeback.

  • We are calling for a dramatic tax cut, which includes:
    • A larger zero tax bracket;
    • Lower tax rates for individuals, providing relief to Middle Class American families;
    • Lower small business tax rates, giving a boost to millions of American businesses and farms; and
    • Lower corporate tax rates, making American business more competitive.
  • Tax cuts, like those in President Trump’s unified framework, boost economic growth.
    • Since Vice President Pence’s 2013 tax cuts, as Governor of Indiana, unemployment in Indiana has been cut in half and more than 200,000 jobs have been created.
    • President Reagan’s 1986 corporate income tax cut contributed 3.3 percent to economic growth over ten years, according to the Tax Foundation.

A TAX CUT For WORKING AMERICANS: We are laying out a tax-relief framework that will unburden America’s Middle Class.

  • Double the standard deduction so that more income is taxed at zero percent.
    • The first $12,000 of income for an individual and $24,000 for a married couple will be tax-free.
  • Consolidate the seven existing tax brackets for taxable income to only three brackets: 12 percent, 25 percent, and 35 percent.
  • Increase and expand the Child Tax Credit to benefit more middle-income families and eliminate the marriage penalty.
  • Create a new $500 tax credit for those caring for an adult dependent or elderly loved one.

Simplify the tax code: We will simplify tax filing so Americans can file their returns on a single sheet of paper.

  • The vast majority of Americans will be able to file their taxes on a single sheet of paper.
    • American individuals and businesses spend more than 6 billion hours complying with the tax code, according to the National Taxpayer Advocate.
  • The plan repeals the Alternative Minimum Tax, which requires many taxpayers to do their taxes twice.
  • The plan ends the job killing “Death Tax.”

Lower The Crushing Business Tax Rates: We will cut tax rates for American business and make American business competitive again.

  • The plan will reduce the corporate tax rate to 20 percent.
    • The United States corporate income tax rate is the highest in the Organisation for Economic Co-operation and Development (OECD), and has been above the OECD average for almost 20 years.
    • The United States corporate income tax rate is more than 10 points higher than China’s, according to the Congressional Budget Office (CBO).
  • The plan will also reduce the top tax rate paid by sole proprietors, S corporations, and partnerships to 25 percent.
  • For the next five years, American businesses will be able to immediately write off the cost of their equipment and other capital investments.
  • Economists agree that America’s corporate tax rate harms America’s workers by keeping their wages down.
    • More than 70 percent of the corporate tax burden falls on American workers, according the CBO.

Bring Wealth Back: We are proposing an “American Model” that will bring back trillions of dollars held overseas and restore America’s competitive edge.

Profits that have accumulated offshore will be subject to a one-time low tax rate, thereby ending the tax incentive to keep those profits offshore.

To avoid paying high U.S. corporate taxes on foreign profits, American companies have often reinvested their money abroad instead of repatriating it to U.S. shores.

Companies hold an estimated $2.8 trillion in earnings offshore, according to Audit Analytics.

This plan will stop the “Offshoring Model,” which penalizes companies for incorporating in the United States.

https://www.whitehouse.gov/the-press-office/2017/09/27/president-trump-puts-americans-first-in-tax-relief?utm_source=facebook&utm_medium=social&utm_campaign=wh_20170927_na

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-tax-plan-20170927-story.html

https://www.bloomberg.com/news/articles/2017-09-28/most-economists-agree-trump-tax-plan-will-widen-budget-deficit

https://thefederalist.com/2017/09/28/heres-need-know-estate-tax-family-farmers/

The Growing Danger of Dynastic Wealth

https://www.cnbc.com/2017/09/28/gary-cohn-says-1000-in-tax-savings-can-buy-a-family-a-car-kitchen.html

https://www.washingtonpost.com/news/posteverything/wp/2017/09/28/i-helped-create-the-gop-tax-myth-trump-is-wrong-tax-cuts-dont-equal-growth/?utm_term=.e22b4f93e846

https://finance.yahoo.com/news/republicans-700-million-problem-could-173027048.html

A FEW OF THE FACTS ABOUT GOP TAX REFORM PLAN:
• The tax cut proposal will eliminate the estate tax, which affects ONLY those estates worth OVER $5.49million!
• Reduces the top tax rate from 39.6% to 35%. This affects only the top 5% of Americans! Example: Someone like Trump, might make $100 million per year. In 1 year, this cuts $4.6 million out of Trump’s tax bill and moves it to the rest of us to pay. Is $4.6 million a lot of money? Well, the “average American” makes $51,000 per year, so, if they make that for 40 years, they will earn $2,040,000 IN THEIR LIFETIME, or, said another way, IN THEIR LIFETIME, they will earn 44% of Trump’s “self imposed” tax cut FOR ONE YEAR! So, yeah, it’s a lot of money!
• The tax rate for business owners who report on individual returns will see their rate drop from 39.6% down to 25%. Again, do some math. It’s HUGE for the already wealthy!
• The GOP proposal TOTALLY ELIMINATES the alternative minimum tax, (AMT), which as a rule affects those who earn between $200,000/yr and $1million/year. NOTE: In the one tRump tax return, (2005), that we all saw, if his AMT is eliminated, Trump saves, $31million, or, in 1 year, Trump would save an amount equal the earnings of 15 American LIFETIMES!!!!
So, it’s pretty obvious, when tRump says “I think there’s very little benefit for people of wealth,” his lips are moving, so, he’s lying again! Do you see why? 9/28/17

Bill Gates Says We Shouldn’t Panic About Artificial Intelligence

On September 26, 2017, Dom Galeon writes on Futurism:

EVERYONE HAS AN OPINION

Artificial intelligence (AI) is one of today’s hottest topics. In fact, it’s so hot that many of the tech industry’s heavyweights — Apple, Google, Amazon, Microsoft, etc. — have been investing huge sums of money to improve their machine-learning technologies.

An ongoing debate rages on alongside all this AI development, and in one corner is SpaceX CEO and OpenAI co-chairman Elon Musk, who has been issuing repeated warnings about AI as a potential threat to humankind’s existence.

Speaking to a group of U.S. governors a couple of months back, Musk again warned about the dangers of unregulated AI. This was criticized by those on the other side of the debate as “fear-mongering,” and Facebook founder and CEO Mark Zuckerberg explicitly called Musk out for it.

Now, Microsoft co-founder and billionaire philanthropist Bill Gates is sharing his opinion on Musk’s assertions.

In a rare joint interview with Microsoft’s current CEO Satya Nadella, Gates told WSJ. Magazine that the subject of AI is “a case where Elon and I disagree.” According to Gates, “The so-called control problem that Elon is worried about isn’t something that people should feel is imminent. We shouldn’t panic about it.”

FEAR OF AI?

While the perks of AI are rather obvious — optimized processes, autonomous vehicles, and generally smarter machines — Musk is simply pointing out the other side of the coin. With some nations intent on developing autonomous weapons systems, irresponsible AI development has an undeniable potential for destruction. Musk’s strong language may make him sound like he’s overreacting, but is he?

As he’s always been sure to point out, Musk isn’t against AI. All he’s advocating is informed policy-making to ensure that these potential dangers don’t get in the way of the benefits AI can deliver.

In that, Musk isn’t alone. Not all experts think his warnings are farfetched, and several have joined Musk in sending an open-letter to the United Nations about the need for clear policies to govern AI. Even before that, other groups of AI experts had called for the same.

Judging by what Nadella told the WSJ. Magazine, much of this conflict may actually be mostly imagined. “The core AI principle that guides us at this stage is: How do we bet on humans and enhance their capability? There are still a lot of design decisions that get made, even in a self-learning system, that humans can be accountable for,” he said.

“There’s a lot I think we can do to shape our own future instead of thinking, ‘This is just going to happen to us’,” Nadella added. “Control is a choice. We should try to keep that control.”

In the end, it’s not so much AI itself that we should watch out for. It’s how human beings use it. The enemy here is not technology. It’s recklessness.

Bill Gates Says We Shouldn’t Panic About Artificial Intelligence

Gary Reber Comments:

I agree with Elon Musk for the need of informed policy-making to ensure that these potential dangers don’t get in the way of the benefits AI can deliver.

But the question I must raise again is Who Will Own The Productive Applications Of AI?

Citizens need to OWN the technology!

Broadening future productive, wealth-creating, income-producing capital assets simultaneously with the growth of the economy, and propelling that growth to realize a future economy that can support general affluence and leisure for EVERY citizen by creating “customers with money” who are self-sufficient and able to meet their own consumption needs is the agenda of the JUST Third Way (note: not the neoliberal Third Way) and the various solutions it advocates. This includes monetary reform and enacting the Capital Homestead Act. The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.

I am not going to elaborate further, as I have already written extensively about solutions that expand beyond employee ownership to universally extend to EVERY child, woman, and man.

Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797, http://www.cesj.org/resources/articles-index/the-just-third-way-basic-principles-of-economic-and-social-justice-by-norman-g-kurland/, http://www.cesj.org/wp-content/uploads/2014/02/jtw-graphicoverview-2013.pdf and http://www.cesj.org/resources/articles-index/the-just-third-way-a-new-vision-for-providing-hope-justice-and-economic-empowerment/.

Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.

Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

Why Workers Are Losing To Capitalists

Maybe he had a point. Photographer: Uwe Meinhold/AFP/Getty Images

Automation and offshoring may be conspiring to reduce labor’s share of income.

On September 25, Noah Smith writes on Bloomberg:

Back in April, I wrote about one of the most troubling mysteries in economics, the falling labor share. Less of the income the economy produces is going to people who work, and more is going to people who own things.

Less of the Pie for Labor

Share of GDP received by workers.

Source: Federal Reserve Bank of St. Louis

This trend is worrying because it contributes to increased inequality — poor people own much less of the land and capital in the economy than rich people do. The devaluation of workers could also increase unemployment, social unrest and general malaise. No one would like to see capitalism transform into the kind of dystopia envisioned by Karl Marx. That’s why even though the decline in labor’s share has so far been relatively modest, economists are racing to diagnose the cause before the problem gets any worse.

Recently, a lot of attention has focused on the idea that monopoly power might be causing the shift. But the famous paper that draws this connection — by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen — also shows that it can account for perhaps only 20 percent of the change. This means other possible explanations for labor’s decline, like increasing automation or globalization, need to be re-examined.

Economists Mai Dao, Mitali Das, Zsoka Koczan and Weicheng Lian of the International Monetary Fund argue that the culprit is not automation or offshoring alone, but the interaction between the two. As evidence, they note that the labor share has been falling not just in rich nations, but in developing countries as well. Here is a figure from their paper:

If globalization were purely to blame, this wouldn’t be happening. Standard trade theories imply that because rich countries have a lot of capital and poor countries have a lot of labor, when these countries start to trade, labor’s share of income should go down in the countries where it used to be scarce — i.e., the rich world — but should rise in the poor countries where it was previously abundant. That’s not what’s happening.

Meanwhile, if automation is just now starting to make workers obsolete, developing countries shouldn’t be experiencing the fall in labor share at the same time, because in technological terms they’re decades behind the rich countries. The authors confirm that investment goods — machines, vehicles, computers, etc. — haven’t really gotten much cheaper in poor countries, as they have in rich ones. So the puzzle really boils down to this: Why is the labor share falling in the developing world?

Dao and her co-authors offer a hypothesis. It has to do with the types of industries that exist in poor countries before and after trade gets opened up. When poor countries are isolated from the global economy, they tend to specialize in things that rely on a lot of cheap labor — farming, low-end services and simple labor-intensive manufacturing. Local landlords and other capital owners do well, but don’t have a chance to get truly rich, because any investment in machinery or technology can be undercut by a flood of low-wage workers. So they don’t bother making the investments in the first place. This dearth of capital spending is exacerbated by rudimentary or dysfunctional financial systems.

But when trade opens up, the rich countries start offshoring manufacturing jobs to the poor countries. These jobs offer better opportunities for workers, but much better opportunities for capitalists. Even as capitalists in the U.S. or Japan or France get rich cutting labor costs by shipping jobs to China, Chinese capitalists get rich because they’re finally able to amass huge business empires.

The IMF economists also predict that global financial integration should help alleviate the pressure on labor in poor countries. If American, European, Japanese and Taiwanese companies are able to invest in a developing country like China, the inflow of foreign money will boost incomes for local workers and compete down the profits of local capital owners.

So what about rich countries? Here, the argument is that automation and globalization are working together — companies in rich countries can ship labor-intensive manufacturing jobs in electronics assembly, toys and clothing to China and Bangladesh, while buying advanced machine tools and robots to do more high-end manufacturing of things like microprocessors and airplanes. As a result, workers in rich countries where routine jobs were more common were hit harder by both free trade and the advent of cheap automation.

In other words, the two most conventional explanations for rising inequality and falling wages might both be correct. A perfect storm of robots and free trade — and some monopoly power to boot — could be shifting power from the proletariat to the capitalists. With all these factors at work, maybe the real puzzle is why workers aren’t doing even worse than they are.

https://www.bloomberg.com/view/articles/2017-09-20/why-workers-are-losing-to-capitalists

Gary Reber Comments:

What we are experiencing is the ever-greater substitution of machines for human labor and at the same time greater world-wide competition to produce goods, products and services at the lowest cost. This makes for a poor position for those (the vast majority) who can only depend on their labor to earn income. That being the reality, what really makes wage slaves is being without capital ownership in any significant degree. Capital is the non-human factor of production. Fundamentally, economic value is created through human and non-human contributions. In simple terms, there are two independent factors of production: humans (labor workers who contribute manual, intellectual, creative and entrepreneurial work) and non-human capital (land; structures; infrastructure; tools; machines; robotics; computer processing; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like which are owned by people individually or in association with others). With capital carrying out most production these days, and the market rate of wages declining in value relative to the cost of capital, what locks people into the wage system in which most people get the bulk of their income from wages is lack of access to capital credit, not the wages, per se.

Yet a just wage is mandatory in any system. Non-owning labor must be compensated fairly, but it is time for the abolition of the wage system, not the abolition of wages. And while ideally a just wage should be defined as the rate determined by the free market, this can only be achieved with equality of bargaining position, with the employer (owner) and the employee entering into free agreements.

What about the exceptions, however? What happens when the free market rate is insufficient for the worker to meet ordinary expenses, or something interferes with the free market in labor, e.g., when the propertyless laborer is forced to take less than justice demands simply because he is in a bad bargaining position?

The difference must be made up of employer charity to ensure that the worker is able to meet ordinary expenses adequately, so that justice is completed and fulfilled by charity.

But, of course, this is not reality. Employers are always seeking to produce at the lowest possible cost, while maintaining the level of quality demanded by the market. From the employer-owner’s perspective, the problem with paying workers more than the free market rate of wages is it increases costs to the consumer (who is usually the worker under another hat). After all, full employment or paying wages higher than the market rate are not objectives of businesses nor is conducting business statically in terms of geographical location (outsourcing). Companies strive to achieve cost efficiencies to maximize profits for the owners (the reason the owners are in business), thus keeping labor input and other costs at a minimum. They strive to minimize marginal costs, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place, in order to stay competitive with other companies racing to stay competitive through technological innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price (which people as consumers seek), or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.

The result is that the price of products and services are extremely competitive as consumers will always seek the lowest cost/quality/performance alternative, and thus for-profit companies are constantly competing with each other (on a local, national and global scale) for attracting “customers with money” to purchase their products or services in order to generate profits and thus return on investment (ROI).

Over the past century there has been an ever-accelerating shift to productive capital — which reflects tectonic shifts in the technologies of production. The mixture of labor worker input and capital worker input has been rapidly changing at an exponential rate of increase for over 239 years in step with the Industrial Revolution (starting in 1776) and had even been changing long before that with man’s discovery of the first tools, but at a much slower rate. Up until the close of the nineteenth century, the United States remained a working democracy, with the production of products and services dependent on labor worker input. When the American Industrial Revolution began and subsequent technological advances amplified the productive power of non-human capital, plutocratic finance channeled its ownership into fewer and fewer hands, as we continue to witness today with government by the wealthy evidenced at all levels.

People invented “tools” to reduce toil, enable otherwise impossible production, create new highly automated industries, and significantly change the way in which products and services are produced from labor intensive to capital intensive — the core function of technological invention and innovation. Kelso attributed most changes in the productive capacity of the world since the beginning of the Industrial Revolution to technological improvements in our capital assets, and a relatively diminishing proportion to human labor. Capital does not “enhance” labor productivity (labor’s ability to produce economic goods). In fact, the opposite is true. It makes many forms of labor unnecessary. Because of this undeniable fact, according to binary economist Louis Kelso, “free-market forces no longer establish the ‘value’ of labor. Instead, the price of labor is artificially elevated by government through minimum wage legislation, overtime laws, and collective bargaining legislation or by government employment and government subsidization of private employment solely to increase consumer income.”

Furthermore, according to Kelso, productive capital is increasingly the source of the world’s economic growth and, therefore, should become the source of added property ownership incomes for all. Kelso postulated that if both labor and capital are independent factors of production, and if capital’s proportionate contributions are increasing relative to that of labor, then equality of opportunity and economic justice demands that the right to property (and access to the means of acquiring and possessing property) must in justice be extended to all. Yet, sadly, the American people and its leaders still pretend to believe that labor is becoming more productive, and ignore the necessity to broaden personal ownership of wealth-creating, income-producing capital assets simultaneously with the growth of the economy.

We need to shift to a democratic growth economy. Such a future economy,  based on Kelso’s binary economics (human and non-human productive inputs), the ownership of productive capital assets would be spread more broadly as the economy grows, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate capital asset wealth. Instead, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader, benefiting EVERY citizen (children, women and men), including the traditionally disenfranchised poor and working and middle class. Thus, productive capital income, from full earnings dividend payouts, would be distributed more broadly and the demand for goods, products and services would be distributed more broadly from the earnings of capital and result in the sustentation of consumer demand, which will promote economic growth and more profitable enterprise. That also means that society can profitably employ unused productive capacity and invest in more productive capacity to service the demands of an environmentally responsible growth economy. As a result, our business corporations would be enabled to operate more efficiency and competitively, while broadening wealth-creating, income-producing ownership participation, creating new capitalists and jobs and “customers with money” to support the  goods, products and services being produced.

And how to bring about this state of affairs? Capital Homesteading suggests one way.

Support the Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

Economist Dierdre McCloskey Promotes False Math About Inequality And Redistribution

On March 18, 2017, Adam M. Finked writes on Evonomics:

The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies.

To the extent that a regulation correcting an externality or other market failure provides total benefit in excess of total cost while particularly helping the disadvantaged subsets of society, the regulation may—and in my view, should—be seen as doubly wise. If, instead, the regulation creates positive net benefit but requires the poor to pay the costs so that the rich can reap health or environmental benefits, it may be neither just nor wise.

Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. The economist A.O. Hirschman asserts in his book, The Rhetoric of Reaction, that both conservatives and progressives promote different flawed narratives in order to rationalize their policy preferences. But it is conservatives, according to Hirschman, who uniquely tend to argue that even when good intentions do not backfire, they simply are futile.

Get Evonomics in your inbox

In a recent New York Times op-edUniversity of Illinois at Chicago Professor Deirdre McCloskey exemplifies this type of argument, in conspicuously misguided fashion. In her column, McCloskey offers a litany of reasons as to why progressive taxation and other policies aimed at redistributing benefits to the poor are ill-advised. At the core of the essay, McCloskey makes the empirical assertion that such policies cannot actually make much of a difference in any event.

Unfortunately, the basic mathematics of McCloskey’s claim are mangled. She may not prefer that we seek progressive tax and regulatory policies, but her claim that these policies do not “uplift the poor very much” is erroneous. That the Times has decided not to correct her error—even in the face of an email exchange in which the author herself acknowledged her mistake—may be an example of how tempting it is to ascribe black-and-white factual issues to the realm of “healthy controversy.”

McCloskey states that “[a]s a matter of arithmetic, expropriating the rich to give to the poor does not uplift the poor very much. If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off.”

It was obvious to me, and I hope to others, that McCloskey’s math is only correct in the extreme and unrealistic situation where there is zero inequality—that is, no “distribution” at all—to begin with. If in a population of 1,000 people, each person had exactly the same $500,000 in wealth, then it is true that if the entire $100 million that the “top” 200 people held were transferred to the “other” 800 people and split equally among them, those 800 people would be given $125,000 each, which would indeed increase their individual wealth by 25 percent.

In the real United States, however—where $500,000 is indeed a reasonable estimate of the average individual net worth, but where the top 20 percent own85 percent of all wealth—the math is very different. Among a representative sample of 1,000 Americans, there would be $425 million to redistribute among the bottom 800 people, who would each start with only $93,750. These 800 individuals would receive $531,250 more from the rich, increasing their wealth by 570 percent—not 25 percent. Thus, the only plausible takeaway of McCloskey’s example is that soaking the rich might conceivably help the poor “not very much”—but only if the “poor” are as rich as the rich to begin with! Unfortunately, readers may have come away with the comforting and self-serving “knowledge” that the pie is not big enough to meaningfully help the poor, so why bother trying?

In reality, imposing a policy of redistribution down the economic ladder—whether through the tax code, regulation, or any other means—could help the poor immensely. So should we adopt such policies? Of the many arguments McCloskey offers as to why redistribution is wrong-headed and futile, I disagree with two in particular.

First, McCloskey asserts that once the poor have “a roof over their heads and enough to eat,” they have no further need for any of society’s accumulated wealth. Elsewhere, she claims that all progressives seek a “forced equality” that would require brain surgeons and taxi drivers to earn the same amount. The former assertion is callous , and the latter is a strawman: even the most repressive Communist regimes in history sought equality of opportunity—not equality of outcome. Surely, somewhere within the 99 percent of the ideological distribution between dystopian Darwinism and utopian equality-for-its-own-sake, there is room for fruitful discussion about whether we should favor some modest redistribution via a progressive tax code and social programs. But McCloskey’s caricature of both positions makes any compromise impossible.

Second, McCloskey refers to taxation as “state violence,” “compelled equality,” and “envy-and-anger-satisfying extraction from the rich.” What can one say to this view of community-as-prison, other than to say that McCloskey does not speak for me, and many like-minded friends and colleagues: I have zero envy for the hardworking, lucky, or rapacious folks who are rich compared to me. I simply contribute—both voluntarily and compulsorily, and without rancor—and I expect the wealthier in society to do as much, or more, with their surpluses.

I recognize, of course, that McCloskey’s substantive views are shared by others and that reasonable people can differ on how much redistribution society should pursue. But we can have no meaningful dialogue about the costs and benefits of modestly progressive policies if that discussion is grounded in “alternative math.” It is possible to argue that the rich should not help uplift the poor, without making the claim that they cannot do so as a matter of “arithmetic.”

As with many of the toxic myths about regulation—that, for example, it is responsible for destroying countless jobs while failing to create any new ones in the process, or that it relies on gross exaggerations of risk and plays to irrational public fears—we are lost without the ability to distinguish between ideological responses to facts and ideological twisting of facts into nonsense. In recent weeks, likely in response to being tarred as “fake news” by the new Administration, the Times launched an impressive ad campaign (print ads and a Super Bowl commercial). I agree: the truth about data, algebra, and policies is indeed “more important than ever.”

Originally published at RegBlog here.

Economist Dierdre McCloskey Promotes False Math About Inequality and Redistribution

Numerous economists think that when the government redistributes wealth (from the top down)), the shifting of demand from one group (top) to another (middle to bottom) actually increases demand that is good for the economy and the culture.

Unfortunately, the way the government redistributes — through inflation — undermines the very demand aimed at stimulating the economy, and shifts purchasing power back to producers (owners) to generate savings for reinvestment. It’s an ugly, no-win scenario with the rich constantly getting richer.

The solution is to turn more people into capital owners so that consumption can keep up with production, thus economically empowering the poor and middle class simultaneously with the growth of the economy, without taking anything from those who already are producer-owners (the rich).

The government should be implementing the non-inflationary Capital Homestead Act (aka Economic Democracy Act and Economic Empowerment Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.

Study: Seattle’s Minimum-Wage Hike Didn’t Boost Supermarket Prices

Raising the minimum wage in Seattle to $13 an hour did not affect the price of food at supermarkets, according to a new study led by the University of Washington School of Public Health.

That’s good news for those earning higher wages. “Typically, criticisms of minimum wage policies have been that even if wage goes up it will be offset by increases in prices of consumer goods,” said Jennifer Otten, assistant professor of environmental and occupational health sciences and a member of the School’s nutritional sciences faculty. “This paper shows that, as of Seattle’s wage increase to $13 per hour in 2016, food prices are not going up.”

The study was published in the International Journal of Environmental Research and Public Health.

A growing number of cities in the United States are raising the minimum wage in an effort to improve the well-being of low-wage workers, but few studies have looked at the public health implications of these policies, including effects on food security, diet quality, and associated health outcomes. This is the first study of the effects of a minimum wage policy this size, and at the local level, on supermarket prices in real-time.

In Seattle, large employers, such as grocery retailers, were required to pay workers at least $11 an hour starting in April 2015, $13 an hour in January 2016, and $15 an hour in January 2017.

Otten and colleagues collected data from six supermarket chains affected by the policy in Seattle and from six others outside the city but within King County and unaffected by the policy. They looked at prices for 106 food items per store starting one month before enactment of the ordinance, one month after, and a year later.

Researchers found no significant differences in the cost of the market basket between the two locations at any point in time. A second analysis to assess the public health implications of potential differential price changes on specific items, such as fruits and vegetables, was also conducted and researchers found no evidence of price increases by food group.  Meats made up the largest share of the basket, followed by vegetables, cereal, grains and dairy.

The study was funded the City of Seattle and the Laura and John Arnold Foundation. It is part of ongoing work of the UW Minimum Wage Study Team.

Analysis of supermarket food prices collected after the Seattle policy increased to $15 per hour is forthcoming. Otten, along with Heather Hill of the Daniel J. Evans School of Public Policy and Governance and James Buszkiewicz, a doctoral student in epidemiology, are also examining the links between minimum wage and health outcomes over time.

https://newsroom.uw.edu/news/seattle%E2%80%99s-minimum-wage-hike-didnt-boost-supermarket-prices

 

Insanely Concentrated Wealth Is Strangling Our Prosperity

On September 18, 2017, Steve Roth writes on Economics:

Remember Smaug the dragon, in The Hobbit? He hoarded up a vast pile of wealth, and then he just hung out in his cave, sitting on it (with occasional forays to further pillage and immolate the local populace).

That’s what you should think of when you consider the mind-boggling hoards of wealth that the very rich have amassed in America over the last forty years. The picture at right only shows the very tippy-top of the scale. In 1976 the richest people had $35 million each (in 2014 dollars). In 2014 they had $420 million each — a twelvefold increase. You can be sure it’s gotten even more extreme since then.

Bottom (visible) pink line is the top 10%.

These people could spend $20 million every year and they’d still just keep getting richer, forever, even if they did absolutely nothing except choose some index funds, watch their balances grow, and shop for a new yacht for their eight-year-old.

If you’re thinking that they “deserve” all that wealth, and all that income just for owning stuff, because they’re “makers,” think again: between 50% and 70% of U.S. household wealth is “earned” the old-fashioned way (cue John Houseman voice): it’s inherited.

The bottom 90% of Americans aren’t even visible on this chart — and it’s a very tall chart. The scale of wealth inequality in America today makes our crazy levels of income inequality (which have also expanded vastly) look like a Marxist utopia.

American households’ total wealth is about $95 trillion. That’s more than three-quarters of a million dollars for every American household. But roughly 50% of households have zero or negative wealth.

Now of course you don’t expect 20-year-olds to have much or any wealth; there will always be households with none. But still, the environment for young households trying to build a comfortable and secure nest egg — the American dream? — has gotten wildly competitive and hostile over recent decades. (If we had a sovereign wealth fund, everyone would have a wealth share from birth.)

But here’s what’s even more egregious: that concentrated wealth is strangling our economy, our economic growth, our national prosperity. Wealth concentration drives a vicious, downward cycle, throttling the very engine of wealth creation itself.

Because: people with lots of money don’t spend it. They just sit on it, like Smaug in his cave. The more money you have, the less of it you spend every year. If you have $10,000, you might spend it this year. If you have $10 million, you’re not gonna. If you have $1,000, you’re at least somewhat likely to spend it this month.

Here’s one picture of what that looks like (data sources):

These broad quintile averages obviously don’t put across the realities of the very poor and the very rich; each quintile spans 25 million households. But the picture is clear. The bottom quintiles turn over 40% or 50% of their wealth every year. The richest quintile turns over 5%. For a given amount of wealth, wider wealth dispersion means more spending. It’s arithmetic.

Now go back to those top-.01% households. They have about $5 trillion between them. Imagine that they had half that much instead (the suffering), and the rest was spread out among all American households — about $20,000 each.

Assume that all those lower-quintile households spend about 40% of their wealth every year. They each get to spend an extra $8,000, and enjoy the results. Sounds nice. And it’s spending that simply won’t happen with concentrated wealth. The money will just sit there.

Now obviously just transferring $2.5 trillion dollars, one time, is not going to achieve this imagined nirvana. Nor is it bloody well likely to happen. That example is just to illustrate the arithmetic. Absent some serious changes in our wildly skewed income distribution (plus capital gains, the overwhelmingly dominant mechanism of wealth accumulation, which don’t count as “income”), that wealth would just get sucked back up to the very rich, like it has, increasingly, for the past forty years — and really, the past several thousand years.

If wealth is consistently more widely dispersed — like it was after WW II — the extra spending that results causes more production. (Why, exactly, do you think producers produce things?) And production produces a surplus — value in, more value out. It’s the ultimate engine of wealth creation. In this little example, we’re talking a trillion dollars a year in additional spending and production. GDP would be 5.5% higher.

If you want to claim that the extra spending would just raise prices, consider the last 20 years. Or the last three decades, in Japan. And if you think concentrated wealth causes better investment and greater wealth accumulation, ask yourself: what economic theory says that $95 trillion in concentrated wealth will result in more or better investment than $95 trillion in broadly dispersed wealth? Our financial system is supposed to intermediateall that, right?

Or ask yourself: would Apple be as successful as it is if its business model was based on selling eight-million-dollar diamond-encrusted iPhones? Broad prosperity is what made Apple, Apple. Concentrated wealth distorts producers’ incentives, so they produce, for instance, a million-dollar Maserati instead of forty (40) $25,000 Toyotas — because that’s what the people with the money are buying. Which delivers more prosperity and well-being?

This little envelope calc is describing a far more prosperous, comfortable, and secure society — far richer and and one hopes far more peaceful than the one we’re facing under wildly concentrated wealth. With the possible exception of a few very rich multi-generational dynasties, everyone’s grandchildren will be far better off 50 years from now if wealth is more widely dispersed. And over that half century, hundreds of millions, even billions of people will live far richer, better lives.

Why wouldn’t we want that? Why wouldn’t we do that? (We know the answer: rich people hate the idea — even those who aren’t all that rich but foolishly buy into the whole trickle-down fantasy. And the rich people…have the power.)

By contrast to that possibility, here’s what things look like over the last seven decades:

Here are the results — growth in inflation-adjusted GDP per capita:

The last time economic growth broke 5% was in 1984. And the decline continues.

So how do we get there, given that we’ve mostly failed to do so for millennia? Start with a tax system that actually is progressive, like we had, briefly, during the postwar heyday of rampant and widespread American growth and prosperity. And greatly expand the social platform and springboard that gives tens of millions more Americans a place to stand, where they can move the world.

All of this dweebish arithmetic, of course, doesn’t put across the real crux of the thing: power. Money is power. So it is, so it has been, and so it shall be in our lifetimes and our children’s lifetimes (world without end, amen). This is especially true for minorities, who have been so thoroughly screwed by our recent Great Whatever. Money is the power to walk away from a shitty job. To hire fancy lawyers and lobbyists, maybe even buy yourself a politician or two. If we want minorities to have power, they need to have money.

Add to that dignity, and respect, which is deserved by every child born: sadly but truly, they are delivered to those who have money. You can bemoan that reality, but in the meantime, let’s concentrate on the money.

If you want to create a workers’ utopia, a better world for all, seize the wealth and income.

2017 September 18

=================

Data Sources

The data for the tall chart is from Gabriel Zucman, PSZ2016AppendixTablesII(Distrib).xlsx Table TE3. Google sheet with data and chart here.

Average wealth by quintile is from the Federal Reserve’s Survey of Consumer Finance (SCF), scf2013_tables_internal_nominal.xls, Table 4. (Top 20% wealth in the table above is an average of the means for 80-90% and 90-100%.) The most recent triannual SCF release, covering 1989-2013, determined the year chosen for the table. The next release, through 2016, should be out imminently.

Spending by quintile is from the BLS Consumer Expenditure Survey (CEX; earlier years here), Table 1101 (adjusted; see below): https://www.bls.gov/cex/2013/combined/quintile.xlsx. All annual expenditure-by-quintile tables 1984-2016 in one spreadsheet here.

Note: Measuring expenditures is very difficult, especially the spending of the very rich. They’re not keen to answer lengthy surveys like the CEX, given that they don’t even want their housekeepers to know that they paid $6 for a loaf of bread. As a result, CEX — which breaks out spending by quintile — missesabout 40% (xlsx) of the spending tallied in the BEA’s Personal Consumption Expenditures (PCE) — which doesn’t. As a rough corrective for that discrepancy, the spending-by-quintile figures in the table above are CEX measures multiplied by 1.66. This “PCE correction” results in far more plausible spending figures, especially for the top 20%: Average $165,000 in 2103 annual spending versus CEX’s $100,000.

Insanely Concentrated Wealth Is Strangling Our Prosperity

 

The Science Of Flow Says Extreme Inequality Causes Economic Collapse

On February 9, 2017, Dr. Sally J. Goerner writes on Evonomics:

According to a recent study by Oxfam International, in 2010 the top 388 richest people owned as much wealth as the poorest half of the world’s population– a whopping 3.6 billion people. By 2014, this number was down to 85 people. Oxfam claims that, if this trend continues, by the end of 2016 the top 1% will own more wealth than everyone else in the world combined. At the same time, according to Oxfam, the extremely wealthy are also extremely efficient in dodging taxes, now hiding an estimated $7.6 trillion in offshore tax-havens.[3]

Why should we care about such gross economic inequality?[4] After all, isn’t it natural? The science of flow says: yes, some degree of inequality is natural, but extreme inequality violates two core principles of systemic health: circulation and balance. 

Circulation represents the lifeblood of all flow-systems, be they economies, ecosystems, or living organisms. In living organisms, poor circulation of blood causes necrosis that can kill. In the biosphere, poor circulation of carbon, oxygen, nitrogen, etc. strangles life and would cause every living system, from bacteria to the biosphere, to collapse. Similarly, poor circulation of money, goods, resources, and services leads to economic necrosis – the dying off of large swaths of economic tissue that ultimately undermines the health of the economy as a whole.

In flow systems, balance is not simply a nice way to be, but a set of complementary factors – such as big and little; efficiency and resilience; flexibility and constraint – whose optimal balance is critical to maintaining circulation across scales. For example, the familiar branching structure seen in lungs, trees, circulatory systems, river deltas, and banking systems (Fig. 1) connects a geometrically constant ratio of a few large, a few more medium-sized, and a great many small entities. This arrangement, which mathematicians call a fractal, is extremely common because it’s particular balance of small, medium, and large helps optimize circulation across different levels of the whole. Just as too many large animals and too few small ones creates an unstable ecosystem, so financial systems with too many big banks and too few small ones tend towards poor circulation, poor health, and high instability.

In his documentary film, Inequality for All , Robert Reich uses virtuous cycles to clarify how robust circulation of money serves systemic health. In virtuous cycles, each step of money movement makes things better. For example, when wages go up, workers have more money to buy things, which should increase demand, expand the economy, stimulate hiring, and boost tax revenues. In theory, government will then spend more money on education which will increase worker skills, productivity and hopefully wages. This stimulates even more circulation, which starts the virtuous cycle over again. In flow terms, all of this represents robust constructive flow, the kind that develops human and network capital and enhances well-being for all.

Of course, economies also sometimes exhibit vicious cycles, in which weaker circulation makes everything go downhill – i.e., falling wages, consumption, demand, hiring, tax revenues, government spending, etc. These are destructive flows, ones that erode system health.

Both vicious and virtuous cycles have occurred in various economies at various times and under various economic theories and policy pressures. But, for the last 30 years, the global economy in general and the American economy in particular has witnessed a strange combination pattern in which prosperity is booming for CEOs and Wall Street speculators, while the rest of the economy – particularly workers, the middle class, and small businesses – have undergone a particularly vicious cycle. Productivity has grown massively, but wages have stagnated. Consumption has remained reasonably high because, in an effort to maintain their standard of living, working people have: 1) added hours, becoming two-income families, often with two and even three jobs per person; and 2) increased household debt. Inequality has skyrocketed because effective tax rates on the 1% have dropped (notwithstanding a partial reversal under Obama), while their income and profits have risen steeply.

We should care about this kind of inequality because history shows that too much concentration of wealth at the top, and too much stagnation everywhere else indicate an economy nearing collapse. For example, as Reich shows (Figure 1a & b), both the crashes of 1928 and 2007 followed on the heels of peaks in which the top 1% owned 25% of the country’s total wealth.

Fig. 3a Income Share of U.S. Top 1% (Reich, 2013) & 3b Reich notes that the two peaks look like suspension bridge, with highs followed by precipitous drops. (Original Source: Piketty & Saez, 2003)

What accounts for this strange mix of increasing concentration at the top and increasing malaise everywhere else? Putting aside the parallels to 1929 for a moment, most common explanations for today’s situation include: the rise of technology which makes many jobs obsolete; and globalization which puts incredible pressures on companies to lower wages and outsource jobs to compete against low-wage workers around the world.

But, while technology and globalization are clearly creating transformative pressures, neither of these factors completely explains our current situation. Yes, technology makes many jobs obsolete, but it also creates many new jobs. Yet, where the German, South Korean and Norwegian governments invest in educating their workforce to fill those new jobs, the American government has been cutting back on education for decades. A similar thought holds for globalization. Yes, high-volume industrialism – that is, head-to-head competition over price of mass-produced, uniform goods – leads to a race to the bottom; that’s been known for a long time. But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world.

So, while the impacts of globalization and technology are profound, the real explanation for inequality lies primarily with an economic belief that, intentionally or not, serves to concentrate wealth at the top by extracting it from everywhere else. This belief system is called variously neoliberalism, Reaganomics, the Chicago School, and trickle-down economics. It is easily recognized by its signature ideas: deregulation; privatization; cut taxes on the rich; roll back environmental protections; eliminate unions; and impose austerity on the public. The idea was that liberating market forces would cause a rising tide that lifted all boats, but the only boat that actually rose was that of the .01%. Meanwhile, instability has grown.

The impact this belief system has had on the American economy and its capacities can be seen in American education. Trickle-down theories are all about cutting taxes on the wealthy, which means less money for public education, more young people burdened with huge college debt, and fewer American workers who can fill the new high-tech jobs.

To be fair, this process is not just about greed. Most of the people who participate in this economic debacle do not realize its danger because they believed what they were told by the saints and sages of economics, and many are rewarded for following its principles. So, what really causes the kind of inequality that drives economies toward collapse? The basic answer from the science of flow is: economic necrosis. But, let me flesh out the story.

Institutional economists talk about two main types of economic strategies: extractive and solution-seeking. (Hopefully, these names are self-explanatory.) Most economies contain both. But, if the extractive forces become too powerful, they begin to use their power to rig the rules of the economic game to favor themselves. This creates what scientists call a positive feedback loop, one in which “the more you have, the more you get.” Seen in many kinds of systems, this loop creates a powerful pull that sucks resources to the top, and drains it away from the rest of the system causing necrosis. For example, chemical runoff into the Gulf of Mexico accelerates algae growth. This creates an escalating, “the more you have, the more you get” process, in which massive algae growth sucks up all the oxygen in the surrounding area, killing all of the nearby sea life (fish, shrimp, etc.) and creating a large “dead zone.”

Screen Shot 2016-02-14 at 9.43.56 PM

Neoliberal economics set up a parallel situation by allowing the wealthy to use their money to extract ever more money from the overall economy. The uber-wealthy grow wealthier by:

  • Paying for policy favors – big corporate bailouts and subsidies; lobbying; etc.
  • Removing constraints on dangerous behavior – removing environmental protections; not prosecuting financial fraud offenders; ending Glass-Steagall, etc.
  • Increasing the public’s vulnerability – increasing monopolistic power by diminishing antitrust regulations; limiting the public’s ability to sue big corporations; limiting Medicare’s ability to negotiate for lower pharmaceutical rates; limiting bankruptcy for student loans, etc.
  • Increasing their own intake – rising CEO salaries and escalating Wall Street gambling; and limiting their own outflows – externalizing costs, cutting worker wages and lowering their own taxes.

All of these processes help the already rich concentrate more, and circulate less. In flow terms, therefore, gross inequality indicates a system that has: 1) too much concentration and too little circulation; and 2) an imbalance of wealth and power that is likely to create ever more extraction, concentration, unaccountability, and abuse. This process accelerates until the underlying human network becomes exhausted and/or the ongoing necrosis reaches a point of collapse. When this point is reached, the society will have three choices: learn, regress, or collapse.

What then shall we do? Obviously, we need to improve our “solution seeking” behavior in realms from business and finance to politics and media. Much of this is already taking place. From socially-responsible business and alternative forms of ownership, to democratic reform groups, alternative media, and the new economy movement – reforms are arising on all sides.

But, the solutions we need are also often blocked by the forces we are trying to overcome, and impeded by the massive merry-go-round momentum of “business as usual.” Today’s reforms also lack power because they are taking place piecemeal, in a million separate spots with very little cross-group unity.

How do we overcome these obstacles? The science of flow offers not so much a specific strategy, as an empowering change of perspective. In essence, it provides a more effective way to think about the processes we see every day.

The dynamics explained above are very well known; they are basic physics, just like the law of gravity. Applying them to today’s economic debates can be extremely helpful because the latter have devolved into ideological debates devoid of any scientific foundation.

We believe Regenerative Economics can provide a unifying framework capable of galvanizing a wide array of reform groups by clarifying the picture of what makes societies healthy. But, this framework will only serve if it is backed by accurate theory and effective measures and practice. This soundness is part of what Capital Institute and RARE are trying to develop.

John Fullerton’s white paper, Regenerative Capitalism, lists eight principles critical to systemic economic health. The Capital Institute’s research group, RARE[1], uses recent scientific advances – specifically, the physics of flow[2]– to create a logical and measurable explanation of how these principles work to make or break vitality in the human networks of which economies are built. 

 

[1] RARE = Research Alliance for Regenerative Economics

[2] The “physics of flow” refers to the study of flow-networksmeaning any system whose existence arises from and depends on the circulation of critical resources and/or information throughout the entirety of their being. Living organisms depend on the circulation of nutrients and oxygen. Ecosystems depend on the circulation of carbon, oxygen, water, etc. Economic systems depend on the circulation of money, information and resources. The physics of flow uses universal principles and patterns of flow to clarify what makes economies healthy over long periods of time. While “living systems” are flow networks, the advantage of using the broader-case principles is that there is no question about whether the results are merely a metaphoric extrapolation from ecosystems.

[3]https://www.oxfam.org/sites/www.oxfam.org/files/file_attachments/ib-wealth-having-all-wanting-more-190115-en.pdfhttps://www.oxfam.org/en/pressroom/pressreleases/2015-01-19/richest-1-will-own-more-all-rest-2016

[4] 2013 Documentary film, http://inequalityforall.com

The Science of Flow Says Extreme Inequality Causes Economic Collapse


 

The Myths Of Recovery: Why American Households Aren’t Better Off

Getty Images

Workers pack and ship customer orders at the 750,000-square-foot Amazon fulfillment center on August 1, 2017 in Romeoville, Illinois.

On September 14, 2017, Constantin Gurdgiey writes on Market Watch:

Off the top, the figures published by the U.S. Census Bureau on Tuesday are encouraging:

• Median household income rose to $59,039, the second straight gain;

• The percentage of people in poverty fell to 12.7%, returning to around pre-recession levels;

• The supplementary poverty measure also fell, to 13.9%;

• The percentage of people without health insurance coverage fell to 8.8%.

The excitement of some analysts reporting these as a major breakthrough along the trend is understandable, as notionally, 2016 U.S. median household income has finally surpassed the previous peak, recorded in 1999. Back then, median household income (adjusted for official inflation) stood at $58,665 and at the end of 2016 it registered $59,039.

As this chart clearly illustrates, notionally, we are in the “new historical peak” territory.

Alas, notional is not the same as tangible. And here are the reason why the tangible matters probably more than the notional:

1) Consider the following simple timing observation: real incomes took 17 years to recover from the 2000-2012 collapse. And the Great Recession, officially, accounted for only $4,031 in total decline of the total peak-to-trough drop of $5,334. Which puts things into a different framework altogether: the stagnation of real incomes from 1999 through today is structural, not cyclical. The “good news” are really of little consolation for people who endured almost two decades of zero growth in real incomes: their life-cycle incomes, pensions, wealth are permanently damaged and cannot be repaired within their lifetimes.

2) The Census Bureau data shows that bulk of the gains in real income in 2016 has been down to one factor: higher employment. In other words, hours worked rose, but wages did not. American median householders are working harder at more jobs to earn an increase in wages. Which would be OK, were it not down to the fact that working harder means higher expenditure on income-related necessities, such as commuting costs, child-care costs, costs for caring for the dependents, etc. In other words, to earn that extra income, households today have to spend more money than they did back in the 1990s. Now, I don’t know about you, but for my household, if we have to spend more money to earn more money, I would be looking at net increases from that spending, not gross. Census Bureau does not adjust for this. There is an added caveat to this: caring for children and dependents has become excruciatingly more expensive over the years, since 1999. Inflation figures reflect that, but the real income deflator takes the average/median basket of consumers in calculating inflation adjustment. However, households gaining new additional jobs are not average/median households to begin with — and most certainly not in 2016, when labor markets were tight. In other words, the median household today is more impacted by higher inflation costs pertaining to necessary non-discretionary expenditures than the median household in 1999. Without adjusting for this, notional Census Bureau figures misstate (to the upside) current income gains.

3) In 1999, the Census Bureau data on household incomes used a different methodology than it does today. The methodology changed in 2013, at which point in time, the Census Bureau estimated that 2013 median income was about $1,700 higher based on new methodology than under pre-2013 methodology. Since then, we had no updates on this adjustment, so the gap could have actually increased. Tuesday’s numbers show that median household income at the end of 2016 was only $374 higher than in 1999. In other words, it was most likely around $1,330 or so lower, not higher, under the pre-2013 methodology. Taking a very simplistic (most likely inaccurate, but somewhat indicative) adjustment for 2013-pre-post differences in methodologies, the current 2016 reading is roughly 1.6% lower than the 2007 local peak, and roughly 2.3% lower than the 1999-2000 level.

4) Costs and taxes do matter, but they do not figure in the Census Bureau statistic. Quite frankly, it is idiotic to assume that gross median income matters to anyone. What matters is after-tax income net of the cost of necessities required to earn that income. Now, consider a simple fact: in 1999, a majority of jobs in the U.S. were normal working-hours contracts. Today, a huge number are zero-hours and gig-economy jobs. The former implied regular and often subsidized demand for transport, childcare, food associated with work etc. The latter implies irregular (including peak hours) transport, childcare, food and other services demand. The former was cheaper. The latter is costlier. To earn the same dollar in traditional employment is not the same as to earn a dollar in the gig economy. Worse, taxes are asymmetric across two types of jobs too. The gig economy adds to this problem yet another dimension. Many gig-economy earners (e.g. Uber drivers, delivery & messenger services workers, or AirBnB hosts) use income to purchase assets they use in generating income. These are not reflected in the Census Bureau earnings, as the official figures do not net out cost of employment.

5) Finally, related to the above, there is higher degree of volatility in job-related earnings today than in 1999. And there are longer duration of unemployment spells in today’s economy than in the 1990s. Which means that the risk-adjusted dollar earned today requires more unadjusted dollars earned than in 1999. Guess what: Census Bureau statistics show not-risk-adjusted earnings. You might think of this as an academic argument, but we routinely accept (require) risk-adjusted returns in analyzing investment prospects. Why do we ignore tangible risk costs in labor income?

The key point here is that any direct comparison between 1999 and 2016 in terms of median incomes is problematic at best. It is problematic in technical terms (methodological changes and CPI deflator changes), and it is problematic in incidence terms (composition of work earnings, risks, incidences of costs and taxes). My advice: don’t ever do it without thinking about all important caveats.

Materially, U.S. households’ disposable risk-adjusted incomes are lower today than they were in 1999. That explains why American households are drowning in debt: the demand for income vastly exceeds the supply of income, even as the official median household size shrinks and cost of housing is being deflated by children staying in parents’ homes for decades after college. The rosy times are not upon us, folks.

http://www.marketwatch.com/story/the-myths-of-recovery-why-american-households-arent-better-off-2017-09-13

 

 

The Rock-Star Appeal Of Modern Monetary Theory

(Illustration by Victor Juhasz)

On May , 2017, Atossa Araxia Abrahamian writes in The Nation:

In early 2013, Congress entered a death
 struggle—or a debt struggle, if you will—over the future of the US economy. A spate of old tax cuts and spending programs were due to expire almost simultaneously, and Congress couldn’t agree on a budget, nor on how much the government could borrow to keep its engines running. Cue the predictable partisan chaos: House Republicans were staunchly opposed to raising the debt ceiling without corresponding cuts to spending, and Democrats, while plenty weary of running up debt, too, wouldn’t sign on to the Republicans’ proposed austerity.

In the absence of political consensus, and with time running out, a curious solution bubbled up from the depths of the economic blogosphere. What if the Treasury minted a $1 trillion coin, deposited it in the government’s account at the Federal Reserve, and continued on with business as usual? The workaround was technically authorized by an obscure law that applies to commemorative platinum coins, and it didn’t require congressional approval, so the GOP couldn’t get in the way. What’s more, the cash would not be circulated, so it wouldn’t cause inflation.

The thought experiment was catnip for wonks and bloggers, who described it as “ludicrous but perfectly legal” (Slate); “a monetary parlor trick” (Wired); “really thrilling” (Business Insider); “a large-scale trolling project” (The Guardian). The idea made its way onto late-night TV, political talk shows, White House press conferences, and lived on as a hashtag: #mintthecoin. At the heart of the attention was an acknowledgement that money wasn’t the problem here—politics was.

For a small but committed group of economists, academics, and activists who adhere to a doctrine called Modern Monetary Theory (MMT), though, #mintthecoin was the tip of the economic iceberg. The possibility of a $1 trillion coin represented more than mere monetary sophistry: It drove home their foundational point that fiat currency is a social construct, and that there are therefore no fiscal limits on how much a sovereign currency-issuing nation can spend.

According to this small but increasingly vocal cohort of economists, including Bernie Sanders’s former chief economic adviser, once we change the way we think about money, we can provide for everyone: We don’t have to “find” the money to “pay” for universal health care by “cutting” the budget elsewhere. In fact, our government already works that way: Spending must precede taxation, or there would be no dollars in the economy to tax. It’s the political will to spend on certain things, not the money to afford it, that’s lacking.

“The idea that you can’t feed hungry kids and build a bridge is a huge problem,” says Stephanie Kelton, an economist at the University of Missouri, Kansas City. “It’s cruel to say we want more money for education and food but have to wait for legislation.”

Kelton, who spoke about the coin on MSNBC, is MMT’s most mediagenic expert. She’s 48 years old, whip-smart, impeccably coiffed, and brims with enthusiasm—important for someone who spends half her time telling Wall Street types to rethink their basic approach to economics. When San-
ders ran for the Democratic nomination, Kelton became his chief economic adviser at the recommendation of several prominent left-wing economists, including Dean Baker and Jamie Galbraith. Before that, she served as chief economist on the Senate Budget Committee and moonlighted as the editor of a blog called New Economic Perspectives.

Kelton sees the fundamentals of her work as “a descriptive analysis that could be exploited by either side: Democrats and Republicans can use the insight to push tax cuts or increase spending.” Indeed, the idea of a big-spending economic stimulus to fix the country’s infrastructure served as a common ground for Trump and Sanders voters who liked the idea of jobs perhaps more than they disliked the idea of national indebtedness. If that’s what voters want, then MMT is a rare bird: an economic theory that not only validates their hunches, but contends that they’re the key to a healthy, stable, prosperous economy for all.

Modern Monetary Theory emerged as a 
distinct school of economic thought in the 1990s, when Kelton and her colleagues—mainly professors with homes in heterodox economics departments like the University of Missouri, Kansas City, and Bard’s Levy Institute—published research and discussed their theories, albeit mainly among themselves on a now-defunct listserv called “Post-Keynesian Thought” and at an annual conference that started in 2003.

The various strains of thought that make up MMT have their roots in Adam Smith and John Maynard Keynes, along with more contemporary thinkers like Hyman Minsky and Abba Lerner, but only recently have researchers connected the dots in quite this way. “We’ve rediscovered old ideas,” Kelton said, “and assembled them into a complete macroeconomic frame.”

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT’s adherents like to point out that the federal government never “runs out” of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn’t a scarce commodity like silver or gold. “To people who’ve worked in financial markets, who work at the Fed, this isn’t controversial at all,” says Galbraith, who, while not an adherent, can certainly be described as “MMT-friendly.”

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT’s proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we’re a long way off from that, particularly if we include people who have given up looking for jobs or aren’t working as much as they’d like to among the officially “unemployed.” The point is that, once you shake off notions of artificial scarcity, MMT’s possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.

MMT didn’t get much traction outside of academia at first. In fact, it was (and remains) on the fringes of the economics profession itself. “We all had offices in the same alley at the Levy Institute,” Kelton recalls.

Then along came Warren Mosler, a wealthy financier who, as a result of his banking work, had come to some unorthodox and complementary ideas about money. Eager to share his views, Mosler finagled a meeting with Donald Rumsfeld in the steam room of the Chicago Racquet Club. Rumsfeld led him to Arthur Laffer, the right-wing economist who came up with the “Laffer curve” theory promoting low taxes, and Laffer, in turn, connected Mosler with his future collaborator, the economist Mark McNary. In an independently published paper titled “Soft-Currency Economics,” Mosler, drawing on McNary’s research, argued that taxes are what create a demand for federal spending and that deficits don’t cause countries to default on their debt.

Mosler sought comments on his work from academic departments, too. He didn’t have any luck with Ivy League institutions, but the man made it on Wall Street for at least one reason: He won’t take no for an answer. So Mosler sent his paper to the “Post-Keynesian Thought” listserv and found a group of kindred spirits willing to engage.

Stephanie Kelton recalls initially disagreeing with some of Mosler’s theories about taxes; then her colleague L. Randall Wray told her to do her own work and show how he was mistaken. “I wrote it up in the Cambridge Journal of Economics and set out to prove he was wrong,” Kelton recalls, “but I arrived at the same place he did.”

From then on, Mosler became something like the movement’s sugar daddy, funding graduate research, making donations to the Center for Full Employment and Price Stability at the University of Missouri, even opening a research center in Switzerland. He was an unlikely addition to the gang: He lives in St. Croix for the taxes, has a thing for fancy cars, made a nice chunk of money investing, and has run for office in St. Croix and in his home state of Connecticut. Mosler isn’t particularly ideological, but after some hesitation, he describes himself over the phone as “basically progressive.” Still, he insists that he is simply opening the public’s eyes to basic math. “It’s a theory insofar as arithmetic is a theory,” Mosler tells me.

“If you eliminate the tax on people working for a living and [let them] keep more money, the average family would have $625 of payroll pay. Why won’t politicians do that? Because they believe the tax money is used to make Social Security payments. But that’s a mistake.” Even so, Mosler notes, “if anyone would propose that, it’s not a big-spending liberal—it’s something the Tea Party might propose.”

Early in his foray into MMT, Mosler hired Bard economist Pavlina Tcherneva to help him with the research. Tcherneva had her 15 minutes of fame in 2015, when Bernie Sanders held up a graph she’d made showing how few gains in income American workers have seen since the Reagan years. (It went viral online under the Vox headline “The Most Important Chart About the American Economy You’ll See This Year.”) Today, Tcherneva’s research is focused on how MMT can provide jobs.

“There is no reason why society should tolerate unemployment,” she tells me in her office at Bard on an unseasonably warm day in February. “It’s a basic human right. By pegging a dollar amount to one hour of labor by having full employment, money will mean something in socially useful terms, and we can design a system to support and tighten the labor market and let people opt out of shitty jobs. Trump has his finger on the pulse of joblessness,” she adds. “It’s a direct recognition, a precise recognition, of their plight. But we need something concrete to offer.”

In Europe, where a generation of young people 
remain under- or unemployed, more spending, better social welfare, and a guaranteed job are a particularly attractive combination. But eurozone countries share a common currency, so the European Union would have to allow all of its members to borrow more, not less, to stimulate the economies of its more beleaguered states. There is some, if limited, buy-in from governments, though probably nowhere near enough to change the policy. In Greece, for example, Rania Antonopoulos, who runs Bard’s “Gender Equality and the Economy” program, serves as the alternate minister of labor in the Syriza government; she’s proposed pushing the government to be the employer of last resort.

Despite the lack of official interest, austerity has given these MMT economists rock-star status. Kelton recalls a conference a few years back in Rimini, Italy, where her group sold out their initial venue and had to move the event to a basketball stadium. “When we were driving there, the parking lot was packed,” she says. “We asked the driver what was happening, and he said it was for us.” She thought he was kidding—until she saw the MMT signs in the background.

On this side of the Atlantic, the financial crisis, the tepid recovery, and the Occupy movement have paved the way for alternative ways of thinking about the economy, and the events of 2008–12 have made it clear that the US government had the money—it just chose to bail out the banking sector, not spend it on social welfare. This all served to validate many of the points that Kelton and her colleagues have been making for decades.

“We built credibility,” Kelton says, “and that helped us get established as a school of thought. The [New Economic Perspectives] blog helped us get a voice. It also gave us a historical record about being right about things like how the US downgrade wouldn’t make interest rates go up; that quantitative easing wasn’t inflationary; and that the eurozone would run into trouble. We were saying that in 1998!”

Kelton’s work with Sanders further boosted the gang’s legitimacy. She didn’t transform him into a “deficit owl,” but observers note that during his run, Sanders did make moves to refocus the conversation around social goods, speaking of education, health care, and infrastructure deficits instead of obsessing over abstract negatives on a balance sheet. “He didn’t ‘go there,’” Tcherneva says, “but it was a teachable moment. The frame was useful because it concerns concrete things. People don’t lose sleep over government deficits.”

MMT has something else that most obscure economic doctrines don’t have: a band of devoted bloggers and commenters, and a “street team” of young, politically engaged people who learned about these theories online and have taken it upon themselves to spread the gospel wherever they go with an almost religious fervor.

During the recession, the popular economics blog Naked Capitalism began publishing articles about the movement; economists Tyler Cowen and Paul Krugman, though not particularly sympathetic to MMT (in part because of their concerns about inflation), at least responded to them. In 2012, a Columbia Law School student, Rohan Grey, started a group called the Modern Money Network, which has hosted a series of symposiums with big-name speakers like the former Greek finance minister, Yanis Varoufakis. On YouTube, videos of MMT lectures, seminars, and tutorials abound. “I’ve been amazed by the activism,” Tcherneva says. “We’ve always wanted to democratize our ideas, and we now can thanks to the magic of social media.”

It’s hard to imagine radical changes being made to the way politicians talk about money. It could take decades, even centuries, to make a dent in entrenched ideas about debt, scarcity, and supply. Even so, the time seems ripe for MMT: There is, particularly among young people, an enormous appetite for new solutions to the problems that modern economies face, from automation to offshoring. And the financial crisis has shaken the public’s trust in established ways of thinking. Take the universal basic income: A few years ago, it seemed unrealistic and utopian, but today, versions of the UBI have been embraced by Silicon Valley moguls, economists on the left and the right, and politicians around the world.

MMT is less prescriptive: It describes the way that money works in a way that an 8-year-old can grasp more readily than a PhD, which in itself is unnerving. “The contribution of MMT is not the discovery of new facts,” Galbraith says. “It’s a teaching core of things which are factually uncontroversial.” But its implications can be radically humane. What’s threatening to the establishment, Galbraith adds, “is that the narrative is very compelling.”

The Rock-Star Appeal of Modern Monetary Theory

http://www.independent.co.uk/news/long_reads/actually-the-magic-money-tree-does-exist-according-to-modern-monetary-theory-a8021501.html