Does the trickle-down part of supply-side economics ever work? In a Financial Times article last month, Rana Foroohar pointed out that the recent track record of trickle-down economics may not be terribly impressive:
The argument is that trickle-down economics will somehow magically start working to bolster growth, even though there is no evidence over the past 20 years that this has been the case. Tax cuts in 2001 and 2003 during George W Bush’s administration did not juice growth, nor did any Obama era cuts.
Unfortunately, any discussion on the topic quickly breaks down into what is often a political debate and not a discussion about the economics of income distribution. Either one is in the camp that believes that the economy is automatically better off from tax changes that benefit the wealthy, or one is in the camp that dismisses the whole thing as voodoo economics. The conversation generally ends there.
This is an important topic and one that can have a substantial impact on the future growth prospects for an economy. The issue matters especially to the United States, an economy with a level of income inequality, among the highest in the world, more typical of developing economies than of advanced economies. But rather than being an open-and-shut case when it comes to the United States, I would argue that there have been times in which the economic impact of income inequality has supported long-term growth and other times when it has inhibited growth.
Foroohar’s aforementioned article points out that “Americans do not mind paying taxes,” but instead mind if tax-paying is unfair; Americans are pragmatic enough, in general, to consider long-term growth prospects as relevant in the definition of what is and isn’t unfair. One of the policies the Trump administration has proposed—and similar policies have been proposed directly by nearly every Republican administration since Ronald Reagan and indirectly perhaps by most Democratic administrations since Jimmy Carter—is to cut taxes on the very wealthy. The Hartz reforms in Germany in 2003–2005 had a similar impact, although rather than lower taxes on wealthy Germans, these reforms caused wage growth to slow relative to GDP growth, boosting corporate profits by roughly 50 percent. The net effect has been quite similar, and although income inequality in Germany is quite low, it probably is not just a coincidence that, in recent years, income inequality has sharpened far more rapidly in Germany than in the rest of Europe.
The key point is that the rich save a greater share of their income and consume a smaller share than do the poor. Transferring $100 from poor households to rich households would immediately cause a drop in consumption. It would also cause an immediate rise in ex ante savings, but, as I will show below, whether ex post savings actually rise or not is much more complicated than most people first assume.
The argument in favor of cutting taxes on the very wealthy hinges on the impact this has on savings and investment: it allows well-off individuals to redirect their wealth into increases in productive investment, and as these investments are made, they subsequently increase the productive capacity of the economy. Because the only sustainable way the average citizen in any country can get richer is if worker productivity increases, this, in turn, leads to higher incomes for all, including the less wealthy.
In this essay, I will show that in economies in which savings are scarce, and which consequently suffer from investment levels that are lower than what the market would otherwise choose, income inequality can increase long-term growth. When savings are not scarce, however, income inequality results, over the long term, in lower growth and higher unemployment, although this can be temporarily postponed with rising debt.
Desired and Actual Investment
In order to understand the conditions under which supply-side tax cuts for the wealthy will lead to more growth or greater unemployment, we must make a distinction between actual investment and desired investment. Actual investment, as its name implies, consists simply of the current investment level, that is, all the investment projects that are being funded.
By contrast, desired investment consists of investment projects that have not been funded because capital is not available to fund them. The key here is the availability of funding, and whether or not savings are scarce. There are many potential projects in the world for which injections of investment capital would benefit these economies. This would raise productivity levels by more than the cost of funding such investment, in which case these projects would be wealth-creating and net positive ventures for these economies.
If these projects have not been implemented because savings are scarce and capital is not available to fund them at a reasonable cost, they form part of desired investment. If, however, these projects have not been implemented because of other reasons—say political opposition, or because their value consists of externalities that cannot be realized by the investors, or for other similar reasons—they are not included in the category of desired investment.
In some countries, desired investment substantially exceeds actual investment. These are usually developing countries with low credibility that have high investment needs that have not been met because of weak domestic savings and the limited availability of foreign savings. This condition characterized the United States for much of the nineteenth century and most developing countries today.
In other countries, desired investment is roughly in line with actual investment. This is the case for most advanced economies, in which credibility is high and access to finance at reasonable costs is fairly automatic, especially now, when the world is flooded with excess savings and suffers from limited demand.
Finally, in a few countries, actual investment may exceed desired investment. These are countries that have followed what I have called the Gershenkron development model, in which savings have been forced up, the investment decision has been centralized, and high investment levels have been maintained long after a given economy has reached its optimal investment level. This was the case in Japan in the 1980s, and perhaps still is today to some extent, and it is also the case in China today.
What Happens When Taxes for the Wealthy Are Cut?
In any economy, the two main sources of demand are consumption and investment. There is a third source of demand, the trade surplus, which is the excess of foreign consumption and investment over foreign production, but this is usually dwarfed by domestic consumption and domestic investment. An economy will grow sustainably mainly if there is sustainable growth in domestic consumption and domestic investment. Sustainable growth in consumption is largely a function of growth in household income.
Sustainable growth in investment depends on growth in desired investment and the excess, if any, of desired investment over actual investment. Consumption growth usually drives growth in private sector investment, for obvious reasons, in such a way that the two often grow or shrink together.
The consequence of a tax cut on the wealthy is basically a transfer of wealth from average households to wealthy households, and if it is to generate higher growth this transfer must sustainably increase demand in the form of higher consumption or higher investment.
- If taxes on the wealthy are cut with no change in fiscal expenditures, the net result is that the wealthy pay a smaller share of total expenditures, so—with the tax cut—wealth is effectively transferred from average households to wealthy ones.
- Because the richer the household, the smaller the consumption share of income, the net impact of such a transfer is that overall consumption declines, along with the consumption share of GDP. As the consumption share of GDP declines, by definition, the savings share must rise.
- But total savings need not rise. Here is one of the great confusions that tends to mar nearly every discussion about the impact of tax cuts on the wealthy. A decline in consumption will only be accompanied by an increase in savings if GDP remains constant, but GDP will only remain constant if a decline in consumption is matched dollar for dollar with an increase in investment. Total savings only rise, in other words, if total investment rises.
- Will investment rise? It turns out that if desired investment exceeds actual investment, the additional savings will be borrowed and invested, and investment will rise by the same amount by which consumption declines. The net effect is to convert consumption demand into investment demand, so total demand is unchanged. There is consequently no reduction in current GDP, which means that savings rise.
- As consumption is transferred into investment, current living standards decline for ordinary households, but future living standards rise as the greater investment leads to faster productivity growth. At first, ordinary and poor households are worse off and wealthy households are better off, in other words, but as the benefits of higher investment are realized, wealth trickles down to ordinary and poor households so all are better off.
- But this isn’t necessarily what happens. If desired investment is in line with actual investment, the existence of a higher ex ante level of savings will not increase investment because businesses have already invested all they want to invest. If that is the case, investment will not rise, except temporarily in the form of unwanted investment as inventory rises (lower consumption leaves goods unsold, which makes it seem at first as if point number 4 above is occurring).
- This means that consumption demand is not converted into investment demand (except perhaps temporarily), and total demand declines, bringing GDP down along with the decline in total demand. Although there is a decline in consumption, in other words, there is no commensurate increase in savings.
- But the rich do save more than the poor, so how is it possible that there is no increase in total savings if there is a transfer of wealth from average households to wealthy ones? The savings of the wealthy have definitely gone up.
- But total savings don’t rise because something must happen to reduce savings elsewhere. As consumption declines, those who produce consumer goods and services must cut back, and as they do so, they must fire workers. These workers shift from zero or positive savings to negative savings, so that the reduced savings of the newly unemployed counter the increased savings of the rich.
- There are three things that may temporarily interfere with this process. First, as consumption drops, and before businesses that produce consumer goods and services cut back and fire workers, they will see inventory rise or profits decline. Rising inventories cause (unwanted) investment to rise so at first it seems as if points number 4 and number 6 have taken place. But as declining profits reduce business savings, these will counter the rise in the savings of the rich.
- Second, the additional wealth of the rich pours into real estate markets and sets off a speculative real estate boom. This causes a rise in real estate development. In such a case, investment rises temporarily along with debt and at first it seems again as if point number 4 has occurred.
- Third, the additional wealth of the rich pours into the banking system and banks respond by lowering lending rates and relaxing lending standards. Riskier or more optimistic households that had previously been unable to borrow for consumption are now able to do so, and so consumption does not decline even as money is transferred from average households to wealthy ones. In that case, total demand is unchanged. There is consequently no reduction in GDP, which means that the savings of the rich rise as the savings of the ordinary and poor decline, and GDP is maintained by a rise in debt.
- To summarize, if desired investment exceeds actual investment, transfers from ordinary and poor households to wealthy households will immediately cause investment to rise at the expense of consumption, as living standards drop. But the overall economy will increase its total production of goods and services and, depending on how future higher income is distributed, ordinary and poor households will eventually see their income and consumption rise.
- If desired investment is in line with actual investment, however, investment will not rise sustainably. At first, either overall consumption will not drop because a rise in debt-fueled consumption will counter the drop in disposable income among ordinary and poor households, or overall investment will rise because of a temporary increase in unproductive investment—that is, unwanted inventory or excess real estate development—either of which also implies a rise in debt. Eventually, however, unemployment will rise, in such a way that as consumption drops, it is not replaced by higher investment but rather is accommodated by lower GDP. Overall savings will remain unchanged because the higher savings of the wealthy will be matched by the lower savings of the unemployed.
- I have discussed how the current and capital accounts cause savings to adjust in several earlier blog entries (including here, here, here, and here, for example) and the economic consequences of income inequality in my book, The Great Rebalancing, and several earlier entries (for example, here).
Desired Investment Exceeds Actual Investment
When it comes to determining whether or not supply-side tax cuts benefit the economy, the key is the relationship between desired investment and actual investment. For some reason, most participants in the debate have failed to understand that this is the key to whether or not policies that force up the savings rate benefit an economy, but the logic is pretty clear. If desired investment exceeds actual investment, trickle-down economics works, and everyone eventually can benefit from tax cuts for the wealthy because they lead to an increase in productivity-enhancing investment that ensures that GDP growth in the future will be higher than it otherwise would be.
This was the case in the United States for much of the nineteenth century and is usually true for developing economies with high investment needs and low savings. The United States in the nineteenth century can be thought of as part of a single system that also included Great Britain (and the Netherlands and France to lesser extents). Significant income inequality in Great Britain did not lead to a corresponding increase in British domestic investment but, as excess savings flowed into the United States, it set off higher investment in the United States, a country with substantial investment needs and insufficient savings.
The United States benefitted, of course, because it was able to raise its productive investment to much higher levels than it could have managed had it needed to rely only on domestic savings. The British benefitted because income inequality did not result in higher unemployment or higher debt but rather in a higher trade surplus (since exporting capital is the same as importing demand).
Desired Investment in Line With Actual Investment
If desired investment is in line with actual investment, however, the higher ex ante savings of the wealthy does not lead to greater productivity, more growth, or increased wealth eventually trickling down to all households. It can temporarily lead to no change in GDP as long as nonproductive investment rises (mainly in the form of inventory) or increases in debt-fueled consumption keeps total consumption unchanged. But either way, GDP can only be maintained with an unsustainable rise in the debt burden and, over the longer term, GDP growth must drop.
In that case, rather than implement tax cuts for the wealthy or other policies that increase income inequality, the economy is better off with the reverse. If wealth is transferred from wealthy households to ordinary and poor ones, either consumption will rise without a corresponding reduction in investment because unemployed workers will be put back to work, or consumption will remain constant but it will no longer be fueled by a rise in the debt burden. Either GDP growth rises and wealth actually trickles up, in other words, or it is maintained without a corresponding rise in the debt burden.
By the way, it is important not to ignore the impact of higher consumption on investment. As consumption rises, it turns out that desired investment will rise too, as businesses must produce more goods and services to satisfy higher demand for their products. In that case, GDP growth will rise even more as the increase in GDP is not wholly driven by an increase in consumption. As the income of ordinary and poor households rises, in other words, part of this will be diverted to more consumption, but part of it also will be diverted to more investment, which in turn will increase productivity.
We saw how this happened in Germany, or rather, we saw how a reduction in consumption can actually cause investment to decline, not to rise. After the labor reforms of 2003–2005 effectively pushed down the household share of GDP in favor of business profits, German savings rose. But this happened not because higher ex ante savings were channeled into higher investment, but rather because they were exported to peripheral Europe, so Germany—which until then had been running current account deficits—began to run surpluses the sizes of which soon rose to levels that were historically unprecedented. In fact, as the German savings share of GDP rose, the German investment share of GDP actually declined as German businesses responded to lower consumption at home with lower private sector investment.
This is why former U.S. President Franklin Delano Roosevelt’s brilliant Federal Reserve chairman, Marriner Eccles, a self-made millionaire, insisted in the 1930s that wealth had to be redistributed downward. He did this not because he wanted to give away his wealth but rather because he wanted to keep it. This is the same reason Warren Buffet too wants to reverse income inequality. It is much better to own a factory, Eccles insisted and Buffett would probably agree, when people are eager to buy the things it produces, and can afford to, than when people can’t. During his 1933 testimony to Congress, Eccles quoted with approval an unidentified economist, probably William Trufant Foster:
It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they cannot save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying.
It is for the interests of the well-to-do, to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.
Actual Investment Exceeds Desired Investment
There are cases in which actual investment exceeds desired investment, strangely enough. China, as I pointed out above, is the most obvious such case because of its dependence on massive increases in investment to generate enough domestic demand to keep the economy running, but there are other examples.
This usually means that investment has long stopped being productive and is being wasted—and on a massive scale that may well be unprecedented in China’s case. When actual investment exceeds desired investment, it is vitally important to reduce investment growth as rapidly as possible and, in order to prevent demand from dropping and unemployment from rising, to increase consumption as rapidly as possible. This is exactly what rebalancing means in China’s context.
Conclusion
Trickle-down economics does indeed work, as does its opposite, trickle-up economics, depending on underlying conditions that are not hard to specify. The key is the relationship between desired investment and actual investment. When the former exceeds the latter, policies that increase income inequality will generally cause savings to rise and expenditures to shift from consumption to investment; this leads to higher future growth that will eventually more than compensate ordinary and poor households for the increase in income inequality.
When desired investment is broadly in line with actual investment, however, there is no trickle-down effect. Policies that increase income inequality must permanently lower growth in the long run, although, in the short run, lower growth can be postponed by an increase in the debt burden.
In advanced economies, like those of the United States and Europe, there is no savings constraint on desired investment, so income inequality can only result in higher debt or higher unemployment and slower growth. It is only in developing countries that income inequality may boost growth, although in countries that have pursued the Gershenkron model of forcing up domestic savings, like China has, actual investment can substantially exceed desired investment. This makes the reduction of income inequality or the channeling of wealth from the state to ordinary and poor households an urgent matter.
Comments(125)
It is impossible to separate the economics of income inequality from Politics because the point at which wealth has to be redistributed down requires Politicians to act. The Politicians then have to balance the interests of those that fund them and/or elect them/allow them to rule. For example Republicans (supply side champions - business) v Democrat (voodoo economics - labor), President Xi of China wrestling with vested interests v social stability. In the West will we simply not sway between the two schools of thought with each change of government (often as a result of timing/luck) until the economics profession can agree that both schools of thought are right depending on the circumstances and convince governments of this?
Dr Pettis, thanks for this definitive statement on net benefits of supply-side economics. Your argument is laudably easy to follow. Not to unnecessarily complicate the model, but can you comment on knock-on effects to the economy of changes in government deficits brought about by the implementation of supply-side tax measures? How do changes in government deficits and/or spending due due to tax changes affect the overall calculus of the net benefit of the policy (since, for example, tax cuts may have to be funded through increased government borrowing)?
It is difficult to answer that question, miletos, without a lot more detail. The way changes in spending and changes in current or future tax revenues occur will determine how wealth is transferred between groups, which will then determine the impact on consumption and savings.
But where is the inflection point with respect to income inequality? When is income inequality so low that the increases in demand begin to outstrip the savings capacity of the economy? I think this is something like the Laffer Curve where you will get a lot of support for presenting the idea, but will now get ideologues arguing that we're on either side of the inflection point.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
That is a good point, Steven, but I think it is hard to argue that we are at or near a point of too-great equality. At the very least that would be inflationary.
It's a tough situation for sure. I do know the demand side arguments for income inequality and how it *should* be the case that high inequality will reduce future growth rates, but there's also a risk of transfer payments from growing regions to declining regions. If you basically transfer resources from expanding regions to declining regions, then what you're effectively doing is depriving the growing regions of the resources they'd need to reinvest in their own regions. In effect, you'd be stripping cities and city-regions of real earnings with which they could reinvest and effectively transferring those earnings to keep other places on life support. From my understanding, by the 70s there were no growing cities in the US. A full generation of basically stripping wealth in city regions to prop up other areas will do just that. It creates short-term growth for sure, but also has a terrible cost: it can create decadence and input the seeds of decline.
Per the article, it would seem that you are only stripping regions of real earnings if their desired investment is greater than their actual investment. If desired investment isn't being constrained by a lack of savings, and there is a high level of inequality, then there is a stronger argument for measures to reduce income inequality, moral arguments aside.
Suvy, I think your're confusing the direction of the injustice. I suggest, don't think in terms of regions, think of prople. When someone like Trump, a billionaire, pays no income taxes, and he's one of many. (Remember Mits' handpicked tax return showed 14.5% rate) And ordinary working people pay a higher rate - this is a transfer of wealth from the ordinary people producing it, to the elite. This is so to the extent that govm does anything truly productive. Mike has already said that govm is an investing sector. Repblns label govm as a total waste to inhibit populace from understanding this. As the resources of the country flow to the wealthy the capital structure of the country takes shape around them. The people who are cheated are the ones who can't water their own garden with their own work because someone has decided that the elites would better manage it for all. They haven't. The stripping took place, but it took place in the wrong direction - the powerful used their influence to do an end run around the working people of this country, supplant them with the production of outsider, arbitraged them. Successful regions in this country were stripped, but not by other regions - by the wealthy and powerful, our vested interests. Be careful of what you read. Your thinking shows sign of the type of confusion created by the wealthy. More everything you see and hear are designed to prevent people from reaching truthful conclusions.
If you transfer resources, you're always stripping areas of their real earnings. That has nothing to do with real investment being above desired investment. That is a regional fact. If Cali pays out tons into federal coffers and Alabama receives that, then Cali loses real earnings regardless of what investment levels are unless it's infrastructure spending, in which case it's not a zero-sum game where everyone can benefit. For direct transfers (most taxes and spending), that doesn't hold true.
Do we talk about tax cuts for the wealthy or how supply side was originally defined? Also if a person who values (welfare payments?) at 30 thousand (which costs 100 thousand in government borrowing) better off than someone working for 30 thousand? And how are (welfare payments?) reported in the official income distribution reports? Supply side was defined as encouraging people through tax policy to create goods and services. That the evil investment banks (joke) sucked up all the money was a pleasant surprise to crooked (joke) politicians.
~65% of the budget is Medicare, Social Security, the military, and interest on the debt. If you include Medicaid, that number goes to ~75%. What're you gonna cut? We have an aging population. Rich people want tax cuts? Great. You wanna cut Medicare or Social Security? LOL! Try it and see what happens (I say this as someone who wouldn't mind making cuts in those programs). The fact that not everyone has health insurance in our health care system drives up total cost. It's health care costs that're bankrupting us and we need to get those under control. They're making our businesses uncompetitve and the fact that not everyone has insurance means that the total cost of the system is greater than it otherwise would be (actors spend time on how to off-load risk even though the risk never leaves the system, so all resources spent off-loading risk are just a deadweight loss). You wanna cut Medicaid? Great: there's another thing that won't pass. If you want tax cuts for the wealthy, you're gonna have to find a way to pay for it and make sure you can get elected off it. You won't be able to accomplish both of those things.
The US is large and diverse. Most of the governance discussion comes from the articulate class. My opinion is the real wealth of a country is people and tools used to create food, clothing, shelter, and more tools. Large portions of the articulate class consider most of the people involved in these pursuits to be autistic. This has been an issue from even before 1776. The current President was elected as a voice for the Supply Side people. Not the Rich. Not the nominal poor. At this moment the tail-wagging-the-dog seems to be ending in the US. Tax cuts will be large or a new group will be voted in. Technology can and will be used if necessary to bypass port cities. Office holders who have been living in fantasy worlds are being voted out. People who create wealth, who are not the rich, are tired of being played a patsy. For-the-children is now a laugh line. US has never had much use for beggars.
Sorry to break it to you: you won't get your tax cuts. Most of the tax paid by the upper-middle income is the payroll tax. You gonna eliminate that? LOL! You're not gonna be able to fund Medicare and Social Security. Here's the thing: we have an aging population. That means entitlements explode unless you cut them. Here's another crazy part: old people vote very Republican. So you're telling me you're gonna get a guy and a Congress cut something that key parts of their constituency rely on?! LOL! Your tax cuts aren't happening unless you're willing to blow a huge hole in the deficit. Spending cuts won't happen. I'm getting you accustomed to reality cuz now Trump's in DC. If you think you can come into DC, operate like a strongman, and pass any legislation you want, you will guarantee that you get nothing through. This is what's happening to Trump and the GOP. It takes ~6-12 months at a minimum to write and pass legislation (legislation comes from Congress, not Presidents). Usually, that number is closer to ~8-16 months. GOP has the House, Senate, and White House but has passed no legislation after having power for ~6 months. There's a budget fight in 2 months with Senate recess in mid-July through August. So nothing will be done then either. In campaign season next year? Nothing will be passed. So there's a shot to get one bill through. After that, GOP lead in the House will fall. If it falls to within ~5-10 seats, they won't get anything done. What you think will get done and what will get done are not remotely similar. DC operates at a snail's pace (Dems passed far more legislation when they had both Houses of Congress and the White House, but even they ran into this problem). DC doesn't change.
Former Vice President Joe Biden once said this "If I took them blindfolded and took them to LaGuardia airport in New York, he would like 'I must be in some third world country.' I'm not joking." From bridges to sewage systems, there are many systems that are parts of the United States infrastructure is on borrowed time. That's just the existing stuff. The US population has grown as well since the 1900s and much of this growth is still built on top of previous investments. From your point of view, at what point does the US have to reach so that Desired Investment exceed Actual Investment? What would that look like in a developed country? Another question is, in Desired Investments, you've mentioned this as something that isn't a desired investment "because their value consists of externalities that cannot be realized by the investors". Can you expand on this? I know of a few busy intersections in the city that has a steady death rate. The city wants to improve it but is lacking funding to do so and the priority is lower compared to intersections in more wealthy part of the city. Nearly all the intersections of the city need to be improved. Would this be considered a Desired Investment? How do investors value life saving investments to poorer residents?
"The fact that not everyone has health insurance in our health care system drives up total cost." Not true. Medical insurance was quite profitable before Obamacare. Government regulated monopolies are what drive health care cost up. Doctor, Nurse, Drug, Hospital, Insurance. Five that I can think of with no effort. A hospital must have a Certificate-of-Need. Easy to get in a rural area with few-and-poor patients. Hard to get in a profitable urban area. "the budget" is just a way to stir people up emotionally. The reasoning goes that people that are dependent on Government transfer payments will become politically active if it is said political opponents are going to cut their free-lunch. I used the emotional term free-lunch as an illustration of manipulation. Cognitive dissonance. Funny thing is President Clinton cut Social Security payments significantly. My mother knew her monthly payment had been cut but President Clinton did it artfully so he didn't get the blame. President Clinton linked Social Security to Medicare premiums. That coupled with (questionable) COLA was all that was needed to get rid of Social Security. At some point in the future Social Security payments will not be enough to cover Medicare Premiums.
If government drives health care costs up, why does the country with seemingly the least government involvement in health care (as compared to other developed countries) have by far the highest health care costs as a percentage of GDP? (you can also go procedure by procedure see the price differences...e.g., hip replacements and such). Baseline differences in health status do not appear to explain the difference (e.g., some countries smoke more than the U.S, others are similar with respect to overweight/obesity). Health care is a unique market, as compared to something like mobile applications. For mobile apps, having a bunch of small, creative, disruptive companies has a huge upside. Administering health care is different. First, the smaller the company, the higher the costs to cover huge risk uncertainty (e.g., if you have 10 people, and one gets cancer, you are screwed). Second, the more companies you add, the more negotiations among providers/payer and armies of private sector bureaucrats to work it all out (the providers need their own armies too). All that aside, purchasing private health insurance as a 50-64 year old with a health condition is massively challenging. Interesting, this is an area where government involvement can spur creative private sector activity. A person in that age range can get affordable coverage through their employer. Suppose they wanted to take a risk and start a new business. Not so easy when with health care premiums/health care costs in the U.S. It is reasonable to assume that a significant number in that age range stick with an employer for health care coverage. Rather than focus on health care costs, if your goal to is attack "free lunch" policies, you should probably focus more on wait times or death panels or something.
This isn't rocket science: we have an aging population with no rationing requirements. The composition of healthcare costs isn't that different from 1960. The problem is that when people get old, they get sick. That drives up cost. It's not cheap to pay for 90 year olds on respirators. BTW, Medicare, Medicaid, the VA, and CHIP account for ~64% of healthcare costs. The OECD average is ~70%. If you think we're far off from a healthcare system that the rest of the world has, yo're delusional. We're almost there. When they started to get older, they ran into similar problems. You can't fundamentally change the dynamic of insurance. Also, insurance companies are still profitable. Medicare premiums? The premium for Part B (given you're already enrolled in Medicare) is ~$160 or so for a $183 deductible and 20% coinsurance. If you offered that to most Americans who don't get great healthcare through their employers, they'd take it in a heartbeat. Even a $200 deductible looks great when the deductibles on the ACA exchanges are numbers like $3000 or $5000. You are very detached from the way most Americans live. FYI, most people don't live in rural areas (by and large, older people live there). Most of the population lives in urban areas or suburbs.
Huggy. Good point about Clinton. Over time I'm more and more disappointed with both of them.
"Rich people want tax cuts? " No they want their competitors ran out of business. Industries devolve into oligopolies who use their position to get laws passed to keep profits high, stop real innovation, and limit competition. They collapse from their own ineptitude and demand bail-outs and subsidies. End game is to go bankrupt or become regulated-subsidized-utilities (eg railroads).
Wanting monopolization and wanting lower taxes aren't mutally exclusive. But hey, let's keep making points that divert from the conversation to "prove" how "right" we are. That makes sense. Wait....
To understand what happened to healthcare, one need only look at nominal gdp growth and growth in healthcare. The divergence between these two numbers can then be brought into focus, then, Suvy, ask yourself, is it merely an aging population, or are there other implications: the need to amortize specialized techniques and devices across the insured population, the need to pay for new pharma and biomedical engineering research and for it to be rationalized within the cost of even old medicines sold (amoxi, etc). Then, ok, but if are insured and some need these new techniques and services, how can be reconciled that others need to pay for them. Because, insurance is in a pool. Then, if the pool were to increase, and if the expensive techniques of some need to be paid by others in a pool, how can someone argue that these expensive techniques should be paid, unless all be included in the pool (that is everyone has healthcare). Then, of course, all being involved in the system would amortize the costs across all, rather then, let's say, the lucky who have healthcare, and are happy to amortise the lucky, in the current pool, who can have healthcare, but just use more of the resources. Any who had studied public poicy, understand that this is an issue that should have been addressed decades ago. While healthcare provision can be a useful unit of GDP construction, its utility goes far beyond mere profits. Frankly, all those still wielding the market in the face of gross global misuse of it, should stop talking, and do more reading.
Mike, thanks for your truthfullness. For a long time I'd been searching for someone of a like mind, somewhere my instincts, gut feelings, observations could be confirmed, supported by other thought. You're my favorite economist. There are some things we understand differently. I also like Wray, Krugman, Hobson, Mosler and a few others. I think you'd be a good presidential advisor on economics. I think your truthfullness kind of precludes a position at the Fed. The politicians, wealthy and powerful, would never let you speak to the population at large. Once again, Thanks.
Thanks for this essay Michael. You have a great gift in being able to break down issues into their relevant components and explaining their interaction with clarity and distinction. Hats off to you! On this issue, should we not be looking at desired against actual investment in a global context, bearing in mind that to a large extent there are few (some capital controls and investor prejudice / bias against developing economies not withstanding) significant barriers to capital flows? If so and (assuming overall that desired = actual investment per "savings glut" proponents) shouldn't the argument be considered and addressed at G20 rather than national level?
"Sorry to break it to you: you won't get your tax cuts." (Smile) wanna-bet? As Hilary Clinton told Pakistan,"We tax everything coming and going in the US" (close paraphrase). The funny-money has grown so big it is starting to cause problems with real money. The US borders will be controlled, easy credit will be removed, transfer payments will be curtailed (there will be a shortage of workers even then; causing abortion and birth control to be discouraged). All this and more will come to pass or the US will devolve into tribalism. Right now there doesn't seem to be a replacement ready for the US. If the US pulls out of Asia then 4+ nuclear powers are ready to go at it. My bet is North Korea is opened up for development much to the benefit of China, Russia, and South Korea. A New-World-Order similar to the split in the Roman empire between West and East.
Illegal immigration isn't hard to control in the US. I don't know anyone in their right mind who doesn't want to control borders. I'm not a Dem, never have been one. LOL @ people being encouraged to have kids!!! Kids are basically luxury goods. Kids cost ~$500,000-1 million to raise. That's why people are waiting later. Most policies you advocate make it more expensive to raise kids. Birth control is very easy to get access to. If you can't access that, you just get a Plan B. Abortion is unnecessary (this isn't the 60's).
And no, those tax cuts aren't coming. If they were coming, they'd be done by now. Votes aren't there right now (Collins, Murkowski, Heller, Capito are no's in Senate and no Dems will vote in favor). You'll have to wait until after 2018 to get those--and that only happens if GOP can make enough gains to pass them, which's possible.
Funny thing: Mitch McConnell just came out today and said that there's no chance for them to pass an ACA repeal. Tax cuts have the same problem: not enough votes. Presidents don't pass legislation; Congress does. If you can't pass those bills through the Senate, it can't become law. The problem? The GOP lead in the Senate is 2 and there's ~4-7 moderates. If you move center to appease the moderates, the hard-right conservatives (Cruz, Lee, Paul, and some others) won't be on board. The only way legislation passes is on a bipartisan basis, like the Omnibus budget bill a few months ago. That recent statement by McConnell makes every point I ever needed to make for me. The same problem basically exists in every issue. The American President is pretty weak on domestic policy.
I should imagine there will be tax reform, at some point, but the same old debt inducing tax cuts of the Reps are a thing of the past. As to cleavage of Empire, let it be so. This is a much more serious consideration for the world to drill down upon then for American citizens and policymakers to be weighted upon. Actually, your statement of that consideration, underscores the global problem that exists, and foments a slippery slide down the mountain of refuse that enabled such considerations to be seriously pondered in the first place. Just take a look at the world. Arguably China has built twice as much productive capacity, relative to its current level of exports, that is it could use current productive capacity to export twice what it does, problem is no-one wants it. The advanced world ages. Many prominent developing countries age. Africas population is booming, but what are prospects for development when, china has built so much productive capacity. Regional tensions have been kept at bey by a global system underwritten by the American taxpayer, who tires, especially as their economy becomes more distorted by an openness, that is almost solitary in the global system. Even if new and ancient tensions don't flare, as a US steps back (a process begun at the end of the Cold War), how can development, the impetus for trade openness, and many other forms of political cooperation continue, with the distortions of Chinese development upon the prospects recent and new developers globally. As the US steps back, a process began at the end of the cold war, even if China weren't a restraining influence upon the stability of recent developers, and the ability of new developers to develop, giving necessary lifeblood to a global open trading regime, even if development went well, that is, what delimits the rise of nuclear proliferation, regional arms races, and conflict, on the back of many real and imagined cultural, national, social and historical basis, as we move to the future. So, the supposed cleavage of the empire, here or there, is a fantasy of monumental proportions, in the face of the easily discernible trajectory of the globe, from points in the past to present to future. Indeed, that this should be troubling to the US, only points to discourses that have become popular, if have little in the way of heft within reality.
"...divert from the conversation..." I worked in a medium size company 13 years. I worked in a large company 26 years. The people who run these companies are just people. Think Orwell "Animal Farm". The lesson from that book is that farmer's must do certain things or forget about farming. A country does best with a balance between investment and consumption. That balance is created by incentives. Mr Buffett doesn't pay as much in taxes because he has accountants and lawyers who make Mr Buffett's income pleasant to politicians. The US is starting a boom simply because President Trump has started cutting back on regulations. I'm sorry mentioning those items hurts your feelings. The media can't explain why US employment is picking up. eg Cutting unneeded, time consuming and costly regulation is invisible to them.
Huggy, stop reading popular news and watching popular news. Employment picked up long before Trump, and were heading in such a direction. They only thing to spike with prospect of Trump have been, the already bloated equity prices. As if "bulls" need a reason.
"with seemingly the least government involvement in health care" Edgar Cayce (mystic) was sued for practicing medicine without a license. Big Medicine in the US has great power over the media. More people die in the US from medical misadventures than car accidents. Open Secret.
Yes, we have a rent-seeking health care network where the insurance companies, doctor's union (AMA, most powerful union in the country), and government all work together to screw us. We will have no point of disagreement there. I'm all for liberalizing doctors practice here. I'd also prefer to get the insurance companies out of medicine unless we're dealing with catastrophic issues (we can find ways around it for people who're poor or of unfortunate circumstance). If you think I'm someone to stand with big business, big insurance, and corrupt unions, you've got the wrong man. Big business is now pushing for single-payer cuz they wanna dump employer insurance costs onto the taxpayer. I oppose single-payer and I oppose big business.
Thank you, Prof. Pettis, for this very easy-to-follow post that to my mind has the ring of truth. Now what we need is for someone (Prof. Piketty?) to lead an effort to assemble the historical evidence to make these ideas difficult for anyone to refute! Unfortunately, truths that the powerful do not wish the rest of us to understand cannot win a fair hearing without someone's building an unassailable case. Just making a lot of sense isn't enough to get the conventional wisdom overturned.
Nassim Taleb has thoroughly slammed Piketty's work rigorously. Piketty's idea of r>g leading to inequality is nonsense. He ignores default risk, assumes the only form of capital investment is debt, and he ignores financial distress costs. If r=g and there's default risk with financial distress costs, capital gets wiped out over a long time horizon. Also, wealth can be created in winner-take-call effects (aka scaling). Piketty begins with false premises.
A girl after my own heart. Mike is much less cynical than me. Here's a fundamental truth the world rests on - WHEN THE TRUTH RUNS AGAINST THE INTERESTS OF THE WEALTHY AND THE POWERFUL, THE WEALTHY AND THE POWERFUL STEP ON THE TRUTH. Likewise, if you promote and serve the interests of the wealthy and powerful you will be rewarded with promotions, recogitions, coveted positions and wealth for yourself. Just look how rarely the media actually looks at, studies, interprets, inequality. They refuse to acknowledge economic truth, economic justice. To succeed in their system you must compromise critical thinking and judgement. The lust that drives them isn't amenable to reason. That's why we have slavery, world wars, imperialism, poverty.
Suvy, forget Nassim. Did you read his work?
Suvy, did you read Capital in the 21st Century? I did, and even just looking at the graphs was enough to show that economies can function very well on the inter-World-War level of capital accumulation, which was a small fraction of the long-term historical norm and of what we have today. THAT was the game-cbanging takeaway of this very important book, and none of the arguments you mention touches that.
I didn't read his book, but I did read his technical papers a while back. His reasoning is totally off. And I find this blaming of the wealthy beyond absurd. Let's take a look at someone who got very wealthy like Jeff Bezos. He got wealthy off Amazon. I have Amazon Prime and love it. I can basically get most any book I want shipped to my door within 2 days for free. I can stream live music. I can watch TV shows (though I don't watch TV shows). Is it fair for me to blame him for my problems? No. He provided a great service and got very wealthy. I use that service. Let the man get wealthy as I get obscure financial history books sent to my door for pennies on the dollar of what I'd have to buy them for 15 years ago. Economics isn't zero-sum.
Suvy, it’s not about blame. It’s about fixing the economy so it will produce more jobs. It’s well-known that the wealthier people are, the more they hoard and the less they spend (as a percentage, of course). Mr. Bezos can’t realistically spend the same percent of his income –or his wealth – as most other Americans do unless he gives it all away. For a long time now, at least since the 2008 financial crisis, the news from businesses has been that they aren’t expanding or investing because there are not enough customers buying what they produce. If we accept that as true, then the world economy will continue to fail to produce enough decent jobs until something is done to cause hoarded money to be spent instead. That’s pretty much the point of this blog post. And as an aside, do you think Jeff Bezos’s children deserve to inherit his wealth? Morally, they should get nada from him. All young adults should start from the same starting line in the race of life.
I read Piketty. Very disappointing. Not on historical data collection (for which you have to credit his students) but on the weak explanation of why r > g since the late 1970's-early 1990's, leading to rising inequalities within countries (for which you have to credit him). No analysis on how systematic wage arbitrage allowed by trade globalization between countries of very different income level within an exchange rate system allowing massive an persistent trade imbalances led to a massive opening up of compensation scales in developed countries, as well as substantial under-employment. Piketty diagnostic being incorrect, his solution also is. Much more than a global tax on capital, a rebalancing of the global trade and exchange rate system towards equilibrium (as Michael Pettis has been suggesting) is likely to reduce inequalities within countries while keeping the happy result of lower inequalities between developed and developing countries.
"stop reading popular news" (smile) like help wanted signs? Prof Pettis books and papers gave me a mental filing system to organize facts I see as part of my everyday life. I used to use an emotional filing system that had zero predictive power and left me upset over the supposed stupidity of others. People respond to incentives. People will tell untruths to others and to themselves. Untruths can be accidental or deliberate but that makes little difference if the facts are important. Was US President Johnson a misguided or evil man? Few who know anything about LBJ's political career would call Landslide-Lydon a good man. But my understanding is that there are people in West Texas still alive who consider President Johnson one of the best. Mr Johnson was instrumental in bringing electricity to parts of West Texas. People who had to haul water every day appreciated electric pumps and the man who made it possible to run them.
Karen, in many ways very true. Suvy's point is that to maximize advances we need not penalize those who succeed. The world was amazed at the advances of the world, despite much criticism counter to actual trends of impacts, after the era of "Financial Deglobalization" that began toward the (mid) end of the 1990's. In fact global GDP doubled between 1998 and 2008. As we have learned the reasons why here, this required a blow-up in the US debt profile, and after 2008, the blowup of EM debt profiles (we all know China, but elsewhere as well). The flow of FDI, the investment, the growing sophistication of economies, rises in standards of living, but what is left in its wake, the bastardization of some function between supply and demand that previously gave vital breath to asset valuations, the beggaring of neighbors (policy and currency), initial (uh-oh) focus on raising wages (while global punditry talked of Rise of Rest), switching to real estate and infrastructure, depressed commodity values after initial high China stimulus push (oil and others deflating growth of global middle class dynamics; if such hasn't hit the reports out of CFR, yet, or been acknowledged by those who sell their books (ahem, Mr Roach, at Yale or Morgan, Diamonds still on that hand at Goldmans), etc..... But, Karen, you are right the issue is structural demand dynamics, supported, these make it all, without such, low-rates, and distortions to investment patterns, asset valuations and the the inevitable beggaring, beggaring the necessary demand needed to advance standards, and potential for consumption. What we have, is too quick, too fast, too much, great distortion, uh-oh, problems, stimulus, low rates, distortions to maintain optics of GDP growth in Rising EM, growth in global debt, and the inevitable declining growth, in trade, in sustainable supply and demand structures, under conditions of global asset bloat. Too much savings in the hand of too few to rationalize the burgeoning asset values. Lord Adair Turner, between Debt and the Devil, might even be required in Advanced Economies. Isn't Direct Monetary Finance essentially what has occurred in China regardless, if they resolve local gov and soe debt through moving to gov balance sheet, essentially such. And what do we in the West, continue to pretend that this system, which has fostered too many monsters, labor under purported values, because one party or another attempts to norm entrap us in the superficial dialogues of the present, that had enabled their rise previously. We don't need Plaza accords to set this ship right, or stoke demand. Direct monetary finance, focused on the service sector, to mitigate immediate leakage through trade channels could do much to support wages (necessary for demand Suvy), tax revenues, and the industries being disrupted, while providing potential for mitigating issues related to education, re-training, medical, youth-employment, and easing baby-boomer retirement difficulties (through these). From Friedman, not told to politicans, because they didn't want them to know such options were available, but could be used if timeframes, and purposes were delineated from the beginning, and could be very useful to right this system, while countering the impacts we have of "too much understanding" for the needs of others, as we address the issues you note. Then, Ms Yellen, why exactly do you need to shrink the balance sheet of the FED.
"Mitch McConnell just came out today and said ", stuff to motivate people emotionally. The reality is that US Government (establishment?) like The Patient Protection and Affordable Care Act. The only American Citizens who like this legislation are the ones who get large subsidies for their medical care and the ones employed by Medical Industries. They are in the minority and costs have outstripped the ability of anyone to pay including the US Federal Government. Search for the wisdom of Mr Grubber. The supposed author of Romneycare and Obamacare. Open Secrets. Hidden in plain sight.
Who likes what is irrelevant. What matters is what will pass. How people feel, what they think, what they want, etc don't mean anything. And yes, the ACA was designed by the AMA and the health insurance companies. I won't dispute that. It's now a choice between government run single-payer or some kinda hybrid system. That's the debate and the choice. If you don't wanna play the game, then feel free to cede power to others.
We're >6 months in and no major piece of legislation has passed the Senate. After a bill passes the House and Senate, the House and Senate versions need to be reconciled (negotiated). Then, the new bill must pass both the House and Senate. Then, it needs to be signed by the President to go into law. These things will take time. We're ~50% of the way there for this bill to pass. The Senate also has August recess and has a budget fight after they come back. So it'll take until 2018 to get a major piece of legislation through.
"We're >6 months in and no major piece of legislation has passed the Senate. " The debt ceiling is where the action will be at. Right now it is President Trump vs DC establishment. Chairperson Yellen stated that the US Federal budget needed to be reduced in real terms. President Trump is likely to accommodate her. DC establishment has no stomach for that. The US Senate and House of Representatives can act fast when their re-election prospects are on the line. They either fall-in-line for President Trump or will face tough primaries. Senator McCain just got re-elected but it is unlikely he will run for office again. Speaker Ryan is unpopular every where but the House of Representatives. Other Republicans could have primary opponents just based on their support of Speaker Ryan. The elite-club-atmosphere is cracking and the media and DC establishment are courting the destruction of their professional careers. President Obama burnt through a lot of funny money and created a lot of resentment and ill-will. President Trump has the backing of the people who count in this case. The DNC and the media are backed by people who are dependent on the Federal Budget. Obama took funds from Medicare to prop up Obamacare. The Democrats can not hold their coalition together without a budget that Chairperson Yellen says is impossible. The action will be fast-and-furious. Also North Korea regime change will be happening. The old-saw "don't change horses in the middle of the stream".
Republicans have a balancing act. Some like me support the volatility of Trump in introducing extended boundaries into the dialogue which will outlast his presidency. But Reps do not have to, and likely understand they better not, follow Trump on any level, that they do face pressure to accomplish thins while holdin leislature and executive, but in no way are subsumed to Trump, he isn't a popular president. Most voted as a protest, some were deluded, alone Rep lines, he's a Biznis man (spelling implies irony for those "thieves" out there), others remember he was Dem but a short period ago, all want to accomplish something, none being too close. But this is just the beinning. Ain't no going back to the kumbaya, "I want to buy the world a coke, and keep it company", free-love, superficial political dialoues, post-1960's, anti-love leanings of the hippy to yuppy, convertible BMW, Ayn Randites, especially we are entering spike of retirements, and rises in expenditures. Frankly, rather than, Yellen sayin this or that, we are likley closing in on Summers, more Adiar Turner, like responses, and with the blowup of asset values globally, why shouldn't the US. I bet direct monetary finance will not even degrade, but for an initial trough, USD currency valuations. As frankly, ain't no other game in town, if designed well, likely will get us nicely past the weight, both financially and spiritually, of the declining baby-boomer influence. As to changing, politicians, journalists, DC elites, and also NY Finance, global institutional, and, this to mention, nothing of flacid scholarship supporting the soft techniques of elites in emering markets (oh, wait, how can you, you always supported free trade...norm entrapment type stuff, bandied about about ignorant pundits and polis alike) . Those who pick up from Putin, and perhaps, other petro-states, along with nationalistic and protectionistic Manu EM elite, will be wringing out their towels for decades.
LOL! Trump already tried to primary Paul Ryan last year. The result: Paul Ryan beat the hell out of him (~60%) on record turnout. GOP leaders down-ballot outran Trump by huge margins basically everywhere in 2016. We see the same thing in our area. We talk about it all the time. Local GOP leaders are, for the most part, pretty popular.
From everything that's happened since Congress has been in session in January, the only person who's fallen in line is Trump. He is weak and ineffective. Here in the South, we have a different word for people like that, but I'm not gonna use that word cuz it's "offensive" (starts with p and is 5 letters). He's a weak Yankee who was born with a silver plate in his mouth. GOP candidates down-ballot will run all over his guys (for the most part). See Paul Ryan vs Paul Nehlen in 2016 as case in point.
FYI, in the most recent version of the healthcare bill, it keeps almost all of the tax hikes the ACA put in place. I told you that those tax cuts weren't coming. The only tax they really removed (for the most part) was the medical device tax, which's a good thing cuz that's a dumb tax. People with incomes >~$150-200k won't see tax cuts for the next few decades. Those with incomes >~$300k will see significant tax hikes. In 30 years, I think we'll see capital gains taxed as income and the cap on the payroll tax either raised or removed. Even conservative Senators like Jon Cornyn were pushing to keep the ACA tax hikes. They already scrapped them and we're not even 7 months in. Yet you insist they're coming. The moderates in the GOP are gaining ground. If anyone's gonna win in the primaries, it won't be the Trumpers; it'll be moderates. Guys like Chris Christie (early Trump supporter) have done such a terrible job that he basically hands the Gov seat to the winner of the Democratic primary. In Kansas, moderates have taken over the legislature. If Trumpers successfully primary Heller or Flake, both of those seats will be blue in 2019.
BTW, ACA was not a very large expansion of government spending. If they got public option through, the deficit would fall. They raised Medicare taxes on asset income in order to pay for it. Most of what you're saying is verified nonsense. You were tryna tell me rich people don't want tax cuts. Who do you think pays capital gains? You think it's the poor or the middle class? Gimme a break dude. That's laughably absurd. The ill-will is there cuz rural areas have fallen behind, largely through technology. If you're in an urban area, you have networks and access to knowledge or infrastructure rural people can't have. Why? It's population density. There's entire towns and cities of people who have little to no access to good broadband. In my area, Fiber internet just moved in and I will soon be getting 300 mbps for $60/month. I recall paying that much for crappy broadband 10 years ago. Then, these are the same people saying I'm seeing massive inflation. Their comments make no sense at all. Cities *should be* ahead of the countryside in terms of tech and innovation. That's how the world works. If there's ill will cuz of it, that's a different matter all together. I live in a suburb (in between country and city), so I see both sides.
I'm getting a sense of frustration on this blog
"I'm getting a sense of frustration on this blog" That is because there is no agreement on basic facts. Also everyone seems to be talking US politics instead of China Financial Markets. I see no reason to discus public policy with someone who says "ACA was not a very large expansion of government spending". That would be like discussing football with a soccer fan. (joke ie Wikipedia: Unqualified, the word football is understood to refer to whichever form of football is the most popular in the regional context in which the word appears.)
Medicare Part D and Wars in Iraq/Afghanistan was several times larger in magnitude. It's not even close. But hey, facts. Oh BTW, the ACA "repeal and replace" is now dead in the water. Expect much more of that going forward on all the things that you just said were sure to happen. You can deny facts and deny how DC operates, but that just makes you wrong. The big part of the ACA was that it expanded Medicaid. Today, the structural deficit (not the cyclical deficit, which's basically 0-1% right now) is less than it was in the 2000's after the passage of the ACA.
You need to work on your sense of humor. There's no agreement of basic facts cuz you refuse to accept basic facts. You literally said that anyone who liquidates stuff they own pays capital gains and then said that the wealthy don't pay much of it cuz Warren Buffett doesn't down below?! If you're wrong by definition, how can we have a serious conversation? Do you think it's your normal 30 year old that liquidates assets? Or do you think it's 60 year olds who liquidate assets to pay for retirement? What you're arguing for is a transfer from the young to the old. You are incredibly incapable of even understanding the logical implications of your own comments.
"Who do you think pays capital gains?" Warren Buffett =>rich Warren Buffett => pays less tax than a close aid of his Warren Buffett probably doesn't pay capital gains. Or if he does then not much. Numerically most capital gains come about through inflation. So anyone who owns anything pays capital gains when they liqidate unless the sovereign exempts. Workers pay all taxes. Wealthy individuals simply organize the wealth so that taxes are easier to collect. Send every billionaire on vacation and replace them with a Soviet. Tax collections will be reduced. This has been proven empirically.
>Saying Warren Buffett doesn't pay capital gains, therefore no one who's wealthy pays capital gains.<---That's being deficient in reasoning. Examples do not prove general claims. How? It's called logic. Anecdotes don't apply to statistical generalities. Why? It's true by definition. "So anyone who owns anything pays capital gains when they liqidate unless the sovereign exempts."<---So tell me what the poor and middle-class own? You know what they own? NOTHING. The people who own the most stuff and liquidate it aren't the poor or middle class. They're generally wealthier and have higher incomes. But hey: apparently logic doesn't matter anymore so we can make up our own BS claims and then use reasoning deficiencies to come up with garbage.
How do people with no assets (or no assets held long-term, more properly) liquidate? If I buy a stock and sell it for profit within a year (which I do frequently regularly), that's not taxed as capital gains. That's taxed as income. You know why? Cuz I pay those taxes. If you liquidate your portfolio to pay for retirement that you've held for decades or you liquidate your house, that's taxed as capital gains. So you're basically asking for a transfer from people like me to people like you. That's called taking from the young and those who don't have very much and giving it to older people while you also ask for further tax cuts, then argue for dumb abortion and terrible social policy, and all the while you end up dead while I suffer the costs. This isn't happening.
My portfolio isn't more than several tens of thousands of dollars and everything I get taxed for is income, not capital gains. So let's take up policies so the old can loot the poor. So let's take up policies to fund dumb wars abroad that the young pay for, take all their benefits, keep benefits for the old, remove taxes on everything the old pay, tax the hell out of the young, and then lecture to them what they need to do while saddling them with more and more debt (I don't have debt, but most my age do). That's called bad policy. That's how countries end up in decline (literally).
"Examples do not prove general claims" Ok. Please list your Axioms and use them to define wealthy. (smile) For example. In one part of US I'm middle class. In another part I would qualify for Government Assistance. The only agreement in the US is that I am not wealthy. I've been told I would be considered wealthy in large parts of Africa and Asia. Now which is it in this logic you speak of? Am I rich, poor, or middle class (upper or lower)? Would I and society benefit if I received a tax cut? I only got tax cuts under President Reagan, President George W Bush, and President Obama (for a short time followed by an overall tax increase including Obamacare and other taxes). Was that good or bad? Put my situation in your logical system and convey to me the wisdom of Mr Spock. Live long and Prosper (smile)
Wealthy? The tail of the distribution. It can be anywhere between top 5% and top 1%. It all scales and follows a scaling factor, so it doesn't actually mean that much (easy to show mathematically). It's just funny to see someone like you get taxed at capital gains while I get taxed as income and then having you telling me it's not a transfer of resources from me to you. That seems a bit hypocritical. Obviously, income isn't wealth. For income, my guess is that it'd be ~$250k-400k depending on the location and cost of living. Using income, it varies as cost of living. In most red states, ~$150k puts you over the top. In cities, it'd prolly be closer to ~$400k+.
I wonder what Prof Pettis' views are of the paper written by Glenn Hubbard, John Taylor and Kevin Warsh, co-authored with John Cogan of Stanford University. Is this a trickle down thesis?
I assume, Obiwan, that you mean "On the Prospects for Higher Economic Growth." A lot of it seems pretty rooted in supply-side assumptions that I am not sure are valid any longer. The authors argue for lower taxes to boost investment, but US businesses don't seem investment constrained. They seem more worried about weak demand for whatever it is they might produce, which suggests that the problem is not a supply-side problem but a demand-side one. The authors also worry about crowding out, which to me is very much a savings-scarcity phenomenon, something that no longer applies to the US economy.
It is a supply-side issue if you see healthcare costs here as a supply-side issue. Healthcare is cannibalizing every other industry and has eaten up basically all wage gains in the past ~30-40 years--largely cuz we don't ration, have any kinda cost controls, and force everyone to pay for a fat-tail via high premiums. Unless we can shift the healthcare cost structure from a fat-tail distribution to some kinda thinner tail (either with a payoff transformation or by setting a cap on the tail or by capping total costs or however), I do not see this issue becoming resolved. Keep in mind that businesses take care of their employees healthcare costs, so they pay that cost too and the employee pays for it with a mix of higher premiums and less coverage.
I assume, Obiwan, that you mean "On the Prospects for Higher Economic Growth." A lot of it seems pretty rooted in supply-side assumptions that I am not sure are valid any longer. The authors argue for lower taxes to boost investment, but US businesses don't seem investment constrained. They seem more worried about weak demand for whatever it is they might produce, which suggests that the problem is not a supply-side problem but a demand-side one. The authors also worry about crowding out, which to me is very much a savings-scarcity phenomenon, something that no longer applies to the US economy.
I assume, Obiwan, that you mean "On the Prospects for Higher Economic Growth." A lot of it seems pretty rooted in supply-side assumptions that I am not sure are valid any longer. The authors argue for lower taxes to boost investment, but US businesses don't seem investment constrained. They seem more worried about weak demand for whatever it is they might produce, which suggests that the problem is not a supply-side problem but a demand-side one. The authors also worry about crowding out, which to me is very much a savings-scarcity phenomenon, something that no longer applies to the US economy.
I assume, Obiwan, that you mean "On the Prospects for Higher Economic Growth." A lot of it seems pretty rooted in supply-side assumptions that I am not sure are valid any longer. The authors argue for lower taxes to boost investment, but US businesses don't seem investment constrained. They seem more worried about weak demand for whatever it is they might produce, which suggests that the problem is not a supply-side problem but a demand-side one. The authors also worry about crowding out, which to me is very much a savings-scarcity phenomenon, something that no longer applies to the US economy.
"... until something is done to cause hoarded money to be spent instead...." Japan has tried to drain hoarded money for more than 20 years. I say that because that is why inflation is so important to central banks. To stop money hording. I suggest studying Japan to see all the ways money can be hoarded. As they say, why reinvent the wheel.
Japan's problem is that they can't print people. An aging population makes it very hard for the young to pay for everyone else. There's always a cost and everything is, in the end, ultimately paid for. We have to start resolving structural issues like excess debt and need to focus on how to get fertility rates up for the middle class if we wanna grow without relying too much on immigration. If we take up child care tax credits (like Trump ran on), we need to finance them with some other kinda tax hike.
" so it doesn't actually mean that much (easy to show mathematically). " So if wealth doesn't mean that much (or is it income that doesn't mean that much?) why do you consider it such an important factor in tax policy? Typically scaling of taxes has been looked upon as a variation of a bill-of-attainder in the US. Some of these trends may persist. The number of high-school graduates is projected to remain flat through 2023, according to an analysis by the Western Interstate Commission for Higher Education. White graduates, the most likely among races to attend
Wealth isn't created by flipping assets. Wealth is created by innovation and creation of new businesses or industries. Taxing capital gains as income has nothing to do with a bill of attainder. It's just a sensible policy to eliminate our deficit.
Its revealed on tv that for many years Trump hasn't paid income taxes. Mit was down there at 14.6% for the year that he revealed. I'll bet he's had plenty where he didn't pay income taxes either. And a lot others. For the extremely wealthy the taxes actually go down. For me I see an extreme injustice for the great bulk of the population of the US. What does the media do? Its brought up a few times. No one has any interest in picking it up and going anywhere with it. All the people who run the media, own the media, advertise in the media - hey most of them are in that group. Everyone in the system knows who they'r working for. It dies on the vine. This marks the triumph of the wealthy and the powerful - when the injustices they inflict, the lies they put forward - are not inventoried, and corrected. Our hearts go out to the wealthy and the powerful. We acknowledge that they are better than everyone else, we are dependent on them, and so deserving of their privileged treatment. All the republican candidates, I said it before, their economic policy was "cut taxes for the wealthy and get the economy moving." All 17 of them. With this article Pettis rebuts the lie. All these years I've listened to it unchallenged in the media. It marks the triumph of the wealthy and the powerful.
Sorry for the web browser hiccup. Don't know where "for Higher Education. White graduates..." came from. Please ignore.
Suvy. I agree with your taxing capital gains as income. Why favor one persons way of making a living over another? Well it happens that the wealthy make most of their money this way. That's why. You sell your assets frequently - you'r not an investor, you'r a speculator. Try holding onto them longer, say a year. Guys like Trump take advantage of over-depreciation of real estate. Say you buy a property for 10 mil; you can fully depreciate it in 20 yrs regardless of the true reality of the value of the property. Each year you take 500,000 loss against the income from the property reducing your profits to about nothing. At the end of 20 years you sell the property for 12 mil. You pay capital gains taxes on the 12 mil and have effectively transformed the business income from the last 20 years into a one time long term capital gain, taxed at the lower capital gain rate. I consider it an unfair loophole for the wealthy. Don't expect it to change. Hedge fund people have a similar distortion to be taxed at 15%. The extremely wealthy are taxed at the same rate as poor working people. Hey we're told the wealthier they are the better we'll all be. Inequality is something to be celebrated and promoted.
Give time ~20-30 years and that policy will change.
What I'm hearing is those pesky humans don't know how to act when confronted with perfect tax policies. As a thought experiment lets try coming up with some tax policy that gets 100 million working instead of putting 1,000 billionaires out of business. Usually that is cutting taxes on family-and-friends run businesses. Otherwise it is a good thing the robots are coming and will be so much easier to create incentives for.
I'm all for giving small businesses very low pass through rates. That's a good idea cuz that's what creates new enterprises. That's how you get wealthy: innovation, technology, adaptation, etc.. There's nothing wrong with having billionaires, but when you have regressive taxation, it protects the elite by making it harder for the lower classes to accumulate capital (higher regressive taxation means lower disposable income for the middle class). It's not that billionaires are bad, but top 1% has more income than bottom 40% (there is nothing wrong with that) and the top 1% barely pay the payroll tax. Removing the cap on the payroll tax (turning it into a flat tax), taxing capital gains as income, and raising marginal rates (Steve Bannon, Trump's Chief Strategist, wants 44% marginal tax rates). If you can explain to me how it makes sense to tax the income of those who flip assets by an arbitrary duration less than it does someone like me, that'd be terrific. But that makes no sense. It's a transfer away from me to them and it's bad policy. We've been blowing out deficits for decades and someone has to pay for it. For the past ~35-50 years, we've seen a debt binge in the face of declining real incomes for households. That's unsustainable and unsuitable for wealth creation. That's NOT how you get new enterprises.
"taxing capital gains as income" Taxing at a lower rate than income is taxed is suppose to remove inflation from the amount. People do stuff that isn't the best outcome for society because of bad tax policy. I would add that often what is bad for society isn't recognized till long after the point of decision. Governments like to tax what people are addicted to. Misers are addicted to net-wealth-statements. Poor people beer and cigarettes. Middle class to children, grandchildren and their pets. In the US capital gains taxes destroy family owned small businesses. Especially small farms.
It's supposed to remove inflation from that amount? Inflation is a tax and inflation has been ~0-1% since 2008. Hell, I'm not even sure we have any inflation cuz I think their inflation measurements are out of data. The Fed itself has said inflation may be overstated (it makes a lot of sense to me). Inflation fluctuates and we're not in a period of high inflation. And workers face inflation too. It's a nonsense argument. Tax capital gains as income and level the playing field. Small farms get crushed more by consolidation and estate taxes IMO (estate taxes cuz small farms are asset rich and cash poor) than they do from capital gains taxes. Capital gains destroy small businesses? I'm not so sure about that. I was in NYC a few months ago and almost all I saw were small businesses and they were everywhere. In the 70s, some of those same places in NYC were crime ridden dumps. So yea, I'm not buying that argument. Free consolidation hurts small biz more than capital gains taxes. There's an easy way to avoid "sin taxes": don't buy stuff like cigs and booze. That's a choice which diverts income from other areas. If you're poor cuz you spend all your money on booze and cigs, that's your own fault.
"someone has to pay for it" The professor lists the possibilities in his books. I would only add that payment isn't from some numbers on some bank or business account. If workers pay then it is in less buying power. If businesses pay then it is through higher prices to consumers (which cuts their market share) or asset selling, or canceling expansions. If Government agencies pay then it is through privatizing of assets. Those are real money. Most of the arguments I read here are about funny money like the US-social-security-lock-box.
Agree on all accounts. I'd rather keep the costs explicit in the form of taxes rather than implicit via the financial system. That's why I'd rather raise taxes. I don't mind privatizing some assets like air traffic control or other infrastructure that's really been lagging behind cuz it's been under public control. I AM NOT OKAY with selling federal lands out west for extraction. It's a very, very bad idea to incentivize extraction and export of scarce resources to drive growth. That doesn't create capital; it destroys it.
"I'm not even sure we have any inflation" Most agree that inflation is a monetary phenomena. Cost-of-living is often confused with inflation. The Federal Reserve and Government Agencies encourage this. Stock market prices and real estate are where most of the fiat money is flowing. Also excess reserves and quantitative easing but those are games-central-banks-play. All the loyalty cards will go away and prices at good restaurants will skyrocket when central banks quit trying to hide price discovery.
Yea, I don't think inflation is a monetary phenomenon. It's a real phenomenon when consumption rises faster than production. In the banking system of the 60s, monetary expansion led to inflation. Today, it does not. That's a structural shift in the financial system. Our financial system is like how things operated in the late 19th century.
I would agree with Suvy that at its most basic, inflation is a real phenomenon, Huggy, that occurs when demand grows faster than supply (this is almost a truism). Inflation can have as its source a monetary component, of course, and often does because monetary expansion can cause demand to rise by increasing nominal incomes, or through wealth effects, but there has to be a specific mechanism that converts a specific type of monetary expansion into greater demand relative to supply. The monetary argument for inflation can be correct, in other words, but I think it places the emphasis on a secondary issue, rather than the primary, and so it can lead to mistakes. For example, in China, rapid M2 expansion seems disinflationary rather than inflationary when it comes to CPI (at least it has until recently) probably because it tends to spur credit creation towards production and to reduce household consumption by effectively reducing the real value of household savings (a negative wealth effect). And yet every time China posts a lower-than-expected CPI inflation number, analysts around the world immediately respond by calling on the PBoC to take advantage of low CPI inflation to expand M2 further. They have it exactly backwards. So I wouldn't disagree with the claim that inflation can be a monetary phenomenon, but I would have two caveats. First, we have to be very specific about exactly how monetary changes feed through into price changes, and not assume that more money means more CPI inflation. Second, we must recognize that inflation can also be non-monetary. To put it in terms of this blog entry, redistributing income can cause consumption to rise or fall relative to production by changing the propensity to consume within a given income level.
"when consumption rises faster than production" (smile) That is why all the retail stores are going out of business? They don't have anything to sell? I'm going to drop this thread cause I don't like talking past people who haven't researched the subject. Happy delusions.
Huggy What you refer to is a reltively new phenomon, asset inflation. What Suvy refers to is the normal long-term, definition from economics, not finance. And disruption, over-capacity, price destruction, due to over-commodification, selling below normal cost due to social needs, and beggaring the entire global trading system, due to interventionism, and the growth of tehcnology, and lengthening of supply chains, is why there has been stores closing, i there have been. That might be a further indication of stagnation in wages, or as me, I have long had enough of the things I need, and made a decision to buy everything but underwear used to support single mothers at thrift stores. To to distortions, the millenials are inculcated with this ethos, as well, a terrible harbinger for future developers, and the world who needs dollars to buy commodities
Brick and mortar retail stores don't have much to sell. We have the internet. I go to my grocery store and get the rest of what I need online. I have an Amazon Prime membership, so I get stuff delivered to my door in 2 days. I don't think retail can keep up with that.
If you add in "fringe benefits", wages and fringe benefits have risen. The problem is that most of those "fringe benefits" are healthcare costs. In the US, all the inflation is being driven by healthcare, education, and housing costs. If you exclude the first two alone, inflation is flat to slightly negative.
I can remember back to the 1980's. There was a Macy's store near to where I lived. It had an outlet store around the corner. I could buy articles of clothing at 5% of the cost of the Macy's in the store. Only thing is, you had to search the racks. They were jammed with clothing by gender, and kids/adults, pants'{shorts/long}/shirts{long, short, polo's, t's}. For some reason, I could buy a 50 USD shirt for 3 USD. A 120 USD pants for 6 USD (or less). And so on, and so forth. I just took 6-7 200 litre bags of clothing to the local thrift store. I have the same (or slightly less still hanging in my closets.) This, winnowing on margins, reductions in interest rates, disruption via technology, alterations in demography and so forth is related to where inflation sits, and why global growth has lessened. Similarly, walking down any street in Asia shows, that they have the same situation, stacks of everything. Reminds me of when I used to go to the places that sold crafts, prior to everyone was under modern modes of production. Was then that, crafts could be imported tax free because they supported poverty eradication in the developing world. With modern modes of production, beggar thy neighbor competition strategies, and export led development strategies, which suppress consumption and wages, unless countries were to reverse these, and I now think the time for that has passed, we can only see rises in asset values, rises in financial assets, malinvestment, and when seen through the alteration of demographic profiles in countries of final-use goods consumption, we have a fiasco on our hands. Remember High Net Worth lost 5 of 7 trillion in 2008. I suspect, what has occurred since then will only excerbate. Then, China, I see illiquid assets, and suspect that the government, on the back of this illiquidity and what will roll out of it, will not have the financial fire-power many believe, as assets hold value, but are immobile.
We have full employment in the UK but a stagnating/declining real wage. The problem is to increase the real wage. So raise the top-level of income tax and maybe introduce a new higher rate band. The money raised could be used to increase the wages of government employeees. This is (something like) the present Labour Party policy (insofar as they can be said have a policy). In an extremely unequal society where there were rich pickings from the wealthy this could work. Money saved would now be spent, economic activity would increase. The real wage would rise. The problem of underconsumption is resolved. In a more equal society the tax raised would have to be levied on people who were primarily consumers not savers and so would just be a redistribution without any economic effect. How does one assess which the UK is? It has a GINI coefficient of 0.36. The US has one of 0.39, Germany is 0.29, China 0.56 (when it was last measured). How do you measure inequality?
This piece misses an important consideration for tax policy. Wealthy people (and corporations) are mobile and thus can better optimize their tax rates across more favorable regimes. If wealthy people take their incomes into lower tax regimes, this is a transfer from the higher regime to the lower regime and the wealthy person. Lowering rates reduces the incentive to move relative to trend. If you don't believe this can have a meaningful impact, look up Hedge Fund Manager New Jersey Budget for an extreme case.
Mobility is a long-term argument. Demand sustainabiity exists in few places. Supply is in excess, further development causes it to rise. the only thing that isn't mobile is financial system. Such, built on the back of national fiat, in fact using fiat currencies, can alter the course of the system at the fiat of the electorate. Both declinism and constant suggestion of limitations, are but narratives used in support of what inevitably doesn't have to be, while supposing not only does it have to be, but better get used to it. Similar to the evolutionary response of a long-distant runner who had been hit by a truck and must live in a wheelchair. The notion, like any within the realm of the propagandists who would like propel "must-be's" and inevitabilities or goose that lay golden egg fictions, is of course just a notion wihtin someone's art of influence. But inevitable it is not and with coming and further attrition of technology, likelihood of sustenance diminishes tremendously.
Actually, JR, the US makes it hard for US citizens to escape US taxes by changing domicile. As I understand it, Americans still have to pay US taxes for 10 years after renouncing their US citizenship. If they move to a country that doesn’t cooperate with the US on this issue, they can get away with not paying but they will be considered guilty of tax evasion and travel will be a risk. Corporations are a different animal, of course, but the obvious simple answer is tariffs/sales taxes levied on all goods and services sold to American consumers regardless of the nationality of the seller. Our current leadership does not have the political will to take that step, but that doesn’t mean it would be difficult to do for leaders who want to do it.
It is not so easy for Americans to transfer their income to lower tax regimes. They always have to pay US taxes no matter where they reside, and can only use foreign tax payments as tax credits. Even in the extreme case of renouncing their citizenships, they are still liable for US income taxes for, I think, ten years after their renunciation.
Again I find the response to be lacking. It is a truism that in a perfect world of 100% compliance / 100% harmonized tax regimes, you do not need to discuss 'tax competitiveness' within a broader policy discussion. But we do not live in that world. Tax loopholes and treaties make for extensive amounts of arbitrage across jurisdictions, and this arbitrage is only available for the corporate sector and the wealthy. The OECD believes tax arbitrage costs national governments between 4-10% of corporate income tax receipts annually, which is almost certainly understated from the perspective of the high jurisdiction regimes because it is net of the benefit to the tax haven. The point of all of this is that there exists a set of conditions where you lower the statutory rate for, say, corporations, and you may actually see an increase in consumption: 1) the lowering of corporate rates causes an immediate transfer from the fiscal government to corporates who are full taxpayers 2) rather than being funded by the household sector, the lower rates are funded by formerly aggressive corporates who no longer find it beneficial to use loopholes and havens, and so bring back offshore profitability. Tax havens lose. 3) depending on the nature of the market, lower corporate rates will lead to either increased corporate profitability or increased levels of price competition with no change in household incomes. Regardless of whether this surplus remains with suppliers or transfers to customers, consumption will increase. Admittedly, the initial conditions required for this outcome are relatively special.
you assume that investment depends on savings. With current central banking, this seems to be outdated. Banks have enormous reserves, but consumers don't spend. If consumers spend, companies get credit. It does not really matter if companies have savings......
Junior. "Once again you find the response lacking" sound a little pretentious. I find the line of your thinking hard to follow. Cut taxes for corporations because loophole countries and laws are allowing them to evade them. Hey, let's not make them contribute their rightfull burden. Let's do a race to bottom, let's beggar ourselves before the wealthy and powerfull. After all we don't live in a society founded on justice and equality before the law. The 1% owns 50% of the corporate value, so a corporate tax cut amounts to a more or less a tax cut for the wealthy and powerful. Oh, I forgot, tax cuts for the wealthy and powerful are actually good for everyone else cause we wouldn't know how to use our lives productively for ourselves. Sounds like the old depency lies of the wealthy and powerful. "Full Taxpayers" huh. We see with Trump and Mitt, and hedge fund owners, the wealthy and powerful don't pay full taxes. "Funding" by aggressive corporates who come home when there is no advantage to offshoring - nonsense- they'd blackmail the places where they are already at for even greater injustice. How about this, decide what level of taxation is right, fair and good for all, and then enforce it by whatever means necessary. Let's not act from the position of weakness, vulnerability, as hostages. A corporate tax is just a tax cut for the wealthy and powerfull. What I see in your response is the same old self serving lies of the wealthy and powerful.
Karen, I think the elephant in the room with respect to inequality in the US is healthcare costs. It's literally eating up all wage gains on the employee side and limiting higher profits on the employer side. If we can limit costs on the healthcare side and even bring them down to ~15% of GDP, I think we'll begin to see wages rise and inequality come down pretty quickly. One of my concerns is immigration cuz American workers are getting crushed. I don't think the GOP proposal for skilled labor immigration via a points system is the worst thing in the world. I think it'd help lower wage/skill American workers a lot. I think they'd see wages rise pretty quickly and rather sharply. I'm sure Prof. Pettis doesn't like the GOP immigration bill to switch to a points system (my suspicion is that he'd favor higher taxation on the wealthy, likely by raising taxes on capital gains+dividends and removing/raising cap on FICA taxes to fund social programs), but I do think that wages will rise sharply. If the amount being cut is too much (it cuts immigration by ~50%) cuz the population workforce might not grow, we could reduce that ~50% cut to ~25-30%. But we gotta start looking out for American workers.
This thread has gone long in the tooth. I suggest we discuss how trade disputes will effect Chinese markets. I'm thinking developing North Korea and possibly Venezuela would be the best moves for China. Both these countries have a much greater need for Chinese products, including financial products, than US, Europe, and Russia.
I think if we actually see harsh trade policy from the US, China would get hit hard. We're already seeing transactions for oil using other currencies. Sauds are now asking to fund part of their development funds in CNY. This could be the end of USD as reserve currency. Sterling collapsed as a reserve currency due to imperial overextention. USD is losing reserve status due to lack of willingness by American workers unwilling to run large, persistent trade deficits. How China gets affected? If China shifts it's growth model (I think they have ~5-7 years tops), they may be running current account deficits and might be able to expand their reach. That'd mean liberalizing their financial system. I don't know if that's likely or happening.
Suvy, if I remember Mike correctly, GB ended Sterling when they erected trade barriers in the early 30s, and then their economy turned around. All show and no go. Yuan going nowhere. China has policy against taking currency out of country. Mike had an article - everything they do strengthens the role of the dollar. Balanced trade isn't being tough - it's being just and fair.
I'm not so sure Yok. In my view, it's pretty clear USD became reserve currency at the end of World War I. By the 1920s, the US was setting limits on naval disarmament treaties for the rest of the world to abide by. That doesn't seem like UK hegemony to me, but what do I know?
Suvy, I'm sorry I caused you to feel lessoned.
China needs a new customer. The US imported a lot of poor people starting in the 1980s. This batch of poor people didn't add any economic value. They were just a way to transfer wealth from capable people to untrained and poorly motivated pawns. The US Federal Government taxes labor and subsidies sloth. A group gets less of anything that is taxed and more of anything that is subsidized. Capable people are revolting in the US. Most likely a lot of immigrants are going to go back to their homes. A lot of big cities in the US are going to shrink. Automation and decentralization are likely to be the new themes. China needs new customers. China will probably have to finance the purchases of their new customers. London is having issues. (if a worker can be much-more-economically replaced by automation then they are not adding to an economy; In the US this includes Doctors and Teachers who hold their jobs because they are part of a government monopoly. If the US depopulates these jobs will be automated because the stake holders will retire in mass.)
You sound apocalyptic Huggy. Things are bad. But not quite that bad.
That's not borne out by facts. Immigrants older than 25 are more likely to have college degrees or graduate/professional degrees than the rest of the population at large. The highest income ethnic groups in the US are almost all from Asia (immigrants older than 25 are ~35% more likely to have college degrees and ~65% more likely to have professional degrees). Most of the uneducated immigrants are largely older and mostly from Mexico. If you strip out Mexican and Central/South American immigration, you see something very different. Also, most immigrants are from Asia. If you actually look at transfer payments and who receives them, they're mostly natives and most of the *net transfers* are *to red states*. >50% of our budget is Social Security, Medicare, and interest. All of those are basically handouts to the elderly. Even ~60% of Medicaid goes to nursing homes. That's all resources to the elderly. You're just wrong.
BTW, automation is gonna take place in cities. Automation increases concentration of people in cities and helps big city manufacturing. I love how you say you're gonna throw all these immigrants out. Why don't you pick up arms, form your own militia, and make it happen tough guy? The old days of having tons of small towns and rural areas as your key population center are over. Cities are always a country's economic base and wealth center. It's just population density and interaction capabilities. I'm supposed to expect a bunch of old fat people sitting on their couch mobilizing a force for mass deportations when they need city wealth to finance it? I'm dying. The world you grew up in is dead. In life, only change is constant. Either embrace it or suffer. Your choice.
BTW, you're not gonna automate doctors or teachers. Medicine is mostly dealing with people (~90%). It's actually very interpersonal. Ditto with teaching. When you talk about AI or automation, what they really mean are "deep learning" algos. They can't actually think. They're not even aware they exist.
I'm remember reading that Sterling accounts being frozen was one of the reasons the Suez canal was nationalized. Special-Drawing-Rights are unlikely as a reserve currency. What is SDR other than a lossless way to change fiat currencies? Who believes the IMF would give up any of its gold to back SDR? Trade is reduced if there isn't a reserve currency. Public institutions like the World Trade Organization are too political to perform the functions of a reserve currency. Multinational companies could create one but I doubt that would be allowed. BIS could be expanded but I doubt Central Banks would allow that. Blockchain (Cryptocurrency) could work but the details of the system would be important.
I don't know where I found it, but there's a 1994 essay by the NSA on blockchain technology talking about what you just described. I don't know too much about it, but I'm pretty sure American IC has been involved in blockchain going back decades, but that's a different issue.
I get the savings vs. consumption balancing act. However, what I think is missing from the discussion is whether or not federal income taxation is an effective vehicle to redistribute wealth. I believe you made the point in The Great Rebalancing that government is considered a 3rd class in the wealth inequality debate (individuals and businesses being the other 2). It seems to me that re-distributive policies only grow GPD in developed countries is if the wealth actually gets into the hands of the middle/lower income classes, which then will increase non-debt financed consumption. It seems to me that it is extremely inefficient for the government to act as the forced moderator (via income taxation) between the two classes. A better solution might be policies that promote direct transfers of wealth (where the gov. acts as the moderator and not the benefactor).
Jozif, you do realize, that at this time, the income tax is used by the wealthy and powerful to transfer wealth from the great bulk of the working people of this country to themselves?
CSteven. Sounds like you've got a handle on things.
- It will only help the economy if and when they spend each of USDs in the economy.
Mr Pettis, for me you are the best economist worldwide. Everything becomes easy to understand in tour hands.
"it allows well-off individuals to redirect their wealth into increases in productive investment, and as these investments are made, they subsequently increase the productive capacity of the economy" But why would they? There is no rule that any rich person or corporation ever has to invest anywhere near purportion to the wealth they make through tax-breaks and cutting costs in production and wages/employees. No one has any incentive, beyond investing in the minimal amount possible in order to increase their bottom line. So it's not voodoo, it just mathematically doesn't make any sense when you equate human psychology which is how money moves. If AI was doing all the economic upkeep then you have a different story, because it would calculate economic growth and investments as part of it's accumulation tactics. It would also be so good that it would completely change how any of it works anyway. To put it really simply. If your cup is overflowing, you get another cup. You don't let others take your water. There is no trickle down when there is no incentive to let the cup even start to overflow. Why would their be? Most especially so when everyone you see around you in your social class also has more than one cup to collect any excess.
Gracie, I see Mike stating a position for the for the sake of argument. I don't disagree with your position on the psychology of the wealthy and the powerful. If I understand when a country has a low level of savings(productive capacity), by taking consumption away from the general population, that same measure of human effort can be placed into the expansion of productive capacity(savings). However, as you say, when there is no, or insufficient competent demand, there will be no savings. Expansion of production only takes place when wealth and power covets some other form of wealth in the possession of others, as a way of obtaining, if violence is not practical.
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