Last Thursday, Cheryl Block presented her work in progress, “Tax Justice and the Equitable Distribution of Bailout Costs,” as our last paper of the semester.
The paper posits that public anger over the financial sector bailout, along with reasons for thinking that the anger might in various respects have been justified, suggests the possibility that ability to pay principles don’t provide the best guide to thinking about how the costs of the bailout would equitably be distributed. E.g., is the view that the financial sector ought to pay a distinctive view that we need to think seriously about?
Cheryl agrees that there may be important incentive reasons for making the people who caused (and may again cause) a bailout to be necessary pay for the expected costs of their behavior. Not only ex ante, before they act, but even ex post, if the lesson that is learned will impress itself upon future actors. But she wants to leave the efficiency analysis to one side, for purposes of considering the equity issues as well.
My main criticism of this is that there is a considerable overlap between giving people proper incentives and deciding whether they are blameworthy or not. Our intuitions (in the realm of “distributive desert”) about punishing the guilty, etcetera, have a lot of overlap with the idea of giving people proper incentives (and not minding what they decide if they had the right incentives to consider harm to others, etc.). So it is difficult to pursue this analysis independently of efficiency even if one concludes that one’s (or at least my) admitted emotions of distributive desert (a.k.a. retribution) should be preferred to, say, utility maximization where the two, despite their considerable overlap, prove to be in conflict.
Also, I would say that the financial sector as such can’t pay since it’s not a human being. When we say this we presumably have particular individuals in mind – e.g., in this case, the managers and other highly-paid employees in the financial sector, along with their pals in the rating agencies, captured regulatory agencies, etc.
Just because it’s been a very busy semester, I was relieved to have it come to an end, even though so much of it is very interesting and fulfilling. The students were great and their degree of interest and involvement was exhilarating. Things have hardly let up for me since, however – I testified today before the Senate Finance Committee on equity issues in the income tax (more on this shortly), and am off on Saturday to teach in Singapore for 2 weeks. Pretty fast turnaround there, admittedly adding a bit to the stress, although I am hopeful that the Singapore class will go well too.
Next year (January through April 2012), I’ll be teaching the colloquium on Tuesdays with Alan Auerbach. I’m very much looking forward to doing it with Alan. Thanks to Mihir Desai for collaborating with me in the enterprise over the last two years.