Income Inequality, Taxes, and Incentives

In yesterday's New York Times, Ian Ayres and Aaron Edlin make a provocative proposal for taxing not the wealthy per se but inequality.  They rightly point out, as does Robert Frank in his new book The Darwin Economy, that extreme inequality produces all sorts of negative consequences for society (from felt deprivation to health, education, and democracy).  Inequality in the U.S. is quickly approaching developing country levels (we have long been the outlier among OECD countries), and Ayres and Edlin argue that the current trajectory could lead to serious social disruption.  They note that average income of the richest 1% is currently about 36 times median household income.  They propose an inequality tax tied not to absolute income but to the ration of a household's income to median income, effectively capping total income at the current position of 36 times median household income.  Just as we have a minimum wage, they propose a maximum wage.

The idea of relating income to national medians is intriguing and suggests other possibilities as well.  Perhaps we could use it to incentivize (to use the language of executive compensation) our elected officials by having congressional pay linked to median incomes (at 1:1 or 1:2).

Kim Il Sung and Mao Tse Tung in Maputo

The corner of Kim Il Sung and Mao Tse Tung Avenues; Maputo, Mozambique

Capitalism, Sustainability, and Inequality

Jon Shayne sent me an interesting piece by economist Kenneth Rogoff, who asks "Is Modern Capitalism Sustainable?"  Rogoff points out that the alternatives to U.S. style capitalism these days are limited to other flavors of capitalism: Northern Europe's compassionate capitalism or China's cut-throat authoritarian variety or any number of other possibilities.  These ultimately boil down to the balance of regulation and laissez faire, between public goods and private rewards.

In previous posts I have extolled the virtues of the German Soziale Marktwirtschaft, and I think Rogoff is too casually dismissive of European model's as being unsustainable.  But he rightly points out key flaws in our own system: undervaluing public goods, growing inequality, provisioning healthcare, discounting the future, and magnified risk.  And these are all things the German system does pretty well.

On the topic on inequality, Jon also passes along a great Paul Solman report on why conversatives are generally happier than liberals--and it is not just a greater tolerance of (and even appetite for) inequality, but a belief in the availability of opportunity and of meritocratic advancement.  If folks have (or even just believe) that opportunities are open to them, they are much more content with their lives (whatever their own present circumstances).    

Amartya Sen has argued that real economic development is about freedom more than income: the freedom to live the sort of life one values.  Central to this conception are opportunity structures (as well as the material resources and agency needed to effect change).  In a study of poor farmers and peasants in rural Mozambique, my colleague Bart Victor and I found that personal ambitions and resources with no outlet, with no opportunity structure to facilitate action, results in "frustrated freedom" and low subjective wellbeing. 

The happiness difference between liberals and conservatives in the U.S. therefore might well be in how open they perceive available opportunity structures. 

What Latin America Can Teach the US about Inequality

Jorge Castaneda, writing in today's New York Times, offers a view of "What Latin America Can Teach Us" in in terms of income inequality.  He observes that just as income inequality has been on the dramatic rise in the U.S., Latin America, thanks to a growing middle class, has seen a significant decrease in inequality.  This is especially true in Brazil, where programs such as Bolsa Familia have elevated families from abject poverty to consuming lower middle class.  Inequality is still very high, much higher than the U.S., but the inequality measurement the Gini index has been declining steadily.  And we can see it in the growing consumer market for cars, refrigerators, and other hallmarks of entering the global middle class.

The UN Economic Commission for Latin America (ECLAC) recently released its annual poverty figures.  They show that 30.4% of Latin Americans live below their national poverty lines, a steady decline for a peak of 48.4% in 1990.  With rapidly growing GDPs in Brazil, Mexico, Peru, and elsewhere, and with the ongoing success of conditional cash transfer programs, the future looks good for the region in terms of equality.  Yet, deeper investments in the quality of education and healthcare will be needed to keep these trends moving in a positive direction.

Castaneda argues that the effects of extreme inequality are felt for decades or generations.  This is especially clear in terms of nutrition and education, areas that contribute centrally to human capital but that take a long time to show the rewards of investment, or the setbacks from neglect. The US should, therefore, be worried about rising inequality and its effects on social solidarity as well as economic competitiveness and productivity. 

Mexican Investment in Tennessee

When one thinks of Mexican influence in Tennessee, what probably comes to mind first is immigration. Yet, Mateo Perez-Rodriguez, Larry Harrington, and I just published a report that finds significant investments in the state by Mexican corporations.

I have been writing here about shifting relations in the international political economy: the rise of China and Brazil, the revalued German model, and the Euro crisis. But an often overlooked but important topic is foreign direct investment (FDI) in the U.S. by developing (or formerly developing) countries.

Mexico, as it turns out, has major capital investments in Tennessee that provide jobs for thousands of Tennesseans. Read more:Significant Mexican capital investment in Tennessee, VU study shows

Another View of China: Yoram Bauman on Chinese Bread

My friend Jon sent along this wonderful piece from standup economist Yoram Bauman, a slightly different view of the Chinese boom:

Watch For the Love of Chinese Bread on PBS. See more from PBS NEWSHOUR.

China and the Emerging New World Order

Seeing is believing, so they say, and I have to admit this was true for me in understanding China's recent rise.  I just returned from my first trip to China and was overwhelmed by the pace of construction and development.  Guangzhou, China's third largest city with just under 13m residents, may not be your typical Chinese city, but it reflects the general trend of China's urbanization and development.

The sheer number and massive size of new buildings is jaw dropping.  For mile and miles and miles, as far as they eye can see, there are enormous new apartment buildings (30, 40, 50 stories high) and more under construction.  At the same time, the city is still pretty green, with lots of trees and parks; traffic is bad, but not at all chaotic.  And billboards and shop fronts advertise a plethora of foreign prestige brands, Louis Vuitton and Armani, BMW and Apple. While the Chinese nouveau riche are buying Prada and Ralph Lauren now, the attitudes here are rapidly changing and I wouldn't be surprised if before long some of the prestige brands in NY and Paris will be Chinese.

I have been saying for a while that we in the U.S. are going to have to get accustomed to a new place in the world, with countries such as China and Brazil taking on new positions of power.  It is striking that the EU in its current financial crisis has had to go hat in hand to Beijing rather than Washington looking for help.  It is even more striking that China's response, at least as reported on CCTV, is that they will need some assurances of structural reforms before they commit to any bailout and suggested that the IMF would be best placed to assure such reforms.  Substitute the U.S. for China and Bolivia or Mali for the EU and we could be back in 1988.

China is also making huge investments in infrastructure and in research and development.  My U.S. colleagues in the academic world are starting to look to China for funding for their research in a way that the rest of the world used to look to the U.S.The tide is shifting in terms of economic clout and research funding, and that means the tide is shifting in terms of power to set agendas internationally.

At the same time, it is unclear how stable this growth is.  China is marked by large and growing income inequalities.  In absolute terms, middle and upper class markets are growing quickly, but this should not mask the fact that most are left behind in this growth (although recent figures show increasing low-end labor costs).  This creates a disarticulated economy (overly dependent on exports) and grounds for political and social unrest. 

Doing Good, and doing well (enough)

The NY Times reports on the rise of a new sort of corporate structure, L3C companies, that explicitly mandates social benefits be balanced with profits.  These "low-profit" limited liability corporations as the new phase of social entrepreneurship, and could point the way for more conventional corporate entities as well that are the focus of the 99% protestors opprobrium.  Indeed, all corporations should also take into account social good along with executive compensation and shareholder value, seeing a judicious balance for the long-term health of the company as well as the good of society.    

Música Campesina opens in Chile, picked up by MovieCity

Música Campesina, the film by Alberto Fuguet on which I am the Executive Producer, has won the Validvia (Chile) film festival as well as the MovieCity prize.  MovieCity will show the film on its Latin American network, reachingover 150m households. Música Campesina also opened last week in Santiago theaters.  Read more (in Spanish) at QUE PASA. 

Merle Hazard's Ballad of a Would-Be, Too-Big-to-Fail Banker

Merle Hazard, everyone's favorite country-financial singer, is at it again.  His new Ballad of Diamond Jim was just featured on the PBS Newshour website with commentary by economist Simon Johnson:

Watch The Ballad of Diamond Jim - Annotated on PBS. See more from PBS NewsHour.

Bob Frank's The Darwin Economy

Adam Smith advocated for a progressive tax on carriages so that "the indolence and vanity of the rich is made to contribute in an easy manner to the relief of the poor."  His disciples too often forget Smith's regard for justice and advocacy of free(er) markets in the progressive battle against tyranny and oppression.

Robert Frank is true to Smith's original intent, and in his iconoclastic new book The Darwin Economy, he argues that competition can at times undermine the collective good.  (Read the first chapter here.)  Calling on Darwin's observations of runaway selection, Frank shows that this is an apt analogy for competitive consumption in our affluent society.  He calls on behavioral research, showing that affluence and poverty as felt, as lived experiences are relational: our norm adapts quickly to rises in income and material conditions, and we adjust our aspirations upwards in ways that reflect not so much material need or utility but symbolic, social, positional conditions.  He shows how subjective wellbeing has become detached from objective income levels in ways that lead to greater and greater consumption that does not improve quality of life.

Frank is a compelling and persuasive writer, and here he is in top form.  He calls on classic political economists such as Smith, the evolutionary observations of Darwin, and cutting-edge behavioral research to illuminate the way our economy has moved in recent years.  Yet he is not content with this theoretically powerful argument, he also takes the next step and spells out policy implications.

Namely, he advocates a progressive consumption tax to both provide revenue to reduce the deficit but also to curb wasteful (and, as he shows, even harmful) competitive consumption (what he terms the 'expenditure cascade" of recent years).  He is even able to resolve the paradox of advocating such a tax while identifying himself as a libertarian.  Smith would be proud.

Recommended Blogs

1. Jon Shayne's Blog: my friend Jon has started a blog that contains a sampling of his insightful views on business, the economy, and investing.  I often tell Jon that he should have been a professor--he is more of an intellectual than many of my esteemed colleagues in the academy. Jon recently shared this great cartoon with me, from Donald Marron's blog:

2. M. Howard Thomas's Anthropology, Design, and Mobility presents a fascinating look at the intersection of culture, how we think, and design.  In a recent post he reports on the work of the late Hans Monderman, who showed how too many traffic signs, for example, could be counterproductive.  Indeed, he demonstrated that no signage was often much, much safer, as folks were more attentive.  Thomas then asks how urban design make take into account the vast tacit knowledge of residents. I don't know the answer, but the question is important.

What Have the Germans Got to be Unhappy About?

Germans should be happy, so it seems.  Sure, the Greek debt crisis looms large, but the German stance toward Greece comes largely from a place of feeling more-or-less secure (if not downright superior) in their own position.  The economy is booming (by OECD standards, but still not China or Brazil), unemployment is at record lows, and the German Model, so easily dismissed a few short years ago, is touted as a model for all, even in the U.S. press.

The credit for Germany's recent success, as I have argued here before, owes a lot to the structural model of Rhenish capitalism.  But this was transformed from sclerotic welfare state to Third Way-ish stakeholding welfare largely through the Harz Commission reforms pushed through by Gerhard Schroeder.  Planet Money's Caitlin Kenney recently did a great piece that captures the somewhat paradoxical public sentiment toward the Harz reforms: glad to have a booming economy and jobs, but miss the cushy safety net and think that business should give back more of what they make.    

My brother David sent me this link to the new Gallup-Healthways Wellbeing Index that shows Germans are significantly unhappier than the Brits and Americans:
Less than half, 41.1%, of Germans rate their current lives and expectations for their lives in five years high enough to be classified as "thriving," compared with 52% of Britons and 52.9% of Americans who say the same. Relatively few Germans are "suffering," but a majority are "struggling."

There would seem to be at least three possible explanations for this paradox of malaise amid relative abundance.
1. that there is a German disposition to be not so happy.  As an anthropologist, I shy away from gross stereotypes, but having lived in Germany a good bit, I also know that there could be something to this.  Germans, on average, are definitely not as cheerfully happy as your average American, but this question asks about overall life satisfaction.  Still, the Germans tend to characterize the state of things (their lives included) in much more reserved terms that the typical American.
2. that the big-state social democracy model is bad for happiness, so despite rosy objective measures, the encroachments on freedom and laissez faire markets is bad for society's overall wellbeing.
3. that German dissatisfaction with the status quo is what produces the relatively high objective measures of economic quality of life, an angst that leads to public agitation that leads to policies that tame the market toward certain common good ends.

Now these are not mutually exclusive, or even exhaustive.  And, in fact, I would say that there is something to be said for each of these factors in producing the German malaise the Gallup poll finds, even if my understanding of bildung and an eudaimonic fulfilled life lead me to give greater weight to the first and last.

Oysters and Race Relations in Dothan, Alabama

I’ve eaten a good number of oysters in my lifetime.  Some of my earliest memories are sitting on a stool next to my dad at an oyster bar here in Dothan.  That one, like all of the good oyster bars around here, was a little rough around the edges, with an emphasis on the bar as much as the oyster.  Being too clean or too well lit would definitely have been viewed as suspect.  Maybe a good oyster bar, like a good oyster, is meant to be hiding something.

So it was a surprise when I first had oysters in Hamburg—in Germany oysters have almost the opposite social associations.  Think black tie and champagne rather than work jeans and Miller ponies.  And in Paris, the prices of the Gran Cru oysters made even those of New York's storied Grand Central Station Oyster Bar look cheap.

But the very best oysters I have ever had are the Apalachicola oysters I get here in Dothan.  Consistently.  Following in my dad’s footsteps, I always go to Hunt’s.  The ambiance is about as far away from Hanseatic northern Germany as you can get; some would say it is dirty and smelly, but I think it is homey.  And I am always “baby” to the waitresses there.

A dozen raw will set you back $4.99 at Hunt’s, up $1 from last year.  Their oysters are fresh—it is a two hour drive to the bay where they come out, and they make it daily.  And these little gems than come from the Apalachicola Bay are succulent: just the right size, not grossly big or anemic, briny with a subtle mineral edge, served cold with a sleeve of saltines.

There is a paper plant just up the river from the bay, and I assume that is what gives these beauties their special flavor—or maybe that is just my suspicious nature, thinking that something this good must have a dark underside.  

It is sort of traditional at Hunt’s to eat some oysters and finish it off with a chili dog.  I normally forgo the dog, but I am back in town visiting my dad and feeling a bit nostalgic, and so yesterday I stopped by for a dozen raw and a chili dog.

I’m sitting there, disinterestedly watching the game on t.v. and waiting for my order when four twenty-something African-American guys came in.  I tensed up a bit, wondering if anybody at this good ol’ boy hangout would make any comments.  But it was a non-event, mutterings or awkward silences—the waitress was super friendly, the other customers at the bar accommodating.  This wouldn't have always been the case.  I’m glad some things have changed here since I grew up.  And, slurping these oysters, I’m also glad some things remain the same.

When I was growing up, Savannah White was our maid and my de facto nanny; my "other mother" we called her.  I have fuzzy, Kodachrome memories of trailing her skirt tails around the house as she made lunch or ironed shirts.  About 15 years ago, at home with my new wife Mareike for Christmas, we took a few sacks on pecans to Savannah as a gift.  When she saw them, her first remark was, "does your mother want me to shell them?"  Things were complicated, nuanced in ways that are hard to explain without softening the underlying harshness.  It feels like they are simpler now, for which I am glad.

CEO Pay, Poverty, and the Rise of the BRICs

Disturbing headlines on the domestic front:
 
CEO pay more than federal taxes at Boeing, eBay, GE, Verizon, and others

Poverty Reaches a 52-Year Peak: 1 in 6 Americans below the poverty line ($22, 314 for a family of 4)

And signs of shifting global power in the world:

Brazil Calls Meeting of BRICs to Help Bolster Eurozone Finances (and Geithner's pleas are largely dismissed by Euro finance ministers--perhaps we are no longer the go-to country in financial crises)

Brazil and China have both become net donors in foreign aid: indeed in absolute dollars China is second only to the U.S. in terms of foreign aid--this is not only effective soft diplomacy, but often has plenty of explicit strings attached.  The balance of world power is shifting.  The U.S. is not going to stop being a superpower anytime soon, but our standing in the world is diminishing and it is ever more difficult for the U.S. to act unilaterally.

What's Wrong with Industrial Policy?

My friend Jon Shayne sent me a link to a Jon Stewart piece on the $500m loan to Solyndra, found on Greg Mankiw's blog under the heading "The Problem With Industrial Policy."  It does seem that the Solyndra loan was scandalous: analysts had warned the company's business model was fundamentally flawed and a key Solyndra advisor was a big Obama fundraiser and had several high level White House meetings before the loan went through.

But is this an indictment of industrial policy as a whole?  Conventional wisdom holds that "industrial policy" is politically toxic in the U.S.  Yet, in just the last couple of weeks a series of articles have come out in The Economist, Forbes, and the New York Times that suggest we should rethink our laissez faire stance on government intervention in the market.

Of course, we have long recognized that Japan and South Korea and China have effectively used industrial policy to enter and frequently come to dominate particular markets.  But the sense has been that what works in Asia won't work here.

The Economist's recent article "Workers and (Business) Unite!", for example, argues that there is a lot to be said for the Obama proposals for an infrastructure bank and job training programs.  To quote: "this may look like meddling, and close to tacit industrial policy, but it is practical."  And The Economist does not make such pronouncements lightly.
Jon Gertner in the NY Times Magazine points out that the new economy actually does not employ many folks: a couple of thousand at Facebook, 30,000 at Google.  But old-school manufacturers work on whole other magnitude: GM directly employs 200,000 and probably several times that with suppliers and related businesses

So why is "industrial policy" so politically toxic?  It need not imply a command-and-control market, but following and helping the market in areas that are in our national interests.  Indeed the strongest case is just that: national interest.  Is it in our national interests that so much of our computer technology and memory is made abroad?

Gertner writes about large-scale lithium-ion battery manufacturers starting up in the U.S.  This is technology developed at MIT and the Univ of Texas but used primarily by manufacturers in China and Korea.  It is great that we are the source of the intellectual property and scientific discoveries, but this doesn't help combat widespread employment.  Even with our advanced knowledge economy, only a small fraction of our 300m citizens will work in MIT labs.  Widespread jobs requires a different approach.

Stephen Denning, writing in Forbes, spells out "Why Amazon Can't Make the Kindle in America."  As it turns out we just down have the capacity to build the high-tech displays or underlying semiconductors or even the lithium ion batteries required.  Denning cites an influential Harvard Business Review article by Gary Pisano and Willy Shih who argue that actually manufacturing is fundamentally tied to innovation and that "an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate."

WSJ: Germany's Socialist Tendencies Stimulate Economic Growth

In previous posts I have been arguing that there are structural reasons Germany has fared so well in the global recession, and that the U.S. has a lot to learn from this Old Europe political economy.  Still, I was surprised to read today's Wall Street Journal article "Germany's Resiliency Buoys Europe," whose authors praise the country's "cozy labor relations" and a "government program that compensated workers on short hours for their lost wages" for their role in fostering sustained growth over the long haul. 

Indeed, the "co-determination" system in which labor is well represented up to the board level in companies and the "kurzarbeit" program that subsides reduced hours and wages in slowdowns to prevent layoffs have, both of which looked a bit daft to many Americans ten years ago, proved a powerful inoculation in the downturn.

Another key factor has been Germany's staid, and quasi-public, internal banking system (see posts below about the Sparkasse and Landesbank structure).  This was the subject of an odd profile by Michael Lewis in last month's Vanity Fair.  He takes a strange scatological angle on the whole affair, based on reading Allan Dundes Life is Like a Chicken Coop Ladder, a book of folklore I have actually used in class before.  But if we can leave all the shit behind, Lewis offers a sharp analysis of the German banking involvement in the exotic instruments that led up to the 2008 crisis: there was no such lucrative market at home (just old fashioned collateralized lending), and so a few adventurous banks invested heavily to get the returns their American peers were reaping.  As Lewis paints it, the German bankers were seen as as gullible (at best) by the slick U.S. investment bankers who sold then CDOs and other high return instruments.  And they got hit hard, but on the domestic front credit tighten up a bit for a while, but things more or less continued as the conservative pace of before.  

Alberto Fuguet, Chilean filmmaker and literary figure, goes looking for the Nashville that Robert Altman didn't find

Alberto Fuguet, Chilean filmmaker and literary figure, goes looking for the Nashville that Robert Altman didn't find: My Own Private Nashville

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.

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"

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.

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.