Income re-distribution debate

edanto

UCD_Econ wrote: »

The definition of 'Economics' as a field of study is: a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services.

1% of the population owns 40% of the wealth.

Something is wrong with the way economists are advising us to run the world.

Mod edit: Split to start a new debate

Time Magazine

edanto wrote: »

1% of the population owns 40% of the wealth.

Something is wrong with the way economists are advising us to run the world.

That's not a fact, but an opinion. The distinction between the two essentially defines the difference between the study of economics and the political economy.

You can state 1% own 40% as a fact, not "this is wrong". Of course I'm not disagreeing with you, I'm just trying to re-enforce the argument that you can't take Naomi Klein's/Robert Fisk's/Noam Chomsky's writings as the former. Results-based approaches lead to unintended consequences. For example, you might note that the disabled are employed less than the able and that even when they're employed that they're paid less. So you mandate that all disabled get the same pay as everyone else. The result? Whether you want to accept it or not, will be less employment of the disabled.

Similarly, economists are typically against high minimum wages. This is not because they're against the re-distribution of wealth or against fair wages or whatever. It's because if you have high minimum wages (say €10 an hour) then employers don't employ as many people. So although there is some bargaining power to low-earners who become better off, it's at the expense of people who lose their jobs. Another consequence is that those from less well-off areas often choose jobs over further education, which isn't good for them in the long-run. When I first read this I was disappointed but it was a fact that I couldn't ignore, and obviously it made me less supportive of minimum wages. Now politicians absolutely have to weigh up the pros and cons of the minimum wage when deciding what level to set it at. (For the record, I think they've got it about right.) But people who argue about "economics" from the results-based approach rather than the process will argue for things like a €10 minimum wage, which is probably too high.

I've picked a relatively simplistic example of the minimum wage to clarify the problems with taking your economics lessons from non-economists. Minimum wages are simple first-year economics stuff. The monetary system and the scrapping of the Bretton-Woods joke is far more complicated. The arguments are far more nuanced. The consequences of bad analysis far less obvious and ultimately better hidden by talented journalists. When economists scoff at the gold standard, it's not because of them enjoying exchange-rate risk, it's because the effect on average people of not having monetary policy is far worse than having floating exchange-rates.

So now onto your point. You might think 1% of 40% is unfair. What's a fair level? Fundamentally, and I'm challenging you to come up with a distinct answer to this, who decides what level of re-distribution is fair? If 1% of the population owned 90% of the wealth (as is the case in some parts of the world), would you be happy with 40%? Have you considered the consequences of taxing the wealthy more? Do you know how many of this wealthy people would leave the country if we taxed them at 80%? Why should they keep their companies in Ireland, taxed at 80%, rather than give jobs to Latvians, taxing them at 15%? Would you be happier if that 1% suddenly lost half their wealth, say it all just disappeared, simply because the that means the top 1% now only owned 20%? Why is that necessarily a fairer number? How much more should professors get than average civil servants? If civil servants are paid well (and they are), why should professors subsidise them (pay more tax) at all?

Have you read Amartya Sen? Or Robert Nozick? Your approach seems utilitarian: would you agree that the aim of society should be to maximise its joint happiness, even if that means taking some happiness from others? If that's your opinion, that leads to the conclusion that if society were to enjoy the public execution of one rich person to re-distribute his wealth more than that person "dis-enjoyed" it, would you support their execution? Presumably not. That means you support basic levels of decency and human rights. Once you get into defining exactly how many human rights someone has, including property rights, you get into a whole different ball game. Who are you to decide how much of my property should be re-distributed?

Right all these things are just the tip of the iceberg when it comes to this political approach. Maybe this should even be split into a new thread. There's no reason to believe that elected governments do everything economists tell them to. But trust me, there's a lot of reason to believe they ignore a lot. Basically what I'm trying to convey is that your gripe is not with the study of economics, but probably the actions of elected governments. And that's a disconnect that people fail to grasp, and boosts the sales of many an econo-journo.

edanto

I'm looking forward to getting into this with you.

By the way, have you seen Zeitgeist Addendum?

Time Magazine

edanto wrote: »

I'm looking forward to getting into this with you.

Likewise!

By the way, have you seen Zeitgeist Addendum?

Nope, but I will watch it soon, so feel free to reference points from it in your argument. (You might want to find something a little more authoritative though, in case any of it is just plain wrong and we end up debating about why it is wrong rather than debating the policy conclusion side of things.)

SoCal90046

edanto wrote: »

1% of the population owns 40% of the wealth.

Something is wrong with the way economists are advising us to run the world.

Mod edit: Split to start a new debate

How did the world look long before economists were giving advice? :eek:

Économiste Monétaire

The monetary economic analysis, even at a basic level such as the structure of the Federal Reserve system, is nothing short of a joke in both Zeitgeist movies. If the author cannot ever understand that to call the Federal Reserve System a private corporation is completely false, then none of it should be taken seriously.

eamonnm79

UCD_Econ wrote: »

The monetary economic analysis, even at a basic level such as the structure of the Federal Reserve system, is nothing short of a joke in both Zeitgeist movies. If the author cannot ever understand that to call the Federal Reserve System a private corporation is completely false, then none of it should be taken seriously.

If calling The Fed a private corporation is completely false then what is the truth of the matter?

Ive heard many anti establishment quotes saying that the fed is a private cartel of major bankers.

Id appreciate some clarity.

eamonnm79

"Similarly, economists are typically against high minimum wages. This is not because they're against the re-distribution of wealth or against fair wages or whatever. It's because if you have high minimum wages (say €10 an hour) then employers don't employ as many people. So although there is some bargaining power to low-earners who become better off, it's at the expense of people who lose their jobs."

I remember being in first year economics and the lecturer was arguing this.
Only problem is that in Ireland over the last ten years, a steady increase in the minimum wage has coexisted with an increase in employment.
Now I know there are lots of external reasons for this.
I know that an increase in the minimum wage did not cause the celtic tiger.

However the fact that more people had higher disposible incomes means that they could at least contribute more to our GDP and therefore they were.

I think that there is a good economic arguement for a high minimum wage in developed economy. For the very same reason that some right wing people advocate very low rates of income tax. People have more money in their pockets to spend on what they want.

leninbenjamin

eamonnm79 wrote: »

I think that there is a good economic arguement for a high minimum wage in developed economy. For the very same reason that some right wing people advocate very low rates of income tax. People have more money in their pockets to spend on what they want.

nah, that's crap.



have a look at the digram. this is the analysis at it's simplest. the introduction of a minimum wage acts as a price floor. price floors are bad from an economists point of view because they represent inefficient use of resources. it costs more to produce less. more importantly, as resources are now inefficiently used and capital doesn't yield as high a return, less resources are employed and it results in a contraction in the economy (the square MW-QW's total area is smaller than NW-QW's, or it should be if i did the digram right). this results in higher unemployment as denoted in the diagram (WW-QW).

I think it's important that one keeps in mind that neo-classical economics primary concern is the most efficient use of resources. it's up to the policy makers to balance this against the welfare concerns (which they are doing a pretty bad job at)

but the welfare argument is also, as mentioned somewhere else, that higher wages for unskilled jobs (or rather lesser skilled jobs, to be PC) act as a deterrent against pursuing higher education. despite the recession, we're now facing a skills shortage in many areas because the lure of the construction sector's high wages deterred people from furthering their education (and ultimately getting a better job down the line, seen this first hand in the sites i worked on). this is why there are more willing workers in the second diagram than the first.
a second dimension to the welfare argument, is that higher minimum wages in the long term tend to just increase living costs across the board, resulting in little to no real gain for minimum wage workers. if we want to increase their welfare we need to look at other measures really.

SoCal90046

eamonnm79 wrote: »

If calling The Fed a private corporation is completely false then what is the truth of the matter?

Ive heard many anti establishment quotes saying that the fed is a private cartel of major bankers.

Id appreciate some clarity.

That's a good question, as you definitely hear some people say that the Fed is a private entity. Milton Friedman used to like to make make such statements. You'll also hear that banks, not any branch of the government, are the shareholders. The last paragraph in the excerpt below discusses that point about the regional banks.

Here is what the Federal Reserve says about itself:

The Federal Reserve System is not "owned" by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.

As the nation's central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms. However, the Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as "independent within the government."

The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

Here is a link to the FAQ page on the Federal Reserve website.

Économiste Monétaire

eamonnm79 wrote: »

If calling The Fed a private corporation is completely false then what is the truth of the matter?

Ive heard many anti establishment quotes saying that the fed is a private cartel of major bankers.

Id appreciate some clarity.

Right, I’ll briefly outline the Federal Reserve System structure, and then get back to my point.

At the very apex of the Fed structure you have the Federal Reserve Board of Governors. The system as a whole contains the Boards of Governors in Washington D.C. and 12 regional Federal Reserve Banks. The Board of Governors are appointed by the President of the U.S., and their appointment is approved by Congress; there are 7 members of the Board of Governors, the President appoints one from any of the 12 regional districts (this is a bi-product of an effort not to centralise the system too much) to give an fair picture of the whole country. The President also designates one Governor to be the Chairman of the Board of Governors and another to be Vice-Chairman.

The Federal Open Market Committee (FOMC) is the decision making body of the Federal Reserve System. It consists of the 7 members of the Board of Governors, the President of the New York Fed, and the 4 other presidents of the regional Reserve Banks are rotated into sitting on the FOMC (1 year terms). The FOMC is the body that conducts monetary policy in the U.S. It is chaired by the Chairman of the Board of Governors (you might have seen him on the T.V., he’s the baldy guy with the beard, Ben Bernanke).

Below the Federal Reserve Board of Governors, on the structure hierarchy, you have the 12 regional Federal Reserve Banks. These work together to print currency and manage intra-bank systems, and the New York Fed carries out Open Market Operations (OMOs). The regional Reserve Banks have their presidents elected by a board of directors, there are nine members of the board of directors (the appointment is approved by the Board of Governors in Washington). The Reserve Banks generate their own income (this helps to keep the ideal of independence), mostly from the interest earned on government securities they acquire in the course of monetary policy actions. However, and to emphasise the distinction from a for-profit private corporation, the Reserve Banks must return all revenue above operating expenses they incur, to the Treasury Department. There are other functions that the Reserve Banks operate, but to keep it short I’ll leave them out.

There are also the member banks of the Federal Reserve System, at the bottom of the hierarchy. These have a role in appointing directors of the regional Federal Reserve Banks. Their role is complex, so are their voting procedures. I can outline that too if you want, but I’ll leave them out to keep the post short but this is where some of the contention lies with relation to crap like Zeitgeist.

Back to my original point, i.e. why it’s stupid to say that the Federal Reserve System is a private corporation. Member banks, at the bottom of the hierarchy, are private corporations. Think of another entity that contains private corporations... like Ireland. Would you consider Ireland a private corporation because it contains private corporations? Does Microsoft, Google, Dell, et cetera, run/own Ireland? The Federal Reserve System must present bi-annual reports to congress, the Chairman of the Board of Governors must then answer questions from both houses of congress. The Federal Reserve System has been effectively delegated the task of monetary policy by Congress, because direct political control (not the same as oversight) never a good thing, as Galbraith said, the power to print money should be separate from the power to spend it. Neither congress, nor the U.S President, have vetoes on decisions by the FOMC, but they can alter the Fed's remit and role at any time they choose to.

Yes, the structure is complex. For that you need to blame Central Banking history in the U.S., and a general dislike of power centralised in one area, government or otherwise, in the minds of U.S. citizens.

Kama

Something is wrong with the way economists are advising us to run the world.

Agree, but we could nuance that differently: something is wrong with the system of economics we are using, or which economists are in advisory positions. Widening income isn't just a equity or social justice issue, there are inefficiencies and externalities from having the lopsided distribution as well (stagnant or declining real wages due to an increasing capture by the top earners aren't a strong base for an economy, in my opinion) even before going into the more 'fuzzy' social costs.

That's not a fact, but an opinion. The distinction between the two essentially defines the difference between the study of economics and the political economy.

I for one have never really 'bought' the seperation or eviction of the political from economics, nor the idea that economic facts are 'brute' facts as you seem to imply ('economics is factual, political economy is an opinion' I would consider to be more of an 'opinion' than a 'fact', in my opinion the there are plenty of hidden normatives anyway). Like most facts, they are generated by theories, which have assumptions and procedures which produce them. Theories by their nature are simplifications, and hence do not contain the 'full picture', which is why the necessity for a science is to persistently check against reality; which is why prediction (which economics is notably poor at) is so key to scientific validation. (Apologies if this seems pedantic btw, but feel is relevant).

In the minimum wage example, yes the graphs say this would happen, but I have more trust in evidence than in abstracted graphs, even though evidence unavoidably contains the same reflexive problem of being theory-laden. (Tangentially, this is part of why I'm against one-size-fits-all policies; diversity of approaches allows us better grounds on which we can compare the effects of disparate regimes and policies, which seems to me a 'cost' from 'Golden Straightjacket' approaches and homogenous prescriptions).

Whatever its demerits, Card-Krueger showed minimal effects from changes in minimum wage. I'm aware it's a poor study in some ways, but an influential one, and much of the criticism I've seen focused more on how it contradicted the 'sacred cow' than produced contradictory evidence, which is frankly unscientific. Equally, you can accept that there is a effect consistent with the price equilibrium model above, but that compared to other factors its negligable. I don't think its fair to just call 'crap' just because it disagrees with (an aspect of) the orthodox system of analysis, nor to say 'economists' are against it (Arrow, Stiglitz, and Solow, fr'instance, went pro) The losses in efficiency at that level may be more than compensated by benefits elsewhere; evidence needed for either claim, obviously.

I think it's important that one keeps in mind that neo-classical economics primary concern is the most efficient use of resources. it's up to the policy makers to balance this against the welfare concerns (which they are doing a pretty bad job at)

To me, this is part of the problem: creating a downstream problem and externalizing the responsibility. If we agree that there are welfare considerations (I hope we do) then declaring them Someone Elses Problem, especially when we are advocating their production, seems insufficient to me. But thats a whole different messy, smelly, kettle of fish...

eamonnm79

The Economist wrote: »

. For example, you might note that the disabled are employed less than the able and that even when they're employed that they're paid less. So you mandate that all disabled get the same pay as everyone else. The result? Whether you want to accept it or not, will be less employment of the disabled.

Just rereading this.

I think you are forgetting that you can legistlate against discrimination or other uncivilised economic outcomes. Infact we do.

By the way, it would be interesting to sub women for disabled and man for non disabled in your analogy.

Time Magazine

eamonnm79 wrote: »

I think you are forgetting that you can legistlate against discrimination or other uncivilised economic outcomes.

Nope, I'm not. That's the economist in me making that statement. Everybody wants equal (or even preferential?) treatment for the disabled, myself included. Equivalently, nobody would want a law enacted that discriminates against the disabled, be that discrimination by design or effect.

On that point, I strongly recommend you read this and this. Very interesting stuff, and runs to the heart of the distinction between politics and economics.

By the way, it would be interesting to sub women for disabled and man for non disabled in your analogy.

This thread is going off-topic fairly lively, and we're still waiting edanto to put forward his argument, so we'll agree to leave this for now?

Kama

Both linked articles cite the 'Law' of Unintended Consequences, and esssentially assert 'markets good, politics bad, less politics in markets kkthx?', which seems tendentious. The exact same argument (unless I'm wilfully mischaracterizing) can be made of market liberalization, that it can lead to 'unintended consequences'; to take just one example, a unintended consequence of securitization was systematic underpricing of risk, with current and topical results.

Applying the Law to the original topic, does anyone have evidence that progressive taxation or income redistribution is regressive in effect?

Time Magazine

I'm not sure edanto's coming back, so...

Kama wrote: »

Both linked articles cite the 'Law' of Unintended Consequences

You're right to call it the "Law". I read a very good piece asking what unintended consequences arise from this "law".

and esssentially assert 'markets good, politics bad, less politics in markets kkthx?', which seems tendentious.

No it doesn't. The Marginal Revolution blog rightly points out that these things arise when simple mechanisms try to manage complex systems. The most obvious example is legislation trying to be the market. However there are others. You can consider the price mechanism wish asymmetric information left to its own devices as a simple/imperfect mechanism that won't work. Similarly sociologists earn their keep pointing out the problems with McDonaldisation.

The point of me referencing this can be pretty well summed up by Paul Samuelson's first rule of economics: not everything is as it seems. Indeed that was essentially my original argument. Economics, I feel, should devote itself to the scientific study of outcomes and not make the judgement calls. Politics then does the rest. Of course economists can be both scientists and policy-makers, but economics shouldn't be based on thinking that "ooh this law seems nice it must be right!" or vice versa. Not to debase all of their points, but certainly many of Chomsky/Klein's arguments fall under this heading.

The exact same argument (unless I'm wilfully mischaracterizing) can be made of market liberalization, that it can lead to 'unintended consequences'; to take just one example, a unintended consequence of securitization was systematic underpricing of risk, with current and topical results.

Indeed, see my argument about adverse selection above.

Applying the Law to the original topic, does anyone have evidence that progressive taxation or income redistribution is regressive in effect?

The most obvious tangent I see here is something approaching the Lappher curve - that higher taxes don't necessarily raise revenues. I should point out though that the Lappher curve should, imho, only be used illustratively, and not considered a precise fact. If a state is more socially conscious/if social cohesion enters their collective objective function, then the Lappher curve would have a different formulation to if they're all purely self-interested, etc.

BenjAii

The Economist wrote: »

Economics, I feel, should devote itself to the scientific study of outcomes and not make the judgement calls. Politics then does the rest. Of course economists can be both scientists and policy-makers, but economics shouldn't be based on thinking that "ooh this law seems nice it must be right!" or vice versa.

That doesn't really make any sense though does it ?

All economic activity is completely connected to the body politic. All economic participants from individuals as producers/consumers/workers/business owners operate through & in the law, as do larger economic entities, up through businesses to countries and other entities. All dealings between these are both economic and at the same time political.


Trying to understand economics without giving any consideration to politics is a bit like trying to study medicine by insisting you just need to understand how a few individual body organs work in isolation.

Kama

The Economist wrote: »

You're right to call it the "Law". I read a very good piece asking what unintended consequences arise from this "law".

What piece? For me, the nomothetic assumptions are a bit of a physics-envy hangover; social scientists love the idea of having 'laws', it makes up for a general failure in effective prediction of complex systems (us).

No it doesn't. The Marginal Revolution blog rightly points out that these things arise when simple mechanisms try to manage complex systems. The most obvious example is legislation trying to be the market. However there are others.

Unintended consequences would appear unavoidable in complex systems, but there presence in and of itself doesn't invalidate intervention; firstly, cost vs benefit on the gains v losses (problem here is that defining gains and losses tend to have a normative component) secondly intervention redesign on a evidence-based 'tinkering' basis, and thirdly there is a bias toward the present; the status quo also has consequences. Intervention is messy, agree, but ditto for not intervening (which implicitly includes the debate as to whether inaction is an action, or deregulation is regulation).

Economics, I feel, should devote itself to the scientific study of outcomes and not make the judgement calls.

Mine (and I think Benj's point) is that judgement calls either creep in, or are difficult to evict, which is precisely why 'outsiders' so often see economics as 'ideological', the recurrent Marxist complaint; 'Barstool Economics' seems a case in point. Its famously difficult to create an 'objective' social science...Applied or policy-oriented disciplines necessarily have a harder time being 'objective', because they are plainly more interested/involved. I dont think this has an easy and clean 'answer', just as think the divorce from politics is easier said than done, and dangerous is its assumed to have actually happened.

The most obvious tangent I see here is something approaching the Lappher curve - that higher taxes don't necessarily raise revenues. I should point out though that the Lappher curve should, imho, only be used illustratively, and not considered a precise fact.

Yep, this was Gardners point with the 'Neo-Laffer Curve':


Laffer curve makes a lot of intuitive sense, principally at 100% and 0%, and often then gets taken as 'evidence' without empirical backing; the theoretical 'it should work' often overrides the evidence-based question: 'does it work?' Similarly, with Card-Krueger, there was a tendency to see the 'Law' as more important than the evidence. The end-call for humility in Marginal Revolution should also properly be a reflexive one.

Stabshauptmann

edanto wrote: »

Something is wrong with the way economists are advising us to run the world.

This is an idiotic statement that I have heard one time too many. Economics is not a set of rules dictating how markets are to be run. It is a study of how markets work.

nesf

Kama wrote: »

In the minimum wage example, yes the graphs say this would happen, but I have more trust in evidence than in abstracted graphs, even though evidence unavoidably contains the same reflexive problem of being theory-laden. (Tangentially, this is part of why I'm against one-size-fits-all policies; diversity of approaches allows us better grounds on which we can compare the effects of disparate regimes and policies, which seems to me a 'cost' from 'Golden Straightjacket' approaches and homogenous prescriptions)

But the graphs are specifically about an instance where we've (essentially) an infinite supply of homogenously skilled workers that firms can hire and fire at will at no cost as well as everything else being ceteris paribus (i.e. that the rest of the system stays fixed when the wage is increased). No one who actually understands those graphs would actually expect to see them in reality when the minimum wage was increased because well, eh, the real world is very different.

The simplest example of something closer to the real world is that a firm has two choices when the minimum wage is increased, fire workers and/or raise prices. A rise in the minimum wage might cost no jobs but result in inflation in prices of goods produced by the "minimum wage sector" (remember that people on the minimum wage have more money now so they could afford to pay more and still get the same amount of goods and services as they had before the wage increase). In the abstracted example portrayed in the graphs firms do not have the option of raising prices. If a minimum wage increase was combined with price controls then yeah, I'd say reality would look more like the graphs though you'd still expect to see some difference because of inelasticities in the system depending on the size of the increase.



The minimum wage example is good and useful because it forces people to see that you can't have a free lunch and that if you do something like raise the minimum wage you need to pay for it somehow. This would be why it's such a favourite in First Year Economics courses. As an example it's meant to underline how interrelated all the bits of the system are but because it's so simplistic it can't really capture reality directly. But honestly, anyone expecting the real world to behave like the graphs in an exact sense doesn't really grasp the topic very well.

Time Magazine

BenjAii wrote: »

That doesn't really make any sense though does it ?

All economic activity is completely connected to the body politic. All economic participants from individuals as producers/consumers/workers/business owners operate through & in the law, as do larger economic entities, up through businesses to countries and other entities. All dealings between these are both economic and at the same time political.


Trying to understand economics without giving any consideration to politics is a bit like trying to study medicine by insisting you just need to understand how a few individual body organs work in isolation.

I think the problem is you're taking my statement too literally. Of course there are some assumptions regarding things like the rule of law that are political in nature. However when I say "political", I mean statements like "it is morally wrong that 1% of the population own 40% of the wealth".