Friday, October 31, 2014

NYU event on Kleinbard book

Yesterday Ed Kleinbard presented his new book at an early evening session at NYU Law School.  Linda Sugin and I then offered comments.  Unfortunately, perhaps, for the intellectual diversity of the event, we both approached it more from the left, leaving viewpoints more from the right under-represented there.

My remarks went something like this:

The book is great, a tour de force and an important contribution to public debate.  I agree with the great majority of it.  But since that’s no fun to discuss, I’ll emphasize my main disagreement, which relates to high-end inequality, or the recent lift-off from everyone else of not of the top one percent, but rather the top one-tenth of a percent (which is where a recent paper by Emmanuel Saez and Gabriel Zucman finds that U.S. wealth gains since 1979 have been almost entirely concentrated).

I consider rising high-end inequality, in the top one-tenth of one percent, more important and broadly problematic than Ed does.  Now, this is at least partly an empirical question – what adverse effects, if any, does it actually have on everyone else? – but that is hard to evaluate.  So, while both Ed and I are open to evidence, we may have to continue to disagree about the importance of this issue, at least for the time being.

Because of this difference, at least in emphasis, I attach more importance than Ed does to distinguishing, both conceptually and empirically, between high-end and low-end inequality.  A measure like the Gini coefficient fails to do this, and not because of its particular tradeoffs or flaws, but because it’s a single overall measure.  When Ed says that even taxes that are regressive in isolation can create greater equality if they are spent right, he is emphasizing the effect on low-end inequality.  You can’t do much about high-end inequality, at least directly or in the short run, through greater social spending.

Given the greater importance that I ascribe to high-end inequality, I am more eager than Ed is to address it through the fiscal system, which really does mean the tax system.  Now, there may be important non-fiscal tools for addressing it – for example, regulations concerning intellectual property, the financial sector, corporate governance, and campaign financing.  But if we want to seriously address high-end inequality through the fiscal system, it has to be done through higher taxes at the top.

Now, this doesn’t necessarily have to mean higher graduated rates in the income tax, although it could.  Estate or inheritance taxes with fewer planning outs might play a big role as well, as might income tax reforms such as taxing asset appreciation at death, and perhaps finding a way to tax borrowing against appreciated property, so the likes of Larry Ellison can’t avoid tax on high current consumption.  (Ed says, by the way, that he supports the use of estate taxes to address dynastic wealth transfers – but he doesn’t emphasize it much, nor does he fully explain why it might be exempt from the political logic that he offers for steering away from greater high-end rate graduation.)

Although there are lots of different ways to skin the apple, I am more open than Ed is to having high income tax rates at the top, as Diamond and Saez have suggested.  By the way, they stop at 73 percent, including state and local taxes, under a low estimate of elasticity, because they are just trying to revenue-maximize at the top.  There’s an argument for going beyond that if you believe that high-end wealth concentration has net negative externalities, like pollution.

Raising the Social Security earnings cap would be a significant (12.4 percent) tax rate increase on people who are well above the median – but obviously it starts applying long before we reach the top tenth of a percent.  So, while that would be a progressive tax change, it wouldn’t be aimed where my special concerns lie regarding what’s happened since 1979.

Of course, there is more than I’ve acknowledged so far to Ed’s side of the argument against specially aiming higher up.  So let’s back up for a minute.

This is at least three books in one – perhaps more.  But it certainly includes at least the following three:

First, it’s a book about substantive policy analysis.  What are the issues, and what are the tools that we might use to address them?  A core argument is that, in addressing inequality through the fiscal system, we should focus on spending, not tax progressivity.  Again, while I agree with this, it addresses low-end inequality, to the relative exclusion of high-end inequality, and I would like to address both, while using Ed’s approach for the low end.

Second, it’s a book about morals and rhetoric.  The two are linked because appealing to people’s underlying moral beliefs is crucial to rhetorical success.  Here Ed does a great job of attacking market triumphalism. 

But I wonder if he is being either too optimistic about moral argument’s capacity to cajole people into caring more about the bottom end, or else too pessimistic about its doing the same at the top end.  In any event, I wonder about the substantial gap between his optimism and pessimism on these two scores.  And while he views addressing low-end inequality and high-end inequality as substitutes – in his view, pursuing one would undermine pursuing the other – it’s also possible that they could function as complements.

Third, this is a book about political economy.  Ed believes that some approaches to addressing inequality might succeed, while others will surely fail.  Here I’d make the same point about whether addressing high-end and low-end inequality have (a) such different prospects and (b) are necessarily substitutes rather than complements.

Okay, more about the first book, concerning substantive policy analysis.  Ed notes that recent increases in inequality have been driven by the rise of the top 1 percent.

In support of his nonetheless focusing almost exclusively on low-end inequality, the case for addressing it admittedly is much more clear-cut than that for addressing high-end inequality.  When we think about helping the poor, the idea is to make them better off.  That’s not hard to endorse.  But when we think about addressing extreme high-end inequality, is the idea just to make those people worse off?  Why would we want to do that?

The answer is that there are reasons for thinking that extreme high-end inequality may indeed be bad for everyone else.  It’s not just a matter of the declining marginal utility of consumption, which merely suggests that others would get more utility out of a dollar than people at the top do.  Extreme high-end wealth inequality can potentially have directly adverse effects on the bottom 99.9 percent.

But let’s start with declining marginal utility, since Ed disparages it as a ground for wanting to level down as well as up. In the book, he notes that his former clients loved money so much that the theory of declining marginal utility seemed not to apply to them.  But I have two responses.

First, that example does not concern the marginal utility of consumption, but rather of the income and wealth amounts that they get to see reported on pieces of paper.  Neither Ed’s super-rich former clients nor their heirs are likely to spend all of that money any time soon.  So a large part of what they love is the abstraction – gross dollar numbers that they see reported to them.

Among the key elements of this may be keeping score against their peers.  But if you tax all of them at the same high rate, their relative ranks stay the same.  And if what they like is the power and status that it brings them relative to everyone below, that is a mainly zero sum phenomenon.  More power and status for them means less for others.

I also question the admittedly standard practice in welfare economics of taking preferences as given.  I would argue that some combinations of people’s preferences can lead to higher total utility than other combinations.  Suppose one person enjoys hurting or oppressing others.  The standard utilitarian answer to why we shouldn’t let this happen is that surely the victims’ pain is greater than the inflictor’s pleasure.  But what if it isn’t? 

Well, probably it is.  But even if it isn’t, it seems obvious that we could get to a greater overall welfare level if the oppressor’s utility function instead had inputs that were at least neutral regarding whether others were suffering.  And preferences may be socially malleable over time, even if not for a given individual whose ways are set.

It makes sense for us to think about the long run, not just feelings that are based on expectations today.  Say I’m a hedge fund manager who believes that making me pay tax on my labor income at ordinary income rates, rather than capital gains rates, is on a par with Kristallnacht.  A billionaire actually said something like that recently.  And while his comment could not easily have been more ludicrous and offensive than it was, it certainly testified to his genuinely strong feelings.  Does that mean his marginal disutility of paying the same tax rate as the rest of us is really, really strong?  To me, even if so, that means he has preferences that shouldn’t be encouraged, and that over time, with habituation to a better system, could change.

In sum, I think that focusing on the marginal utility of consumption has more juice than Ed attributes to it, insofar as justifying a response to high-end inequality is concerned.  But it’s only a small part of the argument for concern about the takeoff in recent decades by the top tenth of a percent.  Other important points include the following:

--First, the fact that high-end inequality makes other people feel worse than they would in a more equal society.  There is extensive behavioral research evidence confirming this.  People say they’d prefer to have somewhat less in a more equal society, rather than somewhat more in a society where they are far below everyone else.  Utility comes not just from own consumption, but relative consumption.  This reflects that we are a competitive social animal.

--Second, political economy.  I see lots of evidence that a shift towards plutocracy is choking our political system’s capacity to respond to most people’s interests and concerns.  Consider the work of Princeton political scientist Martin Gilens, showing that policy preferences below the very top appear to have almost no influence on policy outcomes.

Case in point, I think it’s in good part because of rising plutocracy that there has been so little interest among policymaking elites in stimulating demand to address high unemployment still lingering from the Great Recession.  You might have to challenge the concentration of power at the very top in order to make the government more responsive to other people’s interests.

Now, campaign finance law might be part of the response, if there weren’t 5 Supreme Court justices asserting that the right to give a billion dollars to a candidate is sacred, while it’s perfectly fine to disenfranchise millions of voters through the equivalent of poll taxes.  But even if the Supreme Court majority actually respected our country’s best traditions, rather than being eager to trample on them, campaign finance reform might not be enough.  When things are so unequal, the power imbalance is going to seep through one way or another.  So you may actually have to address high-end inequality in order to preserve meaningful democracy.

--Third, social solidarity.  The reason you have all these billionaires complaining about Kristallnacht, the moment anyone even looks at them funny, is that such radical inequality as we have today undermines the sense of shared membership and enterprise that you may need for a successful democratic society.  These people end up living lives completely separated from the rest of us, and they grow accustomed to receiving enormous deference most of the time.  They start to find democratic politics and manners unacceptable, and they get paranoid that the voters will take it all away.  I don’t entirely blame so many of the super-rich for feeling this way, even though they appear to have immense political power, with fealty from the leaders of both major parties.  It goes with the territory to feel paranoia.  But the fact that they feel so threatened reflects the destruction of cohesion and social capital.

Let me turn briefly now to Ed’s second and third books – the ones on morals and rhetoric, and on political economy.

On morals and rhetoric, Ed believes that progressives need to focus more on the old-fashioned virtues, including basic human decency, and on saying “social insurance” rather than “redistribution.”  I agree about those rhetorical choices.

But I am not so sure that “we are better than this.”  For example, our country’s racial history makes it difficult to motivate helping people at the bottom.  Ed appeals to altruism, and to the appeal of being a mensch, not a jerk.  But altruism often takes the form of loyalty to one’s own racial, ethnic, or other social group, with an accompanying lack of compassion for, or even hatred of, other groups.

Politics is also importantly driven by economic interests.  And it’s not clear why those who are in the driver’s seat would share Ed’s concern about low-end inequality, even if high-end inequality is allowed to stand unchecked.

Jared Bernstein, in a review of Ed’s book that was extremely favorable, nonetheless made the following comment, based on the book’s title, “We Are Better Than This”:

“Just who is this ‘We’ he keeps talking about? More than any time in our recent history, we are balkanized by income, class, ideology, religion, politics, race, and pretty much every other dimension you can think of. And if there is no coherent ‘we’ then there can be no clear path for ‘us’ to take together that will make us ‘better than this.’"

One of the book’s important themes is combating market triumphalism.  But discrediting it could motivate addressing inequality at the top, as well as the bottom.  If the market’s losers don’t deserve contempt for having lost, then perhaps the winners don’t deserve quite so much genuflection for having won.  And if you can’t counteract the moral influence of market triumphalism, then addressing inequality at both ends is difficult.  The two might be tightly linked.

Finally, let’s turn to the political economy book.  Ed makes a number of judgments that are contestable – which is not to say wrong.  Opposing judgments would also be contestable, as this is a murky area.  To give an example, Ed argues that, if you advocate highly graduated income tax rates, you get into a class war, zero-sum framework where you inevitably lose.  An opposing view would be that you need to weaken the grip of plutocracy at the top before you can achieve anything at the bottom.  I find it hard to tell who’s right.

Plus, there’s the question of why some increases in high-end taxes (such as from base-broadening or making the estate tax more effective) won’t generate the same political backfire as raising high-end rates.  Ed may have specific distinctions in mind, but it’s bound to be debatable.

Insofar as the aim is to avoid angering the rich, the book employs what I call the “Mongo” theory, derived from the movie Blazing Saddles.  Mongo is the gigantic brute who can punch out a horse, and who initially is working for the bad guys.  Gene Wilder tells the good guy sheriff, played by Cleavon Little, “Don’t shoot Mongo – it only makes him angry.”  Likewise here, Ed fears that if you use steeply progressive rates to go after the super-rich, they will oppose the rest of your agenda.  But what if they’ll oppose it anyway?

In the movie, the sheriff tricks Mongo with an exploding Candygram, and Mongo then changes sides.  I’m not sure how we can exploit that insight here.  But leaving the very top alone may do less to placate the opposition, than to leave hostile forces still in control of our political and economic system.

In sum, I agree with Ed that addressing low-end inequality depends much more on revenue adequacy and spending levels than on tax rate progressivity at the top.  But there are distinct reasons for addressing inequality at the top, not just the bottom.  And, as a matter of morals, rhetoric, and political economy, it is hard to be sure whether addressing the two kinds of inequality is more a case of substitution – you can only do one, at most, as Ed believes – or of complementarity, where they are best seen as parts of the same enterprise.

1 comment:

DM Hasen said...

I found this post very enlightening. Thanks for it.

I was struck by the comment that disutility from rising inequality, "reflects that we are a competitive social animal." My intuition on this point - and it is only an intuition - is opposite: that the disutility is more likely attributable to a widely shared assumption that the benefits anyone gets from social and economic cooperation are significantly due to participation in a joint enterprise. When the distribution of benefits is so skewed, it seems there is some kind of cheating going on. Joint participation is not yielding joint gains.

I think this thought is actually reflected later in the post, where you say, "such radical inequality as we have today undermines the sense of shared membership and enterprise that you may need for a successful democratic society."

Again, thanks for the post.

David Hasen