September 8, 2015 1:58PM

Big Problems with Anthony Atkinson’s “Inequality: What Can Be Done?”

“The godfather of inequality research,”  is how The Economist describes septuagenarian  British economist Anthony Atkinson. A frequent co-author with Thomas Piketty and Joe Stiglitz, Sir Atkinson has written a book about inequality which a  New York Times reviewer described as a “flurry of largely recycled policy proposals.”   Inequality: What can be done? is all about “unapologetic support for aggressive government intervention,” says The Economist, and “a throwback to the 1960s and 1970s.” 

There is no need to buy the book, because the following summary – “15 Proposals from Tony Atkinson’s book ‘Inequality: What can be done?’ – is more than enough.  Each Proposal is in the author’s own words, but followed by my own view of Problems with those plans.  [I skip Proposals 9-11, which are just inflated versions of policies similar to those in the U.S. – the earned income credit, estate & gift tax, and property tax.]

Proposal 1: The direction of technological change should be an explicit concern of policy-makers, encouraging innovation in a form that increases the employability of workers and emphasizes the human dimension of service provision.

Problem 1: To invite political officials to obstruct labor-saving technology or to encourage (subsidize) employment growth at the expense of output growth are plans to depress the growth of real output per worker (productivity) and therefore depress real income per worker.

Proposal 2: Public policy should aim at a proper balance of power among stakeholders, and to this end should

(a)   introduce an explicitly distributional dimension into competition policy;

(b)   ensure a legal framework that allows trade unions to represent workers on level terms;  and

(c)   establish, where it does not already exist, a Social and Economic Council involving the social partners and other nongovernmental bodies.

Problem 2: The first proposal (2a) hopes to turn antitrust lawsuits into a device for reducing profits, apparently based on a zero-sum notion that smaller profits ensure larger wages. The second proposal (2b) insinuates that current law is biased against unions in unspecified ways.  The third (2c) endorses a Social and Economic Council composed of private interest groups.  Such councils already exist at the Arab League and U.N., apparently as a pretext for conferences.

Proposal 3: The government should adopt an explicit target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it.

Problem 3:  Guaranteed public employment at the minimum wage would have to be financed by taxes, which reduce employment in the private sector. If the minimum wage were both high and binding, this could shift a large and growing share of employment away from production of marketable products into provision of “free” government services of unknown value to consumers.  By creating a growing constituency for large increases in the minimum wages, guaranteed tax-financed public jobs could displace or “crowd out” more and more private employment.  In the U.S., the legal minimum of $7.25 an hour is not binding; it applies only to certain formal and visible forms of employment. The U.S. Bureau of Labor Statistics reports that in 2014 there were only 550,000 people over the age of 25 earning the federal minimum wage of $7.25 an hour, but 999,000 earning less than that minimum wage.    

Proposal 4: There should be a national pay policy, consisting of two elements: a statutory minimum wage set at a living wage, and a code of practice for pay above the minimum, agreed as part of a "national conversation" involving the Social and Economic Council.

Problem 4: How could the proposed overturning of private labor contracts by an unelected “Council” be consistent with any concept of political or economic liberty?  This comes frighteningly close to saying governments (e.g., Nixon’s wage controls) and/or non-governmental interest groups (e.g., Medieval guilds) can and should dictate to workers how much they should charge for their work, and how much employers must offer.  Yet inequality is famously low in countries with no minimum wage, such as Sweden, Austria, Denmark and (until 2015) Germany.  And inequality is very high in U.S. cities with a high minimum wage, such as San Francisco. The concept of nationwide “living wage” is arbitrary gibberish, since such a goal cannot possibly be the same for an Alabama teen living with parents as it is for a single mother in Manhattan with four children.  

Proposal 5: The government should offer via national savings bonds a guaranteed positive real rate of interest on savings, with a maximum holding per person.

Problem 5:  U.S. Treasury inflation-protected securities (TIPS) guarantee a positive real rate if held to maturity, as do similar bonds in Europe. There could be no maximum holding of such bonds unless savers were somehow prohibited from selling their securities (which would make them illiquid and undesirable). If Atkinson means to offer a higher real return than the market provides then the proposal would misallocate capital and increase government (taxpayer) debt.

Proposal 6: There should be a capital endowment (minimum inheritance) paid to all at adulthood.

Problem 6: This proposal would everyone a check for about $15,000 upon reaching adulthood, described as “capital” yet likely used for consumption.  This indiscriminate transfer payment is to be financed by a 65% death tax. Higher tax rates on the capital accumulation of older savers to pay for large subsidies to the consumption of young consumers would, as Joe Stiglitz explained in 1978, reduce productivity and weal wages by reducing the ratio of capital to labor.

Proposal 7: A public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and in property.

Problem 7: Atkinson is proposing to emulate Arabian princedoms, China and other autocratic states by investing taxpayer funds (like the U.S. Social Security trust fund) in private equites and real estate.  Malaysia’s wealth fund, for example, is the majority shareholder in Malaysian Airlines, whose stock recently fell 90%.  Governments with budget deficits would be investing borrowed funds in stock markets, which is as speculative as individuals buying stocks on margin.  The authority to allocate taxpayer capital by political favoritism could not safely be entrusted to even the most saintly and omniscient bureaucrats and politicians, and they would bear none of the losses from bad investments.

Proposal 8: We should return to a more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broadening of the tax base.

Problem 8: If a top tax rate of 65% would be harmless to the economy and raise more revenue, then why is no country in the world adopting this advice?  All of the fastest-growing economies in Asia and Eastern Europe have very low and sometimes flat marginal tax rates, particularly on capital. All countries with very high and/or rising marginal tax rates (France, Greece, Japan, etc.) have performed quite poorly.  U.S. tax revenues were a larger share of GDP when the top tax rate was 28% than when it was 70% or 91%.

Proposal 12: Child Benefit should be paid for all children at a substantial rate and should be taxed as income.

Problem 12: Atkinson views his “Child  Basic Income” (CBI) plan as an intermediate stepping stone toward his comprehensive Basic Income plan because he thinks it easier to peddle to intransigent voters than his actual Basic Income goal for everyone.  Basic Income is essentially the 1967 “credit income tax” plan designed by James Tobin of Yale and converted into a $1000 “demogrant” for Sen. McGovern’s 1972 Presidential campaign. What McGovern missed is that a flat tax was the other key element of Tobin’s plan, as was confirmed by later work by Atkinson and Stiglitz on optimum taxation.

Proposal 13: A participation income should be introduced at a national level, complementing existing social protection, with the prospect of an EU-wide child basic income.

Problem 13: Participation income  is another rhetorical device (like CBI) for moving toward a Basic Income on a piecemeal basis.  The pretense is to make guaranteed income conditional on “participation in the society” by residents (not just citizens). In addition to all children and seniors, checks go out to those participating in approved training, taking approved care of children; doing approved volunteer work, etc.  Caseworkers empowered to decide which activities get approved would have treacherous authority to promote politically-favored nonprofits and thwart others.  If he can’t sell this idea, Atkinson’s alternative Proposal 14 is to simply to spend more on “social insurance, raising the level of benefits and extending their coverage.”

Proposal 15: Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income.

Problem 15: Foreign aid has often been used to prop-up bad policies and authoritarian politicians, and has never helped those economies in Asia and elsewhere which lifted themselves from chronic poverty to rapid economic growth – after reducing tax rates, tariffs and regulations. Besides, no academic has any right to tell taxpayers of sovereign nations how their elected representatives “should” spend their money

After his 15 Proposals, Atkinson also mentions even stranger “Ideas to pursue.” The zaniest, borrowed from Thomas Piketty, is “a global tax regime for personal taxpayers, based on total wealth.” Try to imagine the size and power of the required global army of tax collectors attempting to assess every wealthy individual in every country and collect a tax based on such inevitably arbitrary assessments. If such a tax could be enforced on a global scale, there would clearly be no democracy anywhere.

Sir Atkinson’s old-fashioned “policy polemic,” as the New York Times’ reviewer described it, is surprisingly disappointing.  He wrote a much bolder and better book back in 1995: Public Economics in Action: The Basic Income/Flat Tax Proposal.  In it, he suggested replacing all means-tested and social insurance benefits (such as unemployment or disability benefits) with a guaranteed annual income (refundable tax credit).  This would, he wrote, “do away with the present complicated means-tested   benefits” and shrink unemployment.  A key second part of the plan required replacing the progressive income tax with an optimal flat tax of 16-31%.   The combination of a flat tax and basic income, he concluded, “should definitely be on the agenda for public discussion.”  What Atkinson now proposes, unfortunately, is the exact opposite – numerous lavish political gifts ostensibly financed with destructive tax rates on capital and entrepreneurship.  These proposals would soon leave any country that adopted them in ruins.