Banana Republic?

November 7, 2010 at 9:45 am (By Randy)

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.

(Nicholas Kristof in the New York Times)

Advertisements

73 Comments

  1. amba12 said,

    Conservatives will tell you this is an expression of freedom, that those people have earned their wealth and it is wrong to redistribute any of it to those who are less creative, productive, aggressive in creating wealth for society and themselves.

    You can’t help feeling the system’s rigged, somehow, though, and that wealth is not being created by creativity as much as it is by . . . wealth. The rich get richer. Of course it has to do with the market, and being rewarded for creating shareholder value, which some will argue trickles down since so many ordinary citizens have become stockholders, if only through their 401Ks.

    I do not know the answer. I know that one argument for taxing wealth beyond a certain line at a higher rate is that much unacknowledged “social capital” goes into the amassing of it. I also know that the Japanese find too high a ratio of CEO to worker pay unseemly. I cannot remember whether the modest ratio that is the norm there is a matter of law or of consensus.

  2. amba12 said,

    A good way to read Timothy Noah’s series in Slate is as an all-in-one PDF.

  3. Maxwell James said,

    Conservatives will tell you this is an expression of freedom, that those people have earned their wealth and it is wrong to redistribute any of it to those who are less creative, productive, aggressive in creating wealth for society and themselves.

    I think that argument’s a dumb one, self-evidently so in this day and age. But there’s a smart conservative argument too, which is that it is the symbiotic relationship between great wealth and regulatory capture that allows the gap to grow wider and wider. TARP and its ilk are only the most obvious example of this. Here’s Tyler Cowen’s take on it, which I’ve found to be one of those arguments that has lingered in my head.

    This is a big part of why I’ve come to favor both significantly higher top marginal tax rates on income and capital gains, but also significantly lowering the government-determined barriers to entry in most industries – especially the financial industry. Otherwise we’re all just the servants of federally-reinforced oligopolies that exist to create massive wealth for a few, while writing policy for the rest of us.

    Finally, Dave Schuler’s recent series in response to Noah’s is excellent (though unlike Dave, I liked Noah’s as well). He hasn’t put the whole series in one place yet but here’s the most recent post. Basically, he’s more concerned about the stagnation of growth among the lower quintiles than the profusion at the very top.

  4. wj said,

    The only thing I can see that might level the income distribution once more, is a higher marginal tax rate on the super-rich. But you have to understand that any increase in taxes, on anybody including the super-rich, is totally unacceptable. After all, if we were to raise taxes, that would follow in the footsteps for that radical leftist/socialist Ronald Reagan. Where would it all end???

  5. amba12 said,

    Dave Schuler has a partial answer:

    When income becomes less a matter of effort, talent, and creativity and more a factor of getting the rules made in your favor is it any wonder that the economy isn’t performing as well as it should?

  6. Charlie (Colorado) said,

    “Regulatory capture” is certainly an issue — look at all the money Rahm Emmanuel, all the Clinton-era pols who moved to Fanny and Freddie, and the return on investment Warren Buffet made in Goldman after TARP — If there’s a couple trillion dollars being thrown around, you can get pretty rich by just managing to siphon off a couple mills per thousand dollars. The problem is that Kristof is asking the wrong question, unless we assume that inequality of income is per se wrong.

    (“Income inequality is per se wrong” is the underlying assumption behind statements like “Eventually you’ve made enough money.” I think the assumption is both mistaken and wrong.)

    The missing question is “what happened to the incomes of the lower percentiles?” There Schuler is asking almost the right question, but we also have to consider what you can buy with that income. I remember 1964, when a new Mustang and a console color TV (with the circular tube and a 5 minute warmup time, and needing to be degaussed every few months) cost about the same: $1995. Now a bigger better flat-screen HD TV costs $400 — about $60 adjusted back to ’64 dollars.

    The thing is, a rising tide does float all boats, just as Jack Kennedy said. It’s better to be in the bottom quintile of income now than it was in 1960 even if people in the top 1 percent make proportionately more.

  7. amba12 said,

    Obviously, “income inequality per se” isn’t wrong. But there’s a difference between “per se” and “500x,” and the question is, at what point has wealth left being a reward for enterprise far behind, and become more a matter of inertial momentum?

    True, without coercion (and coercion inevitably means the income redistributors are now the ones getting rich), no one can define that “point,” draw a line and say “Enough,” (ha ha) “The buck stops here.”

    On the other hand, do we want to allow ourselves to evolve into a society where social mobility slows to a glacial crawl and where there is an entrenched, immensely wealthy, self-perpetuating ruling class? In some ways we seem headed in that direction.

    Charlie, you seem to be saying that as long as the average worker can afford a flat-panel TV, all’s right with the world. Well, OK, it’s better than bread and circuses.

    On the other hand, the movement of the immensely wealthy towards immense philanthropy (if only it is effective philanthropy!) seems as if it could be recycling wealth into feeding the roots of social mobility without government interference (the government can encourage it through tax breaks). If this is becoming one of the greatest sources of potlatch-like prestige for the very rich (let them be human and get some rewards out of it!), all to the good.

  8. Randy said,

    IIRC, during approximately the same period of time, insider ownership of public corporations doubled from 6% to 12%, almost all of that change due to options. This change is apparently unprecedented in history. It happens to parallel changes in the compensation of theoretically independent members of boards of directors, who grant such options. (The info. I remember seeing on this subject was pre-2008 meltdown.)

    Make of that what you will. Or won’t.

  9. Icepick said,

    There are many questions to be asked. For me I want to know, How has the wealth been amassed? I don’t much begrudge the tech guys their fortunes. I much begrduge the fortunes of financiers who have been saved time and again by the government.

    For example, I cannot see any good reason for HFT. Nor do I find it reasonalbe that Bank of America (I believe it was) just had an entire quarter in which they claim they came out ahead on every single trading day. That strains credulity.

    It’s also hard to see how most CEO’s should get massive rewards for their work. They can’t ALL be above average. And too often bad CEOs get a pot of gold for fucking up a company.

    A question Dave Schuler often asks is, What kind of country do you want to live in? Do you prefer a country with a flatter social structure, or one with super-elites who are completely beyond almost all restraints? We’ve definitely drifted to the latter in recent decades.

  10. amba12 said,

    Not so coincidentally, in response to my question Dave just wrote to me, “This isn’t the country I grew up in or thought I could expect.”

  11. Randy said,

    Side Note to WJ: Your comments often get caught by the spam filter (and have to be be manually approved by someone who happens to look in the spam folder) because it recognizes that email address as fake. If you want to avoid that problem, you might want to try using something with at least 3 letters/numbers before .com

  12. Randy said,

    They can’t ALL be above average.

    If they were, why did almost all of them fail to anticipate the events of 2008 and the impact those events would have on the performance of their business, the one they were hired and paid vast sums of money to both lead and protect?

    And too often bad CEOs get a pot of gold for fucking up a company.

    This has become SOP in recent decades. It was extremely rare not all that long ago. It is so common now that public bodies, such as school districts, are now regularly paying large sums to rid themselves of incompetent administrators. When challenged, they often point out that they are doing nothing different than what most companies do today.

  13. amba12 said,

    Irony: some friends just brought over a DVD of episodes from the first year of Kung Fu, which must have been about 1972. It seems incredibly, solemnly kitschy now. At one point the young woman rancher brings Kwai Chang Caine (David Carradine, who I couldn’t help thinking recently died in his 70s, apparently of autoerotic asphyxiation gone wrong — how sadly sordid) some money for the work he has done mending and painting her fences. He waves it away. “What do I need? . . . Food . . . a place to sleep . . . work . . .”

  14. Icepick said,

    This has become SOP in recent decades.

    Yeah, a friend of mine and I used to fantasize about the prospect of getting to run a Fortune 100 company into the ground so that they’d pay us tens of millions to go away. Ah, to be a titan of industry….

  15. wj said,

    Randy, thanks for the info. (My habits for avoiding getting e-mail floods obviously have gotten to me. I’ll try to be more sensible.)

  16. Randy said,

    WJ: I know what you mean about the floods ;-) Once I realized what was probably happening with some of your comments, I thought I’d pass it along. (My favorite, “no@no.com” went by the wayside some time ago due to similar problems at another site.)

  17. Peter Hoh said,

    I realized something was wrong back in my youth. The Delorean Motor Corporation went bankrupt. The workers lost their job. The government (Ireland, I think) which had lured the company to their country with loan guarantees lost money. Investors lost money. And yet John Delorean was still a rich man.

  18. Randy said,

    Peter: DeLorean’s personal investment in the Delorean Motor Corporation was said to be only $700,000. Others invested much more. DeLorean and those stockholders lost all the money they invested in the corporation when the company went bankrupt. Under normal circumstances, considering the size of his personal investment, that DeLorean still had money after the corporation collapsed doesn’t seem strange or unfair to me as corporations and individuals are separate entities. That said, in 1985, DeLorean was indicted for diverting corporate funds for his personal use, but he wasn’t convicted. There were other lawsuits, however, and DeLorean ended up declaring bankruptcy in 1999, due to a 1995 judgment ordering payment of $10 million in legal fees and a 1996 $100 million judgment in favor of the original investors.

  19. amba12 said,

    Or, as MLK said, “The arc of the universe is long, but it bends towards justice.”

  20. wj said,

    I don’t generally have much sympathy for the arguments about using government funds to induce a business to set up somewhere. But the one which really irritates me is when local governments (with very limited tax bases) decide to spend lots of money that they don’t have on building a stadium to induce some rich owner to move a sports franchise there. (But then the only sports franchise where I have much enthusiasm for the owners is the Green Bay Packers. Having shares owned across a wide swathe of the community seems like what a “local” sports team ought to have.)

  21. Peter Hoh said,

    Randy, I know how corporations work and all that, but I grew up reading/hearing stories of people who lost everything when their business failed. I was still wet behind the ears when DMC failed, and it dawned on me that rich people had figured out a way to make sure that a business failure did not end up costing them their fortune.

    Socialize the risks, privatize the rewards does not make for good capitalism.

    It’s one thing for a state/local government to offer tax breaks to encourage a business to locate within their boundaries. It’s another thing to offer loan guarantees. And then there are the continued subsidies for things like ethanol which have failed to live up to their promise.

  22. amba12 said,

    What really, really galls me is the preachy hypocrisy of those who talk about “personal responsibility” and “accepting the consequences of your actions” when it comes to the little guy keeping his nose clean and keeping his pitiful job, but then think it’s fine when the “too big to fail” are subsidized or bailed out and the screwup execs float to a soft landing on their golden parachutes. The bigger you are, the better protected against the consequences of your own actions.

  23. wj said,

    “Do as I say; not as I do.”….?

  24. realpc said,

    “The bigger you are, the better protected against the consequences of your own actions.”

    That’s why everyone wants to be rich. It’s safer. But I agree with you about the bailouts, and I think almost the whole country has been appalled and revolted by them. I guess that’s what inspired the tea parties, and the recent election. We all hate the Bush bailouts and the Obama bailouts and stimulus, and now the “quantitative easing.” The Republicans and the Democrats listen to the same experts, and the experts keep telling them the economy will recover it they just spend and create more money.

    What we really now is someone stupid and ignorant enough to have some common sense.

  25. Maxwell James said,

    The bigger you are, the better protected against the consequences of your own actions.

    As I said above, there’s a simple answer to that: take more of their money through taxes. I find it rather sad that the very rich are more than happy to avail themselves of taxpayer money when they feel the need, but so many middle class people recoil at the thought of asking them to pay more for that privilege.

  26. Charlie (Colorado) said,

    Amba, let me pose the question from the opposite side: if “too much money” isn’t per se wrong — where we agree — and it’s hard to define multiple at which having too much money is wrong, then can we define the point at which it’s morally justified to start taking someone else’s money to give away to reduce the differential?

    If, instead, the problem is the ability of some people to achieve sufficient political power to let them get at money the government takes by coercion (ie, taxes) then isn’t worrying about income inequality as such a mistake? A category error?

  27. Charlie (Colorado) said,

    “What do I need? . . . Food . . . a place to sleep . . . work . . .”

    One of those semi-accidental times they got it write — the full Ten Precepts said not to accept gold or silver.

  28. Charlie (Colorado) said,

    As I said above, there’s a simple answer to that: take more of their money through taxes. I find it rather sad that the very rich are more than happy to avail themselves of taxpayer money when they feel the need, but so many middle class people recoil at the thought of asking them to pay more for that privilege.

    What about someone who doesn’t get their money through the taxpayers, like say the kids who started Google (not Google now, where Eric Schmidt is doing a fine job turning political clout into money.)

  29. Maxwell James said,

    Charlie,

    What about someone who doesn’t get their money through the taxpayers, like say the kids who started Google (not Google now, where Eric Schmidt is doing a fine job turning political clout into money.)

    I’ve been thinking about this a lot lately. On a basic level: I don’t think higher marginal income tax rates are that big of a disincentive to entrepreneurs, Most startup entrepreneurs pay themselves largely through sweat equity in the early years of the business, with the goal of a big payday through a sale or IPO. Capital gains taxes are arguably a bigger disincentive, but your average budding entrepreneur isn’t going to shy away from a potential $90 million payday when under a different tax system he might have gotten $120 million. I think by far the more important issue for entrepreneurs is reducing a) the amount of red tape in starting and maintaining a business, and b) the barriers to entry in industries where that’s appropriate.

    That said, it is a big issue for angel and venture investors, and possibly for repeat entrepreneurs. In a perfect world, I’d like to see an exception made for entrepreneurs who grow a startup into a successful, stable company. One form it could take would be that everyone gets a one-time, one-year “get out of capital gains tax free” deduction, but only for selling stock in a business that they founded or invested in early (I’d say within the first 5 years, or before it turned in a positive cash flow, whichever was longer). Obviously that could be abused, and abused hard. But I’ll keep thinking about it.

  30. Icepick said,

    I realized something was wrong back in my youth. The Delorean Motor Corporation went bankrupt. The workers lost their job. The government (Ireland, I think) which had lured the company to their country with loan guarantees lost money. Investors lost money. And yet John Delorean was still a rich man.

    It’s always safer to gamble with other people’s money.

    Charlie: if “too much money” isn’t per se wrong — where we agree — and it’s hard to define multiple at which having too much money is wrong, then can we define the point at which it’s morally justified to start taking someone else’s money to give away to reduce the differential?

    That has to be slightly more morally justifiable (by several orders of magnitude) than taking someone else’s money to increase the differential – which is what we’ve seen the last few years.

  31. Icepick said,

    Socialize the risks, privatize the rewards….

    Wasn’t that a major part of Mussolini’s Fascism?

  32. Charlie (Colorado) said,

    Maxwell, I think there are a couple of issues here.

    First a statistical one: I think Sergey et al are far outliers. I agree that a little bit higher marginal rate doesn’t make much different to then; whether they pay $100 million of $107 million in taxes probably doesn’t affect their lifestyle very much. But they’re far to the end of the distribution; the problem is what higher marginal rates do to, say, a successful plumber, or an MD who owns a successful practice with several partners?

    Second, and to my mind the core question, is the moral one. It’s their damn money. How can you justify taking, say, 90 percent of everything over $10 million a year by the government, without justifying a freelancer doing the same thing with a Ponzi scheme?

    You have a good point that reducing the amount of red tape etc is more important; that is, however, a really big part of the reason entrepreneurs and businesses pay lobbyists, too.

    Cutting to the chase as I don’t have time to get at it Socratically, I think the thing we end up with is that IF the government were small, constrained, and efficient THEN we would automatically both reduce the taxes and reduce the return on investment on lobbyists and political contributions.

  33. Charlie (Colorado) said,

    That has to be slightly more morally justifiable (by several orders of magnitude) than taking someone else’s money to increase the differential – which is what we’ve seen the last few years.

    This seems to raise its own problems.

    (1) how do you tell the kinds of income apart?

    Cf Google and Microsoft. In both cases, they got started by providing something valuable. When Bill Gates was ramping up to being the richest man in the world, he wasn’t doing so by rent-seeking. This undoubtedly increased income inequality — in fact, it’d be interesting to see how much of this inequality can be accounted for just by looking at Gates, Ellison, Brin, Schmidt, and so on. Similarly with Lady Gaga: her string of hit records certainly increased income inequality, by creating something someone else wanted. JK Rowling is richer than the Queen, all on the Harry Potter books.

    It doesn’t seem to make much sense to claim that these people got them money by taking it coercively from someone else; it therefore would appear that income inequality isn’t the real problem, unless we’re defining (as Kristof implicitly does) that inequaltiy is bad in itself.

    (2) What do these people do with their money? They can only eat so much, buy so many houses, have so many side-affairs — a lot of their money goes unspent. What do they do with it?

    Unless they put it in vaults a la Scrooge McDuck, they invest it somehow. In bonds — providing funds for companies or the government — or in stocks — providing funds for other businesses — or they buy iother businesses which make money, or they put it in the bank where it becomes money for mortgages etc.

    The point is this: I don’t think it’s possible to make much of a case that greater income disparity is bad unless you’re starting with the assumption that the money earned isn’t being paid for something of value. (With the real difficulty problem then that you have to ask, if it’s not, why do people keep paying it?)

    If the concern is rent-seeking, then worrying about disparate incomes is a red herring: you should go directly to whatever can be done about the rent seeking?

  34. Maxwell James said,

    Charlie,

    I think Sergey et al are far outliers.

    Sure. This entire thread started with a op-ed about the disparity in wealth between the median and the richest one percent, which is the very definition of an outlier. But it’s true that Sergey and Larry are well beyond that, into the top .1 percent or higher. I would welcome a new tax bracket for people who make over a million dollars every year.

    But how about your plumber and doctor? Well, I don’t see them as exactly the same (and neither does BLS for that matter; a quick search shows that a plumber in the 90th percentile makes $80,000 per year, whereas a GP – not even a surgeon – in the 50th percentile makes twice that). Plumbers, I think it’s safe to say, do not generally benefit at a significant cost to taxpayers.

    But doctors? Good grief. Even for doctors who don’t accept Medicare and Medicaid, those programs form an effective price floor for their services. And that price floor is determined by – you guessed it – doctors! Now I’m not against doctors being compensated well, but they are a remarkably poor example of an upper-class profession that creates all their own wealth with no assist from society at large.

    It’s their damn money.

    Well that’s your moral argument. Mine was already outlined by amba above: I know that one argument for taxing wealth beyond a certain line at a higher rate is that much unacknowledged “social capital” goes into the amassing of it. I’ll also part with a quote from the most notorious socialist of all, Adam Smith:

    ‎”It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

  35. Charlie (Colorado) said,

    Okay, Maxwell, so you do the arithmetic: if you want to reduce the disparity by some percentage, how much do you have to take from the higher end?

    Hint: if you want to reduce the disparity completely, you have to take every penny that anyone makes over the median income.

    The point is that we’re not talking merely “something more”.

    We actually tried something as confiscatory as that, and we know experimentally that what happens is people stop working so hard. That’s why Jack Kennedy insisted on reducing the top rates.

  36. Icepick said,

    (1) how do you tell the kinds of income apart?

    Well Charlie, you can rest assured that I’m not interested in Lady Gaga’s fortune. But consider the financial bailouts of the last few years – who is benefitting from that activity? How much has Warren Buffet made from the bailouts due to his stake in Goldman Sachs – the bailouts that he and his partners have insisted were necessary? How much are the HFT guys making?

    More importantly, how are they making their money? Buffet, Munger et al have made a lot of money recently because of manipulation of the finance system by the government – which has resulted in more government debt, more moral hazard in the finance sector, a completely fucked up legal system, accounting standards that are worthless, the virtual destruction of about 800 years of contract law – and an economy that is getting even worse for those of us not at the top. When I see fuel and food prices going up so those assholes can make another few hundred million I get my revolutionary zeal on.

    And it’s impossible to look at the HFT guys and think they’re doing anything other than turning the stock market into a zero-sum game that is more rigged in their favor than any game of chance in casino is rigged in the house’s favor. Really, are the BoA guys so good that they haven’t lost money even on one day in three months? Unbelievable.

    As for all the great good they do with their wealth – please. Inductively that argument can be used to say that all wealth should end up in the hands of those whose economic smarts are the best.

    And your examples might have been better if you hadn’t mentioned mortgages. All that “wealth” just blew up the biggest economic bubble in this country’s history – and its popping has left millions of us way fucked and at the mercy of the assholes that run the banks. The millions being foreclosed on and the tens of millions more now underwater have all paid for their mistakes (or lack thereof – see below), but those that set the conditions and profitted most from the bubble are getting away scot-free. And it only cost the taxpayers a few trillion. A bargain at any price!

    Examples of those paying the price: Some friends recently had to buy back their own house when a certain bank foreclosed on it and sold it without informing them. Legally they appear to be completely fucked. They’re lucky that the wealthy investor who bought their house out from under them agreed to let them buy it back at a 50% mark-up. I’m not certain but I suspect that the investor has an in with the bank. I personally know of another case were a bank foreclosed on a home (and sold it) where not only had the owners not missed any mortgage payments, but the bank that foreclosed on the house didn’t even hold the mortgage. The couple that should own the house has been advised by their own lawyers that they maybe should consider moving out before the police come and evict them forcibly. Their lawyers think they’ll probably win in the end. PROBABLY. And it’s THEIR FUCKING HOUSE and the bank is totally in the wrong. These are two cases I now know of personally. (Annie, I found out about this second case after I emailed you about the first one.)

    So sorry, but telling me about the wonders of the investment class just pisses me off to no end. At the moment the investor class seems to be nothing but a bunch of rapacious villians with the biggest gang in the world – the US government – at their beck and call. As for the “violence” of higher tax rates for those asshats, we all know they will just insert loopholes into the code anyway – or just refuse to pay them, like our esteemed Chairman of Ways and Means or our honorable Treasury Secretary.

    The libertarian case for taking it easy on the investors appeals less every day. The whole system has been rigged in favor of the mega-investors – I refuse to feel the least bit of sympathy for those fuckwads.

  37. Icepick said,

    Charlie, don’t worry, those top guys have the system so rigged people don’t even think of how to confiscate their wealth correctly. Early this year much was made of the big bonuses at the big Wall Street firms – particularly the banks. The “populist” call (from a media completely owned by big business – and from “leftist” groups owned by the George Soros’s of the world) was to tax the banks. Of course, taxing the banks won’t get at any of that wealth – it will only increase the costs on the bank customers. So the investors are safe yet again.

  38. Randy said,

    So the investors are safe yet again.

    Minor correction ‘pick: “The insiders are safe yet again.” The investors (by that I mean the average stockholders) occasionally get screwed. I wish I could find that report about changes in corporate ownership over a ten year period beginning about the middle of the Clinton Administration and ending in the middle of the Bush years. During that time, insiders helped themselves to a 100% increase in their stock holdings of their publicly held corporations, almost entirely due to ridiculously low-priced options. Where were the outside directors? Lining up next to them, as their share of the booty was tied to the grants provided the insiders. Modern large corporate management bears virtually no responsibility for its any of its actions except to agree to be paid a small, or large, fortune to resign when caught out. Directors who enrich themselves first and ignore their fiduciary responsibilities at every opportunity pay no price whatsoever for their negligence once finally discovered.

  39. Randy said,

    Inductively that argument can be used to say that all wealth should end up in the hands of those whose economic smarts are the best.

    That line in particular appears to be a fair summation of Charlie’s argument thus far.

  40. Icepick said,

    Randy: Minor correction ‘pick….

    I stand corrected!

    Maxwell: I would welcome a new tax bracket for people who make over a million dollars every year.

    The AMT was originally designed to catch the cream of the crop. I’m sure you know how that worked out. ;) Rest assured that loop holes will be put in place to allow the big guys to escape taxes, while bracket creep and the need for more cash for the government and its employees will guar-an-damn-tee that the plumbers doctors and such end up bearing the brunt of it.

    There’s no hope of saving the country (I hesitate to call this a nation any more) without a significant reform of our tax system. And that ain’t happening.

    Don’t bother telling me I’m cynical. That would only make me ask if I’m cynical enough.

  41. Dave Schuler said,

    As I said above, there’s a simple answer to that: take more of their money through taxes.

    It may not be quite that simple. Doesn’t it depend on what is done with the money once it’s taxed away?

    If you tax Bill Gates to give the money to Warren Buffett I don’t think it does much about income inequality. Similarly, if you tax the top .1% to give to the next 4.9% of income earners, it constrains how much it addresses income inequality.

    I haven’t seen much in the way of proposals for direct grants to the poor. Most of the ideas I’ve seen involve redistribution to doctors, lawyers, teachers, school superintendents, and so on. Mostly transferring from the top .1% to the top quintile. Top two quintiles at best.

    I don’t think that’s either effective or moral.

    And when you stop looking at income solely in the U. S. and look at world incomes it becomes even more absurd.

  42. Icepick said,

    Randy, I gave up on strict libertarianism as a young man. It seems like decades ago in part because it was. But libertarians just don’t seem to understand that those who hold wealth and power tend to use that wealth and power to rig the system in their own favor. That’s no Marxist argument either, but a simple acknowledgement of the human condition. A smaller government ‘footprint’ won’t stop that any more than a large government ‘footprint’ – one only has to look at the 19th century robber-barons to figure that out. Or even 18th century speculators such as Alexander Hamilton. None of it seems all that much different than what Crassus did to accumulate his fortune back in the first century BC. Or how a clever Jewish kid manage to buy all the land in Eygpt back in the day. (I’ll note that Pharaoh only demanded 20% from the serfs.)

    Some initial wealth, coupled with insider knowledge or connections, leveraged into more wealth than most can imagine. Occasionally one can still hear the phrase “richer than Crassus” from some old worthy or classicist – and there’s still usually a negative connotation.

    (Annie: The Book of Genesis has to be the worst PR campaign ever waged. Did the Jews ever consider starting the Torah with Exodus instead?)

  43. Randy said,

    Dave: Your last line reminds me that there have been more than a few studies that show that almost all foreign aid ends up in the Swiss bank accounts (or the equivalent) of the elite of the elite of the countries receiving the aid, and what isn’t diverted ends up freeing up local funds that would otherwise have to be used. These freed up funds in turn end up being exported to Switzerland.

  44. Icepick said,

    Dave, at the moment we could take from the top 0.1% and use it to pay off the federal debt. We could do that for a long time and not run out of debt even if we went to a completely balanced budget tomorrow. (And that last part ain’t happening.)

    In many ways that will also just transfer wealth from a fractionally small part at the top quintile to another fractionally small part at the top quintile – but it might get some of the rest of us off the hook in the meantime. A crazy idea, I know!

    And no need to worry about the deflationary pressures as they’re already here at the macro-level. Meanwhile us serfs and plebes will continue to pay more for fuel and food, but that was going to happen anyway.

  45. amba12 said,

    The Book of Genesis has to be the worst PR campaign ever waged.

    Yeah. Lotsa smiting. Men, women, and babies.

  46. Icepick said,

    Randy, I excised a part in comment 36 about the productive uses to which Buffet and Gates would apply their wealth – piss it down some rat-hole in Africa where it will end up in the Swiss bank account of the most vicious warlord in the region. The least they could do is pull a JPMorgan and build more museums and such in this country. I guess that will work out well for the Swiss bankers….

  47. Charlie (Colorado) said,

    There are two underlying issues here.

    First, there’s the unstated (sometimes) assumption that having lots of money is per se bad. If you start with that assumption, then you’re going to pretty inevitably come to the conclusion that, well, having lots of money is bad and so should be punished. That it’s a vacuous conclusion won’t show up until you start examining your assumptions.

    Once you have that assumption, you can come quickly to the opinion that making lots of money is bad. But then you run into some issues, because you then have to account for the way that people making lots of money often do so in ways that are good. Bill Gates pretty much invented an industry. The Google guys turned zillions of web pages into information, while pretty much establishing the basis on which the whole of the Web had turned into what it is now. Lady Gaga gave millions of people enough pleasure with her music that they all gave her 99 cents to listen. So you start looking for “right” ways and “wrong” ways to make lots of money.

    (Or you bite the bullet and insist that all ways of making money are bad. If so, then put down that computer and walk away — you’re just contributing to the evil.)

    Warren Buffet invested in a bunch of companies over the years, which then grew, providing things people wanted; he made money. Then, during a period where it looked like the whole banking system might go under, he put up $5 billion in a risky investment in one of those banks. He made some money on it. he also helped keep the middle class in the US off bread lines. Go look up what happened in Argentina.

    The point is that I don’t think you can be honest with yourself and hold that having lots of money itself is bad in itself. You can make a better case that manipulating the government to get money “for free” is bad.

    But by proposing confiscatory, or merely punitive, taxation as the solution, you’re not punishing the behavior you purport to be punishing — unless, of course, you really do think merely making money is bad. What’s more, the higher you raise the rate of taxation, the more you reward the very rent-seeking behavior to which you purport opposition.

    In fact, this is inherent and unavoidable: if you raise the tax rate from 30 percent to 50 percent, you make it worth 50 cents on the dollar to find (or by lobbying, legislate) ways of avoiding taxes. Raise it to 90 cents and the reward is even greater. If you raise the tax rate to 90 percent, but by spending 10 cents on the dollar on lobbying you can keep the rest, what’s your rate of return?

    Answer: one helluva lot more than you get from a productive use of the money.

    So — what’s the answer? It somewhat depends on what you think the goal is.

    If you simply want to eliminate income disparities, you can do that — take every penny from every family that makes more than about $50,000 and had it out to all the families that make less. The problem is that this has been tried; the places that have been most successful had to build walls to keep people inside.

    (And by the way, go read a few Nero Wolf books: they were written in the days of 90 percent marginal rates, and Wolf, sure enough, would stop working as soon as he reached that point for the year. Wolf was fiction, but the effect was a fact.)

    If what you’re really concerned about is people who make big money by rent seeking, then change things so as not to reward rent-seeking. The only way anyone has ever found to do that is by eliminating the opportunities for rent-seeking. Then, if income disparities are greater, at least the money is being earned by doing something useful.

  48. Randy said,

    ‘pick: I’m not particularly wild about strict libertarianism myself, probably because I lived in Hong Kong while young. Many ignorant libertarians, and an amazing number of intelligent ones, once held it up as a sterling example of libertarianism in practice. Almost all of them chose to ignore the non-libertarian aspects of life there, such as about 50% living in public housing estates, (600 sq. ft/family of 4 – toilets down the hall), and a host of other things, like the overwhelming political and economic power of the bank, (Hong Kong & Shanghai). The accompanying rampant corruption and lack of genuine political freedom was considered a feature, I guess.

    IMO, where the Marxist and the libertarian idealogue become indistinguishable is in their belief that a tiny percentage of the population is entitled amass whatever they want (power and/or wealth) however they want because they are inherently superior to the peons at managing it.

  49. Charlie (Colorado) said,

    It may not be quite that simple. Doesn’t it depend on what is done with the money once it’s taxed away?

    That’s an excellent point: once it’s taxed away, it becomes another pool of money for the rent-seekers. PJ O’Rourke once wrote that there was no poverty in the US and he could prove it, because if you took the money spent on poverty programs, and divided it by the number of people under the poverty line, you got an amount of money per person that exceeded the money needed to get above the poverty line.

  50. Charlie (Colorado) said,

    So sorry, but telling me about the wonders of the investment class just pisses me off to no end.

    Too bad. Your anger isn’t an argument.

  51. Randy said,

    Charlie: Do us all a favor and check your straw men at the door. No one here has made or implied this assumption which you are yet again repeating:

    First, there’s the unstated (sometimes) assumption that having lots of money is per se bad. If you start with that assumption, then you’re going to pretty inevitably come to the conclusion that, well, having lots of money is bad and so should be punished. That it’s a vacuous conclusion won’t show up until you start examining your assumptions.

    Another straw man, IMO. You have the talking points down good, Charlie. We’ll give you an A+ for rote learning:

    But by proposing confiscatory, or merely punitive, taxation as the solution, you’re not punishing the behavior you purport to be punishing — unless, of course, you really do think merely making money is bad.

    Where is anyone advocating confiscatory taxation, Charlie? I think that the only one bringing up 90% rates is you.

  52. Icepick said,

    There are two underlying issues here.

    First, there’s the unstated (sometimes) assumption that having lots of money is per se bad.

    Wrong. We’re sick of people getting rich from screwing others. I confess I think Lady Gaga is just a watered down imitation of Madonna – but she’s putting out stuff people want. On the other hand, Goldman Sachs getting paid out 100 cents on the dollar BY THE TAXPAYERS for insanely bad investments reeks. So do all HFT trades.

    Bill Gates pretty much invented an industry. The Google guys turned zillions of web pages into information, while pretty much establishing the basis on which the whole of the Web had turned into what it is now.

    Bill Gates got lucky when the Unix guys had an attack of principle and Gates was able to buy an operating system on the cheap in order to satisfy IBM. Then he got lucky that IBM was in too much of a hurry to come up with their own proprietary stuff. And all of what was being done was just cribbing the work that had been done at the Xerox PARC a decade earlier. (If Xerox had realized what they had they would own the entire planet by now.)

    Google didn’t do anything really new – they just did it better than others had, and realized that they could turn the entire WWW into a billions of tiny billboards. There whole fortune rests on being ad-men when it comes down to it – just a cloud of commercials.

    And both M$ and Google have made a lot of money by buying up potential competitors or targeting competitors for destruction.

    I don’t really begrudge those guys their fortunes too much – but I still miss Eudora at times, and my wife still occassionally pines for WordPerfect. So much for a rational market – superior products got killed by bundling and advertising. But at least Excel, Outlook and Word are decent programs now. But I will never forgive M$ for PowerPoint.

  53. Randy said,

    ‘pick, FWIW, WordPerfect sealed its own fate when they refused to develop a Windows version. IIRC, at that time, they were still the dominant player in the market and MSWord an also-ran.

  54. Icepick said,

    Warren Buffet invested in a bunch of companies over the years, which then grew, providing things people wanted; he made money. Then, during a period where it looked like the whole banking system might go under, he put up $5 billion in a risky investment in one of those banks.

    Risky? What was risky about it? He already knew the government was going to back-stop the big investors. He just saw an opportunity for a cheap buy. I note that he bought into the American firm that got the most free money, GS, through the AIG conduit. Now if he had bought into Citi he would have been taking a risk….

    If what you’re really concerned about is people who make big money by rent seeking, then change things so as not to reward rent-seeking. The only way anyone has ever found to do that is by eliminating the opportunities for rent-seeking.

    Uunfortunately, the people making money by rent-seeking have rigged the system so that rent-seekers run the show. (That includes government unions.)

  55. Randy said,

    Charlie: It sure sounds like that, in your opinion, all of the tremendous amounts paid to AIG insiders right up to the day the company virtually collapsed was fair compensation for services rendered. And their directors met their fiduciary responsibilities to boot.

    Why then are the taxpayers of the United States of America left with so many bills?

    If Goldman and others were too big to fail, does the government have no responsibility to prevent them repeating their mistakes, given that the taxpayers of the United States of America are now committed by precedent to bailing them out should they do so? (Goldman, btw, has an historical pattern of nearly self-destructing about every ten years.)

    Were you making the same general argument in favor of GM? I don’t recall reading it if you did.

  56. Randy said,

    Now if he had bought into Citi he would have been taking a risk…

    No, that would have been a outright gift of money never to be returned ;-)

  57. Icepick said,

    Too bad. Your anger isn’t an argument.

    Neither is your smug sanctimoniousness. The difference is that I am getting angry over injustices I know of personally, and your snide moral superiority comes from arguing against positions that no one here holds.

    Most people, and I imagine everyone on this forum, are fine with inventors getting rewards for their cleverness. Most are a bit annoyed at the amount entertainers and athletes make, but ultimately accept it.

    But we’ve had inventors making big nuts since the time of Edison (Archimedes didn’t get paid all that much), and we’ve had over-paid athletes and entertainers at least since the 1920s.

    Hell, we’ve even had slimy financial types for centuries now.

    So why the income disparities now? As Dave Schuler points out time and again, a few zip codes manage account for most of that disparity. But the guys in Silicon Valley and in Washington state don’t really get people’s dander up. But those making their money on Wall Street do. That’s partly do to the usual human distaste for usury.

    But it’s also because it has become obvious that they have co-opted the government. The poor and uneducated speak of the crooks running the show and buying the pols. Those farther up the latter speak of regulatory capture and rent-seeking. But it’s pretty damned clear to everyone at this point.

    TARP, TARPII, HAMP, ARRA, sinking the little banks while propping up the big banks, quantitative easing and the purchase of $1.25 trillion (that’s a million millions) in toxic assets, a central bank outside of government over-sight keeping interest rates for the big guys artifically low for almost a decade, QE2, not-so-arbitrary changes to accounting rules, QE2, etc, etc. Even if one lacks the background to understand that stuff, it becomes clear after a while that it’s the biggest of the big who are getting bailed out – at the expense of the rest of us.

    And that these very phenomona are helping make the richest richer while the rest of us sink.

    But if you want to talk about Lady Gaga’s latest 99 cent download, be my guest Charlie.

  58. Icepick said,

    FWIW, WordPerfect sealed its own fate when they refused to develop a Windows version. IIRC, at that time, they were still the dominant player in the market and MSWord an also-ran.

    Hmm, I’m pretty sure I have it running on an old Windows 2000 machine that had previously run Windows 97 and even something before that.

  59. Randy said,

    What I meant to say was that they delayed too long in introducing a windows version, and by the time they got around to doing so, their large customer base had already begun migrating to Word.

  60. Icepick said,

    No, that would have been a outright gift of money never to be returned ;-)

    Well, few investments are riskier than flushing money down a toilet in expectation of a positive ROI.

    Charlie: It sure sounds like that, in your opinion, all of the tremendous amounts paid to AIG insiders right up to the day the bank collapsed was fair compensation for services rendered. And their directors met their fiduciary responsibilities to boot.

    We’ve managed to take the agency problem to new heights – directors who don’t really have much financial interests in ‘their’ companies holding their piositions at the behest of senior management who get paid oddles of money no matter what the result. And the putative owners of the companies are 401(k) mutual funds, day traders and hedge funds – none of which are actually all that interested in the companies themselves, but only in those companies hitting three JACKPOTs on their quarterly earnings reports so that the current holder of a stock can sell it off to the next sucker. (Or worse, leverage the stock to purchase something else.)

    And for the favored few, a government willing to make certain that a profit is turned no matter what.

    Every now and again I’ll hear someone on an old TV show or movie say something like “I own Ford” or “I own Coca Cola”. These days one is more likely to say “I own Ford stock.” Perhaps I reading too much into the presense of that one word, but it does seem to be an entirely different mind-set.

  61. Icepick said,

    What I meant to say was that they delayed too long in introducing a windows version, and by the time they got around to doing so, their large customer base had already begun migrating to Word.

    Ah, now that fits with my memory.

  62. Randy said,

    Thanks for that trip down memory lane. Reminded me of the first word processor I used: Multi-mate. On a PC-XT purchased w/in months of introduction thanks to company special purchase program. (Wasn’t Multi-mate basically a rip-off of a Wang word processor?) My brother was a WordStar aficionado. IIRC, WordPerfect cribbed from Wordstar and a lot of the universal quick-key strokes we still use today are from WordStar.

  63. Icepick said,

    But who ended up making the most money off those little tricks – the Wordstar creators or Bill Gates?

  64. wj said,

    It seems like it would be helpful to distinguish between wealth and income. Granted, you (or someone) had to have income initially in order to generate wealth. But I think what exercises most people is not the great wealth that some people have amassed so much as the enormous incomes that some people are getting.

    And the reason (or at least a major one) that the income disparity upsets people is that there does not seem to be any strong correlation between the salaries of the highest 0.1% and what they actually contribute. Some, e.g. the guys who founded Google, made a huge contribution to their company. Others seem to do very little. But even those CEOs who run their companies into the ground end up getting huge incomes while they do so — Carley Fiorina at HP being just one example.

    I think the same paradigm ought to apply, whether we are talking about CEOs or local school teachers: your salary ought to be related to your performance. And, in both those cases, it is not. In the case of teachers, it’s the best ones who are penalized by the lack of pay for performance; in the case of CEOs, it’s be poor ones who are rewarded. But the principle is the same.

  65. Maxwell James said,

    Charlie,

    I’m sure you would find it irritating if with every post here I implied that you thought tax cuts inevitably increase tax revenues, or that taxation is literally theft, or that the only fair tax is a flat tax. So please stop implying that everyone who disagrees with you wants to impose a top marginal rate of 90% or thinks that any disparities in wealth are bad. I don’t believe either of those things, and I don’t think anyone else here does either.

    You may also be surprised to know that the existence of a phenomenon called deadweight loss is not news to me. Yes, increasing taxes results in deadweight loss. But you know what? It’s not as if we don’t have deadweight loss already. Every society accepts a certain amount of deadweight loss, particularly in order to preserve cultural values. I believe we are best able to foster growth through simplification of the tax and regulatory codes, and I’m willing to counterbalance that somewhat by increasing taxes, and therefore deadweight loss, on the very top end. If we could implement Wyden-Gregg next week but add a 45% top marginal rate for people making over a million dollars a year, I’d consider that a huge step in the right direction. And that’s for a bill that would increase my own personal tax burden.

    PS – I’m a big fan of the Nero Wolfe mysteries, and yes his character is a good illustration of how tax burdens can cause some people to work less. But it’s worth remembering that
    a) a 90% marginal rate is _extremely_ high,
    b) only very wealthy freelancers have that much control over their schedules,
    c) Nero is a fictional character with certain personality traits. Yes, he’s highly taxed, but as Archie constantly reminds the reader, he also _hates working_. You can’t take one aspect of the character without the rest.

    As someone who would prefer a happier society to a wealthier one, I think some people should arguably work less.

  66. amba12 said,

    Excellent point, wj, and that’s where what Charlie has been saying can be reconciled with the rest: no one really objects to the rewarding of competence. It’s the rewarding of incompetence that galls. Automatic lavish compensation just for being “up there,” even if you’re a dead weight or a detriment. As you spotted, this is true of both bad CEOs with golden parachutes and tenured bad teachers.

    These are of course not the only two simple categories of performance. Bill Gates was rewarded on the scale he was partly for being a ruthless competitor — a more competent empire-builder than software creator. (Maybe that’s why he’s so obsessed with philanthropy now.) But still, people grudgingly allow that being a highly competent business strategist is a legitimate way to make a lot of money. Competition is the game. Disabling competition, protecting people from its natural outcome — that’s cheating.

  67. Maxwell James said,

    Dave,

    It may not be quite that simple. Doesn’t it depend on what is done with the money once it’s taxed away?

    It does. This thread hasn’t really touched on spending so I haven’t dug into it. We’ve talked about it before so needless to say, I’m not a big fan of our current spending priorities and would vote to change them considerably.

    Icepick,

    It’s not really my style but I’ve come to have a fair bit of respect for your brand of cynicism.

  68. realpc said,

    “Bill Gates got lucky when the Unix guys had an attack of principle and Gates was able to buy an operating system on the cheap in order to satisfy IBM. Then he got lucky that IBM was in too much of a hurry to come up with their own proprietary stuff. And all of what was being done was just cribbing the work that had been done at the Xerox PARC a decade earlier. (If Xerox had realized what they had they would own the entire planet by now.)’

    Xerox didn’t realize. And hardly anyone saw any use for personal computers. Bill Gates was able to see that when he was still a kid. We have a system where if you are the first to recognize some potential, and you act on it. you can get insanely rich. It requires a lot of luck, but also a lot of foresight. In my recent post I explained that precognition has been demonstrated in scientific experiments. Well maybe some people have great precognition about certain things. Bill Gates did, in my opinion.

    I am not glad Bill Gates, or anyone else, is insanely rich. He deserves to be rich, but that level of wealth gives one person too much power. HOWEVER, there is not much we can do about it. Trying to make things fair almost always makes them even more unfair.

    Socialism is the perfect example of how terribly unfair “fairness” can be.

  69. realpc said,

    But the bank bailouts were insanely unfair. The “experts” are telling us that things would have been much worse without the bailouts. Well how the heck do they know? They don’t know, and we are not stupid enough to believe them just because they are “experts.”

  70. Icepick said,

    wj’s comment 64 – excellent, and I agree completely.

    Maxwell’s comment 65 – also excellent, although I have some disagreement. I think the whole current income tax system should be scrapped infavor of something else. I have favorites for the replacement, but I’m willing to accept seveeral options. That said the tax scheme you mentioned WOULD be a huge improvement over the current mess.

    As for my cynicism – it’s getting worse by the day. I spent my first year unemployed looking for work. I spent the second year studying for a new career (hasn’t panned out) and learning much more about finance, economics and the interplay between our ‘private’ sector and ‘our’ government. That merely increased my cynicism. As has the fact that I’m past the halfway mark in my third year of unemployment. Meanwhile all the idiots at my former company that were predicting 5% GDP growth starting in 2008 and projecting to the end of time are still employed.

    RealPC’s comment 68 – That is a fair and excellent point about Gates. He made huge sacrifices (by normal standards – he may not have thought so) to be in the position to get lucky when IBM came calling. But it was still luck in the end – the UNIX guys really screwed the pouch on that one.

    Your comment 69 – No one can be completely sure what would have happened if the TARP bailout hadn’t been implementded – but it certainly didn’t look good. I would have preferred a different bailout scheme than what was implemented, but the important thing was to let everyone know that there were assurances that the whole system wouldn’t freeze up. The big problem was that no one knew who owned the crap. (It turned out it was pretty much everyone.)

  71. realpc said,

    ” I would have preferred a different bailout scheme than what was implemented, but the important thing was to let everyone know that there were assurances that the whole system wouldn’t freeze up. The big problem was that no one knew who owned the crap. (It turned out it was pretty much everyone.)”

    Do we really know what would have happened if they did nothing and let those companies fail? Maybe we would be better off right now. Maybe they did the bailouts in order to look like they were doing something, because it looks smarter than doing nothing. But was it really smarter? How can we know?

  72. wj said,

    We were not entirely certain in advance what would happen without TARP, although Lehman Brothers gave a hint. But we are in a different position today.

    By now, we have a handle (albeit not a total understanding) of who owed what to whom. Which would allow us to analyze what would have happened if one of them had gone bankrupt. That would still underestimate the knock-on effects from lack of confidence, inability to conduct day-to-day financial transactions because the company’s bank was no longer in business, etc. But it is enough to give a picture of the scale of the impact.

    So, while perhaps we do not know, we can know if we are willing to work it out.

  73. Icepick said,

    Another problem with TARP was the follow through – afterwards some of those insitutions SHOULD have been allowed to fail, but in an orderly fashion.

    But the way things were going post-Lehman I do think (but don’t know) that something needed to be done. There was a significant risk that the whole banking system was going to shut down. The follow up has been disasterous – it has simply doubled and tripled down on the failures of the past.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: