Home > Political Economy > Inequality is political

Inequality is political

from Peter Radford

Let me end the week by tying a few things together. Bear with me.

First, I have spent some time talking about inequality. I see this as our greatest long term issue, but more in terms of politics than economics. Why? Because the extent of inequality in society is something we choose through our political action or inaction. There will always be some degree of inequality. I see that a a fact of life. Asymmetries abound. Inconsistencies, mistakes, and plain dumb luck all conspire to make the distribution of society’s spoils a very lumpy and uneven affair. This we cannot change. But we can, I believe, expand or contract the difference between top and bottom if we so choose. There is no “natural” level of inequality, it is entirely a function of policy.

With that said, I see our current level as both morally unacceptable and socially disruptive.

I will leave the moral commentary as self explanatory: there is no way our CEO’s can justify their disproportionate share of the spoils. It was not long ago that they were satisfied with much less. Only in the past few decades has it become socially acceptable for them to rake in what they do now.

As for the social impact, I see two vectors through which damage is done.

One is the slow erosion of demand. The demand created by wage incomes and the demand created by capital incomes is not equal. So even though the total remains the same the distribution plays a role. In other words an economy with a 50/50 split between wages and capital incomes experiences different performance than one with a 30/70 split. This is due to the way in which people with power incomes – which tend to be wage driven – save or spend as opposed to people with higher incomes – which tend to have a higher capital component – save or spend. That’s just the way I see it. Others disagree.

Even if this is not true the second vector of damage is, I believe, supported by a more secure argument. It is politically disruptive, over time, for the majority of the spoils from growth to go to a concentrated few. History is replete with societies whose stability was undone by inequality. More often than not this instability was offset by force – authoritarian or autocratic oppression preserved the unequal society. So I ought restrict myself to making the argument that long term and large movements away from relative equality are destabilizing for democratic societies.

And this is where I see we are today.

There has been a consistent and very large shift in the degree of inequality in the US during the past three to four decades. This shift is potentially destabilizing. It fosters a deterioration of allegiance to social programs as they are viewed, even by their beneficiaries, as burdensome. It degrades the level of collective commitment to redistribution of wealth. And, in my view, redistribution is the key to stolid democracy because it prevents the concentration of wealth that can be used to subvert it. Money buys power, it always has, and is not equal to free speech no matter what out right wing Supreme Court says. So the prevention of excessive accumulation of wealth is the surest safeguard of democracy we have.

We can make a kind of converse argument too.

The paraphernalia of capitalism is, I think, a better mechanism for generating wealth than any other. Private property, relatively free exchange, and modest government interference in markets have, by and large, produced wealthier societies than other combinations and other principles. But capitalism also breeds greater inequality because those lucky enough to flourish within it are able, absent social constraints, to accumulate more rapidly than those less lucky. Hence the need for the redistributive urge of democracy.

A wise capitalist is, therefore, one who surrenders substantial wealth in order to preserve democracy, and not one who seeks to undermine it by excessive accumulation. Similarly, a wise democrat is one who tolerates some element of inequality as the price paid for the extra wealth generating power of capitalism.

The two systems clash. The two systems enable each other, but only in moderated form. We can understand the combination as having a feedback loop that prevents either system from careening off into a pure form.

Today’s high[er] level of inequality suggests, to me, that the feedback loop is not working well. We have too little redistribution and too much accumulation. If this continues we risk destroying both systems because neither capitalism nor democracy in a pure form can survive the social instability they engender. With democracy being the more likely loser of the two.

However, as I see it, our current leadership is oblivious to such risks and sees its role as protector of an economic system that comprises of, and only protects, those with capital. Redistribution, the heartbeat of democracy, is looked at askance. This we know because of the almost total agreement that “entitlement programs” throughout the western world are regarded as being unaffordable. Which they may be if society’s goal is to enable excessive accumulation.

We can detect this bias in our leadership in all sorts of ways. The latest being the downgrading of French sovereign debt by Standard and Poor’s. This downgrade comes despite the French having made good progress towards debt control and deficit reduction. Better progress than, for instance, the British whose economy S&P still lauds. Why does S&P express a negative attitude towards the French with their superior record? Because the French didn’t make progress by reducing entitlements or by reducing redistribution, they did it by raising taxes – by reducing excessive accumulation. They defended democracy not capitalism. They tried to protect that feedback loop.

Another example, closer to home, is the almost total emphasis in Washington on debt control and deficit reduction even though the evidence is piling up that such emphasis is causing great long term damage to the economy. By some accounts we have reduced our future wealth production capability by 7% because we decided to protect capital and not jobs/wages. This reduction will then be used to justify, further, the argument that we can no longer afford to redistribute as much as before.

This will make inequality worse. It will undermine our politics further.

One last thing: recent research has shown a remarkable consistency of support amongst voters for redistribution, no matter what their expressed political opinions are. Indeed so-called Tea Party supporters are far more likely to support higher taxes and increased government spending when they discus programs is substance rather than in theory. This is a well known paradox in American politics. The longstanding  tradition of opposing “big” government is an abstract not a concrete notion. It motivates Tea Party supporters when they are confronted only with the abstraction. But when they are asked to comment in detail on actual programs and to comment at a concrete level they express an attachment to redistribution that is, in political terms, to the left of center.

The implication is clear: our leadership, in political terms, sits well to the right of the majority of voters, even those who vote for right wing politicians. There is a disconnect of epic proportions. Why? Because our governments, and our major financial institutions worldwide, are run, or deeply conditioned by, corporate and plutocratic interests. Those interests scorn redistribution. Thus they scorn democracy. And they are armed, by and large, with economic theories that argue inequality is not a problem, but rather is a natural outcome of free markets at work.

Until the influence of those interests is reduced we can expect inequality to increase, and with it the risk of greater social tension and confrontation.

I know many of you disagree with me, but I hope this is a more clear exposition of my point of view.

  1. Deniz Kellecioglu
    November 14, 2013 at 10:34 am

    Dear Peter, by and large, I agree with you. But I would like to expand the issue of inequality. For one, what is redistribution? It’s an active taking from some sections of the society in order to give to others. Would it not be great if we had a system in which we (basically) did not need to redistribute? The current system is extremely unequal. Capitalism was built upon such unequal point of departures, especially with reference to ethnicity (you say race in the US, but there is only one race: the human race), gender, religion, nationality, etc. Sure, things would be relatively better with a capitalism with the features you describe above, including meaningful redistribution. But great inequalities would still be repoduced because of the unequal point of departures. Ideally, we need an economic system in which there is no need for redistribution. In the meantime, we need redistribution but more importantly we need equal opportunities and equal access to high quality education, health and jobs for everyone, without discrimination. To finance such structures and mental change we ought to take from the very rich, the plutocracy to start with.

  2. Lyonwiss
    November 14, 2013 at 11:37 am

    Sloppy use of language leads to sloppy thinking which could lead to sloppy economics. How could you say, “Ideally, we need an economic system in which there is no need for redistribution”? A society without redistribution can happen only when everyone produces exactly what they individually need or produces exactly the same amount.

    Equality of opportunity always leads to inequality of outcomes, because some are smarter and more hard working than others. It is stupid to talk about equality generally and in abstract, when equality is impossible in everything.

    If you want economic equality, you need communism, which has historically achieved apparently the greatest equality. It is also quite hypocritical to talk about inequality when the writer or the speaker can make himself or herself more equal in wealth by simply giving much of it away in order to belong to the bottom 90 percent rather than the top 10 percent. Economic professors should have equal pay as janitors, according to some political beliefs

    • Oliver
      November 14, 2013 at 1:47 pm

      Of course, the division of labour and the existence of property rights require the redistribution of real goods after production. But neither require an inequal endowment with money, i.e. with property rights to the goods produced. Your’s is a sloppy critique.

    • William Neil
      November 14, 2013 at 3:07 pm

      It seems to me Lyonwiss, that the United States in the 1820’s-1840’s was the most capitalist nation on earth, and was noted for its equality, as the remarkable foreign and famous visitors observed, and recorded. The basis for that equality was widespread ownership of land, small and medium size farms, and the small merchants, mechanics and manufacturers that were a crucial part of the system. Hardly communist, indeed the exact opposite in public ideology, with the few exceptions in the form of socialist utopian experiments. It is this historical period and its economic system, which had great upward mobility, which gave rise to the American Dream, best expressed without that name in the persona and writings of A. Lincoln.

      But as Richard Hofstadter’s marvelous biographical essay about Lincoln expressed – “Abraham Lincoln and the Self-Made Myth” (In the “American Political Tradition, 1948) – this was a very dynamic system which would not retain these feature: “Had he lived to seventy, he (Lincoln) would have seen the generation brought up on self-help come into its own, build oppressive business corporations, and begin to close off those treasured opportunities for the little man. Further, he would have seen his own party become the jackal of the vested interests, placing the dollar far, far ahead of the man. He himself presided over the social revolution that destroyed the simple equalitarian order of the 1840’s, corrupted what remained of its values, and caricatured its ideals.”

      Right now I am reading about the ancient economies of Greece and Rome, and I’m doing so because I don’t trust the Tea Party’s worship of our founders, great as they were, and I do believe they were great men…they drew heavily upon Rome, but selected Romans, and i’m filling myself in on what they and our political scientists and early Republic historians, like Gordon Wood, seem to have left out of the tale: that in Roman economic history there were two great revolts of debtors and small land-owners who were facing crises of maldistribution – of growing inequality from better times, as early as the 5th Century BC…there was the actual physical withdrawal of the plebians from the City, to set up a parallel society…leading to the creation of the Tribune’s…and then the revolt of the Gracchi in the 2nd century BC…again over rising debts and maldistribution of land…the backbone of the Roman army, the small landowners who manned the legions were away so long they could not maintain their farms, which were being appropriated in their absence…military tours lasting for decades in some cases…the reaction of the Senate oligarchy to this debtor revolt and proposals for land redistribution was what ended the Roman “republic,” such as it was, which is not the story our founders tell us, who place its demise much later among the more familiar names and villains of Roman history. Rome could not solve the inegalitarian dynamics of the economy of its day, which was not a capitalist economy, but nonetheless seems to have its dominant trends moving towards oligarchy and monopoly. I thought it was important to explore this period because it is pre-Marx, pre great 19th century debates about the nature of the capitalism of that century, and present day conservatives in the US worship the Rome worshipping founders…But there it is, dynamics and vectors in a pre-capitalist society threatening the admittedly already oligarchical republican institutions that supplied much of the template for modern democracy…so great tensions even then, BC, never resolved: it would fall to emperors and military dynamics to attempt to solve the great inequalities of land distribution. By then it had nothing to do with “democracy” even in its limited Roman republican earlier forms.

      Among other sources, I recommend M.I. Finley’s “The Ancient Economy” (1973) and his “Democracy: Ancient and Modern,” (1972) as a good exploration of these themes, supplemented by Michael Grant’s “History of Rome (1978). Finley was driven from Rutgers University in the McCarthy period, went to England and on to become one of the great classical scholars of our time, and his book on Democracy here cited is built about the lectures he gave in New Brunswick in 1972, the first Mason Welch Gross lectures, which seemed to be, in part, at least, an attempt to make amends for the semi-forced earlier exile. A little ironic twist, don’t you think, Lyonwiss, to the assertions you made and my discussion here?

    • William Neil
      November 14, 2013 at 3:29 pm

      And I should add, after my longer piece above, that it would appear there are dynamics, power dynamics in economic systems, even pre-capitalist one, but also certainly in even the best “young” capitalist ones, that move toward concentration of wealth, whether in the form of land or wealth and newly invented forms of productive institutions, corporations, hedge funds…but I would note it is hard to entirely separate this trend from the political institutions of the time…in all the cases I cited above, based on private property. If you recognize these trends towards inequality across very different systems and millenniums, and then lock yourself into defining all attempts at redistributive adjustments as threatening private property itself…then you disarm reform out of the gate….not a bad description of the modern Republican Right: anti-tax, anti-regulatory, anti-spending, anti-government…: live with the dynamics – I, and Peter – have described. In this worldview, everything is “conservative,” except the nature of the economic system(s) itself.

  3. Deniz Kellecioglu
    November 14, 2013 at 12:18 pm

    Lyonwiss, you should also add: sloppy reading adds to sloppy thinking. If you read again, I talk about an ideal situation as a reference point to the real-world of today, in which we do not need redistribution. Taken together with Peter’s comments above, the conclusion is that we will never reach a perfect equal world, which is all and well, but to strive for a less unequal world is extremely important.

  4. Vilhelmo
    November 14, 2013 at 1:31 pm

    Lyonwiss :
    If you want economic equality, you need communism,

    As far as I know, no “Communist” nation had equal wages.

  5. Vilhelmo
    November 14, 2013 at 1:57 pm

    Lyonwiss
    Equality of opportunity always leads to inequality of outcomes, because some are smarter and more hard working than others. It is stupid to talk about equality generally and in abstract, when equality is impossible in everything.

    That simply is not true.
    You seem to assume that remuneration must be based on human differences.

    You also seem to imply that those receiving the greatest remuneration either must be or should be the smartest & hardest working.
    But I may be reading too much into your comment.

    In most societies those that receive the greatest remuneration are in no way the smartest or hardest working.
    In most societies the hardest working earn the least & the smartest not much more.

    Capitalism was supposed to reward work over privilege, to distinguish between earned & unearned income.

  6. November 14, 2013 at 4:01 pm

    vilhelmo and oliver i think made the two correct responses to lyonweiss (if there aren’t more). this is based on the fact that there is no cardinal utility function, which means noone can really compare the productivity of individuals or value of goods (related to the idea that ‘gross substitution’ axiom fails).

    Say we have 2 people, one sitting under a peach tree, the other an apple tree. In 8 hours, one picks 2 peaches, the other picks 100 apples. Now, if they each consume what they produce, one can say they are ‘equal’—-but not really because peaches and apples are incomparable.

    Suppose they decide a division of labor is good, because then they can get both apples and peaches—-they decide to trade one peach for 50 apples. Is that fair? Who is to say? Maybe picking one peach is worth picking 50 apples (even if anyone would use the same time and energy to pick either one). For example a peach may be worth 50 apples for the same reason that one person can write a slogan like ‘coke is it’ and make as much as someone who developed c language or the standard model of physics.

    Maybe an executive ordering 100 people to move rocks around or fight a war really produces and labors more than all 100 of them combined, but its unprovable (except via the political approach of ‘because i say so’—-money is power).

  7. Lyonwiss
    November 14, 2013 at 6:30 pm

    I agree that the concern about “inequality is political”, the title of the post. Inequality is a natural outcome of economic activity (earned reward). Inequality can also arise from inequity, unfair situations (unearned reward). It is when inequality has arisen from inequity that one needs to worry about it, from a moral perspective.

    The redistribution of wealth by government policy from ordinary people to the rich bankers is an inequality which is inequitable. The policy is based on an economic argument “to save the economy”, but has led only to even greater inequality and greater inequity. In other words, bail-outs (aka QE) have not worked.

    Most economic attempts at wealth redistribution to produce greater equality only lead to greater inequity. It is equity one needs to be concerned about and not equality. Unless one can define what is equitable that one should strive for then it is no rational basis to discuss inequality.

    My own view is that financialization has been inequitable and this has led to unearned inequality. It is this inequitable inequality from unearned reward which is undesirable, not the equitable inequality from earned reward.

  8. William Neil
    November 14, 2013 at 7:24 pm

    “The truth is, we are all caught in a great economic system which is heartless.” The quote comes from the collected speeches of Woodrow Wilson, from the campaign trail of 1912, and published a year later under the title “The New Freedom.” The methods, Wilson says, of the great and successful capitalists of the Robber Baron period, were so frightful and intimidating to competitors including small businessmen, that they feared to speak with him in public of what they had seen thrown against them in business practices. So they came to him in private. He says this in his speeches, and he is yearning to restore more of the world that I referred to in my earlier quotes about the Antebellum period of American history.

    I see the distinction you’re driving at Lyonwiss, and it has some merit and some truth, but not all of it. Would you maintain, as I think a lot of economists today would, that the methods that have spawned Silicon Valley’s myths and realities are better in ethics and towards competitors than those of the Gilded Age? I’m not so sure about that; I catch glimpses, from some conversations I’ve had with truly modern entrepreneurial types, that this isn’t the case but the rough and tumble thrown at the small successful firm and inventor – should we look more closely at the oil industry and mature energy industry and their track record over the past 30 years towards alternative energy start ups and beyond? I suspect that a lot of the buyouts were done from at best, very mixed motives and at worst to stifle and bury alternative energy promises. But I can’t speak with the authority I would like to have about this…

    But conceding for the moment the best case, that the successful entrepreneur in the marketplace – pick your market – has been ethically superior to the Robber barons, then what? As George Orwell pointed out in responding to Hayek’s “Road to Serfdom,” the economic race is fairest the first time it is run; after that there is a reward and advantage to those previously successful…the “race” becomes more unfair the further we move from the quasi-mystical first race, (and when was that…when in Fitzgerald’s words in the closing of the Great Gatsby, the Europeans gazed upon the green breast of the New World? )

    Going further, and now we are getting more details in public; the money and wealth fairly won by virtuous entrepreneurs today goes into politics and quasi-politics of think tanks and foundations, a good number of which are trhying to destroy public education and unions, no? Whether the money was won fairly or by old Robber Baron means, it is undermining democracy as we have known it.

    Let’s come back to the classical foundations of the “Atlantic republican tradition,” and its roots in widely distributed agricultural land…and by extension, its application to the “young republic” of the founders. It’s conservative political structure may have been well suited to a seemingly stable nations of farmers and merchants, but soon the dynamics horrified the remaining founders who gazed out at jacksonian democracy and declared “this isn’t what we had in mind.” There’s no small irony for the matters at hand, the economic basis of democracy that these conservative founders underestimated the radical nature of the capitalism which they helped set loose, and my suggestion would be that the system they set in motion has a hard time coping with the massive, radical power of the private sector to change all aspects of the democratic equation, as well as inherited moral systems, the testimony of the auto, the pill and the credit crying out for the recognition that Daniel Bell gave to them.

    So what’s the modern day basis in economics for our now much older republic; the farms are gone by, largely the process I’ve been describing, and we celebrate the great productivithy and efficiency of the few remaining and glide over the elimination of the farmers…we have now broken the democratic aspects of the New Deal’s labor reforms, and industry has largely left…so what’s replaed the broad symbol and reality of the farmer in the Atlantic republican tradition? I would submit that both parties want to rush to the small businesses of America, if you can shield your eyes from the haloed glow for a moment,you’lll find they represent at most, and stretching the formal definitions about 17-25% of the working population…yet there are times when I feel and fear that “the entrepreneur” small and large, is the component in the population who has real standing in the political process. Status and standing, and I would suggest to all concerned here that whether the current bundles were justly and fairly won and invented, the vector of the intersection between capitalist wealth and democracy is not currently in democracy’s favor, even conceding the oligarchical bent of that ancient “Atlantic republican tradition.”

  9. Podargus
    November 14, 2013 at 7:37 pm

    William Neil, the USA prior to the civil war was a slave owning society. The Greek and Roman “civilizations” were slave economies.Most of your founding fathers were slave owners.
    To speak of equality in those contexts is absurd.

  10. William Neil
    November 14, 2013 at 8:51 pm

    No Podargus, only part of Antebellum US society was slave owning, and it had sharp geographical boundaries, and the contradictions between it and the “free labor” portion of the that society, already by the 1850’s far greater in numbers and economic potential (if not actual value of capital itself – slaves were more valuable than existing northern capital according to historian Eric Foner) tore the nation apart. Yes, many of the founders were part of that southern society, and they did own slaves.

    And after the Civil War, what emerged in the South, now free and “capitalist,” for a majority of the small white land owners and freed former chattel slaves? Tenant farming and the crop lien system, a form of indebtedness that I would maintain was a form of slavery which few escaped from, and which had lasting consequences right into the 20th and 21 centuries for those who did move north and west when the system came apart with the mechanization of farming in the South after World War II.

    And the distinctions between the limited “citizenship” in the ancient economy and the slavery that developed after 600 BC in Greece and after 200 BC in Rome – the one M.I Finley was writing about – and please note that slavery was not the starting points in those societies…becomes quite complex…Finley suggests that slavery developed its intense forms in both those societies when the internal labor markets and the “citizen” status of the small land-owners and craftsmen could no longer meet the demands of the broader society…the slaves were imported to fill the gap from those places Rome conquered in the nearly constant warfare of 300-100BC. There was a conflict between the status of the most humble citizens and the status of the labor required…maybe the best way to convey this is to give you a quote from Cicero, which should be a jolt to any modern economic man, and democrat, and economists themselves, about how that writer, much quoted and admired by our founding fathers, thought about work and status in his society…this is at the cusp of Rome’s transition from republic to tyranny.

    “‘Now in regard to trades and employment, which are to be considered liberal and which means, this is the more or less accepted view. first, those employments are condemned which incur il-will, as those of collectors of harbor taxes and money; lenders,. Illiberal, too and mean are the employments of all who work for wages, whom we pay for their labour and not for their arts; for in their case their very wages are the warrant of their slavery We must also consider mean those who buy from merchants in order to re-sell immediately, for they would make no profit without much outright lying…And all craftsmen are engaged in mean trades, for no workshop can have any quality appropriate to a free man. Least worthy of all are those trades which cater to sensual pleasures: ‘fishmongers, butchers, cooks, poulterers and fishermen,’ as Terrence says; to whom you may add, if you please perfumers, dancers and all performers in low-grade music-halls….Commerce, if it is on a small scale, is to be considered mean; but if it is large-scale and extensive, importing much from all over and distributing to many without misrepresentation, is not to be greatly censured. Indeed, it even seems to deserve the highest respect if those who are engaged in it, satiated, or rather, I should say, content with their profits, make their way from the harbor to a landed estate, as they have often made it from the sea to a harbor. But of all things from which one may acquire, none is better than agriculture, none more fruitful, none sweeter, none more fitting for a free man.”

    Please don’t understand me, this is no defense of chattel slavery, but an attempt to see how it evolved side-by-side with the roots of citizens in ancient democratic republics, contradictions and all, including our founding fathers; are we so sure and smug that today’s modern capitalism is not inventing new forms of it – Michael Hudson has suggested it, named it – in the new debtors and the voiceless 28 million working for that $9.89 per hour or less in the US – who can vote but don’t seem to get much policy traction within the two parties? Who would call them slaves, but what exactly is their status, despite the vote? Even the remains o organized labor doesn’t no how to address them, since they are not middle class, which is where status and genuine citizenship – listen closely to how even labor slides over the working poor to make them aspirants to that middle class, but not having much dignity as only the working poor. If the remnants of today’s labor movement has trouble with language to describe their constituency…what about economists?

  11. William Neil
    November 14, 2013 at 9:53 pm

    Podargus:

    Stop and think about all the controversy surrounding “immigration” in the contemporary US, and the immigrants themselves when considering what Finley was writing about in how slavery developed in the ancient economies alongside a dwindling number of small landowner “citizens” and the status that said they could not do certain types of labor. Yes, yes, most of today’s immigrants came of their own free will – but also driven by dire circumstances in their home countries south of the US, mostly. But think of the arguments made by US businesses and many economists: filling the needs of a US labor force that allegedly won’t fill those jobs (is it the jobs or the wages paid?)…a labor shortage…they work hard, don’t give employers a hard time…help break unions as in the building construction industry around Wash. DC…(and build some too in the service sector) .and what is their status, exactly? Hmmm..some will gain citizenship…others placed on a long trial period…to some their whole existence is very threatening…there is some upward mobility….but there was in Greece and esp. ancient Rome, even for slaves, who performed a remarkable range of activities, some with a great deal of responsibility – all with the caveats on status and standing expressed in the Cicero quote from above. So I guess I’m really looking for trouble in making this analogy, and no disrespect to immigrants…but they do suggest exactly the type of never-never lands, no man lands that Finley was writing about as slavery developed alongside the “free citizens.’ Metics in Greek society. And I think modern capitalism here in the US and its greatest defenders have some substantial illusions about citizenship, standing and the status of at least the bottom third of our society, immigrants included.

  12. Peter Shaw
    November 14, 2013 at 10:09 pm

    I take it you’re discussing the modern tax-driven economy.
    I think you’re implying that there exists a balanced wage share not open to negotiation, only distortion. Also, that this is based in economics rather than ethics.
    I agree with all of that.
    Both parties (as you imply) have an interest in maintaining that balance, so they shouldn’t conflict (if rational and well-informed).

    Establishing a balanced wage share should reduce inequality, but might not solve it. You say little on that, so I have a suggestion:
    The natural instrument addressing inequality is personal taxation – simply as it’s the only government institution that can. Let this be its sole function.
    Create a separate “department of philanthropy” with sole power of personal taxation. Have it deliver $-for-$ to the needy what it recovers from the rich, so as to sustain general demand (as you require).
    Personal tax then goes exclusively to a “good cause”, and private actions by the rich uplifting the needy to the breadline reflect directly in their tax.

    Tax on income which is spent is VAT in anticipation; my scheme would need an increase in VAT to the true “cost of government”, and the government-size debate shifts to VAT rather than personal tax – as perhaps it should.

    If the rich bought into this scheme, might not government follow?

  13. Lyonwiss
    November 15, 2013 at 2:38 am

    When you talk about the “problem of inequality” the implicit assumption is that the objective is to achieve equality. This is a sloppy use of language in economics, because the rationale for economics (through exchange and redistribution) is to deal with inequalities. Without inequalities, economics would be far less significant.

    Everyone has unequal amounts of nearly everything from skills to cows, to chickens etc. Economics exists to improve individual welfare by exchange and redistribution, arising from the existence of inequalities. I have cows, but no chicken and you have chickens, but no cows. This inequality between us is the motivation for the economics of exchange.

    The slave trade was an economic activity, because many sold themselves voluntarily into slavery to improve their own welfare, (though others were coerced). Given particular situations of inequality, such as starvation, unemployment, lack of education etc. slavery provided an economic solution. Slavery is not an economic problem to be solved. Slavery is a moral problem, where people, through no fault of their own, find themselves in situations of inequitable inequality for which slavery was/is an economic solution, existing even today in different forms.

    Today we are talking about “debt slavery”, where a significant part of someone’s salary or wage goes to servicing a debt, usually a mortgage. Many people voluntarily become debt slaves in this sense. This is not necessarily bad, if it is a fully informed economic decision and particularly if house prices appreciate. Debt slavery is only bad when the economic transaction is based on fraud and the outcome is bad. The problem is fraud, not “debt slavery”.

    Emotional use of the term “debt slavery” is political. The logical outcome of prohibition of “debt slavery” is the total elimination of lending and borrowing. This would be another example of sloppy thinking on the issues of debt and inequality.

  14. Lyonwiss
    November 15, 2013 at 4:46 am

    Sloppy thinking on inequality is having adverse implications for society from government policies proposed now and in the near future. The Keynesian policy of “euthanasia of savers” is partly based on a wrong-headed notion of inequality.

    According to Keynes savings are bad because they represent idle resources which could be used to reduce unemployment. This inequality between savers and workers needs to be “fixed”. So savers should be euthanized progressively through negative real interest rates directly and through monetary inflation indirectly.

    The explicit US policy is zero nominal interest rate and 2 percent targeted inflation, plus unlimited quantitative easing (QE). So even if inflation is kept at 2 percent (grossly understated), the saver’s real asset is eroded at 2 percent per year, plus when the asset is spent for consumption, the real purchasing power is also reduced by 2 percent. A total wealth confiscation of effectively 4 percent per year.

    If inflation is actually 5 percent (Shadow Government Statistics), the currently confiscation rate is effectively 10 percent per year. It takes the government only about 7 years to confiscate half of one’s savings, even without explicit measures such proposed policies such as bank deposits confiscation in bail-ins or confiscation of pension fund assets.

    These government actions are unjust for two main reasons; firstly it is wrong to blame and punish savers for idle resources and secondly it is based on a wrong-headed notion of inequality.

    Firstly, when savers put their money in a bank deposit they are effectively lending money to banks, who then use their knowledge to lend for business and investment. If there are idle resources, it is the banks which are responsible for not lending out the money for real economic production. Blame and punish the banks and not the savers. Instead banks are being rewarded by bail-outs, bail-ins and financial speculation.

    Secondly, there may appear to be an inequality of wealth between savers and non-savers. But this is mostly a wrong-headed notion of inequality. Most of savings are retirement savings in individuals’ portfolios and pension funds. Such savings represent postponement of consumption for retirement in old age when the opportunity and capacity to work are greatly diminished. The human or labor capital is unequal between the young and old over a life time.

    Saving is a means by which human capital is transferred to financial claims for future consumption. Savings therefore enable consumption to be smoothed or equalized between young and old, over their life times. The Keynesian policy of “euthanasia of savers” merely creates a new form of inequality where the old are robbed of their rightful consumption in retirement. In fact, this inequality may already be having a significant effect in reducing consumption and increasing unemployment.

    • Oliver
      November 15, 2013 at 3:25 pm

      It’s called euthanasia of the rentier and not of the saver. These are two distinct categories albeit with large overlaps. One can decrease broad and transfers via interest payments and simultanously increase direct transfers via state pensions. (Unless, of course, one has a large group of raging pensioners fighting to slash their own entitlements…)

      It takes the government only about 7 years to confiscate half of one’s savings

      Confiscation is only relative from creditors to debtors. Non government and external sector debtors constitute a larger class of debtors than goverment in most places. So it is wrong to say ‘government confiscates…’

      Savers do not lend their savings for banks to lend on. It is well known that investments create savings and not the other way around. It is NEW credit for NEW investment that is needed while old debt needs to be paid / written down. The credit cycle needs to be accelerated, not slowed down at this point.

      Saving is a means by which human capital is tranferred to financial claims for future consumption. One can accumulate financial claims to exchange for future output. One cannot save to consume present output in the future, nor does saving money now guarantee that anything will be produced in future. Only accumulation of real, productive capital (machines ‘n’ shit) can do that. And spending on capital goods does is not an act of postponed consumption. It is an act of slowly consuming capital goods instead of quickly consuming consumer goods.

  15. November 15, 2013 at 12:28 pm

    Well said.

    In thinking about the matter I would make a distinction between reinvested capital gains, profit taking for consumption, and profit taking to fund an expression of will. I would subdivide the latter on whether it comes back to disguised investment such as lobbying, or it truly has another purpose such as social policy or charity.

    Our present system is strongly biased to reinvested capital gains, or profit taking to invest. That’s probably a psychological symptom of immaturity to the modern world, clinging to tribal instincts of competition and insecurity. It causes the skewed demand that you mention. Because of inadequate demand, or more accurately inadequate surplus recycling, western economies depend on continual monetary expansion by MFIs or central banks – not in itself a bad thing, but a better structure is desirable. These issues are mainly instrumental.

    The moral angle applies more to profit taking for ostentatious consumption, and to profit taking for expression of will depending on what such will is. Personally I like George Soros’s expression but dislike the Koch brothers’. But either of them, I reckon, would defend their privilege to decide on allocation of society’s funds much more strongly than their personal consumption.

    Our concept of redistribution via taxation rests on the assumption of acting between earners-consumers, that is balancing one’s consumption with another’s. Increasingly it is not so. Capital gains is not the same as wage income, and profit-taking for consumption is not the same as for expression of will. A good society needs to address each separately.

    Relative equality of consumption is, I think, commonly agreeable even in the United States. When it comes to capital, more equal distribution of capital should be a social goal – for example through a national wealth fund. As for expression of will in the allocation of funds, it should be accessible to ordinary people as both a civic duty and political act. I would look forward to a society where I’m limited in my own consumption but I can earn the right to allocate funds for the common good as I see it.

  16. Lyonwiss
    November 15, 2013 at 9:51 pm

    Oliver, “Euthanasia of the rentier, and the functionless investor” is Keynes’ phrase. As you admit this includes savers, who are functionless investors. I use “euthanasia of savers” to focus on the subgroup of savers to show how Keynesian economics affect this group more clearly.

    You said, “confiscation is only relative from creditor to debtors”. A debtor defaulting is not confiscation of the creditor; it is a breach of contract and the defaulter could potentially go to prison. No. only the government with the laws (it enacts) and enforcement can confiscate. Confiscation includes not only your financial assets, but also other things, such as your house and land (though not likely in some countries at the moment).

    You said, “It is well known that investments create savings”. This is not correct. How does a farmer grow more corn, if he has not saved the corn he previously grew and did not consume? And the corn he “invests” may fail, resulting in no consumption or saving. Even in a “chicken and egg” view of investment and saving cycle, it is wrong to just pick arbitrarily a starting point. Most of what I read about money creation is simply wrong because economists confuse the apparent mechanics with the substance and meaning of money.

    For example, most people, including most economists and Keynes are confused about capital and money, which are often used interchangeably. For example, Keynes said (GT, p.376), “whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital”. Here, the word “capital” can only mean “money”, which can be created “out of thin air” through debt creation by the banking system.

    But capital is not money, because money, or accurately currency or debt, is a claim on capital and consumption. Capital is real and tangible means of production such as land, machinery, building etc, all factors of economic production. Capital is scarce and cannot be created “out of thin air”. You would agree with this when you said:

    “One can accumulate financial claims to exchange for future output. One cannot save to consume present output in the future, nor does saving money now guarantee that anything will be produced in future. Only accumulation of real, productive capital (machines ‘n’ shit) can do that.”

    When someone earns $1,000 in the week and deposits $100 in a bank, it is a postponement of current consumption and an accumulation of financial claims to exchange for future output for future consumption. This saving is earned money, corresponding to real economic production of capital or consumption goods already achieved.

    When the government and the banking system creates money “out of thin air”, it is unearned money which does not correspond to any saving or real economic production. The unearned money is not capital, but merely financial claims on what is produced by others. Because both the earned money and unearned money have equal status as financial claims for economic output, by creating unearned money, the government dilute or reduces the purchasing power of the saver’s money, through the policy of higher prices or inflation. This is an indirect confiscation of the saver’s money.

    Of course, the government denies this confiscation by saying the unearned money will be used for investments which lead to economic production and the money “pays for itself”, thus the “investments create savings” mythology. But the unearned money is mostly consumed and what investment which may take place may not produce anything at all and probably no savings. All you need to prove this fact empirically is to look at the data for GDP/debt or for saving/debt. Unfortunately, academics like Bernanke and Yellen, must read Keynes like the bible.

    • Oliver
      November 17, 2013 at 12:18 pm

      A debtor defaulting is not confiscation of the creditor; it is a breach of contract and the defaulter could potentially go to prison.

      It’s an option for limited liability companies and debts that cannot be payed, won’t be payed. And one can also pay down debt, leaving the banks with less performing assets (loans).

      Further, you assume that inflation is ‘made’ by government or the central bank. This is by no means the case. And while government can overpay and thus contribute to rising prices, you must remember that each money loan is a tripartite agreement in which the bank, as underwriter (or, in government’s case, the central bank) is responsible for maintaining standards. Each and every transaction with a bank has the potential for creating inflation (raising prices). Inflation is not a phenomenon unique to government transactions.

      Capital is scarce and cannot be created “out of thin air”. You would agree with this when you said:

      Yes, there is one word for two separate things, which is where much of the confusion comes from. Same goes for saving, investment etc. The Keynesian claim is that there is no direct, linear link between money saving / investment and the formation of real capital. ‘Euthanasia of the rentier’ is an after the fact qualitative intervention to make that relation more 1:1 by weeding out the non productive parts.

      When the government and the banking system creates money “out of thin air”, it is unearned money which does not correspond to any saving or real economic production.

      This is not necessarily true. It depends on what is financed by the emission of new money. If credit is used to finance wages, the new money corresponds to the output produced by the wage earners. If, instead it is used to finance the purchase of existing houses, then there is no corresponding real value added. The well known effect is asset price inflation.

      When someone earns $1,000 in the week and deposits $100 in a bank, it is a postponement of current consumption and an accumulation of financial claims to exchange for future output for future consumption.

      Yes, but what happens with the output that corresponds to the $100 income saved? The money can be saved, the output, assuming it’s not tangible capital, just rots unless someone else buys it in that period. Which begs the question with what? Remember Say’s Law assumes that all income is spent on current output.

      In any case, there is no way to guarantee that unconsumed output is automatically turned into productive real capital. Higher interest rates don’t help. In fact, they may be harmful in that there is less incentive to earn profits via higher sales volumes because they’re coming in through transfer payments instead.

      • Lyonwiss
        November 17, 2013 at 11:25 pm

        With statements such as,

        “Each and every transaction with a bank has the potential for creating inflation (raising prices). Inflation is not a phenomenon unique to government transactions” or

        “Remember Say’s Law assumes that all income is spent on current output. In any case, there is no way to guarantee that unconsumed output is automatically turned into productive real capital.”

        I cannot hope to converse meaningfully with you. Let’s agree to disagree.

      • Oliver
        November 18, 2013 at 7:48 am

        OK, although I’m not sure which part of what I said is controversial. The first quote is logically imperative if you accept the endogeneity of the money supply (inflation is a direct function of prices paid). I’m assuming you don’t. The second may not be very well stated, I admit. But as you say, no point wasting our time if there’s no common ground.

      • Oliver
        November 18, 2013 at 10:49 am

        or you can take ot from Wiki, if you prefer:

        Endogenous money creation or destruction is the concept that each participant in the economy has their own version of a ‘printing press’ for money. This concept was explained by Irving Fisher in his treatise on The Theory of Interest (1930) in terms of the value of currency being affected by two (potentially opposing) movements – expected growth in the money supply reducing the real purchasing power of money and expected increases in productivity increasing the real purchasing power of money.

        This means that participants can affect the value of currency in a number of ways:
        Investment choices to invest in ‘non productive’ money equivalents rather than to invest directly in productive assets effectively increases the money supply, reducing the real value of currency.
        Demands for higher wages or supplier payments can increase the financing requirements of firms, creating a risk of ‘supplier led inflation’, effectively reducing the real value of currency.
        Choices made about the level of contribution to productivity can increase the real value of currency, (in fact this is the only mechanism which provides any basis for the real value of currency.)

        This all adds up to the conclusion that participants have the power to affect the value of currency,…

  17. William Neil
    November 16, 2013 at 4:57 pm

    Peter:

    It’s hard to let your posting go. Since I’ve written a lot, and gone back over what came out fast, free form in the best blogging tradition, to raise what I wrote to its highest level of generalization, I’m arguing that I pick up an inegalitarian vector inside capitalism, and maybe economic systems in general, since Finley was arguing that the “ancient economy” was not capitalism at all as we’ve come to know it – yet it drifted to two great crises of debt and inequality in Roman history – and one in Greece that I did not write about – and two grand revolts which were not successful in Rome, the later, the Gracchi revolt, did contribute to the collapse of the republican political tradition, such as it was. And of course, and I say this hopefully about the human impulse toward freedom and dignity, that there were great slave revolts, the Spartacus one most famously 73-71 BC, but others as well in the previous century, especially in Sicily.

    And let’s not forget Wendell Berry’s most ignored speech – the nation’s highest award in the humanities – the Jefferson Lecture, which he gave in the spring of 2012 – “It All Turns Upon Affection” in which he declared that capitalism had two powerful tendencies – towards the elimination of labor and towards oligopoly and monopoly. By the way, he recollected his grandfather, a small tobacco farmer dependent on the great Duke kingdom for payment at the end of the year in the ritual called the “settle,” coming home at Christmas time with zero, nothing for a year’s labor – and he was not a tenant farmer, he owned his own land.

    Who can draw such clear lines between the political and the economic? In some of his deepest and best writing, Michael Harrington, trying to explain Marx to an American public in that unusual decade, the 1970’s, wrote about the interpenetration of the two, the dance between the two occurring under a “pervasive light,” capitalism’s powerful sun, how corporate priorities emerged at the apex of the political system, not at all times, but often when it most mattered – energy policy – and I’m also thinking of Bill Greider’s “Who Will Tell the People,” a book of the early 1990’s, that corporations filled in the vacuum left by the decline of participation by effective citizens and their organization, became almost by default, the “public interest” (its painful to write that, the irony) and the planning agencies in America.

    And the devolution of the Democratic party from FDR”s brave words of defiance in 1932 and 1936 – no President has ever said such things publicly about the failures of private economic leadership and institutions – to the revolving door today – Goldman Sachs alumni, – the situation where both parties are so close to the wishes of the private sector that the working poor and the lower middle class have lost a voice, as has labor, which has given away its independence, its labor day address in 2012…and again this year to an administration official.

    Is there any better example that the process now under way, the TPP – the Transpacific Partnership Trade “negotiations,” both the structure and the processs where most of Congress is shut out, labor and environmentalists must seine the news and leaks for clues as to what is going on, and those at the tables are almost all corporate representatives, working on arbitration mechanisms that will be in their own reps hands, undermining what’s left of the democratic processes in the resolution of disputes. “Free Trade’s” aura, still, remarkably, is so strong and the normal political processes so threatening to the corporate traders and their political defenders that “fast track” has been invented to undercut normal democratic processes – which themselves have left much of the public out under the best of circumstances. Up or down, yes or no, no amendments, under Presidential guidance, that’s fast track and the TPP, I think one of the best illustrations of the interweaving of economic and politics to the vast undermining of the latter. There does seem, finally, however, to be a revolt underway which transcends left/right divisions, against the whole process.

  18. chdwr
    November 16, 2013 at 7:08 pm

    It’s Wisdom we need. Wisdom is the ethical integration of the best thinking (philosophy) and best acting (policies) possible. At the pinnacle of human wisdom is the concept/experience and action/policy of Grace. Incorporate a policy of actual monetary grace into the the current economic and monetary systems and you will restore the needed balance and effect the even more necessary evolution of those systems. Paradigm changes occur when their magic is also the most practical and effective thing to do.

  19. Lyonwiss
    November 16, 2013 at 11:02 pm

    It’s honesty we need from everyone, particularly from those in charge. Not everyone can be wise, knowledgeable, educated etc. You certainly cannot expect this from the “leaders”. But everyone can be honest.

    It is dishonesty, deception, corruption and fraud which have been ignored and unpunished that have led to the inequitable inequality we have today.

    There has always been such inequity historically. But this has been magnified many times in the past 15 years with the unregulated use of derivatives, new tools for leveraged deception and fraud, responsible for much of the inequality. The evidence of this assertion can be seen in most economic charts where inflection points or turning points occur around 2000, when derivatives were formally deregulated.

    Without transforming human nature, there is a simple practical thing we can do stop the progress of inequality: regulate derivatives, which means reporting on them. It is scandalous that substantial parts of bank assets are opaque to standard accounting practices.

    If the banks refuse to report on derivatives, as they have done so far, then a new Glass-Steagall act must be re-introduced to separate derivatives from traditional commercial banking. This will stop the theft that has created most of the recent inequality.

    • chdwr
      November 17, 2013 at 3:13 am

      “It’s honesty we need from everyone,…” That too. But if we really want real and effective change it has to be transformation first, reform later as necessary.

      People change by changing the ideas in their heads and the experiences they create there as well. Human systems change their character and their vector in exactly the same way except the ideas are policies. It’s both magical and completely down to earth. This is why C. H. Douglas described Social Credit as “the policy of a philosophy.” It’s policy prescriptions go deeper and hence make the deeper changes of character and direction that are necessary when old ways of thinking have been left unchanged for as long (literally millenia) as they have. Mankind’s technical abilities have progressed to such a point as to be indistinguishable from magic as someone whose name I currently forget said. This only makes more practical the philosophical and hence transformational changes necessary if we are to truly change the character and direction of our human societies….and also have reforms which help discourage the inevitable in human activities and interactions because there will never be an end to history. But let us also and first, give ourselves a chance to begin evolving once again instead of wallowing in the failed experiment of homo economicus. If you look at history from a “punctuated equilibrium” point of view Mankind has been sitting at a semi colon, ….pause or period for centuries. All we need is to begin a NEW cycle of action with a new frame of mind in the sphere of human activity that preoccupies most of our time and whose problems are most pressing, monetary and economic affairs, with the paradigm changing ideas that will “do the trick”. Wisdom and Wisdom’s pinnacle, the policy concept and experience of Grace, are the final pieces of a puzzle that will make clear the bigger picture. And also make easier intelligent reforms as well.

  20. November 18, 2013 at 8:08 am

    In the real world, political decisions determine who gets bailed out and who doesn’t, who stays afloat and who goes under, who gets rewarded and who gets prosecuted (and if prosecuted, who gets hit hard and who gets off with a slap on the wrist … or a slap on the back). As such, it should be obvious that we cannot discuss our economy or even investing decisions without addressing politics.

    • BFWR
      November 18, 2013 at 2:51 pm

      Yes, and that is why a mass social movement that is focused on the correct problem is necessary.

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