Arnold Kling  

Recommendations on Income Distribution

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David Friedman's Defense of Hi... Structural Employment Policy...

1. Hispanics have lost wealth proportionately more than whites. I think it is pretty easy to connect the dots between government policy to expand home ownership and this outcome. As I said at the Senate banking committee, buying a home with little or no money down is gambling, and it's wrong. Government policy promoted gambling on house prices, and minorities bore the brunt of this "help."

2. Scott Sumner is adamant that taxing savings is bad.


You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart. But it's an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard. Where do people think the car factory comes from? Or the Walmart building? BTW, this has nothing to do with trickle-down economics, a theory I reject. This is simple accounting.


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CATEGORIES: Income Distribution



COMMENTS (26 to date)
Nick Bradley writes:

1. Hispanics bought heavily in the exurbs, which saw the biggest price declines. There are also a lot of hispanics in Las Vegas, Phoenix, the Inland Empire, and the Central Valley -- those areas are the worst-hit by price declines.

1a. But one point you failed to make is that Hispanics relied on family loans from relatives for the down payment, which hurt their wealth more.

2. Sumner has been hammering thoughtful progressives like Matt Yglesias over the head with this for some time. I'm skeptical he'll ever get through, because most of them don't care about actually improving the lives of the poor -- they'd rather punish the rich. When I pointed out in a MattY article comment section that the wealthy in the US pay higher taxes than in any other OECD country and they simply did not want to accept it. When you point out that the best way to help the poor is to redistribute consuming power and juice investment, they bring up a wealth tax to ensure that the rich don't get too wealthy. I told them that since the point of saving is to consume more in the future, a rich person that accumulated mass wealth just for the sake of it, he is making a generous donation to society...they didn't buy it.

Dave Killion writes:

I blogged about the Pew Study just yesterday, and asked "Where are the Asians? And the Arab-Americans?"

Eric Morey writes:

Nick Bradley, If wealth is a measure of delayed consumption and you are trying to redistribute consumption, what is inconsistent about taxing wealth to redistribute the consumption?

Tangentially, a consolidation of wealth also consolidates political power both formal and informal. This is inconsistent with the ideal of democratic rule. Could this be justification for taxing wealth?

R Richard Schweitzer writes:

If any grouping has "lost" something that was weighted as "wealth," it is important to both classify the form of "wealth" (such as the value of residential real estate referred to, but include others)and to define the nature of "loss" such as loss by decline in value or loss through foreclosures, repossesions, etc.

There are a lot of loose statistics being cited.

nazgulnarsil writes:

Sumner's point is one I have bashing my head into for a long time. The folk narrative is that there is this nebulous class of wealthy people just sitting on huge stockpiles of money going "na na poo poo" at the poor people. People do not understand investment.

Nick Bradley writes:

@Eric Morey -

- That is precisely Sumner's point. By taxing income, you remove the incentive to delay consumption. Why would anybody want to do that? Wouldn't good social policy be to encourage the rich to delay consumption for as long as possible so that everyone else can consume more? Wealth is highly elastic and liquid. So if you tax wealth, you'll have a huge deadweight loss

Ryan writes:

I'm glad Scott is back to blogging. He usually has a well-reasoned perspective. In this post, his well-reasoned perspective aligns with something I've been arguing with my progressive brethren over the past few years.

Eric Morey writes:

Nick Bradley -

I must be missing something. Why is some redistribution of delayed consumption to the present and to those with less opportunity to consume a dead weight loss, but an encouragement of delayed consumption not a dead weight loss?

Also wouldn't the elasticity of delayed consumption vs current consumption not be uniform across the distribution of wealth? Thus, any dead weight loss would also not be uniformly distributed?

As I understand it, wealth is not a zero sum game, but it's distribution can tend toward a winner takes all game.

Hasdrubal writes:

Eric Morey:

The phrase "eating your seed corn" comes to mind.

Like others have said, "wealth" isn't just sitting there looking pretty, the majority of it is tied up in productive enterprises. If wealth taxes were only sin-type taxes on homes and cars over a certain value/number, yachts, private jets, and whatnot, the tax would be much closer to a simple transfer. But the majority of America's top 1%'s net assets are not that type of thing, and I have yet to hear anyone promote a wealth tax on only non-productive assets.

So if you tax wealth, you don't just end up with fewer estates in the Hamptons, you also end up with fewer Ford factories, fewer new Wal-Mart buildings, and fewer loans to entrepreneurs trying to start up small businesses.

By shifting future consumption to current consumption, you wind up only being able to consume the present value of that wealth, which is much less than the future value that it could have been. That's where the deadweight losses come in.

Eric Morey writes:

Hasdrubal:

Thanks. That makes a lot of sense. However, would some amount of fewer Ford factories and Wal-Marts be worth the price of increased current consumption or redistributed delayed consumption, i.e. wealth transfer from the Ford and Walton families to the other 99.999%+ of the population?

Daniel M. writes:

"I think it is pretty easy to connect the dots between government policy to expand home ownership and this outcome."

- Arnold Kling

I think it is pretty easy to jump to conclusions. The study...

(http://pewsocialtrends.org/2011/07/26/wealth-gaps-rise-to-record-highs-between-whites-blacks-hispanics/)

...also points out that Asians took a 54% hit, almost as bad as the 64% hit Hispanics took, and worse...though trivally so...than the 53% hit blacks took. It's hard for me to believe that government policies encouraging home ownership by the poor is to blame for their problems, as, until this drop, they had the highest household wealth level of any group (now they are second to whites). And, as the study points out, one of the things that really hurt them is exactly what hurt the Hispanics: they're highly concentrated in areas where housing prices fell the most. You don't need to take on a bad loan for your household weatlth to fall if the values of all the houses around you are falling.

Daniel

Costard writes:

Eric - you're increasing current consumption at the cost of future consumption. Do you understand that? You're denying people jobs tomorrow, so that you can give them a handout today.

Tracy W writes:

Tangentially, a consolidation of wealth also consolidates political power both formal and informal. This is inconsistent with the ideal of democratic rule. Could this be justification for taxing wealth?

Um, some points. 1. How does a consolidation of wealth consolidate political power formally? I can understand informally, but I thought that formally the one person-one vote was reasonably well agreed, however breached it may be in practice. Can you say what country you are thinking of here?

2. People getting together into groups focused on a single issue consolidates political power informally, and where governments invite the representatives of groups to formulate policy, it consolidates political power formally as well. However a cry to "Tax Greenpeace!" doesn't appear remotely as often as "Tax the rich!"

3. I think this depends on your definition of "democratic". Is it majority rules, or is it something with more of a balance of power, allowing people liberty even if a numerical majority does not agree with their beliefs If you see some merit in the second view, then wealthy people can promote democracy, by having the power to take on the government through the courts.

R Richard Schweitzer writes:

In view of where these comments seem to trend, is it too late to raise the issue of whether the "wealth" of a nation, culture or civilization is "productive?"

Productive taken to mean significantly deployed to create the means to provide broader (demographically, at least) or better satisfactions of the needs, wants and desires within nations, cultures and civilization.

Steve Sailer writes:

The Housing Bubble in the Sand States was heavily driven by Hispanic and Asian immigration into those states, especially into California, which caused spillovers into Arizona and Nevada. It wasn't just the availability of mortgages, it was an increase in demand due to immigration. They interacted.

Eric Morey writes:

Costard - Yes I realize that. The axiom I started with was that some redistribution of income is desired. I'm asking questions about the difference between redirecting consumption between and among current consumers and future consumers.

Tracy W - 1) I was referring to formal and informal politics, not formal and informal transmission of wealth consolidation to political power. I think this is just a semantics issue, we are using the same words to talk about different concepts. I think we understand each other on the pertinent question at hand.

2) I don't think freedom of association is a political problem. I think consolidation of wealth that leads to a distortion away from democratic preference and toward economic rents is a problem. Possibly enough to justify double taxing consumption of the wealthiest. I posed it as a question because this is not clear to me at this time.

3) Wealthy individuals have shown a tendency to use courts and the political structure of government for their own gain at the expense of the rights and liberties of others. From my perspective this tendency overrides their ability to promote democracy.

Costard writes:

Eric - I'm not sure you do. A tax on investment does not not redistribute income from rich to poor, it redistributes from future to present. It is completely neutral: every citizen of the future, rich and poor alike, is the worse for it. Whereas a tax on luxury goods would in fact be progressive, and not affect consumption.

re #2&3 - There is another solution: you could remove the structures of government that provide for the abuse of wealth....

Richard - That depends upon whether you measure the needs and wants of people through the markets or through the polling booth.

Eric Morey writes:

Costard - Sorry my last post should have read "...some redistribution of consumption is desired. This probably would have changed your response. With that in mind I respond to you.

Taxing of wealth is a tax on future consumption of that wealth. I don't see how that is neutral especially if it was progressive. Nor do I see how it could effect everyone equally. That is at the essence of my questions about consumption and wealth taxes. I agree in general that "taxing savings is bad". However, there are nearly always exceptions and limitations to the truth of such statements. Is concentrated wealth such an exception?

"you could remove the structures of government that provide for the abuse of wealth...." An excellent start. But this doesn't account for the ways wealth can be used to exercise political power outside of government. There may also be risk that wealthy interests can reinstate those structures.

Tracy W writes:

Eric Morey,

1. I still don't understand what you mean by formal politics. Perhaps if you give an example, like I did when talking about how single-issue groups can consolidate political power formally (when governments invite them to sit on groups designed to establish policy), I might be able to understand what you are trying to say, and as you say, we might be able to agree.

I don't think freedom of association is a political problem. I think consolidation of wealth that leads to a distortion away from democratic preference and toward economic rents is a problem.

So why do you think that consolidation of wealth is a problem but not consolidation of political power, in the form of single issue political groups? I mean, it's nice that you don't think that freedom of association is a political problem, but what I was asking about was people aggregating themselves into single issue groups, that strikes me as much a consolidation of politcal power as anything wealth can achieve.

Wealthy individuals have shown a tendency to use courts and the political structure of government for their own gain at the expense of the rights and liberties of others.

As has nearly everyone else, like trade unions (eg lobbying for trade barriers, prison guard unions lobbying for tough prison sentences), politicians (eg campaign finance laws), scientists and artists (lobbying for increased government funding for science and/or the arts), elderly voters (lobbying for more government spending on pensions and healthcare for the elderly), charities (lobbying for government funding). The political powerless in society are the working poor with small children, who just don't have the time or resources to lobby at all. People will always try to use the courts and the political structure for their own gain at the expense of anyone else, there's nothing special about the wealthy. The advantage the wealthy have is in resisting the government, as individuals.

From my perspective this tendency overrides their ability to promote democracy.

How do you think that democracy ever came about?

Eric Morey writes:

Tracy W - "I still don't understand what you mean by formal politics."
What most people think of when they think of politics is formal politics. The formalized sharing of power set up by governments and other associations. Informal politics is any ad hoc use of power.

"So why do you think that consolidation of wealth is a problem but not consolidation of political power, in the form of single issue political groups?"
People aggregating themselves into single issue groups is the association that is protected by the USA constitution and is an important part of a democratic society. An individual with enough wealth to significantly influence others is contrary to democratic ideals.

A benevolent dictator may be preferable to democratic rule in a perfect world. However, the ax swings both ways. There is too much risk of a malevolent dictator to advocate dictatorship. This is analogous to my position on wealth concentration. Wealthy individuals can and have promoted democracy. However, there are always uncertainties. Those uncertainties always seem to be decided in favor of the wealthiest without regard to utilitarianism, egalitarianism, just deserts or any other philosophical measure. From an economic perspective, giving those that have provided economic utility in the past the ability to alter the economic benefits of their future actions, seems like a fundamental corruption of a market economy.

Tracy W writes:

Eric Morey:

Can you give me an example of how wealth is included in formal political power, and say which country you're thinking about?

I still find myself puzzled. You say that you define single issue groups as an important part of a democratic society, while you define individuals with enough wealth to significantly influece others as contrary. But you don't explain why you make this distinction, it seems to be entirely arbitrary. Why don't you just define the wealthy individuals as being entirely in line with democratic society, like you do with single-issue groups?

You also mention that there are uncertainities about wealthy individuals' support of democracy. However, you don't mention that there are uncertainties about freely-associating groups' support of democracy. Military groups have carried out a number of coups around the world, and civil societies have thrown up groups opposed to democracy, sometimes successfully - the Communists and the Fascists, some Islamists (Iran, after the Revolution) the South African National Party (stripping people of their rights), etc. It seems odd to worry about concentration of wealth, while not to worry about concentration of political power in ordinary groups.

You make an extraordinary statement that: "Those uncertainties always seem to be decided in favor of the wealthiest without regard to utilitarianism, egalitarianism, just deserts or any other philosophical measure. "
This is unbelievable in light of the growth in democracy, the abolition of slavery, the expansion of human rights, the increase in the rights of women, the general growth in prosperity amongst the middle-class, the abrupt increases in wealth in previously poor countries (eg Japan, South Korea, Botswana, India, China) that we've seen over the last two centuries. (You might be able to better support the second part of your statement, about philosophical measures, it's the first clause that's unbelievable).

You also say: "From an economic perspective, giving those that have provided economic utility in the past the ability to alter the economic benefits of their future actions, seems like a fundamental corruption of a market economy."
This is all very easy to say, the question is who do you think should be in charge of making the laws? If we restrict law-making to those who have not provided economic utility in the past, we are left with small children, those who have been severely disabled all their adult lives, and those who are entirely supported by inherited wealth. I don't know how small children and anyone so severely disabled that they can't do any economic work can be expected to rule, so that means you're calling for rule by those with inherited wealth. This does not strike me as an improvement over our current situation. Much as I dislike the influence of single-interest groups on our politics, I do think that an inclusive democracy is more practical.

After all, when I look at history, in non-democratic societies people seem to just put their effort into lobbying those who do have political power - for example the Tudor monarchs were notorious for doing things like handing out monopolies to their favourites, and Adam Smith, despite living in a society with a severely limited franchise, spent a lot of time analysing how the laws of his day corrupted market outcomes. Why wouldn't this happen again if we limited the franchise to those who haven't provided economic utility in the past?

Eric Morey writes:

Tracy W - I would like to respond in detail, but I don't seem to have the time today. I'll leave you with this for now:
I may be a bit myopic in regard to problems stemming from wealth consolidation vs. single issue groups. But I think these are separate issues with largely separate effects and potential solutions.

You also seem to be creating a false dichotomy regarding my observation about the potential systematic corruption of a market economy.

I don't mind continuing this private debate on a public forum. If you are curious I can come back to this when I have the time. Let me know if you would like to continue or change venues.

Wayne writes:

@Tracy W & Eric Morey

I think a good point of reference for your discussion is Mark Pennington's lecture @ The Cato Institue on "robust political economy".

Tracy W writes:

Eric Morey: I am surprised and distressed that you said that I "seem to be creating a false dichotomy". I attempt to avoid any such false dichotomies in my thinking, like all the other logical errors. In re-reading what I have written, I can't see any point where I even implied a dichotomy, true or otherwise (I did say one trichotomy in response to your political recommendation). Consequently, if I have, the only way I can correct my thinking is if you explain more precisely what I said that seemed to involve a dichotomy, if I haven't, the only way I can be confident that I avoided that error was if I know exactly what led you to believe it. So if you have any kindness in you, please do me the courtesy of explaining what made you think I seemed to be doing that.

(By the way, the definition of dichotomy I am using here is "division into two mutually exlusive ... groups".)

More generally, I don't mind which forum we debate on, but I do mind your habit of making assertions like "seem to be creating a false dichotomy", or "a consolidation of wealth also consolidates political power both formal", or "I think these are separate issues with largely separate effects and potential solutions", without bothering to give any reason behind these assertions, or indeed even being able to cite an example when asked.

Wayne: Is there a text-version of the ideas you refer to? I find watching talking head videos tediously slow.

matt writes:

"promoted gambling on house prices"
should be promotes- this is present tense: we're still backing 3% down with tax dollars.

Eric Morey writes:

Tracy W - I haven't forgotten, just busy. If you want to send me an email (eric@glodime.com) I can let you know when I post a response. Or you can just keep checking back.

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