Monday, August 29, 2011

Why Don't the Poor Want to Tax the Rich?

The United States is a land of paradoxes.  Whereas fervor of religious belief seems to decline with economic growth in other parts of the world, we stand alone among the OECD countries in terms of church attendance and the strength of faith.  These are the sorts of data that give an empirical basis to the idea of American Exceptionalism, an idea transformed into an article of faith by Leoss Strauss and the neo-cons.

Another U.S. paradox is that the American poor generally largely oppose increasing taxes on the wealthy.  This would certainly not be the case in Germany, for example, or France.  One popular explanation is that with the American dream of upward mobility, many folks expect to one day be high earners and so are opposed to taxes on their future incomes.  David Brooks did the most to promote this plausible explanation.  He writes:
My favorite poll from the election season was in Time magazine. They discovered that 19 percent of Americans believe they are in the top 1 percent of income, and a further 20 percent EXPECT to be soon. This is truly the land of self-esteem. We all think we're above average. And that scrambles all incipient class-consciousness. (Both Brooks interpretation and the poll it is based on have been called into question by a number of critics.)

The last issue of The Economist reports on an alternative explanation, one that resonates with work by Robert Frank and other behavioral economists who point out that we feel poverty and affluence relatively, not in absolute terms (see my previous posts on this):
Instead of opposing redistribution because people expect to make it to the top of the economic ladder, the authors of the new paper argue that people don’t like to be at the bottom. One paradoxical consequence of this “last-place aversion” is that some poor people may be vociferously opposed to the kinds of policies that would actually raise their own income a bit but that might also push those who are poorer than them into comparable or higher positions. The authors ran a series of experiments where students were randomly allotted sums of money, separated by $1, and informed about the “income distribution” that resulted. They were then given another $2, which they could give either to the person directly above or below them in the distribution. 

In keeping with the notion of “last-place aversion”, the people who were a spot away from the bottom were the most likely to give the money to the person above them: rewarding the “rich” but ensuring that someone remained poorer than themselves. Those not at risk of becoming the poorest did not seem to mind falling a notch in the distribution of income nearly as much. This idea is backed up by survey data from America collected by Pew, a polling company: those who earned just a bit more than the minimum wage were the most resistant to increasing it.

Poverty may be miserable. But being able to feel a bit better-off than someone else makes it a bit more bearable.

Tuesday, August 23, 2011

We're standard and we're poor

Curtis Threadneedle along with Merle Hazard have a new take on the S&P downgrade.  Favorite line: "in this new normal we are subprime"

Monday, August 22, 2011

Policy for the People, and Investing for Future Growth: Wisdom from Merkel and El-Erian

Today's New York Times had two provocative reports.  Angela Merkel is quoted as saying that "politicians can't and won't simply run after the markets."  German politicians she presumably means.  "The markets want to force is to do certain things," she continued in discussing the Euro-bond proposal, but "that we won't do.  Politicians have to make sure that we're unassailable, that we can make policy for the people."  What a refreshing idea, policy for the people.

Pimco chief investment officer Mohamed El-Erian is also quoted as arguing for more government investment at this crucial time--while also pointing out that in the long-term entitlements have to be reigned in.  But short term, he argues for more direct government hiring, more investment in education and research, and more spending on desperately needed infrastructure updates. 

Yes, but as the Times notes, this is a immanently sensible plan that probably has no political chance to succeed, or even be seriously discussed.  A no go for Obama, but Merkel might be interested.

Sunday, August 7, 2011

Unemployment, Corporate Profits, and Luxury Sales all on the rise

Reading the headlines in the New York Times and the Financial Times the last couple of days almost gives me whiplash: unemployment remains at a post-war near-record high and S&P downgraded U.S. sovereign debt while luxury retailers are booming and corporate profits are at all time highs.  Something is amiss, and I fear it is not with the data.
from Wikipedia

Floyd Norris, writing in the New York Times, shows that in recent years corporate profits have risen as workers' incomes have declined (even including the dramatic rise of benefits, especially medical benefits, for those fortunate enough to have benefits. : 

Retail sales are up significantly in July over the previous year.  Yet, The Financial Times
argues that this "conceals a bleaker picture in which a conspicuous minority of wealthy shoppers are outnumbered by a beleaguered majority."

The budget deficit is a serious problem--but we have more pressing problems at the moment.  If we do not invest in infrastructure, research, and education both as a current stimulus and as a long term investment, we risk losing our global competitiveness.