Mike kindly put me up on RBC as a guest in February, and Mark, our genial host, called me â€˜orthogonalâ€™ in his post of March 1: â€œBut Schutz is simply wrong to treat the question of distribution as orthogonal to the problem of falling living standards. The forces he cites â€“ which all boil down to globalization and the falling cost of making good stuff overseas â€“ 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.â€Â Thanks, I think.Â Orthogonal Declinist, whatâ€™s not to like?Â More: â€œThe threat of globalization is precisely the threat of a greatly worsened distribution of income….But if â€“ and itâ€™s a huge if, in this Age of the Tea Party â€“ 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 thereâ€™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.â€
Yes, I said I think our income drops in future due to (1) people (both within and without the US) wonâ€™t pay as much for stuff made here – and this is due to falling cost of making good stuff overseas, and (2) higher cost of inputs – because manufacturers and residents in other countries will pay more for inputs than we will, there are new bidders for Zambian copper and we have to pay more, and in addition the cheapest oil has already been pumped, so new oil will cost more to lift.Â So Iâ€™m claiming itâ€™s not just gains from trade, itâ€™s also that some props have been knocked from under our gains from our production -Â a lot of our apparent prosperity in the last ten-fifteen years has been fake, investment by China and Saudi sovereign wealth funds, and Japanese teacher retirement funds, in mortgages on houses whose value was rising because of speculation rather than because the people buying them could ever reasonably expect to keep up on those mortgages with income from making and selling things.Â This was going to end in tears, and it has, and this foreign aid from China and Saudi Arabia and Japan has no future.Â So, no more HELOC money to buy Chevy Suburbans, and itâ€™s not coming back. I did pay some attention to distribution, in suggesting that relative incomes have been set, partly by the market directly and partly by negotiation between public employees and government, at levels which gave relatively similar rewards to people with similar talents and training, and that those arrangements are cast into doubt going forward because some sectors/employers are becoming far less rewarding relative to others.Â And this is merely a restatement of, what will we do for the buggy whip makers?
Mark is quite right that we can and will think whether our current distribution of wealth, gains from trade, etc. should be moved around by tax and transfer, and from and to whom.Â We are seeing the opening salvoes of this discussion in the struggle over level of compensation and benefits to union workers relative to other workers in the US – Wisconsin this past few weeks, Obama froze Federal civil service wages, California election, these are all facets of the same gem.Â Volcker gave a speech in which he said we are spending 4 Â½ per cent of GDP on the financial sector, that historical levels were about 1 Â½ per cent, and we should aim to get back closer to 1 Â½ per cent.Â Mark has views that we should be taxing the rich more intensely, and I think assumes this would be through income tax – I absolutely share the view that we should be taxing more, but am inclined to think VAT and gasoline and close-loopholes-for-ethanol, mortgage tax deduction.Â I regret that Obama threw in the towel on estate tax, which was a wealth tax, we donâ€™t have enough of those.
But I think no matter our decisions on redistribution, the future will be less abundant than the past.Â This sharpens my concern for what I will call the â€˜useless crapâ€™ lines in our national expenditures.Â Some have been funded by the tax-and-transfer function of government, some by private individuals who thought they were good investments, and I think we canâ€™t afford all of them any more.Â Thereâ€™s going to be ongoing struggle about which (if any) of them we continue to fund.Â In looking at my list, remember John Wanamaker: “Half my advertising is wasted, I just don’t know which half.”
My useless crap list:Â the East Saint Louis public schools.Â The Compton public schools.Â College educations in majors called â€œXXXX Studies.â€Â Â Employers require college degrees to avoid screening for competence in employment.Â Giant cars with low gas mileage driven by one person to work.Â Free travel on roads paid for by general fund taxes (somewhat less: free travel on roads paid by gasoline taxes.)Â Time spent in traffic jams. Giant houses with low energy efficiency, lived in by small well-to-do families who get huge tax deductions from the mortgage tax exemption.Â Welfare for folks who could have, would have, done day labor before they were displaced by illegals.Â Security guards.Â Year after year energy subsidies for heating poorly insulated homes.Â Corn ethanol to fuel cars.Â 4 Â½% of our GDP to the financial services industry.Â High speed trains between LA and SF, Orlando-Tampa or, actually, anywhere but Boswash.Â Legal notices printed in the newspapers.Â Discarding Detroit while building Tucson.Â Miles and miles of useless empty houses in Vegas. Expensive residential jail services, provided to nonviolent offenders, including drug offenders. And by the way, drug laws generally and the consequent destruction of Mexico.Â Throwing away the human capital we have invested in guys who like to look at photos of naked 13 year olds, but who donâ€™t themselves abuse 13 year olds.Â Throwing away the human capital of guys who drive drunk.Â Criminalizing prostitution.