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Economical arithmetic* — Crooked Timber

January 10th, 2011

I’m at the American Economic Association meeting in Denver, and just attended a panel of the great and serious discussing the US budget deficit. The numbers are pretty impressive – on current projections, US government expenditure (properly measured) is likely to be around 25 per cent of national income (around 3 trillion/year) and the default budget deficit is around 10 per cent of national income. While current and former CBO directors went over the usual options, it struck me that I had seen those numbers before.

Roughly speaking, the share of US national income going to the top 1 per cent of the income distribution has risen from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability of the financial sector. As I’ve argued before, this payment to the top percentile can be seen as a kind of tax paid by the population as a whole for the benefits of living in the kind of economy that has developed over the past few decades of financialisation. (Please check irony alerts before responding!)

Clearly, any attempt to claw back some of this money to fill the budget hole would have what economists call “incentive effects”. More precisely, it would necessitate a big contraction of the financial sector. Judging by the reaction of the assembled experts when I raised this point (all declined to respond), this is literally unthinkable.

  • I’m alluding to Richard Feynmann’s joke that, in view of the size of budgets, we should talk about “economical” rather than “astronomical” numbers.

Posted via email from John’s posterous

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  1. January 10th, 2011 at 07:28 | #1

    John, John, you are so cynical. You know, don’t you, that some of the crumbs from those rich men’s tables will reach the poor and float their yachts too. Or am I mixing metaphors? It may not happen today, and it may not happen tomorrow, but it will happen. One day. Unless of course they haven’t quite reached the level of wealth yet at which they have some crumbs to spare. That’s probably it.

    So have faith John, pray to the blessed St Ronald. Just because you can’t see the crumbs trickling down the well-tailored leg (again, mixed metaphors perhaps), can’t touch them, doesn’t mean they don’t exist. The less evidence the stronger the faith – in economics as in religion. You must know that if you purport to be an economist.

    Anyway, happy new year etc. Let’s see if you and I can go on keeping the bastards honest in 2011. Or trying to.

  2. Alice
    January 10th, 2011 at 07:33 | #2

    @David Horton
    David – in fact it is the other way around. Its the crumbs from the poor mans table that the rich are sucking up.
    The trick of the Trickle that defies gravity.

  3. Alice
    January 10th, 2011 at 07:46 | #3

    Oh now – we couldnt possibly start with a financial transactions tax, to shrink a sector grown so bloated that everyone else is suffering because of it.

    Why exactly have we permitted and presided over the mass legislative subsidy of the financial sector (super – it just keeps feeding it year after year).

    A better way to equalise the gross imbalances between the financial sectors and the rest of the economy, including labour, would be to give those wages back to those who rightly earned them and who now need them.

    This is thinkable, not unthinkable.

  4. Ikonoclast
    January 10th, 2011 at 08:28 | #4

    This is a link someone posted on Crooked Timber. It’s a report about how the middle class is hurting in America.

    My editorial comment would be this. The violence and instability that is coming to characterise American life correlates with its inequity in wealth distribution. A contributory cause is America’s deep seated ideological and religious veneration of weapons and violent solutions.

    http://www.ft.com/cms/s/2/1a8a5cb2-9ab2-11df-87e6-00144feab49a.html#axzz1AZvphL6V

  5. gregh
    January 10th, 2011 at 10:48 | #5

    David Horton :
    John, John, you are so cynical. You know, don’t you, that some of the crumbs from those rich men’s tables will reach the poor and float their yachts too. Or am I mixing metaphors? It may not happen today, and it may not happen tomorrow, but it will happen. One day. Unless of course they haven’t quite reached the level of wealth yet at which they have some crumbs to spare. That’s probably it.
    .

    I agree with your sentiment David – it is all very well to attack the rich but whose crumbs will we be able to glean if there are no rich people to drop them. Just another illustration of the way the Left don’t think things through. If there are no rich it’s the poor who’ll suffer.

  6. January 10th, 2011 at 10:58 | #6

    @gregh
    You need to switch your irony detector on.

  7. gregh
    January 10th, 2011 at 11:00 | #7

    @Ian Milliss
    back at ya Ian :)

  8. Ikonoclast
    January 10th, 2011 at 11:01 | #8

    The irony of the US situation is that it is their rigid attachment to their most passionate beliefs that will destroy them. These include beliefs in;

    - US exceptionalism and Manifest Destiny;
    - Maintenance of Imperial overstretch;
    - Enormous military spending;
    - “Free” markets dominated by the Financial sector’s ponzis and patronage;
    - Inadequate tax base and low taxes for the rich;
    - Neglect of the middle class and poor;
    - Rights to private gun ownership;
    - Non-regard for the environment and resource limits.

    The TEA party is the classic example. Everything in the TEA party’s platform will speed the ruination of the US.

    I would wish that US would change course as all our fates are bound up in this. However, I see no hope as the pathological addiction to insane ideological policies just runs too deep in the American psyche.

  9. gregh
    January 10th, 2011 at 11:09 | #9

    @Ikonoclast
    I find the way people from the USA think about the construction of the person – ie the US version of individualism – is at the heart of many of the strange ideas and hysterical attachments I come across in forums. I think a great deal of the points you make are underpinned by their vision of ‘The Individual’

  10. January 10th, 2011 at 11:59 | #10

    Thanks Greg, quite right. But what follows from that? Does it mean we need more and more rich people, turn, in fact, all the poor people into rich people so they would all have their own crumbs? or should we try to have fewer rich people so each one would be even more rich with more crumbs to, one day, mustn’t rush, sprinkle on the street for the children to find?@gregh

  11. gregh
    January 10th, 2011 at 12:18 | #11

    @David Horton Important issues David and I’m glad you raised them. On your first point – if everyone was rich, who would clean up the crumbs? Once again the natural order gives evidence of a higher power at work for those able, and willing, to read the subtle signs. Your second point presents a thorny problem in optimisation that I can’t give justice to. Perhaps someone here could point us to a reference from one of the think-tanks.

  12. Ikonoclast
    January 10th, 2011 at 12:29 | #12

    @gregh

    I agree gregh. John Ralston Saul’s analysis of this kind of individualism is apropos. Extreme individualism is also the stuff Thatcher came out with. “Society doesn’t exist, only individuals.” It’s a bit like saying compounds don’t exist only atoms. According to Thatcher you could put out a flame with a 2 to 1 ratio of hydrogen and oxygen rather than throwing water on it. :)

    Overall, it’s a complete blindness to the vital importance of emergent properties coming from combinations of simpler elements.

    Society does matter. Language is a prime example of a social property that we make and which makes us. It exists due to the need to communicate and cooperate. It plays a key role in socialised personality formation (construction of the person).

    Extreme individualism of the American libertarian kind involves about equal proportions of blindness and selfishness. Of course, as you point out, this construction of the person is deeply embedded in American culture and thus in the psyche of many, perhaps most, Americans. This accounts for their stubborn adherence to their self-destructive course.

  13. may
    January 10th, 2011 at 15:14 | #13

    islands of opulence in a sea of not-so-quiet-desperation.

    all those individuals being trickled down on.

    makes me think of that rude rhyme–

    no matter how much you shake yer peg
    the last wee drop runs down yer leg.

    is it really true that under USA law a corporation comprising of the collective purpose of its human parts is equal to an individual citizen?(and vice versa)

  14. JP
    January 10th, 2011 at 16:11 | #14

    This is my first comment, although I have been following for a while JQ blog with a lot of interest… Clearly, the wealth distribution in the US is currently at such an inadequate level that reflects serious economic and social disfunctionality.

    However, I feel a bit nervous when the general comments are about rich and poor people, as if there is currently a social class struggle taking place. I came from a country that went through a leftist revolution in the 70s and this was the type of retoric you would hear at that time. The socio/economic outcomes of the revolution did not help much the poor. I guess the focus should not be in eliminating the rich but instead assisting the poor out of poverty.

    I prefer a mild social democratic exchange of ideas, where what is in discussion is the level and focus of government intervention to help the unprivileged out their situation. It appears that government intervention and general wealth creation can sometimes work in opposite directions. The key is in finding the right balance, I think…

  15. Hal9000
    January 10th, 2011 at 16:43 | #15

    @Ikonoclast

    John Ralston Saul’s analysis of this kind of individualism is apropos.

    I suspect you meant to say ‘apposite’. As indeed your own comments are.

  16. Michael of Summerhill
    January 10th, 2011 at 17:28 | #16

    John, I’m easy going, if the well to do don’t want to pay a fair share of tax whilst alive, then O’bama should be thinking about increasing the ‘estate tax’ from the current 35% cap to 50%.

  17. gregh
    January 10th, 2011 at 17:56 | #17

    Michael of Summerhill :
    John, I’m easy going, if the well to do don’t want to pay a fair share of tax whilst alive, then O’bama should be thinking about increasing the ‘estate tax’ from the current 35% cap to 50%.

    I prefer a cap on inheritance, rather than a tax. Hard to see why anyone should whinge about only being able to inherit, say, $10 mill. it is important for democracy to prevent inherited wealth at least to the extent where that wealth is sufficient to bring with it significant power.

  18. Michael of Summerhill
    January 10th, 2011 at 18:17 | #18

    gregh, if the well to do don’t wish to pay a fair share of tax whilst alive, then it is only fair the government take their fair share upon death. No skin off my nose.

  19. gregh
    January 10th, 2011 at 18:26 | #19

    @Michael of Summerhill
    only disagreeing on the details Michael. But where wealth is enormous – as unfortunately we see now – I don’t feel a tax is sufficient. After all, 50% of 4 billion is still far too much. Of course, I would prefer no-one was allowed to amass that much money for themselves anyway.

  20. Michael of Summerhill
    January 10th, 2011 at 18:54 | #20

    gregh, if a well to do individual amassed a $4 billion fortune and did not pay his/her fair share of tax whilst alive, then I am all in favor of a higher estate tax and redistribute the individual’s wealth upon death. That is only fair.

  21. Michael of Summerhill
    January 10th, 2011 at 19:53 | #21

    Gregh, what really ticks me off are those Libertarians who continue to push the false argument that individual choice and personal gain is best but don’t believe in what is best for the our society. Where would we be without past progressive governments?

  22. gregh
    January 10th, 2011 at 20:04 | #22

    @Michael of Summerhill
    If any one can amass a fortune in the billions – or even 10s of millions then I think we have an indicator of significant problems in a society. I am a Dunstan era child and wish that Dunstan’s legacy had not been so squandered by succeeding governments. I know you still support Labor as a progressive force Michael but I cannot see the legacy of Dunstan being carried forward by the Labor party but rather it is being carried forward by the Greens.
    In general I give libertarians short shrift and don’t even bother reading what they write once I see them mention ‘freedom of choice’. Sam made an interesting point elsewhere though.

  23. Michael of Summerhill
    January 10th, 2011 at 20:25 | #23

    Gregh, besides the US one only needs to look at Ireland today and wonder what bulldust the Libertarians would come up with to resolve the problem?

  24. Alice
    January 10th, 2011 at 20:48 | #24

    @Michael of Summerhill
    Im not as easy going as you Moshie. The well to do have been granted successive large tax cuts over the decades since Nixon and all it has done is increased inequality. Im for increasing the taxes on the rich now. What better time – when giovernments across the world are plunged into deficits, when welfare has been cut, when the young are burdened with exorbitant education fees, when less well to do people (incuding the middle and upper classes) everywhere else are losing out to short term contracts and casualistion and lower and lower income levels at which any assistance kicks in, and people everywhere are being asked tyo work longer and face higher unemployment levels???

    Im not easy going. Why should any of us be? The solution to this global mess is plain.
    Raise the taxes on the rich and soon and raise taxes on the financial sector, and every other obscene wealth hoarder that has gained from these globally damaging policies.

  25. Alice
    January 10th, 2011 at 20:53 | #25

    @may
    says “is it really true that under USA law a corporation comprising of the collective purpose of its human parts is equal to an individual citizen?(and vice versa)
    ??

    May strikes at the heart of the problem. The corporation is not a natural person, and that great error of law took a long time to grow into the monster of the massive rampaging acquisitive short term profit oriented and destructive firms we see today.

    The slave was a natural person. The corporation was never a natural person.

  26. Michael of Summerhill
    January 10th, 2011 at 20:56 | #26

    Now your talking Alice. And what Party was thinking about a super tax on the wealthy in Australia?

  27. Monkey’s Uncle
    January 10th, 2011 at 21:11 | #27

    Ikonoclast :
    The irony of the US situation is that it is their rigid attachment to their most passionate beliefs that will destroy them. These include beliefs in;
    - Inadequate tax base and low taxes for the rich;

    Actually, the US tax system is significantly more progressive than that of other developed countries (the OECD has recently confirmed this). In the US, income taxes represent a larger share of government revenue than in most other developed countries. And the top few percent of income earners pay a higher share of income taxes, while the bottom half pay virtually no income tax.

    Moreover, in the US payroll taxes, consumption taxes, taxes on fuel, tobacco and alcohol (which are less progressive than income taxes) are quite low compared to most OECD countries (particularly compared to European nations).

    In reality, the biggest problem with the US tax system is that the middle-class and the poor pay very little tax, and it is simply not possible to fund all government expenditure off taxing the wealthy. I know this is not a terribly popular view, but it is the reality nonetheless.

    The whole theme of the US tax system being too generous towards the wealthy is actually a good example of the trend that Professor Quiggin otherwise decries, namely that of debate based on dubious, recycled talking points rather than objective evidence and reliable sources.

  28. Alice
    January 10th, 2011 at 21:19 | #28

    MU – there are so many fallacies in your argument above – I wouldnt know where to start.
    I guess you havent seen Citigroups Plutonomy reports?

    Your view is not only dangerous MU. Views like this have been running policy initiatives for 30 years and the rich have had tax cut after tax cut and all it has done is make the entire mess we see now, miserably rising inequality, deficiencies in all kinds of government services (the management by governments of, once taken for granted).

    MU – the next thing your dangerous ideas will do is totally stuff up our ability to actually make it to work to get paid (no transport – crappy roads)…but by then I imagine people will come looking for the rich.

  29. Michael of Summerhill
    January 10th, 2011 at 21:19 | #29

    Monkey’s Uncle, the wealthy can afford to pay a higher rate of tax. Maybe you should do some more reading before you push a false argument.

  30. Alice
    January 10th, 2011 at 21:21 | #30

    @Monkey’s Uncle
    I prefer my society civilised if you dont mind MU.

  31. Michael of Summerhill
    January 10th, 2011 at 21:57 | #31

    Monkey’s Uncle, to give you an example in the US tax evasion is a big problem and it has been estimated that in 2007 some $345 billion in taxes were not paid by Americans resulting in a number of development programs to be postponed. Maybe you can guess who did not pay their fair share of tax.

  32. Michael of Summerhill
    January 10th, 2011 at 22:15 | #32

    Monkey’s Uncle, don’t bother answering for I will give you an example. In 2010 the IRS established an amnesty-like program that allowed wealthy tax evaders to avoid possible criminal prosecution and penalties and some 14,700 wealthy Americans came forward.

  33. Monkey’s Uncle
    January 10th, 2011 at 22:27 | #33

    Michael of Summerhill :
    Monkey’s Uncle, the wealthy can afford to pay a higher rate of tax. Maybe you should do some more reading before you push a false argument.

    It is a fair point that if inequality in market incomes is higher to begin with, the wealthy should pay a higher share of the tax. (But I believe the OECD reports that even if you adjust for the slightly higher income inequality in the US, the US tax system is still more progressive).

    But this does not make it okay for others to misrepresent the situation and say the wealthy are paying little tax (as the comment I originally addressed claimed). I was not making a false argument. I was correcting one.

  34. Michael of Summerhill
    January 10th, 2011 at 22:45 | #34

    Monkey’s Uncle, to give you another example on 15 April 2010 in Manhattan, N.Y., seven UBS clients were indicted for collectively hiding over $100 million in secret Swiss bank accounts. Two of these individuals, Jules Robbins and Federico Hernandez, pleaded guilty and agreed to pay civil penalties of $20.8 million and $4.4 million, respectively. The remaining indicted clients were Kenneth Heller, Sybil Nancy Upham, Richard Werdiger, Ernest Vogliano and Shmuel Sternfeld. These are the real facts about tax avoidance and do you think for one moment the above gave a rats arse about those living below the poverty line?

  35. Jill Rush
    January 10th, 2011 at 23:55 | #35

    I don’t know about tax in the USA but the original point of the article is that there has been a large aggregation of wealth by the financial industry – “the greed is good” group who can’t handle a dollar without taking some and who only look at money in terms of what they as individuals can receive.

    Higher taxation or better tax collection may be the answer but from my understanding there are a plethora of taxes in the USA from every level of government which is why there is such antipathy towards taxes in general. The point is that the rich by taking so much for themselves leave little for others so that for the poor they may work two and three jobs and still not make a decent living. The hostility to unions and individual work contracts support this inequality.

    The point made by Prof Q that “More precisely, it would necessitate a big contraction of the financial sector. Judging by the reaction of the assembled experts when I raised this point (all declined to respond), this is literally unthinkable.” which is the result of the Greed is Good philosophy and shows the inability to see new ways to resolve societal problems. No doubt radical solutions such as greater controls on the financial sector would be labeled socialism and there would be no more thought given to it because of that label. This despite the strength of the Chinese economy.

    Ikonoclast #8 has a nice summary of American beliefs – none of which appear to help the USA move to the next stage with hope for change.

  36. Michael of Summerhill
    January 11th, 2011 at 07:36 | #36

    Jill Rush, corporate corruption has increased the US ‘tax gap problem’ over the years. And the legal and accounting professions are not immune for they are also directly responsible in creating the overall problem by promoting illegal or questionable tax avoidance schemes. As for corporate social responsibility, well we all know about that for corporations and individuals still continue to use various offshore bank account schemes ie credit cards to hide taxable incomes.

  37. Socrates
    January 12th, 2011 at 12:55 | #37

    JQ raises an intersting point about the finance sector being unwilling to consider a contraction in its own scale. For that matter, has there ever been a paper on the economics of employing economists? I’m serious – we have seen every other profession from nurses and teachers to sports and entertainment analysed for its economics and efficiency. What is the most efficient sized finance sector for a country to have? There must be an upper limit, given honest analysts.

  38. Alice
    January 12th, 2011 at 17:26 | #38

    @Socrates
    Socrates – what is the point of asking ? There are two types of economists a) economists who are largely unemployed except in the university sector b) economists who are employed by financial institutions to inbreed with treasury economists.

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