Were he writing op-eds today, Tolstoy might point out that all shutdowns are dumb, but that this one is the dumbest.
What makes it so dumb? Do I really need to answer that? Suffice it to say that this Congress, which can't agree on anything, agreed to appropriate the money needed to avoid a shutdown, until President Trump swooped in at the last minute and blocked the deal, based on pressure from his base to "build the wall." No one, including Trump, knows what "the wall" is, beyond a campaign slogan.
True, spineless Senate Republicans won't stand up to Trump on this, but the fact remains: If one stubborn, ill-informed person can shut down the government of the world's largest economy and keep it that way for more than a month, something very important is very broken. And it's going to take a lot more than ending the shutdown to fix it.
For now, 800,000 furloughed or unpaid government workers are feeling the direct brunt of this idiocy, but consider that Trump's chief economist, Kevin Hassett, warned that the shutdown is doing so much damage to the economy that it could mean that the real gross domestic product growth rate this quarter will be zero. As I'll explain in a moment, I suspect he's wrong, although quarterly numbers are volatile, so you never know.
But what is Hassett saying here? Is he trying to send his boss a message? Trump explicitly owns the shutdown, so I can't be the only one having trouble wrapping the aging noggin around his administration complaining about its effect. They could stop it by the time I finish writing this missive! Hassett warning about the shutdown's effect is like a mugger warning you that if he doesn't cease and desist, you might get hurt.
Ironically, if the government remains partly shut down through March — an unprecedented disaster — we won't learn the GDP growth rate for the current quarter because the Commerce Department won't release it. But let's think about the macroeconomics of this a bit.
Last seen, real GDP growth was trending at a 3 percent rate, goosed by a tight labor market generating moderate real wage gains, which in turn support solid consumer spending. Because such spending is 68 percent of our GDP, that's a decent tail wind. True, a variety of head winds, including higher interest rates, weaker home sales, slower global growth and, yes, team Trump repeatedly kicking the ball in our own goal — trade war, shutdown — are expected to shave maybe one-half a percentage point off the trend (more if the shutdown persists). That gets us into the 2 percent range, although technical factors could slice a bit more off the rate (in recent years, first quarter GDP has been over-adjusted down for seasonal effects).
That's not zero, but again, these numbers — if they come out! — are noisy, so who knows? Also, as Hassett noted, some of this lost growth comes back when the shutdown ends and government spending ramps up more than it would have otherwise.
Is there any way out of this seemingly never-ending dumbness?
I'm not just talking about ending the shutdown, although that's the first imperative. Perhaps the Senate votes that are scheduled for Thursday, although not expected to pass, will be the beginning of the end. If not, and I don't say this lightly, I'd urge Transportation Security Agency workers to engage in either a massive sickout or a strike, the latter of which would be illegal and is thus not without risk (although working without pay shouldn't be legal either). Shut down air travel and you un-shutdown the government in about an hour, I'd bet. I acknowledge that it's easy to tell other people to engage in civil disobedience, although I guarantee you, I wouldn't be the only progressive to join that picket line.
But what I'm talking about — and what so many of us are longing for — is to get away from arguments about "the wall" and whether and where Trump will give his State of the Union address (because of the expected content of that speech, I can think of no less pressing question), to the policy debates we're not having. We're existentially threatened by climate change. That's partly a function of inadequately regulated capitalism that's also delivering monopolistic dominance in key industries (tech, health, retail) and oligarchic levels of income and especially wealth inequality. Our pay-to-play political system maps such wealth concentration onto the least representative politics and policies that many of us have seen in our lifetimes.
Trump and Brexit and authoritarian leaders worldwide offer easy answers to these challenges: It's the elites, it's the immigrants, it's people who don't look like you. More often than not, they do so while appropriating even more wealth for themselves, their families and their donors.
Let's be very clear about this: Such leadership loves the fight between "Nancy and Don" about the State of the Union. This is the only type of fight Trump's knows. Beyond serving up tax cuts and deregulation to their donor base, and the "wall-that-Mexico-will-fund" to their political base, they got nothing.
Again, ending the shutdown is the first order of business. But at the same time, progressives must cordon off the crazy and start intensely facilitating and planning for the essential shift in political power. I've been trying to help on the policy front and will continue to do so.
But we all need to row in the same direction on this one, by which I decidedly don't mean we have to agree on the way forward. Let's argue about Medicare for More vs. Medicare-for-all, and job subsidies vs. job guarantees, and where to set the top marginal rate. But every minute spent fighting on Trump's turf is a minute wasted in the greatest cause of this moment: the one to revitalize representative democracy.
Sen. Elizabeth Warren (D-Mass.) has just introduced a tax idea this country desperately needs: a tax on high-end wealth. It's an idea that's well-crafted for our time, one that promises to add fairness to an unfair tax code, raise significant, much-needed revenue and push back on the historically high level of wealth concentration in the United States.
Here's the plan, which, for the record, is extremely simple to explain, an advantage when it comes to tax policy: Wealth over $50 million would be taxed at 2 percent; wealth over $1 billion would face an extra 1 percent tax. "Wealth" is defined as net worth — the value of assets minus any debts.
That's it. It is projected that the tax would raise about $2.75 trillion in revenue over 10 years. To get a sense of that magnitude, recall that the Trump tax cuts lost less revenue (just under $2 trillion) than this tax allegedly gains. That's a lot of tax progressivity pushing back on the highly regressive Trump cuts.
According to wealth scholars Emmanuel Saez and Gabriel Zucman (S&Z), less than 0.1 percent of households (the top tenth of the top 1 percent), about 75,000 of them, would face this new tax, which raises the question: How could such a small tax on such a tiny base raise so much money? The answer speaks to the extent of wealth concentration.
[Elizabeth Warren to propose new 'wealth tax' on very rich Americans, economist says]
S&Z find that since the 1970s, the share of total wealth held by the top 0.1 percent grew by a factor of almost three, from 7 percent in the late 1970s to 20 percent in recent years. Moreover, the top's gain has been everyone else's loss: The bottom 90 percent of households have gone from holding 35 percent of wealth in the 1970s to 25 percent today. In other words, the top 0.1 percent's wealth holdings aren't that much less than those of the bottom 90 percent.
It's notable in this context that wealth tends to be about twice as concentrated as income, in part because it feeds on itself. The "miracle of compounding" is a tremendous force for those sitting on a large pile of large assets. It's also terribly skewed away from minorities. As Valerie Wilson has shown, the black/white median income ratio is about 60 percent. For net worth, it's 10 percent.
Narrowing the scope within the top 0.1 percent to the 75,000 households with net worth above $50 million yields a base of more than $9 trillion, of which about $2.5 trillion would face the billionaire's surcharge of an extra 1 percent. In other words, the small tax delivers a large revenue payload because there's so much wealth concentrated in that rarefied bit of the stratosphere.
The plan's $2.75 trillion score implies the ability to capture a lot of wealth that's sheltered from taxation, so it must be robust to tax avoidance and evasion, of which there's a lot among this crowd (remember the "Panama Papers"?). One important feature in this regard is that no assets are given favorable treatment: All the assets of households above the threshold are included in the net worth measurement, regardless of where in the world such assets reside.
To meet this goal, the plan includes a significant increase in the Internal Revenue Service's enforcement budget, a minimum audit rate for the wealthiest taxpayers, a 40 percent "exit tax" on those above the $50 million threshold who renounce their citizenship and — among the most important parts of this — anti-evasion mechanisms to share information with foreign governments. Still, these are folks with the best tax lawyers money can buy, so the score assumes that households subject to the tax find ways to reduce their liability by 15 percent.
All that said, as S&Z themselves recently pointed out in a must-read commentary, revenue isn't the only rationale for such progressive taxation. It's also about "regulating inequality and the market economy" and, even more so, "safeguarding democracy against oligarchy." In that context, they make two critical points. First, top U.S. tax rates are much lower than they've ever been in our history, and, second, despite fact-free rhetoric to the contrary, there's no negative growth impact from high top rates, either here or in other advanced economies.
Still, you can be sure we'll hear massive sob stories about how the Warren high-net-worth tax will crush capital investment. Don't believe it, for at least three reasons. First, the historical record fails to show a correlation between changes in taxes, including those on capital gains (income derived from wealth) and business investment. Second, the Trump tax cuts, which were explicitly targeted at investment, have very little to show for it. Third, even if there were a negative effect, we're talking about tax rates of 2 percent or 3 percent, so any such "elasticity" would be barely tweaked by this tax.
S&Z's sage warnings on inequality and oligarchy raise what is perhaps the most important attribute of this idea: the taxation of wealth, something we do almost none of in this country. Especially when it comes to the rich and their contemporary portfolios, this makes no sense. We tax income, of course, but for the wealthy, income streams flow from wealth in the form of interest, dividends and capital gains. True, we tax those forms of incomes, but at favorable rates, privileging wealth-derived income over work-derived income. In fact, S&Z find that the Warren tax would raise taxes paid by the wealthiest households as a share of net worth from 3.2 percent to 4.3 percent, compared with 7.2 percent for households in the bottom 99 percent. One way to further close the remaining regressive gap between those rates would be to lower the threshold of the plan from $50 million to something like $20 million or $30 million.
But perhaps the main reason to bring Warren's plan to fruition is because, as Zucman writes, "For the rich, wealth begets power." This is especially the case in our pay-to-play politics, where the high wealth concentrations documented above buy the policies that block ideas just like this one.
In other words, to give Warren the last word, the economy — more precisely, the tax code — is rigged. True, this plan isn't going to become law anytime too soon, but those of us longing to de-rig the economy are in it for the long haul. So, thanks, Senator, for providing us with an inspiring idea whose time has come.
The post-1945 income distribution system is irretrievably broken, threatening the market economy. And traditional redistributive tools such as direct taxes, collective bargaining, and labor regulations cannot put things right.
In 1942, William Beveridge issued an epoch-defining report that established a model for welfare states in the post-war era. He recognized that the old social protection system had broken down and that it was "time for revolution, not for patching." The challenge, Beveridge said, was to slay five giants: disease, idleness, ignorance, squalor, and want.
Today, it is the post-1945 income distribution system that has broken down irretrievably, threatening economic failure and jeopardizing what Klaus Schwab calls "Globalization 4.0." Today we must fight eight new giants. To do so, we urgently need a twenty-first-century income distribution system in which a basic income plays a central role. Such a system might not slay today's eight giants, but it would significantly weaken them.
The first giant is inequality – the huge growth in income and wealth disparities within countries that goes well beyond what is captured by measures such as the Gini coefficient. An increasing share of total income is being captured as rent by owners of physical, financial, and so-called intellectual property. Meanwhile, real wages have stagnated or fallen, and ever more people are falling through widening holes in the social safety net. Traditional redistributive tools such as direct taxes, collective bargaining, and labor regulations cannot reverse these structural shifts, however much those on the left might wish.
What is needed is a new income distribution system that restores the market economy rather than distorting it. By recycling rents currently taken by the plutocracy and elite to everybody, a basic income paid as a common dividend would be the anchor of a reformed system. Contrary to what some critics assert, a basic income would not be regressive. Paid equally and quasi-universally from rentier income, it would necessarily be progressive.
The second threat is economic insecurity. The welfare state was supposed to insure workers against contingent risks and shocks. But it is failing because of reduced social insurance coverage, flexible labor markets, and widespread technological disruption, among other causes. Moreover, today's economic insecurity is characterized by uncertainty about the future rather than known risks. People feel threatened by "unknown unknowns" that, by definition, cannot be insured against. In an open, globalized economy, only a basic income can guarantee basic security.
The next giant, and closely related to the first two, is debt. Millions are living on the financial edge, with unpaid rents, utility bills, and high-cost credit cards. A significant rise in interest rates or an economic downturn could trigger an avalanche of distress. True, a basic income would not solve the debt problem, but pilot projects show that when people know a regular amount is coming in, they are likelier to pay down debts and gain greater control of their finances.
Fourth, and again related, is stress. This is a global pandemic, with an increasing number of people suffering from depression, mental illness, suicidal tendencies, and physical ailments linked to job pressures, insecurity, inequality, and feelings of inadequacy among many people who perceive themselves to be just "licking at the window" of consumerism. A basic income would not cure the stress pandemic, but it would reduce its intensity and prevalence.
The fifth giant is the ever-growing precariat – the millions of people who face a bits-and-pieces life of unstable, often unpaid labor, having to rely on money wages alone. They are supplicants, without what sociologists call "agency," who depend on discretionary favors from bureaucrats, family members, and occasional employers. A basic income would offer much-needed respite to these people and make them feel less like beggars.
Robots are the sixth danger. I am skeptical about the alarming predictions of tech gurus and economists who believe that artificial intelligence and technological wizardry will soon lead to mass displacement of humans. Still, the ongoing tech revolution is undoubtedly disruptive and, although it may accelerate growth, it will continue to intensify inequalities. A basic income would help to share the gains more widely.
The threat of extinction from global warming and the ecological catastrophe is the seventh giant that must be confronted, and it may prove to be the most decisive in mobilizing support for a basic income. The threat must be combated with new and increased eco-taxes or levies. Returning the proceeds of "green" levies to people as equal common dividends – a form of basic income – would turn unpopular regressive measures into progressive ones. This is already happening in Canada, led by a successful initiative in British Columbia. What's more, our research shows that a basic income would tilt economic activity toward personal services, community, and voluntary work, reducing the yawning "care deficit" in aging societies.
The eighth giant blocking the way to a flourishing, inclusive economic system is populism, which in some cases is fast becoming neo-fascism. Support for populists also has grown dramatically in Europe, no doubt owing to chronic economic inequality, insecurity, debt, stress, and anger. A basic income would make many more people feel like valued citizens with a stake in democracy.
I have worked on basic income policies for three decades, and I have been involved in piloting variants on four continents. As the economic, political, and environmental threats to our future multiply, rolling out a universal individual basic income is more important than ever.
Guy Standing, Professorial research associate, School of Oriental and African Studies, University of London.
This first appeared on the World Economic Forum's Agenda blog.
Techies, trade, and skill-biased productivity
James Harrigan, Ariell Reshef, Farid Toubal 23 January 2019
In order to identify the effects of ICT and R&D on firm-level productivity we use data on workers in technology-related occupations. We call these workers 'techies'. We view techies – engineers and technicians with skills and experience in science, technology, engineering, and maths – as essential to productivity growth, by creating new products and processes as well as by mediating technology. For example, consider ICT managers and support staff in a firm. These techies are central in creating, planning, installing, and maintaining ICT, as well as in training and assisting other workers in the use of ICT. Techies (for example, engineers in manufacturing firms) are also involved in R&D. They design new products and lead R&D teams, and ensure the transfer of new knowledge to other workers in the firm.
We measure techies by their share of hours worked. This measure of firm-level technological sophistication can be compared to R&D expenditures, a common metric for technology adoption in the literature. Firm-level R&D is a useful measure, but it excludes much of the ongoing expenditure and managerial attention that firms devote to technology adoption and ICT use. In fact, reported R&D is not even a necessary condition for technology adoption and innovation, and firms employ many scientists and engineers in non-R&D occupations. Conversely, R&D is likely to be impossible without the employment of techies, who are needed to install, maintain and manage the ICT used in R&D departments. Thus, the techie share is a more comprehensive measure of firm-level effort devoted to technology adoption than R&D expenditure. In our data, ICT and R&D techies together account for 3.6% of hours worked and 5.2% of the aggregate wage bill. About 44% of techies are in ICT-related occupations.
In our paper, we apply and extend new econometric techniques for the estimation of production functions and inferring productivity at the firm level. Our methodology allows us to separately identify two dimensions of productivity. The first dimension raises the productivity of all of a firm's inputs (capital, materials, and all types of labour) equally. In addition to this 'Hicks-neutral' measure of technology, we also identify an element of technological progress that directly raises the productivity of the firm's more skilled and educated workers. This 'skill augmenting' technology measure turns out to be central to our findings. In the final step of our methodology, we open up the black box of productivity and estimate the causal effects of firms' investment in ICT and R&D and of importing and exporting decisions on firm productivity.
We find that compared to firms that don't employ techies, firms with a lot of techies (in the 75th percentile) have skill-augmenting productivity which is 60% higher. We do not find that techies have a statistically significant effect on Hicks-neutral productivity. Turning to the effects of trade, we find that firms that import have skill-augmenting productivity which is 120% higher, and Hicks-neutral productivity which is 50% higher, compared to firms that do not import. The effect of importing on skill-augmenting productivity is mainly due to imports of intermediate inputs, which is consistent with the view that offshoring raises the productivity of skilled workers. We find no effect of exporting on productivity (i.e. no 'learning by exporting' effect), which is not surprising in the French context.
Putting all the pieces together, we are able to quantify the impact of these factors on the demand for skilled and unskilled labour. Again, compared to firms that don't employ techies, firms with a lot of techies have employment of skilled labour that is 60% higher, employment of unskilled labour that is 15% higher, and skill intensity that is 40% higher. The effects of importing are even larger. Firms that import have employment of skilled labour that is 115% higher, employment of unskilled labour that is 25% higher, and skill intensity that is 70% higher, compared to firms that do not import. When we aggregate across firms, we find that estimates can account for much of the overall increase in skill intensity in our sample from 2009 to 2013.
These results on the employment effects of technological change (mediated by techies) and trade are crucial to public policy debates. They show that unskilled workers are right to be wary of technology and trade, which we find do indeed favour employment of skilled workers. But this is a relative effect – because of the powerful productivity effects of technological change and trade, both skilled and unskilled workers see labour demand rise when the firms where they work hire techies and/or engage in offshoring. The reason is that both forces cause strong competitive effects that prompt firms engaging in these activities to expand. Another policy implication of our analysis is the importance of techies for productivity growth, both through R&D and ICT adoption.
All the results we find in our paper are within-firm effects of firm-level decisions. We do not consider why firms choose to employ techies or import, nor do we consider the effects of these firm-level decisions on industry- or economy-wide wages. These are limitations of the scope of our paper but do not impinge on the credibility of our research strategy. Furthermore, any credible analysis of the effects of technology adoption and globalisation on labour markets must be built on an understanding of what goes on within firms. This is where our contribution lies.
Acemoglu, D and D Autor (2011), "Skills, tasks and technologies: Implications for employment and earnings", in Ashenfelter, O and D Card (eds.), Handbook of Labour Economics, Volume 4b, Amsterdam: North Holland.
Harrigan, J, A Reshef and F Toubal (2018), "Techies, trade, and skill-biased productivity", NBER working paper 25295.
Helpman, E (2018), Globalization and inequality, Cambridge: Harvard University Press.
It's about curtailing inequality and saving democracy.
By Emmanuel Saez and Gabriel Zucman
Mr. Saez and Mr. Zucman are economics professors at the University of California, Berkeley,
Alexandria Ocasio-Cortez has kick-started a much-needed debate about taxes. But the debate, so far, has been misplaced. It's obvious that the affluent — who've seen their earnings boom since 1980 while their taxes fell — can contribute more to the public coffers. And given the revenue needs of the country, it is necessary.
But that's not the fundamental reason higher top marginal income tax rates are desirable. Their root justification is not about collecting revenue. It is about regulating inequality and the market economy. It is also about safeguarding democracy against oligarchy.
It has always been about that. Look at the history of the United States. From 1930 to 1980, the top marginal income tax rate averaged 78 percent; it exceeded 90 percent from 1951 to 1963. What's important to realize is that these rates applied to extraordinarily high incomes only, the equivalent of more than several million dollars today. Only the ultrarich were subjected to them. In 1960, for example, the top marginal tax rate of 91 percentstarted biting above a threshold that was nearly 100 times the average national income per adult, the equivalent of $6.7 million in annual income today. The merely rich — the high-earning professionals, the medium-size company executives, people with incomes in the hundreds of thousands in today's dollars — were taxed at marginal rates in a range of 25 percent to 50 percent, in line with what's typical nowadays (for instance, in states like California and New York, including state income taxes).
That few people faced the 90 percent top tax rates was not a bug; it was the feature that caused sky-high incomes to largely disappear. The point of high top marginal income tax rates is to constrain the immoderate, and especially unmerited, accumulation of riches. From the 1930s to the 1980s, the United States came as close as any democratic country ever did to imposing a legal maximum income. The inequality of pretax income shrank dramatically.
The view that excessive income concentration corrodes the social contract has deep roots in America — a country founded, in part, in reaction against the highly unequal, aristocratic Europe of the 18th century. Sharply progressive taxation is an American invention: The United States was the first country in the world, in 1917 — four years after the creation of the income tax — to impose tax rates as high as 67 percent on the highest incomes. When Representative Ocasio-Cortez proposes a 70 percent rate for incomes above $10 million, she is reconnecting with this American tradition. She's reviving an ethos that Ronald Reagan successfully repressed, but that prevailed during most of the 20th century.
And she's doing so at a time when there is an emergency. For just as we have a climate crisis, we have an inequality crisis. Over more than a generation, the lower half of income distribution has been shut out from economic growth: Its income per adult was $16,000 in 1980 (adjusted for inflation), and it still is around $16,000 today. At the same time, the income of a tiny minority has skyrocketed. For the highest 0.1 percent of earners, incomes have grown more than 300 percent; for the top 0.01 percent, incomes have grown by as much as 450 percent. And for the tippy-top 0.001 percent — the 2,300 richest Americans — incomes have grown by more than 600 percent.
Just as the point of taxing carbon is not to raise revenue but to reduce carbon emissions, high tax rates for sky-high incomes do not aim at funding Medicare for All. They aim at preventing an oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.
Of course, there are many policies — from the enforcement of antitrust laws to a broader access to education; from the regulation of intellectual property to better corporate governance — that can contribute to curbing inequality in the years to come. And government transfers, whether in the form of income support for families or public health insurance, have a critical role to play.
But redistribution alone will not be enough to address the inequality challenge of the 21st century. All societies that have successfully tamed inequality have done so mostly by curbing the concentration of pretax income — the inequality generated by the markets — for the simple reason that extreme market inequality undermines the very possibility of redistribution. Tolerating extreme inequality means accepting that it's not a gross policy failure, not a serious danger to our democratic and meritocratic ideals — but that it's fair and just and natural. It produces its own self-justifying ideology. It vindicates the "winners" of world markets. But vindicated winners, sure of their own legitimacy, seldom share much of their "just deserts" with the rest of society.
An extreme concentration of wealth means an extreme concentration of economic and political power. Although many policies can help address it, progressive income taxation is the fairest and most potent of them all, because it restrains all exorbitant incomes equally, whether they derive from exploiting monopoly power, new financial products, sheer luck or anything else.
A common objection to elevated top marginal income tax rates is that they hurt economic growth. But let's look at the empirical evidence. The United States grew more strongly — and much more equitably — from 1946 to 1980 than it has ever since. But maybe in those years the United States, as the hegemon of the post-World War II decades, could afford "bad" tax policy? Let's look then at Japan in 1945, a poor and war-devastated country. The United States, which occupied Japan after the war, imposed democracy and a top marginal tax rate of 85 percent on it (almost the same rate as at home — 86 percent in 1947). The goal was obviously not to generate much revenue. It was to prevent, from that tabula rasa, the formation of a new oligarchy. This policy was applied for decades: In 1982, the top rate was still 75 percent. Yet between 1950 and 1982, Japan grew at one of the fastest rates ever recorded (5.1 percent a year per adult on average), one of the most striking economic success stories of all time.
Contrast Japan in 1945 with Russia in 1991. When Communism fell, Russia was also a poor country, with income and life expectancy well below that of Western economies. In lieu of 85 percent top rates, however, Russians got fast privatization and a top tax rate of 30 percent — again modeled on what was prevailing in the United States at the time (31 percent in 1991). That rate was replaced in 2001 by an even lower flat rate of 13 percent. That shock therapy created a new oligarchy, led to negative income growth for the bottom half of the population, fostered a general discontent with democracy and produced a drift toward authoritarianism.
Progressive income taxation cannot solve all our injustices. But if history is any guide, it can help stir the country in the right direction, closer to Japan and farther from Putin's Russia. Democracy or plutocracy: That is, fundamentally, what top tax rates are about.
Emmanuel Saez and Gabriel Zucman are professors of economics at the University of California, Berkeley, and the authors of a forthcoming book about tax justice.
Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion)and Instagram.
