Declinism, with an asterisk

Cheap imports can’t make the country poorer. Stupid policies can. But cheap imports, plus bad government, can worsen the income distribution, making most of the citizens worse off even as GDP per capita rises. And that, in turn, can support more bad government. Indeed, I just described the current strategy of the oligarchs, their tame Republican party, and their useful idiots who attend the Tea Parties.

I think it’s quite possible that David Schutz is right to fear a period of national decline for the United States. A sclerotic political system and the forces of organized greed and hatred may well cause the whole country to go the way of California, a naturally rich state now being impoverished by its feckless government, due to institutions that allow a stubborn minority to rule.

But Schutz is simply wrong to treat the question of distribution as orthogonal to the problem of falling living standards. The forces he cites – which all boil down to globalization and the falling cost of making good stuff overseas – are not, by themselves, capable of reducing real GDP per capita in the United States. On the contrary: the cheaper and better stuff we can import, the greater our real income.

The threat of globalization is precisely the threat of a greatly worsened distribution of income.

Now that worsening income distribution, and its political consequences, could easily lead to real economic decline as our roads, railroads, telecoms infrastructure, electrical grid, and schools become less and less capable of sustaining a healthy economy, and our institutions allow more and more of the inefficient looting that characterizes so much of the financial-services and health-care industries. And as long as the oligarchs let their hatred of Al Gore blind them to the obvious facts about climate change and the urgent need to do something about it, we risk serious real economic decline due to utterly preventable changes in the environment.

But if – and it’s a huge if, in this Age of the Tea Party – the gains from trade are recycled by the tax-and-transfer system and by directly provided government so that they translate into rising standards of living up and down the income distribution, and if the result is more support for vital public-sector investments, then there’s no more contradiction between prosperity for China and India and prosperity for the U.S. than there was between economic growth in the U.S. and economic growth in Europe in the 19th Century.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

28 thoughts on “Declinism, with an asterisk”

  1. So, if Republicans exercise power everywhere then then whole country will go the way of California where Republicans haven’t exercised any power to speak of in many years? That’s your argument?

    And what, exactly makes a state (or country for that matter) “naturally rich?” Its certainly true that California has good farm land, and a coastal region (among other features) that make it attractive to tourists and mobile professionals. So that seems like a source of natural wealth. But to the extent that California has experienced tremendous econbomic growth since WWII it seems to be much more about the strength of certain industries (aerospace & defense, information technology, entertainment, etc.) that aren’t especially “natural.” In fact, they’re quite man made.

  2. If you regard the Reagan Revolution as a kind of experiment, testing the economics of the marginal revolution, against the hypotheses of the classical economists, I think you’d have to give the classical economists their due. The marginalist hypothesis is the Laffer Curve, no? The classical analysis centered on economic rent, and the way the benefits of economic growth could be diverted into the sterility of economic rents.

    The effect of lowering tax rates on high incomes — which high incomes are derived largely from, or padded out with, economic rents has been to empower the rentiers, to the point at which the rentiers, with their huge stake in preserving the status quo, hold us hostage. Far from unleashing productive efforts, the “free market” unleashed, instead, what became a snow-balling of rent-seeking, ever more base and destructive, until now, the financial sector seeks mass debt peonage, while the oil and gas folks want to destroy the environment for a couple more weeks of $3/gal gasoline and suburban bliss.

  3. sd,

    I thought one important reason California has the industry called “Hollywood” was its abundance of sunlight. Early movie cameras and film were not very good under cloudy skies. So the first movie pioneers were in fact exploiting one of Southern California’s main natural resources. Once they set up shop, competitors followed, then would-be starlets, then more competitors, and tradesmen, and so forth. Once the film industry got established there, it was too much bother to move it elsewhere, even after better cameras and film came along. So yeah: the movie industry is man-made, but the reason it got man-made in California had a lot to do with one of California’s “natural resources”.

    –TP

  4. I don’t think Mark necessarily meant natural resources. California has a lot of different types of capital. For instance, I’m sure many states would dream of having their own silicon valley or Hollywood. Excellent schools. Access to the Pacific. Pioneering spirit. Just to name a few.

    This was my worry about decline as well. I don’t think it’s a mater so much of capital generally, but of equitable distribution and infrastructure investment that frees up mobility and opportunity. Of course I’m a liberal, so I’d rather not have society huddled under the pig trough, waiting for the ‘trickle down.

  5. Politics aren’t an asterisk; they the most important dependant variable in the effects of international trade.

  6. sd,

    What you have forgotten is that, while Republicans have not had nominal control in California for some time, they have had effective control (similar to the filibuster) due to the requirement that 2/3 of the legislature vote to approve tax increases. So long as they have had that 1/3 bloc in the legislature, they have been able to stop meaningful tax increases to offset the spending increases that have been approved, thus requiring the draconian cuts in services that have been required for the past several years.

    So, yes, this is a very good argument, because he who can destroy something can be said to control it, and Republicans have been effective in destroying effective government in California by blocking the “increase tax” option at every turn. They are exporting this argument nationwide.

  7. One of my favorite lines ever is Warren Buffet: “when the tide goes out, that’s when you see who has been swimming naked.” Distribution of income is a huge thing, and I find it hard to have a clear view what to do. I do generally agree society is healthier when incomes are clustered in the middle. One of the things I was trying to talk about in the guest post was the sort of roulette quality, going forward, to who does okay and who doesn’t. You got a podiatry degree and opened a practice in Flint, and bought a couple of commercial properties: you’re hosed, everything you worked for is worthless. You did the same thing in Orlando: you have a prosperous retirement coming. People really thought they had swim suits, and the tide goes out and they are gone.

    Our GINI has been getting worse for years: in Reagan, in Bush the first, in Clinton, in Bush the second. Nobody has managed to fix it. I haven’t seen anything recent, but I don’t see why it would be getting better now, as I read about financial sector bailouts. The UAW has bought into a two-tier salary system, the airlines are paying nickels to new pilots, because they can get away with it. Meanwhile, work areas which have been more fortunate – and often this seems pretty clearly to be a result of being shielded from international competition – get more and more conspicuous as the tide goes out around them. Mark, you are suggesting redistribution (‘tax and transfer’) in your post. I think the details are difficult. What do you want to do for the Flint podiatrist? If you tax the bejeesus out of the income of a hedgie, what do you do when s/he moves to Bermuda? If your expensively trained oncologist faces a 75% marginal tax rate, what do you do when s/he knocks off after 40 hours and paints his house, because the improvement in his living standard is higher from the painted house than from 25% of what he would have made working hours 41 to 60, and what do you do for the unemployed house painter who needs cancer treatment?

  8. Assuming this is a problem at any likely tax rate, we could train more oncologists, which we would be able to afford…

  9. The forces he cites – which all boil down to globalization and the falling cost of making good stuff overseas – are not, by themselves, capable of reducing real GDP per capita in the United States.

    I don’t think this is true.

    The falling cost of making stuff overseas (more precisely, the increase in human and institutional capital overseas that makes overseas production relatively cheaper) makes the marginal product of capital higher, and the marginal product of labor lower, than it was. (This is not a distributional point, but a production possibility frontier point; there’s much more labor relative to the supply of capital.) The natural result is that production uses more labor, and less capital, and thus labor is less productive (labor productivity is largely driven by capital).

    One would expect that the US would have lower actual productivity, no?

    Looking at the same phenomena from a different direction–a US manufacturing worker, in 1950, was probably in the top 10% of the global income distribution, and the global productivity distribution. Looking at the US income distribution, you can observe that the distribution of incomes is more skewed, but to see that is to miss the big picture. Most of the GLOBAL growth in incomes over the past 2 decades has been in the 50-80th percentiles, not the top 10%. You can’t redistribute enough in the top 10% to make the 90th percentile as relatively well-off as they were relative to the 50th percentile, and this is a good thing.

  10. Dave, just a thought on the unemployed cancer patient: if we had anything like a 75% marginal rate, we could afford universal health care with our pocket change!

  11. Yeah, in the age of those people that Dave Schutz admires so highly, what was the top income tax rate?

    Yet things were “better” then than now.

    Hmmm.

    Dave, do you believe, really believe, that we’re anywhere close to the Laffer “Curve” being valid? Did you ever see Martin Gardener’s take on it?

    Why do so many rich people live in Silicon Valley and New York City if Dave’s fears of podiatrists moving to Harare are correct?

    The Right, and I include Dave Schutz among them, is simply logically incoherent. Not reality based.

  12. Eli, right now in New York state tax rate is 7.85% for over 200 k income, one of the recurrent left proposals is to tax all income for social security – which if our oncologist is self employed, would be 12% or so, and then if the Bush tax cuts get repealed (also a regular proposal) that’s 39%. This is from memory, except for the state tax. But that puts the oncologist at about 60%. Where do you think own house painting gets attractive? Do you think it’s a good idea to spend all that public money to train more oncologists so they can work 40 hour weeks?

  13. “Do you think it’s a good idea to spend all that public money to train more oncologists so they can work 40 hour weeks?”

    How much state funding goes toward training oncologists? Last I heard they paid for it themselves.

    This isn’t the only mistake made above. There is the easy swing into marginal vs. absolute tax rate, for instance.

    So, apparently Dave is a big believer in the Laffer “Curve”, at any point on the income distribution. Bog standard Rightwing ideologue.

  14. Oncologists with 5 years experience make about $250K. Let’s pretend that it’s paid as an hourly wage, and the oncologist can just choose how many hours to work, and let’s say the average oncologist works 60 hrs/week now. That’s a wage of $80/hr. 40% of that is $32/hr.

    So, until house-painting labor costs over $32/hr, the oncologist taxed at 60% will maximize his $$$ by working, instead of painting her own house. House painters earn about $14/hr, so we’re nowhere near that point. The oncologist would need to face a marginal tax of 82% to find herself in a position where painting her own house makes financial sense.

    And that’s assuming that the oncologist is indifferent between practicing oncology and house-painting, without regard to the wage paid for these activities. That’s doubtful. House painting is messy and unpleasant work.

  15. sd says:

    “So, if Republicans exercise power everywhere then then whole country will go the way of California where Republicans haven’t exercised any power to speak of in many years? That’s your argument?”

    RTP

  16. Dave: “If you tax the bejeesus out of the income of a hedgie, what do you do when s/he moves to Bermuda? ”

    First, we’ve heard that again and again. But whenever taxes are raised, we don’t see that; whenever they’re lowered, we don’t see masses of hedgies immigrating.

    Second, ***************hedgies are destructive, pure and simple**************.
    Getting rid of (probably 90%) of them would improve the wealth of the USA, and the world.

  17. California is obscenely capital wealthy in many ways. The climate and geography of the state are one such element, which is why California has such a robust Ag sector. Even the constrains of Climate change on the water supply will not reduce it as much as people think. Another is its proximity to China and other key trade partners and the trade that goes through Ca. through the port of Los Angeles/Long Beach. The biggest of course, is the California University system and the intellectual capital that it creates. It is not an accident that Silicon Valley is in California, or that technology companies exist throughout the state in such numbers.

    California’s greatest asset is its workforce. The more we educate and train that workforce, the more employers will come here and the more businesses will be created. In addition, the inflow of immigrants, so derided by the buffoons on talk radio, is actually an asset for the state. It will be even more of an asset as we improve our ability to integrate and educate those immigrants.

    The potential of the state to lead the way in economic growth is undiminished. But it can be diminished if we don’t recognize that turning ourselves into Mississippi by copying its economic model is a foolish path. The California model is to educate and train a workforce and maintain an infrastructure that brings employers to the state despite taxes and regulation.

  18. This may be a bit harsh, but there’s an easy way to stop rich people from moving abroad to avoid taxes. We just don’t let them in again – ever. Not to visit the Mayo Clinic, or Disneyland, or their mother. Not if they buy an island and try to join the UN.
    If people want to be disloyal they should pay the price. I hope the door hits them on the way out.

  19. @Hebisner:

    Another thing that must be remembered about California is that if it were an independent nation, its GDP would rank it something like #9 or #10 in the world; larger than countries like Spain, frex: it is an advanced, diversified “First World” economy with a population of 37 million people – but one with an infrastructure and tax system designed for a population half its size, and hamstrung by an unwieldy political setup where a particularly obdurate and retrograde minority (Republicans)- whose mindset has been fixed somewhere around 1928 for as long as I can remember – can act as an immovable stumbling-block to any attempts at serious fiscal reform. Not to mention its dysfunctional “proposition” system; where “citizen initiatives” – whether useful, or mere special-interest giveaways (or simple bigotry, like the late unlamented Prop 8) can end-run the political process at any time.

  20. ACCCKK!! That was supposed to be “Prop. Eight” in my last line: not the sort of thing I’d put a smiley on.

    RBC needs an emoticon warning!

  21. “a naturally rich state now being impoverished by its feckless government, due to institutions that allow a stubborn minority to rule”

    The only thing the Republicans can do is block tax increases in a state that already has the highest state income tax out of 50.

  22. ” If your expensively trained oncologist faces a 75% marginal tax rate, what do you do when s/he knocks off after 40 hours and paints his house, because the improvement in his living standard is higher from the painted house than from 25% of what he would have made working hours 41 to 60, and what do you do for the unemployed house painter who needs cancer treatment?”

    Dave I’m sympathetic to large parts of your argument, but this is disturbingly stupid. How about we worry about this problem WHEN WE ACTUALLY FACE IT?
    The entire history of economics subsequent to the Industrial Revolution is of almost all people choosing consumption over leisure, no matter what their wealth level. There is ZERO reason to believe that our oncologist would choose leisure over consumption given higher tax rates. It has never happened in the past, and it doesn’t happen across societies. (We do see people leaving for other tax regimes if they can; the hedge funder fleeing for Bermuda is a real issue, though of course there are various things that can be done to make this migration rather more of a hassle, starting with stripping him of his vote and his say in lobbying and money politics. And we do see different societies that have, as a whole, chosen to consume higher amounts of leisure. But, as far as I know, we simply do not see the behavior you fear.)

  23. “Do you think it’s a good idea to spend all that public money to train more oncologists so they can work 40 hour weeks?”

    You state this question as though it is self-evidently absurd. But this is, of course, the way the rest of the civilized world runs their medical systems — the state helps pay for doctors, there are substantially more doctors per capita (especially GPs) than in the US, and their medical systems provide better results at a lower cost.

    Yes, I think it would be a freaking FANTASTIC idea to “spend all that public money to train more oncologists so they can work 40 hour weeks”. getting rid of
    – the extremely high costs of medical education
    – the idea that both medical training and subsequent medical practice are the province of supermen, capable of going for 80 hours without sleep
    would be unmitigated benefits to US society and medicine, drastic leaps forward into a better AND more humane society.

  24. “…California where Republicans haven’t exercised any power to speak of …”

    I think it was Edward Abbey who coined the term “monkey wrench,” the CA GOP has made monkey wrenching its business.

  25. It always seemed to me that the very people pushing the “globalization as a force for income inequality in the US” argument are the best counterexample to what they claim. If it really were about local wage plus transport costs, there would be no way in the long term you could pay a US hedge fund manager more than, say, $75,000 plus the cost of a couple of FIOS connections.

    All that fundamental ideas about markets tell you is that a good or service will be priced somewhere between the minimum a producer is willing to accept and the maximum a consumer is willing to shell out. Where in that range depends on relative power and market institutions.

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