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When All Else Fails….

from Scott  Grannis at The Calafia Beach Pundit, Why the Global Gloom:

excerpt:

Despite all the gloom out there, and despite all the disappointment, there is reason to be optimistic. If we’ve learned anything in the current recovery it’s that 1) fiscal stimulus (e.g., the ARRA) doesn’t work and 2) monetary stimulus (e.g., QE and zero interest rates) don’t work either. Government policymakers cannot conjure up prosperity by spending more money or cutting interest rates. What’s needed is for government to get out of the way and boost incentives for the private sector to jump-start the economy. That means lowering marginal tax rates, simplifying tax codes, eliminating subsidies, and reducing regulatory burdens.

This is not rocket science. The entire world has witnessed massive, almost laboratory-type experiments in fiscal and monetary stimulus fail to deliver the promised results. There’s nothing left to try except what is most likely to work. Politicians need to hand the reins over to the private sector and market forces and step aside. The world’s stock markets seem to be saying that this is a real possibility that may come to fruition within the foreseeable future.

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Insulated Decisions

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From John Cochrane, The Grumpy Economist, Behavioral Political Economy

excerpt:

People do dumb things, in somewhat predictable ways. It follows that super-rational aliens or divine guidance could make better choices for people than they often make for themselves. But how does it follow that the bureaucracy of the United States Federal Government can coerce better choices for people than they can make for themselves?

For if psychology teaches us anything, it is that people in groups do even dumber things than people do as individuals — groupthink, social pressure, politics, and so on — and that people do even dumber things when they are insulated from competition than when their decisions are subject to ruthless competition.

So on logical grounds, I would have thought that behavioral economists would be libertarians. Where are the behavioral Stigler, Buchanan, Tullock, etc.? The case for free markets never was that markets are perfect. It has always been that government meddling is worse. And behavioral economics — the application of psychology to economics — seems like a great tool for understanding why governments do so badly. It might also inform us how they might work better; why some branches of government and some governments work better than others.

HKO

Bureaucracies are also insulated from accountability. Political factors make it much harder to admit mistakes or failures.  Business organizations are also resistant to change but market forces are far less political and often blind and brutal.  Bureaucracies will make better decisions when they face the same accountability faced in a bankruptcy court.

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Inequality and The Tax Reform of 1986

In The Wall Street Journal Phil Gramm and Michael Solon write How to Distort Income Inequality- The Piketty-Saez data ignore changes in tax law and fail to count noncash compensation and Social Security benefits.

excerpt:

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown. This change in the structure of American businesses alone accounts for roughly one-third of what they portray as the growth in the income share earned by the top 1% of earners over the entire 1979-2012 period.

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Throwing The Puppy Into the Class

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:

Finally, why is “inequality” so strongly on the political agenda right now? Here I am not referring to academics. Kevin has been studying the skill premium for 30 years. Emmanuel likewise has devoted his career to important measurement questions, and will do so whether or not the New York Times editorial page cheers. All of economics has been studying various poverty traps for a generation, as represented well by the other authors at this conference. Why is there a big political debate just now? Why is the Administration and its allies in the punditry, such as Paul Krugman and Joe Stiglitz, all a-twitter about “inequality?” Why are otherwise generally sensible institutions like the IMF, the S&P, and even the IPCC jumping on the “inequality” bandwagon?

That answer seems pretty clear. Because they don’t want to talk about Obamacare, Dodd-Frank, bailouts, debt, the stimulus, the rotten cronyism of energy policy, denial of education to poor and minorities, the abject failure of their policies to help poor and middle class people, and especially sclerotic growth. Restarting a centuries-old fight about “inequality” and “tax the rich,” class envy resurrected from a Huey Long speech in the 1930s, is like throwing a puppy into a third grade math class that isn’t going well. You know you will make it to the bell. 

That observation, together with the obvious incoherence of ideas the political inequality writers bring us leads me to a happy thought that this too will pass, and once a new set of talking points emerges we can go on to something else.

But if that is our circumstance, clearly we should not fall for the trap. Don’t surrender the agenda. State our own agenda. We care about prosperity. We care about fixing the real, serious, economic problems our country faces and especially that people on the bottom of society face. Globally, we care about the billion on $2 a day, that no amount of tax and transfer will help.

The “solutions,” the secrets of prosperity, are simple and old-fashioned: property rights, rule of law, honest government, economic and political freedom. A decent government, yes, providing decent roads, schools, and laws necessary for the common good. Confiscatory taxation and extensive government direction of economic activity are simply not on the list.

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The Solution is The Problem

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Economist John Cochrane writes in the WSJ-  What the ‘Inequality’ Warriors Really Want

Excerpts:

Yes, the reported taxable income and wealth earned by the top 1% may have grown faster than for the rest. This could be good inequality—entrepreneurs start companies, develop new products and services, and get rich from a tiny fraction of the social benefit. Or it could be bad inequality—crony capitalists who get rich by exploiting favors from government. Most U.S. billionaires are entrepreneurs from modest backgrounds, operating in competitive new industries, suggesting the former.

But there are many other kinds and sources of inequality. The returns to skill have increased. People who can use or program computers, do math or run organizations have enjoyed relative wage increases. But why don’t others observe these returns, get skills and compete away the skill premium? A big reason: awful public schools dominated by teachers unions, which leave kids unprepared even to enter college. Limits on high-skill immigration also raise the skill premium.

Americans stuck in a cycle of terrible early-child experiences, substance abuse, broken families, unemployment and criminality represent a different source of inequality. Their problems have proven immune to floods of government money. And government programs and drug laws are arguably part of the problem.

These problems, and many like them, have nothing to do with a rise in top 1% incomes and wealth.

Here’s another claim: Inequality is a problem because rich people save too much. So, by transferring money from rich to poor, we can increase overall consumption and escape “secular stagnation.”

I see. Now we need to forcibly transfer wealth to solve our deep problem of national thriftiness.

You can see in these examples that the arguments are made up to justify a pre-existing answer. If these were really the problems to be solved, each has much more natural solutions.

A critique of rent-seeking and political cronyism is well taken, and echoes from the left to libertarians. But if abuse of government power is the problem, increasing government power is a most unlikely solution.

If we increase the top federal income-tax rate to 90%, will that not just dramatically increase the demand for lawyers, lobbyists, loopholes, connections, favors and special deals? Inequality warriors think not. Mr. Stiglitz, for example, writes that “wealth is a main determinant of power.” If the state grabs the wealth, even if fairly earned, then the state can benevolently exercise its power on behalf of the common person.

No. Cronyism results when power determines wealth. Government power inevitably invites the trade of regulatory favors for political support. We limit rent-seeking by limiting the government’s ability to hand out goodies.

HKO

A great piece. The inequality fanatics are a solution looking for a problem.  We are likely better to have wealth determining power than to have power determine wealth.