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12/10/2006

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Matt Rognlie

While I agree with your basic point, I wonder whether the distribution of assets will become much more important in the coming decades. We're entering a period of such rapid technological change that it's impossible to predict whether many jobs will even exist in 50 years. The near-total mechanization of agriculture and manufacturing seem like givens. More ominous (or promising, depending on your view) is the possibility that mainstay service jobs will be supplanted by computer systems -- for many such jobs, even the slightest machine intelligence would be enough to substitute.

In such a future, control of assets rapidly becomes all that matters: a body willing to work is worth almost nothing. An uneven distribution of assets, then, implies a similarly uneven distribution in income, and thus in welfare. And that is an alarming prospect.

Wes

The Report finds that the richest 2 percent of adults own half the world's assets,...But are the richest 2% doing half the work? If the Paris Hiltons and Bill Gates of the world all stopped working and went on vacation, would the total economic output of the world decrease by half? Obviously not.On the other hand, if assets owned by the richest 2% were destroyed, would the would economic output decline? If the hotels owned by Paris Hilton and the fraction of Microsoft owned by Bill Gates were destroyed, would the world economic output decline? Probably. Maybe even by half.What if the assets of the ricest 2% were not destroyed but were instead put under the absolute control of corrupt dictators? Well, that's communism and we've seen how well that worked.What if the economic output of these assets was taxed heavily and reinvested in collective assets such as schools and scientific research? It can hardly be argued that such taxes would be unfair to someone like Paris Hilton because she neither built the hotels she owns nor does she do the work of operating them. It might be unfair to Paris Hilton's father but without society he would be living in a cave picking flees off himself so he, himself, owes a rather substantial debt to society.Clearly, certain technological assets allow workers to be vastly more productive. It would be undesirable to tax such assets at such a high rates that it discouraged their use. On the other hand, the major reason for increases in productivity over the long term is scientific and technical innovation. The inventors of electricity are no longer alive and yet society still derives considerable benefit from electricity. Future generations are more likely to benefit from the kinds of innovation funded by governments through tax revenue than from marginally higher economic efficiency in years gone by.Also, if the goal of an economy is less to maximize efficiency and more to ensure that no one is desperately poor, particularly as a result of taking business risks, then taxation to provide a social safety net is easy to justify.

Anonymous

First a few operational suggestions:

Why is it that topic threads are cut off?

If it is necessary to cut them off couldn't your administrator post a "Topic Closed" message to save your contributors from having to guess and test?

Thanks!

Jack

It's not surprising that Posner and Becker who are satisfied to "let the market" continue to bid down the wages of those at the bottom and not favor intervening even to the extent of restoring the min wage to the purchasing power it had a decade ago, would also be complacently satisfied with the world-wide inequality of wealth and income, and glosses over the rapidly widening wage-wealth gap in the US that is of concern to more thoughtful social observers.

Matt makes some good observations in regard to technology changing the relationship of production and labor. Indeed there was an econ book a decade or so ago entitled "The End of Work". But as we've seen in the US all of the productivity increases have gone to capital owners with some accruing to what Posner terms "high-end abilities of human "capital" and of course if pressed this would all be justified by the "efficient" workings of "The Market" and the meeting would be gaveled to a close.

I got a chuckle out of Posner's remarks that wages, not earnings from capital, were the primary wealth of the world's poor. He's right of course as it's after low paid workers mine the gold, oil, diamonds, coal, etc, or for that matter code software, with token participation in their increased value that "our" mighty corporations turn them into capital.

Then Posner remarks that "the past 25 years have been devastating for persons with little education." He's right again, but I recall that 25 years ago heads of households often held jobs in grocery stores, but today, despite Walmart and others making tremendous improvements in the efficiency and productivity of distribution that the employees do not share in that productivity increase and that their meager wages are supplemented by more than $1.5 billion of taxpayer subsidies to Walmart's fattest bottom line in world history.

And oppostion to the estate tax? It's these very Walmart heirs who are most lobbying Congress for their "right" to pass on the Walmart fortune untaxed. Perhaps it's lost on Posner but the fortunes such as Walmart's or Gates being comprised of initial stock that has never been sold that it has paid no tax and if passed tax free down through the generations never would be taxed. Seemingly forgotten is that when the estate tax was put in a part of its purpose was that of breaking up vast inherited wealth that we not become the land of lords and vassals that we left. Many here will recall that pre-Thatcher England nearly succumbed to the lords not having to work, while the young seeing they'd never go much beyond floor foremen had little incentive to work or create.

In closing and returning to Matt's point of declining costs, I often find it handy to take some effect such as that to the extreme. Say that mfg goods had nearly a zero cost and that all who made those goods were out of a job and had no money to buy the goods, the goods would still be "too expensive" to buy. And, of course there are parts of our economy that do not lend themselves to rapidly increasing productivity and price declines such as teaching, lawyering, or hiring a plumber, so the costs of using human capital will continue to rise as compared to mfg goods.

So, Judge Posner, if all the productivity gains continue to accrue to corporate entities and the top X percent will it be the end of the Monopoly game when regular working folk land on "Legal Bill" or "Plumbing Repair?"

To me it seems clear that if "The Market" does not distribute the growing wealth of productivity gains among the very workers who make much of it happen then an external mechanism to fix the shortcomings of "The Market" must be designed. And, timely enough Yale economist Robert Shiller is writing a book on the subject:

http://www.econ.yale.edu/~shiller/

The book doesn't yet exist but the page contains other interesting concepts. Jack

Franklyn Rodgers

Gentleman, Why did you not comment on the fairness of the resource distribution and the consequences of inequitable distribution in matters like health care and educational opportunities?
Should we care about a level playing field for everyone?

Nelson

Countries that let the market decide have higher standards of living than countries where government is in charge of capital assets. Who cares if Bill Gates is in charge of MSFT's assets rather than some government offical, as long as consumers are getting products they see value in?

The wealth of the top 2% isn't some stockpile of diamonds somewhere (debeers excepted of course) but in assets used for the production of goods and services for *consumers*... that is to say for *us*. How is this a bad thing? Even Paris' family's hotels aren't for her own private use, they are for *our* use. So what if we have to pay by the night to stay in them? It's still far cheaper and more convenient than building our own houses all over the place just so we have somewhere to stay when we travel.

If Paris' family got rich building places for me to stay while travelling to make my life better, I don't begrudge them "wasting" a portion of that wealth on luxury goods or stupid lifestyles.

Haris

The issue of inequality is not so much an issue per se; the true issue is whether the degree of inequality is, for the lack of a better term, earned or unearned. That is, should people who have made no productive contribution to society [yes, I'm thinking here of Paris Hilton] keep their vast fortunes, whilst some much higher-skilled productive humans are compensated [including job satisfaction] much less? In essence, should people be allowed to keep the gains from luck? With the rise of superstar markets [markets in which one or a few people make tremendous earnings while others who are similarly skilled get nothing], I more and more think that you should not be able to keep gains from luck. If your operating system, as flawed as it may be, by some stroke of luck becomes the preferred OS of society, I don't see why you should get the benefit of such luck. [Same if you are a fortunate actor who was marginally better at one audition and as a result has a terrific career.] What is the argument for not taxing "lucky" gains heavily? Where is the disincentive?

Nelson

STOP WORRYING what other people have. It doesn't matter if its from skill or good fortune or a combination. The argument against taking other's gains is they are not yours to take. If it bothers you so much that someone else has something, then stop thinking about them. Just pretend they don't exist. Someone else having insane amounts of wealth doesn't make me any worse off.

This isn't some dictatorship or monarchy that has all the resources of the country because they took them from others by force. This is America and non-political people are allowed to amass great fortunes by benefiting others... or just by being lucky. And Paris' wealth was not luck. Her family built their wealth by providing something that people were willing to pay for. If they *choose* to spend some of that wealth on Paris, then that is *their* decision to make, not some progressive/communist goody two shoes who thinks they can solve all the worlds problems by soaking the rich.

Jack

Haris & Nelson:

Haris.... you seem close on to what will really have to be the policies of the future.

I was talking, a few years back, with Ralph Nader (whose first PIRG was in Alaska) about the corporate theft of the public resource of fish in the rich Alaskan waters, and he commented that "the word poverty should be unknown in Alaska". Hard to argue! With less than a million in population, we've the richest fisheries, mining, and producing 1.5 million bbls of oil each day, but there IS poverty and low pay in amounts similar to the rest of our "wealthy nation" where poverty should also NOT exist. Instead poverty, amid all the glossy news of the DOW and corporate profits, and wage increases coupled with tax reductions for those above $90k increased last year with 12.6% trying to live on $10,000. And the gap is widening at a rapid rate. I don't see any social benefit to this situation.

"Just pretend they don't exist. Someone else having insane amounts of wealth doesn't make me any worse off."

........ ahh Nelson but they do. And it seems that exactly the same people who give such advice are the FIRST to oppose an increase in the min wage or a raise in teaher's pay. So, far we are NOT so wealthy that the "insane" compensation of some, do not affect us all. For example last year just ONE medical insurance CEO's gleanings were $150,000,000 or $50,000/hr, or the pay of about 3,000 teachers. Or looked at another way; the ENTIRE premium of 30,000 "insured" paying $5,000/year AND using more chunks of what we pay to lobby in Congress so they can keep doing it to us.

1% 19% 80%

20.0% 38.7% 41.4%

These are the shares of income (2001) and I would submit there's something wrong with a "model" that awards 60% of the income to the top 20% and leaves the 80% doing most of the work to wrestle over the remaining 40%.

You might enjoy looking over a few of these charts: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Nelson

Jack, its not your wealth. Do what you want with your wealth. If the wealth is not yours, do not think about it. If you wish to gain wealth to do good deeds, then you are more than welcome to try. But stay out of other people's lives. It's their property, not yours... not the states... theirs.

ben

Sorry to butt in on Jack's party, but I thought I'd post a quick comment on Wes's post.

Wes the problem with taxing existing assets is not that the tax will likely cause those assets to disappear, at least in the short run, it is the signal that such expropriation sends to future investors about the security of their property rights. This signal is unrelated to concepts of fairness. Bottom line, raising taxes on existing assets is no free lunch because costs in the form of reduced or distorted long term investment must be accounted for.

Second, any claim that all economic benefits are ideally paid in proportion to time or work done is ultimately a disagreement with the concept of fixed assets. I'm not sure if that's what you're suggesting, but that kind of compensation is neither fair nor workable.

IIRC only a small fraction of innovation is attributable to government funding. Nearly all innovation is produced privately, mostly in corporations. I can pull out some literature references on this if you're interested. Baumol (2002) argues public good aspects of innovation (spillover effects) offer only weak support for government funding. So innovation is probably not a good reason for raising taxes.

Esmaeil

Dear professor becker. first of all please forgive me for my weak writing. I always read your blog and I got meany useful thing about economic issue. but for several days i am waiting for your idea about the devaluation of dollar in world economy. let me ask you talk about this subjet. why dollar start to devaluate?what happened for it? what will be the effect of this devaluation in world economy? what will be the effect of dollar devaluation in supply of money and so intrest rate and inflation in country like china and japan which has much dollar reserve and federal bonds?

Jack

Ben sez: "Nearly all innovation is produced privately, mostly in corporations. I can pull out some literature references on this if you're interested."

Not that this is a significant fraction of the national budget or reason for taxation, I'd be interested. Probably tough, though to define "innovation" what with NIH and other government agencies doing basic research and companies making commercial products. Or, the converse, such as Congress giving the "Big Three" a billion in tax breaks plus nearly a decade to come up with a hybrid or other efficient vehicles only to see mileage worse today than ten years ago and the corps selling for break-up value while the foreign marquees eat their lunch? And how do we count the drug "innovation" of a "new" pill taken once a day instead of twice a day so as to extend the patent and avoid competition from the generics? Or that today they spend more on advertising than on research? And that US research dollars are declining?

Anyway, with big bills ahead, and half trillion buck deficits barely maintaining a job market, and $750 billion trade deficits I'd sure like to see fewer headlines and articles such as the following:


ASME NEWS Online May 2005 -- Symposium attendees learn that U.S. competitiveness lags

http://www.asmenews.org/archives/backissues/may05/meetcourse/505symp.html

.... could it be that it's time to take a break from stock buybacks, further consolidation, quit the chest thumping, and take a look around and then get back to work? And make some far wiser big decisions? Will "our" corps take on the task w/o government leadership? Or simply move their operations to "lower cost venues" and their HQ's to the Cayman's? Jack

Jack

http://www.asmenews.org/archives/backissues/may05/meetcourse/505symp.html

Jack

asmenews.org/archives/backissues/may05/meetcourse/505symp.html

Bruce Britton

On Inequality: It seems to me that experience is the only thing that really matters to conscious beings, and so the important inequality is in the quality of that experience. So the important inequality is experiential inequality, where by 'experiential' I mean something like the feeling of subjective well being. The effect of material goods on the quality of experience is determined mainly by consumption, not by wealth (which is just the total claim a person has on consumable goods) nor by income ( which is just the yearly increment to wealth). And the effect of inequality of consumption on the quality of experience is bound to be very small (once you get above a base level of consumption), mainly because everyone, no matter how rich, has only 16 hours in a day to have experience in, can only live in one house at a time, drive one car at a time, eat 3 meals a day, etc.

Haris

I don't actually care about other people's insane wealth. I am talking about wealth for tax purposes. It seems obvious to me that it makes much more sense to tax wealth that is received by luck [inheritances, for example] rather than wealth that was earned by labor or investment.

Jack

Haris: "just for fun" it's interesting to contemplate a society in which the inheritance tax was 99% So, we'd have all competing in a meritocracy, and everyone would spend virtually all they earned (as do 90% of Americans) would still invest in hopes of early retirement or at least a cushy retirement and income taxes would be fairly low. Just for fun!

A shot at a "real world" ideal taxing scheme. Yale economist Robert Shiller proposes that today, we implement a progress tax plan which would kick in later if (when) wage inequality gets worse, it would adjust taxation and something like the EITC so that the wage curve is can not become more steep than it already has.

It would have a number of advantages including that increased productivity would pay most of the bills and taxes for even middle class earners would be very low. That would lower the transaction costs of today, say when a bricklayer has to earn $140 to get home with $100 to pay the plumber who gets home with $65 after tax. We could hire each other, seemingly with a gain in efficiency over the bricklayer having to do his own plumbing to avoid hefty taxes. (Interesting that the costs are all deductible to business but not to home owners.)

I've a couple of add-ons to Shiller's plan: First, before adopting his plan we HONESTLY take some of the income tax burden away by a revenue neutral shift to energy and non-renewable resources to give incentives to conserve them.

Second, as the costs of tech and mfg goods keeps falling while the costs of employing people such as teachers, lawyers, dentists, or even fine dining and all who can not make productivity increases continues to outpace inflation, it might be good to shift some of the tax burden onto the mfg goods and away from increasingly unaffordable human services.

"How would we do that?" Shift yet more of the individual income tax burden to corporate profits and while we're at it levy a bit more on imported goods to make up for foreign factories not creating jobs here or adding anything to our Treasury. Result? A bit higher prices for mfg consumables and much less to hire teachers, docs etc. Adopt the whole package, and voila! any attempt to further widen the wage gap simply results in a more progressive tax, and as JFK said..... a rising tide raises ALL the boats. Something we've gone 25 years without seeing.

Jack

Haris: "just for fun" it's interesting to contemplate a society in which the inheritance tax was 99% So, we'd have all competing in a meritocracy, and everyone would spend virtually all they earned (as do 90% of Americans) would still invest in hopes of early retirement or at least a cushy retirement and income taxes would be fairly low. Just for fun!

A shot at a "real world" ideal taxing scheme. Yale economist Robert Shiller proposes that today, we implement a progress tax plan which would kick in later if (when) wage inequality gets worse, it would adjust taxation and something like the EITC so that the wage curve is can not become more steep than it already has.

It would have a number of advantages including that increased productivity would pay most of the bills and taxes for even middle class earners would be very low. That would lower the transaction costs of today, say when a bricklayer has to earn $140 to get home with $100 to pay the plumber who gets home with $65 after tax. We could hire each other, seemingly with a gain in efficiency over the bricklayer having to do his own plumbing to avoid hefty taxes. (Interesting that the costs are all deductible to business but not to home owners.)

I've a couple of add-ons to Shiller's plan: First, before adopting his plan we HONESTLY take some of the income tax burden away by a revenue neutral shift to energy and non-renewable resources to give incentives to conserve them.

Second, as the costs of tech and mfg goods keeps falling while the costs of employing people such as teachers, lawyers, dentists, or even fine dining and all who can not make productivity increases continues to outpace inflation, it might be good to shift some of the tax burden onto the mfg goods and away from increasingly unaffordable human services.

"How would we do that?" Shift yet more of the individual income tax burden to corporate profits and while we're at it levy a bit more on imported goods to make up for foreign factories not creating jobs here or adding anything to our Treasury. Result? A bit higher prices for mfg consumables and much less to hire teachers, docs etc. Adopt the whole package, and voila! any attempt to further widen the wage gap simply results in a more progressive tax, and as JFK said..... a rising tide raises ALL the boats. Something we've gone 25 years without seeing.

N.E.Hatfield

Perhaps World inequality has diminished slightly. But at what cost? From what I've seen, all economic action results in a zero-sum game. Some win, others lose. Even at the nation state level. Like it or not we are in an no holds barred economic war with each other and there are going to be clear winners and losers in the years ahead. How many here are willing to sacrifice what they already have so that the poorer nations can achieve parity?

birdwin03

Practical question - who decides whether wealth accumulated by an individual is due to luck or productive contributions? Who is that arbiter? The government?

Should a fashion model's earnings be taxed at the "luck" rate because she was lucky to be born beautiful, or should her earnings be taxed at the "productive" rate because she works long, hard hours on the catwalk, thus inspiring apparel buyers to produce practical clothing lines that make ordinary women feel beautiful?

Should Paris Hilton have her earnings taxed at the "luck" rate because she also happens to have a large trust fund, chooses to be a party girl, and many commenters disdain her personal choices? Should Angelina Jolie have her movie earnings taxed at the "productive" rate because she's a UN spokesperson and all-around Africa do-gooder?

Should a landowner who buys property that radically and unexpectedly increases in value have his capital gains taxed at the "luck" rate because he got lucky, or should he be taxed at the "productive" rate because he must have relied on insight and analysis that underscored his risk-taking?

Should the heirs of typical American baby-boomers with modest estates have their parents' wealth taxed at the "luck" rate, because their parents chose to invest for the long-term rather than spoil their children and transfer wealth instead over their childrens' lifetimes?

It's easy to make broad statements about income or wealth that is lucky rather than earned. It's not so easy, though, to walk through specific examples.

Haris

I'll agree that luck v. desert is a difficult question in some circumstances. A few are pretty easy, though.
The Paris Hilton example, for one. An heir to a fortune has done absolutely nothing to "earn" her family's fortune. Inheritances in general are a matter of luck: they depend solely who your parents are. While taxing inheritances heavily might discourage investment and saving by parents, I think that effect is more than made up for by the increased incentives on the child generation who will have to work harder then.
This is the most clearcut example of luck I can think of. [Even lottery winners have done more to "deserve" their earnings, by taking a huge risk and "investing."] The other examples you've listed are essentially all earned, although John Rawls would have his own take on whether a supermodel deserves the rents that result from genetic luck.
There are obviously grey areas, but the essential attributes of luck earnings is that the behavior that leads to such earnings will not be altered if such earnings are to be taxed. In the inheritance example, it's not as if one would [or could] choose different parents or as if one would turn down an inheritance because it is lower than it otherwise would have been. These taxes are good sources of revenue because they don't distort behavior as much as income taxes do. I'd rather have income taxes lowered and the shortfall in revenue made up by taxes on luck.

Jack

Hatfield sez:

From what I've seen, all economic action results in a zero-sum game.


.......The fact of it looking that way is why we're having this discussion. What makes econ activity NOT a zero sum game is productivity increases. In mid-industrial revolution the US became rich by outpacing others by just a percent or two in P. gains. In rough numbers we've DOUBLED productivity in the last 25 years but virtually ALL gains have gone to those high up on the "trickle down" ladder with zip-nada or in the case of min wage workers, a 40% taking of what little they had just a decade ago. Thus the troublesome to most rational folk soaring wage/wealth gap.

As for 'parity' with other nations right now we are giving at a tremendous level, GDP growth in the US is in the 2% range while that of China/India and others are 10%. The diff doesn't strike one as being a "biggy" but anything growing at 2% doubles in 35 years while something growing at 10% doubles every 7 years. And we "give" them free access to our markets just as if they were here and there growing prosperity was a help to us.

Birdwin, All of your concerns were addressed a long time ago with a sharply progressive income tax and a substantial inheritance tax on estates over a million or two.

For "some reason" despite the long trend of lower and middle income folk already falling behind and NOT participating in overall productivity increases those coming in in 2000 acted to dramatically increase the widening income/wealth gap at the EXPENSE of 85% of wage earners and 99% who will never be taxed on an inheritance over a couple of million.

Food for thought: It was always a concern that a democracy would fail due to The People voting themselves unsustainable benefits.... with those in power openly exacerbating an already roaring wage/wealth gap of significant benefit ONLY to the top 10-20% what does it say about Who is really running "our?" country? Jack

Haris

NE
So the poorer nations are catching up. Nothing wrong with that. It's not like they're stealing it from us. If the Chinese or the Indians or the Mexicans or the Rwandans or the Czechs are willing to manufacture our cars for less money, I don't see a reason to deny them. I'm in the minority on this here, but I don't see a reason why an American life is worth more to me than any other. I won't shed any tears for manufacturing jobs that go from Ohio to [insert name of Mexican or Chinese province]. It's unfortunate for a person to lose a job, sure, but it's fortunate to get a job, too. And, keeping in mind diminishing returns, the utility to those who gain the jobs is probably much higher than the utility loss of those who lose them. As a result, worldwide inequality will continue to fall in all the areas in which free trade is opened up. I don't really see anything wrong with that.

N.E.Hatfield

Jack & Harris, Just three questions:

1. And who's paying your bills?
2. What's the projected National Trade deficit for fiscal year 2006, approx. 800 billion dollars?
3. How many years has this deficit been running?

In the end, a final accounting and settlement always falls due. Hopefully, I'll be in my grave when it all falls due.

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