Tag Archives: class

Back in the USSR

ForwardThis month, Rolling Stone brings you economic reforms from an avowed communist.  The online debate is more interesting than the article – over 10,000 comments in ten days.  Jeremiah has reported how young people are turning to socialism, and this debate shows a clear split along generational lines.

People who remember the Soviet era are quick to dismiss socialist ideas, without explanation.  This is unintelligible to young people, who did not have the experience.  Several commentators seem to think Fidel Castro was a swell guy.

One insightful comment went along the lines of, “if you keep dismissing ideas we like as socialist, you will only persuade us that socialism must be a good thing.”  They have seen where mildly socialist policies have worked, in Sweden and Canada.  Such is the danger of using labels.

People could contribute the skills that inspire them – teaching, tutoring, urban farming, cleaning up the environment, painting murals – rather than telemarketing or whatever other stupid tasks bosses need done to supplement their millions.

The problem with a proposal like Myerson’s “make everything owned by everybody,” is that the money has to come from somewhere.  The government can only “buy up assets from the private sector” if the government has surplus wealth to begin with.  That’s why it’s called a “sovereign wealth fund.”

If you fund the purchases by raising taxes, that’s tantamount to simply seizing the assets – which might not bother Myerson.  The moral argument, that nationalization is theft, might not be persuasive.  The practical argument is that you can only do it once.  Once you have seized all the railroads and factories, all the buildings and airplanes – no one will ever again have the ability to create new capital assets.

Will the government make ongoing capital investments out of those dividends, which it has pledged to the “universal national income?”  Here, we must resort to history.  Governments are notoriously poor investors.  The experience of Russia, Cuba, China (before Deng) and Venezuela, has been that assets become steadily less productive from the time they are nationalized, and eventually become worthless.

The ideal of “everybody owns everything” rapidly becomes “everybody owns nothing.”  Oh, except for the government.  The process of confiscating the nation’s wealth might just – maybe – cause the government to become an all-powerful police state.  History again.  Myerson will be living in Harry Reid’s penthouse atop the Ritz, and you will be standing in the rain with your “universal national income” ration card.

So, the old folks do a bad job of explaining our mistrust of socialism.  On the flip side, the young commentators show an astonishing arrogance about history.  They say, in so many words, “we don’t care what happened in the twentieth century,” and, “it’s our country now.”

Indeed it is.  If you want Myerson’s collectivist utopia, help yourself.  It will take ten or twenty years to deplete America’s capital stock.  Jeremiah will be dead and buried, and you kids will be just waking up to how totally screwed you are.

Image Credit: The People’s Cube

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Generational Conflict

The letter from Clara we published last week sets out the markers in a generational conflict that dominates our debate about class and wealth.  Political pundit Stephen Colbert says much the same thing here, and here is a blogger who writes that Social Security promises are null and void in the new economy.

promises made when the economy was growing by 4% a year and the next generation was roughly double the size of the generation entering retirement cannot be fulfilled

On the flip side, people retiring today have been paying into this failed system all their working lives.  Is it fair that Mr. Colbert’s generation should be the one holding the bag?  As Sami Karam observes in his own Clara piece, demographic challenges can be foreseen far in advance.

the number of people aged 40 in the United States twenty years from now is roughly the same number of people aged 20 today

Jeremiah does not blame greedy oldsters for wanting “their” Social Security payments.  He blames the political class for not reforming the program.  The housing bubble may have been a surprise, but this crisis has been brewing for twenty years.  To reform Social Security, it pays to understand where the program went wrong.

  • Passthrough funding seemed like a clever idea when the dependency ratio was low.  It allowed the program to show immediate benefits.  The adverse trend in this ratio was predictable, though, and funding should have been shifted to an investment model.  This would mean positive returns to the program, and it would also fund economic growth.
  • Social security holds its deposits in a special class of Treasury debt, which means free funding for the government.  It should be in an age-weighted portfolio, like any private pension fund.  The administrators should have a stake in obtaining positive returns on investment, and against the Fed’s policy of financial repression.
  • It is irresponsible to go on making promises about benefits, while not investing and not planning for population trends.  The program ought to work more like a defined contribution fund, regularly publishing changes to benefits and the retirement age, depending on the health of the fund.  This would give the public an interest in how well the program manages its money.
  • One goal of the program is redistribution.  People with good jobs would prefer to fund their own IRA, but they face an individual mandate to join Social Security.  We should allow them to opt out, fractionally, in exchange for lower benefits.  This would cost the program some funding, but it would add diversity and reduce total size.

Finally, the administration of Social Security needs to be reformed.  Its three main operations are funds collection, investment, and disbursement.  The latter two could easily be outsourced, taking care to end the Treasury’s conflict as a borrower from the fund.  Jeremiah would also like to see collections handled by a different agency than the IRS, because the IRS is unspeakably evil.

See also:  Age Shall Weary Them

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Just Anywhere, Please

There are many good reasons you may have voted for President Obama, but this isn’t one of them.  The president and his party have attractive positions on the environment, for instance, and on civil rights.  This idea cited in Bloomberg, though, is just silly.  It says that, thanks to Obama’s exertions, our sputtering economy recovery will somehow “start in the middle,” and “grow from the middle out.”

Idiots

Readers are challenged to submit actual policies that would “grow the economy from the middle out.”  Never mind the various roles of Congress and the Executive in forming fiscal policy.  Never mind our pathetic GDP results, structural unemployment, the national debt, or the currency war.  Just submit one law that would stimulate growth by directing resources to the middle class.  Oh, and don’t get a nosebleed trying to define who is in this wonderful “middle class.”

Government cannot do much to stimulate the economy, except keep its own budget small and not impose undue burdens on industry.  Proposing to pick and choose where the growth will occur is just ridiculous.

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Save the Savers

The partisan divide is bridged by nuance.  Neither side is all right or all wrong.  This is why Jeremiah maps the political space into two dimensions.  Today, we apply the two dimensional approach to tax policy.

Discussions about tax policy have degenerated into class warfare because they rely on a simplistic “rich versus poor” paradigm.  Never mind whether the poor actually receive the benefits.  Never mind that the tax code is riddled with backdoor spending.  If you’re not helping the “middle class,” then you’re protecting the rich.

This is where Jeremiah adds a distinction between savers and spenders.

America has an extremely progressive tax system, by international standards.  Other countries use a flatter income tax, plus a sales tax.  Our federal spending is funded entirely by the income tax.  Sales taxes are unpopular because they are “regressive,” meaning that the lower your income, the bigger the tax bite as a share of that income.

Taxing consumption hurts the poor, relative to the rich, but it encourages people to save rather than spend.  When making policy, four stereotypes are better than two:

Poor and Frugal

These people may be poor, but they scrimp and save and try to build a better future.  The Fed’s current policy of debt monetization is killing them.  They’re not making any interest on their savings, and food prices are going up.

Poor and Profligate

These people spend every dollar they get.  Maybe that’s why they’re poor.  They pay no taxes, so they don’t care how tax money is spent.  Paying a sales tax would encourage them to put some money in the bank.

Rich and Frugal

These people have money, and they mean to keep it.  Maybe they started out poor and frugal, back when interest was 5%.  Many old people are in this category.  They are “rich” now, only because they scrimped their whole life.

Rich and Profligate

These people are splashing their money around everywhere.  That’s good for the BMW dealer, but our economy actually does better if they keep it in the bank.  The best way to tax these people is with a luxury tax.

The class war paradigm is a bad guide to tax policy, and a bad guide to monetary policy.  The result is that we are punishing people, both rich and poor, for productive behavior.

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The One-Percent Fallacy

Mark Twain said, “there are lies, damned lies, and statistics.”  Those with training in statistics are alert to its many deceptions – as are the spin doctors.  The populist rage against the top 1% income bracket is an especially dangerous fallacy.   It gives the impression that the 1% are a specific group of people hogging all the income.  In fact, any survey will have a top 1%, and a top 10%, and a bottom 10%.  You will find different people in these categories every time you run the survey.

Our favorite economist, Dr. Thomas Sowell, calls this the “enduring class” fallacy.  In fact, someone in the top 1% this year probably wasn’t there last year – and probably won’t last two years.  This churn among all income levels is called social mobility, and it’s what makes America the “land of opportunity.”

The enduring class fallacy dovetails with the zero-sum fallacy, which Dr. Sowell has debunked elsewhere:

“There is a lot of anger and it’s for a very good reason,” Wolff said. “If all of the income gain goes to the top, there’s not much left to go to the rest of the people.”

Unbelievably, the fellow quoted above is an economist.  This idea is just ridiculous.  No one has actually believed it since, maybe, Mao – and it’s likely the Marxists only use it for recruiting.  It seems appropriate to cite an iconic Democrat in rebuttal:

As they say on my own Cape Cod, a rising tide lifts all the boats.  And a partnership, by definition, serves both partners, without domination or unfair advantage.

It was lovely to hear that, with “pahtnership,” in the original Boston accent.  In fairness, social mobility in America is not what it used to be.  The OECD found that Scandinavia now has better mobility, and so did the Institute for Labor.  Both studies found that it is hard for Americans to climb out of the bottom quintile, due to poor public education.  That’s what we should be protesting.

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