How could Mankiw be wrong? Income inequality has led to dramatic, explosive economic growth in most of Latin America and Sub-saharan Africa hasn't it?
Ask the people of Brazil why they elected a social democrat (Cardoso) and a "worker's party" leftist candidate (Lula) after 25 years of a hard-right military dictatorship.
To be fair, overly state-controlled economies don't do much better (aside from the extremes of poverty in capitalist heavily income-unequal economies), but that isn't the point. Show me a country with a Gini index greater than 40 that anyone in the developed world would want to live in. You can't, because they don't exist.
FDR did the best job of levelling inequality when he got a 94% top tax rate in place. Of course, that also resulted is a flight of capital from risky investment (with no reward due to the tax) into things like municipal bonds. This extended the "equality" of the depression right up to WWII when capital investment (funded by government debt) was needed for the war effort.
As a more general rule, if you want to better yourself there must be inequality or there won't be a better place to go.
We already have a society, more than anywhere else on Earth, where two people of equal natural abilities, merit, etc. can (but are not guaranteed to) achieve similar economic success. That answers the primary question: let's keep it that way.
In such an upwardly and downwardly mobile society, income inequality is well justified by the general equality of opportunity offered to all. I do not say it is perfect, but gov't should be concerned with providing equal opportunity rather than equal outcomes. Unequal outcomes (or incomes) are after all, the natural order of things. It would be strange indeed, if we had income equality -- we're not Communists.
As far as tax burden goes, fair is a flat tax on income over a certain level, say $50k. All income, including dividend, capital gains, etc. should be taxed at the same rate and no deductions under any pretense, including mortgage interest. What could be more fair than the tax burden shared roughly equally (actually quite progressively with the $50k deduction for most folks).
Jason Wright: We have conversed before, but I don't remember you having released particulars of your circumstances. From your argument I can readily deduce that you think you have "made it", or expect to "make it", and are in one of the higher tax brackets, no? It's easy to make such statements from a position of being confident of one's place.
I think that I'm in a reasonably good place as well, but I have been elsewhere before, and don't have nearly the confidence that it has to be or will always remain so.
People who have it good right now may want to be interested in everybody's welfare for their own potential future sake, if not for that of others.
I lived 26 years in Britain before moving to the US and if you think that ability is more a determining factor in economic outcome than heredity I have to ask you what country you live in, because it's not the USA.
Let's take Britain, the other 'low mobility' society mentioned. Growing up, all people have healthcare for free (and from my experience of the NHS, just as good a quality as any HMO here in the US if not better) - there are problems but nothing like getting billed (and dealing with billing errors) while you're sick. The education system, again while being far from perfect, is better on average from what I can see at the K-12 level, and while comparable at the university level a student doesn't rack up six figure debts just to get a degree (despite the recent fees introduction).
So for me, the UK state provided 26 years of good quality, free healthcare, and 21 years of top quality education to Ph.D. again for free. How much would that cost in the USA? How many people working as waitresses or cleaners can support their kids through that?
I've had British friends go through long term illnesses that would have destroyed a family financially in the US (even with insurance) and they come out the other side with no bill, and are now 'productive members of society'.
And one thing I'll tell you is that despite this being paid for by taxes, I paid less taxes in the UK than I do here in CA once it's all added up - at least in the UK I got something for it.
Have you read 'Nickeled and Dimed?' - a journalist spends a year doing various menial jobs and just can't catch a break. The system is rigged so you can't get out.
The USA is still a great place of opportunity IF you can afford the cost of entry to the club - but fewer and fewer people can.
Despite my career in the US going well, I'm already making plans to return to the UK in the next couple of years (as are many immigrants I know from 1st world countries who arrived after the mid 90s). This is not a country where the system works for those trying to raise a family or be in the traditional 'middle class'.
I'll go back to the slightly lower wages of the UK but higher quality of life. And perhaps I can then pay back something more to that society for what it gave me.
No-one is calling for absolute income equality, but what we're calling for is sabity. Henry Ford understood that someone had to have the money to buy his cars and paid his workers accordingly. A vibrant middle class keeps the economy booming - and the current tax policies are design to crush those families.
I'm not seeing what's so terrible about what Jason wrote -- at least not about the tax policy. Maybe you could make the cut-off double the five-year average median income, or something psuedo-scientific like that. If you did that and dropped consumption taxes (or VAT) from all items that cost less than, say, $500, I think you might have a fairly regressive system in place that would still bring in decent income.
The Scandinavian countries fare extremely well in all education indicators of their population. They are also mentioned at the top league regarding upward mobility in the most recent studies, the ones that show that the US and the UK don't do so well. I don't know if it is too early for this (education is a long term investment), but it would be interesting to plot education and social mobility and make an international comparison. If anybody can do it, it will be CR, the king of graphs...
Jason Wright wrote, What could be more fair than the tax burden shared roughly equally (actually quite progressively with the $50k deduction for most folks).
Uh, how about taxing Ricardian rents, for example? Particular land rents.
I still think that the tax rate should be determined by wealth, but the tax itself should be levied against income. That is, wealth determines the rate, but the tax is rate times the income.
I would like to hear a real economist comment on this.
Doesn't income inequality define third world? What's our rush? More fenced and gated communities, huge prison populations, poverty, . . . is that the solution? If so, why didn't it work for them lo these many years? Lord, Haiti should be atop the heap by now.
CR:
America is a land of exceptional opportunity. Even if a few other nations on Earth are a little more so, that doesn't change one's very good prospects here. I repeat: one's outcome is in their own hands here--anyone with drive, motivation, work ethic can make a good middle class life here. Exceptional individuals can go all the way. Your healthcare may be provided in France, and healthy children have better prospects, but the high costs of providing large public benefits has resulted in chronic ~10% unemployment and lackluster growth. There are real tradeoffs to offering generous public benefits. And I should very much like to compare the upwards mobility of the Muslim immigrant in the USA and in the Netherlands.
cm: As far as "releasing" my financial situation, as if I were running for office....what nonsense. I fail to see what bearing it has the discussion. If I had more wit or memory I'm sure I could turn a pretty phrase or quotation on the dangers of assuming much on matters of which one is ignorant.
liberal: wealth is the accumulation of income. If all income is taxed, the portion of left-over income that is saved shouldn't be taxed again. Saving is a virtue, for obvious reasons, and should be encouraged. Living paycheck to paycheck and spending all one's discretionary income should not be a tax advantage. Also, shouldn't we have the right to own private property without confiscatory taxation? I don't know what Ricardian rents are--I betray my ignorance--but if property generates income, that income should be taxed, and I have no problem with reasonable property taxes.
Delong posted the WSJ article that CR cites above (I don't subscribe so I didn't follow the link, but it sounds like the same article). The article suggests that income mobility has more to do with education level now than it did in the US historically (which makes sense given the modern job market). Your parents' education level determines yours for a lot of reasons beyond their wealth. It's worth a read.
"Still, the escalators of social mobility continue to move. Nearly a third of the freshmen at four-year colleges last fall said their parents hadn't gone beyond high school. "
End quote.
Musical Chairs is a game of exceptional opportunity. [...] I repeat: one's outcome is in their own hands here--anyone with drive, motivation, game ethic can get a good chair in every round here. Exceptional individuals can go all the way.
And then there are the elements of happenstance and plain luck. And declining standards -- some chairs have become stools, and what used to be middle-class jobs decades ago are no longer. And many middle-class jobs have outright disappeared (or moved away).
Not to whine, just to put the exuberance somewhat in perspective. I still wholeheartedly agree that the US probably offers the highest degree of opportunity to ambitious individuals, whereas highly regulated e.g. Europe provides a higher baseline living standard at the expense of stifling some more ambition. Where to make the tradeoff is a matter of everybody's philosophy.
But increasingly it takes "elbows" to make it here, not just "drive".
Clarification: That's "jobs per unit of population", not absolute jobs.
And not all of US "prosperity" is the result of the "hard work" in the US. The US also in part gets a free ride due to its currency being the international means of exchange.
And then there has been the brain drain -- but that in fairness is due to the opportunity thing with which I agree.
But at least among us foreigners, there is a clear recognition that the opportunity has lost some of its luster, esp. since Y2K. One of the major reasons is increasing corporate dominion in the society.
Lee-- you made a statement that I keep hearing that the FDR new deal
made the recovery from the depression worse then it would otherwise have been.
What is your source for this conclusion?
If you do not have that maybe you could just give me a ball park estimate of the magnitude of the impact of the new deal on growth under FDR. You know, what would the growth rate have been without the new deal?
As the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth -- or a rich child will fall into the middle class -- remain stuck. Despite the spread of affirmative action, the expansion of community colleges and the other social change designed to give people of all classes a shot at success, Americans are no more or less likely to rise above, or fall below, their parents' economic class than they were 35 years ago.
(my words now..)
I think it's misleading to say class mobility has "stalled" based on this article. It clearly says that class mobility today is the same as it was 35 years ago. In my mind that's pretty darned good. So what's the problem?
Jason Wright: Well, perhaps social mobility was not so great to begin with, and has not improved. Whether that's a problem is left to everybody's interpretation. Well, what's wrong with everybody knowing their place, no?
cm: My experience has been people who work hard and smart, have a positive attitude and don't make excuses get ahead. It seems you are blaming everything except the individual themselves and their personal qualities for their lot in life. I know plenty of friends who have college or professional degrees whose parents or grandparents were either immigrants or very poor. Student loans are widely available for self-improvement. It's not unusual to work yourself through school.
I've had rough times and I know some have it harder by far, but it's absurd to pretend the USA has some sort of 18th century European class system, where people are more or less locked into their circumstance by birth. Any able individual here can become a doctor, lawyer, nurse, engineer, scientist, accountant, you name it. No excuses.
How could Mankiw be wrong? Income inequality has led to dramatic, explosive economic growth in most of Latin America and Sub-saharan Africa hasn't it?
Ask the people of Brazil why they elected a social democrat (Cardoso) and a "worker's party" leftist candidate (Lula) after 25 years of a hard-right military dictatorship.
To be fair, overly state-controlled economies don't do much better (aside from the extremes of poverty in capitalist heavily income-unequal economies), but that isn't the point. Show me a country with a Gini index greater than 40 that anyone in the developed world would want to live in. You can't, because they don't exist.
FDR did the best job of levelling inequality when he got a 94% top tax rate in place. Of course, that also resulted is a flight of capital from risky investment (with no reward due to the tax) into things like municipal bonds. This extended the "equality" of the depression right up to WWII when capital investment (funded by government debt) was needed for the war effort.
As a more general rule, if you want to better yourself there must be inequality or there won't be a better place to go.
As to Dr. Z, my only response is Zzzzz.
remember how "liberal" people used to think Harvard was. what a sad state of affairs
We already have a society, more than anywhere else on Earth, where two people of equal natural abilities, merit, etc. can (but are not guaranteed to) achieve similar economic success. That answers the primary question: let's keep it that way.
In such an upwardly and downwardly mobile society, income inequality is well justified by the general equality of opportunity offered to all. I do not say it is perfect, but gov't should be concerned with providing equal opportunity rather than equal outcomes. Unequal outcomes (or incomes) are after all, the natural order of things. It would be strange indeed, if we had income equality -- we're not Communists.
As far as tax burden goes, fair is a flat tax on income over a certain level, say $50k. All income, including dividend, capital gains, etc. should be taxed at the same rate and no deductions under any pretense, including mortgage interest. What could be more fair than the tax burden shared roughly equally (actually quite progressively with the $50k deduction for most folks).
"Although Americans still think of their land as a place of exceptional opportunity... the evidence suggests otherwise...."
As Rich-Poor Gap Widens in the U.S., Class Mobility Stalls - WSJ.com
Jason Wright: We have conversed before, but I don't remember you having released particulars of your circumstances. From your argument I can readily deduce that you think you have "made it", or expect to "make it", and are in one of the higher tax brackets, no? It's easy to make such statements from a position of being confident of one's place.
I think that I'm in a reasonably good place as well, but I have been elsewhere before, and don't have nearly the confidence that it has to be or will always remain so.
People who have it good right now may want to be interested in everybody's welfare for their own potential future sake, if not for that of others.
Jason
I lived 26 years in Britain before moving to the US and if you think that ability is more a determining factor in economic outcome than heredity I have to ask you what country you live in, because it's not the USA.
Let's take Britain, the other 'low mobility' society mentioned. Growing up, all people have healthcare for free (and from my experience of the NHS, just as good a quality as any HMO here in the US if not better) - there are problems but nothing like getting billed (and dealing with billing errors) while you're sick. The education system, again while being far from perfect, is better on average from what I can see at the K-12 level, and while comparable at the university level a student doesn't rack up six figure debts just to get a degree (despite the recent fees introduction).
So for me, the UK state provided 26 years of good quality, free healthcare, and 21 years of top quality education to Ph.D. again for free. How much would that cost in the USA? How many people working as waitresses or cleaners can support their kids through that?
I've had British friends go through long term illnesses that would have destroyed a family financially in the US (even with insurance) and they come out the other side with no bill, and are now 'productive members of society'.
And one thing I'll tell you is that despite this being paid for by taxes, I paid less taxes in the UK than I do here in CA once it's all added up - at least in the UK I got something for it.
Have you read 'Nickeled and Dimed?' - a journalist spends a year doing various menial jobs and just can't catch a break. The system is rigged so you can't get out.
The USA is still a great place of opportunity IF you can afford the cost of entry to the club - but fewer and fewer people can.
Despite my career in the US going well, I'm already making plans to return to the UK in the next couple of years (as are many immigrants I know from 1st world countries who arrived after the mid 90s). This is not a country where the system works for those trying to raise a family or be in the traditional 'middle class'.
I'll go back to the slightly lower wages of the UK but higher quality of life. And perhaps I can then pay back something more to that society for what it gave me.
No-one is calling for absolute income equality, but what we're calling for is sabity. Henry Ford understood that someone had to have the money to buy his cars and paid his workers accordingly. A vibrant middle class keeps the economy booming - and the current tax policies are design to crush those families.
I'm not seeing what's so terrible about what Jason wrote -- at least not about the tax policy. Maybe you could make the cut-off double the five-year average median income, or something psuedo-scientific like that. If you did that and dropped consumption taxes (or VAT) from all items that cost less than, say, $500, I think you might have a fairly regressive system in place that would still bring in decent income.
The Scandinavian countries fare extremely well in all education indicators of their population. They are also mentioned at the top league regarding upward mobility in the most recent studies, the ones that show that the US and the UK don't do so well. I don't know if it is too early for this (education is a long term investment), but it would be interesting to plot education and social mobility and make an international comparison. If anybody can do it, it will be CR, the king of graphs...
Yeah, all these "liberal" economists just kill me.
Jason Wright wrote, As far as tax burden goes, fair is a flat tax on income over a certain level, say $50k.
Why should a flat tax be on income and not wealth?
Jason Wright wrote, What could be more fair than the tax burden shared roughly equally (actually quite progressively with the $50k deduction for most folks).
Uh, how about taxing Ricardian rents, for example? Particular land rents.
I still think that the tax rate should be determined by wealth, but the tax itself should be levied against income. That is, wealth determines the rate, but the tax is rate times the income.
I would like to hear a real economist comment on this.
Doesn't income inequality define third world? What's our rush? More fenced and gated communities, huge prison populations, poverty, . . . is that the solution? If so, why didn't it work for them lo these many years? Lord, Haiti should be atop the heap by now.
Dr. Z
Nicely argued.
As rich-poor gap widens in U.S., class mobility stalls
Here is the open link to the Wall Street Journal article by David Wessel.
- NY Times
Here is the excellent New York Times series of articles.
Wow, what a response! A few remarks:
CR:
America is a land of exceptional opportunity. Even if a few other nations on Earth are a little more so, that doesn't change one's very good prospects here. I repeat: one's outcome is in their own hands here--anyone with drive, motivation, work ethic can make a good middle class life here. Exceptional individuals can go all the way. Your healthcare may be provided in France, and healthy children have better prospects, but the high costs of providing large public benefits has resulted in chronic ~10% unemployment and lackluster growth. There are real tradeoffs to offering generous public benefits. And I should very much like to compare the upwards mobility of the Muslim immigrant in the USA and in the Netherlands.
cm: As far as "releasing" my financial situation, as if I were running for office....what nonsense. I fail to see what bearing it has the discussion. If I had more wit or memory I'm sure I could turn a pretty phrase or quotation on the dangers of assuming much on matters of which one is ignorant.
liberal: wealth is the accumulation of income. If all income is taxed, the portion of left-over income that is saved shouldn't be taxed again. Saving is a virtue, for obvious reasons, and should be encouraged. Living paycheck to paycheck and spending all one's discretionary income should not be a tax advantage. Also, shouldn't we have the right to own private property without confiscatory taxation? I don't know what Ricardian rents are--I betray my ignorance--but if property generates income, that income should be taxed, and I have no problem with reasonable property taxes.
Delong posted the WSJ article that CR cites above (I don't subscribe so I didn't follow the link, but it sounds like the same article). The article suggests that income mobility has more to do with education level now than it did in the US historically (which makes sense given the modern job market). Your parents' education level determines yours for a lot of reasons beyond their wealth. It's worth a read.
Mankiw is beyond stupid...he is mean and stupid. He does know who is paying for his services, like any good prostitute.
Quoting the same article:
"Still, the escalators of social mobility continue to move. Nearly a third of the freshmen at four-year colleges last fall said their parents hadn't gone beyond high school. "
End quote.
Kudlow has a response up to the NY Times column. He asks some good questions.
lkmp.blogspot.com
Musical Chairs is a game of exceptional opportunity. [...] I repeat: one's outcome is in their own hands here--anyone with drive, motivation, game ethic can get a good chair in every round here. Exceptional individuals can go all the way.
And then there are the elements of happenstance and plain luck. And declining standards -- some chairs have become stools, and what used to be middle-class jobs decades ago are no longer. And many middle-class jobs have outright disappeared (or moved away).
Not to whine, just to put the exuberance somewhat in perspective. I still wholeheartedly agree that the US probably offers the highest degree of opportunity to ambitious individuals, whereas highly regulated e.g. Europe provides a higher baseline living standard at the expense of stifling some more ambition. Where to make the tradeoff is a matter of everybody's philosophy.
But increasingly it takes "elbows" to make it here, not just "drive".
Clarification: That's "jobs per unit of population", not absolute jobs.
And not all of US "prosperity" is the result of the "hard work" in the US. The US also in part gets a free ride due to its currency being the international means of exchange.
And then there has been the brain drain -- but that in fairness is due to the opportunity thing with which I agree.
But at least among us foreigners, there is a clear recognition that the opportunity has lost some of its luster, esp. since Y2K. One of the major reasons is increasing corporate dominion in the society.
Lee-- you made a statement that I keep hearing that the FDR new deal
made the recovery from the depression worse then it would otherwise have been.
What is your source for this conclusion?
If you do not have that maybe you could just give me a ball park estimate of the magnitude of the impact of the new deal on growth under FDR. You know, what would the growth rate have been without the new deal?
What about this excerpt:
As the gap between rich and poor has widened since 1970, the odds that a child born in poverty will climb to wealth -- or a rich child will fall into the middle class -- remain stuck. Despite the spread of affirmative action, the expansion of community colleges and the other social change designed to give people of all classes a shot at success, Americans are no more or less likely to rise above, or fall below, their parents' economic class than they were 35 years ago.
(my words now..)
I think it's misleading to say class mobility has "stalled" based on this article. It clearly says that class mobility today is the same as it was 35 years ago. In my mind that's pretty darned good. So what's the problem?
Jason Wright: Well, perhaps social mobility was not so great to begin with, and has not improved. Whether that's a problem is left to everybody's interpretation. Well, what's wrong with everybody knowing their place, no?
cm: My experience has been people who work hard and smart, have a positive attitude and don't make excuses get ahead. It seems you are blaming everything except the individual themselves and their personal qualities for their lot in life. I know plenty of friends who have college or professional degrees whose parents or grandparents were either immigrants or very poor. Student loans are widely available for self-improvement. It's not unusual to work yourself through school.
I've had rough times and I know some have it harder by far, but it's absurd to pretend the USA has some sort of 18th century European class system, where people are more or less locked into their circumstance by birth. Any able individual here can become a doctor, lawyer, nurse, engineer, scientist, accountant, you name it. No excuses.