Income Inequality Part ???

Income inequality is a bogus issue.  If you want to help the poor then you need to look at serious issues including how to keep families intact, how to get folks to move to economic opportunities like the fracking boom in North Dakota, and reduce barriers like regulations on jobs or minimum wage increases.  The other thing you want to do is pay homage to the growth fairy.  The growth fairy has made us all rich.  Whether you call it Jonah’s Miracle or Deirdre’s Great Enrichment, growth is the key element to why we are all better off.

Robert Verbruggen at NRO has a nice article on how folks are trying to repackage income inequality to gin up the politics of envy.  He is reacting to a NYT article touting The Triumph Of Injustice by Emmanuel Saez and Gabriel Zucman.  Robert starts out with the book’s claims:

Per Saez and Zucman, while the rich have been pulling in more and more of the nation’s income — grabbing about a fifth of it now, double what they got a few decades back — they’re paying lower and lower tax rates. Indeed, in 2018, the richest 400 Americans paid the lowest overall tax rate (including state, local, and federal taxes) of any income group. While the very richest Americans in 1950 paid two-thirds of their income in taxes, in 2018 it was down below a quarter; even the full top 0.1 percent barely pay more than the bottom 90 percent these days. It’s not that much of an exaggeration to say we have a flat tax system, not a progressive one.

These claims seem silly when compared to the data on federal tax returns from the Tax Foundation:

The share of reported income earned by the top 1 percent of taxpayers fell slightly to 19.7 percent in 2016. Their share of federal individual income taxes fell slightly, to 37.3 percent.

The rich are making less than 20 percent of taxable income but paying over 37 percent of federal income taxes.  What the book is doing is making an invalid comparison between taxes computed on one basis and income computed on another basis.

Robert tell us measuring income is complicated:

As the JEC report details, this is only the first of many technical decisions researchers must make that affect the results. Should we worry about income inequality before or after taxes are taken out? Should we include governmental transfers as income? Should we analyze married couples together or separately, bearing in mind the decline of marriage in recent decades, especially among the poor? How to handle corporate profits that are retained rather than given out to shareholders? How to handle stocks that have grown in value but have not been sold?  [Emphasis added]

Yup, computing income is complicated.  We would like to give an example of the last item that we have made bold.  Income, as accountants and especially PhD students know, can be measured in a variety of ways.  Taxable income would be one and financial accounting income (GAAP) would be another but there are others.  When measuring the income, what accountants call unrealized holding gains (UHG) become a big issue especially for individuals. An UHR happens when an asset owned by an entity or individual goes up in value.  Taxes are not paid on the UHG until the asset is sold or in the case of your house not paid at all.  This is one of the reasons that the individuals in top one percent of taxable income varies so much from year to year.  Individuals (generally) only pay taxes on your cash income as your start up company prospers but when the individual sells it to a bigger company, depending on how it is structure, it might cause a big income year.

Let’s take a plausible example to help you understand.  Bill Gates is estimated currently to own over 400 million shares of Microsoft.  He doesn’t pay taxes on the UHG unless he sell the stock.  So let’s say (this is total guess) Bill has cash income of $100 million.  Microsoft is up almost $40 per share this year.  It is a bit of an over estimate but it keeps the math simple.  Bill has an UHG of $16 billion versus taxable income of $100 million and taxes of less than $37 million.  Of course in 2000 when Microsoft decreased in value by over $30 per share and Bill owned many more shares then his tax rate would be astronomical.

Sidebar: It makes good policy sense to tax on a mostly tax basis because taxes must be paid in cash.  End Sidebar.

The argument is all about timing.  When you measure income one way by including UHG and taxable income another way then trying to make a ratio is …  [we pause here as we try to find a word other than crazy or insane] … bad methodology [as we retreat to jargon].

Don’t listen to the envy lobby.  Income inequality isn’t important even if we could agree on how to measure it.  Regulations (generally anti-incentives) and incentives are important.  Let’s worry about those.

 

End Of A Specious Argument?

James Freeman on the WSJ’s Best Of The Web tries logic on the folks that want to try to reduce income inequality.  Do read the whole thing.  We think it is unlikely to work but it might help the voters make a better decision in the general election.  He starts with an assertion:

Leftist politicians have been saying for years that a dramatic rise in wealth and income inequality is the central economic problem of our time.

We are not sure that those leftists care about the changes in income inequality.  Our guess, and it is only a guess, is that they think there there are more folks that think they would benefit from eating the rich than there are folks that worry about being eaten.  James hopes that an academic paper by Gerald Auten and David Splinter

Sidebar: Yes splinter is a bridge bid but we are not making this up.  If we did, however, then Splinter would be one of the authors but Gerald would need a new name and Splinter a first.  How does Diamond Splinter and Bergen Raises sound for the two authors?  End Sidebar

will eliminate the premise to the argument.  We don’t think that logic will stop folks from selling envy.  Here is part of what James says about the new paper:

After a draft of the paper was released last year, Paul Solman of the PBS NewsHour of all places wrote:

You thought income inequality was rising dramatically, right? Well, so did I. In fact, maybe you thought so in part because I and journalists like me have been reporting it as fact, for decades. But maybe we’re wrong — all of us.Mr. Solman reported that the Auten-Splinter draft paper enjoys widespread respect in the economics profession—even if not everyone is willing to admit it.  [Emphasis added]

We don’t like the of all places dig in bold.  Our information is the the PBS NewsHour is only slightly left of center unlike the rest of PBS.  But the second bold item is really damming to about the group-think of journalists.  James tells us that the paper is well received even by those on the left.

We don’t see that Auten-Splinter have any impact on us and we doubt it will have leftist politicians James hopes to convince.  It won’t have any impact on us because we care about growth much more than inequality.  To be precise, at the current levels of inequality in the US we don’t care about it at all.  We do want the growth fairy to come and visit.  We think that the government has been far too worried about inequality and related issues and not worried enough about growth.  An example of this is The Donald, whose administration has sometimes helped growth but his trade wars have not.  No administration has emphasized growth enough.  Growth should be a higher priority than it currently is.

The left doesn’t agree.  They want to increase the emphasis on distribution.  We don’t think they will be deterred by logic from James.  They think envy sells and we are concerned that they might be right.  Will a specious argument be enough?

 

Good Ideas, Bad Ideas, And Bad Claims

The left cannot claim to have all the bad economic ideas.  They have the worst as we see in Venezuela but they do not have exclusive rights to such ideas.  There are lots of ideas out there and some of them are good but to get them noticed folks often make extreme claims.  Thus, good ideas get dismissed because they are not quite as good as the claims suggest.

Our example of a bad idea comes from Cesar Conda at NRO.  He says:

President Trump should propose exactly what President Barack Obama did in 2011: a temporary reduction in the Social Security portion of the payroll tax from 6.2 percent to 4.2 percent.

Cesar Conda is:

a former Bush-Cheney White House domestic-policy adviser and senior aide to three Republican U.S. senators, is founding principal of Navigators Global.

He is writing at NRO.  It is not unreasonable to take him seriously.  We shouldn’t.  Part of his argument is economic growth and we are fans of the growth fairy.  Economic growth is critically important and we believe that governments can influence the growth fairy.  But the way to get the growth fairy on your side is through long-term policies.  Countries with policies that support economic freedom like enforcing the rule of law, having low corruption, low regulation, low taxes, and free trade are highly likely to be visited by the growth fairy.  Going in the opposite direction then the more likely the growth fairy won’t visit.

The best you can hope for with Cesar’s idea is to move growth around.  It was one of many bad ideas from the 44th president.  It is worse now given the deficit and the near insolvency of Social Security.

Sean Maskai Flynn at Market Watch has two really good ideas for improving health care and reducing or limiting the costs.  They are good ideas because they are long-term and make healthcare more of a marketplace than it currently is.  First, we need transparent health care prices:

The first policy—price tags—is a necessary prerequisite for competition and efficiency. Under our current system, it’s nearly impossible for people with health insurance to find out in advance what anything covered by their insurance will end up costing. Patients have no way to comparison shop for procedures covered by insurance, and providers are under little pressure to lower costs.

Absolutely.  And second we need health savings accounts (HSA) that revert to the owner or can be extended into future years.  We don’t agree with Sean that the employer needs to “gift” them and he is surely wrong that it is a gift.   Any such payment is surely part of compensation rather than a gift.  We are not sure of how such a payment would be treated by the IRS.  The tax treatment of HSA need to be part of the solution.  We think the important points are high HSA limits and the opportunity to move amounts among years.

The second policy—deductible security—pairs an insurance policy that has an annual deductible with a health savings account (HSA) that the policy’s sponsor funds each year with an amount equal to the annual deductible.

The details are important but the problem is that the headline says these two changes would reduce health care costs by 75 percent.  Nope.  The text says they will provide $2.4 trillion [yup, trillion] per year in savings.  Since health care spending in 2017 was $3.5 trillion this gets another Nope.  Still, transparent prices and HSA with high limits and methods to move amount into other years or revert to the owners are great ideas.  Temporary tax changes are not.  Realistic claims are another good idea.

 

Stating The Obvious

We have had a hard day enjoying the Grand deGloves (ages 1, 3, and 5) while driving through the Minnesota snow.  It isn’t snowing hard but combining a little snow with some wind and open places makes driving challenging.  Thus, when we saw Kevin D. Williamson give the following obvious solution to Brexit at NRO:

Here, the United Kingdom has an opportunity to reclaim a very old — and very British — solution: unilateral free trade.

Our immediate reaction was: didn’t we say that first?  We’re sure we have made the point that we favor unilateral free trade but we’re not sure about the example of Brexit.  It is just we are too tired to look it all up.  So, we will support Kevin.  Instead of stressing the UK economy by some convoluted agreement the government could improve the UK economy by reducing stress.

Yes, there will be some losers in the new system but there are always losers in the economy.  Always!  By reducing the stress on the UK economy and energizing the growth fairy there will be more resources to help the downtrodden.  Kevin is a noted skeptic of the growth fairy.

Sidebar: Yes, we have very (!) limited cites today.  Trust us or you can do the work and read our previous posts.  End Sidebar

But even he seems to be drinking the Kool-Aid (and we have a previous post on drinking the Kool-Aid without a cite) on the growth fairy:

Great Britain in fact grew vastly wealthy while maintaining trade arrangements that paid relatively little attention to reciprocity even in principle. British territories, notably Hong Kong, grew wealthy while following much the same model.

The way you get vastly wealthy is through economic growth.  We wonder if he is willing to admit to the long-term existence of the growth fairy?  For sure, we are both in agreement on this simple and easy solution to Brexit: Unilateral free trade.

Who To Thank?

On our trip to Tennessee we passed through Williamson County in both Illinois and in our destination state.  Thus (?), we have two posts today connecting Kevin Williamson, now back at NRO and maps.

Kevin has a nice article about clarity, Thanksgiving, and economics, For These Gifts We Are Truly Grateful, at NRO.  In discussing human charity points out the obvious but rarely discussed point:

Here is a truth that almost never is spoken: All of the money that ever has been saved and invested in profit-seeking productive business enterprises has done incalculably more for the poor — more by many orders of magnitude — than has all of the money that ever has been put to charitable uses, formal or informal, mainly by preventing them from ever being poor in the first place. That saving and investment, and the innovation and labor that have gone along with them, are the only thing in the history of this little blue planet that has made its inhabitants less poor.

His observations lead us to the confusion of who to thank and a couple of recent examples.  We are somewhere near the middle of the distribution on modern technical skills.  A text said we could speed checkout at the pharmacy if we downloaded a matrix barcode for each prescription.  We did.  The shock came when the person at the window said we were the first to do it.  The incremental gains necessary to expedite this sale are extensive: two levels of barcodes, cell phones, texting, Internet, etc.

Shortly after that we bought a set of AirPods.  We couldn’t wait for Christmas because we have a trip in December.  First warning: It is likely that we will be unable to post from 12/2-12/23.  We were not sure we needed them but after being a first adopter at the pharmacy we were on a roll.  They are great.  Then through the wonders of cell phone confusion we heard The Offspring.  It turns out that something good musically did come out of the eighties.  It is our second new band this month.  Don’t forget the Brooks Hubbard Band  with its North Middlesex roots.

As this examples point out it is hard to know who to thank for the bounty we have been bestowed.  Here is what Kevin says:

But as you cut into that turkey today, remember that somebody did the hard and dirty work of raising it, butchering it, packing it, driving the truck that brought it to your town, stocking the store shelves — and the very difficult work of figuring out how to get all that done, from domesticating turkeys to fueling that truck, a long unbroken line of human effort and ingenuity stretching back to the first guy who figured out how to chip a piece of stone a certain way to make it more useful.

Markets help us stand on giant’s shoulders and become giants ourselves.  We are so fortunate that the growth fairy came to visit and stayed.

The Growth Fairy Visits

Economic growth created our current state of economic grace.  Deirdre McCloskey calls it The Great Enrichment.  Jonah Goldberg calls it The Miracle.   Both of them would agree, we think, that it wasn’t planned.  After thousands of years of human life being short and brutish, in the past few centuries there has been a dramatic change in the quality of human life.  The [economic] growth fairy visited, because of the miracle of compound interest (separate from Jonah’s Miracle), and left us with riches and resources that the richest folks from a century (and especially two) could not imagine.

As an example, Jules Verne published Around the World in 80 Days in 1873 (set the year before).  The hero takes over, Wikipedia helpfully converts it into 2017 pound sterling, two billion pounds or about three billion dollars to make the trip.  We will take the Lady de-Gloves to Changsha, China in a little over a day for about a thousand dollars (and another thousand for the round trip) in a few weeks.  It is a nice comparison of how life has change in a century and-a-half.  Ordinary people now can do far more than the rich could do ten or 15 decades ago.

Economic growth is crucial to our future well being.  If the economy grows at one percent the compound growth over your child or grandchild’s 80 year life span is about 120% but at three percent it is about 960%.  It is a big difference.  It is important because the growth fairy has revisited the US economy after being away for a few years.  The WSJ tells us:

The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a mild slowdown from 4.2% in the second. Consumer spending led the way with a 4% increase rooted in a tight job market and wage gains that have bolstered economic confidence. The economy has now grown by 3% over the last 12 months.  The U.S. economy hasn’t grown at 3% in a calendar year since 2005…

We, along with the WSJ, John Taylor:

When policy moves closer to those three attributes, as in the 1980s and 1990s for the advanced countries and more recently for emerging market countries, the economy does well, growing in a stable manner. When policy deviates from those three, as U.S. monetary policy did going into the tragic global financial crisis, the economy does poorly.

and many others believe in the growth fairy.  We do not believe that we can eliminate economic cycles.  Rather, we believe that good policy leads to, on average, better results and bad policy leads to bad results.  There are numerous examples of bad policy with Venezuela being close to the worst possible policies.  We think the WSJ is pretty close on its summary of good and bad policy in the US:

Can economic growth from tax reform and deregulation stand up to the headwinds from higher interest rates, tariffs and perhaps a Democratic Congress?

The WSJ position on interest rates isn’t clear.  It seems like they are saying increasing interest rates are a problem but are they suggesting action to reduce them?  We are with John on a rules based monetary policy rather than worrying about and trying to manipulate interest rates.  So do you believe in fairies?  This is one you really don’t want to die.

 

Suicide Of The West

Jonah Goldberg’s Suicide Of The West is a book everybody should read.  It is not a great book but it has parts that are absolutely awesome and is full of thought provoking moments.

The best part is the discussion of what Jonah calls The Miracle and Deirdre McCloskey calls the Great Enrichment.  On titles, we’re with Deirdre but we will use Jonah’s here.  Jonah does a great job of explaining the extent of The Miracle.  We love his “most important “hockey stick” chart in all of human history” on page eight.  It shows actual global GDP over the last two thousand years and we get a hockey stick.  He doesn’t limit himself to one method of teaching so everyone should get it.

Sidebar: We thought of saying that everyone should be required to read Jonah’s introduction and appendix but we can’t count on everyone’s sense of humor.  Everyone should read it but we are not into coercion.  End Sidebar

Jonah’s book’s appendix has a nice summary of his four core arguments which we have abridged even more here:

The Miracle has caused us to be unnaturally prosperous
We stumbled into The Miracle and we can stumble out
Human nature is fundamentally unchanging
Human nature can overpower the institutions that make prosperity possible

We agree.  We are fans of the growth fairy so we would add (and think that Jonah agrees based on the last argument) that we now have the knowledge to make prosperity more likely.  We think that Jonah would say that our romantic side, the feelings of human nature, cause the conflict that might end prosperity.

Part of his stumble out argument is that we got The Miracle by argument and rhetoric and we can lose it the same way.  Here Jonah cites Deirdre’s article above.  We love both of them and especially Deirdre’s Rhetoric of Economics.  It was a light from above in our understanding the intellectual differences between economics and accounting.  When Deirdre finds rhetoric for the second time it is less convincing to us.

The conflict of the book is the the rationality of the discussion of economics and human nature and Jonah’s feelings towards The Donald.  Jonah despises The Donald because he has brought tribalism to the right.  With an already tribal left then there is little to do but despair for The Miracle because corruption will set in and capitalism will become ineffective.

In summary, we were beyond delighted that somebody made such a beautiful and sincere argument for capitalism.  Jonah hasn’t convinced us to share his pessimism but we are concerned.  It is an important book that you should read but it is not a great book.