by Linda Beale
Growing inequality calls for both “predistribution” and (rightly directed) redistribution
In putting forward my theme of democratic egalitarianism, I have often noted that there is no such thing as an economically egalitarian society–there will always be differentials among people, those differences often relate to social class and the education, privileged upbringing, and networking connections that ensure success for some and deny success to others as well as to innate abilities, so that those differences inevitably translate into some being better off economically than others.
Because of those differences, the “powers that be”–i.e., existing concentrations of financial assets, prestige and associated political power among the privileged class at the very top of the income and wealth distribution– result in redistribution upwards from poor and middle class to the upper crust. And most in that privileged upper-crust think they’ve acquired it all on the basis of their own merit and that the reason others don’t have it is because they are irresponsible, don’t work hard enough, don’t have a good business sense or are just incompetent.
(That is of course the tale told by the like of Mitt Romney at his private fundraiser in Flordia, where he revealed his utter disdain for half of the US population and his self-indulging belief that he got where he is entirely on his own merit . He can’t even see, much less acknowledge, either his silver-spoon upbringing of class, wealth and connections or the various government-subsidized upwards redistribution from which he has benefited through capital gains preferences, carried interest treatment, disregard of the harm caused by his leveraged-buyout business model, and government subsidies through high-value government contracts and low-cost government loans.)
Therefore, I have argued, democratic institutions (government, programs, policies) must target achieving a sustainable economy that provides a decent livelihood for all. They must also prevent inordinate inequality, because huge inequality among the citizenry foils all attempts to achieve either a sustainable economy or sustainable democratic institutions.
That means that government policies must focus on creating paths for redistributiondownwards from the upper crust to the middle and lower classes, undoing the corporatist top-down approach that has supported class warfare and allowed the wealthy to capture most of the productivity gains since Reagan’s presidency. Two government systems can work, on the margins, to achieve some level of downwards redistribution–benefits and taxes. Benefits do so by providing a safety net under those most vulnerable who have never achieved a sustainable economic livelihood–the unemployed and unemployable, the sick, the elderly, the children who have poor schools, poor families, and inadequate shelter, nutrition and opportunity. Taxes do so by taking more from those who have grabbed an inordinate portion of the resource pie and using those revenues to fund benefits as well as infrastructure (human and physical) that supports the efforts by ordinary Americans to achieve sustainable livelihoods.
We have been moving backwards on both of these systems. The radical right has spent the last 30-40 years pushing an agenda that ultimately wants to (i) dismantle or radically reduce benefits programs (voucherizing medicare, privatizing social security, cutting back on unemployment, allowing states to reduce medicaid and children’s health coverage, etc.) and (ii) eliminate taxes on corporations and the primary source of income of high-wealth individuals through a gradual reduction in progressive rate structure, elimination of the estate tax, elimination of capital gains taxes (and treatment of wealthy people’s wages as though they were capital gains, through provisions like stock options and carried interest). Paul Ryan’s positions on Medicare and Social Security should be a clarion-call to get out the vote–against the Romney-Ryan ticket– of every person who does not earn more than $300,000 a year. The Norquist-Koch Brothers-Karl Rove-Ryan-Romney agenda on taxes should similarly cause ordinary Americans who earn less than $300,000 a year to take to the streets and to refuse to vote for any member of the GOP.
Recall that the beginning of the current trend towards too little tax revenues and especially too little taxation of the ultra rich was radical reduction of rates with purported base-broadening (such as elimination of the capital gains preference, creation and then ramping up of the alternative minimum tax). As could be expected, lower rates lived on (and were lowered even more by Bush) but much of the base broadening was short-lived: lobbying by the privileged at the top led to a quick return to a capital gains preference and the undoing of the AMT as an inequality leveler. The Bush tax cuts rewarded corporate owners and managers and the wealthy class with extraordinary tax relief, while imposing long-term deficits on the country, behind a cheerful facade of “tax simplification” that was irrelevant for the 70% of the population that uses the standard deduction.
There is a third leg to the reduction-of-inequality stool. Tax reform that restores a truly progressive income tax is one leg. Benefit reform that builds on the achievements of the New Deal rather than destroying them is another. The third leg is what some call “predistribution”–paying attention to the means by which the uppercrust has seized all of the productivity gains and reduced the ability of everyone else to have a decent, sustainable livelihood.
British Labour leader Ed Miliband has called for predistribution as a new agenda in Britain. See Predistribution: A Big New Idea, Noted, The Nation (Oct. 8, 2012), at 5.
The term [predistribution] was coined by US political scientist Jacob Hacker, who in 2011 noted that discussions of government responses to inequality often begin and end with redistribution [downwards]–taxing the rich to provide benefits for the rest. But that’s only half the equation, Hacker said, uring progressives to pay more attention to ‘the way in which the market distributes its rewards in the first place.’ That includes regulations that protect consumers and empower workers: ‘The regulation of markets to limit extremes and give the middle class more voice is hardly easy. … But it is both more popular and more effective than after-the-fact mopping up.’
Milibrand agrees. Noting the high human cost of austerity, he said, ‘We need to care about predistribution as well as redistribution.’ After trying ‘to make work pay better by spending more on trasfer payments,’ he argued, government must ‘also make work pay better by making work itself pay.’
These concepts–predistribution (making up for malfunctioning markets to make work itself pay) and redistribution downwards (actual reallocation from market results through taxation and benefit policies)–are closely interrelated. Successful redistribution downwards augments the ability of workers to afford necessities and small luxuries, and that economic activity empowers workers in the markets and gives workers an opportunity for a voice in the markets and workplaces compared to a position where employers and owners have almost dictatorial control and can garner all the workers’ productivity gains for themselves. Focus on predistribution, however, reminds us that worker rights are essential to a sustainable, broad-based economy
What kinds of rights are we talking about? Surely a critical right is the workers’ right to collective bargaining (supported by a “yes” vote on Proposal 2 in Michigan that would put that right in the state constitution where it could not be removed by the radical right legislative block). Surely the right of the state to build infrastructure (that will create worker jobs) rather than allowing a wealthy tycoon to corner the market on international bridge crossings in Detroit and hog the revenues for himself rather than allow them to be earned by the people (Proposal 6, vote “no” so that Matty doesn’t have veto power allowing him to co-opt public infrastructure for his private profits).
Predistribution pays attention to how much ordinary workers are paid compared to how much the managers at the top get out of a company. We should be “pushing local employers to narrow the pay ratio between the top and the bottom ranks of their workforce.” Id. For too long, we have acted like it is just fine for the “market” to demand that the wealthy be allowed to exploit communities and workers for their own benefit. We need to say no.
Predistribution pays attention to regulations that protect workers–from worker safety to time off to family leave. It disregards the multinational corporations’ pleas for laws to suit them and instead asks why we should be subsidizing their ability to move active business assets to foreign countries and leave US workers unemployed. It acnkowledges that we have for too long allowed corporate owners and managers to snow us with their claims that “globalization” and “free trade” worked for our benefit, when in fact these are excuses for offshoring jobs so that the owners and managers can enjoy even higher “rent” profits. As Milbrand says, “It’s just not true that all the top CEOs will leave the country unless we pay them whatever they demand.” Id.
cross posted with ataxingmatter
I am going to try to explain the fundamental difference between federal investment GM and federal loan guarantees. This is politically important, because the Obama administration invested in GM by buying shares of new GM*. Romney denounced this and said that the Federal government should guarantee private sector loans rather than invest directly. The argument made by everyone who was actually involved in the bailout is that Romney’s proposal is nonsense, because there were no private sector entities capable of making loans of the necessary scale at the time.
I think there is a way to explain this argument to the person in the street (most of whom fortunately are just not buying Romney’s line so why worry). Let’s consider a specific private entity. For example Robert Waldmann. Would Mitt Romney argue that the solution is for the US gov to guarantee loans and then for me Robert Waldmann to loan tens of billions to GM ? It wouldn’t work. I don’t have tens of billions on hand. No one would loan Robert Waldmann tens of billions to loan to GM. That would be risky, because the US Gov guarantees payment to me but not payment by me.
So the straw^10 Romney argument that the US government shouldn’t have sent money but rather guarantee loans from me, Robert Waldmann, is silly. So is the actual Romney argument. The loans to be guaranteed would have been made by large money center banks. In 2009, all of them were just like me in the sense that no sane person trusted us with billions. They didn’t have the cash on hand (normal) and couldn’t raise it (not at all normal) because their solvency was questionable. They couldn’t borrow long term from each other. The banks themselves borrowed from the Federal Government. In particular they borrowed from the Federal Reserve System, something which is always an option for US commercial banks and bank holding companies (that is after the crisis for all US banks) but something they normally don’t do.
They could borrow from each other short term paying a high risk premium. They couldn’t borrow money and tie it up for years without paying a gigantic risk premium to their creditors which they would have had to pass on to new GM which would not have been viable.
If Romney really believes what he is saying, he demonstrates that he doesn’t understand finance at all. Of course he does and he’s lying. He knows that Obama did the risky but wise thing and he bet on failure and lost.
update: Josh Marshall wrote this better here
Yes, both Obama and Romney favored the companies going through managed bankruptcy. But the US auto industry entered its own existential crisis as the world economy, particularly credit markets, were at a standstill. Even with government guarantees there was no private capital for the GM and Chrysler to power to keep them functioning as they went through the bankruptcy process. And that was the rub. Government guarantees weren’t enough. The government had to write checks and at a moment when bailouts of all sorts had become politically toxic.
(Dan here…a recent talk I attended on water in Burkina Faso reminded me to look at another important issue even for the US)
Poseidon Resources has been lobbying to build a desalination plant in Carlsbad (San Diego County), California for around a decade, and I’ve been skeptical of that proposal (earlier posts) — mostly because water consumption in San Diego is still quite high (ranging from 100-300 gallons/capita/day; compare that number to Sydney or Melbourne at 50 gcd!).
It makes more economical and environmental sense, in other words, for San Diego to reduce its demand before going for more supply (this year-old analysis of their supply alternatives [pdf] lists desalination at $1,600/af but that cost is now up to $2,000+/af).
But San Diego politicians are not thinking in terms of environmental or economic sustainability. They are at war with the Metropolitan Water District over imported water and in alliance with property developers who want more supply to build more subdivisions. (It’s ironic, in fact, that SD leaders worry about the burden of paying too much for more water imported from Met via the Delta [pdf] when they are prepared to throw caution to the wind for a local “solution.”)
Those are just some preliminary comments and opinions based on my observations over the past 7-8 years, but there are some new developments that make these comments even more relevant.
First, the San Diego Country Water Authority is thinking of signing a 30-year water purchase agreement to buy water from Poseidon, an agreement that will make it possible for Poseidon to borrow money from the State of California (!) for constructing the plant.
Second, that agreement does not specify how much equity (“skin in the game”) Poseidon will bring to the table in financing the $900 million project, but it DOES specify how much money Poseidon will receive for “overseeing” a project that it will neither design, nor construct, nor operate.
Third, it appears that SDCWA will pay about $3.2 billion over 30 years for water that will be twice as expensive as its existing water supplies from Met. Given the industry-norm of charging average cost for water, that means that SDCWA will be selling water it buys for $2,000 per af for about $1,200 per af. Try swinging that business model past Wall Street. (The Independent Rate Oversight Committee sure doesn’t like it! [pdf])
Fourth, you should read my 6-page analysis of the water purchase agreement (all 550 pages of what-the-hell-are-these-lawyers-saying!?!). The Surfrider Foundation paid me to prepare it, but — as usual — I acted as a consultant with a conscience: I put my original opinions in that report, since I am paid for honesty and accuracy, not groupthink. But read it for yourself.
Bottom Line: San Diego should not build a desalination plant because it would be an expensive non-solution to water reliability problems that are actually caused by poor management of regional water at Metropolitan and a failure to restrict demand to sustainable levels.
reposted from Aguanomics
While he (uncharacteristically) doesn’t explain or deploy it terribly well, Paul Krugman points to some very excellent research on the relationship between private debt levels and the depth and duration of (especially financial-crisis-driven) recessions. The Schularick/Taylor Vox EU article is here. The Jorda/Schularick/Taylor paper is here (PDF).
I think the work is excellent in large part because JS&T address one of my pet peeves: sample size and selection. Unlike Reinhardt and Rogoff, who make wild claims about government debt/GDP levels above 90% based on a mere handful of sample points (examples that mostly aren’t representative of our current or recent situation), and unlike the kind of single-country and short/single-period analyses that you see all the time, and totally unlike shameless cherry pickers such as John Taylor (who dares to call 1981 — unequivocally a Fed- and interest-rate-driven recession — a financial crisis) JS&T look at a long-term, representative, multi-country data set culled from:
o Fourteen advanced economies that at least in that sense are representative of the economies that at least I am interested in understanding (i.e., ours). “The share of global GDP accounted for by these countries was around 50% in the year 2000.”
o Over 140 years
o Using a very clear definition of “financial recession” (below).
They end up with a sample of 208 recessions in advanced economies over that period, 35 of which were financial recessions.
And then they look at multiple lag times (something that is far too often absent from time-series studies): with conditions X in year zero, how do economies perform 1, 2, 3, 4, and 5 years later? (I rather took this issue to the limit in comparing US and EU growth rates, here.)
Results? I’ll cut to the comment that I just left on Krugman’s blog, with graphics added and some links and editing for your reading pleasure.
…a country’s corporate and financial sectors experience a large number of defaults and financial institutions and corporations face great difficulties repaying contracts on time. As a result, non-performing loans increase sharply and all or most of the aggregate banking system capital is exhausted. This situation may be accompanied by depressed asset prices (such as equity and real estate prices) on the heels of run-ups before the crisis, sharp increases in real interest rates, and a slowdown or reversal in capital flows. In some cases, the crisis is triggered by depositor runs on banks [yes we saw some — Northern Rock — but largely a cause rather than an effect], though in most cases it is a general realization that systemically important financial institutions are in distress. [No names, just initials: Lehman Brothers. AIG.]“
A grateful nod to my fellow contributors on this subject: While I find Jazzbumpa and Arthur’s arguments about private debt and growth compelling, I do not find the single-country (U.S.) evidence that they provide conclusively convincing (for the reasons outlined above, and here [also see comments there]). I am pleased to find that a far more comprehensive and more systematically analyzed data set seems to support their conclusions. JS&T don’t do 20-year lags, so it’s hard to know from them what the long-term growth effects are of excessive private-debt runups. But they certainly display a mechanism whereby such runups could damage long-term growth: by savaging that growth in rare but devastating financial recessions.
And it’s worth remembering who that devastation is visited upon: the middle class and the poor. The rich do just fine.
Recessions are nature’s (and neoclassicals’) way…of keeping the little guy down.
Cross-posted at Asymptosis.
I was looking for something else, but in the latest poll the ARRA has become popular
United Technologies/National Journal Congressional Connection Poll conducted by Princeton Survey Research Associates International. Sept. 7-9, 2012. N=1,012 adults nationwide. Margin of error ± 3.7.
Asked of those who have heard about the program:
“From what you have seen or heard about the stimulus program do you think it was the right thing to do for the country or the wrong thing for the country?”
Right Thing 55%
Wrong Thing 36%
We are not talking about losing a debate. We are talking about winning a debate and not noticing.
Sad to say this has been yet another episode of “What Paul Krugman Said” (don’t you hate it when that happens).
Many other polls show majority support for fiscal stimulus. Somehow while the very serious elite was focused on austerity, the general public accepted Keynesian macroeconomics. And the elite didn’t notice.
Just click the link or read my effort to summarize after the jump (the link is better).
further down ABC/WaPo poll better way to create jobs cut taxes or spend on infrastructure projects
Spending on projects 52
Cutting Taxes 33
WaPo Kaiser family
Washington Post/Kaiser Family Foundation Poll. July 25-Aug. 5, 2012. N=3,130 adults nationwide. Margin of error ± 2.
“Which of these do you think is more important right now: increasing federal spending to try to create jobs and improve the economy; or avoiding a big increase in the federal budget deficit?”
tied 48% to 48%
Note that is “federal spending” including bureaucrats.
Same poll solid majority supports both “budget cuts to reduce the federal deficit” and “additional spending on roads, bridges and other public works projects”. Both as ways to help the “JOB SITUATION”.
Oh hell just click the link. In poll after poll a plurality supports more stimulus. Your friend’s views basically can’t be reconciled with the polling data.
I think what happened is when the stimulus, which was supported by a majority when passed was new and things were still bad, the public rejected Keynes. Now that things aren’t quite so bad, the public is re-Keynesed. Altrnatively the public is against whatever the politicians have done lately and lately they have been heading towards fiscal cliffs.
Comment on Ryan Cooper who lamented the Failure of the Liberal Idea Machine. I was claiming that the failure was of the liberal spine machine, went looking for year old polls and was shocked by recent polls.
by Kenneth Thomas
Starbucks in Hot Water Over British Tax
Reuters (via Tax Research UK) reported on October 15 the results of an extensive investigation into the British unit of coffee giant Starbucks, the second largest restaurant firm in the world after McDonald’s. It turns out that the company has reported losing money in every one of the 14 years it has operated in the country, even as it tells investors that the unit is profitable. Reuters documented this latter fact by getting the transcripts of 46 investor conference calls Starbucks has made over the last 12 years.
For the last three years, Starbucks has paid no income tax at all in the United Kingdom. This is a textbook case of using transfer pricing to hide your profits from the taxman and make them show up in tax havens instead.
According to the Reuters report, there are three potential routes the company has to make its profitable British subsidiary legally have no tax liability.
1) The British subsidiary pays a Dutch subsidiary for the use of trademarks and other intellectual property of Starbucks, at a cost of 6% of sales as royalties. An undisclosed amount of this barely profitable unit’s revenue is paid to another Starbucks subsidiary in Switzerland. Where the money goes from there only Starbucks and its accountants, Deloitte, know for sure.
2) Starbucks UK buys its beans through another Swiss subsidiary and they are roasted at a second Dutch subsidiary (this may be a pattern: pay a Dutch subsidiary, which pays a Swiss subsidiary). This gives a second opportunity for transfer pricing, although a transfer pricing investigation by Her Majesty’s Revenue and Customs (HMRC) in 2009-10 resulted in no penalties, the company told Reuters (HMRC would not comment). However, Richard Murphy reports that HMRC has been cutting audit staff and been subject to regulatory capture by the companies it is supposed to be regulating.
3) Finally, the British subsidiary’s operations are financed entirely through debt, for which it pays interest to other Starbucks subsidiaries. The interest is deductible from income in the UK and can accumulate in tax havens as income there. Reuters found that Starbucks UK pays at least 4 percentage points more in interest than McDonald’s UK does.
Paying zero corporate income tax (or corporation tax, as they call it in the UK) gives Starbucks a competitive advantage over other coffee companies that are purely domestic and can’t get out of the tax. Not surprisingly, this has ignited a firestorm of controversy in the United Kingdom. In the last 6 days, HMRC officials have been summoned for testimony before Parliament, probably in November. The Irish Congress of Trade Unions (which represents unions in Northern Ireland/UK as well as in the Irish Republic) has called for a boycott of Starbucks. And the company’s reputation has been simply hammered in the social media there, with studies by YouGov and Buzz showing sharp dips into negative territory on their measures of brand perception.
Of course, if Starbucks goes to all this effort to avoid British taxes, you’ve got to wonder what strategies it’s using to avoid taxes in the United States. Any reporters out there up for the challenge?
Lifted from Robert Waldmann’s more private thoughts:
I love this video.
I agree that it is very odd for Romney to brag about balancing a budget with a 1.5 billion dollar federal bailout. But what exactly does it mean for a manager of a firm to balance a budget ? I’d say the very minimum is to keep the firms you control out of bankruptcy. By this standard Romney is not a budget balancer at all. At Bain he made huge amounts of money relying on limited liability. Several Bain controlled firms went bankrupt. Those were budgets under Romney’s control (sole shareholder CEO and all that) which were as un balanced as budgets can be.
I know I am mixing up budgets and balance sheets. I am doing that to bend over backwards to try to meet Romney half way. Really a corporations budget isn’t balanced if it issues debt. Unbalanced budgets are the key to private equity. Romney’s whole career as a businessman is based on understanding that an obsession with avoiding debt is costly.
On this he is consistent in practice as well as being consistently dishonest, since as you note, he proposes a huge increase in the US budget deficit. The approach of loading an entity up with debt and not worrying about what happens if it can’t pay has worked very well for him so far, so why shouldn’t he stick with it_
I’m very sorry I wrote an outraged comment on your post critiquing #rateloweringbasebroadening (RLBB)for not critiquing it completely enough. In this video you make the key point that extremely high income people will gain money they sure don’t need from RLBB as they just don’t have deductions on the order of their income (importantly this refers to Romney style RL and maybe a bit of BB (but no details) and things are different if the BB includes raising taxes on capital income and capital gains).
On Gas prices, I note that US consumption is a large fraction of world consumption. A US gas tax probably would cause lower petroleum prices in the medium run (not immediately only after people trade in their SUVs for cars). It makes no sense for a country to pretend it is tiny when it is large. Laissez faire is optimal only when price taking is optimal. In the world petroleum market, the US acts as a monopsony which has no interest in maximizing profits. It’s as if Saudi Arabia ignored the effect of their exports on prices. Of course you know this (you praised Mankiw on the gas tax). Fleet economy standards may be a silly way to do it based on the US obsession with low gas prices, but I suspect that Obama’s policies are causing lower petroleum prices and will eventually cause significantly lower petroleum prices. “There is nothing [more] a US President can do” is true given and only given political limits.
(OK so enough being responsible. Now a dumb joke about a smart guy — a smart Pollack joke
Love the denunciation of rate cutting and base broadening. You are the most effective populist since President Jackson, Pollack.)