Tuesday, July 26, 2016

Short: Who rigged the economy?

I was really hoping that I would get some good insights into how the economy was rigged from this article. After all, it's published on Vox, one of the better site for political analysis.

Alas, the article is a big disappointment. When I wonder which people are using the rules or gaming the system to enrich themselves, I think about politicians, developers, Wall Street types, etc. I was hoping to find out more about how they do it. Instead, this article points at these enemies of fair economics:

  • Dentists
  • Owners of beauty schools
  • Massage therapists
  • Arkansas and its laws on nurse practitioners
WTF? These are the people who have rigged the system so that there aren't many good jobs anymore? The author can't seriously expect me to believe this, can he?

Instead of this being a tell-all article, this reads like a low-rent libertarian rant against licensing. Such rants have their place, but licensure isn't what has rigged the economy. Come on!

Then I did a google check of the author, Will Wilkinson. Yep, he used to work for the Cato Institute. The article is exactly a low-rent libertarian rant. And I wasted my time reading it.


Dangerous said...

The system isn't rigged. People work the system to their favor then lock in the rules as best they can. That includes licensing rules for a lot of professions, well-meaning regulations and so forth. The key element that people work to their favor is the tax code. They will find any method to decrease their costs and maximize their profits, no matter what the rules are. The libertarians have it wrong in thinking that no rules is better. Plenty of unscrupulous people will work that non-system as well.

We're talking about human nature. The reason the top 1% get most of the wealth now is because Reagan and the GOP convinced the country to cut the top tax rates by also cutting everyone's rates, and that the resulting gigantic structural deficits were okay (at least while they are in charge). The net effect is that instead of having to give money to the government to pay for stuff, rich people could loan the money to government instead and get a fat return. In economic terms (as I learned at Wharton) government deficits and debt accumulation raises the real interest rate -- the premium someone has to pay to use someone else's money.

I don't think Reagan and his group had that in mind when they cut tax rates. They probably honestly believed in supply-side economics. The benefits of large government debt was just a happy bonus for the tax cut proponents. But then everyone with a mortgage, or school districts needing funds for school expansion, or states needing to rebuild bridges, also had to pay more in real terms for the privilege of using someone else's (i.e., rich person's) surplus funds. Accumulate that for 30 years and this is exactly what you get. Had they had computers back then to model it, this is exactly what they would have shown. It's just math.

Higher real interest rates are easy to hide. The interest rates we see advertised includes the real interest rate, an inflationary risk factor, a real risk (default) factor and an administrative expense factor. Most people don't understand the difference, but if you loaned someone money as a business, you'd figure them out right quick. A 4% fixed rate mortgage looks good now, but image how good it was when inflation was at 6%!!

At this point, the only way to fix the past is a huge tax on the wealthy and using that money for a massive infrastructure program. The banks are far too smart to let those 30-year fixed rate mortgages become unprofitable under 6% inflation. There's no way to directly transfer wealth from the last 30 years to individuals. The huge wealthy growth, now held by just a few people and entities, must be recaptured to build shared wealth and lower the costs for the masses. If Bernie had proposed that, he would have won the Dem primaries and the presidency, and deserved it. But he got stuck on his "political revolution" and "breaking up the big banks" rhetoric, which is just another form of grievance politics.

Paul said...

David Stockman once said the government runs better with a debt. He regrets saying that now, but he was also talking about math.
Maybe the baby boomers should have a high death tax, to pay for what they didn't pay for while alive.
I believe the key to growth is in small business. Instead of giving tax breaks to large corporations, maybe we should use that money to fund the SBA.
Not just licenses, but the accumulation of meeting the expenses of local, State, and Federal rules and regulations takes a lot out of a budget.
A great country is not cheap. The "greatest generation" knew this, which is why they taxed themselves at more than twice the tax rate we pay now. A tax revolt was predictable after paying that high rate for decades. We just have to decide what kind of government services we want and then pay for them.
I believe in communal taxation with progressive rates for higher income. The rich alone can't and shouldn't be expected to pay all our bills, or our debt.
Our huge debt piled up over 28 years, about one generation. The "cut taxes", "no new taxes" generation.
Reagan got off on the wrong foot. He should have cut services the same amount he cut taxes. I believe that was his original plan, but the people liked their government services and "paid" benefits. Plenty of votes in Congress to cut taxes, not so many votes for cutting services and benefits.

Dangerous said...

Reagan did cut services, but spent all that and more on "rebuilding our military", which is just code for preparing for voluntary wars. Most people don't recall that during the cold war, each side had proxies in virtually every conflict and there was always a risk of a major confrontation. USSR invaded Afghanistan -- we secretly fund and arm the rebels. Same in Africa and Central America.

We shouldn't have to do this today, even though Russia and China pose threats to world stability, although the chance of major conflict is vastly reduced, particularly with China since we are such a large and necessary trading partner. Russia is suffering because oil prices are down. They would love more conflict in the Middle East, but their support of Assad's regime precludes a lot of the mischief they could advance

So I'd say with low interest rates, $2 gas and less need for military spending, we should be able to realign our priorities toward domestic needs, and at least higher taxes go toward stuff that helps everyone, versus flushed like most military spending.

ModeratePoli said...

@Luke. Very good points. Especially about how the debt piled up in just one generation.

One point though. Maybe because I am a baby boomer, I think you heap too much blame on us. The deficit spending started under Reagan, who was definitely not a baby boomer, but part of the greatest generation. And the taxation level during the greatest generation was set mostly by the generation before them--their parents who were born well before the Depression.

That said, a high tax on estates, as you suggest, is reasonable and fair (and not going to happen).

Paul said...

As usual you are correct.
So we just screwed the next few generations with our selfish, evil (because of its size) debt. Even if they want to "fix" problems we refused to take care of, they won't have the money to do much.
I do have a problem with the boomer generation and its irresponsible behavior. Not only in comparison to other generations, but to the ideals of generational responsibility to the elusive American dream and the progressive idea that we leave the country better off than it was given to us. You are probably correct that I blame the boomers to much, but looking at the numbers, it's hard not to.
The great growth period that created the great middle class occurred during the time of those high tax rates. I don't accept the idea that high taxes kill growth. As long as production and employment is high, tax rates are not crucial. That's the GDP argument more intelligent people than me are always talking about.
Capitalism has a responsibility to the community they do business in. A responsibility that goes beyond just making profits, or paying dividends to its stock holders. A responsibility to keep people employed with salaries high enough to sustain a healthy economy, especially a consumer society as we have. A responsibility to invest in the future of of its own company and the future of our country. If capitalism cannot meet those needs, then it is a failure. To me, earning inequality just shows companies have the money, they are just not paying enough to keep an economically healthy consumer system going. Add to that their talent to pay as little taxes as possible. Then we put government spending on the credit card.
If 50 million people are living off Social Security, then giving them a raise is a good way to keep the consumer society going. It's scary to think 45% of Americans don't have anything but Social security to live on when they retire.
Sorry about the rant. Next time I'll just write a post and link it to you.

ModeratePoli said...

@Luke, I commend you for your clear thinking and logic. Here's an example: "The great growth period that created the great middle class occurred during the time of those high tax rates."
Think about how many Americans don't know that, and therefore are manipulated into this Laffer Curve nonsense.

Please keep doing your thinking, analysis, and writing.

One thing I should point out, however. Will an increase in SS payments just increase debt? It depends how it's structured, but that's what has been happening. Getting any new revenue through Congress is probably impossible.