The Great Stagnation and the Possibilities of Redistribution

Tyler Cowen’s new e-pamphlet (The Great Stagnation) takes on the slowing gains to be had from social and technological progress and offers an interesting explanation of some of the trends that many people see as troubling: the flat arc of median incomes since 1973 and the apparently universal surprise that the last decade offered no real growth for the United States even as the developing world boomed. Cowen claims that we have misrecognized increased spending in the areas of medicine, education, government, and financial services as growth. While those areas have seen the most increases in spending in this period, this spending has not garnered as many benefits as the metric of GDP suggests. Thus, we are “not as rich as we thought we were,” and we’ll need to adjust to this stagnation for a long time to come. We’ll still grow, but more slowly: call it the Great Decrease in Acceleration.

One important element in Cowen’s argument is that many of our current woes are due to the misdiagnosis of our problems. Republicans thought they could solve the stagnation by lowering taxes and raising military and Medicare spending. When this didn’t work, they were surprised. Democrats have thought that the internet and sustainable energy initiatives would spur new growth, but this has largely been growth in private consumption of status updates and Youtube videos, not jobs or public goods measurable in GDP. Electric cars are still toys, not engines of growth: this could change, but it hasn’t yet, and importantly, it didn’t over the last decade, when we were nonetheless living as if it had!

So conservative tax cuts won’t work, and progressive technological hope won’t work. In addition, Cowen also suggests that a redistributive agenda will fail. Yet here he is uncharacteristically short on argument or evidence, so I wonder if this is true. Generally, we say the problem with redistribution is that it slows growth, and it’s better to have a larger pie tomorrow than to have a equally-divided pie today. But if there is little growth forthcoming, then redistribution seems like it’s a much better deal, doesn’t it? Continue reading The Great Stagnation and the Possibilities of Redistribution

Is more illegal immigration the best we can do?

Will Wilkinson on Bryan Caplan’s (false?) dilemma:

Bryan Caplan lays down a challenge to liberaltarians:

From what philosophic point of view is “maximizing growth + lots of redistribution + the immigration restrictions lots of domestic redistribution naturally encourage” better than “maximizing growth + no redistribution + free immigration”?  Whether you’re concern for the poor is Rawlsian, utilitarian, or even dogmatically egalitarian, “no redistribution + free immigration” is the way to go.

I cry foul. I don’t have much patience with ideal theory, but either we’re ideal theorizing or we’re not. If we are, then I’m for “maximizing growth + lots of redistribution + free immigration”. Continue reading Is more illegal immigration the best we can do?

Hard Choices

Steven Maloney asked his students to stabilize the budget using the CRFB’s simulator. Some couldn’t do it without making draconian choices that were particularly painful for seniors, or undoing the President’s decisions to preserve troop levels in Afghanistan and extending the Bush-era tax cuts. Some wouldn’t do it:

That students would hand in deficits of 70% of GDP when the assignment was to get it to 60%, and say, “sorry, I just cannot do it,” when they are checking boxes in an extra credit assignment that affects no one… suggests that perhaps most of our polarization problems are problems of focused attention, and not, as popular theories on both the right and left seem to purport, because we are populated by disagreeable, sub-mental, conspirators out to destroy life as we know it.

It’s a very interesting experiment! Further evidence that there would be real value in letting people wrangle with the whole budget in a public forum.

How Taxation Effects Income Share (Not Much)

Last week, Greg Mankiw posted this graph without comment:

I thought there was something weird about the graph, and it’s been nagging at me. For one thing, it compares the bottom four quintiles to the top 5 percent of Americans. For another, it ignores non-federal taxation. (State and local taxes are more difficult to calculate, I suppose.) So I dug around and found the data* to produce this graph, which compares the share of income earned pre-tax to the share of income kept post-tax. It still only counts federal taxes, but it seems a more honest graph:

Two things are noticeable right away: the top quintile earns more than half of all income in the United States, and only the top quintile loses ground relative to its pre-tax share because of federal taxation. Many goods consumed by the richest 20% of Americans are signalling goods, and thus only valued comparatively (nicer house, better clothes, fancier car, more exclusive schooling for one’s children, etc.) But of course not everything is pure signalling, so relative inequality may be less important that absolute inequality, just as relative wealth may be less important than absolute wealth. Not everything is about keeping up with the Joneses. So if we can bypass these questions of fairness and move on to the relevant question, which is how large a GDP it is we’re sharing, I think that would be good. Tax policy will certainly have implications for future growth, but let’s not feel too bad for the top quintile.

*My numbers are from 2006, supplied by the CBO. Mankiw’s chart is based on estimates of 2010 made by the Tax Policy Center in August of 2009.