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Desirable incentive effects of income taxation V

Fifth and last. Not relevant to the USA. Back in the day when US unions weren’t totally feeble, MacDonald and Solow wrote a brilliant paper on collective bargaining and tax based incomes policy.

Imagine a world in which firms must negotiation with unions (for example imagine Europe). The unions have two aims — they want high wages and they want high employment in the sector they represent. This means that a GM&UAW right to manage contract which specifies wages and working conditions and allows management to choose output, investment, and employment is Pareto inefficient. It makes sense to specify wages and the level of production (firms must produce more than the amount that maximizes profits given wages).

If unions have power (hah!) and behave optimally (ha!) representing workers in general and not just workers who have lots of seniority and job security (ha ha ha ha ha) then things are better, but not as good as they could be.

If we collectively really want high employment but don’t care about wages in sectors, then we want to give the rational firms and workers modified incentives. This might be because we really care a lot about the unemployed and don’t care so much how high incomes of the employed are. For MacDonald and Solow it is mostly because they think that higher wages mean higher prices so an equal increase in dollar wages in all sectors has no effect on real wages — that is that real wages are really relative wages — always and automatically.

In any case, the proposal is to reward increased employment and penalize increased wages. This changes the efficient choices for the union and firms. In theory it causes higher employment and lower inflation. In practice it is alleged to have worked on the rare occasions in which it was tried.

I ask why penalize increases in wages. The same effect occurs in the model if one penalizes wages (and rewards employment). The focus on the change of wages was natural back when macroeconomists were worried about inflation (paper published 1984). It follows from accepting the existing inter-industry wage structure. It follows from unions being powerful back then so a proposal which would generally punish unionized workers would not get support from Democrats in congress. That was long ago (kids believe me — I was alive back then — things were different — also they still are that way in Italy).

So in the model as written (and published in a top economics journal the AER) the income tax causes increased efficiency. The proposal is to tax income and subsidize employment (that is have an income tax and an EITC).

In theory this should work. In practice it works.

Desirable Incentive Effects of Income Taxation III

This is the third post in a series. I will discuss advantages of income taxation different from the obvious advantage that taking from people with high income hurts them less than taking from people with low income. Here again, I will assume that, in equilibrium, income tax is returned to the people who pay it as a lump sum. I do this to focus on the incentive effects of income taxation.

The first two posts are here and here.

In standard models, these effects are undesirable and amount to a deadweight loss which is second order in the tax rate. However, the standard models rely on standard assumptions which are completely implausible. They are used, because it is guessed that the policy implications don’t depend on the absurd assumptions. The policy implications always, in fact, follow from the assumptions.

In this post, for the third and last time, I will relax the assumption that people are 100% purely selfish and care only about their own consumption and leisure. Instead I will assume that people maximize the sum of their pleasure from consumption and leisure plus a constant far less than one times other people’s pleasure from consumption and leisure.

Rescuing Disposable Time from Oblivion

Two hundred years ago this February, Charles Wentworth Dilke anonymously published a pamphlet titled The Source and Remedy of the National Difficulties, deduced from principles of political economy. Four decades later, Karl Marx would describe the pamphlet in his notes as an “important advance on Ricardo.” In his preface to volume two of Capital, Friedrich Engels described the pamphlet as the “farthest outpost of an entire literature which in the twenties turned the Ricardian theory of value and surplus value against capitalist production in the interest of the proletariat” and credited Marx with having saved the pamphlet from “falling into oblivion.” 

In the 1960s and 70s, Marx’s notebooks from 1857 to 58 were published in translation as the Grundrisse, a section of which – known as the “fragment on machines” – became the subject of much enthusiastic commentary and theoretical controversy. Some of the most evocative and heralded passages of the fragment dealt with the concept of “disposable time,” which Marx had adopted, with citation, from the anonymous pamphlet. But Marx’s rescue of the pamphlet from oblivion was far from convincing. With few exceptions, the discourse on Marx’s fragment on machines ignored The Source (pun intended) of Marx’s category of disposable time.

For Marx, disposable time referred not only to time off work for rest and recreation but more crucially to an explosive contradiction at the heart of the capital accumulation process. Continued accumulation required both the continuous creation and appropriation by capital of ever more disposable time. Marx’s fragment on machines was received as prophetic when the translations appeared. It was as if Marx had been anticipating precisely this time — when automation, computerization, and robotization seemed to either herald “the end of work” or threaten universal precarity. Nevertheless, The Source and Remedy continued to languish in obscurity – if not total oblivion. Few copies and no translation of the pamphlet were to be found in the archives of libraries. Eventually, a microfilm copy of the pamphlet became available in the 1970s as part of the Goldsmiths’-Kress Library of Economic Literature. The full collection of old documents cost around $200,000 in 1980 dollars – the equivalent of $3,000,000 in current dollars. 

You’ve Already Seen These Questions

You’ve Already Seen These Questions

  1. Why is it that no existing society, nor society that ever existed, has arrived at universal prosperity, considering that in all times, and in all societies, excepting only the very barbarous, a few years would naturally have led to it?
  2. How is it that notwithstanding the unbounded extent of capital, the progressive improvement and wonderful perfection of machinery, canals, transportation, and all other things that either facilitate labour or increase its produce; that the population instead of having its labours abridged, works more hours per capita than it did years ago?
  3. Why has society never arrived at the enviable situation of universal abundant leisure, although so immediately within its grasp?

Wages and The Market

In the 19th century, employers stove off employee demands by bringing in immigrants willing to work under existing conditions. In the 20th Century, consequent the Great Depression, prohibition of child labor, immigration reform, … it was no longer so easy for employers to ignore workers demands. Unions took root and membership grew and so did the workers’ wages and benefits; welcome: the end of child labor, the 40 hour week, living wages, and paid vacations.

Fast forward to the late 1960s: Beginning of the end for US manufacturing dominance. Unionized industries moved south in quest of lower wages; thence to Mexico, … Fewer and fewer union jobs, fewer and fewer union members. 1970S, manufacturing exodus to Asia begins; labor becoming more and more irrelevant in US, unadjusted wages stay the same. 1980S, Immigrants from Mexico, Central America, and Asia brought in to work for less. Wages continue decline. 2000, Bush II mounts assault on labor and small business. They didn’t call; it that, but that is what it was. The intent was to put labor in its place. Dems remain on sideline, clueless. 2008-2016, Dems still clueless, went with rhetoric and old fashioned religion. 2016, Trump. 2020, Dems still clueless, keeping talking about the good old days, the good old union days.

To Do I, II, & III

The COVID-19 Pandemic, the inadequate response thereto, and the incompetency of the Trump Presidency in general, combined, have exposed our nation’s weaknesses and failings to an extent unknown since at least the Great Depression. This is likely a do or die moment for America. Recovery will be difficult. Improbable unless we are careful in our choice of goals and daring in our efforts to achieve them. The margins for error do not allow for dawdling. Attempting to just return to a time before Trump and The Pandemic would be disastrous. A time like this should also be seen as a time of opportunity.

First, we must rid ourselves of denominational economics such as Capitalism, Socialism, Hayekism, Free Marketism, … These, but ideologies, dogmas, that some would impose on economics, on the rest of us; have done the Nation great harm. They are, at their very best, reasonings of a time past. As likely to be the answer to today’s problems as Adam Smith is to rise from his grave.

As a first step toward becoming again competitive in today’s world; we must stop blindly paying twice as much for inferior healthcare, internet, and cellphone service,… as is being paid in other developed nations; and while we are at it, we need to solve our homeless problem. These are all essential services that should be provided to all. In the grand competition of things; we’re losing. Have been for a while. Were before the pandemic. Ideology is a luxury we can no longer afford.

Let’s pay for these things that need to be done, and help with our wealth distribution problem, too, by taxing the piss out of the too rich and too profitable. Apple, Google, Amazon, Facebook, Microsoft, Sheldon, Warren, …; fun and games are over guys, time for you to pay up.

Let’s pay for these things that need to be done by cutting the ‘Defense’ Budget in half. Halve the number of Generals, the number of Admirals, the number of Aircraft Carriers, the number of Missiles, …; and full-stop attacking other nations. Half of $720+Billion is $360+Billion; $360+Billion is aplenty for Defense, nothing for Attack, and about right for expanding Medicare to Medicare For All. Ike was right about that and Harry was right about health care.

I. Internet Access and Cellular Networks

All those fireman who died because of poor communication on 9/11/2001 should have taught us the need for an ubiquitous cellular network. Mobile radio networks separate cellular networks should have shown us the need for one network. A police car with a half dozen radio antennas on the roof is ridiculous.

So, too, the fact that our cell phone uses a cellular network, our computers use a cable based internet service, and that we need a WIFI router to use our laptops. What’s now the cellular network should be the WIFI router and these routers should be all over our homes, all over every floor in every building, everywhere on our streets, and all across and over rural America. Ubiquitous. Today, thousands and thousands of teachers across America are trying to remotely teach kids, many of whom have very limited internet access, over an internet system that is not reliable. When the fires struck Santa Rosa, the cell towers went down. The internet w/ phones must work at all times during normal times and during times of emergency; needs to be bullet proof. This new inclusive internet is too critical to be trusted to the ‘Market’. Cell phone and Internet should be one and that one should be regulated as a public utility; a service, as a service application, and, as always, the application dictates. Not the ‘Market’.

As a Post Office service, maybe?

In order to fully utilize our Nation’s productivity, better fulfill our personal lives, and assist in times of emergency, the Internet needs be ubiquitous and bulletproof. We should be able to access the internet from our backyards, on a hike, in the mountains, in transit, …; from anywhere we are or can be. It was a big mistake letting cable companies have the internet and the cell phone companies the phone towers. Let the cable companies have Cable TV. Internet and cell phone transmission should be one and the same; should be a Public Utility. It isn’t about ideology, it’s about how it should be; what should be. Half-arsed won’t get it. If we continue to stick with ideology and dogma, China, Japan, and the EU will continue to eat our lunch.

Tone Deaf

Working-class Black and Latino Americans, more likely to be paid lower wages, less likely to own significant assets; feel that they are being deprived of a fair share; see this as a consequence of white privilege. Meanwhile, white working-class American’s see themselves as less than privileged, barely hanging on; feel that such demands by Blacks and Latinos amount to a threat to their meager share, their livelihood. Neither group is the other group’s problem, the two groups have a common problem; America’s wealth and income distribution problem.

In a prosperous nation with more than 800 billionaires, no one should have to work for low wages, work multiple jobs, in order to survive. Yet, not enough is coming down to the working class for sharing. Robbing Peter to pay Paul is not the answer. It is because of America’s unfair income distribution that the two groups are being pitted against one another in their struggle to eke out a living. More needs to come down to the working class in toto. Less needs to go up to the already wealthy.

While the Democratic Party seeks to attract the vote of working-class Blacks and Latinos, Republicans have made significant progress in attracting votes from the white working-class; thus splitting, thereby negating, the working-class vote. Choosing sides is not the answer. These are the same group with an artificial distinction being made on the basis of race and ethnicity. There is only one side here – that’s the side of the working class; the side of a majority of Americans.

Catching up with wages, income, and layoffs

Catching up with wages, income, and layoffs

Yesterday and today have seen several significant data releases. Let’s catch up.


The Employment Cost Index was released for Q2 this morning. This is a particularly important release because unlike the monthly “average hourly wages” number, this report normalizes by job category, e.g., it compares clerks’ wages in Q1 with clerks’ wages in Q2. So if clerks have experienced widespread wage cuts, it should show up here. Given the many anecdotes of wage cuts I have read and heard about since the pandemic began, I have been waiting to see what this number would be.

And the answer is . . . Wages did rise, albeit at one of the slowest rates in over 10 years, less than 0.4%, in Q2:

Because consumer prices fell close to -0.9% in Q2, in real inflation adjusted terms wages for equivalent jobs rose even more for the quarter:

I was expecting very bad news, so I will take this “less good” news with a sigh of relief.


Personal income and spending for June were also released this morning. The bottom line is that income declined slightly, while spending rose:

Boosted by the $1200 relief check in April, and supplemental unemployment assistance of $600/month, income remains 5% higher than in February. Spending, meanwhile, has made up more than 1/2 of its April decline. This is also a positive – but one month ago. Since the supplemental payments end as of today, this picture is likely to change in the high-frequency data beginning in a week or two, although it won’t show up in the monthly data until August’s is released at the end of September.


Yesterday’s initial and continuing claims continued the recent string of bad news. While the important non-seasonally adjusted initial claims did make a pandemic low, these were still over 1.2 million for last week. On an adjusted basis, initial claims rose again:

Continuing claims for two weeks ago also rose on both an adjusted and non-seasonally adjusted basis:

In other words, both layoffs and unemployment are likely increasing. We’ll find out next week with the July employment report whether new hires and rehires continued to outpace layoffs, as they have in the past two months, or not.

So the good news – at least for now – is that we do not appear to be in a wage-deflationary spiral. The bad news is that the underpinnings of the good news has started to go away in the past few weeks.

Stephen Miller’s Racist Fix for Race Relations

Word is circulating that Stephen Miller is writing Donald Trump’s speech on race relations. I’m going to go out on a limb and predict that Trump’s “solution” to the current malaise in the U.S. will involve extending a ban on immigration and expanding enforcement and expulsion of undocumented individuals. This seems like a safe bet to me because Miller really is a one-trick pony and Trump relishes rehashing his greatest hits. Maybe Miller will toss in some “enterprise zones” or other ornamental trivia but the meat will be anti-immigration.

They playbook for this will be Miller’s Immigration Handbook for a New Republican Majority that he wrote for Jeff Sessions in 2015. Footnote 21 of that handbook states that, “Amnesty and uncontrolled immigration disproportionately harms African-American workers, and has been
described by U.S. Civil Rights Commission member Peter Kirsanow as a ‘disaster.'” The handbook also cites a poll commissioned by Kellyanne \Conway, one finding of which was that “86% of black voters and 71% of Hispanic voters said companies should raise wages and improve working conditions instead of increasing immigration.”

Two years ago, I posted a couple of pieces discussing Miller’s handbook in more detail: The Lump That Begot Trump and Goebbels or Gompers?: A Closer Look at Stephen Miller’s Immigration Manifesto. I hope these pieces provide some insight into just how dangerous and effective Miller’s and Trump’s anti-immigration rhetoric can be, especially given the hypocrisy of neo-liberal promotion of immigration as exemplified by Tony Blair’s and Gerhard Schroeder’s “Third Way” advocating “a new supply-side agenda for the left“. To put it bluntly, “Third Way” immigration policy was intended to create jobs by keeping wages low through an abundant supply of labor. The transfer of income from the working class to the wealthy would provide ample funds for “investment.”

In short, Miller’s and Trump’s anti-immigrant rhetoric is dangerous and effective because Blair and Schroeder (and Clinton and Obama) enacted right-wing, supply-side economic policies in the name of “the [‘responsible’] left.”

THE Important Graphic from April’s Unemployment Report

What happens when you downsize a large number of people? Well, it depends on the cohort downsized. In this case,

Figure 1

That’s correct; Average Hourly Earnings skyrocketed from $28.67 to $30.01: up $1.34.

For context, that one-month change matches the average hourly earnings growth from September/October of 2018 until March of this year–18 months of increases in a month. And all it took was eliminating the jobs of about 6% of the U.S. population (not just workers).