I appreciate that Clive Crook is talking about inequality in an intelligent, serious way. I think that’s rare on both the left and the right. My experience living in China left me thinking that inequality wasn’t nearly as important as absolute poverty reduction and people’s quality of life improving. I have several friends in China who grew up eating meat only a few times a month and didn’t get electricity in their homes until the mid-90’s. They drive cars and own their own electronics businesses now. It would seem on an intuitive level that the kind of economy that lets them increase their own livelihoods so quickly would also produce a few billionaires in the process. I also have issues with the way we calculate and compare inequality. Richard Wilkinson, however, recently convinced me relative poverty is one of the most important issues of our time – even in wealthy economies.
In Look Past Taxes to Fix Global Puzzle of Inequality, Clive Crook makes a number of very good points with a few weak points worth rebuttal. It’s a good place to go through some of my own thoughts on the issue.
What I think Crook gets correct is that this 99%/1% sloganeering is problematic. Our “obsession with the peak of the income pyramid is much too simple-minded,” as we should be more concerned about our income distribution patterns overall.
US Wealth Distribution (2003)
The super-rich only make up one side of tail of a distribution where the other tail has 46 million Americans in poverty. Important for me, and less for him, is that this tail is far longer than the top tail. Though he doesn’t make the point explicitly, just taxing the 1% more won’t make a only a small dent in inequality or our budgetary problems.
Second, tackling the inequality problem is going to be difficult:
inequality isn’t one issue but a writhing bundle of issues. Unpack it and you see there’s no easy remedy. It demands more thought and humility than most politicians can muster.
In complex systems theory the idea of power laws inside critically self-organized systems is amongst the most overlooked insights that I know of. Compare human heights with power laws and normal distributions : if human height followed a power law distribution, most of us would be incredibly short but at least one of us would be over 8000 feet tall and the median height would still be the real-world median height. In reality, heights are normally distributed bell-curves with only a few Kobe Bryant’s and Peter Dinklage’s.
Our global economy is, without a doubt, critically self-organized and produces power law distributions with market shocks and wealth distributions (see chart to the left). Disentangling the global economy and uncovering its feedbacks and the paths that led to our current state of affairs might take decades. And after that we’ll likely have to wait decades more before politicians listen to academics who propose strategic decouplings to make economic systems healthier. I am almost certain that the things that bring the most instability to our systems are also the most lucrative – like the financial industry in the US and real estate markets in China (and the US from the late 90s until 2008). I can’t help but think of the global warming debate all over again.
Scott Page asks us to think of earthquakes, whose distributions relative to size and frequency also follows a power laws when analyzing how to harness the lessons of complexity. Perhaps the best way to bring these geophysical systems out of criticality is to intentionally set off smaller earthquakes to release pressure at critical places and times. Doing that might gives us a bell-curve with more small/medium-sized quakes to stop the large ones from happening. In the same way, finding the things that bring our economic system to a critical state would help prevent the kind of market shocks we’re seeing in financial markets,
Earthquakes also follow a power law distribution. Flip this 90° right for it to look like the US inequality distribution
commodity prices, and income distributions. The Chinese government’s experiments with free market economics limited inside special economic zones like Shenzhen springs to mind as an cordoned-off economic outlet that contains the excesses of capitalism but can still spread the rewards through the system. Ultimately, a healthy system is one where only a few people are doing very badly and they exist in near equal proportion to people doing phenomenally well – where private jets and food insecurity are equally rare. We couldn’t be further from that today with 1 in 6 people in America food insecure.
Crook’s solution is that we need a host of policies to address the problems, including taxing the “middle class”:
An enlightened liberal agenda should include higher taxes on the rich — and higher taxes on the middle class as well. That agenda needs those revenue streams not to punish the 1 percent but to pay for low-wage subsidies, other supports for the working poor and a more effective safety net. It would prioritize K-12 education, vocational training and other main avenues of opportunity for the less well-off. It would attack rent-seeking, broken corporate governance and hidden subsidies to industries that don’t add value.
His use of “middle class” is problematic, as (like most Americans) he seems unable to see past his own nose to choose his terms more carefully. He goes on to says “American liberals find high incomes more upsetting than poverty.” It’s a silly statement and the problem is much deeper because – as a society – Americans have mostly agreed that “real” poverty doesn’t exist here except in a few isolated cases. Mentally disturbed homeless people come to mind but your typical Wal-Mart employee doesn’t. In the colloquial sense America only seems to have three economic classes: the homeless, the middle class, and now the 1%. Everyone, apparently, is the 99%. Meaning everyone is middle class. Every time anyone from Boehner to Obama speaks about the economy it’s about the middle class. Every tax cut, jobs bill, stimulus or trade bills are all either for (or against) “the middle class.”
But this is by self-identification and something a professional policy wonk should see past. A professor and friend of mine once asked an American freshman class of 200+ students to raise their hand if they thought they were upper class. One or two people raised their hands. He asked who thought they were middle class. Everyone else rose their hand. Poor? Nobody. This despite the recent census showing that fully 15% of the population live in poverty.
Where Crook and I might agree is on the numbers. Who he calls the middle class I would probably call rich and would have quintile statistics behind me. I think we’re probably both talking about the top 10-20% of the country. The salient issue, for me, is that the discourse of “middle class” is even more problematic than his critique of obsessing over “the 1%”.
I think Crook is most wrong when he focuses on income taxes having gotten slightly more progressive and argues that the wealthy are paying their share. Instead of breaking out the charts, it’s self-evident to say that people’s income classes can be broken down into weather they make money from wages, salary, or from profit. The most pernicious effect of the Bush Tax Cuts was the reduction of capital gains taxes and other profit-earning taxes. As a high school teacher in Florida, I was paying something near 35% of my income in taxes*. Warren Buffett recently disclosed that he only paid 17.4% of his income in taxes.
Crooks insistence that “rich Americans contribute a greater share of taxes than do their peers in other industrialized nations” is rubbish. The issue today isn’t how progressive our taxation because we have a regressive tax system now that needs to be fixed. It’s like asking how best to redecorate the kitchen when all the doors of a new home are missing. In the meantime, the two biggest tax policies we should be pursuing is (a) getting the Buffett’s of the world to pay, at minimum, what other works are paying by looking at more than just their salaries, and (b) simplifying the tax code enough to make it both easier on everyone else and much, much more difficult to cheat on.
* state sales tax + federal income taxes on $33,000/yr. Like most lower middle class earners, I spent every dollar I made.