I'm afraid there are people with similar wealth, obtained with hardly legal means, not on this list, however Forbes does not know about them -- and they are very eager to remain ignored. Think of drugs, slaves or weapons.

More to the point, I'm afraid that when you look at Forbes top 10, stiffening the estate tax appears relevant: the “lucky sperm” argument that Gates made himself about his children. However, people further down the list know better about the family asset then any government, and proved (thanks to an expensive business school education, and kin/property ties) better managers then anyone money could buy. I would love to recommend a few good economists who studied family businesses, so that you realise their undeserved wealth offer several points of NGP, as well as jobs and expertise to their community.

The dubious history of central planning has demonstrated that a dollar spent by government on a particular cause is not equal to a dollar spent privately. Wealthy private donors often take an interest in the results they are purchasing with their donations. Few would argue that government is equally demanding with its funds. Thus, an increase in government spending to replace charitable donations seems counter productive.

The estate tax could serve another purpose. Instead of putting estate tax revenues into the general treasury fund, they could be allocated entirely to the trust funds that concern themselves with the care of the elderly - Social Security and Medicare - to the extent that those programs are underfunded.

The reason for doing this would be to avoid inter-generational exploitation and conflict. One of the criticisms of social security in our democracy is that it is too easy for a retiring generation, who wrote and voted in the rules about payments, to allocate the risk and burden of finding the money to make those payments to future generations. The future population, which often was too young to vote when the rules were written, is essentially blackmailed because millions of future retirees have lived their financial lives based on the expectation of receiving these payments (despite being told for decades the system was unsustainable).

If a generation fails to either save or tax itself sufficiently to secure the viability of its system of pensions and health care - then the excessive past consumption is essentially gone forever, but the extra assets in the form of investments (vs what people would have had they been taxed at the system-sustaining higher rate) could be recoupable upon death by using the estate tax. Instead of the bulk of the extra "trust-deficiency" assets being inherited by a tiny number of people, with the rest of the earning population on the hook to make payments - the appropriate share of money would stay within the generation it should have never left.

Tax-deductibility of large gifts to charity would probably have to be eliminated since it wouldn't make much sense for Warren Buffet to accumulate his fortune under a regime of the insufficient taxation of his generation only to be able to avoid contributing to a rebalancing of the books through a massive contribution.

In this way, generational-integrity would be promoted in the trust-fund system. Under-taxation would yield higher estate taxes - and there would be a somewhat internalized weighing of preferences between taxes and benefits.

In fact, the balance of power between generations could be altered since younger workers, if they dominated the voting population, could vote themselves lower taxes, or abolish the system altogether, with the shortfall in payments to those that relied on them being made up entirely by estate taxes.

In this way, entire generations could be "means-tested", with perhaps the expectation that only if very high estate taxes were insufficient to make pension payments (essentially, generational bankruptcy) would younger workers chip in through increased general taxation.

In an alternative, but similar, vein, all government payments could be guaranteed but treated as a debt due, with interest, upon death with the U.S. treasury first in line. If an estate is capable of paying the difference, then the person was essentially self-sufficient at any rate and never really needed government assistance except as insurance against uncertainty with longevity and health-status. If an estate is insufficient to repay the debt - it is liquidated, the remainder forgiven but recouped with generational-integrity through an appropriately-fractioned death tax on large estates.

I see generational-integrity with estate taxes as a reasonable compromise between the collectivization of the trust system and the risk of private accounts, but with a huge number of frequent voters going into retirement in the next decade, and the current situation in the congress, it's likely just a fairy tale.

Judge Posner,

I don't understand how eliminating charitable deductions from the death tax (let's call a spade a spade ok?) can plausibly increase much tax revenue. People will simply give whatever money they had otherwise intended to charity while they are still alive, noting they don't need tax deductions to do so. Therefore, barring car/plane/etc. accidents, eliminating the charitable deduction "loophole" from the death tax will yield next to no additional tax revenues. Unless you plan on making it illegal for rish people to give away money while they are alive (ha!), then you are arguing for a nonexistent revenue increase.

It is also worth pointing out that government gets, and has gotten, a rather small portion of its tax revenue from the already prohibitively high death tax. Becker astutely refrained from conflating annual earnings from net wealth, a trap you fell into. Even if "we" murdered all of the richest Americans (the bulk of whom are prolific job creators by the way), that partially taxed $600 billion would be a one tme event, with $0 in death tax revenue thereafter.

I also think you are radically underestimating the incentive effects of giving to one's offspring. Assume you can close all the "loopholes" permanently and it is impossible to give one's wealth to one's children (what a hideous thought) after death or while alive, then I assure you an awful lot of our most prolific job creators would either retire or stop being workaholics and instead take time out to smell the roses. One could argue that this might be helpful for them, but I fail to see how it benefits society at large to remove our best employers from the job creation pool, and to remove our best innovators from creating new and exciting and labor saving goods and services.

Furthermore, who do you think would do a better job of redistributing their wealth, the likes of Gates and Buffett, or the US government? By revealed preference the vast bulk of Americans think they themselves can do a better job, which is why they write hundreds of billions of dollars of charitable checks each and every year instead of writing identical sized checks to the US Treasury above and beyond whatever the IRS says they owe the government.

Since citizens are better at identifying the truly needy than government is, and since they don't create perverse moral hazards by doing so, and since you acknowledge that Gates et al can't possibly spend all of his money on himself, I find it completely illogical to try to use the coercive power of the government monoloply on force to try to stop that from happening.

Economic is about tradeoffs for scarce resources, and both you and Gary Becker seem to have suddenly gone brain dead and joined the ranks of socialism without examining the unintended consequences of your envy.

If you think that the poor and middle class are overtaxed relative to the wealthy, the solution is simple. Cut, or better yet abolish, their taxes. Don't "pay for it" like the socialist twits in DC and the media would have you do by raising taxes elsewhere. Pay for it by drastically reducing US government spending by a couple of trillion dollars, which is in fact quite easy to do (albeit not politically) unless you have a socialist mindset or are a warmongerer or a sap who gullibly defends Europe and Japan from Lord knows who when they are perfectly capable of doing so themselves. The actual needs of the US people for US government services are actually quite minimal, and if we refrain from foreign entanglements then those needs are even fewer.

As a matter outside of economics, lying more closely in property law, how can we justify a policy that reduces your claim to your own assets (or property) as your wealth increases? Or the right by which a citizen has to see the wealth he has created put to the uses of greatest personal utility?
And in a matter of economics, how can we ignore the strong incentive to spend personal wealth productively due to the hard work and thought engainged in its production?

I agree with most of your points but a quick factual check. You say, "Adding up the fortunes listed in the Forbes article for just the 10 wealthiest Americans yields a total of almost $600 billion." The gut check suggests this is an inflated number. If each of the top ten were worth the same amount, they would each have to be worth $60 billion, more than the estimated net worth of Gates. A quick calculation based on the top 10 Americans from the Forbes site suggests they have a combined wealth of just $288 billion. A sum that is incredibly large, but significantly lower than the $600 billion cited.

Ben asks: "Or the right by which a citizen has to see the wealth he has created put to the uses of greatest personal utility?"

.......... Ben nothing is taken from "the individual" but taxed as the wealth is transferred to others.

BTW am I detecting an undue concern from some "conservatives" that their offspring would not fare well unless they had a better head start than $5 million plus 60% of their inherited fortunes?

Aside from the mythology of "Pay for it by drastically reducing US government spending by a couple of trillion dollars, which is in fact quite easy to do" as contributed by happyjuggler, I wonder which services you'd favor taking away from working folk or which shoulders you'd rather place the additional tax burden as we all tightened our belts in an effort to save all the Paris Hilton's the inconvenience of contributing anything to their country?

Juggler, could you show us where you might cut our federal budget? If not by the $2 trillion that is most of the entire budget, say, by 50%? 25%? Any?

As for the likes of the Morgans, Astors, Mellons, Rockefellors, Carnegies, and the like; Twain had a name for the epoch, "The Gilded Age". If I remember correctly, a UC Economist also made his name off of it. Any one remember Thorstein Veblen? And where are they all now? Perhaps, we ought to come up with a suitable name for our own. How about, "The Tarnished age"? At least with the early wealthy they had some major religious and moral qualms about their wealth. Unlike most today.

As for the controlling of great wealth, that's one of reasons for government's existence, the maximization of social utility. As for the Gilded Age, wasn't it put to an end by the Sherman Antitrust Act? Similiar methods can be used in our Tarnished Age if need be.

As for the impact on the entrepenurial spirit, it shouldn't impact it in the least. Most entrepenuers are more interested in seeing if they can make it work or make go of it. The wealth accumulation is a secondary or tertiary concern.

So, accepting Judge Posner's analysis, 600 bn in revenue is generated with the least amount of pain to the rest of society. To what end? To allow an already bloated government to spend more of the public's money? How many more "Bridges to Nowhere" must be built before people wake up and realize that government only expands and doesn't contract?

Although I do realize I'm by far the most socialist in this crowd, let me simply answer to two comments:
- Property law might appear absolute: it has limits, like public rest, and it is generally accepted that a “Rawlsian judge” (someone trying to consider everybody's point of view) takes from those who have more then they need, to redistribute it to those in need; the idea of *need* might be foreign to a neo-classical unsaturated model, it is appears as a useful element to consider in that matter;
- I'm a big fan of bridges, but not a big fan of bridge to nowhere (too much of a tree-huger, I guess) however, one thing that appears under-funded in America is Children's health; private initiative doesn't seem to cover that for the moment.
I know this is a heated debate now in the USA, but we are talking a millionaires, so let me simply stay on that question and ask you:
Would half of those new billionaires have created so much wealth without the striking, demanding, unique contributions of one of them: Steve Jobs? Graphical interface, Computing anyone could use, Digital animation, Paying for music in the Internet era. . . We can agree he was not alone, but he contributed. Read his biography: how would a similar lower middle class family handle it now? Maybe the next seed of a billionaire is catching the flu right now, and he needs medication.
Government spending is generally inefficient in America--but is sometimes is necessary all the same.

Most of the wealth of these billionaires is not from income and has not been taxed, e.g. Balmer has not sold and rebought his Microsoft stock on which to pay capital gains, but has held it and his wealth is from appreciation that has not been taxed. So the estate taxes, for the most part, are taxes on money as it passed to heirs that has not yet been taxed.

As for the excess of a government that builds bridges to "no where", the same was said of one that built a Trans-Continental railroad that linked a continent. It was also said of a government that "wasted" money on a ditch in Panama that linked two oceans. How about that, we never could get to "no where" and now we can. Let's go!

Oh ye of little faith and vision!

Anonymous. YES! And just why is that fact so overlooked by the "death tax" set?

Neil, I live in Alaska and am familiar with both "bridges to nowhere" sites. Neither are or will be economically viable in this century and they truly are markers for the worst of Congressional pork and earmarking.

BTW most of the bridges that get built are preceded by decades of ferry service of a magnitude to justify a bridge project. The Ketchikan "ferry" is a 40' runabout, and the Anchorage crossing has no ferry, most likely because a four lane highway is available for getting to the other side. THE reason for these gobs of fatted pork is only that of Rep Don Young getting transportation chairman after the three decades of lackluster performance in Congress that followed his gaining the seat after the Begich-Boggs airplane crash that gave the seat to what had been a sacrificial lamb candidate with no chance of out polling the popular Rep Begich.

i don't recall exactly where i was reading it, but i think it was my favorite newspaper, the economist. someone there was making a case for replacing estate/death taxes with inheritance taxes. might clean things up some, get rid of the inconvenient "taxing the dead" thing...

Good postings regarding how many assets appreciate and therefore have not in some part been taxed at death. However, whenever they do get realized by whomever inherited them, they will be taxed. Although, consider this: To figure the tax to be charged on who inherited the money, a "new basis," determined by value at death, will be used.

So, if I spent 100 after-tax dollars and bought stock that appreciated to $1,000,000 when I died and left it to junior, and then junior sold it for $1,000,100, he would only owe taxes on $100 of income. In reality though, $1,000,000 of income was realized but untaxed. It might be useful to consider reforming this rule. (It is not a loophole, just a plain rule)

Of course, if I owned somewhere around 2.5 million in assests when I died (or whatever the current exemption is now), a steep tax would cut into anything over the exemption amount, so it is not a huge issue, in the grand scheme of things.

The above post was confusing, sorry.

The "new basis" rule only applies to appreciable assets (not money, like I accidently suggested).

Also, the new basis can hurt if the value of stock goes down at the time of death and then goes back up, or stays down. Still, stock generally goes up over long periods of time.

Dear Neilehat:
The transcontinental railroad that you describe was, theoretically, a purely private enterprise until railroad builders, unhappy with actually having to compete in the marketplace, went to Congress and the state legislatures for protective legislation that granted them monopolies.
The Panama Canal was a government enterprise that, like the space program, should also have been purely private but, once undertaken by the government, accomplished its stated end. Who knows if these ends could have been accomplisehd cheaply and more efficiently had the government not been involved?

When one proposes that important consequences should turn on a suggested legal distinction, one who has studied how democracies work should also consider what may result as the precise terms of the legal distinction are changed by the Congress and courts. Both Becker and Posner appear to want to change the tax system in order to discourage the retention of wealth by very wealthy people, at least with fortunes in excess of several billion dollars.

Posner suggests people cannot "deserve" such fortunes because fortunes or incomes should correlate with ability and small differences in ability may lead to disproportionate results. Becker does not quite articulate his problem with great fortunes, largely limiting his discussion to the realizable utility from substituting a tax on wealth for a tax on income.

The problem that they both understand but do not address is that the definition of undeserved wealth or income varies extraordinarily among different segments of the population. Most Democrat Congresspeople do not wish to limit taxes on wealth to those in the billionaire class. Nor when they choose to distribute benefits do they propose to limit the gifts to the poor or even near poor. Consider Senator Clinton's free health care for children in families at 4 times the poverty level.

Trends develop a momentum of their own in American politics. My guess is that if Posner and Becker were in the United States Senate--a pleasant daydream--and proposed a wealth tax, whether estate or inheritance with a no-exemption flat rate at say 70% above $10 million, they would be flooded with Democrat amendments raising the rate and lowering the threshold.

They might pass a bill at 90% above $3 million with very substantial negative effects on what they would agree are family farms and small businesses. Other results would include getting the Congress to seriously consider what is "deserved" income and at what level wealth becomes sufficiently "staggering" that its simple possession should be taxable without requiring the convenience of death.

The point is that our country has sustained sustained truly remarkable growth in income, wealth, productivity since Reagan began removing the tax code biases against growth. Instead of suggesting a reversal in direction, one would hope these thinkers would recognize that the society needs a dream, and the hope of acquiring wealth is the current version. The Twentieth Century witnessed a number of less desirable dreams.

Robert, The canal started out as a private enterprise by the French and failed miserably. Hence U.S. involvement. As for the railroad, the motivation was the "rights of way" granted to the Union Pacific and Northern Pacific. Which turned the "Great American Desert" into the bread basket of the world. Not a pursuit by worthless corporations looking for monopolistic protection. Ahh, I love it when history is revised to support a failed economic ideology.

Jack, Currently, those bridges may go to "no where", but give them time.

Neil, Ha! I thought I stated the case fairly well, but perhaps not! Ketchikan where one multi-million dollar "bridge to nowhere" was porked is a small coastal town backed by mountains too steep for homes or businesses. Further, the only business will be those who locate there for the resources (economically beleagured fisheries and timber that relies very heavily on federal tax subsidies) and is "Tijuanna North" selling baubles to cruise passengers who get off there for a few hours. The population is about 20,000.

The "other side" is an island with a pop. of well under 100 and a small airport. At even $50 million, what do you suppose the toll would have to be to attract investment from a private toll company? It's pure fatted pork of the juiciest kind.

Oh, nearly forgot, the BTN would have to arch high in the air to allow the multi-story floating hotels and traditional Inland Passage traffic to pass under it.

Sam sez:

Posner suggests people cannot "deserve" such fortunes because fortunes or incomes should correlate with ability and small differences in ability may lead to disproportionate results.

............ Or economic anomalies. TV and radio broadcasters pay virtually nothing for the use of OUR airwaves. Were they to bid for them or otherwise pay the proper rental value for them they would not have the billions that make sports guys instant millionaires. Before gaining control of mass media the best sportsmen played their best games for little pay.

......... and perhaps I've said enough here on the matter of CEO gleanings having soared 2,000 percent since 1980 to over 500 times worker pay from 80 times. From reading the biz page I'm hardly convinced they are many orders of magnitude better than those of earlier decades. In fact, after watching a few such as auto execs routinely missing the boat, I'd have no trouble asking how much their poor or very short term decision have contributed to our soaring trade deficit.

Dear Judge Posner,
Your blog and the discussion it generates is appreciated, although the issue of unfairness when wealth gets superheavy at the top may not ever be solved. But like those of all income brackets, some are generous, some stingy - probably more of the latter.

Simply because they are incomparably rich, and therefore being taxed wouldn't put much of a dent in their lifestyle or business potential, they should bear a larger "technical" burden than those for whom taxes may, in my case, for example, be a greater burden than the electric bill. I mean I don't get my teeth fixed in order to pay taxes. But of course, many more people don't find it so intrusive - I just happen to be an entrepreneur, so the social security taxes add up. It's another thing that should be fixed.
(sorry couldn't get the paragraphs to show up)

But as a tax-paying Muslim, I take great offense at your recent statements that all Muslims in America should be under surveillance. Most of us probably are, anyway. It makes it very hard to practice one's religion. I never tell people "in real life" about my religion or dress that way, in order to avoid attacks against my family. Now on top of that, we can't even email our friends, family, or others without the All-Seeing-Antiterrorist-Eye looking over our shoulders. The CIA will be enjoying all our love letters, etc. But you should at least appreciate the fact that we're helping to pay for it. "Big Brother Is Watching You - And You'll Foot the Bill!"

Dear Judge Posner, please get out of this Orwellian fear-unto-death mode. I'm just as afraid of a terrorist attack as you are. But I'm also afraid of losing the one great Republic where we can actually still BE Muslims, where there is actual freedom of religion (unlike most so-called Muslim countries). Now I'd pay for that! There has to be a balance, and the use of the mind.

Islam is one religion which enjoins its followers to use reason, as the Qur'an came to "people who use their minds". The fact that many Muslims don't actually follow their religion or Qur'an doesn't mean you'll save us from destruction by killing off the dream of America. Have you no faith in reason, in human conscience, in the power of good over evil? It exists in the Muslim community, and explains the mysterious absence of UBL-led attacks stateside. We are as human as you are. The myth of the Muslim Monster is just a myth.

While working on our tax issues, work on your worldview of homo sapiens. Remember, Hitler was a "Christofascist". And to Nazis, Arabs were also "Juden." The surveillance and secret trial kangaroo court angle does NOT WORK. The only thing that works is what's always worked.

Good will triumph over evil. Believe it. Or you'll end up on the wrong side.

thinkbridge wrote:"Islam is one religion which enjoins its followers to use reason, as the Qur'an came to ..."

Which begs the question: Why don't the followers of islam then use reason?

Also, what precisely do you mean by "one" -- as in the only religion? So, for instance, what you imply is that Buddhism asks its followers to be mindless f%$ks?

Given that 98 percent of all terrorist acts are done by the followers of Islam, I think keeping an eye on all the followers of Islam is a great idea. It is going to happen, eventually. After all, there is precious little sign to show that they are going to let up easily.

Neilehat:
The first part of your statement is unquestionably true, i.e., French private interests tried and failed to build the canal. However, that does not mean that American private interests would have had the same result. As for the railroads, the granting of a "right of way" by the government is the sine qua non of a monopoly. I recommend for your reading pleasure the story of James J. Hill. He was the only railroad builder of the 19th century who succeeded without going to politicians for protective tariffs, subsidies, etc. Yes, Virginia, it can be done.
Now tell me, who's engaging in revisionist history? And are you implying that it is capitalism that has failed?

Cowsay: Just to keep things honest here, a few comments:

When quoting someone the protocol is to use their exact statement including their punctuation. (The exception may be "talk radio" where a somewhat different, and rather curious protocol has developed.)

"Islam is one religion which enjoins its followers to use reason, as the Qur'an came to "people who use their minds".

A rereading with close attention to the punctuation may be worthwhile.

"Which begs the question: Why don't the followers of islam then use reason?"

.............. I'd beg those who pose such a question to note there are some billion and a quarter Islamics world-wide and 8 million or so in our own nation. Were even a small percentage of "them" to act in an unreasonable manner the world would be quite a chaotic place.

BTW it may be of interest that in the US there are about the same number of Islamics as adherents to the Jewish faith and they seem to coexist peacefully; perhaps something those who favor building walls or attempting to create separatist nations against the trends of the rest of the world might want to consider.

"Given that 98 percent of all terrorist acts are done by the followers of Islam, I think keeping an eye on all the followers of Islam is a great idea. "

............ Hmmm, it looks as though the purposeful propagandistic fear mongering of the current administration has taken quite an evil hold on you. I don't know whether you'd like to go back in history and note the ferocity with which the "christians" subjugated the Muslims when they got the upper hand, but even in modern times it would be good to include the young "christian" McVeigh of OK City fame, those "good folk" who've terrorized abortion clinics, and those who've burned churches, oppressed, beaten and lynched many of their own citizens for the crime of "being different" in terms of skin color even after they'd served honorably in several of our wars.

I'm guessing that it might be fruitless, just now, to attempt to compare our "pre-emptive" attack and the dismantling of a sovereign nation, or carpet bombing and dumping a few super-tankers of Agent Orange on a people to prevent their "turning communist" with the methods of warfare used by the, seemingly, powerless against the powerful.

"It is going to happen, eventually. After all, there is precious little sign to show that they are going to let up easily."

............ perhaps you and many others would be wise to find out why some are so tenacious. Have you read much of the history of Irish terrorism? I'd point out that a small band of people who felt their cause was just and the oppression intolerable took the Brit Empire to its knees at the apex of its power in the world and reclaimed half of Ireland. The "troubles," often sold as a war between religious factions continued despite strong military attempts to end it. After about a century it appears that a political solution has been struck and amazingly? the religious factions live in relative peace with each other in a very small nation. Do you ever wonder, at all, why we hear nothing of what the various Iraqi factions are seeking?

Robert, As for the "Ditch", it was offered to American Business interests and they turned it down. As for the granting of a "Right of Way" as a "sine qua non" of a Monopoly clearly raises questions about your understanding of Monopolistic practices and understanding of a "sine qua non". And that pretty much sums it all up.

Now, where do you get off, accusing me of being against individual enterprise? Simply because I'm not an Anarcho-Capitalist?

The first part of your statement is unquestionably true, i.e., French private interests tried and failed to build the canal

Neilehat:
The "Ditch" was NOT offered to American business interests first.
Monopolies can only granted by the government. There is no such thing as a "right of way" in a free market--only that which buyers and sellers create.
Additionally, there is no such thing as "Anarcho-capitalism"; instead, there is just capitalism. What you seem to be referring to is laissez-faire capitalism (ironically, something which has never existed in any society including our own).
And THAT pretty much sums it up.

?Whatever?

Robert? Absent intervention by a US or Panamanian government how would you avoid monopolistic or preferential pricing? and access? in the case of the canal?

Also in regard to "What you seem to be referring to is laissez-faire capitalism (ironically, something which has never existed in any society including our own)."

....... Ironically? each time l-f-c has been approach the system has melted down. It strikes that as with other powerful engines such as diesels its power must be guided and governed to provide its benefits to the users. (For those unfamiliar with diesels w/o a governor it will keep pumping fuel to itself and inhale more air until it self-destructs.) Those placing too much trust in "the market" seem to forget the US and its states speak of "developing our resources for the benefit of its people" not just the bottom lines of a few mid-ocean based corporations.

Becker says:

"There are two objections, however, to a stiff estate tax on large fortunes. The first is that it would encourage the wealthy to spend rather than invest, in order to reduce their taxable estates. "

To what level is "saving"/"investment" better for the economy than "spending"?
Now, here's a economic principle that I never really understood: Is "saving" / "investment" better for the economy than "spending"?

Always? How would a billionaire "spend" his fortune? Say, he buys a jet, rents a yatch. Aren't these "spendings" good since they invoke a multiplier effect from the economic activity they spurt?

Any advice on how one resolves this issue?

Ben 12:28,

Good point.

One possible justification for having the rich pay more is that the interest of having your assests protected by the government is directly proportional to the amount of assests you have. To the extent that you rely on that interest, should you be expected to pay more for it?

Jack:
First, government would be the CAUSE not the cure for monopolistic pricing. As it is, the marketplace has actualy allowed for this problem by creating an incentive for the consideration of other routes. Don't believe me? Check here:http://en.wikipedia.org/wiki/Panama_canal.
Second, there has never been a meltdown of "lfc" because it's never existed--either in America or anywhere else. Given that fact (and it IS a fact) how can some claim the dangers of something that has never been tried?

Raul: To what level is "saving"/"investment" better for the economy than "spending"?
Now, here's a economic principle that I never really understood: Is "saving" / "investment" better for the economy than "spending"?

............ tough questions and ones that require deciding what "good" means. Obviously, as individuals, when we decide to spend all of our income it's because we view fulfilling our needs and wants to be worth more than the money or the future returns and rewards of saving. Then, if things are going well and the companies were we spent our money are profitable they can expand from profits or by borrowing. In a single nation model we might not have money to borrow if some did not save and bank their savings and I think this was the case somewhere around the late 60's here. Today, China and others are the savers and there are tons of investment capital available.

"What about the nations of "savers?" China's policies create virtually a forced savings program so after they work hard all day for the short "buck" they are not able to buy what they need or want and particularly so if it is imported.

Always? How would a billionaire "spend" his fortune? Say, he buys a jet, rents a yatch. Aren't these "spendings" good since they invoke a multiplier effect from the economic activity they spurt?

............. It's very basic economics that the lower income folk have a far higher "propensity to spend". Most of us know the drill, when money is short and a tax rebate or windfall hits the table there is a bill to pay or an immediate and fairly urgent need to fill. A fairly high percentage of what is purchased would be the consumables of food, clothing, energy and even the "durables" are of fairly short life spans, appliances, furniture et al.

A billionaire quickly finds it impossible to "spend" it all so his spending is much more like investing. "Spending" on estates, second homes, yachts, art and antiques etc. all put something back on the asset column often returning more than was spent.

I don't know if the multiplier effect is different and it seems to me it can get pretty confusing in terms of being "good". Suppose the new rich of Silicon Valley bid up the prices of existing homes in San Jose. The former owner gets something of a windfall that he can spend but now that very average home is more expensive and beyond the reach of many, perhaps including its former owner.

Here's something to mull: At least since the Depression we all think in terms of rapid "growth" that "creates lots of jobs" as the path to "wealth", and so it seems as most of us only make our wages when we build or make something to sell to someone else. But consider two islands, one of static population and enough housing to go around and fish or crops to feed everyone. On that island they'd not have to work very hard building more homes, schools, shopping centers and all for an ever-expanding population.

The next island has population increases on par with say, Mexico, so instead of young marrieds moving into the homes of those recently deceased on the island of static population, they are all busily building new housing and facilities for themselves and those to come........ kinda the problem CA is experiencing in trying to keep up on school construction.

You can see that the static island would enjoy a slower pace of life and have more time to mfg things for export or to enjoy the arts or their leisure time than the island of rapid population increases.

I've been frequent visitor to Seattle for 30 years or so. About 20 years ago it went from being quite a nice, and very livable city to that of gridlocked traffic that given the topography is impossible to remedy, unaffordable housing, and on every visit the cranes are piling up another tall building downtown and the Chamber of Commerce has campaigns to draw more business to an already maxxed out city. I have to wonder if capitalism is a form of cancer and counter to sustainability.

Robert: I guess I'd have to differ as some things simply don't lend themselves to a "competitive" "private ownership" model.

...... Today as the Canal finishes up its first century of operation, is maxxed out, and can't handle super-tankers or aircraft carriers it may well be that another canal should be built but for most of that time a competitor would hardly make things more efficient or lower transit costs.

"Second, there has never been a meltdown of "lfc" because it's never existed--either in America or anywhere else. Given that fact (and it IS a fact) how can some claim the dangers of something that has never been tried?"

............ True. The last "gilded age" melted down even with some rudimentary and inadequate governors and safeguards. After learning a little about economics and understanding even a few of its fundamental flaws the need for governance is obvious. In "theory" a kite should fly higher w/o the drag of a tail but! it doesn't work out that way.

........ of the governing mechanisms we have installed in the 20th century, seemingly to good effect, are there any specific ones you feel are superfluous or counterproductive?

Robert, If we were to use your example for the development of an economic structure, "Lets try it and see what happens", makes as about much sense as, "Hey! Let's drive our car off the cliffs at high speed to get to the bottom faster!" "Let's do it now!" Luckily, common sense and rationality prevails (most of the time). Usually, except among the ideologues.

Jack 11:32 Very interesting.

Guys, any opinions on this question:

Say Person A invests his $1000 in a Company X (by buying common stock) say. Person B uses his $1000 to buy a product(say a refrigerator) that Company X produces. As a matter of economic policy is there one action we must favor? To me that goes to the crux of the investment vs spending argument. Maybe that is a settled question in economic theory and so Becker so effortlessly invokes it. I am mostly ignorant.

Question 2: We have three equi-cost products P, Q and R. They all provide identical utility to the buyer but P has a life of 1 year, Q 10 years and R essentially infinite. Does sound economic policy demand that we intervene in favor of any outcome? That I think is also relevant to Becker's "glorifying" investment over spending.

This question is to critically question Jacks reasoning where he (I think) makes an argument in favor of the purchase of "durables" of fairly short life-spans vs. long term assets. If carried to the extreme it would lead to the (somewhat incredulous) claim that disposable products are better for the economy than long-lasting ones!

Of course, I am ignorant as to the nuances of macroeconomic theory. Feel free to correct / enlighten me!

Raul, When you question the actions of individuals in a "better/worse" scenario vis a vis economic policy. the real question becomes, is this "policy" perspective to be taken at the individual level or the state level. By providing the distinction, will give you the appropriate answer. To try to answer both simultaneously, will only lead to confusion.

Raul, FTW I'll try to clarify; might not be perfect as you put a lot on the table at once. Might not be perfect but............

In your first paragraph there is not one "good" and typically not one worthy of government incentives. It's a bit like making a cake, you need about the "right amount" of each of the ingredients.

But in today's macro "debate" (if you can call it such) the "supply side" partisans claim that the way to spur the economy is that of giving a businessman monetary incentives to build a new cafe out on a lonely stretch of Hwy 66, while more traditional, perhaps Keynesian, theorists would say that demand for such a service is the fundamental reason for investing in the new cafe and its success. The two can be seen as the old "glass half full or half empty to some extent as no amount of incentive is going to make it work if their's no traffic, but perhaps a nudge from an incentive might be a tie-breaker and spur the investment sooner. Who knows?

More of what I was saying is there's a time when it may behoove "government" ie us, to spur demand by tax policy and carefully targeted deficit spending. At other times it may be better for government to give investment tax credits or other incentives to invest in plant and equipment that is worn out or running at full capacity. Trouble is government is slow to see what is happening, and by the time a policy emerges from the partisan bickering it's likely too late or wrong in the first place.

As for "durables" vs a throwaway society, We'd leave it to the consumer to make his rational decision as to whether a paper, china or stainless steel cup was best for him.

In the "static island" example if all the residents inherited an SS cup then no one is going to work, or make a living from making or selling cups. Good! they can go to the beach. Bad! they may have nothing to trade for food. The point being that in a static economy it appears that capitalism, as we know it, is not very good at distributing wealth and we see it in the situation of the last three decades in that the "rising tide" of dramatic increases in productivity are NOT lifting "all the boats".

So, we arrive at a question as to whether it is ONLY those well above median income and the well-fatted CEO's who created all of the productivity gains? and should take all of the gains? or that our version of capitalism is flawed in not distributing the productivity gains with those at or below median income?

I guess the cup example goes on to a "throwaway" society as under-employed cup sellers produce fashion cups, cups for holidays, fragile cups and lots of cups to have on the shelf in case two dozen friends come over, etc.

Lastly? As for not understanding the nuances of macro, I'd say that given the falling trade barriers, world-wide currency and asset flows, migrating work forces, changing technology et al that NO one understands it today, and surely not the recent batch of Fed Reserve members and chairmen.

Jack, Here-Here! I especially like your last paragraph. With the advent of "International Neo-Mercantilism" ie. "Globalization", the "Federal Reserves" of the world have become something of an anachronism. The moneteristic policies of such agencies work fine when dealing with a closed economic system or semi-closed system, but when the economic forces move beyond the confines of the system, they are no longer effective. Much like the little Dutch boy with his finger stuck in the dike and more holes which are appearing every minute.

Jack, neilehat: Thanks for those explanations. Do u think with time the monetary policy of the fed becomes more and more irrelevant? I did read a little Von Mises on monetary policy and my gut feeling (only as a layman )was that the whole adjustable fractional reserve business was somewhat of a fraud anyways. If that goes away the fed. can't tinker with the money supply and loses its raison d'être.

Unfortunately contemperory economic thought seems to consider the proponents of the "gold-reserve" as some kind of nut-jobs. I am compelled to think: "If all of these smart economists think the fed is good, then it must be true!" What makes me uneasy is that I have yet to see a single good argument that justifies all the monetary tinkering.! Do u know of any? Finally, from all that I read the fed. doesn't(mostly) seem to have the faintest idea what its doing anyways! Its more like tinkering and seeing what happens. (black magick?) If they don't have a clue anyways, why not leave everything to the free markets? I find it paradoxical(almost hypocritical) that the proponents of the "free-markets" would want those in everything BUT money! If supply-demand equilibria succeed so well in pricing everything else in capitalism why not money? Most of the right-wing will be up in arms at any mention of "price-control" or other govt. intervention but happily tolerates a similar arbitrary "control" on (the price of) "money"!

Again, I'm no economist so maybe I've got it all wrong and mixed up. If so I am absolutely eager to be corrected.

Raul: Here's a link to the GDP's of all the nations. Basically the US was (2006) $13 trillion and the next three are Japan @ $4 Germany at $3 and "big bad worrisome" China at $2.5. You have to toss in UK and France to these to total US GDP. So what the US does is still pretty relevant. You might find the list interesting.

http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf

"Unfortunately contemperory economic thought seems to consider the proponents of the "gold-reserve" as some kind of nut-jobs."

Ha, and one made topical by Ron Paul's success at the polls. In one sense the "gold standard" is silly as the value of the buck in your pocket is much more a function of our productivity and success at trading in the world and whether our federal government pays it's bill instead of putting them on Unc's nearly maxxed out credit card. In essence your buck is a unit of stock in the US economy and there is no way to cover up an economy that is running $750 billion in trade deficits and a government in debt over $9 trillion dollars.

Also, were we on a "gold standard" when the US warranted the buck as 35 to the ounce but we could not own gold bullion? In any case the 35 to the ounce became recognized as fiction and was unsustainable.

Today? perhaps we are on a better "gold standard" as is when we doubt the value of US script we are free to convert it to gold if we please or even into the currencies of those nations whose script is increasing rapidly in value.

But! Still, it doesn't go unnoticed that the buck has lost 80 - 90% of its purchasing power since we jettisoned the "gold standard", though most of the loss occurred during the massive "inflation" that took place after Nixon ended the gold standard, and I assume, the dollar was floating (sinking?) to its corrected value in the eyes of the rest of the world. (After WWII when we became the "world's banker" we dealt ourselves and edge and were doing to the world what bankers often do to us.) It's surely a major factor in OPEC repricing its oil shortly after. So perhaps we're on an "oil and scarce resources" standard today?

Well, you do have to give the Fed credit for having much more than a "clue" but perhaps an economic commission should have more control, or at minimum provide the Admin and Congress with a rational economic plan that would be relevant and typically voted up, as a means of preventing, as we've seen, some guy getting elected on the basis of an irresponsible tax cut, targeted at the wrong economic brackets to "spur" the economy while running up unsustainable deficits and inflationary debt while Gspn was standing on the brakes to "fight" inflation. With both having only clumsy cudgels as economic tools they should, at least, try to coordinate their clumsy efforts.

Some of what you indicate feeling seems to me "right on". Both now and in the early 70's the "oil price shock" (absent the political will to deal with cartels and manipulated markets) is an external price increase, not the classic "inflation" of too many dollars chasing to few goods. Thus, as you say the response should be to let the market absorb and adjust to the ........ screwings. Dollars grabbed by the oil dynasties will not be there to chase other goods, so in theory, while prices of food, plastic et al will rise it's not really "inflation" and "fighting" it via tightening money is most likely to do nothing or even worse make more expensive the massive capital programs needed to respond to the energy mess, such as funding many billions for wind generators or solar installations etc. As the working guy can easily see the amount he's paying for oil is deflationary as he can't spend his money twice and must forego other expenditures as his dollar flies gaily off to an OPEC nation to create inflationary pressures there!

Raul: Here's a link to the GDP's of all the nations. Basically the US was (2006) $13 trillion and the next three are Japan @ $4 Germany at $3 and "big bad worrisome" China at $2.5. You have to toss in UK and France to these to total US GDP. So what the US does is still pretty relevant. You might find the list interesting.

http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf

"Unfortunately contemperory economic thought seems to consider the proponents of the "gold-reserve" as some kind of nut-jobs."

Ha, and one made topical by Ron Paul's success at the polls. In one sense the "gold standard" is silly as the value of the buck in your pocket is much more a function of our productivity and success at trading in the world and whether our federal government pays it's bill instead of putting them on Unc's nearly maxxed out credit card. In essence your buck is a unit of stock in the US economy and there is no way to cover up an economy that is running $750 billion in trade deficits and a government in debt over $9 trillion dollars.

Also, were we on a "gold standard" when the US warranted the buck as 35 to the ounce but we could not own gold bullion? In any case the 35 to the ounce became recognized as fiction and was unsustainable.

Today? perhaps we are on a better "gold standard" as is when we doubt the value of US script we are free to convert it to gold if we please or even into the currencies of those nations whose script is increasing rapidly in value.

But! Still, it doesn't go unnoticed that the buck has lost 80 - 90% of its purchasing power since we jettisoned the "gold standard", though most of the loss occurred during the massive "inflation" that took place after Nixon ended the gold standard, and I assume, the dollar was floating (sinking?) to its corrected value in the eyes of the rest of the world. (After WWII when we became the "world's banker" we dealt ourselves and edge and were doing to the world what bankers often do to us.) It's surely a major factor in OPEC repricing its oil shortly after. So perhaps we're on an "oil and scarce resources" standard today?

Well, you do have to give the Fed credit for having much more than a "clue" but perhaps an economic commission should have more control, or at minimum provide the Admin and Congress with a rational economic plan that would be relevant and typically voted up, as a means of preventing, as we've seen, some guy getting elected on the basis of an irresponsible tax cut, targeted at the wrong economic brackets to "spur" the economy while running up unsustainable deficits and inflationary debt while Gspn was standing on the brakes to "fight" inflation. With both having only clumsy cudgels as economic tools they should, at least, try to coordinate their clumsy efforts.

Some of what you indicate feeling seems to me "right on". Both now and in the early 70's the "oil price shock" (absent the political will to deal with cartels and manipulated markets) is an external price increase, not the classic "inflation" of too many dollars chasing to few goods. Thus, as you say the response should be to let the market absorb and adjust to the ........ screwings. Dollars grabbed by the oil dynasties will not be there to chase other goods, so in theory, while prices of food, plastic et al will rise it's not really "inflation" and "fighting" it via tightening money is most likely to do nothing or even worse make more expensive the massive capital programs needed to respond to the energy mess, such as funding many billions for wind generators or solar installations etc. As the working guy can easily see the amount he's paying for oil is deflationary as he can't spend his money twice and must forego other expenditures as his dollar flies gaily off to an OPEC nation to create inflationary pressures there!