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Is Inequality Always Bad?

University of Chicago economist John Cochrane has written one of the most unique and insightful perspectives on inequality in his blog, The Grumpy Economist.  Read Why and how we care about inequality in its entirety.  It is about 6 pages long.

excerpts:

Yes, the reported, pre-tax income and wealth of the top 1% in the U.S. and many other countries has grown. We have an interesting debate whether this is “good” or “market” inequality – Steve Jobs starts a company that invents the iphone, takes home 1/10 of 1% of the welfare (consumer surplus) the iphone created, and lives in a nice house and flies in a private jet – or “bad,” “rent-seeking” inequality, cronyism, exploiting favors from the government. Josh Rauh made a good case for “market.” It’s interesting how we even use different language. Emmanuel Saez spoke of how much income the 1% “get,” and Josh how much the 1% “earn.”

In middle incomes, as Kevin Murphy told us, the “returns to skill” have increased. This has nothing to do with top-end cronyism. As Kevin so nicely reminds us, wages go up when demand for skill goes up and supply does not. He locates the supply restriction in awful public schools, taken over by teacher’s unions. Limits on high –skill immigration also restrict supply and drive up the skill premium. There’s a problem we know how to fix. Confiscatory taxation isn’t going to help!

More “education” is one obvious “solution.” But we need to be careful here, and not too quickly join the chorus asking that our industry be further subsidized. The returns to education chosen and worked hard for are not necessarily replicated in education subsidized or forced. Free tuition for all majors draws people into art history too. Forgiving student loans for people who go to non-profits or government work, or a large increase in wealth and income taxation, remove the market signal to study computer programming rather than art history, which raises the skill premium even more. Saudi Arabia spends a lot on “education” in Madrases around the world. In a Becker memorial conference remember three rules: Supply matters, not just demand; don’t redistribute income by distorting prices; and human capital investments respond to incentives. (By the way, I’m all for art history. Just don’t pretend that the measured economic returns to education will apply.)

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Financial Bloat

A black hole for our best and brightest by Frank Tankersley at The Washington Post
Excerpts:

It’s not that finance is inherently bad — on the contrary, a well-functioning financial system is critical to a market economy. The problem is, America’s financial system has grown much larger than it should have, based on how well the industry performs.

To understand how and why that is, think of money as water and the financial system as a series of pipes. Ideally, the pipes deliver the water from people who have stockpiled it (investors) to people who want to put it to productive use (entrepreneurs, executives, home buyers, etc.).

Over the past half-century, America’s financial industry built a whole bunch of new pipes. The sector grew six times as fast as the economy overall during the past three decades. Other advanced countries didn’t see anywhere close to that growth in their financial sectors.

Some of America’s growth was driven by Washington. Lawmakers kept encouraging financial innovation, which built a market for smarter investment bankers. They did that by changing the tax code to encourage businesses to hire financial whizzes who could spin ordinary income into certain, preferred types of investment income, and by loosening restrictions on the kinds of financial activities that the titans of Wall Street could engage in.

But starting at about the time that Jackson joined Goldman, when Congress began tweaking investment-tax rates, Wall Street started drawing more educated workers. This made the average finance salary go up — from less than $50,000 a year in 1981 (which is about $100,000 in today’s dollars) to more than $350,000 a year in 2012.

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The Laffer Curve at 40

laffer

From Bloomberg Businessweek Haley Griffin writes The Napkin Doodle That Launched the Supply-Side Revolution

How would you classify the Laffer Curve today?
Laffer: It’s the same as always. It works. It’s not Republican, it’s not Democratic, it’s not conservative, it’s not liberal, it’s not left-wing, it’s not right-wing. It’s economics. People respond to incentives, and if you make something more attractive, they will do more of it. If you make something less attractive, they will do less of it. If you tax rich people and give the money to poor people, you are going to get lots and lots of poor people and no rich people. The dream in our country has always been to make the poor rich, not to make the rich poor.

tips to Calafia Beach Pundit

HKO

Laffer simply applied basic principles of economics to tax policy. Supply side economics is just simply ‘economics’.  Supply and demand are just twin sides of the same coin.  My supply is the source of my demand.

Yet this simple principle has been lost in terrible government policy where complexity is designed to obfuscate reality (Gruber), and mechanisms are created to hide true costs often from the proponents themselves.  The economic choice remains; it i snot extinguished when usurped by the government. Rather than to face the reality of tax policy the Laffer Curve has been demonized as trickle down economics and voodoo economics, by those who poorly understand it.  Many from the right distort it by claiming all tax cuts pay for themselves- also not true.

It is easier to demonize the truth than to accepts its consequences.

 

 

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A Warrior for the Cause

gruber

From Jonah Goldberg in Townhall,  Jonathan Gruber Should’ve Been Time’s Person of the Year

For similar reasons, I think Time missed an opportunity in not putting Gruber on the cover. Tea partiers and Wall Street occupiers disagree on a great many things, but there’s one place where the Venn diagrams overlap: the sense we’re all being played for suckers, that the rules are being set up to benefit those who know how to manipulate the rules. The left tends to focus on Wall Street types whose bottom line depends more on lobbying Washington than satisfying the consumer.

But Gruber is something special. He was supposed to be better, more pure than the fat cats. Touted by press and politicians alike as an objective and fair-minded arbiter of health care reform, the MIT economist was in fact a warrior for the cause, invested emotionally, politically and, it turns out, financially through undisclosed consulting arrangements. The people who relied on his expertise never bothered to second-guess his conflicts of interest because they, too, were warriors in the same fight.

In speeches and interviews, Gruber admitted he helped the Obama administration craft the law in such a way that it would seem like it didn’t tax the American people when it did. Using insights gleaned in part from his status as an adviser to the Congressional Budget Office, Gruber helped construct an actuarial Trojan horse that could smuggle a tax hike past the CBO bean counters — because if the individual mandate had been counted as a tax, it would’ve been a big political liability for President Obama. (Fortunately for Obamacare, the Supreme Court saw through the subterfuge and called it tax, rendering it constitutional.)

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The Politics of Nostalgia

Howdy Doody

William Galston writes Populism Rises on a Wave of Frustration in The Wall Street Journal

excerpts:

Populism offers many satisfactions. Its narrative is clear and easy to understand. It identifies villains—corrupt officials, unresponsive bureaucracies, arrogant elites, large corporations, giant banks, immigrants, even the Jews. It legitimizes outrage, the expression of which is one of the greatest human pleasures. It flatters the people, whose virtue and common sense, it claims, could set the country right if only rich and powerful forces didn’t stand in their way. “The humblest citizen in all the land,” declaimed William Jennings Bryan more than a century ago, “when clad in the armor of a righteous cause, is stronger than all the whole hosts of error that they”—the elites—“can bring.”

Populism is the politics of nostalgia. It appeals to a better time in the past—whether that means the mid-19th century, when sturdy yeoman farmers and craftsmen formed the backbone of the economy; or the decades after Congress slammed shut the gates of immigration in 1924; or the mid-20th century, when assembly-line workers enjoyed secure jobs and middle-class incomes.

The ills against which populists inveigh are rarely illusory. On the contrary: Populism typically gives voice to genuine grievances, and in so doing gains credibility and energy.

“Large forces—technology, automation and globalization—are not inherently malign forces,” he said. The task for Democrats is not to turn back the clock to the fleeting period when the American economy dominated the world. It is rather, Mr. Schumer said, to “figure out ways for the middle class . . . to be able to thrive amidst these forces.”

But how? When it comes to the economy, the old answers have lost credibility. Few Americans believe that another tax cut—or, for that matter, another stimulus package—will restore middle-class opportunity. Citizens understand that something fundamental has changed, even if they cannot say what it is. You can, as Bill Clinton would say, “work hard and play by the rules” and still find yourself falling behind. You can borrow tens of thousands of dollars to finance a college education and still be a Starbucks barista. The old rules no longer apply, but it is not clear what the new rules are—if any exist.

On the Democratic side, populist economics has found its voice; not so for nonpopulist liberalism.

Like nature, politics abhors a vacuum. The right response to populism is to offer real solutions.

HKO

Our current choices seems to be between bad solutions and no solutions. But the lack of a solution from the government does not mean one will not develop in the market. Both parties have a real challenge to control their populist wings.  It is one thing for the OWS and the Tea Party to have their day in the media. It is quite another to let them decide important policies.