Home > Economic policy, Tax and public expenditure > Populism, Patrimonialism and US politics (crosspost from Crooked Timber)

Populism, Patrimonialism and US politics (crosspost from Crooked Timber)

October 17th, 2015

Nuance is nearly always appealing to academics. For a long time, that was true of my approach to economic issues, particularly including income distribution. When presented with simplistic populist solutions to inequality like “Make the rich pay!”, I was inclined to responses along the lines of “It’s more complicated than that”.

A big problem with “Make the rich pay!” is that with the kind of income distribution that prevailed in the mid-to-late 20th century, any change to income tax that would raise significant revenue would have to apply to the top quintile (20 per cent) of the income distribution. People in the top quintile of the income distribution mostly derive their income from (typically professional or para-professional) employment, don’t think of themselves as rich, and aren’t, in general, seen this way by others. So, the slogan didn’t match the implied policy.

But with the rise of the patrimonial society that’s largely ceased to be the case. The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income, considerably more than the total revenue of the Federal government. Within that group, the top 0.1 per cent have done better than everyone else, and the top 0.01 per cent even better.

So, taxing the 1 per cent more makes sense. I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality. And while I was drafting this post, the NY Times came out with an article that reached broadly the same conclusion as mine.

There’s nothing inherently ludicrous in the suggestion that the very rich should pay most or all of the costs of sustaining a system that benefits them so greatly[^1]. And, as in the 1920s, the very rich are different from everyone else. Their wealth is derived primarily from capital, or from control over capital (as business owners or from the financial sector). And, while most of the current cohort of ultra-wealthy did not inherit large fortunes, that’s an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently. As Piketty demonstrates, a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.

Similar points arise in relation to proposals for a large increase in the minimum wage,say to $15 an hour. In the mid-to-late 20th century, a lot of minimum wage jobs were filled by teenagers, who often came from relatively well-off families and could expect to earn middle-class wages in the future. Moreover, the minimum wage was substantially higher in real terms than it is now, so that poverty was primarily a problem for those who were not working. So, it made sense to focus attention on other policies.

Again, things are different now. Teenagers from high-income families are increasingly less likely to work, particularly in minimum wage jobs that do nothing for a resume. More importantly, as the real value of the minimum wage has fallen, the number of “working poor” or near-poor households has risen.

Finally, the argument that higher minimum wages would greatly reduce employment has been refuted by empirical studies, beginning with the work of Card and Kreuger. Although controversy remains active on this, the mainstream view has clearly shifted to the position that employment effects of minimum wage increases, over the range being debated at present, are likely to be small.

Unlike attempts to reverse the decline of unions, or to push for a more expansionary fiscal policy, the demand for a higher minimum wage is simple to campaign for, and easy to implement in legislation. Unsurprisingly, it attracts strong support across the political spectrum. In particular, it’s the kind of policy that could peel off a lot of non-college educated[^2] white voters from the Republican Party.

So, it’s time for populism. A program based on taxing the rich much more heavily and raising the minimum wage is not only politically saleable but economically sensible.

[^1]: I’m hoping no one here is silly enough to bring up the debating point that the top 1 per cent pay a large share of Federal income tax. If you’re tempted to do so, try Google first. Or read the NY Times article, which shows that the average tax rate of the very rich (33 per cent) is only moderately higher than that of the top quintile (26 per cent) which in turn is only moderately above the average for the population (20 per cent).

[^2]: In a lot of US political discussion, the term “working class” is often implicitly defined as “non-college educated”. This is misleading – there are plenty of business owners without college degrees for example. Still, there are plenty of current Republican voters who are working class by any definition, and would benefit from higher minimum wages.

  1. rog
    October 17th, 2015 at 16:27 | #1

    Unfortunately we are, for various reasons, stuck with concepts about the very rich

    1) they are rich because they are clever

    2) we need these rich clever people to create/give us jobs

    3) one day I will be as rich and clever as they are (that might take a lotto win or other stroke of good luck). Therefore I identify with the very rich.

    4) I live in a lucky country, opportunity beckons and I support entrepreneurs who make their own luck.

    5) having failed to achieve 3) you just never know when your luck will change – lets just buy another lotto ticket.

  2. Collin Street
    October 17th, 2015 at 16:40 | #2

    Downward intergenerational social mobility is key to economic development. The inheritors of great wealth are unlikely to be as talented as their parents, so a growth in private fortunes is a growth in the fraction of the economy under the control of less-than-brilliant people: this will lead to poor allocation choices.

  3. bjb
    October 17th, 2015 at 17:35 | #3

    @rog

    Our Prime Minister rather let the cat out of the bag this week when he was defending himself from the Oppositions attack on where his wealth is parked. He exposed the very dangerous idea that the very wealthy don’t necessarily work any harder than taxi drivers etc, and that his wealth is due just as much to extraordinary good fortune as hard work (and in Turnbull’s case lucking out in the genetic lottery by being born incredibly smart).

    I’m not sure if the commentariat has picked up on this, but it must make it hard for very wealthy to continue to claim they should be not be taxed at much higher marginal rates because it patently isn’t the case that personal hard work (as Gina would have you believe) is solely responsible for their wealth. Of course, Daniel Kahenman already knew this where he says great wealth owes more to luck than talent.

  4. Chris O’Neill
    October 17th, 2015 at 19:43 | #4

    I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality.

    It would of course greatly assist with governments getting their deficits under control (especially the US government). So since there is no harm to inequality and a great benefit to government fiscal management it’s obvious that it should be done.

  5. rog
    October 17th, 2015 at 19:50 | #5

    @bjb Ah yes well, by his own definition our Malcolm is a lucky lad indeed.

  6. Chris O’Neill
    October 17th, 2015 at 19:52 | #6

    The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income

    The top 1 per cent own even more than 20 per of total wealth, so a wealth tax would be more progressive than income tax. The same applies to land ownership, land tax and land value increment tax (such as Taiwan’s). Land tax and land value increment tax have the advantage over all other taxes of being more economically efficient.

  7. Chris O’Neill
    October 17th, 2015 at 20:04 | #7

    a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.

    And so it becomes a class war between those with wealth and those with powerful talents or education while those with neither are courted by the other two to gain political power and those with both – well that’s Malcolm Turnbull.

  8. Chris O’Neill
    October 17th, 2015 at 20:25 | #8

    there are plenty of current Republican voters who are working class by any definition

    This is one of the great success stories in conservative politics – getting the less well-off to vote conservative.

  9. derrida derider
    October 17th, 2015 at 20:48 | #9

    @Chris O’Neill
    Chris it’s hardly a new success. The Tory working man is a stereotype – the 18th Century’s “Church and King” mobs drew on them for instance. And they were then the same conservatives then as they are now – people with a LOCAL position (ie in family, community or workplace) they wish to conserve and therefore deeply afraid of “outside” interference.

  10. James Wimberley
    October 17th, 2015 at 20:54 | #10

    The richest 1% by income or capital own an even higher share of mindspace.

  11. Stockingrate
    October 17th, 2015 at 23:20 | #11

    I think the % change in the federal minimum from $7.25 to $15 would have a big negative impact on jobs in much of the USA – (though many states have higher minimums than $7.25). More than doubling of wages in some states vs 19% increase in the case of Card and Kreuger.

    An increase in the minimum legal wage is not the same thing as an increase in the direct reward for labour- there are many many illegal labour arrangements in the USA and many people working legally for little by contracting eg gig economy/Uber and piecework.

    Too much labour supply and not enough demand.

    The Crooked Timber post picked has been picked up by Naked Capitalism

  12. Ikonoclast
    October 18th, 2015 at 04:39 | #12

    Taxing the rich and increasing the minimum wage are symptomatic treatments. These policies do not do anything to address the etiology, the cause of inequality. The structural cause lies in the structure of private ownership of production and private allocation of outputs.

  13. Ivor
    October 18th, 2015 at 08:29 | #13

    @rog

    People getting rich through being clever does not lead to economic catastrophe.

    So it seems you have missed the entire point.

  14. Ikonoclast
    October 18th, 2015 at 10:36 | #14

    @Ivor

    It does if the “being clever” leads to things like CDOs (collateralised debt obligations), housing bubbles and other bubbles. Indeed, a lot bubble behaviour results from people being “too clever by half” which usually means being manipulative, deceptive and dishonest. Of course, all these behaviours are greatly facilitated by the capitalist system which is premised on deception, dishonesty, exploitation, greed and environmental destruction.

  15. J-D
    October 18th, 2015 at 10:50 | #15

    @Ikonoclast

    Taxing the rich and increasing the minimum wage are symptomatic treatments.

    Yes, they are. They’re very good symptomatic treatments. There’s nothing wrong with symptomatic treatments.

  16. Chris O’Neill
    October 18th, 2015 at 11:25 | #16

    an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently

    Most of the value of those large fortunes in Australia today is in property and most of the economic rent in Australia has gone into property values.

    However, because of factor (3) identified by rog above “one day I will be as rich and clever as they are” or get rich from property “therefore I identify with the very rich,” there is little if any chance that the ongoing economic rents falling into the hands of Australian landowners will do anything but continue falling into the hands of Australian landowners.

  17. Ivor
    October 18th, 2015 at 14:43 | #17

    @Ikonoclast

    Actually I expect that socialism has to be premised on the potential for cooperatives to also deceive, misrepresent, act out of greed, and exploit the environment for the sake of profit.

    The difference is only in ensuring there is no capitalist exploitation although the democratic institutions necessary to establisj this state of affairs will also empower social forces to deal with all the other sociological and environmental issues that are aggravated by capitalism.

  18. Ikonoclast
    October 18th, 2015 at 17:39 | #18

    @J-D

    For sure, symptomatic treatments have their place. Sometimes, the underlying disease is untreatable or must simply run its course. In other cases, symptoms are treated when causes could be treated. The latter process is often not the best course. I find it astonishing that people seem to assume that treating inequality after it has been created by the system is the only possible course of action. I wonder why they seem incapable or unwilling to question why the system generates so much inequality in the first place.

    It’s a bit like a boat that keeps leaking badly every time you take it out. Yes, you can keep bailing vigorously each time or you can get the boat up on the slipway to repair it or caulk it. Or you might even decide the old boat (economic system) is dilapidated and can’t safely or efficiently meet current needs. Therefore you must build a new boat (economic system).

  19. Ivor
    October 19th, 2015 at 08:02 | #19

    @Ikonoclast

    Moving from symptomatic treatments of economic diseases to dealing with underlying causes is probably the greatest need we have today.

    It separates the scientific approach from the pragmatic approach – the intellectual from the academic.

    In economics – taxing capitalism to re-introduce social justice soon dumps most of society into poverty as a historical process – as shown by Picketty and many others before.

    In the 1950’s and 60’s it was expected that you can treat current account deficits, low wages, low demand, few jobs, and homelessness with regulation and tax revenues but only if you doom future generations to more deficits, lower wages, crushing debts, fragile employment, and almost complete housing unaffordability.

    This is pretty much what we have today for huge swathes of US and UK populations as well as in most OECD economies.

    Under socialism things are different. Everyone will have a job and an real income based on productivity shared collectively. Consequently everyone will have a right to housing simply because everyone will have a right to housing.

    Under capitalism only some people get jobs and only some people get houses while at the same time, less and less people get real wage increases.

    Today in Australia, Federal public servants are having their wages and conditions practically destroyed. This is what you get when Tories respond to symptoms. It threatens a downward spiral into Depression.

  20. sunshine
    October 19th, 2015 at 10:21 | #20

    Labors attack on Turnbulls wealth has fallen flat. Greedy is glorious. The great achievement of neo-liberalism has been to drain people across the Western world of faith in human nature. The 2014 budgets downward envy style attack on the less fortunate didnt work because it was too much too fast .Turnbull has the charm to successfully resume the slow but sure march toward unfettered marketisation of every aspect of life. Only selfish competition with maximised consumption is seen as natural or viable for humankind, anything else is folly.

  21. J-D
    October 19th, 2015 at 14:15 | #21

    @Ikonoclast

    If John Quiggin had written anything that suggested that only symptomatic treatments are possible, that would be a relevant response. But he didn’t.

  22. kevin1
    October 30th, 2015 at 00:27 | #22
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