Thursday, January 4, 2018

... desire for “wealth” as such, that is, for the potentiality of consuming an unspecified article at an unspecified time.

That definition of wealth comes from J.M. Keynes

Looked up wage suppression. Found this, from EPI:

Wage stagnation for the vast majority was not created by abstract economic trends. Rather, wages were suppressed by policy choices made on behalf of those with the most income, wealth, and power. In the past few decades, the American economy generated lots of income and wealth that would have allowed substantial living standards gains for every family. The same is true looking forward: Overall income and wealth will continue to grow. The key economic policy question is whether we will adopt policies that enable everyone to participate in a shared prosperity, or whether the growth of income and wealth will continue to accrue excessively and disproportionately to the best-off 1 percent.

I want to consider what happens as wealth accumulates.

A two-player game. My income comes from wages. Your income comes from wealth.

At the start we each make 10,000 a year. Say the interest rate is 10%, so your 10,000 income comes from your 100,000 wealth.

Time passes. You do well. Your wealth grows to 1,000,000. Your income is 100,000. My income is still 10,000. You know: wage stagnation.

Time passes again. Your wealth grows to 10,000,000. Your income is 1,000,000. My income is 10,000.

Focus now. Don't ask "How much is enough?" That's not an economic question. Focus.

EPI says:

The key economic policy question is whether we will adopt policies that enable everyone to participate in a shared prosperity, or whether the growth of income and wealth will continue to accrue excessively and disproportionately to the best-off 1 percent.

Right. So let's look at what has to happen to "enable everyone to participate in a shared prosperity".

One way to achieve parity is for my income to keep up with yours. If your income grows from 10,000 to 1,000,000 then my income has to grow from 10,000 to 1,000,000. That's what "shared prosperity" means, I guess. Dunno, really.

One way to get my income to grow like that is inflation. After the inflation, I make 1,000,000. It's only worth 10,000, yeah, but I make 1,000,000.

However, if we have inflation, you will demand a higher rate of interest. My income will fall behind, again. This plan will fail.

Another way to achieve parity is for policy to suppress your income. Maybe policy can do that by reducing interest rates from 10% to 1%. That's not realistic, I know. But this is an economic model. It's not supposed to be realistic (ha ha).

So your income grows from 10,000 to 100,000. Then policymakers see the light and force interest rates down to 1%. Your wealth still grows from 1,000,000 to 10,000,000, but 1% of 10,000,000 is 100,000, so your income stays at 100,000.

My income goes from 10,000 to 10,000 to 10,000. Your income goes from 10,000 to 100,000 to 100,000. Let's say I can live with that.

You can't. You can't live with 1% interest. John Bull can stand many things, but...

So if we want "policies that enable everyone to participate in a shared prosperity", what policies are we going to use? Inflation won't do the trick. Lowering interest rates is unacceptable. What's left?

Maybe we have to put limits on the accumulation of wealth.

Say we cap wealth at 1,000,000 and re-start the game.

In the first period your wealth grows from 100,000 to 1,000,000, and your income grows from 10,000 to 100,000. My income goes from 10,000 to 10,000. So far, everything is the same as when we played this game before.

But now you have reached the wealth cap. Your wealth cannot get any bigger. So your income will not increase any more.

In the second period my income goes from 10,000 to 10,000 and your income goes from 100,000 to 100,000. No increase. But you are still making 10%, so you can be happy about that. Maybe you're not happy about the wealth cap. Life's a bitch.

You're not allowed to accumulate more wealth. If you do, the government will tax it away. Now your face is red and there is smoke coming out your ears. You refuse to let the government tax your wealth away. You'd rather spend it. Harrumph! You'll show them.

So you take all that wealth and income that the government would take in taxes, and you spend it. You piss it away. You party like there's no tomorrow. Good for you. I'm working my ass off while you are partying your ass off. But at least I didn't fall farther behind.

The future has arrived.

By the way... What happens to that nine million of wealth that you are no longer allowed to have? Some other guy accumulates it. Nine other guys. Now you have some competition. The economy is more like a real economy again. Wealth is distributed, not concentrated. And all that extra spending you are doing, well, that just gives those nine other guys a boost! And the rest of us, too.


Jerry said...

Maybe everybody with more than $1,000,000 in wealth would just move to ireland? You'd need a 50% expatriation tax (by which I mean, any dollar that leaves the country, you take 50c out of it), or something like that. Not obviously a bad idea, but it's a big change and it's hard to tell what the side-effects might be.

What do you think about: stopping short of a wealth cap and making a sort of compromise somewhere in the middle. Instead of a wealth cap, a flat tax on wealth (instead of on income).

This at least moves it in the direction of your solution, without being so extreme. At least wealth accumulation is slowed down. If you find that you need to slow it more (or less) due to current conditions, you can increase (or decrease) the tax rate.

Interestingly, I thought of a wealth tax not as a solution to an economic problem, but just because it makes sense if you think that everybody ought to pay in proportion to the services and benefits he receives from the government.
e.g.: the government basically exists (at least in the conservative viewpoint) to prevent people or events (russians, germans, criminals, revolting peasants, fires, ...) from taking your stuff. You benefit in direct proportion to how much stuff you have. The soldiers/cops/firemen don't just protect the stuff that you bought this year (sales tax) or the money that you made this year (income tax). They protect all of your stuff (wealth tax). Every year they protect all of that stuff, and every year you should pay for that service -- they need that funding to provide that protection for that year.

footnote: One practical obstacle to either plan is that a wealth tax is unconstitutional. The constitution says: "No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken." (article 1 section 9). To be able to levy an income tax, they had to add the 16th amendment. It doesn't seem like an insurmountable obstacle, but it's worth mentioning.

The Arthurian said...

Hey Jerry. I like your justification of a wealth tax.

RE the Constitution: I don't understand the part you quoted. It seems to say that a "direct" tax is okay if it is in proportion to the census. So, are they talking about a tax on states? New York has a higher population than Tennessee, so New York should pay more? ... or New Yorkers should pay more? I never understood that part.

Maybe everybody with more than $1,000,000 in wealth would just move to Ireland. Yeah, the unpatriotic scum. Import duties could prevent them from raiding US markets. (In addition to your expatriation tax.) I always go back to Keynes: "if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours."

There's a lot of unwarranted support these days for agglomerations like the E.U... because Big [existing] Government is not working. Somehow, people seem to think that even bigger government can solve the problem. Those people think in terms of political solutions. I think in terms of economic solutions. If we figure out how to make our domestic policy provide us with full employment, then [AFTER that] I have no problem with making government bigger. Or, less problem with it, anyway. But if we cannot solve our economic problems domestically, then why does anyone imagine we can solve them by merging nations?

"Instead of a wealth cap, a flat tax on wealth" -- A much more practical suggestion than mine. You will note, however, that without a cap, wealth will continue to concentrate. So maybe it takes twice as long for us to reach the "Fall of Rome" stage. It's not an adequate solution, in my view.

I also like a cap on income. Because if there is no upper limit to the annual income a person can earn, then there is no lower limit to the value of the dollar. As a patriotic American who thinks about the economy, I feel it is important to preserve the value of my nation's currency. And anyway, it may gain me little to increase my income when each dollar of that income is falling in value. If caps on income and wealth allow the value of the dollar to stabilize, that would be good even for the guys who were thinking about moving to Ireland.