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More on the victimization of the rich
Yesterday, I linked to a Malcolm Gladwell piece that included the following sentences:
The rich have gone from being grateful for what they have to pushing for everything they can get. They have mastered the arts of whining and predation, without regard to logic or shame.
It put me on the lookout for other examples of rich people whining about being victimized, and reminded me immediately of this week’s Economist cover story — provocatively titled “Hunting the rich.” Here’s how it starts:
THE horns have sounded and the hounds are baying. Across the developed world the hunt for more taxes from the wealthy is on.
This is important because the basic demographic to which The Economist appeals is rich people. (Before you argue with me, purchase a dead trees issue and check out the ads.) Clearly this is a message that they are confident will resonate. Fortunately, being The Economist, they are willing to engage with actual facts:
First, the West’s deficits should not be closed by spending cuts alone. Public spending should certainly take the brunt: there is plenty of scope to slim inefficient Leviathan, and studies of past deficit-cutting programmes suggest they work best when cuts predominate. Britain’s four-to-one ratio is about right. But, as that ratio implies, experience also argues that higher taxes should be part of the mix. In America the tax take is historically low after years of rate reductions. There, and elsewhere, tax rises need to bear some of the burden.
Second, there is a political argument for raising this new revenue from the rich. Spending cuts fall disproportionately on the less well-off; and, even before the crunch, median incomes were stagnating. Meanwhile, globalisation has been rewarding winners ever more generously. Voters’ support for ongoing austerity depends on a disproportionate share of any new revenue coming from the wealthy.
This is basically the argument I see most progressives make regarding taxes. Tax revenue has been going down for years and the gap between rich and poor has been increasing for years. Clearly US economic policy has disproportionately benefitted rich people the most, and they can best afford the tax increase. The article then goes on to endorse an Obama-like tax plan. Hunting the rich, indeed.
The wealth gap and the NBA lockout
Malcolm Gladwell on the wealth gap:
It is worth noting, though, that in the social and political commentary of the 1950s and 1960s there is scant evidence of wealthy people complaining about their situation. They paid their taxes and went about their business. Perhaps they saw the logic of the government’s policy: There was a huge debt from World War II to be paid off, and interstates, public universities, and other public infrastructure projects to be built for the children of the baby boom. Or perhaps they were simply bashful. Wealth, after all, is as often the gift of good fortune as it is of design. For whatever reason, the wealthy of that era could have pushed for a world that more closely conformed to their self-interest and they chose not to. Today the wealthy have no such qualms. We have moved from a country of relative economic equality to a place where the gap between rich and poor is exceeded by only Singapore and Hong Kong. The rich have gone from being grateful for what they have to pushing for everything they can get. They have mastered the arts of whining and predation, without regard to logic or shame.
From a piece that defies summarization on how a real estate developer purchased the New Jersey Nets NBA team as part of a plan to acquire and develop a coveted piece of prime real estate in Brooklyn. I strongly encourage you to read the whole thing.
How to fix the economy
Last month Tim Bray reminded me that I should be reading The Economist. The thing I like best about The Economist as a publication is that its editorial stance is to be uniformly in favor of global economic growth. While I am certainly much more left wing than their usual reader or their editors, I am essentially in agreement with them that the number one priority of economic policy must be continued, long-term economic growth, even if I disagree with them on other priorities or occasionally on the best approach to creating sustainable growth.
In any case, whether or not you agree with The Economist on anything, they are the best advocates out there for center-right, pro-business policy. Even if you disagree with their conclusions, their arguments are worth grappling with.
Their policy prescription for dealing with the current jobs crisis and economic slowdown is straightforward — Western governments should pursue policies that prop up demand encourage job growth now and make binding commitments to address structural deficits later. This should sound familiar, because this has been the Obama administration’s position since President Obama took office. It’s also the position of nearly all economists who are not partisan hacks. And the truth is that if President Obama resigned tomorrow and House Speaker John Boehner took over, it would probably be his policy as well.
Unfortunately, despite the fact that this policy course is stunningly obvious, the odds are that a gut-level impulse toward austerity, a misplaced fear of short-term inflation, and pursuit of partisan advantage are all conspiring to render not just the US government, but governments all over Europe, impotent in the face of this crisis. And as The Economist points out, an economic crisis is also a human crisis:
… the human cost of the economic crisis is paid largely by those who are out of work, for joblessness increases depression, divorce, substance abuse and pretty much everything that can go wrong in a life. Worse, today’s joblessness is a particularly dangerous sort. A disproportionate share of those out of work are young, and youth unemployment leaves more scars, in terms of lower future wages and greater likelihood of future unemployment (see article). Joblessness is also becoming more chronic. In America, famous for its flexible labour market, the average jobless spell now lasts 40 weeks, up from 17 in 2007. In Italy half of those without work have been so for more than a year. Long-term unemployment is harder to cure, as people’s skills atrophy and they become detached from the workforce. Its shadow lingers, reducing future growth rates, damaging public finances and straining social order for years to come.
People are looking to Belgium with envy because their lack of a government prevents them from pursuing pro-cyclical austerity measures that deepen the crisis. I thought that multinational organizations like the OECD and the G-20 were created in order to facilitate coordinated responses to global crises like the one we’re facing right now. Instead we’re seeing little collective action to turn the global economy around, and very little on the policy front from individual countries as well. In the meantime, things continue to slide downhill.
Two opinions on the Groupon IPO
David Heinemeier Hansson takes a look at the numbers behind the Groupon IPO:
At the moment, it’s costing them $1.43 to make $1, and it doesn’t look like it’s getting any cheaper. They’re already projected to make close to three billion dollars in revenues this year. If you can’t figure out how to make money on three billion in revenue, when exactly will the profit magic be found? Ten billion? Fifty billion?
On the other hand, Matthew Yglesias says that Groupon is an example of how to achieve growth through aggressive deficit spending:
Maybe this will work out, or maybe it will be a disaster. But it’s worth noting that absolutely nobody thinks it’s categorically absurd to think that what a firm needs to do to maximize long-term profits is boost spending over revenues.
It’s an interesting way to take a jab at critics of economic stimulus.
Update: Jason Kottke points out that Amazon.com operated at a loss for a long time before becoming the profit-generating machine that they are today.
Scott Sumner illustrates why it’s easy to hate libertarians
Libertarian economist Scott Sumner talks about the “marshmallow test” and says that he doesn’t trust Democrats:
What do we do if Social Security needs to be trimmed in order to balance the budget? I hear lots of talk about cutting back on benefits for those who “don’t need it.” That would be people like me. Here’s why I don’t trust the Dems—I see them as the party of one marshmallow eaters. They represent people who have less self-control. I fear they will cut my benefits, but not cut the benefits of people who didn’t save for retirement. I fear they will use “wealth” as the criterion to determine who is needy and who isn’t; not lifetime wage earnings.
In my view there is nothing egalitarian about redistributing income from two marshmallow eaters to one marshmallow eaters. They’ve already had their fun when young, loading up their three car garages with all sorts of fun toys. I’ve never even had a garage.
My take on this is that Scott Sumner is a selfish bastard who’s painfully out of touch. There are plenty of people in America and around the world who were never offered the first marshmallow. The Democrats don’t do much to help them out, but Republicans and libertarians don’t seem to believe the government should help them at all. In fact, their main concern is that people with many, many marshmallows can eat them all themselves, and they justify that stance the same way Scott Sumner does. If you’re poor, it’s because you’re inferior to people like them.
Why the Internet hasn’t grown the economy
Tyler Cowen’s The Great Stagnation argues that economic growth in advanced nations is slowing because we haven’t seen any innovations in the past few decades that encourage economic growth. Ezra Klein’s review provides a solid synopsis of Cowen’s argument.
In Slate, Annie Lowrey looks at a variety of explanations for why the Internet hasn’t proven to be a GDP-boosting invention. I tend to agree with the argument that economists aren’t very good at measuring the value of the Internet:
That brings us to a final explanation: Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient. MIT professor Erik Brynjolfsson explains the idea using the example of the music industry. “Because you and I stopped buying CDs, the music industry has shrunk, according to revenues and GDP. But we’re not listening to less music. There’s more music consumed than before.” The improved choice and variety and availability of music must be worth something to us—even if it is not easy to put into numbers. “On paper, the way GDP is calculated, the music industry is disappearing, but in reality it’s not disappearing. It is disappearing in revenue. It is not disappearing in terms of what you should care about, which is music.”
This is sort of the story of blogging as well. Or photography. Or anything else that can be delivered over the Internet at a minimal cost.
The role of the federal government
What’s the role of the federal government? Here’s one answer, courtesy of Matt Yglesias:
One of the main things the federal government does is transfer resources from high-productivity urban areas to low-productivity rural ones.
In principle, I don’t have a huge problem with this. However, I do have a problem with the fact that the people in the more subsidized areas fail to understand that this is how things work, and indeed consider themselves to be exploited by the federal government rather than exploiting it.
Mainly, I just appreciated reading that sentence. I had never really thought of things that way.
Two good posts on budget deficits
Both Matthew Yglesias and Karl Smith (guest blogging for Ezra Klein) posted today on deficit spending by the federal government. They both dismiss the idea of opposing budget deficits for reasons of morality or responsibility and instead discuss them in terms of their impact on economic growth, which is the only thing you should really care about. Debt is a tool that can be used to make you (or America) better or worse off depending on the terms of the loan and what you do with the money you borrow.
Here’s Karl Smith:
So, deficits do matter. When the economy is strong, they lead the Federal Reserve to raise interest rates, strengthen the dollar and increase imports. When the economy is weak they lead to falling unemployment and rising capacity utilization.
Matthew Yglesias points out the negative effects of deficits, which under certain conditions:
In the real world, though, deficits matter for a specific reason. If the government tries to borrow a huge amount of money, investors will start demanding generous interest rates in exchange for lending. And if investors can get high rates lending to the government, which is safe, they’ll start demanding even higher rates of non-government borrowers. That becomes a problem for the private sector. Investments that are profitable at a low rate of interest are unprofitable at a high rate of interest, so the overall pace of investment and growth declines. Bad. The Federal Reserve can, however, act to keep interest rates low. The problem with this is that Fed action to lower interest rates might produce too much inflation. Inflation, when it gets high, is not just annoying but starts to really erode the workings of the price system and thus the whole economy. Again: Bad.
He then goes on to point out that the conditions under which it is bad for the federal government to engage in deficit spending are not currently in effect.
This is why just about every credible economist I read says that what the government needs to do is borrow money to stimulate the economy now and make a credible promise that it will cut the deficit later. For example, here’s Nouriel Roubini a couple of weeks ago:
The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.
The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability.
Expanding consumer surplus in the digital era
Matthew Yglesias makes an astute point about how digital technology makes it easier to create things that promote the general welfare without necessarily creating wealth:
Consequently, the realm of activities with gigantic divergence between measured GDP and welfare value is vastly expanding in ways that I don’t think policymakers and civil society donors are yet responding to in fully appropriate ways. The case for finding ways to directly and indirectly subsidize the creation of such goods is extremely strong. But more generally, I think we should expect the significance of this kind of thing to expand in the future.
The negligible marginal cost of producing multiple copies of digital works is the enabling factor. I think so many people get caught up in the mentality of “monetization” that they fail to step back and look at the sheer number of interesting, entertaining, and useful works that are now being produced simply because people find it fulfilling or entertaining to produce them.
Why the economy needs stimulating
Modeled Behavior explains our fundamental economic dysfunction, with charts:
This is a failure of our basic institutions of production. The job of the market is to bring together willing buyers with willing sellers in order to produce value. This is not happening and as a result literally trillions of dollars in value are not being produced.
Let me say that again because I think it fails to sink in – literally trillions of dollars in value are not being produced. Not misallocated. Not spent on programs you don’t approve of or distributed in tax cuts you don’t like. Trillions of dollars in value are not produced at all. Gone from the world entirely. Never to be had, by anyone, anywhere, at any time. Pure unadulterated loss.
This is what has bothered me for months — the opportunity cost of having so much human and industrial capacity idle. We live in a world where many, many things are needed and wanted by people, and the capacity to produce them exists but is going unused. I don’t know if another round of government spending will help or if that’s what we should do, but “stimulus” is exactly the right word for what needs to happen.
His main point is that this loss should bother everyone to the extent that they’re willing to move beyond their political hobby horses and look for a solution. That isn’t happening.
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