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September 26, 2010

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Latest Posts from Economist's View

What the Rich Don’t Need

Posted: 26 Sep 2010 01:23 AM PDT

Richard Thaler says "Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist":

What the Rich Don't Need, by Richard Thaler, Commentary, NY Times: Want to give affluent households a present worth $700 billion over the next decade? In a period of high unemployment and fiscal austerity, this idea may seem laughable. Amazingly, though, it is getting traction in Washington.
I am referring, of course, to the current debate about whether to extend all, or just some, of the tax cuts of President George W. Bush... President Obama has proposed retaining the current rates on incomes up to $200,000 for individuals and $250,000 for couples. ...
 Republican leadership has drawn a line in the sand, saying it will oppose Mr. Obama's bill unless all taxpayers remain at current rates. Although it wouldn't put it this way, the Republican position is, in effect, that if the rich can't share in the bounty, rates should rise for everyone.
They offer three arguments to support their view. The first is that it is folly to raise taxes in a weak economy. ...
Tax cuts are one of many ways to stimulate the economy. Building infrastructure, for example, is another. We have to choose. And if the primary goal is stimulating the economy, tax breaks to the rich are simply not cost-effective. ...
The second argument is that not extending the tax cuts to high-income earners would impose an excessive burden on small businesses. Here, however, ... the fact that 3 percent of the businesses earn nearly half of the money is precisely what many people are concerned about: growing income inequality.
Which brings us to the third argument. Conservatives say that to do anything other than extending tax cuts to everyone would amount to "class warfare." The best response to that notion comes from Warren E. Buffett: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." ...
And what about incentives? Will the owners of the profitable small businesses work less hard, or hire fewer people, if their own after-tax income falls? This is a much-researched question, and ... we shouldn't expect significant real reductions in economic activity...
The question comes down to whether we want a society in which the rich take an ever-increasing share of the pie, or prefer to return to conditions that allow all classes to anticipate an increasing standard of living. Demanding that the rich get a tax cut as a condition for tax relief for others is simply elitist. Tea Partiers, take note.

Is it possible for an outcome to be equitable when, as in recent decades, nearly all of the gains from growth accrue to one class?

Will Wall Street's Attacks Turn Obama into a "True Populist"?

Posted: 26 Sep 2010 01:17 AM PDT

Is Obama about to become more populist?:

Wall Street's attacks could turn President Obama into a true populist, by Jacob S. Hacker and Paul Pierson, Commentary, Washington Post: Corporate America's stance toward the Obama administration has recently deteriorated into vitriolic attacks and outright opposition. ... Far more ominous for the White House, business has been putting its money where its mouth is: In sector after sector, corporate campaign contributions ahead of November's elections are going to Republicans.
Conventional explanations for this mounting opposition focus on policies and personalities, insisting that the president has embraced runaway government or unnecessarily ruffled business's feathers. ...
But this has it exactly backward. The business-Obama divorce isn't about personalities, and it's not ... anti-business policies. Instead, it reflects a deeper disconnect between corporate leaders and the rest of America... This disconnect has blinded corporate leaders to the extent to which most Americans feel that the government, far from crushing corporate America, has been looking out only for those at the top.
Had Obama realized sooner that he would never win over corporate America, he might have pursued rhetoric and policies that would have alienated fewer voters. ... But could the president have ... won over the public by launching the very thing his detractors in the business community already accuse him of: a populist campaign to reform the economy?
To many on the left, the answer is yes. Journalist Robert Kuttner ... blames ... an economic team that was too solicitous of Wall Street. Democratic pollster Stan Greenberg, meanwhile, has found that Obama's fight against extending tax cuts to the very rich resonates powerfully with crucial voting blocs.
Still, the barriers to a more populist route weren't limited to Obama's temperament and his Cabinet. They extended to his Congress, in particular the conservative Democrats in the Senate and the "Blue Dogs" in the House... A more populist route would have alienated them, jeopardizing Obama's entire agenda.
After November, however, Democratic moderates will probably no longer be at the center of the action. With even more Republican votes needed to overcome a filibuster, and with the GOP shifting ever further to the right, Congress is likely to descend into gridlock.
At that point, tough talk will no longer threaten important legislative opportunities. The president will be free to speak frankly about middle-class concerns and draw sharper ideological distinctions. By swinging its support to the GOP, business could bring on a more strident Obama -- in rhetoric, and maybe even in substance.

Maybe Obama will change, but his heart of hearts does not seem to be populist by nature.

links for 2010-09-25

Posted: 25 Sep 2010 11:03 PM PDT

"Greed May Not be Good for the Economy, but Envy is Worse"

Posted: 25 Sep 2010 12:33 PM PDT

Here we go again. Whenever there is discussion of raising taxes on the rich, the inevitable the charge that people in favor of raising taxes are suffering from "envy" of the success of others is levied. The argument is that the envious don't know what's good for them -- if the policies they favor are enacted, they will only hurt the economy and themselves. Further, the argument states, it's a mistake for the envious to suggest that "those making over $250,000 should feel guilty for the hard work they have done." You know, like the hard work Ben Stein did to inherit money from his parents:

Greed may not be good for the economy, but envy is worse, by Carlos Lozada, Commentary, Washington Post: ...[I]s greed capitalism's worst sin? Not so, argues economist Victor Claar. In a speech at the American Enterprise Institute last week, Claar posited that another deadly sin -- envy -- is an inherent part of the free-market system and can prove even more insidious.
Claar, a co-author of "Economics in Christian Perspective," relied on Thomas Aquinas's definition of envy: sadness at the good of another. He cited the biblical parable of the prodigal son, in which the older sibling is envious of his dissolute brother, whose return home sparks a big party. "It sounds like blue-collar frustrations that we hear today," Claar said. " 'I did everything the right way, I played by all of the right rules -- and here I am.' "
Whether because of differing intelligence, skill, ambition or luck, free markets produce different outcomes for different people, so envy is inevitable. And in democratic systems, "envious majorities" can push for policies that "narrow the gap between them and the targets of their envy."
But Claar worries that this road can lead to initiatives that, "in the guise of social justice," produce greater unemployment or less overall wealth. And those results in turn lead to "outrage at the system that generated the outcome."
Was Claar talking about President Obama's policies? "The current administration does seem to be keen on taking from the rich to give to the poor," he said in an e-mail. "Sometimes the tone is not mean -- 'spread the wealth around' -- yet at times it is, suggesting those making over $250,000 should feel guilty for the hard work they have done to contribute something others find valuable enough to voluntarily pay for. So our efforts to reduce envy may very well reduce long-term growth by discouraging effort, invention and discovery in the most talented among us." ...

Several points. First, the implicit assumption here is that the existing tax distribution is fair, and any deviation from the present distribution would be unfair to the wealthy. But why is the present tax structure more equitable than another? That question is not addressed, but there are plenty of reasons to believe that equitable taxes require a progressive structure. Whether it's too progressive or not progressive enough is worth asking, and I think a more progressive structure is quite consistent with equity -- partly for the reasons I'll outline below --  but the point is that there is nothing that says the current distribution is necessarily correct (and economics cannot speak to equity).

Second, there is an efficiency argument made in defense keeping taxes where they are. The argument is that if we raise taxes on the wealthy to levels where, in the past, growth was robust, it will harm growth. But at the tax rates being discussed presently, there's no reliable evidence that this is true. It's asserted to defend the existing tax structure, the 'you don't know what's good for you' defense, but again there is no basis for this assertion.

Third, the argument is that the wealthy deserve the income they receive as a reward for their for their skill, ambition, intelligence, hard work, and the resulting contribution to the social good. Consider, however, that most of the gains in recent years went to the financial industry, and mostly to the very, very top, and that the social gains from a huge financial meltdown and subsequent recession are hard to see. From this perspective, the efficiency argument rests on pretty shaky ground.

Fourth, the idea that incomes have nothing at all to do with inheritance and privilege, monopoly power, cronyism, and the like is not defensible. To the extent that higher taxes are clawing back unearned gains, as they do, there is nothing inequitable or inefficient about it. If anything, we are clawing back too little, not too much.

People aren't envious, they are frustrated and furious with a system that causes them to lose equity in their homes, have their retirement funds evaporate, have their employment prospects plummet, while at the same time bailing out those at the top who caused the problems. It's not envy, it's a plea for social justice, a plea for they typical household to get the same consideration as the wealthy on Wall Street. Just look at how quickly Washington moved to bailout Wall Street, and how much reluctance there is to tackle the unemployment problem. The argument is that it was necessary to save Wall Street to avoid an even bigger meltdown and a worse outcome for Main Street, and there is something to that, but the rewards could have been distributed differently. And if the ultimate goal was to help Main Street, why not offer more help directly instead of through a "help the big players and hope it trickles down" approach?

Most people do not begrudge income that is earned no matter how high that income is, but when it's clear that forces other than reward for hard work and contribution to the social good are behind the distribution of income, that's a different matter. When some households are struggling mightily just to keep up, let alone make gains, while others are rewarded in excess of their contribution to the social good, it's no wonder that people sense the system is set up to work against them, and that they are angry and frustrated with it.

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