Tuesday, July 14, 2015

Atkinson on Inequality

I recently finished reading Anthony B. Atkinson’s recent book Inequality: What Can Be Done?  It doesn’t duplicate what Piketty did in Capital in the Twenty-First Century, but in some ways I like it better. Atkinson’s examination of the determinants of income distribution focuses more on product and labor markets, and on the social context in which markets operate. Atkinson does not believe that we are condemned to increasing inequality because r is greater than g. He points to other times and places where inequality has been reduced even though growth rates were low.

Atkinson points out that government policy had a lot to do with decreasing inequality in the past, and he proposes a long menu of options to consider at this point. In this he differs from Piketty, whose policy proposals are mostly limited to a global wealth tax. His fifteen proposals include comprehensive redesign of the income tax, to make it more progressive and to introduce an “earned income discount”, rather than the present discount for capital gains. He proposes a progressive lifetime capital receipts tax in place of the estate tax. He believes that all young people should receive a capital endowment when they reach adulthood, and that there should be a taxable “participation income” and a substantial child credit.

Many of these ideas would not get a lot of support in the U.S. today, or even in the U.K., Atkinson’s home. But they are cleverly designed to deliver help to those in need while preserving incentives and garnering strong political support. Everyone is eligible, but benefits are taxable at progressive rates. They borrow their best features from the design of successful programs like Social Security. Political action may be long coming, but planting these ideas in the public imagination now is important.

Monday, September 22, 2014

George Will and FDR

Ken Burns uses the conservative columnist George Will as one of the commentators in his monumental documentary miniseries on the Roosevelts. I suppose he felt he had to include such a conservative commentator lest he be accused of not being "balanced." PBS makes a point of being balanced in this way.

At one point, Will says that Americans had always believed that they had the right to the pursuit of happiness, and that government should protect that right, as it says in the Declaration of Independence. But, says Will, FDR goes beyond that to try to give the people happiness itself, that is, money. He is referring to the New Deal social insurance programs, like Social Security, Unemployment Insurance, Aid to Dependent Children, and so on. Will clearly believes that this goes beyond the Constitution, which he says both Roosevelt presidents treated as just a nuisance.

Will's fundamental error is one commonly made by professional economists. It is the identification of money and happiness. FDR and other liberals do not and did not support social insurance because they think it will make people happy. Most of the involuntarily unemployed, single mothers, ill and disabled people, and others receiving money from the government are not particularly happy about their circumstances. They would rather not qualify for that government check, thank you very much. The point of social insurance is not to make people happy, but to enable people who would otherwise be impoverished to live a life of dignity. It is to enable people to have access to the institutions and services that might help them improve their condition. It is to help pay the rent, put food on the table, pay for the bus fare to get to a job, or to a doctor's office, or to the church.

So happiness is not what this is about. Money doesn't buy happiness. Seeking money in order to be happy is a vain quest. Giving money to the poor thinking you are making them happy is silly. Only economists and children believe these things. Social insurance is there to "promote the general welfare", an object endorsed in the Preamble to the Constitution.

Tuesday, August 26, 2014

All-American Burger King

I'm getting really tired of the lazy coverage, even in the business-news media, of the Burger King--Tim Horton's proposed merger. "All-American" Burger King?  Burger King was owned by a British conglomerate from 1989 until 2002, and since 2010 has been controlled by a Brazilian private-equity firm (though it has publicly traded stock). Yes, it is talking about a tax inversion, but that seems to be a relatively small part of the story, unlike the Walgreen's situation. Do your homework, people!

Wednesday, July 30, 2014

Why can't the banking industry solve its ethics problem?

This is the question asked yesterday in an article in the New York Times. They offer two possible answers. One is that the highly competitive conditions in the industry attract bankers who are extremely motivated by money and are very risk-tolerant, meaning the risk of being caught, I guess. The other is that the industry does not have sufficient financial incentives in place (clawing back bonuses when there are violations, for example) that encourage ethical behavior.

Both of these approaches suggest that there is only one sort of motivation, namely financial, and the only questions concern how strong the motivation is (people who are not very motivated might be ethical just out of laziness or risk-aversion), or what sorts of behavior are rewarded financially. Neither views ethics as a intrinsic, a desire to do the right thing, to be honest with other people, or even to have a good reputation, that might act as a constraint on gain-seeking behavior.

The theory of economic regulation provides a context for this discussion. To explain the conundrum of industries and firms that seek or support their own regulation, economists have offered a variety of hypotheses. The conservative, Chicago School version is that they want government to set up and enforce a kind of cartel, preventing entry and keeping prices high. A more liberal approach suggests that businesses understand that without public trust and confidence, they will lose their markets. Once trust is lost, the best way to reestablish it is to have some outside agency provide accountability. Government has usually been a good choice, since government has usually been trusted more than the press or private non-profits.

The conclusion I come to about today's bankers is that they do not think public trust is important to their business. The public does not have a choice: they have to use banks, and all of them are tainted. If the public's money is stolen or wasted or lost, the government will make it good, so no worries. Therefore there is no need for regulation, nor is there any need for the industry to change its culture or reform itself.

So we do not see what I have been hoping to see: some prominent bankers standing up and saying, "There is something wrong with our industry, and we need to change." Until that happens, the crisis of corruption that began in the 1980s with the savings and loans will just keep getting worse.

Sunday, July 27, 2014

Businesses and charities

Stephen L. Carter has an opinion piece for Bloomberg (reprinted recently in the GR Press) in which he claims that people's problem with Hobby Lobby and other businesses that claim religious rights is that they make profits, and profits are evil. He is completely wrong about this.

Yes, businesses make profits and charities don't. Charities must follow the non-distribution rule, that their members (contributors) must not receive any surplus funds generated by the charities' activities. Those funds must be used for the charitable purposes for which the organization was established. But that doesn't mean that a business can't earn profits, or that profits are wrong.

There are other differences between the two kinds of corporations that are more important. Businesses make our economy run. They provide goods and services that people are willing and able to buy, and they expect to make a profit in the process. As key economic institutions, we need them to be open to all, serving people without regard to race, nationality, gender, religious belief, or any other irrelevant personal characteristics. The only way we can have an open, competitive economy with opportunity for all is if businesses are required to serve all equally in accordance with universal moral principles.

Indeed, this principle of the openness of business is not only part of American national ideology, but is a basic part of Calvinist Protestant social thought. John Calvin's argument that the Biblical prohibition of usury should not apply to New Testament Christians was based on the idea that since there was no longer an exclusive "chosen nation," Christians should treat all others according to universal moral principles, especially the Golden Rule.

The anger that Carter detects about profits in today's America may be due to a violation of others of Calvin's basic principles. He held that the benefits of specialization and exchange should be equally shared between buyer and seller, and that the public benefit should take precedence over private gain. The growth of profits as a share of national income at the expense of wages suggests that this balance in the distribution of the economy's benefits has been disrupted in our economy.

Charities are established to provide educational, cultural, scientific, artistic, and religious services that often are not profitable, but which serve the public good, and which as a society we wish to promote. Businesses will not do enough of these things, or will not do them at all, and government often does not have the creativity, diversity, and sensitivity to do them well. So we make it possible for groups of like-minded people to contribute before-tax money to enable these activities. By their nature they include some but not others. This is especially the case for religious organizations. People with no affinity to a charity's aims, purposes, or beliefs can not demand service from in the way that they can demand service from a business. Businesses are not giving anything away, but charities are.

The same is true for employment relationships. Sympathy for a charity's purposes and belief in its principles is essential for employees of the organization. Charities have a well-recognized legal right to place religious demands on their employees that are not permissible for businesses. They could hardly operate in any other way. But businesses are chartered to generate economic activity, and their criteria are restricted to who can do the job well. Hobby Lobby can not insist that its employees endorse its religious beliefs, unless it wants to become a charity, collect donations, and start giving away flower pots.

Saturday, July 19, 2014

Use Value and Price Discrimination

For an excellent example of the idea of "use value" as a justification for price discrimination, see Joe Nocera's column in today's New York Times.

Friday, July 18, 2014

Faith and Economics

The new issue of the Association of Christian Economists' journal came yesterday, and I would like to comment on a couple of the pieces in it.

Tony Waterman offers a review essay on Wilkinson and Pickett's The Spirit Level, a good five years after its publication in the UK, and four years after it appeared here. Tony's comments are thoughtful, as they always are. But in his section on theological issues, I have some doubts. He notices that inequality is "a fertile breeding ground for four of the seven deadly sins," namely, avarice, pride, envy, and anger. But he finds that classical (and neoclassical) economics explains the remedy: God uses our sinful desires and acts to make us prosperous through the miracle of the market economy. I suppose the proper conclusion is, let us sin more so that grace may abound!

By no means. Avarice and pride particularly have led to the wave of business scandals that began in the late 1990s. The widespread corruption of American business has led to a loss of confidence, lack of trust, increased inequality, and poor economic performance, culminating in the 2008 financial crisis and its disastrous aftermath. When the economy prospers, it is in spite of our sins, not because of them. The market will not save us from our sins. Only God can.

Quoting Pope John Paul II and Anglican Archbishop William Temple in support, Waterman argues that "human beings need incentives to be good." Apparently a place in Heaven is not enough. But for sure people will not be virtuous if you "punish" them with high taxes.

Injustice by definition means that some people get benefits to which they are not entitled. For justice to be achieved, those people have to give up those benefits. To insist that they must come out whole undermines the remedy. The reward is the knowledge that they have contributed to a more just society, and have helped achieve God's purposes in the world. We count it joy to suffer for our Savior's sake. That has to be enough.

In the opening article, John Lunn explores the distinction between value in use and value in exchange. He concludes that "exchange value is a social construct and is not based on some kind of ontological reality." Therefore, it not helpful to look to anchor an evaluation of market functioning in a relationship between market prices and some objectively determined use values.

I agree with John that the Aristotelian line of thought is not productive as a way to derive a theory of objectively right or just prices, or as a way to justify the outcomes of market processes. But I think there is a much more interesting contemporary question about prices that should be addressed. The virtue of markets is supposed to be that market prices convey information about the relative scarcities of goods, an objective measure of the production costs of the goods to be bought. This results in good decisions by buyers about how to best steward or conserve or economize on resources. But in contemporary America, this connection has been broken. Price discrimination is rampant, breaking the connection between prices and costs, and undermining the efficiency of markets. In the business community, this is now everyday practice, and it is increasingly accepted by consumers. But pricing has become just an exercise in naked power by increasingly monopolistic sellers. This undercuts any serious moral defense of a market system.

I have written about price discrimination before, and the essay appears as chapter 8 in my book, Stories Economists Tell.