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04/18/2010

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Roger Chittum

I agree the focus should be on raising middle incomes instead of lowering the highest incomes, but not because I think lowering top incomes some would cause important disincentives. Lowering top incomes would increase the returns to capital but not increase middle incomes or aggregate demand much. Posner seems to assume that any substantial changes in economic policy will make things worse rather than better. I disagree. Not only have real cash wages been stagnant since 1973, but labor force participation rates for men have been declining since then and for women since 2000. The US economy is inefficient because it is not creating enough jobs here at home (although it has done a marvelous job of creating them elsewhere). Substantially continuing the policies of the last 30 years cannot rationally be expected to start producing different results.

Basically, we have to make a decision whether we want (i) middle class incomes to stay stagnant or decline so they can better compete on price with competent low-wage workers abroad or (ii) domestic wages and workforce participation to rise to produce a healthier domestic economy, in which case there must be some protections against foreign wage competition. The elephant in the room is that there is no set of policies that can increase globalization and simultaneously increase personal incomes for middle class Americans. We have to pick one objective as paramount. If we pick (i), the serious fiscal problems Posner cites, and others, will persist until falling domestic wages levels have converged with rising foreign wage levels.

blake

yay! what a good post, though you might as well throw state governments and the military and the bailout in with the stuff costing too much. I don't see why students can't bring half of the funding they would bring to a public school to a private or charter school? It seems to me that would leave more dollars per student at the school she chose to leave, and provide a very meaningful subsidy to her getting out of a school she didn't like for whatever reason. I have yet to hear a solid argument against a compromise that falls in that range, other than it will allow for strange private schools cropping up(it should not go for home schooling imo). That is a real threat, but parents are somewhat qualified to decide, and our current system seems expensive for the results it produces.

sussanlin

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Jack

Blake, you can find lots of informative debate on vouchers for education. Some of them go something like this:

While it may look kinda glossy at first glance problems abound. That student packing a half-funded voucher will soon find little choice, so such a program is largely for those who can afford voucher-plus and plus-plus. Soon, after those people are paying a substantial cost for "their" private school the support for our long tradition of universal, free public education will erode leaving those students with a choice of crumbling public schools or low-buck voucher only schools.

In another dimension public schools are where we learn understanding and acceptance of those of differing religions, ethnicities and economic strata. As you might imagine those of certain religions or economic strata would tend to congregate with their peers. In the case of religious schools, while you might finesse the separation of church/state problem, today private schools can and do exclude students on about any criteria they choose. Once they accept government money, like colleges today, that's the end of discriminating, most likely including more costly special needs kids.

Rick

An excellent post. Addressing income distribution need not require "bleeding the rich". When the government has money for tax cuts, the simple answer it to always cut taxes at the bottom. That way, everyone gets more, but it makes more of difference to the margins of the poor.

Dr. A. Bajaj

Is it not likely that, as a population in a system (like the USA) grows, and as technology takes care of basic human needs for all, that income will fall, even though perceived standards of living may rise?

More people working and providing goods and services to each other, but advanced technology requires less from the common worker than before, hence median wages fall.

THis may be desirable.

But, if you want wages to keep rising then here is a Solution:
Said system must become an elite exporter of technology that the other systems (nations) want. This was the state of the USA from 1945 till about 2000. Not anymore. We need more elite technology coming out. Fundamental research will need to be encouraged. A real push towards science will need to be done.

Healthcare is sapping our resources so we cannot pus towards innovation.

Just my 2 cents.

GS

You have totally ignored the impact high levels of unskilled immigration have had on the bottom two quintiles of Americans. In fact, immigration has been so large that the skill level of the bottom two quintiles of Americans has declined significantly over the last 20 years.

NEH

Economic anxiety due to stagnating wages? Try economic anxiety due to job loss not just once, but multiple times within a three to four year time frame. Something rotten in the U.S.? You bet.

Never fear, the solution is to "let them eat cake". Or is it? At least Bismark was fully aware of the value of full emplyoment at a livable wage. Something Germany still tries to practice today and because of it is Europe's largest exporter.

Jack

Roger: You make a great point in noting a drag on US productivity due to unemployment and underemployment. Even in the "good times" of "full employment" I'd thought the amount of retail and low wage "service" sector jobs were indicative of our not creating nearly enough career jobs that pay the bills and create demand for easily produced excess production.

Your other point suggests other questions:
"Lowering top incomes would increase the returns to capital but not increase middle incomes or aggregate demand much."

.... Does concluding that any returns not given to top earners indicate either such market power that prices would not fall in order to be more competitive with other nations that do not pay such exorbitant salaries to top execs? or that those at the lower (stagnant) sector who've helped to double productivity but not benefited, have too little market power to improve their lot? Interest too that the returns might accrue to "capital" which in most companies are the who provided much of the capital but also have weak voices these days.

Roger Chittum

Jack,

My friends on the left attack executive compensation because they seem to assume the excess will get spread around to lower paid people. My friends in the investor class want excess executive compensation eliminated to improve the bottom line and their stock values. My assessment is that generally speaking labor has lost its bargaining power and would get none of any reductions in executive pay because, on average, sole production workers stopped sharing in productivity increases after about 1975. That leaves improved earnings as the likely beneficiary of any return to sanity in executive pay. I agree with your points about market power: It is the way it is because US markets are broken and CEOs have market power and labor and shareholders don’t. http://www.realitybase.org/journal/2009/1/17/two-hypotheses-for-why-us-ceo-pay-is-so-high.html

As another reason not obsess about excessive executive compensation, it doesn't seem to be enough money in the aggregate to have significant macroeconomic effect. For example, ousted GM CEO Rick Wagoner's total compensation of $14.9 million in 2008 was 0.01% of COGS ($2 for a $20,000 vehicle), and Jeff Immelt's compensation equaled $48 for each of GE's 323,000 worldwide employees (2.4 cents per hour). http://www.realitybase.org/journal/2009/9/21/the-problem-with-executive-pay-is-not-the-size-but-how-they.html

Jack

Roger: This one is a "truism" of the wage-race-to-the-bottom right, but is there truth to it?

"The elephant in the room is that there is no set of policies that can increase globalization and simultaneously increase personal incomes for middle class Americans."

First, both our Proffs agree that average per capita wages have increased considerably while those of median incomes and below have fallen behind and not shared in the increased productivity or total wages.

Secondly our economy is not a zero-sum or static model. Consider what changes might take place and did take place, if we were in a tight labor, full employment era like the '60's. As labor became more costly we'd respond with more efficient mechanization and use of scarce labor as we always have done. Those in marginally productive jobs like retail and fast food would be drawn to higher paying and more productive enterprises, with no harm done to retailing which would quickly adapt to more efficient models or higher productivity per employee.

At the "top" those now engaged in the shell games on WS of creating shoddy financial products to pawn off on more naive buyers and garnering 30% of all the profits of the US in a recent year would also be drawn to more productive enterprise.

Given that the world markets are increasing from the billion or so of advanced nations to four or more times that number it would not be surprising the good jobs of the future might be in designing exporting expensive products like windmills or millions of inexpensive computers or other electronics, while our big project guys now bilking the military in the M/E might be heading up roads or other large infrastructure projects in lesser developed regions.

In short the road to lower wages (apparently for all but the top 6.3% eh??) in hopes of "competing" with such as China leads to the bad ending of "Get 50 guys out here with shovels" instead of "Bring a couple guys with a backhoe."

NEH

Dr. Bajaj, where have you been? At one time the majority of American Heavy Industries had magnificient and advanced R.&D. facilites that were the envy of the World. No longer. They were sacrificed and shut down years ago in the interests of ever greater margins by the CFO's, Board of Directors and Accounting Exec's. As for "Electronica gizmo's", these are usually done by small startups and fabricated overseas. Much like the world's largest newest advanced solar cell fab. plant being located, guess where, China (utilizing global labor arbitrage and statist controlled capital). Does us a lot of good...

We're behind the eight ball now and it's going to take a lot of moxy and intelligence to get us back into a leading position again.

blake

jack, those are indeed all valid concerns, but they aren't the controlling question, Can a private school(selecting their students) outperform a public school on the same budget? I think yes, in at least some cases. On half the budget, I still think ya, in some cases. I think the average public school budget was like $10,000 a year per student/year. I think that if you gave private schools a 5k a year subsidy per student that private school populations would explode, leaving public schools with a lot more money/student. It's a far from perfect situations, but I'm afraid it would be an improvement on the status quo...

NEH

Blake, Have you ever priced a Private School? I know of one right here in my neck of the woods, that charges $21,000 dollars a year tuition. Now, using your numbers, if the student gets a $5,000 dollar a year subsidy to go to this private school that still leaves a $16,000 thousand dollar a year tuition bill. Now how many average American households can afford that? Now' if it costs $21,000 a year to educate in a private school versus $10,000 a year in Public school that's an additional cost of $11,000 a year per student. Now where's the economy in that?

Furthermore, as to the Private Schools success rate, in terms of Academic achievment, I won't mention that in order to enroll in this school, one has to take an IQ test and qualify with an IQ score of a minimum of 135 (we're entering the top IQ percentiles now). Not too mention, there is a requirement that applicants score two grade levels above their peers in standardized testing in order to be accepted. With these types of standards, I should hope that the Private Schools excel in comparison to Public Schools. Should I also mention, the plundering of the gifted students from the general student population that in the end pulls down both median and average test scores within the Public Schools? How elitist.

Jim

NEH,

Well said but maybe the solution is to let the public schools act like a private school in terms of dicipline, standards of behavior, faculty discretion, expectations, parental involvement, etc. Even now some 15 years later, my 28 year old son can recite chapter and verse his dislike of the chaos and inefficiency of his public school years and the his opinion that he would never subject his own children to that. More money will not accomplish that. And don't forget that education should create a culture of values as well as competency to function in a modern economy. It is going to be a long slog.

Trent Rock

Great post Prof. Posner!!

"Economic anxiety can produce dire economic consequences by increasing the demand for trade protection, for restrictions on immigration, for union protections, for other anticompetitive measures, and for government subsidies; it can also create class resentment, and thus lead to inefficient regulatory policies, as we may be seeing with proposals to “rein in” the “greedy” banks."

So true...very true.

I also notice that Joe Man On The Street thinks that in 2010, the LEVEL of greed is higher. AKA "unfettered greed". And Capitalism itself is a target these days. :(

"Nonetheless, many people, and especially intellectuals, passionately loathe capitalism. As they see it, this ghastly mode of society’s economic organization has brought about nothing but mischief and misery. Men were once happy and prosperous in the good old days preceding the Industrial Revolution. Now under capitalism the immense majority are starving paupers ruthlessly exploited by rugged individualists. For these scoundrels nothing counts but their moneyed interests. They do not produce good and really useful things, but only what will yield the highest profits. They poison bodies with alcoholic beverages and tobacco, and souls and minds with tabloids, lascivious books and silly moving pictures. The “ideological superstructure” of capitalism is a literature of decay and degradation, the burlesque show and the art of striptease, the Hollywood pictures and the detective stories."
http://mises.org/etexts/anticap.pdf

Jack

Roger, completely agree with your first paragraph and don't dispute the math of the 2nd, however it's still the case that 6.3% of "earners?" garner 30% of the wages in the US. The aglomeration of wealth is similarly skewed At some point after housing and commerical R/E hits the bottom with the former owners wiped out those with a few bucks pick up yet more assets on the way up.

Contrary to the wishes of our proffs, I favor (need it even be said?) strengthening the market power of working folks. And there is some hope.... union busting rules of the Reagan era may be reformed and a bill is moving to allow secret balloting on unionizing a shop. SEIU's cross service industry efforts seem to be gaining some momentum and they are well aware and responding to the need to act internationally.

Something needs to be done to modernize stockholder rights and improve their influence. In theory they are the owners and should be guiding directors who then should be working on behalf of the stockholders both with respect to setting of wages and protecting the future of the company. Today those stockholders range from mutual funds, to small investors the world over. Instead of strong and interested hands that might have held ATT, IBM or other for a generation or so, today at the click of a mouse they're likely to bail at the least sign of a disappointing quarter or two.

It's been a while since I've heard of "corporate raiders" as Boone Pickens who'd threaten, or execute a takeover that often improved shareholder value. Today, it seems there are many who are parting out our companies, perhaps as in selling Chrysler twice with Daimler skimming off tech and patents and cash, or worse selling the whole biz off to low wage venues.

Do I insist on the middle and lower income groups participtaion in productivity gains soley from a standpoint of "fairness?" No....... the most important factors are that the stagnant wages MEANS a stagnant economy for most of us, and that means a demand limited environment for offing easily produced goods that are in surplus supply. When strapped consumers put off buying or upgrading a computer both they and Dell, Intel, MSFT and someone in Taiwan suffer.

Jack

Blake: I'd only add to NEH's comments on getting education "on the cheap" via private schools that it's a labor intensive business not prone to improvements in productivity. In running a full service shop you're pretty well stuck with the costs of one teacher/20 students, administration that these days means dealing with special ed, co-ordinating with Fed's including the costly addition of No Child Left Behind, mandates, bus service, and sports.

Thus the only way you can get private schools at lower costs is by chopping wages.

Now our proffs commented on anything limiting the gleanings of the highest income set "reducing incentives" but somehow??? they'd rather weaken teacher unions and pound down pay and working stds.

A bit of history: In the 50's and earlier the career options for women were few as they were excluded from many professions, and womens pay lagged that of men by considerable margins. So, until recently low paid, mostly women teachers have subsidised education. Today, as those teachers are retiring in droves, young women can enter about any field.

So... if teaching pays yadda and lawyering pays two yaddas and WS pays five or more etc. how do you and our profs expect to draw talented, dedicated, "accountable" teachers? and retain them?

blake

That sounds like a creepy school, but super-villain academies aren't going to take over the country any faster with a 5k per kid subsidy(well a bit faster but that market would be relatively unaffected I would expect). They might even lose some students if a new crop of more affordable private schools lured some parents into paying less. I agree there would be all kinds of negative consequences, but the status quo is unacceptable. Letting kids take 1/2 of the money the school district gets to educate them with them when they go, the public school still gets half the money for doing nothing. Let them take that money to a neighboring public school if they like and the public school is ok with that for some price. Giving kids and their parents more options strikes me as giving power to the people most effected by it, giving people who currently have few choices a lot more opportunities.

"Parochial schools are even more affordable. The National Catholic Educational Association reports that the mean tuition for parish elementary schools is $2,607 and $6,906 for the freshman year of secondary school. (Thank you, Pope Benedict)" I copied and pasted this bit

Chris Graves

The empirical methods used to calculate degrees of inequality yield some interesting information, but they can also mislead us into missing critical aspects of this issue. One key consideration that this line of analysis completely misses is how people acquired their income and maintain and increase their wealth. Lying at the heart of discussions of income distribution should be whether or not people acquired their income in accordance with a just process. If they did gain their property fairly, then seeing the overall distribution that results from a just process might be informative to theorists and to those who did not fare as well in the economic and legal structure by offering insight into how they might improve their financial standing, but the actual distribution, in itself, reveals nothing about its fairness. There is nothing intrinsically wrong with inequality of income.

The creation and acquisition of wealth is based upon mixing one's labor with nature and voluntary transactions. One earns one's income or is the recipient of gifts from those who did earn the wealth. There is no other way to rightly gain wealth. Macroeconomic aggregates do not provide any insight into this process.

Rather these statistics only show abstract patterns that omit the personal element. There is no historical dimension to these measures of income and wealth distribution that considers how people gained their wealth. There is a real danger in focusing on macro patterns. It is that this positivist approach cultivates a habit of mind that overlooks the fleshly reality of the individual investing his life in his work allowing him to reap the fruits of his labor as he shares his earnings with his family, friends, or those he takes pity upon. The multitude of these personal experiences are where the numbers in academic studies emerge from. But these quantitative studies fail to provide any glimpse into the lived lives of the individuals whom these studies purport to describe.

Consequently, policy makers and analysts can easily become lulled into thinking that they can simply redistribute income as if they were re-arranging dots on a screen with no harm done to the dignity or the rights or the life's plans of the individuals who are entitled by nature to retain the fruits of their labors. The United States is not based on maximizing the total or the average utility of its citizens nor did its citizens empower the Federal government to forcibly move their income and wealth from person to person in order to make the aggregate of personal wealth fit into a pattern corresponding to a Lorenz Curve. Rather, the United States is founded upon the principle of the liberty of individuals to act within their rights modeled on the Lockean concept of private property allowing them to form social unions. These organic, voluntary associations enable persons to pursue their own conception of the good within the bounds of natural law. Forcible redistribution of income in order to place people into a macro pattern of equality of result (or move them in that direction) is inimical to liberty and respect for persons.

Roger Chittum

Chris Graves says, "Lying at the heart of discussions of income distribution should be whether or not people acquired their income in accordance with a just process." I agree, but he goes on to assume--without proof or even assertion--that it was just. Chris, the whole discussion is about whether the process of the past three decades has been "just" and, I would add, effective to grow the pie. Nothing you say after the quoted language can stand if the process hasn't been just and effective.

Jack

Blake: "the mean tuition for parish elementary schools is $2,607.."

So that classroom of 20 kids raises a total of $52,140 to cover teacher's salaries and pay for the whole show? Do we suspect this is due to the low wages of nuns and brothers who've dedicated their lives to the church? other susidies from within the church along with tax exempt status accorded by our society in general? Or? are miracles involved?

Chris: "Lying at the heart of discussions of income distribution should be whether or not people acquired their income in accordance with a just process."

.......... ah! There's the rub.

"The United States is not based on maximizing the total or the average utility of its citizens......"

.......... One would hope! though the work week is increasing for those with jobs, while for the unemployeds and much of our youth who'd like to contribute their energies little opportunity exists, even as many societal needs go unmet.


"to forcibly move their income and wealth from person to person in order to make the aggregate of personal wealth fit into a pattern corresponding to a Lorenz Curve."

So far most of our transfer programs are an effort to patch up the inherent inability of a largely capitalistic system to operate at full employment while yet smaller amounts not well suited for income generating activities set by "the market" or temporarily engaged in the pre-school raising of the next generation --- alone.

Progressive income tax rates? Are they curve fairing? or simply a pragmatic approach to the futility of turnip squeazing?

What remains of the intergenerational estate tax that the Brits call "death duty?" For those whose earnings came from capital gains never sold it's the families only opportunity to contribute to paying a share of the nations bills. An additional advantage considered by those who implemented the estate tax is that of tending to break up the political and economic power of great fortunes that we don't return to the lords and serfs model that is so inefficient and from which many of us fled.

"Macroeconomic aggregates do not provide any insight into this process." (of gaining income)

............ Lately, even on the wartime economy of federal deficits, and taxes too low to pay the bills, the aggragates are failing to provide opportunities for productive participation for all too many. Does your ideal include something to address those problems? or favor filling our streets with beggars and yet more maruading bands of gangs and desperadoes plying various forms of vices?

Chris Graves

Thanks for your reply to my post above, Roger. If the discussion moves from what percentage of the population has what percentage of total wealth and how do we alter that distribution or how much do we need to take from the top 5% to redistribute it to the bottom 20% in order to head off civil unrest to a discussion of what rules currently in place need to be changed to accord with the demands of justice in acquisition and transfer, then we have moved in the direction that I am suggesting.

At this point in the conversation, I am not making a claim as to whether or not the rules in the past thirty years have been fair or unfair. I seriously doubt that they have all been unjust. That is also a different question from what are effective means to create more wealth. But what I have laid out is what I see as the basis for justice in acquisition, viz. a labor theory of acquisition in wealth creation, in conjunction with a theory of just transfer, viz. voluntary consent. We can disagree on these principles or we can disagree over whether specific laws and policies of the Federal (or state and local) government are consistent with these principles, but, again, that is a very different debate than what pattern is best to arrange people by in apart from individual entitlement.

Chris Graves

Correction for clarity. The last sentence of my post just above should read: We can disagree on these principles or we can disagree over whether specific laws and policies of the Federal (or state and local) government are consistent with these principles, but, again, that is a very different debate than what pattern is best to arrange people in apart from individual entitlement.

Chris Graves

Thank you, Jack, for your replies to my earlier comments. I think what I said in response to Roger might help in addressing your opening remark about whether or not we have just rules. As you and I discussed last week, I am open to reviewing general rules that govern the economy such as whether corporations should be legally recognized as an legal entity apart from their owners. That is a different focus than the justice of numerical distribution of income without regard to how people obtained their income.

I would also argue that what is an humane or effective way to reduce poverty or to increase opportunity must be addressed within the bounds of what is right.

Moving to your next point, whether unemployment compensation or some other social insurance program is justifiable in an industrial capitalistic economy in terms of the ahistorical patterned macro approach to distributive justice is a different question than whether we should have such insurance programs at all. It is possible to enact social insurance programs that are consistent with fairly enforcing general rules that allow people to participate in a program that is open to all who qualify due to need. Such programs do not involve the continual social and economic tinkering that attempts to equalize all people necessarily involve. These programs can also gain the consent of the vast majority of people since anyone can qualify. Anyone might find oneself in need due to cyclical unemployment or financial meltdowns that are beyond any one person's control. If someone seriously objects to the program, such as the Amish, then they can be given a waiver for taxes as well as being disqualified from receiving benefits. Whether or not government can effectively run such a program is another matter.

I can make a similar distinction with the progressive income tax. If we make the argument that a progressive tax is fair based on the notion that progressivity makes it possible for each taxpayer to make an equal sacrifice to the common good due to diminishing marginal utility, then that is arguably consistent with general rules being equally applied. But if one argues, as you do above, that we should have a progressive tax applied to estates in order to keep the distribution from becoming too top heavy, such a rationale is problematic since it does not consider the justice of the sacrifice in any terms other than maintaining a certain abstract formulaic distribution that disregards the individual and his claims to property fairly acquired coupled with his right to pass it down to his family.

Finally, I am not persuaded that we should buy off criminals with tribute. As I argued last week, there is plenty of room for private charity and others who work with the dispossessed to fill the gaps you are concerned about more effectively and in a more personal manner than government transfer payments in order to fit people on various points along a curve.

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