Quick Fixes to Wealth Distribution are Silly

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I woke up this morning and as usual took a stroll through my favourite websites when I came across this  http://www.nytimes.com/2011/12/26/opinion/a-tax-to-narrow-the-rich-poor-gap.html?_r=1&ref=opinion.

Yes, another wealth distribution, 1% vs 99% article.  This one however discussing possibly the most simple minded and least effective remedy I have come across so far.  Fixing the ratio of income between any group of earners is a proposition filled with probable pitfalls.

First, blatantly taking away from one group and giving to another will send a seriously bad message to the economy and the world at large about meritocracy and the value of hard work in America.  In a perfect system people earn what the deserve.  While I agree that the opposite has been happening for the last 30 years or so I don’t think coming up with some arbitrary ratio of equality and then taking money from productive people and giving it to less productive people is the way to go.  It’s a poor incentive structure that will breed serious discontent among the very capable and disincentivize large parts of the economy to obtain a better education and more lucrative skills.

Second, our tax code is incredibly complicated and has become a policy tool, a secret dark little place where politicians hide favors for their friends or attempt social experiments.  We need to simplify the code not make it more complicated.  If we want t make things more equal then let’s take out tax breaks, loopholes, and deductions and simply make it more progressive.

Third, while I believe we have gotten better at understanding economics the truth is it’s not physics or chemistry.  We are still learning as we go with economics and a change like this will bring unintended consequences.  That’s usually not good a good thing.

Lastly, if we are serious about tackling inequality then simple tax gimmicks will not suffice.  We got here partly due to a regressive tax code but that was not the only reason.  In the case of the Brandeis Ratio Tax it seems we are trying to once again cover up the symptoms instead of attacking the root of the problem.  We need to make the tax code simpler and more progressive.  We need to make sure our public school systems are the best in the world.  Let’s shrink the financial markets so that more and more of our resources don’t end up in high powered casinos that socialize losses and privatize gains. Too big too fail should be too big too exist.  Lastly, let’s design programs that retrain the workforce and upgrade the country’s skill set.

The problem of inequality took a long time to take hold and it will take a long time to unwind.  Gimmicky quick fixes are part of what got us to this point.  More of the same won’t fix a thing.

A conversation

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A good friend sent me this link  http://www.newscientist.com/article/mg21228354.500-revealed–the-capitalist-network-that-runs-the-world.html and the following conversation ensued.  I thought I’d share.

 

M

That’s interesting. Especially the piece regarding how the global network reflects the interconnected systems that we have known about for years in ecology.  This has been discussed before – relating financial markets to chaos theory and or to the proverbial Siamese butterfly that flaps its wings to begin the hurricane seen in Chile the following week – but never (at least to my knowledge) with such methodological clarity.

And I agree entirely with the point that this is simply a consequence of people acting in their own best interests rather than a global conspiracy.  If it were a conspiracy, then it would have failed long ago

The question in my mind is whether it is a healthy system, and there seems to be mounting evidence that it is not.  The latest news from the Fed’s secret lending programs is last in a long line of simply piggish behavior that has come at the expense of taxpayers, government colluding with banks to help with profits rather than simply maintain fluidity.

But coming back to ecology, the main difference between the banking system and the natural world is that we intervene to make sure that things don’t fail and this simply doesn’t happen ecologically.  Wolves eat deer, forests burn down, dying plants fertilize next Spring’s flowers and the whole system marches along.  The constant process of life and death is the stability of the system – in a sense it is stable by embracing instability.  So the global financial system is ecologic in its networks, but not in its execution.  Things need some time to rot, and we can’t accept that.

Hope you’re both well,

M

 

J 

O would probably know more about the dynamics (and, undoubtedly, the competition) between Treasury and the Fed but as far as the piece goes, I also noted the parallels to biological systems, the competition and checks within which create a general equilibrium over time.  It looks as if 40% might be the magic number for the largest fish in the food chain.  Of course, this interpretation of competition flies in the face of Marxist theory, which argued that 100% of wealth would eventually accrue in the hands of a single entity.  I personally never understood how anyone could  (or would want to) accumulate all of the world’s wealth if no one else had any purchasing power.  One crazy dynamic in all of this is how interconnected and globalized the financial system has become.  It’s so fast, integrated, and influential that national governments really don’t stand a chance of keeping up.

 

Me – O

Personally I think the Fed and Treasury did a commendable job of executing their plan, unfortunately it was the wrong plan.  In 2008 we missed an opportunity to shrink the financial system and thus diminish the power finance has over politics.  As both of you mentioned or alluded to the system has been allowed to grow with no checks or balances. The one mechanism, that of failure, has been removed for fear, justified since they have become so big, that if the banks go down the pain will be unbearable.  Failure can take the form of bankruptcy or, which is what I would have liked to see in 2008, nationalization. Either way a very strong message would have been sent to the system that continually dumb behavior will eventually get what it deserves.  As an added bonus the wealth that gives so many financial players access to politicians would have been wiped away thus insuring a relatively easier path to reform.  Unfortunately what we did was amalgamate power and wealth into even fewer hands.  This will undoubtedly make it more difficult to move things in the direction of smarter regulation and a more balanced financial system.

Given what a poor job Europe is currently doing managing a liquidity crisis you have to tip your cap to Fed and Treasury for keeping the car moving.  Sadly the car is headed in the wrong direction.

A quick note on J’s last point on governments not being able to keep up.  If the governments of the world were taxing the right people efficiently and not running stupendously inefficient governments there wouldn’t be much to keep up with because the bond markets would not be holding guns to people’s heads.  Much like bankers, politicians’ continual fixation on their short term interests have put governments in a place where they have to bow to the markets.  I agree with M about the situation not being some sort of colluded conspiracy where the bankers are actively taking control but as J pointed out, the bankers are in control.  Through simply acting in accordance with their own short term self interests (mainly wealth accumulation) we have ex Goldman Sachs bankers running the ECB and Italy.  We have created a wonderfully entangled system where a small group of people have acquired wealth and political influence and, whether conscious or not, will continue to usher us down the path that got them there and us here.  A path that does not have stop signs or speed limits.  It’s a path that leads us to a cliff with no railings and a steep drop.

PS..i fuckin love that we can have these chats

 

J  

I definitely agree that governments – theoretically acting on behalf of a greater good – missed their opportunity to leverage maximal leverage against the banks to restructure and shrink the financial system.  Nationalization would have been one way to get there, though that would have been a very interesting thing to see within the first months of a Democratic administration. I do think that we’ll see a shrinking financial system over time, but incrementalism won’t be as nearly as draconian as a socialist equivalent of “disaster capitalism.”  We’re seeing banks shrink and smaller numbers of young people looking for jobs in the sector.  Economic downturn, stricter lending practices, and other market dynamics have much to do with that.  Governments will theoretically also have the ability to pass new laws and regulations to hold the system in check, but I won’t get my hopes up.  In the meantime, we may soon enter a brave new post-euro world, which to me would move most of the European economies individually to the periphery but have untold numbers of unpredictable consequences.

 

M 

Well, I am certainly in a bit over my head here in terms of understanding all that was written.  However, the main thing that I pull from this exchange is that too big to fail should mean too big to exist.  We have to take the steps to force companies of this size to break up, downsize, or both.  There was some musing on NPR the other day that the news about the Fed’s large secret lending practices may lead to enforcement of antitrust laws against the large banks, effectively forcing them to downsize.

I think that this could be done in a very intelligent way, where many of the tenets of Glass-Stegall would come back into play.  At the very least, we have to come back to the idea that investment banks, whose projects tend to have much higher risk, should not be allowed to use commercial and personal banks as leverage for borrowing, effectively putting at risk these cash stores that need protection through low-risk investments.  If the pigs want to play they need to do so with their own slop – not the retirement and checking accounts of John and Joan Q. Six-Pack.  My guess is that you all would have a somewhat more nuanced view of how this might happen.O, I agree that nationalization would probably have been the optimal solution, but politically disastrous for a Democratic government who at the time was trying to push through the controversial health-care overall.  My fear, that it seems that you both share, is that there will have to be a much larger crisis in order to create a socio-political environment that would embrace a larger role of government in financial and social institutions.

One tax I read about in a Paul Krugman article was a transaction tax, which apparently is already in place in Hong Kong and Singapore.  It struck me as a good idea, and one that might discourage some of the high frequency trading that destabilizes markets and offers little benefit to the economy as a whole.  I was interested in any comments you may have about this.

Hope you’re both well – I love these chats too :)

 

J 

There have been various proposals concerning transactions taxes in the past, and the numbers are pretty astounding.  Even a fraction of a percentage tax could lead to huge pools of cash.  Some people have proposed dedicating the revenues to global development funds, though I don’t know how advanced some of the proposals are in practical terms.  It’s interesting to see that the major financial centers have generally opposed the taxes – at least if they are to be imposed in unstructured or unilateral fashions – for fear of sparking a race to the bottom and encouraging trading activity to find new stomping grounds.

 

Me – O

While I’ve read a Tobin tax could be a solution I can’t shake the feeling that it’s a band aid. We didn’t have it from 1930-1985 and finance worked well and we didn’t have the huge imbalances we do now.  That said the global financial landscape has evolved and it may never be able to go back to a more bifurcated system, with retail banks on one hand and investment banks on the other.  Also, hedgefunds have exploded in both size and number so they would have to be brought into the fold as well which complicates things.  Still, a Tobin tax would probabaly just end up being passed on to the customer making banking needlessly more expensive.  If we tax hedgefund emloyee income as income instead of paid captial gains, that would help.  Additionally,  simplifying the tax code and making it more progressive would certainly raise a nice sum of money.

Still, more revenue is not going to be enough.  Government has to to a better job of running itself.  Stories like this simply cannot continue to occur

http://www.seattlepi.com/local/article/Welfare-fraud-investigators-raid-1-2-million-2341224.php

I am more than happy to pay more taxes but not if this is what’s going on.

 

J

sure, tobin tax wouldn’t change a thing structurally.  it’s just low-hanging revenue fruit.  definitely agree that the hedge funds are getting such an unfair deal right now.  why not treat all earnings equally?  what else will people do…park their $ in checking accounts?

 

 

 

 

 

 

 

 

Quick thought on urban sprawl, politics, and how we vote

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I’m home for the holidays and was on a bus yesterday which is rare. The bus system in Miami isn’t the greatest and everyone who can afford one has a car. Unfortunately my car was getting serviced so I hopped on the bus. Anyway given I have lived the majority of my adult life in NY and London I have become accustomed to people of all socio-economic levels taking public transport. In Miami though, as in most other large sprawled out cities, public transport is much more the arena of the poor and working class. It got me thinking that it might not be a bad idea to try and shrink some cities. Get more people of different classes living together on a daily basis. The mixing of classes, I imagine a bit like mixing dog breeds, can only bring good things. It certainly would be harder to vote for a tax cut financed by the shutting down of after school care when you see a single mother on the train struggling in the cold to get her kids home before she goes off to her second job. It’s easy to be a bit more self involved, feel like the world revolves around you and your problems when the only people you come in contact with are people with your same problems. Slowly shrinking cities could also be beneficial to the biosphere as more trees could be planted, parks created and newer buildings would be more environmentally friendly. I know this is not a new idea, and in fact it’s already happening a bit as people move away from suburbs supported my manufacturing industries and into cities which depend on the service economy, but I figured I’d put it out there. Bit of a ramble I know.

Polarized Congresses and the income gap

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I came across this article by Peter Orszag a few days ago.  He’s currently the vice chairman of global banking at Citigroup and former director of the Office of Management and Budge under the Obama Administration.

http://www.bloomberg.com/news/2011-11-23/blame-supercommittee-failure-on-the-income-gap-commentary-by-peter-orszag.html

I’ll get to the article in a second but first just a quick thought on Orzsag.  By all accounts the guy is an absolute rock star.  Princeton, LSE.  He did research under Joseph Stiglitz and has worked for President Clinton and President Obama.  IT IS SUCH A SHAME when I guy like this makes a move to a big bank.  The fact it’s Citibank is the real icing on the cake.  During the Clinton administration Orszag worked closely with Robert Rubin who went on to a very cushy $15 million a year strategy job at Citibank.  Unfortunately he came up with a few strategies that lost $45 billion in shareholder value.  Anyway my point is it sucks when I bright mind uses his connections to get an incredibly high paying job in the banking sector through one of his mentors instead of trying to fix the mess his mentor helped to create.

Now back to the article.  It brings up an interesting point about the polarization of politics and income inequality.  It turns out that one of the reasons the US government, Congress in particular, doesn’t function as smoothly as it could is because more and more people with similar incomes are choosing to live near one another.  As incomes have bifurcated the poor live with the poor and the wealthy with the wealthy.  Makes sense but it doesn’t quite explain why one political party seems to have become completely intransigent.  Just because you live with and are a wealthy Republican does not mean that your political views immediately shift violently to the far right.  We have always had income inequality in America and though we have more of it now than ever it just doesn’t seem like a good enough reason to explain where we are right now.  Especially since inequality has pooled wealth into a smaller number of hands.  The so called 1% shouldn’t be behind this polarization.  There aren’t enough of them.  Also generally speaking wealthier people are well educated and have an understanding of the issues.  Not usually the kind of folks who become real radical in their thinking.

For what it’s worth, and I know it’s not worth much but, when I look at where we are politically I see it as a reflection of frustration from the middle.  Little by little the middle has gotten squeezed and it’s now popping.  For 15 years now the middle has had no wage growth and diminished employment opportunities.  The system encouraged them to turn their homes into ATM’s so that they wouldn’t feel the diminishing wealth affect of their situation.  When the ATM ran out of money they started looking around and realized just how screwed they were.  This breeds resentment and anger which is easy to point in one direction.  The frustrating part for me is not the divergent views but the fact that the parts of the middle is advocating for the same policies and stumping for the same people that are partially responsible for their current crappy situation.

For thirty years wealth has accumulated to the top on a wave of lax regulation, progressively less progressive tax policies, and an increasingly powerful lobbying community.  I can sympathise with the idea that more of the same wasteful, ineffective government is not the solution either.  That said, if we want to get back to a path that ends in a balanced and healthy society we have to go in a direction that leads to the middle not to an extreme.