But I ask that you consider for a moment the possibility that the answer is not quite this obvious, and that in fact government—which is to say, all of us, acting collectively—can make our country healthier, wealthier, and happier, if we put government to useful work in those areas where it most productively complements our private markets. Location 270
We are inundated today by economic noise and fog designed to generate superficially plausible rationales for what at bottom are simply jerk-like instincts. Location 284
We Are Better Than This refutes these and similar exercises in false economic syllogisms. The book demonstrates that we effectively leave long-term prosperity and happiness off the table through our current penchant for minimalist government. And it makes the economic case for a more muscular federal government that complements the private sector through sensible investment and insurance programs. Location 290
This book argues that the strand of contemporary American political thought that defines itself through its hatred of taxation is narcissistic self-pleading wrapped in a flimsy sheath of economic lingo. Personal economic liberty, of course, is one foundational principle of our country and our economy, but it is not the only principle that defines us; and the emaciated government that this philosophy demands is not the way to promote the happiness of society, if by that we actually mean the society composed of all of us who identify ourselves as Americans. Our fixation on taxation means that we have turned our thinking upside down: instead of focusing on what government might usefully do, and whether we can afford it, we obsess over the taxing side of things, and ignore the purposes to which those tax revenues are applied. (Page 4)
My values are old-fashioned progressive values. I internalize these values for two reasons. First, I believe that almost all of us embrace the dignity of work as a central organizing principle in our lives. I do not accept the picture of America that some like to paint, of a vast underclass interested only in leeching, or mooching, or whatever the verb of the moment is, off a virtuous super-class of authentically productive people. And because I believe that government serves all of us, I tolerate the occasional counterexample, if rooting him out comes at the cost of failing to help thousands or millions of others to achieve as much as possible out of their lives. Location 347
Second, I see the pervasive hand of fortune—of simple luck—at work everywhere. I am very industrious, and I have achieved some success and material comforts, but I could fill a book longer than this one with all the good fortune that has come my way, starting with my native intelligence. Those who ascribe everything they are and have achieved to their “native” talents, and who view with derision those who have not achieved comparable success in the world, not only willfully overlook the good luck that has come their way, but more fundamentally fail to consider why it is they are blessed with those congenital qualities that the world rewards. Their fiscal thinking—usually articulated as a confusion of personal financial freedom with a society’s political freedoms—ultimately rests on thinly veiled narcissism, or the embrace of a cartoon version of Calvinist predestination. Both are distasteful and un-American. Location 352
New Coke was a disaster, but it did not prove the futility or incompetence of capitalism in general. Similarly, the healthcare.gov website screw-up is not a particularly persuasive indictment of the utility of government in all cases, although it does suggest some concrete lessons for how large-scale IT rollouts should be handled in the future. As chapter 11 discusses, we often are quick to make a classic error of logic when we abstract from one concrete instance to a general claim about large-scale institutions. The only larger lesson to be drawn from the healthcare.gov rollout is that there are costs to decades of deprecating government service in general, and failing adequately to maintain agencies’ infrastructures. Location 378
First, the movement allowed conservatives to corner the market in encomia for the virtues of thrift, hard work, and personal responsibility. Progressives also embrace these virtues—they just are sensible enough to see the pervasive role that luck plays in actual outcomes. Because outcomes are uncertain, the collective purchase of reasonable levels of social insurance promotes socially useful risk-taking and enhances the overall welfare of society. Second, the progressive movement allowed “redistribution” to be viewed as a value-neutral term, when it is not. You can observe this when reading a passage by substituting “social insurance” for “redistribution” every time the latter appears, and then noting how the sense of the passage changes. Location 386
Note: Level 10 – Magnificent
These values include our strong commitment to private enterprise, both because private enterprise in general is the path to greater national wealth and because the circumstances in which it flowers also are conducive to the preservation of personal liberties. I therefore look for channels where government can productively complement the private sector, not replace it. Location 413
The essence of a state as a political construct is that it exercises the power of coercion over its own citizens. Anything else is a club, or a charity. The great virtue of a democracy is that all citizens participate at least indirectly in how government’s power is exercised over them, and each citizen’s vote is weighted the same as every other’s. These are the political liberties on which our government was founded. But even democracies compel their own citizens’ actions. Location 470
But from this failure to distinguish a state from a club springs a hatred of taxation wholly disproportionate to the reduction in our personal consumption that taxes entail, because taxation is the only significant manifestation of direct government coercion that affects most of us each year. Location 478
Nonetheless, most of us would agree that the shared values to which we aspire include a commitment to genuine freedom of opportunity for all Americans, which in turn requires access to adequate nutrition and to high-quality education, regardless of income levels. We are appalled at the thought of seniors, or children, or veterans, living in grinding poverty. We reject racism, sexism, religious intolerance, or other invidious distinctions among us. We love the American landscape, and embrace the importance of clean air and water. At the same time, our shared values include respect for individual autonomy, and impatience with centralized meddling without good cause. And to a large extent we Americans define ourselves by our work; as a result, we are committed to the idea that every working-age American should have the opportunity to find and prosper at a satisfying personal work career. Thoughtful fiscal policy—the spending we decide to do together—breathes life into these aspirational values. Location 503
Insurance is fundamentally about risk transfer and risk distribution. An individual transfers the financial risks of some adverse fortuity—a car accident, a house fire, or dying prematurely, to take three familiar cases—to a larger group, thereby distributing the risk across the group. Risk distribution from an individual’s perspective turns an uncertain but very large cost into a certain but small and predictable one—the insurance premium. So long as the adverse fortuities are uncorrelated with each other (my house fire is not causally connected to your house fire), insurance companies can rely on the law of large numbers and actuarial research to turn the unpredictability of a single adverse event into a predictable stream of outflows across the larger group, which enables insurance premiums to be priced. Location 518
Private insurance markets are not complete: we cannot insure through private markets against every adverse fortuity that we might wish to. In other cases, private insurance is essentially inefficient, because of the fundamental problem of adverse selection—the tendency of those with private information that they are more likely to need insurance to be the first to step forward to buy it. Voluntary private health insurance is riddled with adverse selection dilemmas, and the methods used by private insurers to address this problem make the market expensive and incomplete. Location 524
Note: Health Care, “personal responsibility” adverse selection and risk. You can’t cover everything.
Governments are extremely effective at complementing private insurers, because the tools of insurance are right at governments’ fingertips. Governments typically have available to them a large captive pool of risks (their residents or citizens), thereby making risk distribution possible. If the insurance pool is defined broadly enough and is mandatory, government can remove in one blow the problem that bedevils private insurers of adverse selection. Governments have available low-overhead mechanisms to collect the requisite premiums: taxes. Finally, a government insurance program is an exercise in the pure mutualization of risks: the government as insurer is in the game to administer the transfer of risks among the participants in the pool, and to pay out claims from the premiums collected, but not to make a profit for itself. Location 528
Note: Fantastic description of Governments advantage in adverse selection
At a more fundamental level, we cannot insure in private markets against all the random al Locations of bad fortune that drive many of life’s outcomes. Those who are born with the requisite genes to grow up tall, handsome, and clever often are befuddled by why others seem to struggle so hard to accomplish so little, or worse yet give up struggling. If we think about things a bit, though, we should appreciate that our founding fathers really did not create a government premised on the belief that happy material outcomes are outward manifestations of inner good karma stored up from past lives. Good fortune makes prosperous outcomes much easier, as the discussions later in this chapter and throughout the book demonstrate. Location 536
To acknowledge the pervasive role of fortune in our material lives does not imply a conspiracy to “level down,” or to “mooch” off the productive elements in society, but rather a commitment to offer all members of society a reasonably fair foundation on which to build productive lives. In the end, we as a society are richer, not poorer, through these interventions, and we also are more tranquil, and therefore happier. Location 541
Tangible public goods like infrastructure investments also can work very well as government programs. Governments can appropriately take a broader view than can a private firm of the returns to an infrastructure investment, because a government ultimately cares (or should care) about the well-being of its citizens. So infrastructure investments that generate good construction jobs (and perhaps in difficult economic times enable people to preserve work skills and avoid falling back on government safety net programs) have positive spillover benefits that a government—that is, all the people, acting together—can take into account along with the direct returns from the investment, but that would not show up on a private firm’s profit and loss statement. Location 556
Governments also can take a longer view of an infrastructure investment’s payback period than can most private firms, since a government’s long-term viability is largely assured. Private firms must price into any “public-private partnership” infrastructure project the risks of future government administrations trying to renegotiate or cancel the deal, but the government does not have to charge a premium to itself to cover any possible future bad faith behavior by it. Governments typically have lower costs of debt finance than do private firms, particularly in the construction industry. And the government, unlike a private firm, does not need to earn a profit on its infrastructure investments. For all these reasons, it is unsurprising that private toll roads and the like remain a small fraction of public infrastructure investment in the United States. Location 562
Note: Private vs Public infrastructure
In some cases, direct regulation that either mandates some positive behavior or forbids some undesirable one is the right instrument. Immunization is a good example of this last category. To achieve “herd immunity” and thereby suppress a disease even among those not immunized, it is necessary that a large proportion (say 85 percent) of a population be vaccinated. In this case, your decision to forgo vaccination affects not just your health but that of your neighbors as well. For this reason, governments (under our Constitution, typically state governments) often require that individuals receive vaccinations. Even though vaccination rates can never reach 100 percent, the herd immunity effect can protect the minority of the population that is not vaccinated, but the government effectively must compel every member of society that it can reach to be vaccinated, to ensure that the herd immunity threshold is reached, and because it would be viewed as unfair for one citizen to declare that he is the only one who is permitted to opt out. Location 594
Note: Vaccinations are a simple example where opting to pursue your own interest in not getting vaccinated creates negative externalities for everyone else.
To measure every policy by its alleged effects on GDP is a sophomoric understanding of the human condition and the role of government. What we should care about is our aggregate welfare, which is not the same thing at all. “Welfare” incorporates all the instances of happiness, well-being, satisfaction, contentment, or similar concepts that together add up to what we would describe as an authentic and good life.4 It is exactly what the framers of our Constitution had in mind when they provided (Article I, Section 8) that the Congress had the power “to lay and collect taxes…to provide for…the general welfare of the United States.” Location 630
The logical error of conflating a nation’s GDP with its welfare is endemic. Consider, for example, the famous economist Milton Friedman, whose popular work emphasized the theme that capitalism and freedom were joined at the hip.5 In Friedman’s construct, unalloyed capitalism supported the cause of personal freedom, and near-absolute personal freedom in turn was the foundation of successful capitalist systems: to interfere with one was to jeopardize the other. This worldview leaves little room for government to articulate any shared values beyond those required to host laissez-faire economic tournaments. Thus, Friedman was mystified by the existence of national parks: “If the public wants this kind of activity enough to pay for it, private enterprises will have every incentive to provide such parks. And, of course, there are many private enterprises of this nature now in existence. I cannot myself conjure up any…[reasons] that would justify governmental activity in this area.”6 Putting to one side the factual error—there are no private enterprises in the business of offering customers privately owned million-acre authentic mountain wildernesses—Friedman’s argument boiled down to the claim that, because he did not understand the value of wilderness or the symbolic pull of the national parks as an expression of national pride, no such values could possibly exist. Yet millions of annual visitors—four million a year at Yosemite alone—not to mention calendars and coffee table books, point otherwise: many Americans take solace in our common ownership of some of the world’s most beautiful terrain, and enjoy the thought that we collectively maintain places where the wild things really are. We accept an apparent economic efficiency cost (a small increase in taxes, which means a constraint on our individual freedom to spend our money exclusively on our private pleasures), in order to fund a portion of the cost of these great commonly owned resources that are open to all of us. We pay for the rest through user fees, but we keep those fees to a reasonable level, and use the tax system to pay the remainder, precisely to ensure that access is within the reach of most Americans. National parks are an example of how national welfare and national product do not always perfectly overlap. And we reach agreement that national parks or other instances of government spending beyond the narrowest possible police functions “promote the happiness of the society” through the mediation of the political system, which is the forum in which consensus is forged and national values are articulated. Location 640
Note: The most valuable message of the book so far, and a beautiful take away against the Libertarian idea that purchasing power and private markets can capture every value. This argument can work for any public good. Even those who say “I didn’t sign up for a damn national park” we can say “Just because you don’t see the value doesn’t mean no one else does. They are immensely popular, and simply would not exist without protection.”
One could analyse these effects indefinitely, but the only thing to be gained from the exercise would be insight into the conventions of national accounting. Measuring output is of interest only as a step on the road towards measuring something else….After all, we could raise GDP further by cancelling Christmas (though we would lose the expenditure on unwanted gifts), taking shorter vacations (though think of the impact on easyJet), and by working till we drop from exhaustion. But why would we want to? The idea that there is something called “the economy,” which is separable from the welfare of society and its citizens, is silly. There isn’t. What really matters is whether the holiday, and the celebration, makes [sic] us better off. That question answers itself without need of economic statistics. Location 664
Note: Memorize. Absolutely fantastic. When people like Chris and his ilk frame everything through the lens of Growth or pure profit, they act this this is the end. This is wholly worthless without and end for this to reach. Well being. Then of course shift into Sam Harris for that, or surprisingly enough, this authors earlier articulation which was more concise and usable.
Say’s Law (after Jean-Baptiste Say), but Say (or at least followers of Say) took matters one step further. Say asserted that production creates its own demand—that once value is created, and labor or business owners realize income, then they must do something with that income, and the only two things that you can do with your income is to spend the money on current consumption or to invest it (ultimately in more means of production). So, said Say, creating value creates income, which creates demand, because that’s all you can do with your income—you demand other stuff with it. In other words, build it, and they will come. Say’s Law is the great-grandparent of supply-side economic logic. Location 718
Note: Not useful for debates but useful to review one of the pillars of conservative economic thinking.
At its logical extreme, Say’s Law (or perhaps Say’s Lore) argues that there can be no such thing as depressions or massive recessions, which we know do occur. John Maynard Keynes’s contribution was to create a logical story as to why production does not always create its own demand, and why in fact demand is sometimes needed to prod the supply side along. Keynes’s core prescription basically was that, since the private sector under-demands things in recessions, government should pick up the slack by borrowing and spending (demanding goods and services) until the economy recovers its equilibrium, at which point the government’s borrowings can be paid down. Location 723
Bureau of Economic Analysis professionals have recently published a fascinating study of the size of this extra-market economy.12 The study concludes that in 2010 “nonmarket services”—basically, things we do in the private spheres of our lives that we could hire someone else to do (child care, housework, etc.)—had a value of roughly $3.8 trillion, against an official GDP for the year of just under $15 trillion. If included in the official accounts, these nonmarket services therefore would have increased GDP by 26 percent. Location 755
Note: At least 26% of value was not captured by market signals, or at least not official Economic records. It reminds us that the idea of “The Producers” and “Job creators” and other Conservative constructs don’t tell us nearly the whole story, similar to Taleb’s argument. You miss so much. This and much of the preceeding content is excellent at refuting the argument that “you’re worth what you make.”
Our official GDP data thus have behaved like the old joke about the professor, except in reverse: it is as if the professor got divorced and started paying his ex-wife to be his housekeeper. The double counting means that a measurable portion of the growth of incomes of Americans in the official data over the last 45 years just reflected a change in visibility, by virtue of crossing the production boundary—which means that in this respect we have overstated our actual economic growth by some 0.2 percent per year from 1965 to 2010. Location 769
Note: This is amazing, and crushing to people like Chris and Sowell who say the middle class have grown in income and try to refute Krugman. This is a very important point to remember, as people like Chris like to point out the way we measure income is different now. Krugman is talking about households and previously it was individuals. Now this is GDP and not income tax returns so be careful. But it does take away some of what we thought was “growth”
It is a commonplace of political disputations to argue that all that we can fairly ask of government is equality of opportunity—that our government does not exist to guarantee equality of outcomes. This may be right: government cannot make the homely handsome, and in the end fortune plays favorites for reasons opaque to us. Nonetheless, government in fact can do a great deal to give real substance to the phrase “equality of opportunity.” Government does so when it militates against the worst outcomes, and creates a more secure platform from which those not clever enough to have chosen wealthy parents can nonetheless achieve their full potential. Social insurance, broadly construed, is one instrument for doing so. And government investment is the other. Location 888
Note: Good passage
Consider one more example. According to research published by Save the Children Fund, malnourishment during the first 1,000 days of a child’s development (from conception through the child’s second birthday) leads to irreversible cognitive impairment. MRI scans show cerebral atrophy—a shrinking of brain—due to protein deficiency, and micronutrient deficiencies inhibit myelination, a critical brain development process that enables complex brain processes.23 As a result, compared to adequately nourished children, victims of early malnourishment are 19 percent less likely to be able to read a simple sentence at age eight, even after controlling for differences in background and schooling. What is more, the young victims of malnourishment suffer from other follow-on effects, such as lethargy and smaller stature, which can lead to lower parental investment in their development. Location 908
The United States in fact is the world’s great outlier in ensuring that its own citizens receive adequate nutrition. Despite living in by far the richest large country in the world, US households saw food security issues at levels associated with Indonesia or Greece (which has about one-half the GDP per capita as does the United States). Location 925
Note: But they can’t tell us enough how good the poor have it over here with cell phones and TVs
We leave a cancer victim to feed a family of four on less than $12 per day in food stamp assistance, and a working man to supplement his family’s calories by hunting squirrels. Hard-working Americans now are reduced to selling their own hair, breast milk, or eggs to make ends meet.29 And in return, a member of Congress calls this government program an act of theft from him and other affluent American taxpayers. Yet at the same time, this Congressman apparently believes that the millions of dollars in federal agricultural subsidies that he has pocketed are the just deserts of the virtuous, paid to him by the gods, rather than by his fellow Americans through their tax burdens. Location 944
Is eradicating malnutrition in the United States a moral imperative? Of course it is, but what more can usefully be said along those lines? Instead, the idea behind this book is to sneak moral objectives in the back door, by emphasizing the economic case for collective action. In other words, I try to meet on their own terms those who dismiss government interventions as naïve or as “class warfare,” and to demonstrate that the fundamental idea of equality of marketplace opportunity—the essence of what Milton Friedman and his ilk have assumed to be the case—in fact is systematically dishonored in America today. Location 950
Thus, the example of infant and early childhood malnutrition can be presented as an investment opportunity as well as a moral plight. This is what Save the Children Fund was doing when it emphasized the loss in future earnings power of children who have suffered cognitive impairment from malnutrition, or what the Center for American Progress meant by toting up the productivity costs of hunger in America. Each institution sees little point in the current political environment in appealing solely to ethical impulses—nor is it necessary so to limit the reasons for government intervention. The economic case for government spending to afford children born into poverty genuine equality of opportunity through education, or to address early childhood malnutrition or adult hunger—the case for collective investment in an area where private markets necessarily must fail—basically makes itself. Location 955
A capitalist offered the opportunity to invest a few hundred dollars today in a machine that will yield thousands of dollars in profits for years to come would jump at the opportunity. But of course there is no market in human lives, nor should there be, and capitalists therefore cannot invest directly in the most productive and important generators of income in American society—its citizens (at least when those citizens are not yet in the workforce). In the absence of such a market, we as a nation are doomed to leave on the table the returns we collectively could reap by investing in the proper nutrition of our most vulnerable citizens—unless we acknowledge that government exists as the mechanism to enable all of us collectively to make just such investments. Government here complements private markets by offering forms of insurance and making completely sensible investments in areas that private markets do not and should not reach. Location 966
All that is required is to appreciate that the poorest Americans are still Americans—that we are part of one large community, one society. If that fact is truly internalized, then it is in our interests to make the investment, because doing so will increase our national welfare (and in this easy case our national income as well), even after taking into account the modest costs to us of implementing the program. Location 973
Note: These arguments rival even The Myth of Ownership in making the case t h at the alleviation of poverty is a public good.
And if the clear positive welfare returns to our country are insufficient to motivate us, if we must be assured that we personally will benefit from this collective investment, well even that is easy to demonstrate here. The modest costs of better prenatal and early childhood nutrition, for example, will lead not only to lower government safety net expenses later in life (which will mitigate future tax burdens), but also to higher national income, which in turn means higher demand for the goods and services that we or at worst our children will produce, and therefore higher incomes for us or our children. Location 976
Note: Level 10 – Best passage in the book so far. Not only has the case been made, but he even meets the selfish conservatives on their own field. “Fine, even if you are a selfish prick who only cares about himself, then here is the case that even you will benefit directly.”
Behind the pious statements about what we can and cannot afford resides a darker picture, of smirking “haves” thinking that they can segregate themselves and their economic outcomes from the futures faced by large swaths of American society, and a Congress that has shown itself to be much more attuned to the opportuning of the affluent than to the needs of the poor. Location 989
The explicitly moral component of the book’s argumentation therefore comes down to this: when there is a clear economic case for collective investment or insurance through the instrument of government spending (net of considering the costs of government taxing) that will enhance the country’s welfare, ignoring that opportunity is profoundly immoral. We endanger our nation’s fiscal soul when we leave such opportunities on the table. Location 999
As Paul Krugman wrote, this is an exercise in spite, not in fiscal prudence.35 We are left instead with the spectacle of a state like Tennessee, which twice a year holds a telephone lottery, in which tens of thousands of uninsured and desperately ill low-income citizens (but nonetheless above the state’s very low Medicaid cutoff) compete to win one of about 500 slots in its Medicaid program.36 Perhaps in the near future other states will stage Hunger Games–type spectacles, in which elderly residents, confined to wheelchairs or walkers, some hauling oxygen tanks behind them, are equipped with bows and arrows and set against each other. Here we see the degradation of our national fiscal soul, when self-evident moral imperatives and economic interests align, and yet our political processes yield perverse results. Location 1015
Note: This is a great book.
To the extent that we engage today in any explicit discourse in this area, our conversations are dominated by one central organizing principle, which is satisfying the demands of Homo Economicus—“the self-interest-seeking individual in a competitive environment.”1 This chapter shows how this powerful metaphor, drawn from one sphere of activity, has today been overextended to answer questions in every corner of public policy, with results that actually are counterproductive to our prosperity and are inconsistent with any semblance of shared citizenship. Location 1038
Our real-world markets are extraordinarily efficient at inventing, making, distributing, and improving the smartphones, automobiles, toaster ovens, and software that we all consume. The original insight that in the ordinary course of commerce the marketplace allocates goods and services more efficiently than does any other mechanism rightly is laid at the feet of Adam Smith. Location 1051
When a private market is humming along smoothly, without distorted price signals from dominant sellers or buyers, without trailing a plume of pollution or other “externalities,” with perfectly transparent information, and without excluding new entrants (which in turn requires that they can obtain financing to enter the marketplace on reasonable terms), economists describe the market as “efficient” in a technical sense.4 When a market is efficient, government meddling, however well intentioned, cannot improve the al Location of goods and services across the economy. Location 1064
Note: One of the really good descriptions of just how heroic the assumptions have to be for markets to perform in the manner Neoclassical Economists say they do.
But as research and our own observations have demonstrated in many different contexts, in fact we live in a world of important market failures, incomplete markets (areas where markets just do not reach), and unlucky persons, where poverty, bad luck, or other factors demonstrably impede individuals from fully participating in that competitive environment, and who therefore cannot maximize their utility entirely on their own. Location 1072
More fundamentally, poverty itself pushes its victims largely outside the orderly world of efficient markets. Poverty erodes cognitive ability in application. It means that rational opportunities for self-improvement cannot always be pursued, because of an incomplete ability to borrow against one’s future, and because of the skewed risk-return calculus that the resulting debt implies. And the children of poverty enter the competitive markets for human services as young adults with far less having been invested in their human capital (including not just through money, but parental attention) than do the children of the affluent. Location 1079
This book therefore rejects the pinched and artificial propositions advanced by economic writers aligned with political claims that unalloyed real-world private market outcomes are the only road to national happiness. I call these pundits “market triumphalists.” These individuals organize their thoughts around a model—a mental map—of reality, dominated by the high ground of perfectly competitive markets, open to all of us, as “participants who maximize their utility from a stable set of preferences and accumulate an optimal amount of information and other inputs in a variety of [freely accessible] markets.” From this mental map, these practitioners draw the conclusion that government invariably is a random meddler in those orderly markets, and that government spending and taxing therefore are inherently suspect. This conclusion follows from the foundational postulate that the ideal of perfect markets maps accurately onto reality. But once this inaccurate organizing principle is abandoned, what follows is a vital role for government as a complement for private capitalism in the world that we actually inhabit. Location 1091
Smith begins the book with an extraordinary sentence: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.”9 Smith’s basic point is that we are social animals, and our happiness and our prosperity are inextricably bound up in the happiness of the society in which we are situated: Location 1131
[I]n the languor of disease and the weariness of old age, the pleasures of the vain and empty distinctions of greatness disappear….Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor….They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death. Location 1175
Note: Like how this is written. Copy this style.
[W]hat improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged. Location 1239
When read in the context of Smith’s complete oeuvre, the hand in question is rendered invisible, not because it belongs to Mr. Marketplace but because it is the hand of God, who wishes for the happiness of His people.26 That is why Smith writes in The Theory of Moral Sentiments that “[t]he happiness of mankind, as well as of all other rational creatures, seems to have been the original purpose intended by the Author of nature, when he brought them into existence.” Location 1253
Note: So they aren’t even using The Invisible Hand correctly to begin with.
Like some sort of new avian flu, the modern market triumphalist school of thought is the result of the unexpected fusing of four vectors. In order of their first appearance, these are the economic/political movement of “neoliberalism”; the Reagan-Thatcher reaction against an often complacent and sometimes bloated government; a relatively recent tendency in society more generally to embrace public displays of narcissism, in this case by lauding rewards accrued in the market economy as due entirely to an individual’s personal merit; and finally the Tea Party movement, which added its random faith-based zeal to the virus. Location 1270
Note: I’m not exactly sure how we would use it in a debate but I love how it’s written and how “virus” us used as a metaphor for neoliberalism. Try to do things like this. Beautiful and colorful metaphore, like Hitchens.
Market triumphalism takes its final virulent form from this over-determined combination of plausible but vastly overstated economic claims, distrust of government, admiration for others’ personal success, and quasi-religious fervor, in each case amplified by appeals to a simplistic understanding of freedom. Location 1277
Note: It’s hard to know where to highlight and not, but just the writing is worth trying to emulate. Nice pointing how how their idea of freedom is simplistic.
Hayek at least had the excuse of staring into the maw of terrifying totalitarian regimes when he wrote his book, but Friedman, for all his accomplishments as an economist, reads today as a political and social simpleton. His insensitivity to the value of national parks (and his perplexing belief that market substitutes were at hand) has already been mentioned, but he did not stop there. He thought that markets would assure the full dissemination of political dissent, without the need for any further protections, and that racial discrimination would wither in the face of market competition for the best and the brightest.30 His predictions have been uncanny in their inaccuracy. Location 1322
But as chapter 1 already has suggested, and as the rest of this book amplifies, dire poverty is not simply a kick in the pants to get going and get a job. It strips Americans of basic freedoms, by immobilizing them, making it impossible to pursue opportunities that those with some money in their pockets can pursue. The theory of efficient private markets presupposes genuine freedom of access to those markets, but that freedom requires more than a nominally open door. Location 1355
To turn neoliberal claims on their head, our abilities to exercise our political liberties depend in practice on minimum conditions of economic sufficiency. Being free to hunt squirrels for your dinner is not in fact the exercise of market or political freedom in a modern democracy, because your hunger crowds out your ability to participate fully in either. People are not free and equal citizens, and markets are not in fact efficient, if individuals enter the marketplace on terms fundamentally skewed against them. This is what happens when infant malnutrition leads to neurological damage, or when systematic underinvestment in public education means that millions of young Americans enter the workforce with their human capital underdeveloped, because they were not able to buy their way into the superior educational experience routinely available to even the most mediocre student in an affluent household. Location 1360
The neoliberal political economy story relies on both an artificial extension of ideal markets to describe all of reality and an impoverished understanding of the meaning of “freedom.” Many decades ago, Franklin Delano Roosevelt reminded us that the “freedom” we cherish (or should cherish) is more nuanced than a simplistic freedom to keep what is “ours” unburdened by taxation. Location 1367
The power of coercion that the state wields over each of us, in the form of taxation, is not an instance of an unconstitutional violation of our inviolable personal liberties—it is exactly what the Constitution contemplated. Article I, section 8, of the Constitution grants to Congress the “Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States.” In addition, Congress is granted authority to “make all laws which shall be necessary and proper for carrying into execution” the powers enumerated in Article I, section 8. Location 1380
Note: That should just about solve it right there. If you show that to people like Jon and they just go “No, Taxation isn’t in the Constitution” then you can merely laugh at them at that point. Sticking your finger in your ears and merely denying the world around you is at best childish and at worst suicidal. But that’s okay. Go to bed knowing you were beat outright, and know that no one was convinced that you didn’t realize it.
First, consider the revisionist history that the federal government caused the Great Recession, through its alleged meddling in the mortgage markets to advance its affordable housing policies. This view unfortunately does not explain why the policies in question predated the crisis by several decades without precipitating an earlier financial crisis; why real estate markets collapsed in Ireland, Spain, and other countries as well as the United States; or why affordable housing policies should be blamed when the vast bulk of subprime lending, led by new market participants like Countrywide, took place outside the ambit of regulated entities covered by the Community Reinvestment Act and the ambit of the government-sponsored enterprises that guaranteed higher quality mortgages (although those enterprises did buy some AAA tranches of securitized subprime debt for their own investment portfolios). Location 1416
Note: Worth memorizing in regards to the financial crisis.
The neoliberal response, on the other hand, is to deprecate the whole idea of public education, and to replace the role of government with that of markets, under which families armed with vouchers would shop for private schools competing for their education business. But this response ignores the social value of a public school as a place where children from different backgrounds learn to respect each other, and puts at risk millions of children who themselves are powerless (and whose parents for whatever reason are unable) to negotiate the education casbah on their own. Location 1428
There are many reasons that wages (the price of labor) are not as flexible as the prices of refrigerators, but the one on which neoliberal thinkers quickly settle is that the fault must lie on the supply side of the equation—with workers who do not adjust the prices at which they offer their services to reflect current circumstances. Labor unions often are trotted out as villains, because they are said to exercise monopoly power over the price of labor; for reasons unknown, the converse case—the monopsony power of many customers for labor services (i.e., employers)—rarely figures in neoliberal narratives. Location 1448
The moral undercurrent emerges through the back door, Location 1453
One response to Mulligan is to argue that Mulligan overstates the importance of “new” income maintenance programs; many of the changes he identifies (with the exception of the very short-term extension of unemployment insurance benefits in the depths of the Great Recession to 99 weeks for some covered workers) had been enacted in earlier years. This response emphasizes that aggregate benefit payments skyrocketed because of millions of new claimants, not because the programs themselves had become that much richer by design. Location 1479
did income maintenance programs like unemployment insurance and SNAP (whether old or new) lead substantial numbers of workers at the margin “to opt to earn less” during the economic crisis? Some economists who have engaged with Mulligan’s thesis have done so at the level of macroeconomic arguments rather than the structure of the fiscal policies at stake. Some of these reasons to doubt the Mulligan hypothesis include the fact that employment collapsed in many countries around the world, not just in the United States; the 2007–2009 expanded benefits have largely expired, and yet employment has not surged; and perhaps most tellingly, that if labor suppliers (workers) left the market because sitting at home was made too cushy, then you would expect to see employers bid up labor rates to lure them back. But instead, exactly the opposite has happened: wage growth continues in 2013 to stagnate. Even a sympathetic reviewer in the Cato Institute’s journal Regulation closed his review as follows: “If the decrease in work hours is due mainly to the drop in labor supply caused by the expansion of the welfare state that discourages work effort, why do so many people show up when jobs are advertised, even at Walmart?” Location 1491
Another line of disagreement with Mulligan’s conclusions would suggest that Mulligan’s model of rational economic behavior is incomplete; again, the point is to suggest that the arrow of causality points in the opposite direction to that suggested by Mulligan. Mulligan postulates the worker as Homo Economicus, carefully weighing the utility of government-subsidized leisure to the after-tax returns available in the marketplace, but he arguably ignores how a rational worker concerned about her lifetime employment actually would behave. Location 1510
Note: A strong rebuttal that takes their own rational model and works it against them. Who really thinks sitting at home collecting benefits for two years would not have an adverse effect on one’s resume. Consider as well, the temporary, shaky nature of benefits. It is rational to take the sure thing than live on a high wire.
Imagine a recently laid-off engineer. She would know that being unemployed for long periods leads to an erosion of job skill and a stigma that affects future employers’ hiring decisions, so her smart move from a lifetime earnings perspective would be to forgo leisure and return to the workforce as soon as possible. Further, the laid-off engineer might well decide not to take a job as a Walmart greeter, because that tarnishes rather than burnishes the resume of a mid-career professional who is further along her career path. (The same concern does not, of course, apply to her father, which is why he might be helping to support the family by working at Walmart while she does not pursue a similar job.) In other words, from a lifetime perspective, holding back from reentering the labor markets at the wrong level and instead waiting for a job commensurate with one’s skills and experience arguably might be the most rational course of action. And finally, searching for a job might well be a full-time job in itself. All these are strictly rational economic reasons for the behavior we see all around us, without recourse to Mulligan’s reverse causality claims. Location 1515
In the same vein, if this hypothetical engineer is a typical American, she will have little choice but to get back to work if she can find employment. The reason is not the straw man that Mulligan sets up and knocks down (that some wage income always is better than none), but rather the reality that most Americans are highly leveraged. They have very little savings (the median family net worth in 2010 was $77,300, and the median value of family financial assets among families holding any financial asset was $21,500, without offset for financial liabilities50). At the same time, they have both mortgage debt service and car payments to meet, at a minimum. The life of a modern Huckleberry Finn rafting down a lazy river, making do on a reduced income for a year or two, would require most Americans to sacrifice both their homes and their automobiles. Location 1523
Note: Mulligan and other psychos claims require heroic assumptions of extraordinary American sloth. Calling people lazy is popular and a way to try to make you appear harder working, but it does not bear out in reality.
The laid-off engineer also would be aware that unemployment benefits—by far the largest in dollar value of the various incremental cash “rewards” for not working that Mulligan identifies as tied to Great Recession legislation—are temporary in duration.51 While the periods covered by UI benefits were extended at the depths of the recent economic crisis, a worker thinking in lifetime terms would be risk averse toward the prospect of letting go a job in hand against the hope of landing another one when benefits ran out. Location 1530
Note: And he finds my rebuttle.
The US income tax is progressive in part because of the rate structure of our tax code. We slice a taxpayer’s income into several layers, and stack them one on top of each other. The first several thousand dollars of income is taxed at zero, the next several thousand dollars are taxed at 10 percent, and so on. The tax rate imposed on each bracket (or as I think of them, each level in an income ziggurat) remains unchanged, even as income that exceeds that bracket falls into a higher bracket and is taxed at a higher rate. Thus, millionaires get the benefit of a 10 percent tax rate on their first several thousand dollars of taxable income. Location 1556
Imagine that people are taxed at a 20 percent rate on the first $100,000 of their income, at 30 percent on their income from $100,001 to $400,000, and at 40 percent on income over $400,000. This is a classic progressive income tax rate structure, with different marginal tax rates for each layer of income. If you earn $99,999, your average and your marginal tax rates are both 20 percent (at least for just one more dollar of income). If you now earn $10 more, your average tax rate stays almost unchanged—your first $100,000 is still taxed at 20 percent, and only your last $9 at 30 percent. (Again, tax rate brackets are like climbing a ziggurat, not like falling off a cliff: your income in the lower-rate bracket remains taxable at the lower rate, regardless of how much income you have in higher brackets.) But now your marginal tax rate—the tax rate you face on your next dollar of income—is in fact 30 percent. Location 1566
Note: Progressive Income Tax. Not a scathing debate weapon but a helpful point to understand.
Most government income maintenance programs are “means tested”: you qualify for them based on having income and assets below a threshold, and you lose those benefits (usually through a phase-out mechanism that ramps down your benefits with increasing income) as your income climbs above the threshold. Location 1582
There are three fundamental problems with Mulligan’s marginal tax rate analogy. The first is that he treats as commensurate two income streams that in fact are temporally incommensurate: the very short-term income stream represented by unemployment insurance benefits in particular, and the presumptively long-term income stream that follows from taking a new job. To view forgoing the first as effectively a permanent burden on the first dollars of income from the second is simply not accurate. If instead Mulligan compared the present value of the short-term stream that an individual gives up to the present value of long-term employment, the marginal cost would have been much lower than the numbers he calculated. (In every case that marginal cost would go down even more the closer an individual was to the expiration of her unemployment insurance benefits, but the point is that the “marginal” tax would be far lower than Mulligan’s calculations.) Location 1630
Note: Another variation of our argument, and one relating to marginal value. Each day that passes the value of saying on unemployment becomes less since less value remains ahead to be collected.
Market triumphalism dominates discourse on political economy issues today. Its twin messages are that taxes are the root of all economic evils and that government spending programs invariably constitute stupid and malicious interference with the smooth functioning of the markets. Its rhetorical devices include emphasizing the differences among us, rather than reminding us of the ties that bind us together into a single country57; claiming that financial success is an outward sign of inward superior character; and implying that financial distress is therefore the just deserts of laziness or character weakness. Location 1709
Market triumphalists are fiscal policy absolutists. They ignore both the efficiency payoffs to well-chosen public insurance and investments that complement the private sector in instances where markets are incomplete and the moral tensions at work in any society, which have been the subject of serious introspection from Aristotle to Pope Francis. Location 1714
Market triumphalism confuses national income with national welfare; it ignores the positive returns to government insurance and government investment; it confuses life outcomes with the hand of Providence; and it justifies a distasteful narcissism and possessiveness toward all material goods. It enables the unreflective affluent to sleep at night, their consciences assuaged by its message that their success is explained by their own admirable virtues alone. And by virtue of its political messaging since the Reagan-Thatcher era and the anti-intellectualism exhibited by its recent influx of Tea Party enthusiasts, its arguments often are largely faith-based. Location 1726
Market triumphalists fundamentally are false conservatives, because they deny that our country has common values that sometimes constrain the outcomes reached through the most literal adhesion to laissez-faire economic outcomes, and yet are worth conserving. Location 1731
Real conservatives differ from progressives in three respects: real conservatives are less inclined to see market failures in how our society functions, they are more wary of government’s abilities to address those failures that they acknowledge do exist, and they value stability and continuity with the past more highly. But all three of these dimensions lie along continuums, which is precisely why real conservatives and progressives were able to reach compromises in the decades before the Reagan-Thatcher revolution turned its back on national values as a component of economic policy. What is left is an empty, narcissistic sort of cult of market outcomes, practiced largely by those lucky enough to have obtained market success. Location 1737
Note: Not only well written but fantastic cogent differentiation between progressive and conservative values, better even than Lakoff.
This is the “leveling down” argument, one of the favorite tropes of market triumphalism. You will poison the goose that is laying all those golden eggs, goes the argument, if you tax high incomes at higher rates, because taxation is toxic to golden geese. Then there will be no more golden eggs and only one dead goose to go around. Chapter 4 unravels this vast overstatement. Location 1773
Note: This man rivals How Markets Fail.
The mechanism by which the golden eggs in turn are enjoyed by the laborers in the field, rather than the owner of the goose, usually is not well developed, but boils down to the theme that more business investment leads to greater productivity, which in turn leads to higher wages for workers—that is, capital and labor fairly share the productivity gains between them. In fact, it turns out that for a number of years productivity has been rapidly increasing in the American economy, but those productivity gains have not been shared with working Americans.62 Instead, the economic returns to investment (“capital income”) have gone up significantly as a share of total national income, while the economic returns to working (“labor income”) have declined. Chapter 5 analyzes in more detail this important phenomenon, which directly contradicts the fable. Location 1776
Note: Joe’s argument that greater productivity being a result of capital investment and better machines refutes the sentiment that greater wealth at the top leads to more higher paying jobs. It just leads to more capital investment and machines while we stay unemployed or underpaid. The conservative argument that the better that affluent do, the better the lower classes do because of greater productivity and job growth not only misses the mark, but points the gun backwards. I don’t have to refute this argument; common conservative arguments do that for me. Worker productivity has been increasing for debates with little to no real income growth for these workers, that is, they are not reaping the benefit in their labor through higher wages. We are told that automation and more efficient, better machinery is allowing the workers to be more productive, not their labor. They push the same button today, and it creates 5 widgets instead of 1 as it would have years ago. More production, but all from the ingenuity of capital. This is exactly why we have no reason to suppose greater wealth by those on top create more jobs at higher wages. Capital owners want to do anything before increase input costs. The money that we are told will go to these mythical higher wages and new jobs goes instead to capital investment and outsourcing, not to increased wages and new jobs.
Moreover, as chapter 1 has suggested, and as will be further developed in the next few chapters, there is strong evidence that our country’s rapidly increasing inequality has profoundly negative welfare consequences. That is, the rich getting richer is not necessarily a “Pareto improvement” (the idea that a move that makes one person better off and no one worse off is always desirable) because large-scale inequality itself has negative welfare consequences. Location 1784
More directly, the leveling down argument misapprehends the economically efficient work that government can do as investor and social insurer. Markets are incomplete and imperfect in important ways—for example, the skewing in the market for human capital development (education) that directly follows from family income differences. This specific instance follows from the cognitive impairment research already mentioned, and the distressing differences in investment (both financial and time commitments) in early childhood development among children from parents of different economic backgrounds. As chapter 10 further develops, the United States is one of only a handful of developed economies that spends less on the public education of poor children than on those from affluent homes. Finally, take into account the concept of the declining marginal utility of income—the fundamental idea that $1,000 more of after-tax income means less to the millionaire than to the Walmart clerk. In essence, this book develops why each of these assertions is a sound foundation on which to build policy inferences. Location 1787
The result is a powerful case for the opposite policy recommendation to that argued by Epstein—significant tax revenues (including but not limited to a progressive income tax) used to fund the real and complementary investments that in practice only government can make. The alternative policy that this implies would mean that the poor in fact do get richer, because someone has invested more completely in developing their full human capital. The rich get a little cash-poorer at first, but their immediate welfare loss is swamped by the welfare gains of many more Americans, and ultimately even the rich share in the trickle-up consequences of more robust consumption across a broad swath of American society. Location 1805
Note: Jesus and the Father God. Best response you “you c a no legislate the poor into prosperity by making the rich poorer.” The bloviating moaning squall that is the Vogue for the right these days. Also an argument for redistribution for the forums. Tags, redistribution, public service, effective government.
Golub’s article accurately reflects the ethos of a large swath of the affluent classes, but in doing so reveals unexamined forms of arrogance that lie at the heart of our deteriorating ability to govern ourselves. Referring to his many tens (hundreds?) of millions of dollars, Golub observed that “I earned it.” No doubt this is true, in the sense that he apparently inherited very little wealth, is highly intelligent, has worked very hard his whole life, and in return has been paid extremely well for his labor. But is it really possible that Golub and his ilk are blind to how lucky they also have been? In other words, do they not realize how contingent the process of wealth accession really is? Many Americans without tens of millions of dollars also work very hard, and many are as smart as Mr. Golub. The nature of life is that we do not control it; both our native talents and our good fortune are distributed through processes that we cannot fathom and do not “earn.” Location 1817
Note: Rich “earn” their wealth.
The income tax in this respect operates as a kind of insurance policy. Following the famous metaphor of John Rawls, imagine that we are all sentient disembodied beings, waiting to be born. We know the full range of possible paths that any new life might take, including the great probability that we will end up struggling to make ends meet. But we know nothing about our future selves. We do not know who our parents will be, how healthy we will be, or with what native endowments we will embark on life. We are offered insurance in the form of a promise of some minimum level of support if we are unfortunate—but being disembodied beings, we have no cash with which to pay the premium. The deal is that we can pay in arrears—if we hit the jackpot, we kick in a fair chunk of money, and if we end up with the short end of the cosmic stick, we get helped out enough to mitigate the most abject misery. Who among us would be so foolish as not to sign up? Location 1824
Note: Possibly the most articulate and meaningful explanation of what it is to be “fair” and how we should run a society altogether.
Wall Street is the perfect laboratory in which to observe the contemporary conflation of success with personal virtues, but it is only the most extreme example. The preferred stock trading desk, for example, might be a sleepy backwater, until some change in securities regulation or tax law, or an unexpected market development, makes preferred stocks the hot thing. Then the head preferred trader will demand (and receive) a huge bonus for his acumen, and will lecture other business units on their many failings when compared to his unquestioned genius, as demonstrated by the incontrovertible results his desk has achieved in the marketplace. Location 1843
Note: Backwards rationalizing success as due to hard work and intellect, when if only small variables in the context had been different the result would have been deleted entirely
Of course, most great success stories contain large elements of hard work and sacrifice. But so do many stories of only middling material accomplishments, or even outright failure. Those of us who have achieved material success have been fortunate in ways great and small, visible and forgotten. We overlook the fact that our native intelligence, or good looks, are not karmic rewards for past lives well lived, that our good health is not due entirely to our superior self-discipline, and that the parent or teacher or boss who inspired or mentored us found us for reasons not entirely within our control. Instead, we emphasize the risks we took and the sacrifices we made along the way, and believe through our weakness of thought that we overcame the randomness that defines all of life solely through personal perspicacity. Location 1849
Note: I did it myself fallacy.
Similarly, the Congressional Budget Office has calculated that the constant dollar hourly wage of the median American male worker remained essentially unchanged from 1979 to 2007. Location 2017
Note: For all the clock suckers who say we have been doing better since Reagan. No.
Saez found that the real incomes of the top one percent of families grew by 86.1 percent over the period 1993–2012, while the incomes of the bottom 99 percent (which by definition includes families that are doing very well) increased by only 6.6 percent. This means that the top one percent harvested 68 percent of the entirety of real income growth over this more extended period. Location 2033
Any increase in middle class consumption over the couple of decades is largely the story of families relying increasingly on the incomes of secondary (predominantly female) wage earners and of spending funded by borrowing against the rising bubble of home prices. Location 2036
For this reason, arguments focusing on the consumption patterns of the middle class over time tend to be highly misleading. For a decade or more leading up to the Great Recession, consumption was financed through borrowing against assets that in retrospect did not exist. In the end, consumption is the aim of earning income, but at the household level it is income that finances consumption, not the other way around. Location 2040
Note: Great for people who are fond of saying “but people bought all those TVs and phones and cars and shit so don’t tell me they were struggling.” We have known for a long time that healthcare and education are two important things that have gone greatly up in price. Food continues to rise in cost as well. You can walk out of the Verizon store with an iPhone 6 for 45$, and for nothing at all after Thanksgiving. So someone “having an iPhone” has absolutely nothing to do with wealth or “doing well.” Food, Education (which is opportunity) and healthcare (which is life) are three things that have risen greatly, without which you cannot live effectively.
The effects of the Great Recession (and in particular the collapse of the housing and stock markets) on wealth are even more dramatic than those it reported for income. In constant dollar terms, the net worth of the median American family (the family in the middle of the wealth distribution) fell 39 percent from 2007 to 2010; if you instead use 2001 as your reference point, the median American family’s net worth fell 27 percent over nine years. In 2010, the median family’s net worth was about the same as it was in 1992,15 which can be rephrased (only slightly inaccurately from a technical perspective) as saying that the middle of the pack family worked 18 years for no net increase in wealth. Even the mean (average) net worth of American families, which is pulled up by the vast wealth of the most affluent Americans, was flat from 2001 to 2010. Location 2059
Note: Thanks Bush.
The CBO calculated that labor’s share of gross domestic income averaged 62.4 percent between 1950 and 2000, but since 2001 it has exhibited a downward trend, reaching 59.4 percent in 2012, the lowest value recorded since 1950.18 The Bureau of Labor Statistics reported that from 1947 to 2000, labor share of income averaged 64.3 percent but had been falling since, reaching a record low of 57.8 percent in 2010.19 This is one reason for the growth in income inequality discussed in the following chapter, but more directly it explains in large measure the stagnation in American middle class family wages just described. Location 2162
So one might start by thinking that if, on average, a US citizen is so well off, poverty must be a rare thing. But this is a misunderstanding of what “average” incomes conceal. Starting with total or per capita GDP demonstrates that the United States as a whole is rich, whether in total or taking into account the size of its population, but it tells us nothing about how that wealth is distributed among the population. Location 2220
The most telling is the S90/S10 ratio, the ratio of the average income within the top 10 percent of households to the average income within the bottom 10 percent. You can see again (Figure 3.14) that the United States has by far the highest ratio among its peer countries. Location 2301
Looking more narrowly at how the recovery from the Great Recession affected family incomes over the period 2009–2012, Saez found that the real (inflation adjusted) incomes of the top one percent of families grew in that period by 31.4 percent, while the incomes of the bottom 99 percent were essentially flat, increasing only 0.4 percent over that period. In other words, the top one percent captured 95 percent of all income gains over this period. Location 2348
First, American adults are not as rich on average as are the adult citizens of several other large economies, including Japan, Norway, Switzerland (the highest average wealth per adult in the world), Australia, and finally (and this one will really hurt) France. But more distressingly, the median wealth per adult in the United States is by far the lowest of these countries. (Again, median wealth measures the wealth of the person in the middle of the wealth lineup, from poorest to richest; by contrast, average wealth measures effectively pretend that poor Americans are able to spend Warren Buffett’s money.) In 2012 the average wealth of an American adult was $262,000, but the wealth of the median adult was only $39,000. A relative handful of very rich people brought up the average, but did not change the modest resources of the person in the middle. Location 2379
Note: And these countries have large public sectors.
Of course there is economic mobility in the United States—this is not twelfth-century Europe, after all, and we are not serfs tied to a nobleman’s land. The right question is, do we compensate for our much greater income inequality with unusually high income mobility, so that everyone has a fair opportunity to capture those disproportionately large payouts? The consensus answer to date has been that we do not—inequalities persist over time. Location 2403
Intergenerational mobility depends heavily on investment in the human capital of young people, which is to say, in their education. As children and young adults we build up human capital through investments made in our education; we then can deploy that human capital in satisfying and remunerative future employment. Location 2473
Note: Mostly just liked how this was written and phrased.
Genuinely efficient private markets require large-scale public investment in education if we take seriously the premises that underlie the intellectual edifice of an efficient private market economy. Location 2488
Inequality is often described as a “static” snapshot of income distributions, but Corak’s work shows that inequality and income mobility are intimately related through the instrument of opportunity: Inequality lowers mobility because it shapes opportunity. It heightens the income consequences of innate differences between individuals; it also changes opportunities, incentives, and institutions that form, develop, and transmit characteristics and skills valued in the labor market; and it shifts the balance of power so that some groups are in a position to structure policies or otherwise support their children’s achievement independent of talent. Location 2497
Note: This and the accompanying graph are highly useful. They tell us inequality results in lower social and economic mobility, which is one of the foundations of the American Dream.
Again, the point is not that the economy of the United States is feudal in its structure: in a country of 310 million, it is not difficult to find examples of individuals who overcame great hardships to achieve extraordinary success, or conversely wastrel children who squandered every opportunity afforded them. There is mobility within the US economy, and no one’s economic fate is wholly preordained. But the evidence is overwhelming that it is pleasanter and much easier to navigate the seas of economic uncertainty in a shipshape schooner whose sails catch the stiff wind blowing over its stern than it is to face constant economic headwinds in a leaky old scow. Who captains which ship is not simply a matter of chance. Location 2534
The United States has the highest poverty rate, the greatest income inequality, and the greatest wealth inequality of any major developed economy in the world. Our parents’ incomes play a larger role in our personal economic fortunes than is true for other peer countries. Our long-term unemployment rate, once the envy of the world, has now sagged badly. Our education system is mediocre, and our healthcare is unaffordable to many, and too expensive for almost all of us. And what, in turn, have we bought in exchange for all this? Not growth, at least over the last generation. The first refuge of the economist when this question is asked is to claim that inequality is a necessary consequence of free markets and a prerequisite to economic growth. This is true, but only to a point; inequality is not the nectar of the economic gods. Some is necessary, but more is not necessarily better. No other developed country is as addicted to poverty and inequality as are we, and yet somehow they prosper. Location 2540
Note: One of the greatest passages in the book. You give charity to the Right by granting them that inequality is nesseary, but that an abundance can be a problem, and doesn’t give us the growth we are told we get as a result.
US per capita GDP, measured in real (constant dollar) terms, grew 69 percent over the 30 year-period of 1982–2011. (It is important to look at per capita GDP to control for population growth.) That sounds pretty good, and indeed it is, but our results were precisely the same as the average performance of the OECD member countries over the same period. Sweden did a bit better (71 percent per capita real growth), Germany a little bit worse (66 percent growth—still extraordinary in light of the costs of German unification). Our outsized inequality did not buy outsized growth. Location 2548
Another way to visualize how inequality does not drive extraordinary growth is to compare changes in median incomes (the income of the household in the middle of the range of incomes) to changes in the Gini index, which measures increasing inequality. Our preexisting high inequality, as measured by the Gini index, increased at an above average rate, but US median household incomes did not increase nearly as much as did the average OECD household. In return for greater and greater inequality, all we really have to show is a more and more unequal society, not a disproportionately wealthier one Location 2552
This is still a very incomplete measure of welfare, because it addresses only one example of the many shortcomings of GDP. Nonetheless it is, I think, a useful reminder that much of what we take to be the steady march of economic growth is not progress at all, when considered from the broader perspective of the sum of the life satisfactions of all Americans. Location 2577
Note: For Chris who only cares about growth, well worded.
The sharp difference between GDP growth per capita and inequality-adjusted GDP growth per capita stands as a reproach to our juvenile fascination for the GDP Olympics, rather than our collective welfare. The standard explanation for why we should focus solely on the former is that all growth ultimately redounds to everyone’s collective benefit. But when over a period of decades that growth is concentrated in fewer and fewer hands—and that is what it means for the Gini index to increase over time—there is reason to doubt the power of the argument, as applied to the vast majority of our citizens. Location 2580
Note: Just fantastic, and tells us a very important and seminal point. One of those points that make all the difference in a debate. One of the most important of the book or year, that makes you unassailable. Inequality is NOT the problem. Again, the objection is not against Inequality per se. It isn’t about the rich getting richer. Good for them. It’s that inequality tells us something different. It is a manifestation of the truly profound problem. Hard work and enterprise aren’t paying off for the vast majority of us anymore. We aren’t made someone else gets rich. We are mad we can’t be. Yes the pie is growing Chris. But the argument is impotent if the increasing share of the pie only goes to the select few at the top. Who cares if the pie gets bigger if the same fat people just eat all of the new peices? People aren’t becoming better off. And that’s the problem everyone struggles with increasing health care and college costs, housing and transportation, food and basic entertainment, and no headway get a made for the rest of us despite larger productive capacity. Once we can answer how we get the new prosperity to the rest of us, then we win the debate.
They capture only a little of the overall income growth of the country, while in turn inequality has real and pernicious consequences that erode the value of the modest real income gains they do garner. A GDP Olympics is not a happy metaphor when most citizens are reduced to being cheerleaders rather than participants. Location 2584
Note: Jesus Christ and the Father. Inequality erodes the purchasing power of the rest of us.
[W]hat improves the circumstances of the greater part [of society] can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged. —ADAM SMITH, The Wealth of Nations, Book I, Chap. VIII. Location 2589
Note: If you want to bring get up Adam Smith, here he is.
What is more, as Piketty and Saez pointed out, if technological change and globalization alone explained the surge in American income inequality, one would expect to see similar rates of inequality growth in other developed economies. Instead, one sees much more modulated growth in income inequality. Piketty and Saez plausibly hypothesize that “other factors, such as changes in labor market institutions, fiscal policy, or more generally social norms regarding pay inequality may have played important roles in the determination of the wage structure.” Location 2646
A more complete telling of the inequality surge would include a topic that Mankiw raises and dismisses, which is the idea of “rent seeking.” Rent seeking is an extremely important contribution by political science to how we think about behavior in a wide range of settings. The idea at its broadest is that people look for shortcuts to wealth or power, by finding ways to advance their interests through whatever levers are available to them, without really creating any new economic value. A narrower sense of the term is that individuals who nominally are agents of others (a politician representing her constituents or a CEO his shareholders) are themselves active actors who seek to turn their situations to their own advantage. In either case, rent seekers enrich themselves without creating any new economic value. Location 2650
Note: Not crushing but useful to combat the argument that the money you make is a reflection of the value you’ve added to society. And knowledge you need for the rest of it.
In reality, everyone, or almost everyone, engages in rent seeking when the opportunities arise. Mankiw argues, for example, that rent seeking in the form of special pleadings and excessive coziness between public firms’ CEOs and their boards of directors cannot explain the extraordinary surge in CEO incomes relative to average workers’ incomes. Private firms as well as public ones pay their CEOs handsomely, he argues. But this misses one of the most obvious instances of rent seeking, which is the leveraged buyout (LBO) firm that essentially overcompensates a public target company’s CEO as an inducement to obtain his active participation in facilitating the leveraged buyout. Location 2673
Through cross-country comparisons, the three authors find a strong correlation between tax rate cuts on top labor incomes (salaries) and increasing shares of national income captured by the top one percent. In turn, these increasing shares of national income captured by the top one percent did not correlate with higher GDP growth, which suggests that the higher incomes were the result of successful rent seeking, not the creation of greater real economic value. Location 2693
Note: Cutting taxes did not seem to unleash the stifled potential of the heroic rich suffocating get under heavy taxes to the benifits of the rest of us. They just got richer.
In so arguing, Mankiw simply ignores the role of brute luck in market outcomes in the first place: our incomes are not in fact calculated by cosmic clerks down to two decimal places as direct returns on our abilities and efforts. But wealth, however obtained, can profitably be plowed into investments in the human capital of one’s children. Mankiw thus understates how much can be accomplished on behalf of a moderately able child who is coached, prodded, cajoled, and bribed all the way into a top tier university, and then introduced to her affluent parents’ circle of friends in order to find a first job. By the same token, Mankiw also ignores the magnitude of the handicaps that poverty imposes. As chapter 1 already introduced, the poor are not just like us, only with less stuff. At every turn poverty erodes actual cognitive ability, the healthy physical and mental development that comes from adequate nutrition, and anything approaching equality of educational opportunity in practice. Location 2701
Finally, Mankiw has no answer at all to the obvious question of why the United States should be such an outlier in the rate at which income inequality has grown. There is something about the United States that is unique: I submit that the answer lies not in its markets, which are largely indistinguishable in operation from those of other countries, but rather in its comparatively parsimonious programs of government investment in its citizens. Location 2716
But not only does that argument assume its conclusion, it also poses the wrong question. Location 2723
Mankiw closes by urging on his readers his “just deserts” theory of moral philosophy. Unfortunately this is not a theory that we all would prefer just to eat dessert, please—that actually might gain adherents among philosophers. It is instead an embarrassing and circular paean to unalloyed market outcomes, now presented as a moral imperative: market outcomes are morally just because they are the outcomes reached by the markets. Location 2725
In short, people should get what they deserve, so what they do get must be what they deserve. Apparently fortune, good or bad, plays no role in the Mankiw household, although it plays a large role in market outcomes. And in Mankiw’s mind alone, perfect markets rule, and opportunities are not at all skewed by the accident of birth or other contingencies. Mankiw has no theory of justice beyond the claim that whatever the market bestows is the natural order of things. Location 2740
Our current enormous income inequality creates social tensions in two directions. From the point of view of the majority, it is not just a question of envy, although that is real—it also is the distortion in prices of important assets, like houses in good school districts. And from the point of view of the extremely affluent, it becomes all too easy to disengage from any contact with the rest of America, and to see one’s great wealth as some sort of divine award for one’s special genius, rather than for many factors, including blind luck. That sense of difference in turn leads to the absurd sort of narcissism and insensitivity to one’s fellow Americans that we see played out in the media and in the “just deserts” school of moral philosophy. Location 2765
Note: One of the best articulations to why inequality is a problem.
Nonetheless, CPS data suffer from two large problems. The first is that they make no effort at all to capture capital gains (profits from selling investments, one’s business, or one’s home). The higher up the income ladder you go, the more important capital gains become, especially after 2001. The Burkhauser 2012 paper simply is missing all data relating to capital gains. The second problem in using the CPS to study income inequality is that public-use CPS data are “top-coded” on an item-by-item of income basis. This means that for those interviewees whose income in a particular category exceeds a stated maximum, the CPS data substitute that maximum, to protect individuals’ privacy. The current top-coding cutoff for “usual hourly earnings,” for example, is $150,000/year; for total income, it is $250,000/year. In 2007, about 6 percent of subjects were top-coded in respect of at least one income category; this obviously is a large number if you are studying incomes at the top of the ladder. Location 2800
Note: Inequality – competing veiws. This isn’t something you would need to memorize in general, but it will be useful for stronger poeple who know about Pickety but want to say his data is wrong.
There is little doubt but that IRS tax return data are more complete measures of money income than are CPS data the higher up the income ladder one looks. At the outset there is an obvious question of whether high-income Americans are more likely to be forthcoming about the exact amounts of their various items of income on their tax returns (where noncompliance can lead to large civil or even criminal penalties) or through a Census Bureau interview. In fact, about 9 percent of households contacted for the CPS survey do not participate, either because they do not respond or refuse to do so. But putting both these concerns to one side, there are still strong reasons to prefer IRS data. Location 2813
Note: So there goes the rebuttle to Picketty
But it turns out that the Census Bureau does not collect information on capital gains, and therefore the Burkhauser group’s 2012 paper simply ignores them, and makes only one laconic reference to that fact in its summary of the March CPS data. This is a very troubling omission. The Piketty and Saez papers generally include capital gains in their measure of incomes, and their continually updated website gives researchers the opportunity to view data with and without capital gains.17 The CBO definition of income includes capital gains. Location 2914
As this fanciful example suggests, it is possible for costs paid and value received to diverge. This observation is inconsistent with standard economic thinking, which treats the market price of something as conclusive evidence of its value to the buyer, but healthcare as delivered in the United States through employers is simply different from most consumer decisions. Location 2954
The CBO, like the Burkhauser group, includes the value of employer-sponsored healthcare insurance in market incomes, but unlike Burkhauser, CBO also includes capital gains, which are particularly relevant at the top end. The CBO, like the Burkhauser group, works with size-adjusted household income, for better or worse. The CBO, like Burkhauser but unlike Piketty and Saez, captures the estimated value of government transfer payments and in-kind programs. And most important, the CBO, like Piketty and Saez, has the best possible data for the very top end of the income spectrum, which is where the extraordinary growth in incomes has occurred. Location 3014
Note: This is a very detailed and difficult to grasp chapter but a simple take home is that Pickety and CBO include capital gains, which is fundamental to the top of the income ladder growth.
Median real (inflation-adjusted) household market income—the market income of the household in the middle, taking into account size adjustments and the value of employer-sponsored healthcare—grew all of 19 percent from 1979 to 2007, with one-third of that gain coming in the pre-crash bubble. In the entire 31-year period from 1979 to 2009 (that is, including the crash that began the Great Recession), median real household market income grew a miserable 14 percent. Location 3033
Median real household market income growth over this period is largely the result of four related stories: fewer individuals in each household; more tax units in each household; more women in the workforce; and higher remuneration for those women. The Burkhauser group’s paper gives useful insights into the changing dynamics of households. Basically, what one sees on average is fewer individuals in each household, but more tax units. This means that on average there are more adults earning income in each household, beyond a husband and wife filing a joint return, and fewer mouths for those income-earning adults to feed, for example through a decision to have fewer children. Location 3037
The percentage of men in the 50th percentile of the earnings distribution who were employed full-time and for the full year increased 5 percentage points, from 87 percent in 1979 to 92 percent in 2007. Meanwhile, the percentage of women who were so employed increased 16 percentage points, from 67 to 83 percent. Over the same 28-year period, the constant-dollar hourly wages of men in the 50th percentile of the earnings distribution were almost precisely flat. Despite large productivity gains per worker, male workers in the middle saw no improvement in real wages. Location 3049
So the very modest gains in median real household market incomes from 1979 to 2007 were mostly the results of more women in those households working, and getting paid more fairly for their work. Male workers in the middle basically saw no gains in the rewards to their labor. Does this not explain a great deal about political and social unrest in America today? Location 3055
Note: This is largely the take home message for this whole section.
There are two answers to these sorts of claims. The first is that, viewed in isolation, the middle class is not doing at all well: chapter 3 and the previous section of this chapter made this point. Real median household market incomes increased only 19 percent over 28 years, and did so largely because the average household contained more income-earning adults, principally due to women’s larger participation in the workforce. Median male wages in constant dollar terms have not increased in decades. The somewhat better record for disposable income is a story of political cravenness, in which median households have received more and more transfer benefits (principally Medicare), while being asked to pay less and less in taxes. This is a fiscal policy of propping up the middle class by borrowing against a future that draws increasingly near. Location 3076
The second answer is that inequality is and always has been about relative wealth. Housing, education, and medical care are all instances where the buying habits of the most affluent Americans crowd out those on the next rung down, and so forth. The great economic success of the top one percent may not trickle down, but their impacts on housing or education costs do ripple outward, in ways that play to the great disadvantage of the middle class. Location 3082
Note: The purchasing power of the top bids the price of the most important commodities out if the range of almost everyone else, creating a winner take all society.
A related line of argumentation is that the so-called poor have refrigerators, televisions, and often cell phones, which means that they are really rich in comparison to previous generations, or to the poor in the worst-off countries in the world.27 Adam Smith made fun of this point nearly 250 years ago, when he mentioned the “common complaint that luxury [now] extends itself even to the lowest ranks of the people,” because the prices of potatoes, turnips, carrots, and cabbages had fallen over the previous several decades.28 This claim not only ignores the fundamental idea that inequality is a relative concept, but also is highly selective in the basket of consumer goods that it holds up as exemplars. Household electronics are cheaper, but education, housing, and healthcare costs all are much higher than a generation ago. This is what it is like actually to be poor in America today: There have been days, since her son Ezekiel was born 11 months ago, that Los Angeles mom Beth Capper has gone without food to keep up her supply. One friend was arrested for stealing some. It’s not drugs or alcohol or even baby formula that has put her in such a bind. It’s diapers. There’s no way around buying them,” said Capper, a 41-year-old single mother who doesn’t work because of a disability. Across the country, mothers like Capper are facing the same predicament. According to a report published…in the journal Pediatrics, diaper need—the inability to afford to keep a child in clean diapers—affects a “substantial” number of low-income Americans, with nearly 30% of mothers questioned in New Haven, Conn., reporting that they did not have enough for their children. Keeping a young child dry and clean can cost a pretty penny; the average is $18 a week. A single mother earning $15,080 a year in a minimum-wage job would need to devote more than 6% of her pay to diapers, according to the Pediatrics study. Add in the fact that many lower-income families can’t afford to buy diapers in bulk at stores like Costco and Target and the expense becomes prohibitive. Location 3086
Note: One of the most common arguments against Inequality is thus debunked, or at least seriously undermined by the fact that being able to buy cheap plastic shit doesn’t really help much when you can’t keep your kid in diapers, you can’t receive critical treatment due to skyrocketing medical costs, you have trouble staying in housing because a roof now costs so much, or you and your children cannot afford to purchase education – the lifeline of opportunity. Basically yes, we are awash in cheap useless plastic shit that we can waste our time on Facebook with. But the things that make life worth living are passing out of reach.
And so low-income mothers stay at home because they cannot afford the diapers that they must provide to send their child to day care, or reuse dirty diapers because they cannot buy clean ones. Hundreds of other examples can be offered, but the simple message is that being poor in America is a hard life, and focusing on the relative cheapness of televisions, or of turnips and cabbages, is as distasteful an argument now as it was 250 years ago. Location 3107
Note: Good follow up
Perry’s presentation is a rich smorgasbord of methodological error. Location 3128
If one starts instead with household incomes, one discovers that in 1967, 30 percent of all households (not 22 percent) had incomes below $25,000, and that in 1967 the $25,000 to $75,000 band of incomes occupied the 30th to 86th percentiles of household incomes.32 Jumping to 2009, the range of household income distributions falling in the income band of $25,000 to $75,000 had shifted profoundly downward, and now covered the 25th to 68th percentiles of household income distributions. The data thus demonstrate precisely the opposite of what Perry claims: individuals who remained locked in place somewhere in the constant-dollar $25,000 to $75,000 band gained nothing from the trebling of real GDP, and got somewhat poorer, not richer, in relative terms, from 1967 to 2009. Location 3139
This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all the ages. Location 3147
Perfectly competitive markets do not yield perfectly equal outcomes. To the contrary, whether through luck or differences in native endowments, individuals’ outcomes vary all over the place. Those who for whatever reason enjoy great material rewards in the marketplace do not directly benefit in the short term from many of the complementary collective investments on which I focus, like public education—the rich can buy the goods directly. In turn, one cannot expect those who have few assets and little income today to fund those collective investments, because they do not have the money to invest, and in the absence of perfect markets cannot borrow to make these otherwise-compelling investments. Location 3183
As a practical matter, investment in complementary collective goods or collective insurance programs requires the mechanism of state coercion to take from the rich and invest in—not give to—the rest of America, in ways that ultimately redound to everyone’s benefit. In modern political discourse, this notion that we collectively should make highly productive investments in those without the resources to invest in themselves quickly is dismissed as “redistribution,” as if that label disposed of the matter, because “redistribution” in turn is viewed as the battle flag of “class warfare.” The logical error should be obvious. Market triumphalists who have made “redistribution” into the battle hymn of the underclass treat social insurance and investment as a forcible and quickly consumed “gift” to the poor, like a Christmas goose (perhaps the one that laid the golden eggs?), when in fact the purported redistribution should be analyzed as money spent on economic programs (insurance or investment) with measurable short- and long-term economic returns. Those programs must be judged on the basis of those returns, while giving appropriate weight to the coerced nature of the investments. The market triumphalist view is profoundly non-economic, because it brooks no possibility of making investments with very high economic returns shared by society as a whole, whenever those investments are made through the mechanism of the state. Location 3188
Note: Level 10 – Redistribution – this is exactly what we needed during the redistribution debate with Ginger that never took place. I was confident but cautious. We had to piece things together. Thus would have been beautiful. “Redistribution ” isn’t taking money from your wallet and handing it to a lazy person as a gift to be squandered on booze. It’s an investment into the society that allows you to measure your wealth to begin with, in a way that increases the welfare of everyone. You might be able to buy your own education, but we all are better off with less blight. Investments in those goods and policies that increase all of our welfare is the epitome of growth. Welfare programs are the biggest nuisance to the market fundamentalist. But enabling your labor pool into productivity is the quickest way to grow and economy. It’s a mystery why a starving man on the street makes us all better off when we could be empowered into a job.
I argue in chapter 11 that one of the three great strategic errors of the progressive movement in America over the last several decades was to allow the highly charged term “redistribution” to creep from social science literature to common discourse, as if it were a neutral concept. It is anything but neutral, right from the “re-” in “redistribution,” which implicitly asserts a claim that the market outcomes reached in a world dominated by imperfect markets and random acts of fortune are imbued with a legitimacy that “redistribution” upsets. Location 3199
Note: This man is the rival of Kuttner, and perhaps his equal.
Our vocabulary here betrays us. You can see this if, when reading any article on fiscal policy, you substitute a term like “social investment” or “social insurance” for “redistribution”—the entire tenor of the passage changes. Location 3204
Economic growth is the product of investment in physical and human capital, new production technologies, and new products. Location 3225
Chapter 1 introduced the theme that our welfare—the happiness of society, as Adam Smith would phrase things—depends on more than our national income. Market triumphalists reject this elementary proposition of moral philosophy. To them, the purpose of life is for the United States to win the gold medal at the GDP Olympics every year. In this quest for GDP gold, the performance-enhancing drug of choice is the Growth Fairy, and she in turn subsists entirely on a diet of low taxes. Location 3230
The second is mentioned sotto voce: it is that the ever-increasing wealth of the rich will trickle down to the rest of us, in ways that do not need to be specified. Being cabana staff to plutocrats is the best the rest of us can hope for, but if we have mobile phones and our parents did not, what is there to complain about? Location 3241
Note: God. Level 0. Beautiful.
Market triumphalists always see a Growth Fairy hovering in the distance, just waiting to shower wealth upon us, if only we would demonstrate that we deserve her blessings by lowering tax rates on the affluent some more. The Growth Fairy offers empty promises of something for everyone, at the immediate price of enhanced inequality, delivered in the form of disproportionately light tax burdens on the most successful. Some observers on the left claim that market triumphalists use the Growth Fairy narrative and their preoccupation with GDP as pretext to cover their real agenda, which is low taxes for themselves (or for the affluent people they hope to be). Unlike these commentators, I take market triumphalists at their word; I believe that they believe that GDP is everything. I reject that worldview, however, because it repudiates any sense of national community, ignores the immediate costs of poverty for cognitive development and educational opportunities, and overlooks how contingent the outcomes of our lives really are. In market triumphalist narratives, tax policy must be used to encourage people to become rich, so that they take big risks, and so they can amass great stocks of capital, which when saved can fund new productive investments by businesses, thereby generating greater business profits, which profits in turn will somehow be shared with workers. These narratives thus emphasize the alleged growth-strangling consequences of higher taxes on the highest-income Americans. In this political economy story, there are no plausible tax increases, just “job-killing tax hikes.” For example, market triumphalists predicted that allowing the Bush tax cuts to expire for the most affluent Americans at the end of 2012 would lead our most productive citizens to throw up their hands and retire to the beach, thereby depriving us of the fruits of their future services. But that did not happen. More generally, as this chapter demonstrates, the economic consensus points in the opposite direction: there is a relatively weak relationship between work effort and labor tax rates, for both technical and practical reasons. Like good science fiction, the Growth Fairy narrative is grounded in superficial plausibility. Since the time of Adam Smith we have understood that business investment is a critical driver of economic growth. Lower taxes can possibly lead to higher private investment. And it is possible to imagine circumstances where tax rates are so high as to stifle current economic activity, much less future growth. It is just that ours are not those circumstances. Why is the Growth Fairy story not a credible guide to fiscal policy? Five reasons, which I discuss further in this chapter: 1. The United States today is a low-tax country. 2. Empirical studies have shown little connection between tax rates and critical inputs into economic growth, like labor participation or individual savings. 3. More theoretical economic models reach many different conclusions; the modeling of the relationship between tax policy and growth is not yet reliable enough to base policy recommendations on it. 4. The Growth Fairy narrative is fundamentally incomplete by its own terms. It does not consider the positive growth effects of public investment that complements private markets. 5. The Growth Fairy story confuses welfare and income, in particular by not offering a convincing story as to how the growth it posits will be broadly shared without violating its own central premise that inequality is the key to growth. Location 3248
In sum, the market triumphalist ode to the Growth Fairy is an exercise in wishful thinking, missing thoughts, and hyperbole. The story is wishful, in that it invariably is a message delivered by the affluent to the rest of us, explaining why the iron laws of economics require lower tax burdens on them, so that they can get richer at ever-increasing rates. The fable is missing a critical part to make its story hang together, which is how all of us will share in the increasing wealth stored up by the most affluent. This in turn raises the question of which government programs are financed by the taxes that the affluent are so eager to shed. And the argument is hyperbolic, because the evidence on the relationship between growth and taxes is far more ambiguous than Growth Fairy devotees claim. Location 3275
Historical data on labor participation rates and average hours worked compared to tax rates indicates little relationship with either top marginal rates or average marginal rates on labor income. Relationships between tax rates and savings appear positively correlated (that is, lower savings are consistent with lower, not higher, tax rates), although this relationship may not be causal…. A review of statistical evidence suggests that both labor supply and savings and investment are relatively insensitive to tax rates. Small effects arise in part because of offsetting income and substitution effects (which make the direction of effects uncertain) and in part because each of these individual responses appears small. Institutional constraints may also have an effect. Location 3366
When all is said and done, however, the conclusion remains that changes in tax rates, at least at the moderate levels seen in the United States for the last several decades, do not have very large effects on total labor supply or on individuals’ savings.22 The first of these thoughts in particular should not be very surprising: few of us can afford to quit our jobs because tax rates go up, and most jobs are not so flexible in hours for which we are paid as to allow us to trim our work effort to correspond precisely to fluctuations in the tax rates we face. Location 3397
This consensus view angers market triumphalists. They argue that the maximum tax rates now in effect on the highest income Americans will crush the souls of high-ability taxpayers, leading them to retire to the beach, no doubt to read The Fountainhead. But arguments of this nature border on the preposterous. Location 3402
To summarize to this point, it turns out that economists of all stripes broadly agree that neither the supply of labor nor the supply of savings is very responsive to fluctuations in tax rates in the range that we have experienced in the United States. Location 3450
We really do not know very much about the relationship between tax rates and entrepreneurial risk-taking. The logical relationship is precisely the opposite of most peoples’ intuitions. A theoretically ideal business tax would apply symmetrically to income and loss: if you make money, you pay tax, and if you lose money, the government mails you a check equal to the tax rate multiplied by your loss. In such a system, the IRS is a business’s full silent partner, regardless of how the business performs. (US law actually offers businesses a partial risk-sharing mechanism; net losses are not immediately reimbursed, but those losses can be carried forward and claimed as deductions against future years’ profits.) Because government is sharing the risk of loss, the effect of taxation is to reduce the riskiness of investments—to modulate returns. Location 3465
Note: Well so much for government crushing business, it actually offers a form of insurance to the risks associated with business endeavors
We see this relative indifference to tax planning in operation in the fact that many recent great success stories (Facebook, Google, etc.) did not organize themselves from the get-go in business structures that a sophisticated tax planner would have preferred.29 I therefore discount the idea that tax rates are a principal driver of entrepreneurial ambitions. Location 3486
It is true that in July 2013 the United States had the highest statutory corporate tax rate of any major economy in the world (35 percent at the federal level)—but virtually no firm pays tax at that rate. The day before Vanetik’s op-ed appeared, the nonpartisan US General Accountability Office (GAO) publicly released a study of the tax burdens of large corporations, drawn from actual tax return and financial accounting data.33 That study concluded that in 2010, profitable large corporations paid an effective federal corporate tax rate (their tax bill divided by a comprehensive measure of their income) of 12.6 percent. If one includes foreign income taxes actually paid on foreign income, the worldwide effective tax rate was 16.9 percent. There are reasons that 2010 may have been an exceptional year, but the fact remains that firms’ effective tax rates are much lower than the nominal headline rate might suggest. Location 3510
Note: Get this ready for Chris when he bitches that the US crushes business with our tax rates.
Vanetik also claimed that the best way “to encourage businesses to translate growth into new jobs is to reform the corporate tax code.” This hardy perennial among Growth Fairy buffs, that high business tax rates are “job killers,” is particularly difficult to square with reality, given that firms deduct from their income the compensation they pay their workers. In other words, firms are taxed on the profits left over after paying workers’ salaries. So long as a new worker can be expected to generate a positive return (more than cover her salary), why would a rational firm not hire that individual? The more nuanced argument is that every new hire implies a concomitant capital investment to support that worker, but here Vanetik conceded the issue without being aware that he had done so, when he wrote that even under the current corporate tax system, firms were expanding operations and accumulating capital. Location 3518
The United States is unique in having a large fraction (roughly half) of all business income earned in entities that are not subject to the corporate income tax: partnerships, “S” corporations, limited liability companies, and sole proprietorships. The key tax fact is that these entities do not pay tax; instead, the firms’ owners report on their personal income tax returns their share of an entity’s profits. (For this reason, partnerships, “S” corporations, and limited liability companies often are referred to as “pass-through” entities.) The effective tax rate of profitable pass-through entities is higher than 12.6 percent, but nowhere near the maximum individual income tax rate. Location 3525
As previously observed, business investment takes three basic forms: investment in intangible assets (patents, processes, software development, goodwill), tangible assets (greasy machinery), and human capital (education and worker training). Investments in intangible assets are heavily tax-favored today: the costs of developing intangibles are immediately expensed by a firm, and in addition, qualifying expenses are eligible for a tax cr—a dollar for dollar reduction in the firm’s tax liability. The combination means that the tax system today subsidizes rather than taxes investments in intangible assets. Location 3541
Note: While not near as hard hitting and beautiful as most blue highlights, it qualifies for blue because there are few arguments more common than the one where taxes are said to kill jobs and investment. Imagine their horror when they see the argument that taxes serve as a subsidy to capital investment.
Figure 5.1 relies on OECD data to examine 28 countries in the period 2004–2006 (a relatively stable economic period, before the Great Recession). The figure compares a country’s total tax revenues as a percentage of GDP with its average growth rate during this period. There is no apparent correlation between lower tax burdens and higher growth rates, contrary to what one might expect if the Growth Fairy performed her magic on market economies generally. Location 3603
The nonpartisan Congressional Research Service (an arm of the Library of Congress) has undertaken analyses of the historical correlations between US tax rates and economic growth. In two recent (and controversial) studies, the CRS concluded, first, that “periods of lower taxes are not associated with higher rates of economic growth or increases in investment,” and second, that “the reduction in the top [personal income] tax rates [prior to 2013] has had little association with saving, investment, or productivity growth.” Location 3611
Measuring the impact of taxes on the overall economy is like watching the mating habits of butterflies alongside a freeway—what seems like a fascinating new behavior often is just the downdraft from a passing tractor-trailer. So too the effect of taxes on actual behavior in the field may be overwhelmed by other more fundamental drivers of the economy and human behavior. Location 3619
The economy is too big, and exogenous shocks (oil crises, globalization, climate change, Federal Reserve policies) are too large (and by definition unpredictable), for moderate changes in tax rates to drive growth or affect investment rates in clearly definable ways. Location 3626
Note: There are so many factors contributing to growth and gdp, that you simply cannot interprete relatively minor changes in either growth or taxation as casual. Absent some massive swing, the person making that claim has a massive job ahead.
And finally, as chapter 6 describes, there is a large cost today to not raising taxes, particularly against the backdrop of our current low levels of taxation in the United States, in the form of much higher interest costs to finance increasing federal debt. Location 3647
A somewhat inefficient tax that funds collective investments that complement private markets is still welfare-enhancing on balance. In other words, in thinking about the economic cost of government intervention, one must examine the spending/taxing system in its totality. The Growth Fairy narrative completely ignores the positive economic growth that comes from government investments in education, infrastructure, or other areas that are complementary to private markets. This point is critical, yet constantly missed in the literature: there is no meaning to the growth effects of taxes as such, only to fiscal policy taken as a whole. Location 3680
Note: Myth of ownership. You get something for taxes that increases utility. You didn’t ask for it, fine. Don’t earn wealth with it. Get out of here.
Growth Fairy acolytes stack the deck in their favor when they frame the debate as exclusively about the costs of taxation without considering that those costs go to pay for public investments that complement private markets in arenas that the private sector does not reach. In those cases, the opportunities for high-return public investment abound. What is more, those returns usually are much more broadly shared than the returns from private investment, without the need to rely on trickle-down hypotheses to explain how those investments will enhance “the happiness of the society.” Location 3688
Note: Public investments returns value that is broadly shared, not just shared in small private spheres as in private markets. I can buy a smartphone. I can’t buy an interstate highway system or an attempt at cleaner air. This is a crucial point, and one with expansive consequences. We know this bit it is often not articulated well in use.
the deadweight loss of that tax by itself would not be a useful measure of the net welfare gains enjoyed by Freedonian citizens from the overall fiscal policy. Location 3696
Narrators of the Growth Fairy fable have a superficially plausible story to tell of how a gentle touch in taxing the rich might spur economic growth (and accelerating wealth for those who already are affluent), but beyond mumbling about trickle-down effects they have no explanation at all for how that increasing wealth will do the rest of us any good. Their mumbling cannot be helped, because the entire theory rests on the idea that more inequality (through a light touch in taxing the affluent) yields more growth. But this becomes a vicious circle, in which the only response to low taxes today on the rich—and therefore minimal public investment—is still lower tax burdens tomorrow, so that their great wealth can accumulate still faster. There is no institutional trickle-down mechanism so much as there is some unavoidable leakage when the most affluent look to spend some small fraction of their wealth on lawn care and personal trainers. Location 3708
The alternative—one completely ignored by Growth Fairy proponents—is a sprinkle-up model. Reasonable levels of taxation (including the progressive income tax) can fund public investments that directly generate higher levels of prosperity for a broad swath of Americans. In turn, the accelerating wealth and purchasing power of most Americans ultimately boosts the returns to the most affluent Americans from their labor and from their savings. This second model is fundamentally welfare-enhancing for the nation as a whole in ways that the Growth Fairy fable is not. Location 3714
We collectively want economic growth, but only to the extent that it corresponds with increased welfare for the nation as a whole. Growth itself should not be our only objective, as if the country were engaged in a GDP Olympics with other nations. Our welfare depends on all of us participating in growth, mostly through work that conveys dignity as well as fair remuneration. But as chapters 3 and 4 demonstrate, this is one place where the data are unequivocal: as tax rates have generally declined over the last 30 years, wages of men have stagnated, and income inequality has soared. While Growth Fairy acolytes fear that we will become as burdened by social programs and taxation as is France, their own economic policies point us in the direction of oligarchic Russia. Location 3719
The CBO in 2001 underestimated the coming decade’s surge in mandatory spending, attributable to excess cost growth in healthcare, in some part to the unfunded extension of Medicare prescription drug benefits, and at the end of the decade to the deployment of safety net mechanisms to arrest the fall of the Great Recession Location 3807
Bluntly, there is no rational alternative. The need to repay the revenue shortfalls of the Great Recession, the rapid increase in the number of elderly Americans, the continuing needs of the many Americans who are unemployed or in poverty, our oversized and inefficient healthcare system, our large military expenditures, and the costs of supervising the world’s largest, most complex, and most sophisticated economy collectively require government revenues greater than those we currently are on track to collect. Location 3823
Note: This is why we need more taxes.
In the end, Congress alone controls the purse strings of the government; the president’s only power is to veto spending legislation. The executive branch cannot spend what Congress has not directed the executive to spend, and must spend whatever monies Congress has legislated to be spent.5 If you think that the federal government spends too much, blame Congress, not the president. Location 3849
Note: So that pretty much absolves Obama of the new debt but also Bush. It also partially negates Clinton. It complicates the debt debate quite a bit. Better in some ways and worse in others.
but also outlays for running the courts and all the government agencies that together comprise the entirety of the legal and regulatory apparatus that keeps our economy working. Location 3881
So the entirety of nondefense discretionary spending (including the budgets for the agencies and courts that keep planes in the air, inspect our food, supervise our securities and banking markets, and administer the justice system) is about one-sixth of the total budget. Location 3897
The United States did not lose its “AAA” cr rating because its revenue base is too small relative to its debt, but rather because the rating agencies correctly perceived that Congress is dysfunctional and cannot be trusted to take the steps necessary to avoid formal default. Location 3928
Third, deficits do not necessarily add to the debt-to-GDP ratio. Imagine that the federal debt-to-GDP ratio is 50 percent and the economy is growing at 4 percent a year. If the federal government runs a deficit equal to 2 percent of GDP, the debt-to-GDP ratio will remain a constant 50 percent—the denominator goes up by 4 percent, and the numerator by 2 percent (from, say 50/100 to 52/104). Many economists therefore do not lose sleep over deficits that average no more than 2 percent of GDP over the long haul; if one assumes that the long-term US economic growth rate hovers around 3.5 percent per annum, this would imply a stable debt-to-GDP ratio in the neighborhood of 60 percent. This is just one of many reasons that balanced budget amendments are silly. Location 3936
Note: You can run deficits and still not increase the debt to GDP ratio due to growth
It is easy to confuse an artificial and avoidable government shutdown crisis with an artificial and avoidable debt-ceiling crisis. A government shutdown arises when Congress fails to authorize and appropriate the funds necessary to keep government services functioning. A debt-ceiling crisis arises when Congress remembers to authorize and appropriate funds necessary to keep government running, but neglects to allow the Treasury Department to borrow the money to pay the resulting bills. Location 3992
During 2011, the debt ceiling became a weapon used by the Republican Party in Congress to extract major concessions from a Democratic president. The predictable results were public disgust with the political process, still further polarization of the two political parties, and the first downgrade of the cr of the United States by a commercial cr rating agency. That downgrade was a reflection on our political process, not our ability to pay our bills as they came due. Location 4004
In this section I emphasize what the Great Recession meant for federal government budget receipts (tax revenues) and outlays (spending). Less went wrong than the usual narratives would suggest. There is no story here of exploding socialism, or a permanent government takeover of anything much. Instead, there is the standard story of all recessions, that tax revenues fell and preexisting emergency safety net spending (for example, for unemployment and Supplemental Nutrition Assistance Program—food stamp—benefits) rose. These consequences are known as “automatic stabilizers”—just by the design of these programs, they operate without any new legislative interventions to mitigate the consequences of a recession, by leading to smaller tax bills and more payments to individuals who qualify for some modest assistance toward meeting current living expenses.15 Of course, automatic stabilizers also generate deficits until the economy recovers and the programs in question return to normal levels. Location 4059
Note: This horseshit about more poeple on food stamps and higher levels of poverty under Obama was not a result of congressional policy but instead automatic stabilizers in place that triggered during the recession.
And although few seem to be aware of it, the CBO scored the Affordable Care Act as reducing, not increasing, government deficits, because the legislation contained revenue-raising measures designed to pay for its new spending. Location 4073
Note: So much for Obama care adding to the deficit. It didnt. Now you can’t just claim this. You need the citation he gives us to demonstrate it.
But the biggest story, and one largely unappreciated, is the collapse in tax revenues during the Great Recession. A quick review of tax revenues during the 2008–2013 period illustrates this point. For the decades leading up to the crisis, and using the pre-2013 restatement of historical GDP, federal tax revenues averaged 18.3 percent of GDP.18 (This of course does not mean that revenues approximated this number each year; revenues topped out at 20.6 percent of GDP at the end of the Clinton administration, for example, and revenues fell significantly in earlier recessions.) During the current crisis years, by contrast, federal revenues fell precipitously, to about 15.1 percent of GDP in 2009 and 2010, for example. To be fair, not all of this decline in revenue was the result of the automatic stabilization properties of the income tax, as Congress implemented new temporary tax reductions to stimulate the economy, but a significant portion was attributable to the automatic stabilization function. Location 4093
In short, forgone revenues (compared to historical norms) are the largest single explanation for where our most recent deficit problems have arisen. In very rough terms, ARRA and other new discretionary spending programs cost no more than $1 trillion; existing safety net programs (some of which, like unemployment benefits, were extended as a result of the severity of the economic collapse) cost about another $1 trillion over baseline levels, and forgone tax revenues cost over $2 trillion. In the absence of these three items, Treasury debt held by the public at the end of 2012 would have been about 47 percent of GDP, not 72 percent. Location 4105
Note: Perhaps the single best definition an explanation of the current dent since the recession to be found. it isn’t poor people staying on welfare and Obama’s spending. It’s shortfall of tax revenue due to the recession
The reason that we are paralyzed by false fiscal crises today is that we are not willing to use the economic recovery to allow tax collections to rise sufficiently to pay down the deficits unavoidably incurred during the economic collapse of the Great Recession, and to provide for the demographic pig in the snake, in the form of our aging population. Location 4112
Note: Why we have deficits. You can’t raise taxes and kicking everyone off food stamps isn’t enough to get it done.
The fact that the 2012 Budget Outlook predicted that in FY 2021 we would be running a deficit of 1.2 percent of GDP was not problematic. In a growing economy, the government can run at least some deficit every year, while debt held by the public remains constant as a percentage of GDP. (As explained earlier, so long as the deficit as a percentage of growth in annual GDP is no greater than total debt outstanding as a percentage of GDP, total debt will not grow as a share of GDP.) Debt as a percentage of GDP is the relevant benchmark, because that is what tells you how the government’s obligations stack up as a fraction of total national market income, which is what GDP approximates. Location 4178
The specific event that took our budget deficit path from rosy to catastrophic, at least over a 10-year horizon, was the January 1, 2013, “fiscal cliff” tax deal, the American Taxpayer Relief Act of 2012. This deal was packaged as a tax hike on the most affluent, but in reality it operated as a massive tax cut for most Americans, against the backdrop of already low tax collections. The CBO in its 2013 Budget Outlook projected that the 2013 fiscal cliff tax deal by itself would add about $4.6 trillion to our accumulated deficits over the 2013–2022 period (comprising $4 trillion in lower tax revenues, and $600 billion in higher interest costs), which would more than double the size of the 10-year projected deficits, compared with the 2012 baseline.28 This means that the budget cost of the fiscal cliff tax deal over the period 2013–2022 is more than double the amount of all the spending caps and sequestrations imposed by the Budget Control Act of 2011, as discussed in the next section. Location 4227
Note: That’s your hard turn right there. “Tax Relief” that the right crows about its first and foremost to blame for another impending fiscal crisus.
To summarize, if the federal government had collected its historic average of 18.3 percent of revenue during the 2008–2012 recessionary period, and then switched to the higher revenue levels contemplated by the 2012 CBO baseline (i.e., the expiration in particular of the 2001–2003 tax cuts in their entirety) for 2013–2023, deficits over the 2008–2023 period would have been on the order of $7 trillion lower (taking into account debt service savings). That $7 trillion in lower deficits represents a 35 percent reduction in projected levels of Treasury debt outstanding a decade from now. So both looking forward to projected revenues after the fiscal cliff tax deal, and looking back to the revenues forgone through the automatic stabilization function of the income tax (as well as various temporary tax relief measures), we see a consistent story of missing revenues that to a large extent explains our recent worrisome fiscal trends. The fiscal policy chasm that has brought our political discourse to a state of paralysis is simply whether tax collections should average 19 or 21 percent of GDP over the next decade (about $4 trillion in total, before interest expense savings). Location 4280
The lesson is plain: the United States cannot run a federal government on a tax base of 19 percent of GDP. Revenues will need to be about 2 percentage points higher—about the levels that would pertain if on January 1, 2013, we had reverted to pre-2001 tax rates. The simple fact is that we cannot afford as a country to see our government’s discretionary spending wither to the levels contemplated by the Budget Control Act’s fiscal corset. At least some of us do not wish to see our military’s capabilities eroded through spending constraints amounting to some $500 billion over the next 10 years, and others of us appreciate that nondefense discretionary spending translates directly into the welfare of our society—through funding the agencies that keep markets honest and efficient, through a variety of social insurance programs funded through this channel, and through investment in infrastructure. The result is a slightly disjointed but ultimately bipartisan realization that the budget caps must go. Doing so would restore spending to historically normal levels, and would not trigger orgies of new government programs. Location 4414
Note: For all of this monsterous chapter here is the main takeaway. We need higher taxes. Or your getting more debt. Or your cutting your military, or your throwing your population under the bus to be defrauded, die of starvation, become homeless, not be educated, lose their roads, let their court system go to rot, or die from lack of musical care. But I guess you can just tell them it’s their own fault so that’s cool.
There is an often-advanced view that the Budget Control Act’s caps are necessary to control federal deficits, or—to deal more frankly with the underlying political objectives—the caps should be replaced with spending cuts in mandatory social spending programs. But as chapter 7 demonstrates, our social insurance programs already are among the smallest in the OECD, and as chapters 11 and 12 develop, there is powerful empirical evidence for the proposition that a country not consumed by economic anxiety is both happier and more productive. We do not have to accept the false proposition that our only choices are to starve our discretionary spending programs or to cancel without transitions of any kind large swaths of our social insurance programs. The missing fiscal instruments in this mix are revenues—in particular, revenues at levels similar to that contemplated by the CBO’s 2012 budget forecasts, which is to say, at levels comparable to pre-2001 tax law. Location 4422
Note: While this isn’t level 10, it’s probably the most important passage of the chapter, and covers the broad strokes.
The federal government’s income security programs include the Supplemental Nutrition Assistance Program (formerly food stamps), Supplemental Security Income, unemployment insurance, the earned income and child tax credits, family support, child nutrition, foster care, and miscellaneous tax credits.4 Impressive though this list may sound, our government’s total outlays for all of these programs combined is much smaller than many observers realize. Congressional Budget Office projections contemplate that government outlays for income security programs will decline as a percentage of GDP from 2.0 percent in 2014 to 1.3 percent by 2023.5 For the largest and most successful economy in the world, this level of support for Americans struggling with unemployment or in poverty cannot in any way be described as lavish. In fact, the OECD graded the United States in 2009 (the most recent year for which data were available) at 28th out of 34 countries in the generosity of its income-support programs for the working age population, as a percentage of GDP. (As a reminder, OECD data include federal, state, and local governments.) The countries less generous than us, with one exception, were not those we think of as peer economies: they comprised Turkey, Mexico, Chile, Korea, Greece, and Japan. We spent just about exactly one-half as much as did Canada or the United Kingdom on such programs, as a percentage of GDP, and about 60 percent of the OECD average.6 Similarly, our 2009 public social spending in its entirety (including Social Security, Medicare, and Medicaid) put us in 29th place among the OECD-34. Location 4472
Note: Level 10 – while not what you consider a typical level 10 beautiful passage, it can’t be any less important. In debate, not one thing defines the right, Chris Jon Sean and all of them more, than complaining about Welfare.
As shown in Figure 7.2, the United States ranked 5th from the bottom in 2013 among the 34 OECD member countries in total government spending as a percentage of GDP.8 We keep company with the Slovak Republic, not most of the developed economies that we might grudgingly acknowledge as peers. Canada, for example, spends 2 percentage points of its GDP more for government than we do, and the United Kingdom spends in excess of 9 percentage points more. Similarly, our 2009 public social spending (which includes Social Security and Medicare) put us in 29th place among the OECD-34.9 Given our outsized military and healthcare spending, as described below, this implies that the United States is a very parsimonious government spender in all other respects, when compared with our world peers. If we were to spend what Canada does as a percentage of GDP, we would spend about $300 billion more every year on government services. Location 4486
Note: So spending isn’t even that high
Healthcare policy debates can easily spin into abstruse arguments, but there are really only three points to remember: 1. Healthcare spending in America is unimaginably high, and largely uncorrelated with favorable health outcomes. Our excess spending, over and above what our most generous peer countries spend, will soon top $1 trillion per year.16 Because government ultimately pays so much of the national healthcare bill, and because our population is rapidly aging (and therefore almost by definition is consuming more healthcare), healthcare is America’s largest fiscal problem. 2. The reasons for our outsized spending are principally our fragmented healthcare delivery systems, the insertion of private firms in monopoly or monopsony positions, and a general failure to implement a coherent theory of healthcare insurance—a theme to which chapter 11 returns. (Monopoly refers to outsized market power wielded by a seller that dominates its market; monopsony is the converse, when the dominant market player is a buyer of the good in question. In either case, market prices can be distorted.) 3. The Affordable Care Act has been a tremendous distraction from the urgent fiscal problems associated with our compulsive healthcare spending behaviors. The ACA does too little, not too much, by way of changing our fragmented healthcare delivery systems. The ACA was, however, self-funding, through new taxes, so the ACA by itself is not an enabler of further fiscal deterioration. (By contrast, the 2005 extension of Medicare to cover prescription drugs, which was wholly unfunded through new tax receipts, did have an adverse effect on our fiscal picture.) Location 4546
Note: And while there are countless branches of argument one can trace in this mess, here are the three broadest strokes of pure fact.
In return for all this profligate spending, we do not buy ourselves extraordinarily happy medical outcomes. It is true that you are more likely to survive breast cancer, a major heart attack, or stroke in the United States than in most other OECD countries, particularly if you have good medical insurance and choose to have your heart attack on the sidewalk in front of a major medical center, in a season other than summer, when the new interns arrive.19 Where we fail, however, is in consistently delivering good health, as opposed to responding to acute crises, because healthcare in America is so disproportionately costly for many, and so fragmented in its delivery.20 Chapter 11 reviews further some of the evidence for just how inconsistently we deliver basic medical services, and how as a result Americans die sooner and are sicker than their counterparts in other high-income countries. Location 4574
Note: Parts of this book are as good as kuttner
Our extraordinary profligacy in government spending on healthcare has nothing whatsoever to do with the Affordable Care Act, which had no impact on 2011 healthcare spending (the year covered by the data in Figure 7.4), and which in fact is projected by the CBO to mitigate somewhat the growth rate of government healthcare spending. Location 4585
Note: Hey Jared, The ACA offsets government healthcare spending.
The same might be said of food or other existentially unavoidable expenses, yet we do not view these as quasi-taxes. The difference is that the food markets are healthy competitive markets; private health insurance markets are not, and as a practical matter can never be. Chapter 11, on government’s role as an insurer, elaborates on this theme. Location 4638
Note: Awesome. I argue government should provide healthcare because you die without it. They respond you die without food. So government provides that? Healthcare is not a transparent competitive market that is accessable to most poeple. It’s different.
As will be described in more detail in chapter 9, most “private” healthcare spending in the United States in fact is heavily government-subsidized. The subsidy is hidden from view because it is delivered in the form of tax breaks on employer-sponsored health insurance, which is how most Americans obtain health insurance. This hidden subsidy runs at a rate of over $250 billion a year. Individuals who agitate to keep the government out of private healthcare markets should contemplate where they will come up with another $250 billion or so every year, if they were to get their wish. Location 4641
Note: How about it Guys?
Finally, I have made the point before, but it is so important that it bears repeating: the Affordable Care Act made the fiscal picture for healthcare spending somewhat better, not worse. The Congressional Budget Office originally projected that the Affordable Care Act in its entirety would reduce, not increase, the budget deficit, and in 2012 reaffirmed that conclusion, by advising House Speaker Boehner that repealing the Affordable Care Act would raise the federal deficit by over $100 billion over the next 10 years.40 Opponents of the Affordable Care Act point out that it will increase federal spending (how else would the act increase the number of Americans with health insurance by some 25 million?41), but neglect to acknowledge that the legislation paired the additional spending with new taxes more than sufficient to cover those costs. The Affordable Care Act also made Medicare’s Part A (the hospital insurance part) somewhat more fiscally sustainable.42 The fiscal challenges posed by healthcare remain very grave, but the Affordable Care Act was a small step in the right fiscal direction. Location 4805
The existence of 10 programs costing hundreds of billions of dollars annually sounds very generous, but as observed earlier, the United States in fact spends much less to support low-income households than do its peer countries. For example, Figure 7.8 relies on OECD data to summarize public spending intended specifically to support families (not including health, housing, or employment support). Because countries deliver these services through different mechanisms, this chart includes cash payments, in-kind benefits (for example, direct provision of child care), and subsidies delivered through the tax system. (Unfortunately, the OECD does not regularly collect data on all three delivery mechanisms for every kind of expenditure, but obviously in-kind benefits are more relevant for family support than they are for military expenditures.) The United States finishes dead last among the peer countries considered in this book. Location 4828
Some people do defraud or abuse the means-tested programs. It also is possible to find example—infinitely larger examples, as it happens—of waste, fraud, and abuse in the private sector. Bernie Madoff defrauded investors of $65 billion, nearly as much as an entire year’s budget for the SNAP program. All programs need proper administration, but if we shut down all activities in which waste, fraud, or abuse were ever discovered, there would be little left for any of us to do to occupy ourselves. Location 4854
More forcefully, the means-tested programs largely support children, the elderly, and disabled individuals. Three out of four households receiving SNAP benefits had a member in one of those categories. The remainder for the most part are just extraordinarily poor; the average income of households receiving SNAP benefits in 2010, for example, was $9,000.46 Similarly, one-half of Medicaid enrollees are children. Another one-quarter of the enrollees are parents of those children or pregnant women. And the final one-quarter are elderly or disabled.47 The means-tested programs are not the refuges of millions of able-bodied loafs. Location 4865
It is profoundly distasteful to imagine distinguished professors of economics spending a day’s SNAP benefits or more on a cup of latte at their local espresso bar, all the while declaiming why the poor will never look for work once given such princely benefits. Location 4878
Looking forward, Medicaid costs will climb as the Affordable Care Act is implemented, because Medicaid is the vehicle by which 12 million low-income Americans who nonetheless are above the Medicaid income ceiling will obtain medical insurance in the future. But this cost was fully paid for when the Affordable Care Act was enacted, through companion tax increases. Location 4902
Rational arguments to justify a state’s decision to behave so spitefully to its own residents do not leap to mind. Exquisite sensitivity toward federal budget costs seems a quite improbable explanation, and the federal sharing ratio means that the costs to states in many cases will be less than the ongoing costs to them of providing minimal services to uninsured patients. Location 4917
More fairly, in 2007, immediately before the Great Recession, almost four-fifths of working Americans had a net federal tax liability, looking only at income and payroll taxes, even after taking any refundable tax crs into account.19 If it would make Messrs. Golub and Romney happy, we could follow the example of other countries and require the working poor to pay income tax, but then mail them checks to supplement their incomes, but that simply does in two steps what our tax code today does in one. Location 5118
Note: See how much sense that makes assholes?
The nonpartisan Congressional Budget Office recently changed its methodology for “distributing” the corporate income tax to individuals. It now assumes that the economic incidence of the corporate income tax falls 75 percent on all owners of investment capital (in proportion to each owner’s capital income) and 25 percent on workers (in proportion to their wages).22 (The Treasury Department, by contrast, treats 82 percent of corporate taxes as borne by investors and 18 percent by labor.) Location 5166
Note: Long-standing debate on how corporate taxes are passed to consumers addressed.
Citizens for Tax Justice undertook a distributional analysis for 2013 comparing individual incomes and the total taxes paid in respect of those incomes, including state and local taxes and corporate income taxes. That analysis concluded that, once all taxes were included, there was surprisingly little variation across the income distribution in the proportion of taxes paid relative to each group’s share of total income (see Figure 8.8 Location 5262
Note: Get the graph for this too. In short, when the dust settles, the rich do not shoulder a disproportionate burden. They pay proportionate to what they make. So to claim they need lower taxes is to claim they deserve special treatment. Why should they pay LESS than than others by proportion?
Of course the income tax is progressive—that has been a hallmark of its design since its adoption in 1913—but again, it is only one of a suite of federal taxes, others of which are regressive or proportional. Fleischer further reports, as if it is news, that those with higher incomes pay a larger share of the nation’s total tax bill than do the poor, but does anyone really recommend the contrary? Location 5375
Evensky, Adam Smith’s Moral Philosophy, 163 (“The invisible hand is not, as the modern discourse generally suggests, the magic of a market economy at work. That is but one of its handiworks. This invisible hand is for Smith the hand of the deity that designed the ‘economy of nature’ and those invisible ‘connecting principles’ that guide humankind’s evolution.”). Location 9447
When one gets to the really super-rich, effective federal income tax rates actually decline, because so much of their income is taxed as long-term capital gain. The data published annually by the IRS on the 400 highest-income tax returns for the year is particularly helpful here. For 2009 (the most recent year), their effective federal income tax rate was under 20 percent. If one measured their tax liabilities against their true economic income (including items like tax-exempt municipal bond income and capital gains not yet harvested through a sale), that rate would decline still further. Location 5308
Note: This is a difficult chapter because it is so dense, but suffice it to say, the very richest of the rich are not drowned in the excessive taxation that is claimed by the right, which is the info you would need at a game store, dinner party, lunch or on the street. Basically, They are taxed at 20% or lower, yet where are all these amazing jobs?
Of course the income tax is progressive—that has been a hallmark of its design since its adoption in 1913—but again, it is only one of a suite of federal taxes, others of which are regressive or proportional. Fleischer further reports, as if it is news, that those with higher incomes pay a larger share of the nation’s total tax bill than do the poor, but does anyone really recommend the contrary? Location 5375
Fleischer thus argued that the US tax system is “incredibly progressive,” by presenting data on how much tax the top 20 percent actually pay, and comparing that, not to their share of aggregate market incomes, but rather to their share of national income after taking into account the very transfer payments that are funded by the tax system. By doing so, he made the average tax rate shouldered by the top 20 percent seem higher. The CBO in this report thus inadvertently helped Fleischer overstate reality by using its odd construct of “before-tax” income (which again actually is after the transfer payments funded by taxes), and also by treating the refundable portion of the earned income tax cr (and other refundable tax crs) as negative taxes, rather than as income. (This presentation is particularly odd, because as explained earlier it conflicts with how refundable tax crs are presented in the federal budget.) This further drives down the aggregate tax burden (as presented in this report) on lower income Americans. Again, if you want to talk about tax burdens and progressivity, you should do so before taking into account tax refunds that exceed taxes paid, because those are transfer payments by another name. Location 5400
Note: This is important, as you get a distorted idea of tax rates if you include the bottom 20th percentile after transfer payments, as opposed to before, which would indicate market incomes, not total income after tax transfers.
You can see this problem by looking at movements in the Gini index for different measures of income over time. Between 1979 and 2007, the Gini index for pre-tax market incomes (the right starting place, as it happens) increased by 23 percent, which means that more and more of total national market incomes were captured by the highest earners. But the Gini index for income after all transfers and taxes increased even more, by 33 percent. Because after-tax and transfer income inequality rose more quickly than did market income inequality, this means that taxes and transfers were doing less at the end of this period to address market income inequalities than they were at the beginning. Location 5428
Government is the things we decide to do collectively, rather than individually through market decisions. Spending is the prime mover of government; it is the first step in much government action, and it determines how much we will be asked to chip into the collective pot to pay for all the goods and services that government purchases. Location 5501
The late David Bradford, the dean of public finance economists of his generation, was fond of a joke that he constructed to illustrate this hidden hand of government spending that lies buried in the tax code. He proposed a marvelous new way to cut taxes without affecting government services: instead of wasting tax revenues on military equipment purchases, Congress could implement a “Weapons Supply Tax Credit,” under which arms manufacturers would receive a tax credit (a dollar for dollar rebate against their income tax bill) for delivering to the US government weapons meeting certain specifications. The amount of the credit would equal what Congress might formerly have spent on purchasing those weapons. Then Congress could announce that, through this “targeted tax relief,” taxes had been slashed without jeopardizing our security or increasing the deficit. The joke, of course, is that nothing at all would have changed; the federal government still would obtain the same weapons and incur the same economic cost to do so. Our governmental accounting for the transactions, however, would differ. Instead of recording government revenues from taxes collected and government expenditures for national defense, we would just report net lower taxes collected. Before, the government took in $1,000 and spent $100 on fighter planes. After, the government would record just $900 in revenues, and some “free” planes would arrive at the Air Force’s doorstep. On paper, the government had gotten smaller; in reality, it would be as large as ever. Bradford’s joke was meant as a gentle parody to illustrate the empty formalism of our categories of government revenues and expenditures. When the government subsidizes people or businesses by writing them checks, we all recognize that intervention as government spending. When the government subsidizes the same people or businesses to the same extent by giving them a targeted tax break, that action often is mischaracterized as “keeping what’s yours” or “smaller government.” Location 5532
Note: This is a monster, huge passage, and surely will be a bear to review. But… It helps to illustrate an important point pertaining to spending, welfare, Redistribution, and size of government. Chris and his “I gave you a tax break, how much did I spend?” the answer is the same in accounting terms.
This “exclusion” from employees’ incomes of wages paid in the form of employer-provided healthcare will cost some $143 billion in forgone income taxes in 2014 alone,10 but even these enormous costs understate the true picture, because they do not include the payroll tax revenues forgone by the exclusion, which amount to more than $100 billion every year.11 In short, the total value of this government subsidy for one mode of healthcare delivery is on the order of $250 billion per year.12 Yet precisely because this subsidy is delivered as an income “exclusion,” its recipients are largely unaware that they are the beneficiaries of a hidden government handout. Location 5622
In a nutshell, PAYGO rules require that every new tax cut be paired either with an offsetting tax increase elsewhere or a decrease in entitlements programs of equivalent value. Bizarrely, relative to most people’s expectations, Democrats reintroduced the fiscal discipline of PAYGO when they took over the House of Representatives after November 2006, and Republicans repealed the rule as soon as they became the majority after the 2010 elections. Location 5667
Note: Fiscal Responsibility
If I were to propose that the federal government should give higher-income Americans cash subsidies to enable them to buy bigger homes, my sanity would be suspected, but when we do exactly the same thing in the form of various tax deductions for housing, the thought never crosses most of our minds. Location 5740
Charitable giving is not a substitute for government social services, as the objects of donors’ affections typically reflect the donors’ backgrounds, business connections, and desires for social status. To be blunt, the money pours into the nation’s greatest private universities, opera companies, medical centers, and art museums, but the poor and disenfranchised from races or backgrounds very different from those of the largest donors are infrequently the beneficiaries of commensurate largesse. There also is an argument that charitable support is in some respects more degrading to recipients than government income maintenance programs; such support certainly is less reliable, as donors’ preferences and financial resources fluctuate. Location 5952
Note: Beautiful takedown of Jon’s common charity argument and other such nonsense
When you set out to buy a house, you think carefully about how big a house you can afford, but in the end you are not poorer for the money you spent, because you acquired something useful, namely, a new home. Why then in fiscal debates do we look only at the cost of government, and not at the collective goods or services we thereby acquire? Unsurprisingly, once we phrase tax policy as a collective exercise in fiscal masochism, our threshold for tax pain turns out to be very low. Location 6010
The sovereign…[has] the duty of erecting and maintaining certain public works and public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do more than repay it to a great society. —ADAM SMITH, The Wealth of Nations, Book IV, Chap. IX. Location 6019
Note: Libertarians, tea partiers, countless others on Facebook, parties, stores, or any public place. When it is inevitably claimed the “Free market” cities do it better and there is no need for government, when you are asked what government can do that markets can’t., in the midst of the countless scores of examples, so many as to bury us and confuse and overwhelm, instead of fumfering inside of a sea of knowledge, you can say it better than this. Just use this.
This chapter focuses on the role of government as an investor in public goods, both in respect of classic “hard” infrastructure investments and in respect of investments in science and education. It analyzes the commercial as well as social returns to public investment and suggests how a national infrastructure bank can help to finance the investment opportunities that surround us. Chapter 11 argues for a more comprehensive understanding of what insurance is all about, and how government (that is, all of us, acting together) is well situated to offer social insurance that is cheaper and more comprehensive than what private markets can provide. Location 6029
Government regularly invests in infrastructure (large-scale physical capital projects, like roads, sewage treatment plants, or hospitals), and in human capital, through public education. Public investment yields high returns, both in straight economic terms and in respect of the ultimate purpose of government, which is the happiness of society. These investments complement rather than compete with private markets, and do not get made if one relies on private markets alone. Location 6043
Public investment in the United States is now at its lowest level since the demobilization following World War II (see Figure 10.1). On a net basis—that is, taking into account the depreciation (wear and tear) on our existing investments—we now are investing almost nothing in public infrastructure, even after adding state and local government investment with federal investment. Location 6046
Note: So much for Government spending like a drunken sailor
Since the construction of the Erie Canal (financed by the State of New York, notwithstanding Thomas Jefferson’s famous objection that the project was “a little short of madness”), government has played a large role in infrastructure investment in the United States. The grant of public lands to nineteenth-century railroad companies to finance their transcontinental expansions, the Hoover Dam, the Tennessee Valley Authority, and the interstate highway system are all familiar examples of federal investment in critical infrastructure. And of course today water and sewage systems are most commonly owned by state and local government agencies, as is much electricity generation and distribution. Location 6069
The United States’s inadequate investment in civil engineering infrastructure results in large hidden costs and dangers. According to a McKinsey study, our demand for roads exceeds capacity by 43 percent.9 That study further estimated that 15 percent of our roads are in an “unacceptable” condition. Congestion resulting from our excess demand and poor road conditions results in $101 billion per year in excess fuel costs and time.10 Additionally, the more time we spend on lower quality roads makes our transportation network one of the deadliest, with 33,000 Americans killed in 2010—a fatality rate that is 60 percent above the OECD per capita average.11 Congestion and delays in our airports resulted in costs of almost $22 billion in 2012, which at current funding levels are expected to rise to $34 billion in 2020. Meanwhile, congestion on rail lines is costing the economy an estimated $200 billion per year. One of every nine bridges is rated as structurally deficient, and over 4,000 dams are classified as deficient, which includes 2,000 “high-hazard” dams. Location 6123
It may be that the SSC was simply too gargantuan in concept, or too poorly managed, to be seen to completion, but the fact is that the United States for decades has enjoyed tremendous private sector productivity gains through serendipitous spinoffs from large-scale pure research projects, including the large ecosystems of scientists that surround the Locations of the projects. We will not know for a generation if the construction of the Large Hadron Collider will have marked the beginning of the end of US dominance in physics research, but the fact is that there is little by way of new “Big Science” projects in the United States to which one can point. Location 6162
Pure research does not simply satisfy idle curiosity; it also opens up whole new fields of applied work. Almost by definition, those practical applications are unknown at the start, but they have followed all the pure research that has ever been done to date. By failing to invest in appropriate “Big Science” projects, the United States puts at risk one of the reasons for the great success of the American economy over the last several decades. Location 6177
Note: Government, science, research
Another example of important infrastructure not encompassed by civil engineering is our system of polar-orbiting weather satellites run by the National Oceanic and Atmospheric Administration (NOAA) and the US Air Force. These satellites gather vital data on weather patterns that feed into complex models used by meteorologists to predict both mundane changes in the weather as well as life-threatening natural disasters. The average person who gets weather information from the nightly news likely does not realize the importance of government-run satellites in gathering the relevant data on which all weather predictions rely—including those of private services. In fact, so expensive are such endeavors that the United States has entered into partnerships with other countries to spread the costs. Location 6180
Note: Government, science, funding, research
If a provider cannot exclude freeloaders from the use of an asset, we can expect that private capital will underinvest in that asset class, even if it is useful to society at large, for the simple reason that private investors will not be able to capture the full economic returns to their investments, and therefore will stop investing well before the classic microeconomic equilibrium point, where the marginal cost of the next profit just equals the marginal returns therefrom. This is a very important point: if private entrepreneurs do not capture all of the returns from a class of investment, the total private pool of such investments will fall short of the optimal level from the perspective of society as a whole. Most economists therefore agree that public investment of one kind or another is justified in the pursuit of public goods (perhaps more accurately, non-excludable goods). In some cases, like research and development, public investment often takes the form of subsidies (in the United States, in the form of tax credits); the theory is that the subsidies compensate the firm for its inability to capture all of the value created by a new discovery as it ripples through the economy. In other cases, like roads and bridges, the more straightforward way to get to the socially optimal level of investment is through government directly funding and owning the asset. Location 6246
The same rationales for public investment suggested earlier of lower cost financing, longer investment horizons, and absence of financial profit markups apply generally to all public infrastructure investments, including those in support of public goods. In addition, public infrastructure investment often yields “positive externalities,” which just means that the investment benefits all of us indirectly as well as directly. If, for example, a new commuter rail line improves air quality by reducing automobile traffic congestion, that is a positive externality. A private investor contemplating building the rail line has no reason to include that indirect benefit in its profit and loss calculation, but government effectively can. One important positive externality is that infrastructure investment means good quality construction jobs. As chapter 3 described, the United States today has a disappointingly low overall level of employment. This excess labor capacity erodes personal dignity and family structures, reduces individual welfare, and lowers national consumption, thereby holding back the overall economy. We can talk until we are blue in the face about the New Economy and knowledge-based jobs, but they are not for everybody. Infrastructure investment puts people to work in productive ways, and thereby supports a broader and more prosperous middle class. The jobs are there whether the investor comes from the private or public sector, but government fairly can take into account the positive spillovers from creating useful and remunerative jobs in judging the viability of a project. Location 6256
The larger point simply is this. The standard economic definition of a public good (one that is non-rival and non-excludable) is not very helpful in the modern world, where the categories themselves occupy continuums, and where there are many ways in which the state and the private sector can interact. The more useful distinction is that any activity that requires the direct application of the power of the state in a way not applicable to all private actors has an element of a public good in it. That state power might be the taxing power, or condemnation power, or the grant of an easement in property owned by the state, or a dozen other forms of government authority. In each such case, however, we cannot pretend that we are dealing with just another instance of private markets in operation, Location 6316
Note: It’s just not as cut and dried as the Right would have you believe.
In general, however, it seems sensible to start with a presumption in favor of government investment and ownership. This presumption aligns major incentives most neatly—that is, avoids the conflicts of interest that bedeviled the British lighthouse experience. Government, unlike private market participants, further has sufficiently broad societal goals, ample resources, and a lengthy investment horizon to address three major concerns associated with private investment in infrastructure: natural monopolies, large positive externalities (ancillary benefits), and high capital costs with deferred returns. Location 6326
Note: Government vs Private. Great passage on Government vs Private
The case for privatization is straightforward when dealing with steel companies, or airlines, or other businesses that generally are conducted through commercial firms, and where no natural monopolies are involved. But once one moves to operations designed to deliver or protect public goods, things get much more complex than these sorts of market triumphalist slogans would suggest. For example, in a long investigative report published in the London Review of Books in 2011, James Meeks examined the postal service in the Netherlands, where four different firms delivered mail to homeowners.32 Mailing costs had plummeted for large businesses, but the reason in large measure was that the new mail carriers were paid on a piecework basis, with individual carriers sorting mail on their kitchen counters, or beds, and delivering the mail for compensation in the neighborhood of €3/hour, far lower than the statutory minimum wage. In one case described by Meek, a carrier for one of the new discount operators had simply given up, and hid dozens of cartons of undelivered mail in her apartment. It is not clear why the cost savings to bulk mailers of catalogs, at the cost of the disappearance of middle class jobs and missing deliveries, necessarily would enhance the happiness of society. Location 6336
For example, if following the privatization of the Royal Mail, domestic mail deliveries in the United Kingdom take on average one day longer to reach their destination, but the Royal Mail’s profits are significantly higher compared with its pre-privatization results, is that a step forward or backward for the happiness of society? Owners of the Royal Mail’s stock might in this case be pleased, while pensioners in remoter corners of Britain would see their welfare reduced, in ways not ordinarily measured in firm or national accounts. Location 6351
Beginning with the work of David Aschauer (then at the Federal Reserve Bank of Chicago) in 1989,35 economists have closely studied whether public infrastructure investment yields measurable economic returns in the form of higher productivity and wealth. Aschauer calculated very high returns to private productivity from public infrastructure, and further estimated that the growth-maximizing amount of public capital stock (i.e., investment in infrastructure) is 61 percent of private capital stock.36 Yet the average level of investment among the 48 states in that study was 16 percentage points lower than that optimal amount. Aschauer’s early work showed such high returns to public infrastructure investment that one persistent strain of criticism has been that his results were “too good to be true.”37 That might be the case, but more recent research continues to show substantial productivity returns to public infrastructure investment, in the range of 8 to 10 percent.38 One 2008 paper, for example, reviewed 76 earlier studies in this area.39 The consensus results are surprising; as the 2008 meta-analysis concluded, “the true output elasticity of public capital is positive and significant.”40 Another 2012 review of the literature concluded, “In fact, the new research shows that public investment is at least as productive as private, and several strands of the research seem to indicate that it is substantially more productive.”41 In other words, public infrastructure investment is a highly profitable business for a society, even when social returns are calculated in the narrow sense of higher measurable productivity. Location 6383
Of course public infrastructure is not inevitably productive—we can expect poor returns from building expensive bridges to remote Alaskan fishing villages—but on balance it is surprising just how large a productivity gain follows from even halfway sensible infrastructure investment. The underlying explanation is simple: public investment is complementary to private investment, and thereby leverages the returns obtained by private investors. Public investment in roads, for example, both reduces transportation charges as an intermediate cost of producing goods and increases the productivity of trucking firms; truckers and producers (and ultimately consumers) in turn divide the resulting surplus. Location 6399
These risks include the risks inherent in partnering with the public sector, and therefore the requirement of high returns to investment, the very long lead times of projects (another kind of risk), and the very large sums of money involved (a third risk, exposing early investors to the uncertainties of future investments to complete a project). Location 6406
Note: Problems with incentives for public goods by private investors
The total social returns to public infrastructure investment greatly exceed the measurable gains from such investment for private productivity (although to emphasize, those alone are very substantial). Cleaner air, more attractive parks, or simply a faster commute, thereby enabling more time to be spent on leisure, are all positive social returns that enhance the happiness of society, but that are not captured in standard productivity measures. Location 6418
Note: Public good, extra market goods, outside of market signals
So, too, a commitment to public infrastructure investment implies a steady stream of remunerative and dignified work for large numbers of Americans who are not destined to be software engineers. These good jobs in turn have positive multiplier effects associated with them, because as those workers spend their wages, their spending provides income for those who provide goods and services to them, and so on. So in a narrow economic sense, well-chosen infrastructure yields a triple benefit, in the form of the returns to the investment, the returns to labor expended to build the investment, and the multiplier effect when those higher incomes are spent. And on top of this sits the more intangible social and psychological values that come from offering thousands of Americans new high-quality jobs. Location 6421
To put matters crassly, which is better for both the wealth and the happiness of our nation: a small number of immensely wealthy Americans employing the underclass as dog walkers and topiary trimmers, or a larger commitment to publicly financed infrastructure that yields both direct productivity enhancements and a more robust middle class, through the jobs those projects create? Adam Smith in fact discussed the trickle-down benefits of the idle rich hiring poorer members of the society to perform menial tasks, but why not a flood instead of a trickle? That is, why not collectively hire fellow Americans to perform work that yields real productivity gains, and hence future wealth, rather than more perfectly manicured lawns? Location 6427
Note: Legendary. Level 11. Public goods. Liberal vs conservative. Well being. Republicans vs Democrats.
In sum, public investment in infrastructure yields positive productivity returns, because those investments are complementary to private investment, and because private investment cannot by itself supply the projects, for the reasons described above. For this reason alone, a country that relies on the private sector to fund investments in infrastructure will systematically underinvest. When one adds to this all the positive externalities of public investment—the ancillary returns to society, from good quality jobs to non-monetary benefits from the investments to the smoothing of investment cycles—the case for public investment in infrastructure is extremely powerful. Location 6436
Note: One of best passages on Government, Public goods and investment ever.
In every country, investments in human capital are understood as properly the purview of government as investor, because every member of a society deserves a comparable level of investment, and because a broad commitment to public education (to investment in human capital) maximizes the potential of each citizen. As in the case of public infrastructure investment, public investment in human capital yields positive private productivity returns in the narrow sense, but equally important, happiness returns as well, because education is the key both to a productive career and to our ability to realize our native endowments, with all the satisfactions that implies. The middle class cannot buy its way out of poor public education, but their children when they mature will compete on a global stage in more and more instances as the world’s economy evolves. Location 6540
Student loan programs make college affordable in a technical sense for some students, but they then graduate with tens of thousands of dollars of debt, which hangs over their future, dampening their appetite for entrepreneurial risk-taking at precisely the point in their lives when such risks should be least costly to them. Location 6690
Public school is one of the few places in life (standing in line at the Department of Motor Vehicles is another) where we are thrown together with people of very different backgrounds and incomes, all of whom have just as valid claims to being American as we do. This is something to treasure, and therefore to work to preserve. Location 6695
The reality is that many private schools across the country are relatively recently established second-rate institutions affiliated with local religious organizations, offering education that is no better—and often worse—than that of local public schools. Whatever advantages these private schools show in terms of standardized test scores are attributable to the relative affluence of the families who send their children to them, not to some pedagogical magic inside their halls.72 Many of these private schools really serve as tribal havens for the families that patronize them, assuring that their children will mingle only with children of similar socioeconomic, and in most cases religious, backgrounds. To encourage such enterprises as large-scale alternatives to public education is to promote the further tribalization of American society more generally. Location 6705
To reiterate, education is investment by another name—in this case, investment in the human capital that will power our country’s economy in a few decades, and pay for the retirement benefits of those old enough to read this book on its publication. In this regard, consider the OECD’s conclusion as to the long-term significance of our mediocre education system: The international achievement gap is imposing on the United States economy an invisible yet recurring economic loss that is greater than the output shortfall in what has been called the worst economic crisis since the Great Depression….A recent study…suggests that a modest goal [of improving as much over the next 20 years as some countries have done in 10] could imply a gain of $41 trillion for the United States economy over the lifetime of the generation born in 2010.74 Location 6729
uncertain prospect of his bakery possibly burning to the ground. Location 6777
Note: Good passage highlighting the impossibly of any one person realistically taking into account and preparing for any possible
The government of every developed economy offers a range of insurance products that are baked into that country’s social compact. In the United States, Social Security, Medicare, unemployment insurance, and the Supplemental Nutrition Assistance Program are all examples. These instances of social insurance have in common the themes that every citizen is in the insurance pool (although of course not every citizen claims benefits at any given point in time), that premiums (which may or may not be determined through actuarially accurate insurance principles) are collected through the tax system, and that the purposes of the programs are to mitigate the harshness of unalloyed private outcomes—by offering minimum income to the elderly, a food budget to the impoverished, and so on. Social insurance in fact operates as true insurance, in that it relies on risk shifting and risk pooling to turn egregiously bad potential outcomes into more tolerable ones, at the cost of annual premiums collected through the tax system. Location 6835
Countries employ social insurance as a key component of the social compact because most people believe that to be a member of a society is to have an interest in the welfare of other members of that society. This impulse can be expressed in ethical terms, but it also is based on straightforward economic logic: healthy and adequately nourished citizens are more productive, and will contribute more to the prosperity of society, than will sick and emaciated ones. Finally, in many cases, such as health insurance or insurance against “absolute inadequacy,” insurance is most efficiently delivered as mandatory social insurance (that is, as a government program), because this effectively addresses problems of adverse selection. Location 6856
Second, regardless of foresight, some unalloyed market outcomes are simply inconsistent with the long-term interests of society—as when a young worker is suddenly fired because her employer has gone bankrupt. That young worker has not yet had time to build up a nest egg of her own, but through social insurance (in this case, unemployment insurance) the worker can pool the financial risk of an uncertain but devastating outcome (she loses her job through no fault of her own) with the same risk faced by all other workers, and thereby accomplish risk shifting and risk pooling. Private unemployment insurance would face large adverse selection problems, but because the unemployment insurance pool is universal, social insurance can complement private insurance markets by offering a useful product that private insurance firms cannot, at least on commercially reasonable terms. Location 6865
Third, social insurance need not be priced on strict actuarially determined terms. Indeed, many social insurance programs, such as Social Security, seek to enhance the welfare of society by structuring benefits or premiums (whether called by that name, or “contributions,” or “taxes”) on some sort of progressive schedule, so that less affluent citizens end up with larger insurance benefits than their premiums would have purchased in an actuarially fair program. Location 6871
Social insurance directly implicates the issue of moral hazard—the concern that insureds will behave more carelessly or lazily in the presence of insurance than they would in its absence. This is the essential point of political contention today over many forms of social insurance—the argument that citizens have chosen not to contribute to their own advancement (and indirectly to that of society as a whole) because they prefer the comfortable hammock of indolence made possible by social insurance. This issue was discussed earlier in the book in the context of unemployment insurance, and is discussed again at the end of this chapter. The short answer is that the argument that members of society look forward to the hammock of social insurance benefits in lieu of exerting themselves fails on careful examination, when the purported hammock turns out to be closer to a bed of nails. Location 6875
Note: Now we are getting to the sort of things that change your life and ability to articulate the point of Liberalism better than everyone.
Social insurance by definition contains an “individual mandate” (the obligation to participate in the social insurance program) whether we are aware of it or not, because the insurance is hard-wired into the social compact. Despite all our collective agitation over the Affordable Care Act’s individual mandate, as if such a mandate were an unheard-of thing, it is worth remembering how many insurance mandates we have been subject to all along. For example, in almost all states you cannot own and operate an automobile without holding automobile liability insurance. (New Hampshire and California allow you to avoid such insurance by making alternative arrangements with the state to assure your ability to meet claims.) Your mortgage lender will require you to carry fire and other casualty insurance on your home, and in many cases might require the assignment of a life insurance contract as well. And of course one is required to participate in Social Security and other government insurance programs. In the ordinary course of modern existence you are not allowed to be wild and crazy, accepting all uncertain risks to which you might be exposed. Location 6882
Note: Back to not even knowing what to highlight, because it’s all game changing. But this is for Obamacare and the individual mandate. We have it for cars and mortgages too.
Contemporary political discourse’s fixation over moral hazard in the context of social insurance—of course usually phrased less genteelly, by relying instead of “moral hazard” on terms like “mooching” or “taking”—has completely obscured a far more fundamental point, which is that insurance, whether private insurance or social insurance, has tremendous social value. Insurance mitigates the catastrophic outcome—say, the financial loss incurred when one’s cargo goes down with a ship sunk by storms—and replaces that outcome with a known alternative that can be priced and accounted for in the calculus of whether to undertake the voyage. Location 6898
The same is true with social insurance, particularly once one sees that the progressive rate structure of the personal income tax functions in part as a form of social insurance premium (see chapter 12). Knowing that the tax-funded “social safety net” exists, a young person takes a gamble, and sets out to develop the next great app. She knows that if she succeeds, her returns will be reduced somewhat by a tax bill (the implicit insurance premium), but she also knows that if she fails miserably she will not starve in the streets. Because her downside is now tolerable, she takes the risk with her time and her life that otherwise would have been foolhardy. Location 6917
My simple summary of the conditions required for efficient insurance markets reads like a bill of particulars making the case that wholly voluntary private healthcare insurance markets either will fail or will include only a small fraction of citizens. There are good reasons that the fourteenth-century Genoese invented modern marine insurance, but not private healthcare plans. Location 6932
But the most consequential government subsidy is rarely mentioned or even noticed: government for decades has directly subsidized individuals’ costs of employer-provided healthcare, to the tune of roughly $250 billion every year in income and payroll tax forgiveness—sums far greater than the annual costs of the subsidized insurance coverage provisions of the Affordable Care Act. Location 6940
In 2009, for example, only about 81 percent of Americans (including seniors) had basic healthcare insurance coverage, putting us in the embarrassing company of Turkey. Somehow 30 other OECD countries were able to provide all or almost all their citizens with healthcare coverage without all rolling down the slippery slope into socialist hells. Indeed, with the exception of Germany, all relied almost entirely on public insurance arrangements of one kind or another to do so Location 7058
No peer country allows healthcare to operate in the Wild West sort of atmosphere that still dominates US provisioning and pricing. Location 7070
The National Academy of Science in 2013 published a book comparing health outcomes in the United States to those of 16 other high-income countries. The study’s conclusions are signaled by its title, U.S. Health in International Perspective: Shorter Lives, Poorer Health.18 That book dissected in detail the mortality statistics reflected in Figure 11.3. A disproportionate number of Americans die prematurely from accidents and homicides, for example, but the most powerful indictment of our overall healthcare system is the number of Americans who die from communicable diseases, given that our per capita medical spending dwarfs that of any other country (see Figure 11.4). Location 7100
Note: There you go. So when they start in on our violence, obesity and diet, or some other form of the victim blaming technique, shut it down right then and there by pointing out that we excel in communicable diseases. And you don’t choose to “get” a disease. (They may try an STD ploy but it won’t get far in life expectancy argument I don’t think). Thus shores up all avenues of escape.
FIGURE 11.4 Mortality from Communicable Diseases in 17 Peer Countries, 2008 Location 7107
Note: You need to make sure to get the graph that goes to this
Even in a world of ideally designed healthcare insurance, our healthcare programs would be very expensive, because our wealth enables us to spend heavily here, and because our unwillingness to allow government to make any decisions that could be characterized as rationing healthcare or regulating prices condemns us to do so. Nonetheless, our current patchwork delivery systems make things much worse along two margins: we waste almost unimaginable sums of money, and we have the terrible overall outcomes that follow from incomplete healthcare insurance coverage. Location 7119
We don’t really have a health care delivery system in this country. We have an expensive plethora of uncoordinated, unlinked, economically segregated, operationally limited microsystems, each performing in ways that too often create suboptimal performance both for the overall health care infrastructure and for individual patients. Location 7130
And as the New York Times demonstrated, hospitals’ “chargemaster” billing systems produce starting bids for routine products, like a bag of salt water (saline solution) used to rehydrate a patient, of 100 or 200 times the manufacturer’s price, not including separate charges for administering the water, already priced at the level of a first-growth Bordeaux.29 This is what happens when private monopolies price goods and services that have existential importance to their consumers. Location 7166
Note: This passage may not do a lot on its own. But in the context of the paragraphs around it, it can be quite helpful
The OECD recently attempted to analyze why healthcare costs are so much higher in the United States than elsewhere, and basically found that medical services cost more at every stage: in-hospital or outpatient, pharmaceuticals, or administrative expenses—all outstrip OECD norms.30 We actually have far fewer doctors per 100,000 residents than do other countries, we have fewer hospital admissions, and the average hospital stay is much shorter than the comparable statistics for most other OECD countries. Where we excel is in charging a lot of money, and in using a lot of machines. A famous article in the academic literature summed things up in its title: It’s The Prices, Stupid. Location 7170
Note: Again, our outcomes aren’t worse because we get fat and don’t exercise. We actually have fewer doctors, go to the doctor less, and stay shorter. We really just get less for more.
Both Medicare and the Veterans Administration have far lower administrative costs than does the private insurance sector, among other reasons because they do not have to negotiate with every provider in their network. They also are not at risk of gaming by other payers in the healthcare chain trying to shift costs to them, because they operate what are effectively single-payer (or in the case of the VA, single-provider) systems. Moreover, because they are open to all individuals who meet the relevant standards, neither program is at risk of adverse selection concerns, and therefore does not have to behave as if it were in a state of war with its customer base. But the biggest cost-saving advantage that a single-payer system like Medicare has over the multiplicity of private insurers in place today is that the single-payer system is itself a monopsony, and so can negotiate reasonable prices. That is exactly what Medicare does today. Location 7187
In summary, healthcare fits poorly with the general conditions for thriving private insurance markets. In turn, the unavoidably fragmented nature of healthcare, attributable to the fact that it is not a “tradable good” (as books sold by Amazon are), is a perfect breeding ground for monopoly sellers (the healthcare providers) and price-indifferent intermediate buyers (the insurance companies). If Karl Marx were alive, he would use our fragmented healthcare system, with its trillion dollar annual waste, as the paradigmatic example of a society so mesmerized by capitalist slogans that it not only sold itself the noose with which to hang itself, but stuck its neck in the noose without the slightest external provocation. Location 7226
Healthcare insurance is different along every margin. The insurance is not obtained incident to a larger financial objective, but to fund an existential necessity. Underwriting exams cannot identify every defect, and many expensive claims relate to conditions that take years to present, and then become chronic conditions. This begs for gaming through adverse selection. The good being insured—health—is uncertain in scope, and the pathways to restoring it (the appropriate medical protocols for each situation, corresponding to the measure of indemnifiable loss) are not themselves well defined at all, so that the same condition can be addressed through interventions of widely different cost, depending on entirely endogenous circumstances (for example, your doctor’s relative predilection for ordering CAT scans). Adverse selection and moral hazard are present at every turn, because for an insured this insurance is the ultimate objective, not an incident to a larger objective, like running a profitable business. And the indemnity—the provision of medical services—is delivered in hundreds or thousands of fragmented local markets dominated by monopoly sellers (the preferred provider organizations and other medical providers). Without more, these are not conditions under which one would anticipate robust private markets. Location 7239
Note: There is a lot here and it’s hard to know what to grab in this chapter on Healthcare but this, and surrounding paragraphs can be fitted and customized quote well to refute a great many arguments for purely private Healthcare
More important, society as a whole has already undertaken to write some poorly defined base level of health insurance, in the form of emergency rooms open to all. In light of all the unknowns suggested above, private health insurance will always leave a large fraction of the population without explicit insurance. But this in turn weakens society, because it exposes the unlucky to bankruptcy risks having nothing whatsoever to do with their willingness to work or similar nostrums. Location 7253
Note: A good one
If the purpose of society is to advance our collective welfare (which encompasses our collective prosperity as one component), we do so most straightforwardly in this area by offering healthcare insurance to all—just as virtually every other country in the world does. Social insurance addresses adverse selection, because by definition everyone joins in the insurance pool. Socially provided healthcare insurance can have modest administrative costs, because we do not have to weed out the “uninsurable” through the underwriting process, and because we have already in place a very low-cost mechanism for collecting the explicit or implicit premiums: the tax system. Socially provided healthcare insurance is not a profit-making venture, and therefore does not need to earn positive returns beyond the loss experience of the pool. And socially provided healthcare insurance responds directly to the monopoly power of locally fragmented healthcare markets. Location 7256
Note: Strap in. We’re off to the races now. This is gonna be a hell of a few pages
The benefits of a healthy population are almost too obvious to recite. A better national health quotient would save resources that today go only to staunch literal or metaphorical bleeding, thereby permitting the redeployment of those resources to more productive uses. And healthier citizens are themselves more productive than sickly ones. So along both margins a healthier population yields a more productive economy, as well as happier citizens. Location 7263
Note: And here it is. A bomb of an argument for universal Healthcare and even setting up how other poeple being healthy makes your greedy ass better off if the only thing you will listen to is how it affects your selfish fat ass.
The same is true of wasteful healthcare insurance. Spending money that we do not need to spend to restore us collectively to a state of health we could have obtained more directly and cheaply is not “good” for the economy, although it might be good for those exercising monopoly or monopsony powers inside this sector. From a social perspective this wasteful spending and incomplete protection of our health represents a diversion of resources from the higher and better uses to which we each individually would have put our portion. Our ersatz patchwork “private” healthcare insurance markets thus are not an engine of economic growth, but rather randomly distribute large losses throughout the economy. Location 7275
Note: Very good template to use for countless applications where sinkholes and gravity wells syphon money and labor and time from more productive uses. Insurance, paperwork, student loans, credit card fees, medical costs going to nothing, fines, and all kinds of inflated useless shut are examples.
We do not pursue the path of our society’s happiness, including our collective prosperity, by pursuing abstractions like the sanctity of markets if by doing so we waste $1 trillion or so every year in healthcare spending, and further leave tens of millions of Americans without adequate healthcare coverage, thereby condemning them to worse long-term health outcomes and to risks of bankruptcy. To the contrary, the markets here are telling us something quite clearly, which is that healthcare for all members of a society is a load that private markets cannot lift alone. And what is true of healthcare of course is even more apt for broader forms of insurance against the vicissitudes of life. Location 7280
Note: Level 12. God. Maybe not that high but top 10, if not 5 in the book. Just a beautiful passage on the market failure of Healthcare. Markets are telling us that they can’t do it alone and we ignore them because markets.
The alternative—a national single-payer system—is so obvious, and so powerful in its logic, that it beggars belief that the Obama administration abandoned it in the debate leading up to the Affordable Care Act. There is a reason, after, all, why virtually all other developed countries rely on this solution (whether in those words, or through combinations of policy instruments that have the same effect), and why the United States itself relies on it for all its seniors (through Medicare) and all its veterans (through the VA system, which actually is a single-provider system). At one stroke, the fundamental problem of adverse selection disappears, because all members of society participate. Premiums are easily collected through the existing tax administrative machinery. A patchwork of largely monopolistic local sellers now faces a monopsonistic buyer. Operating administrative costs are reduced, as we see today in Medicare administration. There is more than enough value on the table here to compensate the medical community fairly and still reap hundreds of billions of dollars of savings every year. Location 7286
For all the good that the Affordable Care Act may have done in extending the number of Americans with some form of medical insurance, it did very little to address the underlying fiscal crisis of healthcare, which is that our current fragmented form of delivering health insurance is unaffordable. Not even the United States can afford to squander $1 trillion a year in the name of free market sloganeering, particularly in this unusual arena, where free market principles cannot help but fail. Here is an instance where more government, in the form of a national healthcare insurance for all, would have meant both better outcomes and greater wealth—in short, a happier society. Location 7294
FIGURE 11.5 Total Public Social Spending as a Percentage of GDP, Excluding Social Security and Healthcare (2009) Location 7324
Note: Get the chart for this
Chapters 2 and 7 already have described the best-known examples of social insurance and ancillary social investment programs, but to review, we can divide the standard forms of these programs outside the realm of healthcare into old age assistance (Social Security) and income support programs. Income support in turn can be subdivided into “making work pay” programs (principally the earned income tax cr), unemployment insurance (another form of insurance directly tied to work), and finally anti-destitution programs like the Supplemental Nutrition Assistance Program and Temporary Assistance to Needy Families, where the relationship to work is more attenuated. Location 7328
Unemployment insurance is a true social insurance program, designed both to ameliorate hardship and to have useful countercyclical effects from a macroeconomic perspective. Location 7366
Finally, we have five anti-destitution social insurance programs (excluding healthcare programs for the poor), of which the two best known are the Supplemental Nutrition Assistance Program (food stamps) and Temporary Assistance to Needy Families.42 (Pell Grants should be viewed as social investment in education, not insurance.) In 2012, deep in the Great Recession, these five federal social insurance programs had a combined cost of about $200 billion. In constant 2012 dollars, they are expected to cost less than that in 2023. These programs represented about 5.5 percent of federal government outlays in 2012. Location 7371
Note: So 5 percent of your taxes go to income security. There us a lot more to bitch about.
Fincher’s description of social insurance programs as “stealing” is beyond the pale, but it is the logical downward tumble of a slightly more highbrow term that dominates both political discourse and the public finance literature. That term is “redistribution.” Location 7388
The progressive movement in America has made three fundamental strategic errors over the last several decades. The first is its failure to embrace explicitly and forcefully its best philosophical vantage point, which is the awareness of the importance of brute luck in life’s outcomes, which in turn shapes policy. Progressives allow themselves to be caricatured as champions of moochers or takers, when in fact their point should be that, of course hard work is to be admired and encouraged, and of course great material success by itself is not problematic, but brute luck has more to do with both great successes and with lives of deprivation than we like to admit. We do not choose our parents, or our hair color, or our intelligence, or height, or any other birth attribute; nor do we control every twist and turn of our daily fortunes. When we recognize the contingent nature of our own outcomes, we also recognize our own face in that of our fellow citizens. Location 7390
Note: Progressivism, well explained
The premises and implications of the word “redistribution” are fundamentally flawed. First, “redistribution” implies a natural order—a legitimacy—to the market distributions that are at risk of being distributed a second time. It is easy, however, to come up with examples of unalloyed market distributions that would give us pause. This is why local electricity companies and other utilities are regulated everywhere, and without objection from most of us: we do not accept the market distributions that would follow from the unalloyed application of monopoly powers. Location 7431
At a deeper level, moral philosophers and ethicists for millennia have concluded that market outcomes depend to a substantial extent on fortune—on luck—and as I discussed in chapter 2, in the context of Machiavelli, a claim to outcomes resulting from luck is a highly contingent one. This is a theme best addressed by highbrow moral philosophers, most famously in the dueling books of John Rawls and Robert Nozick, but the simple point for twenty-first-century fiscal policy is that good fortune breeds good fortune: that is the point of all the inequality research laid out earlier in this book. Children of the affluent grow up in a more language-rich environment, go to better schools, and are surrounded by more parental educational investment in computers and tutors than children of the poor can hope to obtain. In what way, then, are the relatively superior outcomes that those fortunate children enjoy as adults the universe’s entirely natural distribution of things? Location 7440
Note: Redistribution, luck, just desserts, efficient market hypothesis
We do so not only out of moral compunction, or to avoid bread riots in the streets, but because doing so enhances the happiness and prosperity of society. If we want to increase our collective prosperity, we need to field adequately fed children and adults, so that they can devote themselves more effectively to improving their situations within our market economy, rather than being reduced to eating once a day and hunting squirrels to keep themselves alive. But as the New York Times reported in 2013, our social insurance programs are so modest in scope that this is precisely what some of our fellow citizens are reduced to. Location 7451
Note: Welfare, Redistribution, Social Insurance Lazy get off their ass! It’s hard to even know where to start with that. But… I don’t think you can do better than this.
Now, the trouble with this line of argument is that it invites the counterattack that the only equilibrium that would satisfy John Rawls, or a closet Rawlsian like me, is a complete “leveling” of outcomes through fiscal policy. But I believe this to be an unfair reading of Rawls, and in any event an unnecessarily reductionist assertion in our quotidian world. It is here that insurance comes into the picture. Insurance does not eliminate all risk—no one can afford the premium for insuring a wholly risk-free life, and it is not available in any event, because (as explained earlier) insurance is simply a financial product offering indemnity against financial loss. But insurance does usefully modulate outcomes. Fire insurance does so for fires, life insurance does so for the income lost by early death (but not the heartache of the grieving family), and social insurance does so for the financial aspects of individual life outcomes that are morally unacceptable or that simply reduce the aggregate happiness—and material wealth—of society. Location 7465
It is helpful here to return to a point introduced in chapter 2, by considering again Rawls’s famous thought experiment, in which we are unborn disembodied but highly rational beings, and our representatives (I like to think of them as our lawyers) gather to debate the fundamental contours of the society into which we will be born. We know the full range of possible lives that we might assume once we take corporeal shape through birth—gorgeous and brilliant or homely and stupid; American or Bangladeshi; the children of rich parents or of poor ones; healthy or suffering from an incurable congenital illness; and so on. For what sort of society will we instruct our representatives to negotiate on our behalf? Location 7477
We do not expect or desire equal outcomes any more than did the fourteenth-century Genoese mariner contemplating a voyage across the Merranean to Constantinople. That defeats the whole purpose of consciously undertaking life’s adventures as sentient humans. But we are highly rational, and so before lining up in the birth queue, we each say to ourselves, damn, I had better buy some insurance against a really crappy outcome. Location 7486
The Supplemental Nutrition Assistance Program has taken the brunt of criticism from the political right, in the person of individuals like Congressman Southerland, as imposing moral hazard concerns so unacceptable as to justify slashing funding for the program, but this is an inherently nonsensical argument. As chapters 2 and 7 explained, the supposed economic case that SNAP encourages people not to work is simply not there—nor should one expect it to be, given that benefits under this program amount to less than $5.00/day. Most recipients are children, the elderly, or the disabled. Participation soared as a result of the Great Recession, but that is what social insurance is supposed to do—to insure against dire personal financial situations in times of great economic distress for society as a whole. Location 7493
A program like SNAP must be analyzed as a program. When one does so (as for example the Congressional Budget Office did in its 2012 review), one discovers that this and other social insurance programs are actually fairly well designed. No doubt all such programs could be improved, as can all the works of man, but in every case the evidence suggests that our existing suite of social insurance programs errs principally in being too small to accomplish its purpose, not so large as to be dominated by adverse incentive effects. Location 7534
First, the movement did not adequately communicate that progressives embrace the virtues of thrift, hard work, and personal responsibility—they just also are sensible enough to see that the collective purchase of reasonable levels of social insurance promotes socially useful risk-taking and enhances the overall welfare of society. Like you, I have automobile insurance, homeowner’s insurance, medical insurance, and life insurance. I also carry social insurance, as do all other Americans, and for the same reason: social insurance does not interfere with individuals taking on all sorts of risks unique to their individual life adventures, but does enable them to pool those risks not central to their personal narratives. Location 7546
The conditions which limit faculty are to be found not only in the amount of the income, but in the demands that are made upon the individual in disposing of his income. In other words, the idea of burden, or sacrifice, was introduced….Taxes, in so far as they rob us of the means of satisfying our wants, impose a sacrifice on us. But the sacrifice involved in giving up a portion of what enables us to satisfy our necessary wants is very different from the sacrifice involved in giving up a portion of what enables us to satisfy our less urgent wants. Location 7633
Note: Progressive Income Tax Yeah, they will squaller and scream, but there really is a difference between the 5th beach home in Grand Turk and being able to keep from starving to death.
The more convincing justifications for progressive taxation not developed in Blum and Kalven follow from the previous chapter, on social insurance. These begin with my dumbed-down application of John Rawls, in which our society’s basic terms are discerned by imagining the bargaining among our noncorporeal predecessors, who agree to be born, but who further recognize the wide array of possible life situations into which they might be thrown, and who therefore have the good sense to sign up for some insurance just before embarking on the adventure of life. The only way those noncorporeal beings can pay for that insurance is in arrears, and since those who make insurance claims cannot generally afford the insurance premiums, those who do well will have to contribute disproportionately. Proportional taxation does not work well here, because in fact we generally excuse from tax those whose circumstances require them to make an insurance claim, even if they have a little income. The progressive rate structure more neatly describes the post-paid insurance model. Location 7783
The final justification for a progressive income tax rate structure is similar to the argument just offered, shorn of Rawlsian pretense. My claim here is simply that the progressive rate structure by itself is a form of social insurance, in that it relieves those at the bottom of the income hierarchy of a cash expense they would face were income taxes collected on a proportional schedule, and does so simply because their material life outcomes have not been terribly successful. The money so saved in turn can be spent in enhancing the relatively modest material lives that these outcomes imply. Location 7791
Note: All the blathering on about progressive Taxation, arguments for both sides, rebuttles, strengths and weaknesses of most common arguments… When it comes down to it this is the best and most simple one. All you need. If this doesn’t get the point across you were never gonna convince them anyway.
In other words, if one accepts the fundamental premise of this book, that material outcomes are determined by an undifferentiated porridge of personal efforts and brute luck, by virtue of which we all have a bit less control over our material successes than we like to pretend, then some tax rate progression functions as a broad social insurance program to address the brute luck component. It is a broad-brush sort of insurance, as its benefits (relative to proportional taxation) are not delivered with surgical precision only to the most appealing hard-luck stories, but under most any theory of the utility of income, this arrangement, if not carried to excess, increases the net happiness of society. And in contrast to other forms of social insurance, no one on the political right seems to argue that a progressive rate structure necessarily lulls the modestly successful (or downright unsuccessful) into lives of state-supported indolence. For this reason of political economy alone, a moderate approach to progressive taxation is a useful way of delivering some social insurance benefits to those who need it, when compared with the proportional tax alternative. Location 7796
Note: The main paragraph prior to this, with this one, are really all you need.
A tax of $1,000 imposed on each and every billionaire in the United States will score as very progressive—only the very most affluent Americans will be burdened by it—but the tax will raise trivial amounts of revenue. What consolation is there in being told that this tax, although too small to fund any useful government program, is really highly progressive? There is no virtue to such abstractions. Location 7807
Note: Progressivity by itself doesn’t tell you anything in a meaningful sense
All of this suggests that history offers no clear guidance as to what the top rate should be. You can find historical precedent to support any intuition, and if you choose you can draw causal relationships between economic growth in a period and the progressive rate schedule you prefer. But those purported causal relationships are completely unreliable, because they are swamped by omitted variables—exogenous shocks (oil, financial overleveraging, or terrorism for example), demographic factors, large-scale economic developments (the Internet revolution), and the like. Moreover, no amount of inference along these lines can prove the negative—that is, what economic growth would have looked like under a different tax regime. Location 7917
The observation that the size, not the progressivity of the rate structure, is the most important characteristic of a tax system from the standpoint of reducing inequality has an important implication: government spending, not the manner in which revenue is raised, decreases inequality. This explains why countries with regressive taxes, including the European countries that rely heavily on value added taxes (economically the same as sales tax) achieve the most redistribution. In these countries, taxes are not particularly redistributive by themselves, but large revenues are raised, allowing governments to lower inequality through significant social investment and insurance programs. Location 8205
My colleague at the University of Southern California, Thomas Griffith, conducted a careful review of the relationship between progressive taxation and happiness a few years ago.37 His review of the happiness research concluded that, among wealthy nations, equality of outcomes was more important to overall happiness in a society than was the rate of a country’s economic growth. From a happiness perspective, rapidly increasing inequality unfortunately plays directly against human nature, even if incomes rise in absolute terms, because of our rapid adaptation to whatever income level we experience (assuming that it is well above subsistence levels) and our wants for “positional goods.” Location 8219
Note: And it is. More equal societies are simply happier. You can squawk all you want about it being jealousy or envy or whatever, but poeple are happiest when everyone crosses the finish line at the same (or roughly) the same time. Fuck you Chris.
Radcliff’s book analyzes surveys and other data from industrialized economies generally, and separately from the United States. Radcliff concludes that public investments in important goods like education, and well-functioning social insurance, lead to higher overall reported levels of happiness, in the meaningful sense of life satisfaction, not momentary jolliness: Location 8230
In the argument between Left and Right over the size of the state, I demonstrate that “big government” is more conducive to human well-being, controlling for other factors. Indeed the single most powerful individual- or national-level determinant of the degree to which people positively evaluate the quality of their lives is the extent to which they live in a generous and universalistic welfare state. Put differently, the greater the “social wage” that society pays its members, the happier people tend to be….Overall, it is clear that the quality of human life improves as more of the productive capacity of society comes under political—which is to say…democratic—control. The subordination of the market to democracy thus appears to promote human happiness…. It is equally important to note that all of the factors…contribute to greater well-being without particular regard to socioeconomic status. While some of the relationships are indeed stronger for working- and middle-class citizens, in every case, higher-status persons also benefit. Location 8234
Note: And there you have it. We aren’t sure but this might be the end. The holy grail. Simply put, that larger governments more conducive to democratic control, Public goods and social insurance simply produce happier poeple. Democrats and liberals advocate thus, Conservatives and Republicans do not. Therefore, The Liberal conception of government and society under the Democrat party is simply better for human well being. Any argument against this is simply rhetoric, but would lack demonstrable, verifiable and measurable evidence.
The thrust of my book is to emphasize the complementary role of government to private markets in two areas where private markets fail—investment in public goods and social insurance. I therefore shy away from broader invocations of the virtues of “political control” over the market. But I think it plain that Radcliff’s research is entirely consistent with my more modest claims for restoring the role of government as a partner in those areas where private markets have demonstrated that they cannot go it alone. Location 8242
Note: That’s simply put, our world view. Almost nothing is ever optimum at the extremes. To suggest that any system with the slider completely slid to one side is ever the best answer is nieve, ignorant, and myopic. That any system with no balance or checks is somehow for the best. Our claims are relatively modest… Markets alone cannot do everything, they fail in some forms of delivering human well being, the assumptions behind mythical “perfect markets” do not bear out in the real world… Ever… And done level of guaranteed social insurance is nessesary for the tempering of the cruelest edges of capital based private ownership market systems. Government facilitates large scale investment and infrastructure requisite for the optimum wealth creation, and addresses massive collective action problems through Taxation and Expenditure toward large scale collective goods not profitable under the time horizon or certainty or risk level of private investors and markets.
Many other papers reach similar conclusions. For example, in a recent large-scale review published by the United Nations (although the work of private experts, not a UN agency), the United States placed 17th in overall self-reported subjective well-being, which if you think about it is a remarkably unimpressive showing for the richest large economy in the world. What is more, subjective well-being fell more in the United States than it did in most other countries during the Great Recession.40 Denmark, Norway, and Switzerland were the top medalists, but the Netherlands, which actually is a more diverse society than outsiders sometimes suspect, finished fourth, followed by Sweden and Canada. Canada’s materially higher subjective well-being score is particularly relevant, given its many similarities to the United States, but its commitment to a much larger role for government. Location 8247
Note: How? How can you say, when ALL the sources of evidence converge on one single conclusion, that they are ALL wrong and your preconceived narrative is correct? The rebuttle would be somehow that thus report was somehow wrong, you can’t measure happiness, it’s vague, or some stupid shit. But if you can’t ever measure anything nothing matters and I can kill you and it doesn’t matter.
In another recent paper, researchers relying on a large-scale survey concluded that, looking only at the United States (so as to avoid any possible cross-country cultural differences), Americans on average were happier in years with less rather than more income inequality, even where the greater inequality years were also years with higher GDP. The researchers concluded that the reason was not the rise in income inequality itself, but rather the erosion of perceived fairness and general trust that survey respondents identified as correlated with higher inequality in our society. Location 8254
Note: Inequality, fairness,
Franklin Delano Roosevelt had it right when he implied that freedom is a more nuanced word than most Americans appreciate. Both freedom and the pursuit of happiness are distant aspirations when one starts the adventure of life far behind one’s counterparts, because of the accident of your parents’ poverty, and the greater social enrichment and education to which the children of the affluent are exposed. So long, however, as millions of Americans think that absolute atomism is all that “freedom” can mean, there is no point spitting into this headwind. Location 8279
Note: That’s just beautiful and top level Freedom
It may be that my emphasis on returns to social investment and on the desirability of insurance to address the unavoidable perils encountered in the adventure of life is a similarly doomed enterprise, but it has the virtue of couching matters in terms drawn from our everyday commercial experience, without any explicit moralizing. And should through some alignment of the planets a bit of common sense seeps into our political discourse, and we begin to take advantage of the investment and insurance opportunities that surround us, it is good to know that as best as the researchers can tell, we are indeed likely to move our society a little bit further along the happiness spectrum. Location 8283
Combining the two strands essentially changes nothing, except that it becomes easier to apply traditional cost-benefit analysis when both the cost of funding a collective investment or social insurance program and its financial and social returns can be considered together. When we do, we see a grand tableau of opportunities spreading out before us. We could enhance our wealth as well as our happiness were only we to appreciate that government performs useful work when it complements markets in areas that private participants habitually leave incomplete. Location 8298
Note: If we can find a way to phrase thus as a first pass opener, it is the ultimate summary of all our work and perfect “dinner party” opener.
All those different orders and societies [that comprise a state] are dependent upon the state to which they owe their security and protection. That they are subordinate to that state, and established only in subserviency to its prosperity and preservation, is a truth acknowledged by the most partial member of every one of them. It may often, however, be hard to convince him that the prosperity and preservation of the state require any diminution of the powers, privileges, and immunities of his own particular order or society. —ADAM SMITH, The Theory of Moral Sentiments, Part VI, Sec. II, Chap. II. Location 8305
As chapter 10 demonstrated, those increased investments in turn will lead to higher welfare, both through increased employment opportunities for millions of Americans not destined to engineer the next big mobile app and through the positive economic returns generated by those investments. Location 8412
Since labor market participation and savings were strong in the 1990s, it is not realistic to maintain that a reversion to comparable tax rates today will lead Americans to pack it all in and become a nation of beachcombers. Location 8447
If we properly characterized labor income in the first place, rather than allowing it to masquerade as capital gains in particular, the Social Security base would be greatly enhanced, and we could lower payroll tax rates a bit to reflect that. Location 8601
Our current wealth and future prosperity are driven primarily by private markets. No sensible person disagrees with that. But markets are not perfectly complete everywhere, all the time, and as a result government has critically important complementary roles to play, as an investor in our infrastructure and our fellow citizens, and as an insurer against the worst vicissitudes of life. Location 9059
Note: It really is this simple. We need markets but it’s senseless to suppose they are utterly and simply perfect with absolutely no role for help, investment, or regulation from government.
Well-designed social insurance programs increase our appetite for economic risk, rather than depress it, and public infrastructure investments yield positive economic returns, just as private investments do. These are the functions that our government is good at and to which this book has been addressed. Once one moves beyond police powers and the like, what we call government spending and taxing in many respects is really investing and insuring, with those investments and insurance premiums collected through the mechanism of taxation. Location 9064
Note: Really theiberal idea of government. Investing and insuring to create a greater bedrock of opportunity for everyone and greater prosperity overall.
We cannot embrace every generous impulse, because in many cases the return on investment, in the broadest sense, is too low, relative to its social and economic costs. But by looking at the actual state of economic health of millions of Americans (not to mention their physical health), by comparing the US experience to the mix of public goods furnished by other developed economies, and by reviewing the economic literature on the deadweight loss of taxation, the inescapable conclusion emerges that we can do better for our fellow citizens, which in the long run also means doing better for ourselves. Location 9079
This book has argued that the contrary view, encapsulated as market triumphalism, is a flawed pastiche of abstract economic nostrums and unhealthy political claims. It is the marriage of a belief in the infallibility of private market outcomes and the claim that our political liberties depend on laissez-faire economic policies. But markets are not always perfect, market freedoms and political freedoms are not identical, and political liberties can exist without the most fundamentalist sort of laissez-faire policies as a prerequisite. Location 9089
Market triumphalists’ imaginations run riot, in directions that are simultaneously paranoid and self-centered. They see around the corner the impending collapse of social order, always predicated on the same anti-democratic instinct: the shirtless and rootless masses (all of whom happen to be fellow citizens) will fasten on the taxing power as the way to take from the rich and give to themselves, thereby killing the golden goose while grabbing a few eggs. This is why market triumphalist rhetoric is so fixated on taxation, to the exclusion of the goods that taxation purchases. But as billionaire philanthropist Eli Broad recently pointed out, “We are the only country in the developed world without large national labor or socialist parties, and it’s unlikely that many Americans ever are going to be converted to the notion that it’s sinful to be wealthy. What we all need to continue to believe, and to act on, is the conviction that it’s wrong and socially destructive for the rich to forget those who still can use a hand up.” Location 9093
At every turn, market triumphalists seek to impugn the genuine political rights and liberties of others and to paint themselves as the intended victims of self-defeating “leveling down.” The result is that they are quick to sacrifice their fellow citizens’ claims to genuine equality of opportunity, as reflected, for example, in comparable levels of investment in their children’s health and education. They do this by denying the legitimacy of government investment or insurance in general and by claiming that all existing programs are marked by irredeemable design flaws, administrative incompetence, and participant fraud. Location 9101
Taxes must first flow into the Treasury, and then out to a group of individuals, rather than being forcibly paid directly from one group to another.5 Only some insureds have insurance claims in any given year, but every insured benefits from the existence of that insurance. This is why Grover Cleveland was wrong in 1887, and why there was so much well-deserved anger at those members of Congress who sought to block the Hurricane Sandy relief bill: the federal government of the United States offers, through disaster relief and similar measures, de facto disaster insurance to all regions of the United States. And more directly, the “transfer payments” that Epstein finds offensive in fact are social insurance programs from which all of us, even Epstein, benefit, because the programs exist for all of us, should our circumstances change. Location 9139
Note: Revolutionary argument about redistribution and a new way of thinking about “robbing someone by gunpoint to give to another.” Every program is a collective social program available to everyone, just like an interstate is a public good available to everyone. Just because someone is using at one particular time and another is not, doesn’t mean that the person not driving on the highway at that moment is being robbed and his money given to the people who are driving on it. He has access to use the public good as well, when he chooses or needs to. The same is true of social insurance, food insecurity programs, or health and education. Yeah, we know, you are awesome, and “don’t need help.” But if fortune turned against you, and the state of affairs were to tip wrong and help was needed, now rich republicans could get food stamps or TANF if they needed to at some point. It’s a whole new way to thinking of “redistribution.”
We all are Americans. We all deserve to pursue our own happiness, but this promise that binds us as a country requires as a precondition more than simply being neither incarcerated nor a serf. We can afford to do better. We can afford to be better citizens to one another. Location 9270
Evensky, Adam Smith’s Moral Philosophy, 163 (“The invisible hand is not, as the modern discourse generally suggests, the magic of a market economy at work. That is but one of its handiworks. This invisible hand is for Smith the hand of the deity that designed the ‘economy of nature’ and those invisible ‘connecting principles’ that guide humankind’s evolution.”). Location 9447
For a modern retelling of the same theory, see Richard A. Epstein, Forbidden Grounds: The Case Against Employment Discrimination (Cambridge, MA: Harvard University Press, 1992). Epstein argues that discrimination laws are poor policy, not just because they are unnecessary to prevent discrimination in modern, competitive employment markets, but because they interfere with the right to contract: “An antidiscrimination law is the antithesis of freedom of contract, a principle that allows all persons to do business with whomever they please for good reason, bad reason, or no reason at all.” Ibid., 3. But as others have pointed out, Epstein’s argument is largely dependent on his assumptions of perfectly competitive markets and perfectly equal and rational agents contracting with each other. It just as easily justifies repealing laws that prohibit drug use, sodomy, pornography, prostitution, gambling, or dueling. John J. Donohue III, “Advocacy versus Analysis in Assessing Employment Discrimination Law,” Stanford Law Review 44, no. 7 (1992): 1586–1614. Yet prohibitions on discriminatory hiring practices today, like those on dueling in the Revolutionary era, are a justified reflection of our collective moral sentiments. Location 9456
I am not arguing here about divisive social issues that are expressed primarily in non-economic terms (such as issues pertaining to gay marriage), but rather those issues whose first order consequence is to impose an apparent efficiency cost in service of a more intangible value that adds to our collective welfare. Location 9559
Note: Fantastic reply to the common argument, most often applied by Chris, that the ultimate arbitor of whether a service is a legitimate service is if it is “efficient” or generates profit, ignoring other social amd collective values beyond the comprehension of T ledgers.