67992 (Author at Cato Institute) https://www.cato.org/rss/people/67992 en Wake Up, Business! You Could Be a Week Away from Socialist Disaster https://www.cato.org/publications/commentary/wake-business-you-could-be-week-away-socialist-disaster Ryan Bourne <div class="lead text-default"> <p>Wading into election campaigns is fraught with danger for business people. &ldquo;We are concerned by the direction of things, but won&rsquo;t raise our head just to get it blown off,&rdquo; an executive of a popular multinational explained to me this week.</p> </div> , <div class="text-default"> <p>When even Bill Gates, a massive philanthropist, can be media-massacred for critiquing a US presidential candidate&rsquo;s wealth tax plans, no business sees itself safe from the blowback of opposing populist Left-wing policies. Customer bases comprising all political persuasions make any electoral statement from individual companies highly risky.</p> <p>No such excuses, however, can be made for organisations purporting to represent business interests, who have actively chosen to remain neutered. These groups have the licence to take the heat in defending members&rsquo; long-term economic interests. Yet in this campaign, the Institute of Directors (IoD), the Federation of Small Businesses (FSB), and the Confederation of British Industry (CBI) have been utterly supine in the face of Jeremy Corbyn&rsquo;s socialist threat.</p> <p>Here is a Labour Party wanting to confiscate shares in large companies, overhaul corporate governance, nationalise whole industries at prices set by politicians, impose rapid and destructive decarbonisation, reverse the Eighties&rsquo; trade union reforms and jack up all major taxes on capital.</p> <p>Business groups, though, have reacted with unjustified political evenhandedness, passing up on highlighting the destructiveness of socialism to instead hang-wring about smaller policy gripes from both parties.</p> <p>Consider the IoD. Last week, the organisation issued a robust defence of EU-style state aid laws. Conservative plans to change them to assist certain struggling industries and oblige public bodies to &ldquo;Buy British&rdquo; after Brexit were rightly savaged as a &ldquo;retreat away from free and open markets ... unfairly protecting and subsidising large incumbents at the expense of true competition&rdquo;. Bravo! This was exactly what a defence of a competitive market economy should look like, although their head of trade&rsquo;s claim that these mercantilist measures put her into &ldquo;actual convulsions&rdquo; seemed a tad over the top.</p> <p>So what was their reaction to Labour&rsquo;s more stringent calls for active industrial and regional planning, nationalisation for the purpose of cutting prices, and taking de facto government ownership stakes in large companies? Presumably, it sent them into apoplexy. Well, you wouldn&rsquo;t know it from their media release, which read: &ldquo;Taken as a whole, Labour&rsquo;s measures on business risk being too much stick and not enough carrot.&rdquo; Such a line might be appropriate for a minor Tory budget tax threat to push firms towards subsidising creches. But it read pathetically in response to a manifesto proposing a reversal of the Thatcherite revolution and the imposition of Yugoslavian-style &ldquo;market socialism&rdquo;.</p> <p>The FSB&rsquo;s behaviour has been similarly bewildering. It had nothing but caveated praise for the measures in Labour&rsquo;s manifesto. &ldquo;Firms welcome Labour small business pledges, but more details needed&rdquo; was their press release headline. Sure, the Labour Party&rsquo;s shadow chancellor might want to overthrow capitalism.</p> <p>But, no worries, he has made &ldquo;cast-iron commitments to end the late payment crisis&rdquo;. Surprisingly, the usually corporatist CBI offered the most clear attack on Corbyn&rsquo;s manifesto, explaining: &ldquo;Labour&rsquo;s default instinct for state control will drag our economy down.&rdquo; All would be well, of course, if only the party would just &ldquo;work with business&rdquo;.</p> <p>Look, we all know many companies dislike Brexit and want to remain closely aligned with the single market. Tory state aid plans worry them particularly then, as they signal a desired looser free-trade agreement with the EU. Plenty of people in the business community are really playing part-time psephologists.</p> <p>Given current polling, they consider Conservative measures they dislike as a more realistic threat to their interests, resting on their laurels that a Labour majority just won&rsquo;t happen or that, anyway, a Corbyn-led government would be short-term and constrained by mythical &ldquo;Labour moderates&rdquo; or coalition partners. Such faith, though, is fantasy. Electoral history shows the propensity for voting shocks. And, if Labour wins or becomes the largest party, it will be taken as a mandate for their radical manifesto.</p> <p>Business is a mere week away from being governed by leaders who want to &ldquo;democratise&rdquo; the whole economy, introducing ownership institutions to facilitate its slow nationalisation. At best, Labour sees private business as its lapdog for socialist goals &mdash; granting a place by the fire for doing right by Labour&rsquo;s agenda, or a smack on the nose for business models or practices &ldquo;the party&rdquo; doesn&rsquo;t approve of.</p> <p>We&rsquo;ve seen already this week how Labour would use the bully pulpit of government for the sinister targeting of individual businesses. The party&rsquo;s Twitter feed denounced five major firms directly and shared a deeply sinister spoof video mocking Virgin owner Richard Branson.</p> <p>Business groups remained silent. Companies who fail to decarbonise are already being threatened. No doubt Corbyn and McDonnell&rsquo;s anti-Americanism would infuse their actions too. Under Labour, businesses would have to worry about pleasing their dear leaders, not just their customers.</p> <p>Highlighting this threat is not to dismiss businesses&rsquo; frustrations today. No major party has put pro-business policies at the forefront of its campaign. Individual companies do worry over trade, migration and tax policies under the Conservatives. I can understand why high street retailers may like Labour&rsquo;s measures that hit digital competitors. Certain businesses may well consider apprenticeship levy reform the be all and end all.</p> <p>But it is a complete false equivalence to compare such issues to proposals that represent an existential threat to a modern market economy as a whole. In prevaricating or remaining neutral between these risks, the UK&rsquo;s business community is making a high-stakes, short-term bet, rather than taking out prudent insurance.</p> <p>At best, it&rsquo;s been complacent. At worst, suicidal.</p> </div> Thu, 05 Dec 2019 12:02:58 -0500 Ryan Bourne https://www.cato.org/publications/commentary/wake-business-you-could-be-week-away-socialist-disaster The Labour Manifesto Is a Lifetime Tax Bombshell for Ordinary Families https://www.cato.org/publications/commentary/labour-manifesto-lifetime-tax-bombshell-ordinary-families Ryan Bourne <div class="lead text-default"> <p>At times, it was painful to watch. But Andrew Neil&rsquo;s TV <a href="https://www.telegraph.co.uk/politics/2019/11/27/jeremy-corbyn-dodges-tv-debates-disastrous-bbc-interview/" target="_blank">interrogation of Labour leader Jeremy Corbyn</a> served a useful economic purpose: it put to bed, entirely and convincingly, the Labour lie that only the rich and business would feel the heat of the party&rsquo;s planned tax hikes.</p> </div> , <div class="text-default"> <p>With characteristic precision, Neil showed how families currently benefiting from the income tax marriage allowance or receiving puny dividend income could pay hundreds of pounds more under Labour each year. Unsurprisingly, if you abolish or make allowances less generous, and raise dividend income tax rates to those of ordinary income, people outside the top 5pc of earners who use such allowances or receive dividends pay more in tax.</p> <p>This fact seems to surprise nobody except for the Labour leaders, who persist in claiming that only those earning over &pound;80k would pay more income tax under them &mdash; in other words, those affected by their direct marginal income tax rate hikes (to 45pc over &pound;80k and 50pc over &pound;125k).</p> <p>In truth though, the dishonesty at the heart of Labour claims that &ldquo;someone else will pay&rdquo; runs far deeper than Neil had time to dig. Economists distinguish between who pays taxes legally, and where the actual burden really ends up. A huge literature, for example, suggests that between 30pc and 70pc of the real burden of corporation tax ultimately falls on workers in the form of lower wages.</p> <p>Labour, of course, would jack up the main rate from 19pc to 26pc. Their planned broadening of stamp duty &mdash; in effect creating a financial transactions tax &mdash; will, in part, be borne by pensions funds and workers. In other words, ordinary people will be made worse off by their business or transactions taxes as well, even those notionally paid by companies or the wealthy.</p> <p>Things could be far worse in reality. Clifford Chance tax lawyer Dan Neidle says there could be a &pound;20bn revenue hole in the party&rsquo;s plans; and some of their economic assumptions for the revenue obtained from other taxes look heroic. Any shortfall, of course, will ultimately need to be made up with tax hikes on ordinary families to meet their &pound;83bn-plus of day-to-day spending pledges. Given the high likelihood of subsidies for the newly <a href="https://www.telegraph.co.uk/investing/shares/labours-plan-nationalise-bt-will-leave-shareholders-pocket/" target="_blank">nationalised rail, energy, postal and water industries</a>, the tax burden on workers could, for many reasons, be much higher than the manifesto suggests.</p> <p>Even all this, though, is static analysis. What nobody has really pointed out yet are the likely impacts of Labour&rsquo;s manifesto on families&rsquo; tax burdens over longer periods.</p> <p>First off, even Labour&rsquo;s hikes in marginal income tax rates for &ldquo;the rich&rdquo; will affect many more people than they suggest. The Institute for Fiscal Studies has been told that Labour would keep <a href="https://www.telegraph.co.uk/money/consumer-affairs/does-earning-80000-year-make-rich/" target="_blank">the &pound;80k starting threshold</a> for their 45pc rate fixed in cash terms (in other words, it will not be indexed to prices). As incomes rise over time, many more individuals will be dragged into this band, with the number likely rising by 24pc in the next parliament alone.</p> <p>Of course, &ldquo;the rich&rdquo; aren&rsquo;t a fixed block of people either. Many people not earning over &pound;80k now will do at some stage in their life. On quite conservative assumptions, anywhere above 15pc or 20pc of people might pass that threshold at some stage in their careers. Labour&rsquo;s plans then will raise lots of families&rsquo; lifetime income tax rates, even if they appear unaffected today.</p> <p>More importantly, a lot of Labour&rsquo;s spending pledges are what we might call &ldquo;demographically sensitive&rdquo;. That is, they will likely become more expensive as the population ages. Despite the fiscal headwinds the country is sailing into, with health, long-term care, state pension, and pensioner benefit spending already set to explode from 14pc of GDP to 23pc of GDP over five decades, Labour&rsquo;s priorities would make this long-term ageing time bomb much worse.</p> <p>It&rsquo;s not just the promise to freeze the state pension age at 66 &mdash; though this alone will add &pound;24bn per year to direct public spending by the 2050s, increasing the jump in spending expected by over 40pc. Nor is it only the new commitment to provide free personal social care to those over 65, while capping their lifetime &ldquo;hotel&rdquo; costs at &pound;100,000 &mdash; promises that will spiral in cost, particularly if the age eligibility threshold is left unchanged.</p> <p>No, Labour&rsquo;s own manifesto details how the party would also increase the NHS spending baseline, expand free prescriptions, introduce free hospital parking, expand pension credit eligibility, increase state pension generosity for Britons overseas and put taxpayers (rather than the BBC) on the hook for &ldquo;free&rdquo; TV licences for over-75s. All will likely grow in expense with an ageing population.</p> <p>Inevitably, that means further hikes in taxes on ordinary working age people. Labour&rsquo;s own fiscal framework commits to not financing day-to-day government spending via borrowing over time. So as these commitments raise ordinary spending, taxes would have to be jacked up to cover age-related health, pension and welfare policies. Such additional revenue, on top of existing plans, could not be feasibly raised from rich taxpayers alone. Ordinary people would face significant hikes in the taxes they pay.</p> <p>Again, this is just pure public finance accounting. It doesn&rsquo;t require any judgment about whether Labour&rsquo;s broader economic policies would hurt prosperity and so the tax base, though that is clearly a risk too. Some might say tax rises on this scale simply couldn&rsquo;t happen.</p> <p>That they would be politically unfeasible. Yet the history of government entitlement programs shows they are extraordinarily difficult to abolish once introduced. It&rsquo;s not a credible defence of the manifesto to say &ldquo;don&rsquo;t worry &mdash; the long-term promises are incredible&rdquo; either.</p> <p>Hard truths about what will happen to your lifetime tax bill sit there, on the pages of Labour&rsquo;s manifesto in plain sight. The party&rsquo;s plans for income tax, the economic burdens of their business taxes and the ever-expanding expense of many of their spending pledges would see your family handing over more and more of your hard-earned income to HMRC over time. Don&rsquo;t say you weren&rsquo;t warned.</p> </div> Thu, 28 Nov 2019 11:58:30 -0500 Ryan Bourne https://www.cato.org/publications/commentary/labour-manifesto-lifetime-tax-bombshell-ordinary-families Five Myths about the Labour Manifesto https://www.cato.org/publications/commentary/five-myths-about-labour-manifesto Ryan Bourne <div class="lead text-default"> <p>1. Only the top five per cent of earners will be affected by Labour&rsquo;s changes to income tax.</p> </div> , <div class="text-default"> <p>Labour say they only intend to jack up income tax for those earning over &pound;80,000 (with new rates of 45 per cent up to &pound;125,000 and 50 per cent beyond that). But scrapping the marriage tax allowance, while reducing dividend allowances and raising tax rates on dividend income, means they are raising income tax burdens much lower down the earnings scale.</p> <p>Around 1.8 million families obtained the marriage tax allowance in 2018/19, with 1.5 million more eligible. Over ten per cent of the existing total &pound;13.25 billion dividend tax liability for 2018/19 was borne by savers and basic rate taxpayers, let alone those earning between &pound;50,000 and &pound;80,000. Basic and higher rate payers with dividend income would suffer allowance cuts and see their tax rates rise from 7.5 per cent and 32.5 per cent to 20 per cent and 40 per cent, respectively, under Corbyn&rsquo;s plans. Many people earning below &pound;80,000, in other words, will see their income tax burden rise.</p> <p>What&rsquo;s more, Corbyn&rsquo;s new tax bands will be for life, not just for Christmas. The threshold for the 45% rate would be fixed in cash terms rather than indexed &mdash; dragging more people into these higher rates as incomes rise. And, since the rich aren&rsquo;t some fixed group, over a lifecycle many more people will be affected. <a href="https://www.ifs.org.uk/publications/14303" target="_blank" rel="noopener noreferrer">Estimates suggest</a> 3.4 per cent of people will enter the top one per cent of earners at some stage in life. Assuming (conservatively) a similar multiple for the top 5 per cent, around 15-20 per cent of income earners would experience higher marginal rates over their lifetime under Labour&rsquo;s income tax plans.</p> <p>2. Only the rich will be affected by the overall tax changes.</p> <p>Richard Burgon intimated on <em>Question Time</em> that only the rich will be affected by Labour&rsquo;s overall &pound;83 billion revenue grab. We&rsquo;ve seen that&rsquo;s not true, but suppose it was: the average increase in revenue for people in the top five per cent of earners would need be &pound;53,000 per year to raise that revenue. Currently, the top five per cent pay &pound;94 billion in income taxes on a gross income of &pound;283 billion. So &ldquo;asking&rdquo; for another &pound;83 billion from them (no matter the source of tax) looks, shall we say, &ldquo;difficult.&rdquo;</p> <p>Labour supporters went crazy when I <a href="https://twitter.com/MrRBourne/status/1197498937600598016?s=20" target="_blank" rel="noopener noreferrer">pointed this out</a>, claiming I&rsquo;d ignored revenue from corporation tax hikes, expanding stamp duty, and more. But that&rsquo;s the point: Labour&rsquo;s income tax changes would raise only &pound;5.4 billion of the &pound;83 billion revenues they desire. Their other tax rises have economic burdens that hurt far beyond &ldquo;the rich.&rdquo;</p> <p>The <a href="http://www.adamsmith.org/s/CorpTax8.pdf" target="_blank" rel="noopener noreferrer">best evidence</a> that we have on the economic incidence of Corporation Tax (which Labour would raise from 19 to 26 per cent) suggests that anywhere <a href="https://scholar.princeton.edu/sites/default/files/zidar/files/sz_localeconcorptax_aer_2016.pdf" target="_blank" rel="noopener noreferrer">between 30 per cent</a> and <a href="https://cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7503/2006-09.pdf" target="_blank" rel="noopener noreferrer">70 per cent</a> of the burden ultimately falls on workers. <a href="http://www.ifs.org.uk/wps/wp0411.pdf" target="_blank" rel="noopener noreferrer">Existing evidence</a> suggests a financial transactions tax will ultimately hit both pension funds and, again, workers. The idea it&rsquo;s &ldquo;the rich&rdquo; or even &ldquo;business&rdquo; who pays, leaving ordinary folk unaffected, is just false.</p> <p>3. Boris Johnson is &ldquo;lying&rdquo; about Labour Corporation Tax rates.</p> <p>Johnson has claimed Labour would raise Corporation Tax to the highest level in Europe. C4&rsquo;s &ldquo;Fact Check&rdquo; <a href="https://www.channel4.com/news/factcheck/factcheck-johnson-wrong-about-labour-corporation-tax" target="_blank" rel="noopener noreferrer">labelled this &ldquo;wrong,&rdquo;</a> explaining that a 26 per cent rate would still be below those economic powerhouses of France, Belgium, Portugal, and Greece.</p> <p>Labour do reckon they <a href="https://twitter.com/PJTheEconomist/status/1197568734552055811?s=20" target="_blank" rel="noopener noreferrer">can raise more from Corporation Tax</a> as a proportion of GDP than other developed countries. But, practically, Boris was correct about the headline rate, too &mdash; at least, for companies&rsquo; UK profits affected by Labour&rsquo;s expropriation of shares for &ldquo;Inclusive Ownership Funds.&rdquo;</p> <p>Such businesses would be mandated to give up ten per cent of any profits (determined for Corporation Tax purposes) to IOFs. That&rsquo;s functionally equivalent to another ten percentage point hike in Corporation Tax rate from the point of view of shareholders, taking the UK&rsquo;s effective rate to a massive 36 per cent &mdash; not just the highest in Europe, but the whole OECD.</p> <p>You might quibble that this isn&rsquo;t strictly a &ldquo;tax,&rdquo; but a shared ownership scheme. But the IOFs are mandated, not voluntary. And any dividends above &pound;500 go directly and entirely to the government. If it looks like a tax, and quacks like a tax....</p> <p>4. That Labour&rsquo;s day-to-day tax and spend plans are moderate.</p> <p>The 2010 election saw Labour argue that planned Conservative cuts of &pound;6 billion in the Parliament&rsquo;s first year would be huge and devastating. These days, Labour can announce &pound;12 billion per year for WASPI women as a mere manifesto addendum.</p> <p>This is indicative of where debate is at. Labour plan &pound;150 billion extra in government spending before debt interest by 2023/24 (&pound;83 billion current spending, &pound;55 billion investment spending, and &pound;12 billion WASPI). That&rsquo;s a 16 per cent jump from today&rsquo;s projections &mdash; equivalent to almost adding another NHS or growing government by up to eight percentage points, permanently, over one Parliament!</p> <p>Spending at that level has never been sustained here; taxing at it is unprecedented. Some promises &mdash; free social care, prescriptions, TV licenses and fixing the retirement age at 66 &mdash; worsen the long-term debt headwinds associated with ageing. Then there&rsquo;s the renationalisations (assumed not to impact the public finances), which history suggests will result in ongoing taxpayer subsidies if Labour intends to follow through in meaningfully reducing prices.</p> <p>True, Scandinavian countries have sustained governments at Labour&rsquo;s proposed size. But these social democratic states mainly transfer money, and don&rsquo;t engage in Labour-style rampant interventionism. Nor do their governments pretend <a href="https://taxfoundation.org/how-scandinavian-countries-pay-their-government-spending/" target="_blank" rel="noopener noreferrer">only businesses and the rich will pay</a>.</p> <p>In contrast, Labour&rsquo;s tax plans have almost only downside revenue risk. Take hiking Capital Gains Tax rates. Given you only pay it when you sell an asset, many asset holders would likely defer gains and postpone income if a Labour government looked unstable, hoping for a Tory re-election reversing the policy. Elsewhere, heroic assumptions on the revenues from unitary taxation, the financial transaction tax, and more, has seen some legal experts conclude that revenues might be <a href="https://twitter.com/DanNeidle/status/1197512726584664065?s=20" target="_blank" rel="noopener noreferrer">&pound;20 billion lower than Labour plan for</a>, even presuming they are right on the economics of other tax rises.</p> <p>5. The main economic problem with Labour&rsquo;s manifesto is that it&rsquo;s just unaffordable.</p> <p>Focusing on tax and spend, we downplay the likely massive negative cumulative impact of Labour&rsquo;s policy on long-term growth.</p> <p>From property rights incursions to more intrusive wage and price controls; mobilising resources through the Green New Deal to entrenching a quasi-Yugoslavian form of shared ownership, historical evidence suggests GDP will suffer a lot over time. Ignoring this because it&rsquo;s difficult to measure makes laughable other partial analysis, such as the Resolution Foundation&rsquo;s report claiming that Labour&rsquo;s agenda would be better for child poverty.</p> <p>Labour-supporting economists believe their investment plans are &ldquo;good for growth.&rdquo; But when the state competes for resources, the hurdle for improving economic health is whether government activity corrects market failures or is more productive than the private activity it crowds out. Given Labour&rsquo;s aim for &ldquo;green&rdquo; and &ldquo;social&rdquo; transformation, and experience of major state investment programs worldwide, colour me doubtful. If you believe a massive new portfolio overseen by politicians such as John McDonnell will hugely improve public sector net worth, I have a &pound;1 Millennium Dome to sell you.</p> </div> Wed, 27 Nov 2019 11:11:29 -0500 Ryan Bourne https://www.cato.org/publications/commentary/five-myths-about-labour-manifesto Ryan Bourne discusses GDP predictions on CGTN's Global Business https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-gdp-predictions-cgtns-global-business Wed, 27 Nov 2019 10:21:10 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-discusses-gdp-predictions-cgtns-global-business Ryan Bourne discusses UK elections and austerity on BBC Radio’s Business Daily https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-uk-elections-austerity-bbc-radios-business Tue, 26 Nov 2019 12:33:54 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-uk-elections-austerity-bbc-radios-business It Is Creative Destruction, Not a Bad Tax, That Is Killing the High Street https://www.cato.org/publications/commentary/it-creative-destruction-not-bad-tax-killing-high-street Ryan Bourne <div class="lead text-default"> <p>Promising a &ldquo;fundamental review&rdquo; of a policy is invariably political code for saying: &ldquo;I want to kick the can on this thorny problem.&rdquo;</p> </div> , <div class="text-default"> <p>Boris Johnson&rsquo;s election pledge to cut the burden of business rates and launch a review of them in his first post-election Budget falls squarely into that bucket. For the Conservatives know that this is an area where good politics and good economic policy directly conflict.</p> <p>Many high street stores are having their lunch eaten by online competitors. Firms such as <a href="https://www.telegraph.co.uk/business/2019/01/09/amazon-accused-gaming-system-business-rates/" target="_blank">Amazon</a> do not require high cost inner-town and city premises. Struggling with this creative destruction, bricks-and-mortar retailers see the apparent high cost of business rates (a tax on business property that their online competitors often pay little of) as a contributor to high street woes.</p> <p><a href="https://www.telegraph.co.uk/business/2019/11/15/tory-plans-revamp-business-rates-dont-go-far-enough/" target="_blank">Demands for politicians to do something</a> to &ldquo;level the playing field&rdquo; or &ldquo;ease the burden&rdquo; emanate from prominent businesses and the public. Yet economic theory and evidence suggests business rates do not, by and large, affect businesses&rsquo; long-term financial positions.</p> <p>To understand why, economists distinguish between &ldquo;who pays the tax&rdquo; on paper and &ldquo;who shoulders the economic burden&rdquo; in reality. Business rates are calculated using the open market rental value of the property and a government-set multiplier.</p> <p>A 2017 revaluation &mdash; seven years after the last assessment &mdash; saw bills rise substantially in areas such as London, where rent and property values have soared since 2010. Though they fell in most places elsewhere, &ldquo;worse off&rdquo; businesses naturally reacted with horror as their bills, on paper, jumped. Yet most of that increased tax burden will ultimately fall on landowners, not tenant companies.</p> <p>Why? Well, a large proportion of business rates ultimately proxies for a tax on land values. Land supply is fixed. Given strict planning laws, particularly in areas such as London, so is the supply of available commercial property.</p> <p>If supply is largely constant, then the rental value of business property is determined by demand &mdash; the maximum any business is willing to pay for it. When making that calculation, businesses think about the total cost they will face, inclusive of rent payments and business rates.</p> <p>The implication is that a <a href="https://www.telegraph.co.uk/business/2019/08/13/stop-killing-high-street-big-retailers-small-businesses-beg/" target="_blank">cut in a company&rsquo;s business rates bill</a> will ultimately feed through into shop and landowners receiving higher rents from tenant businesses. Any hike to business rates, conversely, results in lower rents. Overall business costs, in time, remain largely unchanged from where they would have been. The only difference is a fall in tax revenue, which has to be made up elsewhere.</p> <p>Back in 1990 when business rates were introduced, places that saw their tax burden rise fell in value, and those that saw a lower tax burden rose in value. Major business rate tax cuts to &ldquo;ease the burden&rdquo; on high street retailers, in other words, wouldn&rsquo;t improve bricks-and-mortar stores&rsquo; long-run bottom line, but would provide a windfall to landowners.</p> <p>Now, in the short-run, reality is messier. Firms on longer fixed rental contracts who see higher business rate will indeed feel a squeeze until rents adjust.</p> <p>An assessment by the British Property Foundation of previous rate revaluations found it took an average of three years for 75pc of such rent adjustment to occur. But these short-term difficulties shouldn&rsquo;t be confused with the high street complaints we hear. Business rate cuts will not help stave off competition from online stores, because ultimately rates are, by and large, a tax on landowners.</p> <p>None of this is to say that the current system of business rates is perfect. In fact, the tax creates some clear distortions. Boris might consider, for example, having more regular revaluations, signposting revisions to allow rents to adjust before tax liabilities change, explicitly changing the legal liability to landowners to reflect economic reality, and abolishing agriculture&rsquo;s unjustified exemption.</p> <p>A post-election review could also examine how business rates interact with council tax &mdash; the higher burden for the former encourages land being used for residential rather than commercial property, even when the latter would be more economically productive.</p> <p>John Allan, the chairman of Tesco, has highlighted the biggest flaw with the current system.</p> <p>By using property values, rather than underlying land values, in determining tax liabilities, the tax can deter investment in improvements to property. Business rates in practice therefore amount to an uneasy combination of an efficient tax on land values and a damaging tax on business property.</p> <p>As Paul Johnson of the Institute for Fiscal Studies has pointed out, pure business rates perversely provide an incentive to demolish property in certain situations and have resulted in a time-limited vacant building relief, that still creates a wasteful incentive for some commercial property to lay empty.</p> <p>To overcome these issues, we could look to adopt a commercial land value tax, targeted at the value of the underlying land absent any buildings on it. Such a tax would face its own challenges, not least how to deliver accurate valuations.</p> <p>But all these issues are quite distinct from the critiques we hear about business rates from book stores, estate agents or supermarkets today. Their larger complaints are that the <a href="https://www.telegraph.co.uk/business/2019/09/10/can-corner-shop-survive/" target="_blank">burden of business rates</a> are just too high, that there&rsquo;s no level playing field with online firms, and that there&rsquo;s no link between a firm&rsquo;s liability and its underlying financial health.</p> <p>These are all very weak economic arguments. Once we observe that business rates proxy (imperfectly) for a tax on land values, we see that they do not affect most firms&rsquo; costs in anything other than the short term. It also makes no more sense to punish online firms who raise profitability by minimising the cost of property they use than punishing a business for introducing a labour-saving machine to the same end.</p> <p>Boris&rsquo;s future dilemma is therefore clear.</p> <p>The catalyst for the business rates review pledge has been the political pressure from bricks-and-mortar businesses. But if that review is to be successful, it must ignore the simplistic economic analysis of those same high street firms.</p> </div> Sun, 24 Nov 2019 11:55:29 -0500 Ryan Bourne https://www.cato.org/publications/commentary/it-creative-destruction-not-bad-tax-killing-high-street Ryan Bourne discusses the Labour Party launching its manifesto on BBC 5 Live https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-labour-party-launching-its-manifesto-bbc-5 Thu, 21 Nov 2019 10:40:30 -0500 Ryan Bourne https://www.cato.org/multimedia/media-highlights-radio/ryan-bourne-discusses-labour-party-launching-its-manifesto-bbc-5 The UK's Infrastructure arms Race Leads Us down a Road to Nowhere https://www.cato.org/publications/commentary/uks-infrastructure-arms-race-leads-us-down-road-nowhere Ryan Bourne <div class="lead text-default"> <p>When a political consensus arises, it&rsquo;s usually time to worry. Right now, the Conservatives and Labour have convinced most commentators that ramping up government infrastructure investment is an economic no-brainer.</p> </div> , <div class="text-default"> <p>Clear differences exist in the scale and composition of the parties&rsquo; plans. <a href="https://www.telegraph.co.uk/business/2019/11/07/chancellor-sajid-javid-launches-investment-boom-ending-era-slash/" target="_blank">Chancellor Sajid Javid has pledged an extra &pound;22bn per year of borrowing</a> for new public investment in road, rail and broadband. Labour&rsquo;s John McDonnell wants to more than double current investment spending, <a href="https://www.telegraph.co.uk/business/2019/10/28/john-mcdonnells-programme-british-economy-utopian-mad-catastrophic/" target="_blank">adding &pound;55bn a year</a> primarily for &ldquo;green&rdquo; and &ldquo;social&rdquo; transformation.</p> <p>Both, ultimately, would raise public investment to levels not seen sustainably since at least the Seventies, predicated on the idea that cheap borrowing costs make today a great time to invest.</p> <p>Economists have legitimised this reasoning, after strongly opposing investment cuts in the early 2010s. But there&rsquo;s an essence of fighting yesterday&rsquo;s war here. The economic case for infrastructure spending is very different when we&rsquo;re <a href="https://www.telegraph.co.uk/business/2019/08/13/employment-jumps-wages-surge-jobs-market-defies-economic-slowdown/" target="_blank">close to full employment</a> than in a recession rebound. No longer do we desire mythical &ldquo;shovel-ready projects&rdquo; putting unemployed construction workers back to productive activity.</p> <p>With unemployment low, infrastructure spending will take resources, workers and capital out of the private sector and into politically managed enterprises. For this to be an economic boon requires such spending to be more socially productive than the private activity it replaces.</p> <p>No economist would disagree that good infrastructure can enhance economic potential, in theory. A new road that cuts travel time between two cities reduces the effective cost of production, delivery and movement of workers, raising profit and encouraging entry into the local market.</p> <p>Better connections allow more specialisation, improved job matching to skills and the building of more meaningful economic clusters. Where the worry creeps in is over whether the political process ensures the right investments are made, and cost effectively.</p> <p>An early warning sign comes from the claim that low interest rates make today a good time to invest. Such reasoning only considers the &ldquo;cost&rdquo; side of a project and not the benefits. If interest rates are low because growth is weak, then user numbers for road, rail or broadband will be lower too, reducing its social returns. Borrowing costs tell us nothing about a project&rsquo;s desirability alone. More instructive is the lack of private sector appetite for the projects politicians desire.</p> <p>Nor does it follow that cheap government borrowing makes<a href="https://www.telegraph.co.uk/business/2019/08/16/time-tories-become-party-big-infrastructure-spending/" target="_blank"> government infrastructure the most desirable response</a>. Suppose some private projects generate an average 5pc return on capital and a government project only generates a 3pc social return.</p> <p>At borrowing rates of 1.5pc, it might be preferable for the economy to engage in deficit-financed business tax cuts, such as full expensing of investment in plant, buildings and machinery within the corporation tax system, to encourage the activities with the biggest economic payoff.</p> <p>Low borrowing costs are therefore a red herring. What matters is whether government investments have bigger net social benefits than if workers, machines and capital were retained privately. Claims that new government infrastructure investment will be &ldquo;good for the economy&rdquo; hinges on Javid and McDonnell knowing better how to generate productivity improvements than businesses and entrepreneurs, perhaps by selecting projects that alleviate genuine market failures or deliver huge bang for the buck.</p> <p>Chalk me up as unconvinced. Politicians historically prefer prestige projects and unveiling plaques over maintenance or removing bottlenecks that tend to generate big returns. How else to explain that in the 2010 spending review, the Coalition government deferred and cancelled road projects with average benefit-cost ratios of 6.8 and 3.2, respectively, but pushed ahead with HS2, then estimated to have a benefit-cost ratio of just 1.2?</p> <p>Bent Flyvbjerg&rsquo;s magisterial work has shown that over-optimism plagues political megaprojects worldwide. Nine of every 10 major projects have cost overruns, commonly of 50pc or more. Rail projects, he finds, are especially characterised by over-optimism on user numbers. Little surprise then that <a href="https://www.telegraph.co.uk/business/2019/11/11/time-uk-invest-not-just-infrastructure-tech-universities/" target="_blank">huge infrastructure spending drives</a> have ended in tears, from Spain&rsquo;s empty airports to China&rsquo;s ghost cities. Japan, in particular, has invested like crazy for three decades, to little avail.</p> <p>Javid and McDonnell&rsquo;s specific investment priorities heighten doubts about a growth dividend. Conservatives prioritise economic infrastructure, true, but their 3pc of GDP annual investment target is arbitrary. A political focus on &ldquo;left behind&rdquo; regions suggests the investment will work against market signals rather than with them.</p> <p>The party&rsquo;s obsession with broadband is based on speculative technological determinism too &mdash; a blind faith that it is a &ldquo;must have&rdquo; because computers are important. Given faster broadband roll out could occur privately and profitably to most areas, the Government would, in effect, be throwing billions of pounds to ensure relatively remote areas are connected, with unclear economic benefits.</p> <p>The sheer scale of Labour&rsquo;s spending plans make them susceptible to dodgy investments (the UK would be the highest spending advanced economy). <a href="https://www.telegraph.co.uk/business/2019/07/15/johnmcdonnell-pursue-water-suppliers-seek-offshore-havens/" target="_blank">McDonnell admits he prioritises &ldquo;green&rdquo; and &ldquo;social&rdquo; transformation</a>, not growth. But building social housing, rather than removing barriers to a responsive private housing market, could lock people into unproductive areas.</p> <p>Though climate change deserves a response, rapid decarbonisation would push the UK into expensive forms of renewable energy, without much affecting global emissions. Other social investments will try to revive flagging regions. Yet previous attempts at regeneration, not least under Gordon Brown, failed miserably.</p> <p>Anyone expecting this infrastructure arms race to address Britain&rsquo;s chronic productivity problem will thus be disappointed. Well-targeted infrastructure projects selected according to disciplined cost-benefit analysis could enhance growth in areas where private provision is impossible. With the outright deluge of funds proposed, mixed with politics, such requirements speak for themselves.</p> </div> Thu, 14 Nov 2019 11:52:00 -0500 Ryan Bourne https://www.cato.org/publications/commentary/uks-infrastructure-arms-race-leads-us-down-road-nowhere Why Billionaries Are a Sign of a Fair Society https://www.cato.org/publications/commentary/why-billionaries-are-sign-fair-society Ryan Bourne <div class="lead text-default"> <p>&ldquo;In a fair society, there would be no billionaires,&rdquo; <a href="https://twitter.com/jeremycorbyn/status/1190186804785418242?s=20" target="_blank">Jeremy Corbyn has claimed</a>. It is one ambition he might actually deliver on, given <a href="https://www.telegraph.co.uk/news/2019/05/11/britains-billionaires-prepare-flee-country-amid-fears-jeremy/" target="_blank">the super-wealthy&rsquo;s musings about their residence decisions</a>.</p> </div> , <div class="text-default"> <p>What&rsquo;s surprised me about this is how many non-socialists came out to agree with him. Usually sensible economists, who don&rsquo;t assume wealthy people are necessarily class menaces, nevertheless endorse Corbyn&rsquo;s view that billionaire wealth is somehow illegitimate.</p> <p>Chris Giles, economics editor of the <em>Finanical Times</em>, no less, <a href="https://twitter.com/ChrisGiles_/status/1189947749422288896?s=20" target="_blank">tweeted</a>: &ldquo;1. You should be a billionaire if you&rsquo;re worth it. 2. Probably, no one is. 3. If you&rsquo;re not worth it and a billionaire &mdash; you&rsquo;ve got your money from rent exploitation &mdash; which should be stopped/taxed.&rdquo; <a href="https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2019/11/the-rights-mega-rich-problem.html" target="_blank">Chris Dillow claims</a> people can <em>only</em> obtain such extraordinary wealth if competition is not working &mdash; i.e. if owners and investors enjoy super-normal profits that don&rsquo;t get competed away.</p> <p>Both agree then that billionaires&rsquo; existence probably indicates &ldquo;market failures.&rdquo; If the UK&rsquo;s 151 billionaires&rsquo; wealth derives from rent seeking, failures of competition, or other government assistance, &ldquo;targeting&rdquo; them is fair. Wealth taxes, in this view, are a mere &ldquo;backstop&rdquo; to correct for the fact that &ldquo;every billionaire is a policy failure.&rdquo;</p> <p>Two implicit claims are central to this argument. First, that it&rsquo;s unlikely people can become billionaires through their talents, investments and entrepreneurialism alone in a competitive market economy. Second, that billionaire wealth taxes or other highly-targeted action can make the economy more efficient. Both are completely unevidenced assertions.</p> <p>In today&rsquo;s globalised, networked economy, people clearly can become super-rich. Take WhatsApp founders Brian Acton and Jason Koum. WhatsApp operates in the highly competitive instant messaging industry, and now has 1.5 billion users in 180 countries after exploding globally as a cheap substitute to texts. Such reach generates the company around $5 billion in annual revenue (a tiny average revenue per customer). When its founders sold up to Facebook, they pocketed a cool combined $15 billion for their innovation.</p> <p>Whatsapp didn&rsquo;t rent-seek or benefit from government-created entry barriers &mdash; its product was just best in class. Its founders obtained a slither of the huge consumer value they created and cashed out before the company suffered disruption from a new competitor. Why, exactly, should their wealth be now plundered beyond their previous obligations? And why should they be &ldquo;targeted&rdquo; more than entrepreneurs who blow such wealth on near term consumption, losing &ldquo;billionaire&rdquo; status?</p> <p>Not every industry has network effects like instant messaging. But this story, of top wealth generated through open markets, replicates time and again. Jeff Bezos got rich through Amazon delivering a great service and range of products to customers in competitive retail, TV and other markets. Michael Jordan became a billionaire through his stardom as basketball&rsquo;s top player. JK Rowling wrote a great series of classic Harry Potter books that went global. Early investors who took a punt on Apple, Amazon, and <a href="https://www.lifehacker.com.au/2017/12/how-an-australian-became-a-billionaire-by-investing-in-a-crazy-crypto-company/" target="_blank">even Bitcoin</a>, have become billionaires too.</p> <p>Giles might claim none of these are truly &ldquo;worth&rdquo; their riches. But as Friedrich Hayek once wrote, rewards in a market economy are not allocated by someone&rsquo;s <a href="https://capx.co/dont-expect-the-market-to-pay-just-deserts/" target="_blank">conception of &ldquo;just deserts&rdquo;</a> or &ldquo;worth,&rdquo; but by supply and demand. Anyone who&rsquo;s viewed Tracey Emin&rsquo;s artwork will attest that worth is subjective. Basing policy on &ldquo;worth&rdquo; would be a rejection of the market economy itself, rather than a claim that market failures are simply driving billionaire outcomes.</p> <p>Now, not all billionaires obtain their riches through open free-market activity, obviously. Real cronyism should be stamped out. But it stretches credulity to just assume that rent-seeking or uncompetitive markets account for all British top wealth. Analysis of the 2018 <em>Sunday Times</em> Rich List found that <a href="https://realbusiness.co.uk/the-uks-top-25-self-made-millionaires/" target="_blank">94 percent</a> of Britain&rsquo;s richest 1000 people were self-made, <a href="https://theday.co.uk/stories/the-rise-and-rise-of-britain-s-billionaires" target="_blank">including</a> entrepreneurs such as James Dyson, the singer Ed Sheeran, and JK Rowling. In some instances, it&rsquo;s difficult to even dream up a potential &ldquo;market failure&rdquo; explanation at all.</p> <p>Even if Giles and Dillow were correct about some billionaire wealth though, top wealth taxes or other responses treating all billionaires equivalently would be misguided. Why? Well, because policy failures often reach more deeply than affecting just billionaires, and tend to shrink the economy, not just determine how wealth is distributed. It&rsquo;s always preferable to deal with the problem at source.</p> <p>Consider a highly distortionary regulation, such as tight land use planning laws. These enrich existing property owners at the expense of others. But that &ldquo;problem&rdquo; reaches far beyond raising the wealth of billionaire real estate magnates. A billionaire wealth tax would be an extraordinarily ill-targeted and inefficient means of dealing with this broad-based mistake, leaving the economy still far from efficiency.</p> <p>Billionaire wealth would be a terrible proxy to assessing whether product markets are competitive too, risking vast &ldquo;false positives&rdquo; (punishing efficient wealth as anticompetitive). New innovations can deliver exceptionally high profits for businesses for a while. If investors or business owners cash out before these are competed away, their wealth doesn&rsquo;t reflect ill-functioning markets. If businesses reinvest in new product lines or efficiencies, as Amazon has done, rising business worth needn&rsquo;t reflect monopoly power. And if businesses just produce a product consumers prefer (think Coca Cola), this doesn&rsquo;t reflect lack of competition either. Consumer prices, choice, and quality are the best evidence of competition working, not billionaire wealth.</p> <p>With top <em>individual</em> talent, be it novelists, singers, or even footballers, it&rsquo;s not even clear what &ldquo;competition&rdquo; means? JK Rowling, Michael Jordan, or Ed Sheeran have created their brands and individualised products that can&rsquo;t, by and large, be &ldquo;competed away&rdquo; once a fan base has been established or <a href="https://www.forbes.com/sites/abinlot/2018/08/28/roger-federer-on-why-he-ditched-nike-for-a-300-million-uniqlo-deal/#76d2e32064db" target="_blank">a career ends</a>.</p> <p>Since billionaire riches can self-evidently be driven by &ldquo;good&rdquo; and &ldquo;bad&rdquo; causes, untargeted billionaire taxes or clampdowns risk significant collateral economic damage. Even <a href="https://www.nber.org/papers/w25725" target="_blank">in a simple model</a>, if new ideas drive growth, and one reward for the best ideas is billionaire wealth, then even modest wealth taxes might deter new hugely enriching innovation, since wealth taxes are the equivalent of huge income taxes on the returns to assets.</p> <p>Again, this is not a general defence of all billionaires. <a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality#poverty-matters-not-inequality" target="_blank">Stamping out genuine cronyism</a> at source is desirable. Having an effective functioning competition policy is worthy. The rich should pay proportionately more in taxes on their incomes than others (as they do). With intellectual property, balancing incentives for innovation and monopoly privileges is tricky. If copyright reform is desirable, then argue for it, but don&rsquo;t arbitrarily loot people just because they obtained vast wealth from a framework of law otherwise seen as beneficial.</p> <p>My real points here though are two-fold. A blanket assertion that billionaire wealth is impossible in a meaningfully competitive free market is wrong; that error by risks significant economic damage if it&rsquo;s a precursor to untargeted anti-billionaire policy. Corbyn wouldn&rsquo;t understand this. But our economist friends should know better.</p> </div> Wed, 13 Nov 2019 11:07:39 -0500 Ryan Bourne https://www.cato.org/publications/commentary/why-billionaries-are-sign-fair-society Exploring Wealth Inequality https://www.cato.org/multimedia/cato-daily-podcast/exploring-wealth-inequality Ryan Bourne, Chris Edwards, Caleb O. Brown <p>What evidence is there that disparities between rich and poor harm the poor, the economy, and our political system? Chris Edwards and Ryan Bourne are authors of the new paper, "<a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality">Exploring Wealth Inequality</a>."</p> Mon, 11 Nov 2019 16:33:53 -0500 Ryan Bourne, Chris Edwards, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/exploring-wealth-inequality The Real Economic Threat Posed by Corbyn and Mcdonnell Is to Jobs https://www.cato.org/publications/commentary/real-economic-threat-posed-corbyn-mcdonnell-jobs Ryan Bourne <div class="lead text-default"> <p>Jeremy Corbyn and Boris Johnson are both fighting this election promising change. For all the Westminster chatter of voters' desire for security, they are faced with a fork in the road towards two economic destinations very different from today. Brexit, the unleashing of pent up private investment, and ending front-line public service &quot;austerity&quot; is Boris's retail offer. Corbyn's Labour instead demands a revived state socialism, incorporating a range of new interventions and government spending.</p> </div> , <div class="text-default"> <p>After nine-and-a-half-years of Conservative-led government, a fresh economic narrative under Boris was understandable. Yet the difficulty with a vote Leave-style &quot;vote for change, you've got nothing to lose&quot; message is that it downplays that voters do, in fact, still have a lot to lose. For all the talk of economic hardship and insecurity, Britain's labour market, in particular, has performed extraordinarily well through this tough decade. And that incredible jobs miracle is on the line with Corbyn's agenda.</p> <p>If the Conservatives don't feel they can defend Britain's flexible jobs market, it behoves us economists to do so. For as Sky's economic correspondent Ed Conway tweeted just two months ago, it's &quot;hard to imagine how Britain's labour market could be doing much better right now&quot;. Our unemployment rate is just 3.9pc, and recently touched its lowest level since 1974; employment at 76.9pc is just a tad off the highest rate on record. Tory MP Rob Halfon drew opprobrium for trying to rebrand the Conservatives as a &quot;Worker's Party&quot; back in 2014. But on job numbers, at least, they have a strong claim to such a title.</p> <p>Yes, this doesn't mean there aren't people out there who'd prefer longer hours or more secure work (although critics ignore surveys showing that most people on zero hours contracts are satisfied and happy with their flexibility). It doesn't mean either that Britain's pay performance this past decade, owing to years of slow productivity growth, hasn't been extremely disappointing (although even average weekly earnings are now rising at over double the rate of inflation).</p> <p>But whatever critiques one might have of Tory policy or the coming impact of Brexit on productivity and wages, basic economics tells us that a country's long-term employment level is not determined by government spending or trade. No, it's determined by structural factors: education and skills, the welfare system, labour market regulation, wage policies, mobility and more. And the truth is that the UK's bundle has delivered a recent jobs creating machine.</p> <p>We take this for granted at our peril. Chancellor Sajid Javid has pushed ahead with another huge minimum wage hike that will see 22pc of workers now have their hourly pay determined by the Government. His thinking reflects a new conventional wisdom &mdash; that low pay is the scourge of our times, now we are near full employment.</p> <p>To the extent this is true, it's a much better problem to have. But Corbyn's agenda takes complacency that employment is robust to policy change to extremes. Our flexible labour market has coped with rising minimum wages and a weak economy in part through greater use of atypical work contracts and the gig economy, as firms find flexible ways to manage costs and would-be workers eek out new opportunities.</p> <p>Yet Labour's 2017 manifesto promised to extinguish such employment safety valves. Their &quot;Fair Deal At Work&quot; pledged to ban zero-hours contracts and impose full employment rights irrespective of worker hours or permanence, while ratcheting up the minimum wage further and introducing new sectoral collective bargaining powers for trade unions too.</p> <p>The dual effect would be devastating for jobs. Raising minimum wages puts cost pressures on firms. Sectoral collective bargaining leaves even less scope for businesses, especially small and medium-sized enterprises, to adjust other wages and labour conditions to their own circumstances. All companies in a sector would have to offer similar terms, dampening remuneration package competition and eliminating the ability for employers to vary pay significantly depending on the productivity of potential hires.</p> <p>Such policies benefit &quot;insiders&quot; at the expense of those out of work or in looser, more informal or part-time jobs not governed by such bargaining. The latter tends to include younger workers, low-skilled workers and women. But if businesses are also banned from offering flexible work contracts or have little incentive to offer part-time roles due to labour rights obligations, such job opportunities will dry up entirely.</p> <p>In Spain, which has sectoral collective bargaining and highly regulated labour markets, the unemployment rate today stands at a massive 14.2pc. In fact, almost all major EU countries with high coverage of sectoral bargaining have significantly higher unemployment than the UK, including Belgium (5.6pc), Finland (6.7pc), Portugal (6.6pc), Sweden (7.3pc) and France (8.4pc).</p> <p>Two countries maintain comparably low unemployment to the UK with sectoral bargaining &mdash; Denmark and the Netherlands. But they embrace &quot;hire and fire at will&quot; and high levels of flexible work, respectively. Corbyn opposes both. In short, policy matters. If Corbyn's package reduced our labour market's flexibility to somewhere between the levels of Belgium and France, anywhere between 570,000 and 1.5 million extra people today would be out of work.</p> <p>Much more will be said about Corbyn's economic agenda and its effects on workers. His industrial policy risks lowering productivity. His large business employee ownership plan would tie workers' fortunes more closely to company survival. His reversal of Margaret Thatcher's trade union reforms could set the stage for a new era of industrial disputes.</p> <p>But the most dangerous risk of Labour's work agenda is an elevated rate of unemployment. Corbyn's threat to business is well known; his threat to your job is underrated.</p> </div> Fri, 08 Nov 2019 11:31:34 -0500 Ryan Bourne https://www.cato.org/publications/commentary/real-economic-threat-posed-corbyn-mcdonnell-jobs No, A Wealth Tax Is Not Like A Cigarette Tax https://www.cato.org/blog/no-wealth-tax-not-cigarette-tax Ryan Bourne <p><a href="https://www.nytimes.com/2019/11/05/upshot/wealth-tax-warren-sanders.html">Neil Irwin</a> of the New York Times says Elizabeth Warren’s wealth tax should be thought of as akin to a cigarette tax, rather than an ordinary revenue raiser.</p> <p>The point of it, he says, is not just to raise some funds for new government programs, but to deter vast wealth accumulation in the first place. This, he concludes, makes it a Pigouvian tax. As with these types of taxes on cigarettes, its aim is in part to reduce the activity it is taxing (the ranks of the super wealthy).</p> <p>This is not very convincing and very confused on the economic theory.</p> <p>The idea behind Pigouvian taxes is not that certain products or activities are inherently “bad,” but that their consumption generates broader social costs than those faced by the individual consumer. In a free-market, I might buy and smoke cigarettes, faced just with the private costs to me of purchasing them and any health consequences. But when I smoke, others around me might suffer the health costs associated with second-hand inhalation. This negative externality is said to be a “market failure” – meaning total consumption is beyond some “social optimum.” A tax can, theoretically, be imposed which incorporates these broader social costs into the price of the product. If imposed, total consumption will fall to the “correct” level with regards to economic efficiency.</p> <p>Now, as I’ve noted before, there are all sorts of problems with Pigouvian taxes achieving <a href="https://www.cato.org/blog/problem-pigouvian-taxes">efficiency in reality</a>. This framework has been bastardized beyond all recognition in recent years, not least through people claiming things as external social costs that aren’t and using this framework to advocate for taxes that are much higher than justified by any reasonable account of real externalities.</p> <p>But Irwin’s article is unconvincing for a simpler reason: he doesn’t actually outline what the supposed external costs associated with top wealth actually are! He just takes it as given that having super wealth is damaging to others, and thus a Pigouvian tax is justified. Given most top US billionaires are self-made entrepreneurs who got rich out of generating vast consumer surplus (see <a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality">Section 3</a>), this seems a remarkable assertion.</p> <p>Now, some others have tried to help Irwin out. Elizabeth Warren’s wealth tax architects Emmanuel Saez and Gabriel Zucman claim that the super wealthy have a negative oligarchic effect on politics. Some say that they can wield influence on politics through donations, and that could be considered an externality on others, if it changes political outcomes.</p> <p>But as I <a href="https://www.cato.org/blog/has-wealth-inequality-eroded-us-democracy">wrote last week though</a>, the evidence for the super wealthy having a big impact here, particularly in comparison to other interest groups, is weak. As <a href="https://www.youtube.com/watch?v=oUGpjpEGTfE">Larry Summers recently explained at PIIE</a>, to be a top donor requires far less money than these top billionaires possess, and so targeting all super wealthy people (irrespective of whether they are politically active) to reduce this perceived problem is bizarrely untargeted and unlikely to internalize the problem. In fact, it may exacerbate the role of vested interests in politics, if wealthy people instead disperse funds to much more powerful interest and pressure groups to avoid the tax.</p> <p>Another claim might be that a lot of rich people get super wealthy because of cronyism or uncompetitive markets. A wealth tax might deter the incentive to engage in such activities, bringing broader benefits to society. But, as noted, a wealth tax’s crude application to all super wealthy would mean that, by the same logic, it would also disincentivize entrepreneurial activity and innovation that has huge positive spillovers to society.</p> <p>So, no, a wealth tax is not like a cigarette tax. First, unlike with cigarettes, it’s unclear what the negative externalities associated with top wealth are. Second, even on the supposed mechanisms people suggest, a wealth tax would be crude and badly targeted, so not accounting for the supposed social costs they indicate accurately.</p> Thu, 07 Nov 2019 15:01:38 -0500 Ryan Bourne https://www.cato.org/blog/no-wealth-tax-not-cigarette-tax Hope from Europe on Economic Liberty https://www.cato.org/blog/hope-europe-economic-liberty Ryan Bourne <p>Last week I attended and spoke at a conference hosted by <a href="https://live.ft.com/Events/2019/FT-Business-Regulation-Forum-Prague">the Financial Times and JTI</a> on economic regulation in Prague.</p> <p>During my panel on the regulation of AI and other innovative new technologies, I made five substantive points about the economics and public policy implications of new technologies:</p> <ol> <li>As far as possible, policymakers should allow permissionless innovation rather than be overly precautionary, only intervening when there was a clear need to do so for some specific application in a given product market.</li> <li>Where regulatory oversight occurs and new products compete with existing goods, policymakers shouldn’t automatically try to shoehorn innovations into current regulatory strictures to maintain a “level playing field.” New products often come with new safety features, for example, changing the balance of risks or mitigating previously perceived market failures. As such, innovation can compete with the regulator as well as incumbent products.</li> <li>Discussion of highly speculative extreme worst-case scenarios and ethical imperfections of new technologies sometimes seemingly ignore that the current world is not perfect, and human beings themselves exhibit biases. It’s a mistake to try to make perfect what is ever-evolving and already very good, especially if doing so deters other new innovations through fines or heavy compliance costs.</li> <li>In some fields where regulation is perceived to be needed, the rules should aim merely to solve the perceived problem proportionately and provide certainty for business. As Alexander Kryvosheyev from JTI explained, for businesses, regulatory clarity can be as important as the regulation itself. It may be that in some areas industry protocols and sharing of best practice can be facilitated, obviating the need for direct government regulation, but we should be ever mindful of the risk of cronyism and capture if this type of forum is provided through government.</li> <li>Regulatory policy is a terrible tool for dealing with distributional concerns re: the winners and losers of technological change.</li> </ol> <p>All in all, I found the messages well received and the conference somewhat heartening.</p> <p>Speaker after speaker in what was a central and eastern Europe heavy event bemoaned the tendency for Europe to be overly prescriptive with regulation and a mere talking shop for genuine pro-growth reform. Many indicated how the US was their beacon for a better environment for innovation in respect of new technologies.</p> <p>What was clear though was an apparent appetite for change. Central and eastern European countries have already experienced significant economic upheaval over the past three decades. That means perhaps they are more willing to embrace a radicalism on moving in a market-friendly direction. Certainly, <a href="https://www.vlada.cz/en/media-centrum/aktualne/speech-of-prime-minister-babis-at-ft-business-regulation-prague-forum-177392/">Czech Prime Minister Andrej Babiš</a> talked a good game about the need for pro-market liberalization both domestically and within the EU, at one stage saying explicitly, “the biggest problem for regulation is in Brussels, not Prague,” and lamenting that “the European Union has no vision.”</p> <p>With much Brexit Remain-sympathizing commentary both here and in the UK seeking to retrospectively paint the EU as a bastion of economic liberty, it was cheering to re-hear the sort of pro-liberty eurosceptic critiques of yesteryear and a determination to make Europe more open to wealth-enhancing innovation.</p> Tue, 05 Nov 2019 16:05:43 -0500 Ryan Bourne https://www.cato.org/blog/hope-europe-economic-liberty Do Elizabeth Warren and Bernie Sanders Really Care About Wealth Inequality? https://www.cato.org/blog/do-elizabeth-warren-bernie-sanders-really-care-about-wealth-inequality Ryan Bourne <p>Senator Bernie Sanders has called levels of U.S. wealth inequality <a href="https://www.nytimes.com/2019/09/24/us/politics/bernie-sanders-wealth-tax.html">“outrageous,” “grotesque” and “immoral.”</a> Democratic presidential candidate Elizabeth Warren is pushing for a wealth tax to curb what she describes as “runaway wealth concentration.” Yet despite their rhetoric, it’s not clear, deep down, whether either really cares about wealth inequality per se or believes that reducing it should be an overriding public policy goal.</p> <p>To see why, consider this. Every year, <a href="https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-databook-2018.pdf">Credit Suisse calculates</a> a wealth “Gini coefficient” for major countries, indicating their level of wealth inequality in a single number from 0 to 100. Higher numbers indicate higher inequality. In 2018, the U.S. really did have a comparatively high figure at 85, as Warren and Sanders lament. But how this number compares to other countries is instructive.</p> <p>Many poorer economies, such as Ethiopia (61), Myanmar (58), and Pakistan (65), have lower wealth inequality than America. Meanwhile, a diverse range of countries have similarly high wealth inequality, including Russia (88) and Kazakhstan (95), through to Sweden (87) and Denmark (84). Unsurprisingly, neither Warren nor Sanders argue for the U.S. to adopt Ethiopia or Pakistan’s economic model in pursuit of more equality. But <a href="https://www.cnn.com/2016/02/17/politics/bernie-sanders-2016-denmark-democratic-socialism/index.html">Bernie Sanders has said in the past</a> that Denmark and Sweden are exemplars par excellence of his vision of “democratic socialism,” seemingly not caring that their wealth distributions are “outrageous,” “grotesque,” or “immoral,” according to his own self-defined standards.</p> <p>The truth, acknowledged by the candidates’ own talking points and omissions, is that wealth inequality statistics in isolation tell us nothing particularly interesting about an economy’s health. Without analyzing in detail the underlying causes of a wealth distribution, statistics like the Gini coefficient, or the top 10 or 1 percent wealth shares, give us no indication of whether “good” or “bad” trends have driven the distribution of net assets across society. Sanders and Warren might use such summary wealth statistics as if they are proxies for “fairness” or how “rigged” the economy is. But few sane people would argue Sweden is less fair than Myanmar, or that the U.S. economy is more rigged than Argentina (79) or Qatar (62). These figures, as with top wealth shares, are a poor guide to policy.</p> <p>All this shows that when it comes down to it, the candidates don’t prioritize wealth egalitarianism as a social goal when it conflicts with their other aims. This is somewhat of a relief. <a href="https://www.cato.org/publications/commentary/want-more-equal-society-be-careful-what-you-wish">Japan immediately after World War II</a> was a very equal place, as was China before its relative economic liberalization from around 1980. But the cost of achieving that wealth egalitarianism in both cases was intolerably high: mass destruction through war and grinding communist poverty. As former treasury secretary and Democrat <a href="https://www.axios.com/newsletters/axios-markets-deef60d9-1bc6-4baa-b477-5a93d84a1743.html">Larry Summers recently said</a> with beautiful understatement, “I do not think a focus on wealth inequality as a basis for being concerned about a more just society is terribly well-designed.”</p> <p>In our new paper today, “<a href="https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality">Exploring Wealth Inequality</a>,” Chris Edwards and I examine some potential causes of wealth inequality in the U.S. In a global free market, the distribution of wealth can widen as entrepreneurs make groundbreaking innovations to become hugely rich through selling their products or services to better-off consumers all around the world (a positive sum cause). On the other hand, cronyism, rent-seeking, and certain bad government regulations can be a destructive cause of wealth inequality – enriching some at the expense of others and reducing overall wealth. There’s <a href="https://www.cato.org/blog/larry-summers-wisdom-wealth-inequality">lots of evidence</a> too that social insurance programs come with a big trade-off: though they may reduce after tax-and-spend <em>income</em> inequality, they widen <em>wealth</em> inequality by deterring the means and incentive to save among the middle-classes and the ability for them to inherit their wealth.</p> <p>Sanders and Warren talk as if it’s pure cronyism or greed that has led to high measures of U.S. wealth inequality. In crude terms, they imply that the U.S. economy is more like Russia than Denmark. And, of course, there is some rent-seeking, which policy change could help stamp out. But evidence that this is <a href="https://www.cato.org/publications/commentary/democrats-are-partially-right-about-wealth-corruption">the overwhelming cause is weak</a>; dynamic entrepreneurial activity and redistributive programs are clearly significant drivers of wider wealth inequality too. Yet neither candidate argues for shrinking the welfare state to reduce measured private wealth gaps. In fact, both want to massively expand it. That revealed preference heavily suggests wealth inequality isn’t a primary concern for either, but rather a secondary one.</p> <p>To paraphrase Orwell: in highlighting wealth inequality statistics, Sanders and Warren talk as if all wealth inequality is created equal. But when it comes to their policy choices, some wealth inequality causes are clearly more equal than others.</p> Tue, 05 Nov 2019 10:27:18 -0500 Ryan Bourne https://www.cato.org/blog/do-elizabeth-warren-bernie-sanders-really-care-about-wealth-inequality Exploring Wealth Inequality https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality Chris Edwards, Ryan Bourne <div class="lead text-default"> <p>Many political leaders and pundits consider wealth inequality to be a major economic and social problem. They complain about a shift of wealth to the top at everyone else’s expense and about plutocrats dominating policymaking in Washington.</p> </div> , <div class="text-default"> <p>Is wealth inequality the crisis that some people believe? This study examines six aspects of wealth inequality and discusses the evidence for the claims being made.</p> <p>Section 1 describes how wealth inequality has risen in recent years but by less than is often asserted in the media. Indeed, wealth inequality has changed surprisingly little given the large economic changes in recent decades from technology and globalization. Furthermore, most estimates overstate wealth inequality because they do not include the effects of social programs.</p> <p>Section 2 argues that wealth inequality data tell us nothing about levels of poverty or prosperity and thus are not useful for guiding public policy. Wealth inequality may reflect innovation in a growing economy that is raising overall living standards, or it may reflect cronyism that causes economic damage.</p> <p>Section 3 examines the sources of wealth for the richest Americans. Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created major innovations that benefit all of us. The share of the wealthy who inherited their fortunes has sharply declined in recent decades.</p> <p>Section 4 looks at cronyism, which refers to insiders and businesses securing narrow tax, spending, and regulatory advantages. Cronyism is one cause of wealth inequality, and it has likely increased over time as the government has grown.</p> <p>Section 5 explains how the growing welfare state has increased wealth inequality. Government programs for retirement, healthcare, and other benefits have reduced the incentives and the ability of nonwealthy households to accumulate savings and thus have increased wealth inequality.</p> <p>Section 6 examines whether wealth inequality undermines democracy, which is a frequent claim of the political left. Research shows that wealthy people do not have homogeneous views on policy and do not have an outsized ability to get their goals enacted in Washington.</p> <p>In sum, wealth inequality has increased modestly but mainly because of general economic growth and entrepreneurs creating innovations that are broadly beneficial. Nonetheless, policymakers should aim to reduce inequality by ending cronyist programs and reducing barriers to wealth-building by moderate-income households.</p> </div> , <h2 class="heading"> 1. Wealth Inequality Has Increased Modestly </h2> , <div class="text-default"> <p>A <em>Washington Post</em> editorial lamented the “ever-higher concentration of national wealth at the top.”<sup><a href="#_ednref1" id="_edn1">1</a></sup> Similarly, <em>New York Times</em> columnist Paul Krugman expressed concern that “we are once again living in an era of extraordinary wealth concentrated in the hands of a few people ... And this concentration of wealth is growing.”<sup><a id="_edn2" href="#_ednref2">2</a></sup></p> <p>Sen. Bernie Sanders (D-VT) claimed that “in the last four decades, there has been a massive shift of wealth from the middle class to the top one percent.”<sup><a id="_edn3" href="#_ednref3">3</a></sup> Sen. Elizabeth Warren (D-MA) said that her wealth tax proposal “will help address runaway wealth concentration.”<sup><a id="_edn4" href="#_ednref4">4</a></sup></p> <p>Fears about runaway wealth concentration were fueled by economist Thomas Piketty’s 2014 book, <em>Capital in the Twenty-First Century</em>.<sup><a id="_edn5" href="#_ednref5">5</a></sup> The book claimed that deep economic forces were allowing the rich to amass a rising share of overall wealth at the expense of workers.</p> <p>Piketty’s narrative has been influential in politics, but his theories and data have not stood up to scrutiny by other economists. Martin Feldstein found that Piketty’s “thesis rests on a false theory of how wealth evolves in a market economy, a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth.”<sup><a id="_edn6" href="#_ednref6">6</a></sup> Alan Auerbach and Kevin Hassett found flaws in “the facts, logic, and policy conclusions in Piketty’s book.”<sup><a id="_edn7" href="#_ednref7">7</a></sup> Richard Sutch called Piketty’s historical data on U.S. wealth “unreliable” and “manufactured,” with some of it “heavily manipulated.”<sup><a id="_edn8" href="#_ednref8">8</a></sup></p> <p>Examining the wealth data in Piketty’s book, columnists for the <em>Financial Times</em> found “errors of transcription; suboptimal averaging techniques; multiple unexplained adjustments to the numbers; data entries with no sourcing, unexplained use of different time periods and inconsistent uses of source data.”<sup><a id="_edn9" href="#_ednref9">9</a></sup> The Cato Institute published a collection of critiques of Piketty’s theories and data in 2017.<sup><a id="_edn10" href="#_ednref10">10</a></sup></p> <p>One of Piketty’s main claims in his book was that wealth concentration is rising because returns on capital in the economy are outpacing economic growth (a hypothesis expressed as r &gt; g). But University of Chicago scholars found that more than four-fifths of academic economists they surveyed disagreed with that contention.<sup><a id="_edn11" href="#_ednref11">11</a></sup> Another of Piketty’s claims was that as capital accumulates, capital income will become a growing share of all income, thus exacerbating inequality. However, excluding housing, the net capital share of U.S. income has actually fallen slightly since the 1950s.<sup><a id="_edn12" href="#_ednref12">12</a></sup></p> <p>Subsequent to his book, Piketty teamed with economists Emmanuel Saez and Gabriel Zucman (referred to here as PSZ) to create a World Inequality Database (WID.world), which presents income and wealth data for numerous countries.<sup><a id="_edn13" href="#_ednref13">13</a></sup> For the United States, the WID data show that the share of wealth held by the richest 1 percent has soared since the 1970s. These data have been the primary source of fears about rising inequality and are frequently cited by politicians and reporters.</p> <p>Few countries have collected reliable wealth data over time, so PSZ use rough estimates to create the data on their WID website. In a 2018 study, economist James K. Galbraith reviewed the WID data and found it “sparse, inconsistent, and unreliable” and “not very consistent with other reputable sources.” Piketty and colleagues have used assumptions in creating their data that are “beyond heroic,” concluded Galbraith.<sup><a id="_edn14" href="#_ednref14">14</a></sup> Nonetheless, the WID data are frequently cited, probably because they show the sharpest rise in wealth inequality of any wealth data.</p> <p>The WID data series are constructed based on income tax return data. But tax returns are an incomplete source of income data, and they do not include any wealth data. Thus, the PSZ approach of using income tax data to measure inequality over time is only a rough estimation for numerous reasons:</p> <ul> <li>Tax returns include only 60 percent of national income.<sup><a id="_edn15" href="#_ednref15">15</a></sup> The distribution of the other 40 percent of income across income groups must be estimated. PSZ use the capital income (a flow) reported on tax returns to estimate wealth (a stock).</li> <li>Family structures have changed over time. Marriage rates among tax filers fell from 67 percent in 1960 to 39 percent in 2015.<sup><a id="_edn16" href="#_ednref16">16</a></sup> That change has created large and differential effects on high- and low-income tax returns.</li> <li>Tax laws have changed over time, altering the income reported on returns. For example, the growth of 401(k) contributions and employer-provided health benefits has greatly reduced the amount of income included on returns. Since these income sources are relatively more important to middle-income individuals than high-income individuals, top income shares will be biased.<sup><a id="_edn17" href="#_ednref17">17</a></sup></li> <li>Marginal tax rate cuts in the 1980s reduced incentives to avoid and evade taxes by high-earners.<sup><a id="_edn18" href="#_ednref18">18</a></sup> Thus, part of the reported increase in taxable incomes at the top end after those reforms did not reflect an actual increase in incomes.<sup><a id="_edn19" href="#_ednref19">19</a></sup></li> <li>Tax-law changes have shifted business income from corporate to individual returns over time. The share of overall U.S. business income reported on individual returns rose from 21 percent in 1980 to more than half today.<sup><a id="_edn20" href="#_ednref20">20</a></sup> That shift has inflated the income reported on individual tax returns particularly at the top end.</li> <li>A substantial amount of income goes unreported on tax returns, including small business income. Distribution estimates are sensitive to assumptions about who earned the missing income.<sup><a id="_edn21" href="#_ednref21">21</a></sup></li> </ul> <p>Scholars use estimates to adjust for these and other shortcomings of tax return data. But different adjustments can lead to sharply different results. For example, widely cited data by PSZ show that the top 1 percent’s share of U.S. income increased from 10 percent to 15.6 percent between 1960 and 2015.<sup><a id="_edn22" href="#_ednref22">22</a></sup> That estimate is after taxes and government benefits.</p> <p>However, a 2018 study by economists Gerald Auten and David Splinter found very different results, as shown in Figure 1.<sup><a id="_edn23" href="#_ednref23">23</a></sup> As with PSZ, they started with tax return data, but they produced more precise estimates. They found that the top 1 percent income share increased only slightly, from 7.9 percent in 1960 to 8.5 percent in 2015. They concluded that “changes in the top one percent shares over the last half century are likely to have been relatively modest.<sup><a id="_edn24" href="#_ednref24">24</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="f13e8323-8d77-4d7a-811c-618deed4ec51" data-type="interactive" data-title="WEB: Wealth inequality Figure 1"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="text-default"> <p>Let’s turn to top wealth shares. Numerous data sources are used to estimate wealth shares, including income tax returns, estate tax returns, and a Federal Reserve household survey. Figure 2 shows different estimates of the share of all U.S. wealth held by the top 1 percent.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="24a31dc3-c6a9-4ace-bdc1-1f15959ced24" data-type="interactive" data-title="WEB: Wealth inequality Figure 2"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="text-default"> <p>One method of estimating wealth shares uses capital income reported on tax returns (such as interest and dividends) to estimate stocks of assets based on assumed rates of return.<sup><a id="_edn25" href="#_ednref25">25</a></sup> These estimates are heavily dependent on the chosen rates, such that small differences in assumptions create large differences in estimated top 1 percent wealth shares.<sup><a id="_edn26" href="#_ednref26">26</a></sup></p> <p>PSZ use this method for wealth estimates on the WID site. They estimate that the top 1 percent share of U.S. wealth has risen sharply since the 1970s, as shown in Figure 2.<sup><a id="_edn27" href="#_ednref27">27</a></sup> This sharp rise is widely cited in the media.</p> <p>However, a 2019 study by Matthew Smith, Owen Zidar, and Eric Zwick (SZZ) found that PSZ overstate the increase in top wealth shares because of their faulty assumptions about the rates of return used to estimate assets.<sup><a id="_edn28" href="#_ednref28">28</a></sup> Using better assumptions, SZZ found that the 1 percent wealth share rose only half as much as PSZ claimed.<sup><a id="_edn29" href="#_ednref29">29</a></sup> From 1980 to 2014, PSZ found that the top 1 percent share rose from 22.5 to 38.6 percent, but SZZ found that it increased from 21.2 percent to just 28.7 percent.<sup><a id="_edn30" href="#_ednref30">30</a></sup></p> <p>A second method uses data from the Survey of Consumer Finances (SCF), produced by the Federal Reserve Board since 1989.<sup><a id="_edn31" href="#_ednref31">31</a></sup> In 2019, a team of Federal Reserve economists published “distributional financial accounts” based on data from the SCF and the Financial Accounts of the United States.<sup><a id="_edn32" href="#_ednref32">32</a></sup> These estimates show a similar pattern as the SZZ data—the top 1 percent share is lower and has risen less in recent years than the PSZ data suggested, as shown in Figure 2.</p> <p>Before 1989, the Federal Reserve completed household finance surveys in 1962 and 1983.<sup><a id="_edn33" href="#_ednref33">33</a></sup> That data show that the top 1 percent share changed little over that period, edging up from 32 percent in 1962 to 34 percent in 1983. Those shares were higher than the 30 percent share found in the first modern SCF in 1989. Economist Edward Wolff used Federal Reserve data to create his own estimates of the top 1 percent wealth share.<sup><a id="_edn34" href="#_ednref34">34</a></sup> He found that the share was fairly flat from 1962 to 2010 but then rose after that.</p> <p>A third method for estimating wealth shares relies on estate tax returns. Using these data, Wojciech Kopczuk and Saez estimated that the top 1 percent share of U.S. wealth was essentially flat from the 1930s all the way through to 2000.<sup><a id="_edn35" href="#_ednref35">35</a></sup></p> <p>In sum, the widely cited wealth data created by PSZ are off base. A 2014 study by Kopczuk concluded that “estimates of the distribution of wealth based on the Survey of Consumer Finance and the estate tax method show little or no rise in the share of total wealth held by the top 1 percent of in [sic] the last 30 years, while the capitalization [PSZ] approach finds a substantial rise.”<sup><a id="_edn36" href="#_ednref36">36</a></sup> Similarly, a 2016 Federal Reserve study found that “the top share estimates derived in this paper show much lower and less rapidly increasing top shares than the widely cited values from the Saez and Zucman (2016) and Piketty and Saez (2003) studies.”<sup><a id="_edn37" href="#_ednref37">37</a></sup></p> <p>The 2019 estimates by the Federal Reserve and SZZ show lower figures for the top 1 percent share and a slower rise than the PSZ data. U.S. wealth inequality has risen, but given the huge changes in technology and globalization that have transformed our economy, some changes over the decades are not surprising.</p> <p>What about the future? Warren Buffett claimed that wealth inequality “has widened and will continue to widen unless something is done about it.”<sup><a id="_edn38" href="#_ednref38">38</a></sup> That is not clear at all. Buffett is echoing Piketty, but the mechanisms that Piketty claimed in his book would lead to higher inequality (relating to capital dominating labor) are speculative and not supported by most economists.</p> <p>Numerous factors may move wealth inequality either up or down in the future. For one thing, there is a “race between the stock market and the housing market.”<sup><a id="_edn39" href="#_ednref39">39</a></sup> Middle-income households gain relative to top groups when housing prices are rising quickly, but top groups do better when the stock market is rising quickly. In recent years, equity prices have risen faster, which has boosted the top 1 percent share, but markets may change direction down the road.<sup><a id="_edn40" href="#_ednref40">40</a></sup></p> <p>Another dynamic is the normal functioning of life-cycle finances. Most young people start their careers with little wealth but build a nest egg by their 60s. The SCF data for 2016 show that the mean family net worth for ages 35–44 was $289,000 while the mean for ages 55–64 was $1,167,000.<sup><a id="_edn41" href="#_ednref41">41</a></sup> As U.S. demographics change over time, so may measures of wealth inequality.</p> <p>Yet another dynamic regards debt incurred for higher education. A growing share of families—currently 22 percent—owe education-related debt.<sup><a id="_edn42" href="#_ednref42">42</a></sup> That debt is now the largest part of household debt aside from mortgages, and it substantially reduces net wealth for affected families in the SCF data.<sup><a id="_edn43" href="#_ednref43">43</a></sup> However, the education investment funded by debt helps people build human capital, which is an asset. But the SCF does not include human capital, so it understates the true wealth of young people who invest in education. The upshot is that the rise in education debt has skewed measured wealth inequality.</p> <p>Human capital is not the only portion of wealth left out of inequality estimates. Some wealth estimates, including the SCF, exclude defined benefit pension plans, which are owned broadly by the middle class. If defined benefit plans were included in the SCF data, it would reduce the top 1 percent share by 5 percentage points.<sup><a id="_edn44" href="#_ednref44">44</a></sup></p> <p>Finally, wealth inequality statistics do not include the “wealth” that individuals hold in Social Security. Social Security is not legally owned wealth, but to individuals, the future benefits are like an asset that is available to fund future consumption. That is also true of other social programs, such as Medicare. Including the effects of Social Security and other social programs would substantially reduce measured wealth inequality, as Section 5 discusses.</p> <p>To summarize, the estimates from Piketty and colleagues on the WID website showing sharply rising wealth inequality since the 1970s appear to be incorrect. Also, Piketty’s projection of sharply rising wealth inequality in the future is based on flawed theories. The top 1 percent wealth share has risen in recent years, but the change has not been large over the past half century given the large structural changes in the U.S. economy. Finally, published data on wealth inequality leaves out human capital and social programs such as Social Security, which has exaggerated estimates of inequality.</p> <p>All that said, wealth statistics such as the top 1 percent share have little relevance to the standards of living of U.S. households. While many politicians and pundits seem obsessed with wealth inequality, the following sections argue that such measurements do not reveal anything about the levels of poverty or prosperity of Americans.</p> </div> , <h2 class="heading"> 2. Poverty Matters, Not Inequality </h2> , <div class="text-default"> <p>Measures of wealth inequality do not tell us anything about the well-being of the poor, which is a more important focus for public policy than inequality. Poverty may fall as wealth inequality rises, such as when entrepreneurs build fortunes by generating economic growth. Or poverty may rise as wealth inequality rises, such as when crony capitalists gain preferences that distort the economy and reduce growth.</p> <p>Poverty and inequality are different things, but they are often conflated in political discussions. High poverty levels, which are clearly undesirable, are often caused by bad policies, such as a lack of open markets and equal treatment. Wealth inequality is different—it cannot be judged good or bad by itself because it may reflect either a growing economy that is lifting all boats or a shrinking economy caused by corruption.</p> <p>Martin Feldstein was right that “inequality is not a problem in need of remedy.” Instead, he noted that economists start with the “Pareto principle that a change is good if it makes someone better off without making anyone else worse off.”<sup><a id="_edn45" href="#_ednref45">45</a></sup> An example is an entrepreneur who builds her wealth by making product innovations that reduce prices for consumers.</p> <p>Consider Brian Acton and Jan Koum, who created WhatsApp, which provides a free phone service for 1.5 billion users globally. Acton and Koum have built combined fortunes of $15 billion. Their success may or may not have widened wealth inequality, but their product has created huge value for consumers by reducing communication costs. America’s economic history is replete with similar stories. Walmart has generated savings for many millions of consumers while making the Walton family rich. Jason Furman, the former chair of President Barack Obama’s Council of Economic Advisers, was right to praise the company as a “progressive success story” for its role in reducing prices.<sup><a id="_edn46" href="#_ednref46">46</a></sup></p> <p>Feldstein argued that the real problem we should focus on “is not inequality but poverty.”<sup><a id="_edn47" href="#_ednref47">47</a></sup> Recent economic data reveal how these two indicators are quite different. U.S. wealth inequality has edged up in recent years, but the poverty rate has declined. Meanwhile, wages are up and unemployment is low. Federal Reserve Board data found that the top 1 percent wealth share increased slightly between 2013 and 2016, but the wealth of the median household jumped 16 percent over that period, with particularly strong gains by less-educated households.<sup><a id="_edn48" href="#_ednref48">48</a></sup> Clearly, recent gains by the top 1 percent have not come at the expense of other Americans.</p> <p>We see similar patterns in other growing economies. After China began adopting market reforms in the 1970s, its economy boomed and hundreds of millions of people lifted themselves out of poverty. China’s gross domestic product (GDP) per capita in constant U.S. dollars was more than 10 times higher in 2018 than it was in 1990.<sup><a id="_edn49" href="#_ednref49">49</a></sup> The share of the Chinese population in severe poverty—measured by the World Bank as income of less than $3.20 per day—fell from 47 percent in 1990 to just 1 percent today.<sup><a id="_edn50" href="#_ednref50">50</a></sup> Yet the rise in general prosperity may have coincided with increased wealth inequality in China—the top 10 percent wealth share is estimated to have jumped from 41 percent in 1980 to 67 percent today.<sup><a id="_edn51" href="#_ednref51">51</a></sup></p> <p>One can see why wealth inequality is a useless measure by examining Gini coefficients across countries. The coefficients are calculated from distributions of income or wealth in populations and indicate the level of inequality in a single number from 0 to 100, with higher numbers indicating higher inequality.<sup><a id="_edn52" href="#_ednref52">52</a></sup> Wealth inequality is estimated to be high in the United States with a Gini coefficient of 85.<sup><a id="_edn53" href="#_ednref53">53</a></sup> On the other hand, many poor countries have much lower Gini coefficients, such as Ethiopia (61), Mynamar (58), and Pakistan (65).<sup><a id="_edn54" href="#_ednref54">54</a></sup> Wealthy countries such as the United States offer more opportunities and higher living standards than these poor countries, yet those countries have “better” Gini coefficients.</p> <p>The United Nations produces a Human Development Index that meas&#173;ures income, life expectancy, and education levels in over 180 countries.<sup><a id="_edn55" href="#_ednref55">55</a></sup> A scatterplot of countries in this index and their wealth Gini coefficients shows a modestly positive relationship between the two variables—countries with higher wealth inequality tend to have higher human development. The Gini coefficients for many countries are probably not very accurate, but nonetheless the data do not support the idea that wealth inequality is bad for general prosperity defined in this way.</p> <p>In some countries, high wealth inequality likely results from corruption. Russia, Kazakhstan, and Ukraine, for example, have wealth Gini coefficients of 88, 95, and 96, respectively, and experts believe many of the richest individuals in those countries gained their wealth from political connections.<sup><a id="_edn56" href="#_ednref56">56</a></sup> One expert noted that among Russia’s wealthiest individuals, “most have made their money by controlling companies in the natural-resources sector—like gas giant Gazprom, oil companies, or metals firms—and use their political connections with the Kremlin to maintain their fortunes.”<sup><a id="_edn57" href="#_ednref57">57</a></sup></p> <p>Wealth inequality by itself provides no guidance on public policy issues because many factors can cause it. And even if it were a useful measure, claims by progressives that there is a global inequality crisis are off base. A Credit Suisse study found that the share of global household wealth owned by the top 1 percent of households worldwide was roughly unchanged between 2000 and 2018.<sup><a id="_edn58" href="#_ednref58">58</a></sup></p> <p>The more important development in the world economy in recent years is the dramatic fall in poverty. Many lower-income nations have embraced markets and enjoyed broad-based growth and social progress:</p> <ul> <li>People living in “extreme poverty” as defined by the World Bank fell from 42 percent of the world’s population in 1981 to just 10 percent in 2015.<sup><a id="_edn59" href="#_ednref59">59</a></sup></li> <li>The share of the world’s population that is undernourished fell from 19 percent in 1991 to 11 percent in 2017.<sup><a id="_edn60" href="#_ednref60">60</a></sup></li> <li>The illiterate share of the world’s population fell from 30 percent in 1980 to 14 percent in 2015.<sup><a id="_edn61" href="#_ednref61">61</a></sup></li> <li>Africa’s average life expectancy increased from 53 years in 2000 to 62 years in 2015.<sup><a id="_edn62" href="#_ednref62">62</a></sup></li> </ul> <p>Many poorer countries are starting to catch up to the living standards in developed nations as they accumulate wealth. The Credit Suisse study found that lower-income countries accounted for 10 percent of global wealth in 2000 but 25 percent by 2018, with China and India leading the way.<sup><a id="_edn63" href="#_ednref63">63</a></sup></p> <p>It is good news that poor countries are pulling themselves up and enjoying rising prosperity. Yet commentators on the political left seem more concerned that some countries with broadly rising incomes have experienced increases in wealth inequality. This seems like “spiteful egalitarianism,” as Feldstein called it.<sup><a id="_edn64" href="#_ednref64">64</a></sup> That is, a knee-jerk dislike of the wealthy even when their wealth stems from productive activities that benefit the overall economy.</p> <p>Many progressives seem to view the economy as a zero-sum game. Senator Sanders complained that “in the last four decades, there has been a massive shift of wealth from the middle class to the top one percent.”<sup><a id="_edn65" href="#_ednref65">65</a></sup> And Dan Riffle, adviser to Rep. Alexandria Ocasio-Cortez (D-NY), complained that “the bigger Jeff Bezos’s and Bill Gates’s slices of the pie are, the smaller everybody else’s slices of the pie are going to be.”<sup><a id="_edn66" href="#_ednref66">66</a></sup></p> <p>That is not true. Innovators such as Bezos and Gates make the pie larger, as have many wealthy Americans, as Section 3 discusses. Market economies are positive sum, not negative sum. The billions of market transactions that take place every day are voluntary and thus mutually beneficial—buyers and sellers each gain value. Entrepreneurs who become wealthy have essentially found ways to generate more transactions. Whatever aggregate statistics—such as wealth distributions—might show, policymakers should remember that the core of market economies is a bottom-up process of value creation.</p> <p>That does not mean that all wealth is justly obtained. Critics on the left are correct that some businesses and wealthy people get ahead by breaking laws and exploiting government preferences. If Bezos or Gates had instead gained their wealth by means of narrow regulatory advantages, their wealth would represent a negative for the economy. Section 4 addresses such crony capitalism. But first we examine the positive-sum wealth generation at the core of market economies.</p> </div> , <h2 class="heading"> 3. Most Top Wealth Is Self‐​Made </h2> , <div class="text-default"> <p>Do the wealthy mainly inherit their fortunes or build them through entrepreneurial activities? Some commentators imply the former, but the evidence shows that most of America’s wealthiest people have self-made fortunes.</p> <p>Former U.S. labor secretary Robert Reich claimed in January 2019 that “even as the ranks of the working poor continue to grow, America is creating a new aristocracy of the non-working super rich with enormous influence over our economy and politics.”<sup><a id="_edn67" href="#_ednref67">67</a></sup> And <em>New York Times</em> columnist Krugman claimed, “We seem to be heading toward a society dominated by vast, often inherited fortunes.”<sup><a id="_edn68" href="#_ednref68">68</a></sup></p> <p>These comments echo a theme in Piketty’s book, which is that economic forces are boosting the power of capital over labor and inherited wealth over self-made wealth. Piketty argued, “It is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin.”<sup><a id="_edn69" href="#_ednref69">69</a></sup> Piketty refers in his book to the wealthy as “rentiers” to evoke the image of an idle class of overlords.</p> <p>Piketty projected that accumulated wealth or capital will increase compared to the size of the economy in coming decades. In turn, he said capital income will become a growing share of overall income as the labor share falls. Since the wealthy receive a large share of capital income, that would boost high-end fortunes and make wealth ownership more concentrated.</p> <p>However, Piketty’s story is inconsistent with actual U.S. trends. Capital’s share of income has risen since the 1970s but not because of larger accumulations by the wealthy. Rather, Matthew Rognlie found that the rising capital share has been entirely due to the housing portion of capital, which is broadly distributed across income groups.<sup><a id="_edn70" href="#_ednref70">70</a></sup> Aside from housing, the net capital share of income has fallen slightly since the 1950s.<sup><a id="_edn71" href="#_ednref71">71</a></sup></p> <p>Another flaw in Piketty’s narrative regards his assumption that if capital accumulates rapidly, the rate of return to capital would nonetheless remain high, thus boosting the capital income share. But most economists would expect the rate of return to fall in that scenario, thus moderating any increase in capital income.<sup><a id="_edn72" href="#_ednref72">72</a></sup> Indeed, Rognlie found that “a rising capital-to-GDP ratio is most likely to result in a fall in capital’s share of income, since the net rate of return on capital will fall by an even larger proportion than the capital-to-GDP ratio rises.”<sup><a id="_edn73" href="#_ednref73">73</a></sup></p> <p>Rognlie concluded that “capital income is not growing unboundedly at the expense of labor, and further accumulation of capital in fact most likely means a fall in capital’s share of total income—refuting one of the main theories of economist Thomas Piketty’s popular book <em>Capital in the 21st Century</em>.”<sup><a id="_edn74" href="#_ednref74">74</a></sup> The fears expressed by Piketty, Krugman, Reich, and others about a growing domination of capital over labor are off base.</p> <p>The related fears about capital ownership becoming dominated by inherited wealth are also misguided. Inherited wealth represents a declining share of high-end fortunes. Most of America’s wealthiest people today are entrepreneurs and business people who built their own fortunes.<sup><a id="_edn75" href="#_ednref75">75</a></sup> There is dynamism and turnover among the richest Americans rather than a static group of people with growing piles of wealth.</p> <p><em>Forbes</em> has published an annual list of the 400 Americans with the highest net worth since 1982.<sup><a id="_edn76" href="#_ednref76">76</a></sup> By our count, just 21 from 1982 were still on the list in 2019.<sup><a id="_edn77" href="#_ednref77">77</a></sup> Where have the others gone? Numerous people have died and their wealth divided among heirs. The wealth of many others has stagnated or declined because of income taxes, consumption, charitable giving, and poor investment choices.</p> <p>Robert Arnott and coauthors examined the <em>Forbes</em> lists and found that of the 400 individuals on the 1982 list, just 69 individuals or their descendants remained on the 2014 list.<sup><a id="_edn78" href="#_ednref78">78</a></sup> They found that the wealth of those 69 people had grown far more slowly than if they had simply invested passively in stocks and bonds in 1982 and let their holdings grow. They conclude that “dynastic wealth accumulation is simply a myth.”<sup><a id="_edn79" href="#_ednref79">79</a></sup></p> <p>Piketty claims the opposite. He argues that the wealthy multiply their money rapidly: “One of the most striking lessons of the <em>Forbes</em> rankings is that, past a certain threshold, all large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates.” And he adds that “the largest fortunes grew much more rapidly than average wealth. This is the new fact that the <em>Forbes</em> rankings help us bring to light.”<sup><a id="_edn80" href="#_ednref80">80</a></sup></p> <p>Piketty’s claims are false. He seems to have only looked at the winners on the <em>Forbes</em> list and did not account for people who lost wealth and dropped off the list. As one example, the world’s richest man on <em>Forbes</em> global list in 1987 was Yoshiaki Tsutsumi, who was worth $20 billion. His fortune plunged to just $1.2 billion in 2006, and then he dropped off the list.<sup><a id="_edn81" href="#_ednref81">81</a></sup></p> <p>William McBride looked at changes in wealth for the 400 individuals on the 1987 <em>Forbes</em> U.S. list through to the 2014 list.<sup><a id="_edn82" href="#_ednref82">82</a></sup> He calculated the growth in wealth for the 73 people who stayed on the list, and he estimated the growth for those who dropped off by assuming that the drop-offs had barely missed the wealth threshold for the 2014 list. With that assumption, he found that the average annual real wealth growth rate over 26 years for the people on the 1987 list was at most a meager 2.4 percent. (By contrast, the average annual real return on U.S. stocks over the decades has been about 7 percent.)<sup><a id="_edn83" href="#_ednref83">83</a></sup></p> <p>McBride found that people on the <em>Forbes</em> lists who had inherited their wealth grew their fortunes more slowly than those with self-made wealth. Active entrepreneurs often generate new wealth, but individuals on the lists who had inherited did not earn outsized returns—instead, their wealth was eaten away over time, as noted, by taxes, consumption, philanthropy, and sometimes bad investment choices.</p> <p>As many older fortunes decline, new fortunes are being made by entrepreneurs. Among those on the <em>Forbes</em> 2018 list, 43 percent were new in the prior 10 years. Many of the new billionaires have impressive achievements in building companies:</p> <ul> <li>Jensen Huang cofounded graphics chipmaker Nvidia, which has revenues of $10 billion.</li> <li>Shahid Khan built automotive parts maker Flex-N-Gate, which has revenues of $8 billion.</li> <li>Judy Faulkner founded medical records software firm Epic Systems, which has revenues of about $3 billion and supports the records of 230 million patients.</li> <li>Acton and Koum cofounded WhatsApp, which provides free phone service globally for 1.5 billion users, as noted.</li> <li>Reinhold Schmieding founded Arthrex, a surgical tools company that has developed many new products and has revenues of more than $2 billion.</li> <li>Robert Pera founded wireless equipment maker Ubiquiti Networks, which specializes in bringing low-cost internet access to rural areas.</li> <li>Thai Lee built business IT provider SHI International, which has revenues of $9 billion. Like Huang, Khan, and Koum, Lee is an immigrant to the United States.</li> </ul> <p>Steven Kaplan and Joshua Rauh found that the share of the <em>Forbes</em> 400 who are self-made rose from 40 percent in 1982 to 69 percent by 2011.<sup><a id="_edn84" href="#_ednref84">84</a></sup> <em>Forbes</em> staff writer Luisa Kroll measured a similar increase and noted, “the number of <em>Forbes</em> 400 members who have forged their own path, using entrepreneurial capitalism as a means to attain a vast fortune, has increased dramatically.”<sup><a id="_edn85" href="#_ednref85">85</a></sup></p> <p>The <em>Forbes</em> list of global billionaires shows a similar pattern. Self-made wealth is displacing inherited wealth in most countries, and that pattern is particularly pronounced in the United States. A Peterson Institute for International Economics study examined the <em>Forbes</em> global lists and found that “among advanced countries, the share of self-made billionaires has been expanding most rapidly in the United States.”<sup><a id="_edn86" href="#_ednref86">86</a></sup></p> <p>Other analyses of the wealthy show similar patterns. On a <em>Bloomberg’s</em> list of the 100 wealthiest Americans in 2013, 73 are self-made and 27 have inherited wealth. A substantial share of wealthy individuals had humble origins. On the Bloomberg list, 18 had no college degree.<sup><a id="_edn87" href="#_ednref87">87</a></sup> On the <em>Forbes</em> 400 list, 20 percent grew up poor. Rags-to-riches stories are not uncommon.</p> <p>Wealth-X has created a database of the world’s richest people. On its list of 2,604 billionaires, 56 percent are self-made, 31 percent are partly self-made, and 13 percent have purely inherited wealth.<sup><a id="_edn88" href="#_ednref88">88</a></sup> On its broader list of people with more than $30 million in net wealth, 68 percent are self-made, 24 percent are partly self-made, and just 8 percent inherited all of their wealth.<sup><a id="_edn89" href="#_ednref89">89</a></sup></p> <p>Other studies confirm the importance of self-made wealth in today’s economy:</p> <ul> <li>BMO Private Bank found that 67 percent of Americans with $1 million or more in investible assets are self-made.<sup><a id="_edn90" href="#_ednref90">90</a></sup></li> <li>U.S. Trust found that 70 percent of individuals with investable assets of more than $3 million grew up in middle- or lower-income households.<sup><a id="_edn91" href="#_ednref91">91</a></sup></li> <li>Wolff and Maury Gittleman found that just 15 percent of the top 1 percent’s wealth was inherited in 2007, down from 23 percent in 1989.<sup><a id="_edn92" href="#_ednref92">92</a></sup></li> <li>Lena Edlund and Kopczuk found that the importance of inherited wealth at the top in the United States has been declining since the 1970s based on an analysis of estate tax returns.<sup><a id="_edn93" href="#_ednref93">93</a></sup></li> <li>Tino Sanandaji found that “self-employed business owners account for an astonishing 70 percent of the wealth of the top 0.1 percent” in 2010.<sup><a id="_edn94" href="#_ednref94">94</a></sup></li> <li>Economists at the Federal Reserve Bank of Chicago found that one-third of all household wealth in the United States is owned by self-employed people who actively manage their businesses.<sup><a id="_edn95" href="#_ednref95">95</a></sup></li> </ul> <p>In sum, the wealthiest Americans are not idle rentiers, as some critics suggest. Rather, as Kopczuk found, “those in the top 1 percent of the U.S. income and wealth distribution have less reliance on capital income and inherited wealth, and more reliance on income related to labor, than several decades ago.”<sup><a id="_edn96" href="#_ednref96">96</a></sup></p> <p>Far from being idle, many of the wealthiest people in our society create new products, generate competition in markets, and drive down consumer prices. Their innovations have been diffused across the economy and benefited many millions of people. Most Americans understand this. A 2019 poll found that 69 percent of the public agrees that billionaires “earned their wealth by creating value for others like inventing new technologies or starting businesses that improve lives.”<sup><a id="_edn97" href="#_ednref97">97</a></sup></p> <p>In the process of building companies, many entrepreneurs have become wealthy. But are their rewards excessive compared to the value they created?</p> <p>William Nordhaus explored that question by estimating a model of U.S. business profits and productivity growth over a five-decade period. He concluded that “only a miniscule fraction of the social returns from technological advances over the 1948–2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.”<sup><a id="_edn98" href="#_ednref98">98</a></sup> He found that businesses received only about 2 percent of the surplus benefits from their innovations, with the rest accruing to consumers.</p> <p>In sum, ownership of the largest fortunes in the United States is continually changing. The relative importance of inherited wealth has been declining for decades. Inherited wealth is being replaced by new wealth created by entrepreneurs introducing new products and building fortunes while adding overall value to the economy.</p> </div> , <h2 class="heading"> 4. Cronyism Increases Wealth Inequality </h2> , <div class="text-default"> <p>In market economies, the level of wealth inequality reflects many factors, including differences in individual knowledge, effort, luck, and savings behavior. Some individuals with unique talents are able to build large fortunes. Most of the wealthiest Americans today are self-made entrepreneurs and business people, as discussed.</p> <p>However, governments also play a role in shaping wealth distributions through taxes, spending, and regulations. Many government activities redistribute resources from the rich to the poor, but some do the opposite. A number of broad-based and popular programs undermine the ability of moderate-income Americans to build wealth, as Section 5 discusses.</p> <p>This section explores an unpopular way that governments increase wealth inequality—cronyism, which generally means gaining narrow government benefits through lobbying or connections. The word “cronyism” is similar in meaning to crony capitalism, corruption, corporate welfare, and rent-seeking. It usually entails businesses gaining benefits at the expense of consumers or taxpayers.<sup><a id="_edn99" href="#_ednref99">99</a></sup></p> <p>Former presidential candidate Beto O’Rourke said that we have “an economy that is rigged to corporations and to the very wealthiest.”<sup><a id="_edn100" href="#_ednref100">100</a></sup> That overstates the problem, but it is a commonly held view. Most income in America is generated in competitive markets, and most people admire individuals who gain wealth through talent and effort. In a 2019 poll, the great majority of the Americans surveyed think that there is “nothing wrong with a person trying to make as much money as they honestly can.”<sup><a id="_edn101" href="#_ednref101">101</a></sup> The key word is “honestly.” As economist Greg Mankiw noted, “The high incomes that generate anger are those that come from manipulating the system.”<sup><a id="_edn102" href="#_ednref102">102</a></sup></p> <p>More than two centuries ago, Adam Smith recognized that businesses often gained privileges from the government that undermined the public interest. He warned:</p> <blockquote>The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.<br><br>The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.<sup><a id="_edn103" href="#_ednref103">103</a></sup></blockquote> <p>Smith is right that it is unjust when the government helps businesses “raise their profits” by imposing “an absurd tax” or burden on the public. Such crony policies likely raise wealth inequality. Smith described in the 18th century how trade barriers create monopoly power for producers and harm consumers, and that is still a major problem today.<sup><a id="_edn104" href="#_ednref104">104</a></sup></p> <p>Governments are much larger now than in Smith’s time, and they manipulate the economy in more ways. There is no hard definition of cronyism, but Table 1 suggests various types of tax, spending, and regulatory schemes in the United States that fit the bill. Some of the categories overlap. The general problem summarized in the table is that some businesses pursue their goals by harnessing government power to favor their interests over the interests of taxpayers, consumers, and other businesses.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="dd17ff35-cc62-4b7f-b106-bec1fbecf8bc" data-type="interactive" data-title="Wealth Inequality Table 1"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="text-default"> <p>To what extent might such cronyism exacerbate wealth inequality? There are no overall estimates of the costs of cronyism or its effects on inequality, but we can put figures on some items.</p> <p>Federal farm subsidies cost taxpayers more than $20 billion a year, and the benefits are skewed toward the wealthy.<sup><a id="_edn105" href="#_ednref105">105</a></sup> The average income of farm households is 40 percent higher than the average of all U.S. households, and 60 percent of farm subsidies go to the largest 10 percent of farm businesses. Even some billionaire landowners receive farm subsidies.<sup><a id="_edn106" href="#_ednref106">106</a></sup></p> <p>Federal sugar regulations and trade barriers increase sugar costs for U.S. consumers by up to $4 billion a year.<sup><a id="_edn107" href="#_ednref107">107</a></sup> U.S. sugar producers gain wealth because the sugar protections give them monopoly power. The Fanjul family of Florida, for example, has built a net worth of about $8 billion in the sugar industry partly off the backs of U.S. consumers who face artificially high prices. To protect their interests, the Fanjuls have maintained close political ties to presidents and members of Congress.<sup><a id="_edn108" href="#_ednref108">108</a></sup></p> <p>State occupational licensing reduces job opportunities while raising consumer prices. Licensure boards are often dominated by existing providers who seek to exclude new entrants—classic cronyism. About one-quarter of Americans work in occupations that require licenses. These rules raise incomes in protected professions but increase costs to U.S. households by about $1,000 annually on average, which is a heavy burden on low-income families in particular.<sup><a id="_edn109" href="#_ednref109">109</a></sup></p> <p>Yale University law professor Jonathan Macey describes these sorts of policies as “wholesale” cronyism.<sup><a id="_edn110" href="#_ednref110">110</a></sup> In addition, he says there is “retail” cronyism, which involves particular individuals and businesses using connections to unethically gain excess benefits from programs.</p> <p>Government contracting is rife with retail cronyism. In the recent “Fat Leonard” scandal, for example, Leonard Glenn Francis cozied up to U.S. Navy leaders in the Pacific to win hundreds of millions of dollars in lucrative deals to resupply Navy ships.<sup><a id="_edn111" href="#_ednref111">111</a></sup> He made large profits by overpricing contracts and submitting fraudulent invoices. Francis had numerous moles inside the Navy steering government contracts his way. He wined and dined Navy officers, providing them with gifts, prostitutes, and other favors to get their help and protection. The scandal exposed “a staggering degree of corruption within the Navy,” concluded a <em>Washington Post</em> investigation.<sup><a id="_edn112" href="#_ednref112">112</a></sup></p> <p>The Solyndra scandal was also classic cronyism.<sup><a id="_edn113" href="#_ednref113">113</a></sup> The Department of Energy (DOE) gave solar panel maker Solyndra a $535 million loan guarantee in 2009. Solyndra was a spendthrift company and its products were uncompetitive. It went bankrupt and closed its doors in 2011 with taxpayers footing the bill for the failed loan.</p> <p>Why did the DOE give Solyndra a big loan guarantee? Solyndra’s largest investor had ties to billionaire George Kaiser, who was also a major fundraiser for President Barack Obama. The <em>New York Times</em> found that Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”<a id="_idTextAnchor001"></a><sup><a id="_edn114" href="#_ednref114">114</a></sup> Similarly, the <em>Washington Post</em> found that the “main players in the Solyndra saga were interconnected in many ways, as investors enjoyed access to the White House and the Energy Department.”<a id="_idTextAnchor002"></a><sup><a id="_edn115" href="#_ednref115">115</a></sup></p> <p>President Obama visited Solyndra and at a press conference called the firm an “engine of economic growth.”<a id="_idTextAnchor003"></a><sup><a id="_edn116" href="#_ednref116">116</a></sup> At the time, a Solyndra board member wrote to George Kaiser, “The DOE really thinks politically before it thinks economically.”<sup><a id="_edn117" href="#_ednref117">117</a></sup> The White House pressured the DOE to approve the subsidy, and that appeared to tip the scales.<a id="_idTextAnchor004"></a><sup><a id="_edn118" href="#_ednref118">118</a></sup></p> <p>As the federal government has grown larger, both wholesale and retail corruption have likely increased, thus contributing to wealth inequality. The larger that subsidies, procurement, and other government spending are, the more likely people will abuse the system and live high on the hog at taxpayer expense.</p> <p>At the same time, the experts who know how to manipulate the government have prospered. Six of the 10 highest-income counties in the nation are now suburbs of Washington, DC.<sup><a id="_edn119" href="#_ednref119">119</a></sup> That wealth is partly driven by highly paid federal government workers but also by the many high-paid lobbyists and federal contractors who live in the DC region.<sup><a id="_edn120" href="#_ednref120">120</a></sup></p> <p>Today, the federal government funds about 2,300 different subsidy programs, more than twice as many as in the 1980s.<sup><a id="_edn121" href="#_ednref121">121</a></sup> The number of pages of accumulated federal regulations has increased from 55,000 in 1970 to 127,000 in 1990, to 165,000 in 2010, and to 185,000 today.<sup><a id="_edn122" href="#_ednref122">122</a></sup> The growing volume of programs and regulations provide many ways that lobbyists can twist the rules and gain unfair advantage over consumers and other businesses. Some share of lobbying stems from businesses protesting misguided regulations that in themselves create unfair restrictions, such as various barriers to competitive entry.</p> <p>People may believe that regulations fix failures in the economy and improve our standard of living. Some do, but many regulations serve narrow private ends and do not improve economic or social outcomes. Economist George Stigler’s celebrated essay “The Theory of Economic Regulation” in 1971 argued that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”<sup><a id="_edn123" href="#_ednref123">123</a></sup> By “acquired,” he meant that businesses are able to influence the design of regulations so that they benefit industry incumbents and undermine the broad public interest.</p> <p>This idea has become known as “regulatory capture.” At the time of Stigler’s writing, heavy regulations on trucking, railroads, and airlines protected businesses from competition and raised prices. The regulatory agency for the railroads was the Interstate Commerce Commission, which Milton Friedman said “started out as an agency to protect the public from exploitation by the railroads” but ended up as “an agency to protect railroads from competition by trucks and other means of transport.”<sup><a id="_edn124" href="#_ednref124">124</a></sup> Similarly, the Civil Aeronautics Board “managed and enforced a cartel among air carriers” to the detriment of the general public between 1940 and 1978, noted economist James Miller.<sup><a id="_edn125" href="#_ednref125">125</a></sup></p> <p>Bipartisan deregulatory efforts in the 1970s and 1980s increased competition in transportation and drove down prices, thus benefiting consumers and likely reducing wealth inequality. Unfortunately, many self-serving regulations remain in other industries, although the overall harm done by anti-competitive or crony regulations is difficult to quantify.</p> <p>A number of studies have compared corruption across countries, so we can get an idea of the relative extent of the U.S. cronyism problem. The United States ranks as the 22nd least corrupt country of 180 countries on Transparency International’s “corruption perceptions index.”<sup><a id="_edn126" href="#_ednref126">126</a></sup> This index draws from various surveys and expert views on government bribery, misuse of funds, financial disclosure rules, and other measures of clean administration.</p> <p>The United States ranks 25th least corrupt of 213 countries on the World Bank’s “control of corruption” index.<sup><a id="_edn127" href="#_ednref127">127</a></sup> And the United States ranks 20th of 126 countries on the World Justice Project’s “Rule of Law” index, which includes measures such as the use of public office for private gain and the number of government officials sanctioned for misconduct.<sup><a id="_edn128" href="#_ednref128">128</a></sup> Overall, these indexes show that the United States is one of the less corrupt countries but that there is room for improvement.</p> <p>It is widely recognized that corruption undermines economic growth. Experts agree that rampant corruption in countries such as Russia damages those countries’ economies. The average GDP per capita in the bottom half (most corrupt) of the Transparency International countries in 2017 was $9,300, while the GDP per capita in the top half was $34,400.<sup><a id="_edn129" href="#_ednref129">129</a></sup> A scatterplot of these corruption ratings and GDP per capita shows a strong relationship across countries.</p> <p>If the United States took steps to reduce corruption or cronyism, it would likely boost overall income levels by reducing economic distortions. But given that we are one of the less corrupt countries, it seems unlikely that corruption or cronyism is a major driver of U.S. income levels or wealth inequality.</p> <p>Economists Sutirtha Bagchi and Jan Švejnar investigated the cross-country relationship between corruption and the type of wealth held by billionaires.<sup><a id="_edn130" href="#_ednref130">130</a></sup> Using the <em>Forbes</em> list, they separated the billionaires who made their wealth from political connections from those who did not. Let’s call those bad and good billionaires, respectively. Across countries other than the United States, 17 percent of billionaires were bad and 83 percent were good. In the United States, just 1 percent were bad and 99 percent were good.<sup><a id="_edn131" href="#_ednref131">131</a></sup> Thus, American billionaires overwhelmingly earned their wealth in productive and noncorrupt ways, according to this metric.</p> <p>Bagchi and Švejnar found that countries with high shares of bad billionaires rank poorly on indexes of corruption—countries such as Malaysia, Indonesia, Thailand, Colombia, and Mexico. By contrast, countries with few politically connected billionaires rank well on corruption indexes—countries such as Britain, Singapore, Sweden, Switzerland, and the United States. The findings indicate that corruption is not related to the amount of top-end wealth generally but rather to how people at the top made their wealth. Countries should focus on equal treatment and uniform laws so that people gravitate toward productive ways of generating wealth and not unproductive cronyist ways.</p> <p>Bagchi and Švejnar also compared country shares of good and bad billionaires to economic growth and found that countries with large numbers of bad billionaires experienced weaker economic growth. That result is not surprising because cronyism often entails regulations and subsidies that restrict competition and misdirect investment.</p> <p><em>The Economist</em> created its own cross-country “crony capitalism index.”<sup><a id="_edn132" href="#_ednref132">132</a></sup> It uses the <em>Forbes</em> list to estimate billionaire wealth in each country obtained from sectors said to be prone to crony capitalism.<sup><a id="_edn133" href="#_ednref133">133</a></sup> Each billionaire is classified as either crony or not based on the industry they are most active in. The magazine compared its cronyism measure to economic performance and found that billionaire wealth in crony sectors as a share of GDP is about three times higher in low-income countries than in high-income countries. Again, cronyism appears to undermine economic performance.</p> <p>As with the Bagchi and Švejnar analysis, the United States scored quite well on <em>The Economist</em>’s index. In 2016, it had crony billionaire wealth of 1.8 percent of GDP, which was the seventh least corrupt of 22 countries. In the United States, billionaire wealth earned in crony sectors is only about one-sixth as large as billionaire wealth earned in non-crony sectors.</p> <p><em>The Economist</em> argues, “Over two decades, crony fortunes leapt relative to global GDP and as a share of total billionaire wealth.”<sup><a id="_edn134" href="#_ednref134">134</a></sup> If true, that may help explain changes in wealth distribution in some countries that have high levels of cronyism, such as Russia. It is less relevant in countries that have lower levels of corruption, such as the United States.</p> <p>With all this in mind, the mistake made by politicians such as Senators Sanders and Warren is to imply that most fortunes owned by America’s wealthy are ill-gotten. They tend to conflate wealth in general with cronyist wealth. Sanders lambastes all wealth inequality as “obscene” in his speeches.<sup><a id="_edn135" href="#_ednref135">135</a></sup> Both Sanders and Warren would impose their wealth taxes on every wealthy individual, including entrepreneurs who create innovations that benefit the poor.</p> <p>Most wealth at the top in the United States is earned in open and competitive industries, not through cronyism. It is true that the government intervenes in many U.S. industries, but most of the profiles on the <em>Forbes</em> list of the wealthiest Americans indicate people who have created value that benefits the general public.</p> <p>Nonetheless, cronyism is an important problem, which probably does increase wealth inequality to an extent. Surveys show that Americans are concerned about cronyism. According to a recent poll, 67 percent of voters surveyed said they believe that big businesses and government regulators often work together to create rules that are harmful and unfair to consumers.<sup><a id="_edn136" href="#_ednref136">136</a></sup></p> <p>So how do we address the problem? Table 1 indicates the types of cronyism that we should target for reform. Our goal should be to allow open competition in every industry so that entrepreneurs can challenge established businesses on a level playing field. Adam Smith stressed the benefits of competition:</p> <blockquote>All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.<sup><a id="_edn137" href="#_ednref137">137</a></sup></blockquote> <p>The public should press policymakers to eliminate the subsidies, regulations, and tax preferences that fuel cronyism. If the government reduced its interventions in the economy, there would be fewer levers for special interests to pull. Interventions often begin with good intentions, but businesses twist and exploit policies to gain unfair advantage. As Adam Smith noted, we should give “most suspicious attention” to intervention schemes that businesses promote.</p> <p>Cronyism distorts the economy and likely increases wealth inequality. It erodes confidence in government and is rejected by the general public. The problem the nation faces is not wealth inequality per se. Rather, the problem is government policies that protect and subsidize favored businesses and unjustly aid the wealthy.</p> </div> , <h2 class="heading"> 5. Government Undermines Wealth‐​Building </h2> , <div class="text-default"> <p>Federal and state governments run many social programs that support lower- and middle-income households. One cost of these programs is that they undermine the incentives and the means for people to accumulate personal savings. Effectively, they displace or “crowd out” wealth-building by households, particularly those with moderate incomes.</p> <p>As government programs for retirement, healthcare, unemployment, and other items have expanded over the decades, there has been less need for people to save for those expenses themselves. At the same time, people are less able to save because higher taxes are required to pay for the programs. This has undermined wealth accumulation by the nonrich and thus increased wealth inequality.</p> <p>The government creates other hurdles to wealth-building. A number of social programs have asset tests, which discourage savings by disallowing benefits if household assets rise above set amounts. Also, numerous government policies raise costs for people with moderate incomes, which reduces earnings available for savings.</p> <p>Therefore, wealth inequality statistics do not just reflect the workings of markets but also the negative effects of government policies on private savings. Politicians complain about wealth inequality, but their own policies are partly responsible.</p> </div> , <h3 class="heading"> Displacement of Personal Savings </h3> , <div class="text-default"> <p>The largest federal program, Social Security, is a prominent example of crowding out. The program is a tax-funded benefit program, not a savings plan. Many Americans rely on Social Security for most or all of their retirement income. The program discourages workers from saving for their own retirement, and it reduces their ability to do so with its heavy 12.4 percent tax on wages up to a dollar cap.</p> <p>In pioneering studies in the 1970s, Martin Feldstein explored how Social Security displaced private savings.<sup><a id="_edn138" href="#_ednref138">138</a></sup> He found that every dollar increase in benefits reduced private savings by about 50 cents.<sup><a id="_edn139" href="#_ednref139">139</a></sup> Studies since then have generally confirmed the substantial displacement effect, although the magnitudes of the estimated effects have varied.<sup><a id="_edn140" href="#_ednref140">140</a></sup></p> <p>Social Security represents a much larger share of retirement resources for the non-rich than the rich, and the program’s benefits cannot be inherited. The result is that the program’s crowding-out effect increases wealth inequality. Jagadeesh Gokhale and Laurence Kotlikoff modeled a simulated population to estimate that Social Security raises the Gini coefficient on wealth by one-fifth and increases the share of wealth held by the top 10 percent by more than one-quarter.<sup><a id="_edn141" href="#_ednref141">141</a></sup> This occurs because Social Security leaves the non-rich with “proportionately less to save, less reason to save, and a larger share of their old-age resources in a nonbequeathable form than the lifetime rich. In doing so, Social Security denies the children of the poor the opportunity to receive inheritances.”<sup><a id="_edn142" href="#_ednref142">142</a></sup></p> <p>The fact that Social Security increases wealth inequality may surprise people because the program is thought to be a progressive achievement. While the program may reduce <em>income</em> inequality, it raises <em>wealth</em> inequality. Other social programs create similar effects. Medicare provides large resources to retirees and thus also reduces incentives to save for retirement. Unemployment insurance, welfare, education aid, and other programs reduce incentives for people to save for midlife expenses. In general, when the government provides income and other social benefits to people, savings incentives are reduced. Higher government aid results in lower private wealth.</p> <p>Barış Kaymak and Markus Poschke built a model of the U.S. economy to estimate the causes of changing wealth inequality in recent decades. They found that the main factor raising wealth inequality has been technological change that has increased wage dispersion. But they also found that the expansion of Social Security and Medicare has had a large effect:</p> <blockquote>By subsidizing income and healthcare expenditures for the elderly, these programs curb incentives to save for retirement, a major source of wealth accumulation over the life-cycle. Furthermore, since both programs are redistributive by design, they have a stronger effect on the savings of low- and middle-income groups. By contrast, those at the top of the income distribution have little to gain from these programs. We argue that the redistributive nature of transfer payments was instrumental in curbing wealth accumulation for income groups outside the top 10% and, consequently, amplified wealth concentration in the U.S.<sup><a id="_edn143" href="#_ednref143">143</a></sup></blockquote> <p>Kaymak and Poschke found that the expansion of Social Security and Medicare caused about one-quarter of the rise of the top 1 percent share of wealth in recent decades.<sup><a id="_edn144" href="#_ednref144">144</a></sup> Social Security and Medicare spending increased from 3.5 percent of GDP in 1970 to 8.3 percent by 2018.<sup><a id="_edn145" href="#_ednref145">145</a></sup></p> <p>Those are the two largest federal social programs, but other programs have likely added to this wealth inequality effect. Total federal and state social spending as a share of GDP more than doubled from 6.8 percent in 1970 to 14.3 percent by 2018.<sup><a id="_edn146" href="#_ednref146">146</a></sup> That large increase was over the period that Thomas Piketty and some other economists claim that there was a large increase in wealth inequality. Section 1 argues that the increase has been modest, but however large, a substantial share stemmed not from market forces but from expansion in government social benefits.</p> <p>Generations of Americans have grown up assuming that the government will take care of them when they are sick, unemployed, and retired. They have responded by putting aside less of their earnings for their own future expenses. Financing social programs requires not just the federal payroll tax but also a large share of other federal and state taxes. American families are less able to save because of higher taxes, and they have a reduced incentive to do so because of the expectation of receiving government benefits.</p> <p>Further evidence for the displacement effect of the welfare state comes from cross-country studies. In an early study comparing national levels of Social Security benefits to private savings, Feldstein found that higher benefits had a “powerful effect” in reducing private savings.<sup><a id="_edn147" href="#_ednref147">147</a></sup></p> <p>More recently, a 2015 study by Pirmin Fessler and Martin Schürz for the European Central Bank used a large survey database across European countries to explore the relationship between the level of social spending and wealth distribution. Their statistical results showed that “the degree of welfare state spending across countries is negatively correlated with household net wealth.”<sup><a id="_edn148" href="#_ednref148">148</a></sup> They explained:</p> <blockquote>The substitution effect of welfare state expenditures with regard to private wealth holdings is significant along the full net wealth distribution, but is relatively lower at higher levels of net wealth. Given an increase in welfare state expenditure, the percentage decrease in net wealth of poorer households is relatively stronger than for households in the upper part of the wealth distribution. This finding implies that given an increase of welfare state expenditure, wealth inequality measured by standard relative inequality measures, such as the Gini coefficient, will increase.<sup><a id="_edn149" href="#_ednref149">149</a></sup></blockquote> <p>Based on Fessler and Schürz’s data, countries such as Germany and the Netherlands have relatively high social spending and relatively low private wealth holdings by less well-off households. But other countries such as Luxembourg and Spain have relatively low social spending and relatively high private wealth holdings by less well-off households.<sup><a id="_edn150" href="#_ednref150">150</a></sup> Consistent with those findings, a 2018 Organisation for Economic Co-operation and Development study shows relatively higher wealth inequality in Denmark, Germany, and the Netherlands and relatively lower wealth inequality in Luxembourg and Spain.<sup><a id="_edn151" href="#_ednref151">151</a></sup></p> <p>The Gini coefficient for wealth is similar in the United States (85), Denmark (84), Norway (79), and Sweden (87), which people usually think of as egalitarian nations.<sup><a id="_edn152" href="#_ednref152">152</a></sup> Credit Suisse’s Global Wealth Databook 2014 explained:</p> <blockquote>Strong social security programs—good public pensions, free higher education or generous student loans, unemployment and health insurance—can greatly reduce the need for personal financial assets, as Domeij and Klein (2002) found for public pensions in Sweden. Public housing programs can do the same for real assets. This is one explanation for the high level of wealth inequality we identify in Denmark, Norway and Sweden: the top groups continue to accumulate for business and investment purposes, while the middle and lower classes have a less pressing need for personal saving than in many other countries.<sup><a id="_edn153" href="#_ednref153">153</a></sup></blockquote> <p>Another way to think about the effect of social programs on wealth is to estimate the present value of future promised government benefits as if it were real wealth. A 2019 study by John Sabelhaus and Alice Henriques Volz calculated Social Security “wealth” for U.S. households compared to the wealth held in private defined benefit and defined contribution retirement plans.<sup><a id="_edn154" href="#_ednref154">154</a></sup> It found that Social Security wealth is twice as large as the combined wealth in private retirement plans and is heavily skewed toward lower-income households.<sup><a id="_edn155" href="#_ednref155">155</a></sup> For the least-wealthy one-quarter of U.S. households, Social Security wealth is five times larger than private retirement plan wealth, whereas for the most-wealthy one-quarter of households, Social Security wealth is less than half as large as private retirement wealth.</p> <p>Social Security and other entitlement programs loom large in household finances for the nonwealthy and thus likely displace a large amount of private wealth. As a result, all the widely cited statistics about wealth distribution—including Gini coefficients and top 1 percent shares—substantially overstate wealth inequality because they exclude Social Security. In a 2016 analysis, Sabelhaus, Henriques Volz, and Sebastian Devlin-Foltz concluded, “Claims to future Social Security benefits are a key component of retirement wealth, and thus failure to include Social Security leads to a biased assessment of the overall distribution of retirement wealth.”<sup><a id="_edn156" href="#_ednref156">156</a></sup></p> <p>That is true of Medicare benefits as well. Future Social Security and Medicare benefits represent “wealth” typically worth hundreds of thousands of dollars to individuals. A 2018 Urban Institute study found, for example, that an average-income single man retiring at age 65 in 2020 could expect to receive $318,000 in Social Security benefits and $229,000 in Medicare benefits in present value terms.<sup><a id="_edn157" href="#_ednref157">157</a></sup> Those are large figures compared to the amount of financial assets the average person holds. Laurence Kotlikoff notes that if claims to future Social Security, Medicare, and Medicaid benefits were included in wealth estimates, we “might find declining wealth inequality in recent decades.”<sup><a id="_edn158" href="#_ednref158">158</a></sup></p> <p>To individuals, Social Security and other entitlements seem like wealth, but they only represent promises of future benefits, and those benefits are in jeopardy because these unfunded programs are driving huge and rising government deficits and debt. As currently structured, Social Security will only be able to pay a fraction of promised benefits down the road. The Cato Institute has long argued that the United States should move to a retirement system based on private savings accounts, as numerous other countries have done.<sup><a id="_edn159" href="#_ednref159">159</a></sup> Traditional benefits would be phased out over time as younger workers built up savings in private accounts with a portion of their earnings that currently go to federal payroll taxes.</p> <p>Other social programs could be transitioned to a savings basis as well. Feldstein modeled how the United States could move toward a savings-based Medicare system.<sup><a id="_edn160" href="#_ednref160">160</a></sup> The nation of Chile has a savings-based unemployment insurance system that is integrated with its savings-based Social Security system.<sup><a id="_edn161" href="#_ednref161">161</a></sup> Such savings accounts would be inheritable, unlike the benefits from current social programs. They would also be more secure because they would not depend on political promises of a massively indebted government.</p> <p>If the United States transitioned to savings-based social programs, it would dramatically reduce measured wealth inequality as the non-rich built up financial assets. A sad irony in public policy debates is that the politicians—such as Senators Sanders and Warren—who complain the loudest about wealth inequality also oppose moving toward the savings-based social programs that would reduce measured wealth inequality.</p> </div> , <h3 class="heading"> Asset Tests </h3> , <div class="text-default"> <p>Government social programs do not just displace private savings by changing incentives to save; some programs actively deter private saving. Numerous means-tested welfare programs impose both income and asset tests, the latter of which cut off benefits if a measure of personal assets rises above statutory thresholds.<sup><a id="_edn162" href="#_ednref162">162</a></sup> Asset tests are in place for Temporary Assistance for Needy Families, Supplemental Nutrition Assistance Program, Medicaid, Supplemental Security Income, and other programs.<sup><a id="_edn163" href="#_ednref163">163</a></sup> Both federal and state governments play a role in setting these rules, and there is substantial variability between the states.</p> <p>The purpose of asset tests is to limit program costs and to target benefits to the people most in need. Asset tests help to prevent abuse by people gaining benefits who do not really need them. However, a harmful side effect is that asset tests help to trap people in poverty by discouraging a culture of personal saving. If assets rise above capped levels, the tests act as a 100 percent tax rate on additional wealth accumulation. The caps are sometimes as low as $3,000, although there has been a loosening of rules in many states in recent years.</p> <p>A number of economic studies have documented the negative effects of asset tests.<sup><a id="_edn164" href="#_ednref164">164</a></sup> The important point with respect to wealth inequality is that asset tests are one mechanism by which governments, not markets, skew economic outcomes to intensify wealth inequality.</p> </div> , <h3 class="heading"> Government‐​Created Costs </h3> , <div class="text-default"> <p>Social programs are not the only government policies that can widen wealth inequality. Federal, state, and local governments raise living costs for moderate-income households, which reduces funds available for savings. Housing, food, transportation, apparel, and footwear together account for 59 percent of spending by the average household in the bottom 20 percent, or quintile, of the income distribution, and government policies raise prices in those sectors.<sup><a id="_edn165" href="#_ednref165">165</a></sup></p> <p>Consider housing, which accounts for 25 percent of total expenditures for the average household in the poorest quintile.<sup><a id="_edn166" href="#_ednref166">166</a></sup> Land-use and zoning regulations that constrain housing supply raise housing costs in many cities. Ed Glaeser, Joseph Gyourko, and Raven Saks estimated that such regulations push up condominium prices by 53 percent in San Francisco, 50 percent in Manhattan, 34 percent in Los Angeles, 22 percent in Washington, DC, and 19 percent in Boston.<sup><a id="_edn167" href="#_ednref167">167</a></sup> High housing costs reduce the funds that individuals would have available to save.</p> <p>Housing-supply restraints may also increase wealth inequality between existing homeowners and others and between homeowners in different regions. A concern of Piketty’s was that as capital accumulates, capital income would become a growing share of all income, thus exacerbating inequality. But Matthew Rognlie disaggregated capital income for the United States and found that only returns to housing have been contributing to rising inequality in recent decades.<sup><a id="_edn168" href="#_ednref168">168</a></sup> French economists found similar results.<sup><a id="_edn169" href="#_ednref169">169</a></sup></p> <p>Economists David Albouy and Mike Zabek conclude that U.S. housing price inequality has risen to pre–World War I levels, driven by the rising value of land and by a growing relative price gap between inner cities and metro areas.<sup><a id="_edn170" href="#_ednref170">170</a></sup> Rising house price inequality also causes a rising wealth gap between homeowners and renters.</p> <p>Restrictive land-use and zoning rules may worsen wealth inequalities in other ways. The rules tend to be the tightest in economically prosperous areas with good opportunities for high-wage jobs. The laws also tend to be the most restrictive on forms of housing demanded by first-time homebuyers, who typically have less accumulated wealth. Economist Lawrence Summers concluded that “an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value” could help address concerns about rising wealth inequality.<sup><a id="_edn171" href="#_ednref171">171</a></sup></p> <p>Poorer households spend a higher share of their incomes not just on housing but also on food, clothing and footwear, transportation, and childcare. Ryan Bourne found that government regulatory and trade policies in these areas can cost low-income households anywhere from $830 to $3,500 per year through higher prices.<sup><a id="_edn172" href="#_ednref172">172</a></sup> Government housing and transportation policies can also reduce mobility toward better-paying jobs.</p> <p>In sum, numerous government policies—often well-meaning—have the effect of raising wealth inequality. Reductions to social spending, taxes, regulations, and trade barriers would reduce costs and increase incentives for families to build wealth. When it comes to government, less is often more for American families.</p> </div> , <h2 class="heading"> 6. Inequality Does Not Erode Democracy </h2> , <div class="text-default"> <p>A popular idea on the political left is that wealth inequality undermines democracy. <em>New York Times</em> columnist Krugman asked, “Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?”<sup><a id="_edn173" href="#_ednref173">173</a></sup> And Senator Warren exhorted: “You’ve got things that are broken in your life; I’ll tell you exactly why. It’s because giant corporations, billionaires have seized our government.”<sup><a id="_edn174" href="#_ednref174">174</a></sup></p> <p>A former lead economist at the World Bank, Branko Milanović, claimed:</p> <blockquote>In every political system, even a democracy, the rich tend to hold more political power. The danger is that this political power will be used to promote policies that further cement the economic power of the rich. The higher the inequality, the more likely we are to move away from democracy toward plutocracy.<sup><a id="_edn175" href="#_ednref175">175</a></sup></blockquote> <p>The designers of Senator Warren’s wealth tax plan—economists Saez and Zucman—favor higher taxes on the rich to resist a supposed “oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.”<sup><a id="_edn176" href="#_ednref176">176</a></sup> Similarly, Vanessa Williamson of the Brookings Institution argues that “the purpose of high tax rates on the rich is the reduction of vast fortunes that give a handful of people a level of power incompatible with democracy.”<sup><a id="_edn177" href="#_ednref177">177</a></sup></p> <p>Are such fears justified? No, for numerous reasons. The political views of the wealthy are not homogeneous, and on many issues, they track the views of the rest of the population. When the preferences of the wealthy are different, they are often not followed by policymakers, who ultimately need votes, not money. Finally, the empirical evidence is complex, but it appears that money does not buy elections, and wealthy self-funded candidates often do poorly.</p> </div> , <h3 class="heading"> The Preferences of the Wealthy </h3> , <div class="text-default"> <p>Do the wealthy have different policy preferences than the rest of us? If they do not have different policy preferences, then even if they had large political clout, it would not affect policy outcomes.</p> <p>The breakdown of policy views of broad lower-, middle-, and higher-income groups are quite similar. Alexander Branham, Stuart Soroka, and Christopher Wlezien note that empirical research generally shows that “preferences across economic groups, especially the middle and rich, do not differ much in many policy areas. In these instances, it does not matter whether public policy is more responsive to one group—policy will end up in the same place.”<sup><a id="_edn178" href="#_ednref178">178</a></sup> In their 2017 analysis of 1,779 poll questions on policy, they found, “in nearly 90 percent of cases, majorities of the middle and rich are in agreement.”<sup><a id="_edn179" href="#_ednref179">179</a></sup> On 80 percent of questions, majorities of all three income groups agreed, albeit with differing degrees of enthusiasm.</p> <p>Political scientist Martin Gilens notes that “the affluent are no more (or less) likely to be of one mind on the proposed policy changes in my dataset than are Americans within low and middle incomes.”<sup><a id="_edn180" href="#_ednref180">180</a></sup> Pew Research found that individuals with family incomes above $150,000 are equally likely to identify as Republican or Democrat (33 percent to 32 percent).<sup><a id="_edn181" href="#_ednref181">181</a></sup></p> <p>Within every income group there is, of course, a broad range of policy views. Jonah Goldberg noted the diversity among billionaires: “George Soros, Tom Steyer, and other liberal billionaires are in a hammer-and-tongs political battle with Sheldon Adelson, Charles and David Koch, and other conservative or libertarian billionaires.”<sup><a id="_edn182" href="#_ednref182">182</a></sup> Similarly, the top 10 wealthiest members of Congress are five Democrats and five Republicans. There is little class solidarity among the wealthy.</p> <p>We used <em>Roll Call</em>'s “Wealth of Congress” database to compare support for social programs in roll call votes from 2009 through 2018 with the net worth of House and Senate members.<sup><a id="_edn183" href="#_ednref183">183</a></sup> In Figure 3, each dot is a member of Congress. Support for redistribution is modeled by examining how members of Congress voted in roll calls on subjects containing the following terms: Medicare, Medicaid, Social Security, Welfare, Entitlement, CHIP, or SNAP. The figure and a simple regression reveal that there is a correlation between politicians’ wealth and their support of social programs among Democrats, but there is no correlation among Republicans.<sup><a id="_edn184" href="#_ednref184">184</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="13867f6e-738a-4a8f-a21b-05ba0b2d9765" data-type="interactive" data-title="Wealth Inequality Congress Net Worth"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="text-default"> <p>The figure shows that party label is a much more important factor than wealth in explaining the votes. Democrats are much more supportive of social programs and clustered at the top of the chart, while Republicans are clustered at the bottom. The key determinant of their voting records on these issues is party affiliation, not wealth.</p> <p>Clearly then, being wealthy does not by itself determine one’s political preferences. However, subcomponents of the wealthy may lean in particular political directions. A recent study looking at campaign contributions estimated that 57 percent of S&amp;P 500 chief executives are Republicans and only 19 percent Democrats.<sup><a id="_edn185" href="#_ednref185">185</a></sup> Also, Gilens’s work on the preferences of the top 10 percent of income earners found some differences in political preferences compared to the rest of the population.<sup><a id="_edn186" href="#_ednref186">186</a></sup> The top 10 percent have somewhat stronger opposition to taxes and business regulation. They also tend to be less protectionist on trade policy; less conservative on religious and moral issues; and more supportive of foreign aid, top income and capital gains tax cuts, gas tax increases, and restraint in Social Security and Medicare spending.</p> <p>Evidence on the views of the extremely wealthy is scarcer. But a survey by Benjamin Page, Larry Bartels, and Jason Seawright of 104 wealthy individuals in Chicago in 2011 found differences in political preferences from the rest of the population for those with a net worth of $40 million or more.<sup><a id="_edn187" href="#_ednref187">187</a></sup> This group was more likely than others to think excessive government spending and budget deficits were the most important economic problem the country faced. They were also more likely to want to cut Social Security, healthcare, food stamps, and homeland security spending than the rest of the public and less likely than the broader public to support a federal jobs guarantee and more redistribution.</p> <p>However, even this elite group supported progressive taxation at about current rates. They also wanted a progressive Social Security system but were split on whether high earners should pay more to fund it. On regulation, they favored intervention in areas where scandals have occurred but considered small businesses to be overregulated. There are some differences within this top group—professionals generally had more liberal views than business owners, managers, and investors.</p> </div> , <h3 class="heading"> Do the Rich Have Disproportionate Political Power? </h3> , <div class="text-default"> <p>On many issues where the wealthy do have different preferences than the rest of us, it does not appear that they get their way in policy. Data show that the wealthy are very concerned about federal budget deficits, yet today’s deficits are massive, and neither party seems interested in tackling the problem. Donald Trump won the presidency promising trade protectionism, unreformed entitlement programs, reducing immigration, and putting conservative judges into courts. None of those positions are particularly popular among the very wealthy.</p> <p>However, Trump does support deregulation and tax cuts, which the wealthy have a relative preference for. But interestingly, not one CEO in the Fortune 100 had donated to Trump’s election campaign by September 2016. His victory did not stem from influence by the wealthy but more from grassroots opposition to wealthy coastal elites. The rich have less direct influence on electoral outcomes or policy platforms than is commonly believed.<sup><a id="_edn188" href="#_ednref188">188</a></sup></p> <p>Some scholars disagree with that view. Using a data set primarily covering 1981–2002, Gilens analyzed the relative influence of high earners in situations when opinions between income groups differed.<sup><a id="_edn189" href="#_ednref189">189</a></sup> He concluded that the federal government is responsive to the public’s preferences, but it is more strongly responsive to the preferences of the most affluent. He focused on issues with an average preference gap in survey data of at least 10 percentage points between the rich and the rest and concluded:</p> <blockquote>When less-well-off Americans hold preferences that diverge from those of the affluent, policy responsiveness to the well-off remains strong but responsiveness to lower-income groups all but disappears.<sup><a id="_edn190" href="#_ednref190">190</a></sup></blockquote> <p>However, Gilens’s methodology is problematic.<sup><a id="_edn191" href="#_ednref191">191</a></sup> He admits there are exceptions to his conclusions, and we think those exceptions are large. On Social Security, Medicare, education, and public works spending, for example, policy outcomes appear more responsive to the preferences of the poor and middle class than the rich. Those policy areas account for about half of all federal spending.<sup><a id="_edn192" href="#_ednref192">192</a></sup> Adding in defense spending, which research suggests the super-wealthy also favor cutting, brings that share to more than 60 percent. Thus, for most of the federal budget, the reform approach relatively favored by the wealthy is generally not followed.</p> <p>Gilens’ study exaggerates the influence of the rich for another reason. By looking at differences in the relative strength of support for policies, “a federal policy enacted with the support of 80 percent of the wealthy and 70 percent of the middle and lower class would count as evidence of the upper class’s greater political clout.”<sup><a id="_edn193" href="#_ednref193">193</a></sup> But that would be a policy that is strongly supported by all income groups.</p> <p>In their 2017 study, Branham, Soroka, and Wlezien looked at policy outcomes just on those issues where majorities of the middle class and rich disagree.<sup><a id="_edn194" href="#_ednref194">194</a></sup> In these situations, the rich got their way 53 percent of the time versus 47 percent of the time for the middle class. That is a fairly small difference, though one that increases slightly in favor of the rich when there are stronger differences in opinion. In other words, when the majority of the rich favors a policy and a majority of the middle class opposes it, the policy is adopted 37 percent of the time, compared to 26 percent of the time when the rich oppose and the middle favor. Over the 22-year period examined by the authors, that means the rich got their way 11 more times than the middle class, equivalent to just one bill every two years. This indicates that the rich’s views may be favored in federal policy outcomes, but the size of the effect is small.</p> <p>Finally, a statistical study by Eric Brunner, Stephen Ross, and Ebonya Washington found that the views of the rich were not favored in legislation. They created a unique data set based on 77 times from 1991 to 2008 that California state legislators voted on the same proposal as the public voted on in a referendum. They compiled information on the ballot votes by neighborhood income levels and found:</p> <blockquote>Contrary to popular view, we do not find that less income means less representation. Analyzing the voting behavior of state legislators on 77 proposals on which both the legislature and the public cast ballots, we find first that the opinions of higher and lower income voters within a district are highly correlated on these issues and thus it is impossible to represent the views of one group and not also represent the views of the other.<br><br>What differences there are in representation do not result in lower income voters’ consistent disadvantage. While Republican legislators more frequently vote congruently with the view of their highest income constituents, Democrats are more likely to vote the view of their lowest income constituents... . What is clear is that our findings on representation by income group have more to do with party than with income.<sup><a id="_edn195" href="#_ednref195">195</a></sup></blockquote> </div> , <h3 class="heading"> Does Rising Wealth Inequality Undermine Democracy? </h3> , <div class="text-default"> <p>There is little evidence that wealth inequality undermines democracy today, but is there reason to worry about the future? Pessimists such as Milanović see us drifting toward plutocracy if wealth inequality rises and the wealthy take greater control of politics.</p> <p>The wealthy have always been involved in politics, but politicians ultimately need votes, not money, and billionaires represent few votes. Consider that wealth inequality was higher across many Western countries in the 19th century and early 20th century to the extent we can measure it, but that was precisely when many nations were widening the voting franchise under pressure from the general public.</p> <p>People, including rich people, vote based on many factors, not just their economic self-interest.<sup><a id="_edn196" href="#_ednref196">196</a></sup> Voters make choices based on ideological beliefs, personalities of politicians, and the stances of their favored parties, which stand on a bundle of electoral promises. Special interests influence politics, but that usually comes from organized groups representing substantial numbers of voters, such as industries and unions.</p> <p>Little evidence exists that rising wealth inequality leads to political outcomes less representative of ordinary peoples’ preferences. Gilens’ work purports to show that the wealthy’s influence on policy outcomes has been rising since the 1960s, coinciding with rising inequality that has made campaign contributions from the rich more important.</p> <p>However, Gilens’ results suggest that a party’s degree of political control is a far more important determinant of responsiveness than income levels. When a U.S. political party has a strong majority and political gridlock is low, policy outcomes are only weakly related even to the rich’s preferences and unrelated to the least well-off. Parties instead deliver on their activists’ preferences. Unsurprisingly, it is when elections are close or control of government uncertain that politicians appear to respond more closely to the public’s preferences.</p> <p>Liberals worry that political contributions from the wealthy may buy politicians’ votes, but substantial evidence rejects that idea. In the final term of members of Congress, we might expect voting patterns to change as members have less need to attract donations. But economists Stephen Bronars and John Lott found no change in politicians’ recorded voting patterns in politicians’ final term.<sup><a id="_edn197" href="#_ednref197">197</a></sup> This supports the idea that donors donate to members they agree with, rather than donating in expectation of changing member votes.</p> <p>Summarizing recent academic research, economist Thomas Stratmann found it showed that “campaign contributions have not had much of an effect on legislative voting behavior.”<sup><a id="_edn198" href="#_ednref198">198</a></sup> Similarly, a study by Stephen Ansolabehere, John M. de Figueiredo, and James M. Snyder Jr. examined 40 statistical studies on whether campaign contributions affected voting in Congress. They found, “contributions show relatively few effects on voting behavior. In three out of four instances, campaign contributions had no statistically significant effects on legislation or had the ‘wrong’ sign.”<sup><a id="_edn199" href="#_ednref199">199</a></sup> In their own statistical analysis, they found:</p> <blockquote>Overall, our findings parallel that of the broader literature. As regressions like these make clear, the evidence that campaign contributions lead to a substantial influence on votes is rather thin. Legislators’ votes depend almost entirely on their own beliefs and the preferences of their voters and their party. Contributions explain a miniscule fraction of the variation in voting behavior in the U.S. Congress. Members of Congress care foremost about winning reelection. They must attend to the constituency that elects them, voters in a district or state, and the constituency that nominates them, the party.<sup><a id="_edn200" href="#_ednref200">200</a></sup></blockquote> <p>Liberals also worry that wealthy people are more likely to favor cuts to social programs and that if wealthy people gain more political power, the welfare state would be cut. Yet, as wealth inequality has risen modestly since the 1980s, federal social spending has grown substantially, not shrunk. Total federal and state social spending as a share of GDP has risen from 9.6 percent in 1980 to 14.3 percent by 2018.<sup><a id="_edn201" href="#_ednref201">201</a></sup></p> <p>Across countries there is no correlation between the wealth share of the top 1 percent and social spending as a percentage of GDP. This is clear in Figure 4 and confirmed by a simple regression analysis.<sup><a id="_edn202" href="#_ednref202">202</a></sup> Note that “social spending” is a broad measure created by the Organisation for Economic Co-operation and Development and includes “cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes.”<sup><a id="_edn203" href="#_ednref203">203</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="57c81f21-7c57-4e7c-911c-e0b526907735" data-type="interactive" data-title="Copy: Wealth Inequality OECD Spending v Wealth Share"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="text-default"> <p>Another worry is that money “buys” elections and that since the wealthy have lots of it, they have inordinate ability to move elections. Money is an important campaign resource, but it certainly does not guarantee outcomes.<sup><a id="_edn204" href="#_ednref204">204</a></sup> Donald Trump won the White House in 2016 even though his official campaign raised and spent just over half that of Hillary Clinton’s campaign.<sup><a id="_edn205" href="#_ednref205">205</a></sup> In the 2008 GOP primary, wealthy Mitt Romney spent more than twice as much as John McCain—much of it his own money—but McCain won the contest.<sup><a id="_edn206" href="#_ednref206">206</a></sup></p> <p>The 2012 congressional elections are a prime example of the impotence of money when election winds are blowing the other way. The public swung to the Democrats that year, and GOP lobby groups spent huge amounts of money to dismal results. Karl Rove’s American Crossroads spent $104 million backing and opposing candidates and was successful in very few of the races it targeted.<sup><a id="_edn207" href="#_ednref207">207</a></sup> GOP-oriented lobby groups—such as the National Rifle Association and U.S. Chamber of Commerce—also did poorly.<sup><a id="_edn208" href="#_ednref208">208</a></sup></p> <p>The <em>Washington Post</em> summarized the role of money in the 2012 election:</p> <blockquote>A clutch of billionaires and privately held corporations fueled more than $1 billion in spending by super PACs and nonprofits, unleashing a wave of attack ads unrivaled in U.S. history. Yet Republican groups, which dominated their opponents, failed to achieve their two overarching goals: unseating President Obama and returning the Senate to GOP control.<br><br>... Even in the House, which remains comfortably in Republican hands, GOP money groups struck out repeatedly in individual races they targeted ... In 24 of the most competitive House contests, Democratic candidates and their allies were outspent in the final months but pulled out victories anyway.<br><br>... Wealthy donors were so central to Romney’s campaign that a swarm of private luxury jets caused a traffic jam at Boston’s airport Tuesday just before the nominee’s election-night party.<br><br>But conservative super PACs and secretive nonprofit groups—which spent up to $10 million a day on the presidential race alone—couldn’t move the needle far enough to prevail in almost any of the major races they targeted.<br><br>... Indeed, if election investments are like the stock market, a lot of billionaires just lost their shirts. American Crossroads, co-founded by GOP political guru Karl Rove, and Restore Our Future, which focused on supporting Romney in the presidential race, together spent more than $450 million, with little to show for it in the end. The groups relied on six- and seven-figure checks from energy executives, hedge-fund managers and other wealthy donors eager to oust Obama and congressional Democrats.<sup><a id="_edn209" href="#_ednref209">209</a></sup></blockquote> <p>Studies appear to show that even though money raised correlates with electoral outcomes, it is not the causal factor. Large amounts of campaign money do not buy elections, rather what usually happens is that highly electable candidates have an easier time raising money.<sup><a id="_edn210" href="#_ednref210">210</a></sup> Note that self-financed wealthy candidates tend to do relatively poorly at elections.<sup><a id="_edn211" href="#_ednref211">211</a></sup></p> <p>Some liberals think that today’s level of wealth inequality is by itself evidence of the wealthy capturing the democratic process. They cannot see any other reason why policy&#173;makers have not voted for higher taxes on the rich or more generous social programs than we already have. They seem to surmise that the rich must have lobbied to distort the public debate.</p> <p>Instead, polling shows that many voters do not agree with more redistributionist policies or that they give it low priority. Two percent or less of the public say “the gap between rich and poor” is the “most important issue” facing the country.<sup><a id="_edn212" href="#_ednref212">212</a></sup> Even those who express concern disagree about what to do about it. Using surveys back to 1966, Graham Wright found that when concern for inequality rises, support for redistributive policies does not follow suit.<sup><a id="_edn213" href="#_ednref213">213</a></sup> Voters may not trust the government to effectively address the issue, or they blame government for creating the inequality. Polls also show that the public dislikes certain leveling policies, such as estate taxes on the wealthy.<sup><a id="_edn214" href="#_ednref214">214</a></sup> Many people seem to have views about what is “fair” that are unrelated to their level of income or wealth.</p> <p>In sum, there is no clear evidence that wealth inequality undermines democracy in the United States. The wealthy do not have homogeneous political views, and where their views as a group do diverge from others, their preferences do not dominate legislative outcomes. The wealthy help fund campaigns and lobby groups, but the role of money in politics is complex. Studies and anecdotal evidence indicate that it is not easy to buy elections or votes in Congress.</p> <p>Despite the anti-wealth rhetoric on the presidential campaign trail today, most Americans admire honest top earners and do not believe they are ruining democracy. A 2019 Cato-YouGov poll found that 62 percent of Americans surveyed do not believe that “billionaires are a threat to democracy” and 69 percent agree that billionaires “earned their wealth by creating value for others.”<sup><a id="_edn215" href="#_ednref215">215</a></sup></p> <p>Nonetheless, the poll found that there is a large partisan divide over many issues regarding the wealthy. Political liberals tend to believe that political connections and luck are key factors in the success of the wealthy, while conservatives tend to think that hard work is more important.<sup><a id="_edn216" href="#_ednref216">216</a></sup> Some of the reforms we have suggested in this study—such as cutting cronyist subsidies and removing barriers to middle-class wealth-building—would help respond to liberal concerns but without undermining economic growth and incentives for wealth creation.</p> </div> , <h2 class="heading"> Citation </h2> , <div class="text-default"> <p>Edwards, Chris, and Ryan Bourne. “Exploring Wealth Inequality.” Policy Analysis No. 881, Cato Institute, Washington, DC, November 5, 2019. <a href="https://doi.org/10.36009/PA.881">https://doi.org/10.36009/PA.881</a>.</p> </div> Tue, 05 Nov 2019 03:00:00 -0500 Chris Edwards, Ryan Bourne https://www.cato.org/publications/policy-analysis/exploring-wealth-inequality Thatcher and Cameron Made Us Happier https://www.cato.org/publications/commentary/thatcher-cameron-made-us-happier Ryan Bourne <div class="lead text-default"> <p>Perhaps David Cameron had better foresight than he&rsquo;s given credit for. <a href="http://news.bbc.co.uk/1/hi/uk_politics/5003314.stm" target="_blank">At a Google conference in 2006</a>, the then leader of the opposition declared &ldquo;It&rsquo;s time we admitted that there&rsquo;s more to life than money, and it&rsquo;s time we focused not just on GDP, but on GWB &mdash; general well-being.&rdquo; With the financial crash ravaging the public finances through 2010 and conventional economic indicators in the doldrums, he risked opprobrium by tasking the Office for National Statistics (ONS) to measure wellbeing for the first time.</p> </div> , <div class="text-default"> <p>Well, his desire to be judged on such metrics now looks incredibly prescient. Never mind sluggish GDP growth throughout and after his premiership. Forget the polarisation of Brexit. <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/bulletins/measuringnationalwellbeing/april2018tomarch2019/relateddata" target="_blank">The ONS&rsquo;s latest wellbeing stats</a>, released last week, show that the British people are significantly happier and more satisfied than back in 2011.</p> <p>It really is remarkable. Every self-reported measure of wellbeing has improved near continuously in the past eight years. Asked on a 1-10 scale whether they are satisfied with their lives (0 being &ldquo;not at all&rdquo; to 10 &ldquo;completely&rdquo;), the public&rsquo;s mean score has risen from 7.11 to 7.42, with the proportion answering 7 or above rising from 76 percent to 82 percent. This isn&rsquo;t some anomaly either. How worthwhile we perceive our lives and self-reported happiness have been ever rising too, on average. Anxiety, meanwhile, has fallen, albeit having levelled out recently. If Cameron had convinced us of wellbeing&rsquo;s central importance, we&rsquo;d now be celebrating his wonderful legacy.</p> <p>As it happens, of course, this &ldquo;good news&rdquo; got about as much coverage last week as a positive Brexit business story. Remainer demands for <a href="https://www.businessinsider.com/boris-johnson-refuse-release-impact-assessment-brexit-deal-sajid-javid-2019-10?r=US&amp;IR=T" target="_blank">a new Brexit impact assessment</a> show that pounds and pence are still king in UK politics (at least until there&rsquo;s an EU regulation the same Remainers want us to follow).<a href="https://iea.org.uk/publications/research/and-the-pursuit-of-happiness" target="_blank"> We free-marketeers were fearful</a>, when subjective happiness metrics were introduced, that they&rsquo;d become active targets of policy. We needn&rsquo;t have worried. Political leftists&rsquo; attachment to them proved skin deep, falling away as soon as they suggested Britain was not hell on earth under the Tories.</p> <p>But was classical liberals&rsquo; fear of such metrics misguided? Perhaps. Consider a new paper from researchers at the University of Warwick. Reviewing eight million publications digitized through Google Books, the study aims to construct longer-run indices of wellbeing from 1820 through to 2009. Its findings are even more jarring than the ONS stats.</p> <p>Here&rsquo;s how their index is put together. Use of positive words in published books, such as &ldquo;cheerful,&rdquo; &ldquo;happy,&rdquo; and &ldquo;joyful,&rdquo; are considered proxies for better subjective wellbeing. Negative words such as &ldquo;sad&rdquo; or &ldquo;miserable,&rdquo; are tallied up as measuring worse wellbeing. In short, the academics assume that in a happier world, more &ldquo;happy words&rdquo; would be written in published tomes.</p> <p>Now, I was sceptical of that methodology. But they check their results against life satisfaction data over recent decades from Eurobarometer and the UN, finding strong correlations in the numbers. Emotive positive/negative language does appear to proxy well for self-reported wellbeing since the 1970s, when both sets of data are available. Having satisfied themselves of the methodology, the retrospective application to earlier periods produces fascinating results.</p> <p>Wellbeing was consistently high in the UK in the 19th century, fell around the time of World War One, before then recovering. Unsurprisingly, it plunged again during World War Two, before rebounding to a lower peak. But the post-war phase is most striking, splitting clear into two obvious periods. From the 1950s to 1980 there was a sustained fall in wellbeing. After 1980, there was a dramatic rebound, fitting with Eurobarometer data showing a sustained improvement in life satisfaction in the UK over the past 40 years. Britain&rsquo;s life satisfaction index since 1950 is therefore distinctly V-shaped.</p> <p>What might explain this dramatic inflection circa 1980? Social trends would surely be a slower burner. People had been getting better off between 1950 and 1980 too, so this is about more than rising wealth. No, there&rsquo;s one rather obvious explanation fitting the time trend: the UK&rsquo;s abandonment of its quasi-socialist economic model and embrace of Thatcherism.</p> <p>Such a thesis is supported by the fact the US experienced a near identical V-trend in its index centred around the launch of Reaganism. Germany, in contrast, saw wellbeing completely flatline from the 1950s onwards. Neoliberalism&rsquo;s birth, it seems, facilitated sustained rises in wellbeing.</p> <p>These findings dunk all over accepted truths. Claims from the Spirit Levellers that inequality and marketisation made us miserable are dismissed. If anything, the exact opposite appears true: the post-war period saw socialist equality beget misery. Life satisfaction rose with inequality through the 1980s and continued to rise once inequality settled at a higher level.</p> <p>Nor can GDP or the labour market adequately explain the trends. Rising GDP per capita, other things given, would be expected to improve life satisfaction, and Britain&rsquo;s economy did perform well relative to other countries after 1980. But growth was stronger in previous decades, when life satisfaction was falling. Wellbeing does not appear to have fallen after the financial crash either. Sure, tightening labour markets might explain some of the rise in wellbeing since 2011, but Britain had very high unemployment in the 1980s, just as life satisfaction took off.</p> <p>No, the absence of clear outcomes-based economic explanations suggests that my friend Terence Kealey may be right. What might explain the reversal from 1980 is simply that we Anglo-Saxons value our economic freedom, above and beyond its GDP or employment impact. Economic liberty makes us happier.</p> <p>The post-war period saw high tax rates, capital controls, Keynesian demand management, nationalisations, price and income controls, and high inflation. Afterwards we shifted towards freer trade and migration, lower taxes, lighter touch regulation, and free movements of capital. <a href="https://capx.co/owen-jones-is-wrong-the-idea-we-live-in-a-world-dominated-by-neoliberalism-is-laughable/" target="_blank">Of course, we&rsquo;re not near libertopia</a>; if anything the Thatcher and Reagan revolutions proved a brake on a longer-term government juggernaut. But there was a paradigm shift on economic freedom. We Brits, and our American cousins, found it deeply satisfying.</p> <p>For a libertarian, this isn&rsquo;t surprising. Our worldview is centred on the belief that individuals know best how to live their lives t<a href="https://www.fraserinstitute.org/research/economic-freedom-individual-perceptions-life-control-and-life-satisfaction" target="_blank">o improve wellbeing</a>. Thatcher, of course, claimed her economic liberalisation agenda was in tune with the true instincts of the British people. All this suggests she may well have been right.</p> <p>David Cameron had no such ideological inclinations. In fact, he probably advocated happiness metrics, in part, to distance himself from the supposed economics-obsessed &ldquo;libertarian&rdquo; wing of his party. How ironic then that the sorts of wellbeing measures he championed took off when classical liberals turned the tide on socialism, and strengthened through the &ldquo;age of austerity.&rdquo;</p> </div> Wed, 30 Oct 2019 11:02:06 -0400 Ryan Bourne https://www.cato.org/publications/commentary/thatcher-cameron-made-us-happier The Conservatives Will Come to Rue Their Casual Dismissal of Economists https://www.cato.org/publications/commentary/conservatives-will-come-rue-their-casual-dismissal-economists Ryan Bourne <div class="lead text-default"> <p>Let&rsquo;s hope it was a throwaway remark in the heat of a tense moment. For Jacob Rees-Mogg&rsquo;s despatch box suggestion that economists are mere taxis for hire, producing the results that their paymasters demand, was a dangerous stance for the Conservative Party to take.</p> </div> , <div class="text-default"> <p>Asked why the Government had failed to produce an economic impact assessment on Boris Johnson&rsquo;s new deal, the leader of the House of Commons retorted: &ldquo;If you ask an economist anything, you will get the answer you want.&rdquo; At times, we&rsquo;ve all shared <a href="https://www.telegraph.co.uk/politics/2019/10/12/jacob-rees-mogg-boris-johnson-wont-concede-much-eu/" target="_blank">Rees-Mogg&rsquo;s frustration about the assumptions</a> embedded within the previous government&rsquo;s Brexit modelling. But such a reckless reply needlessly impugned the integrity of government-employed economists doing their jobs, while sullying the reputation of professionals outside who will provide much-needed analysis of Labour&rsquo;s wealth-destroying agenda.</p> <p>True, economists need to be more careful to protect their own reputations. On Brexit, much analysis held up as indisputable by Remainers has been based on highly contestable political assumptions, not economics, usually buried deep within technical appendices. Judgments on what regulatory changes or<a href="https://www.telegraph.co.uk/business/2019/10/08/no-deal-tariffs-shake-up-ministers-gear-do-die-brexit/" target="_blank"> tariff reductions are politically feasible</a>, how many non-tariff barriers on services will be reduced in future trade negotiations, or guesses about what future politicians will decide on migrant numbers, are fed into models as truths.</p> <p>Governments provide guidance of their intentions, of course, but economists reporting the results should acknowledge that we have no more special insight into the long-term likelihood of these political decisions than anyone else.</p> <p>Yet rather than show humility and explain how much we don&rsquo;t know, many reports (especially government-produced) have instead sought out the veneer of a comprehensive number. Uncertainties tend to be played down, as does the scrappiness of evidence filled in where there is scarce precedent. Subsequent results come without clear warning signs that they should be taken with a lorry-full of salt. As the economist George Yarrow once suggested, the quest for a &ldquo;complete&rdquo; analysis sometimes means reaching for an analytical basis for decisions where conventional methods simply cannot cope.</p> <p>So naturally on major &ldquo;regime change&rdquo; issues such as Brexit, economists tend to take the better-known costs of trade frictions as given, presume no upside in more uncertain areas, and use speculative &ldquo;black box&rdquo; numbers to assess the overall dynamic impact on the economy. We see the results: wild claims<a href="https://www.telegraph.co.uk/business/2019/10/17/brexit-deal-averts-recessionary-shock-world-economy-no-panacea/" target="_blank"> that voting to leave would trigger an immediate recession </a>because of the expectation of huge long-term costs of exit; and the EU held up as a pinnacle of economic achievement that cannot conceivably be bettered. MPs then are dazzled by the authority of these numbers. Economists, for their sins, have not expressed clearly and often enough that with so profound a change as Brexit, there are more unknowns than knowns.</p> <p>Labour and the SNP&rsquo;s crocodile tears about the lack of an impact assessment were pure political theatre too, of course. Very few of them would have taken new Government figures as authoritative if, suddenly, the Treasury had insisted on different assumptions from Philip Hammond&rsquo;s Treasury&rsquo;s previous analysis. No, they&rsquo;d have cried foul play, even though there&rsquo;s no &ldquo;settled science&rdquo; here and the last report was highly disputable. The opposition&rsquo;s aim this week was to try to force the Treasury to admit that their past modelling suggests this deal would make the country poorer than May&rsquo;s deal, and poorer still than Remain.</p> <p>Yet there&rsquo;s a huge difference between Rees-Mogg critiquing past analysis, challenging assumptions economists had to work with, or highlighting problems with models, on the one hand, and attacking the integrity of all economists on the other. He should know better than to imply these two criticisms are one and the same.</p> <p>Economists do know a lot about free trade and its benefits, and trade models are some of the most sophisticated that exist. Dismissing that expertise, one suspects, will come back to bite the Conservatives as the hard Left&rsquo;s anti-globalisation agenda gears up post-Brexit. But more than that, sullying the reputation of economists will do nothing to help Conservatives when it comes to critiquing Labour&rsquo;s radical agenda in other areas.</p> <p>Mainstream economics tends to have an anti-socialist bias. Extensive, detailed economic analysis has proven that crude rent controls, expropriation of private property and active government allocation of resources (what was called &ldquo;the planned economy&rdquo;) are usually dismal failures.</p> <p>Economists tend to understand the dynamic benefits of competitive markets and how they are better placed to incentivise the discovery of better ways of doing things than top-down government control. Basic economic insights about compensation show too that it&rsquo;s bad for most employees to be given shares in their company, as Labour demands, because this will both reduce standard pay and the workers&rsquo; ability to diversify to protect against company failure. Would the Tories really want all this accumulated knowledge to be dismissed because economists are regarded as charlatans, giving politicians the answers they want?</p> <p>As illusive an oasis as it might seem today, there will come a time when we&rsquo;ve left the EU and ordinary politics resumes. When that day comes, the UK Parliament will find itself with control over more levers of economic policy than it has had for decades.</p> <p>As a future Conservative government makes the case that a free-trade agreement with the US would increase GDP, or argues that Parliament&rsquo;s desire to replicate some new-fangled EU labour law would reduce employment or harm business growth, they will be glad to call on practitioners of the dismal science. And they will rue allowing some future quasi-Marxist Labour leader the option of dismissing the analysis as evidence prepared for the Tories&rsquo; benefit.</p> </div> Thu, 24 Oct 2019 11:27:20 -0400 Ryan Bourne https://www.cato.org/publications/commentary/conservatives-will-come-rue-their-casual-dismissal-economists Has Wealth Inequality Eroded U.S. Democracy? https://www.cato.org/blog/has-wealth-inequality-eroded-us-democracy Ryan Bourne <p><span><span>“Billionaires have seized our government,” Senator Elizabeth Warren <a href="https://www.youtube.com/watch?v=L9mWGxJdJU0&amp;feature=youtu.be">claimed</a> earlier this year. This idea, that the rise in wealth inequality has led to the capture of politics by super wealthy elites, is fast becoming conventional wisdom on the left of politics and used as justification for wealth taxes.</span></span></p> <p><span><span>Paul Krugman <a href="https://www.nytimes.com/2011/11/04/opinion/oligarchy-american-style.html">has asked</a>, for example, “Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?”</span></span></p> <p><span><span>Former lead economist at the World Bank, Branko Milanović, <a href="https://www.theguardian.com/inequality/2017/may/02/higher-inequality-move-away-from-democracy-branko-milanovic-big-data">has claimed</a> “In every political system, even a democracy, the rich tend to hold more political power. The danger is that this political power will be used to promote policies that further cement the economic power of the rich. The higher the inequality, the more likely we are to move away from democracy toward plutocracy.”</span></span></p> <p><span><span>Warren’s wealth tax architects, economists Emmanuel Saez and Gabriel Zucman, <a href="https://www.nytimes.com/2019/01/22/opinion/ocasio-cortez-taxes.html">have said</a> that their tax was designed not to raise revenue or improve economic efficiency, but to prevent this ongoing “oligarchic drift that, if left unaddressed, will continue undermining the social compact and risk killing democracy.” </span></span></p> <p><span><span>So which millionaires and billionaires have captured the US’s democracy as wealth inequality has risen? Liberal billionaires, such as George Soros and Tom Steyer, perhaps? Or maybe conservative and libertarian billionaires, such as Sheldon Adelson and Charles Koch? The point I make here is an important one: there is no homogenous political view among the wealthy; just as Martin Gilens found among the income rich “the affluent are no more (or less) likely to be of one mind” than the middle-classes or the poor.</span></span></p> <p><span><span>This is unsurprising. Look at Congress itself. <a href="https://www.rollcall.com/wealth-of-congress">Roll Call’s analysis</a> shows that of the ten wealthiest members, five are Republicans and five are Democrats. Analysis below uses the “nominate scores” method to map apparent support for redistribution across those members with positive net worth from roll calls during the 111th–115th congresses. As you can see, there’s no relationship between wealth and support for redistribution overall. Party allegiance is much more important. There is little class-consciousness among the wealthy on the Capitol.</span></span></p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="60cf0b31-f9d2-49ff-881f-35e4dc92b52b" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="27cf3e8b-59a6-46cc-a09e-99bae6a4959e" data-type="interactive" data-title="Blog version: Wealth Inequality Congress Net Worth"></div> </div> </div> <p><span><span>That’s not to say that the very wealthy across America might not, on average, have <em>relatively</em> different views than the rest of us. Evidence here is scarce, but one survey by <a href="http://faculty.wcas.northwestern.edu/~jnd260/cab/CAB2012%20-%20Page1.pdf">Benjamin Page, Larry Bartels, and Jason Seawright</a> of 104 wealthy individuals with wealth over $40 million in Chicago did find some differences. </span></span></p> <p><span><span>Wealthy individuals, they found, were (on average) more likely to worry about budget deficits and more likely to want to cut Social Security, healthcare, food stamps, and homeland security spending than the rest of the population. They were less likely to support more redistribution, but overall supported income taxation at current rates and backed a progressive Social Security system. On regulation, they favored intervention in areas where scandals had occurred but considered small businesses to be overregulated. </span></span></p> <p><span><span>Other surveys by Martin Gilens on the top 10 percent by income (a much broader group) have found that “the income rich” had somewhat stronger opposition to taxes and business regulation than the rest of the population, were less protectionist on trade policy; less conservative on religious and moral issues; and more supportive of foreign aid, top income and capital gains tax cuts, gas tax increases, and restraint in Social Security and Medicare spending.</span></span></p> <p><span><span>If the wealthy have captured politics, they are doing a pretty good job of hiding it. Yes, we’ve recently seen the Tax Cuts and Jobs Act, and an effective moratorium on new regulation. But we’ve also seen rampant trade protectionism, a President attempting to cut foreign aid, protection of entitlement spending, conservative justices appointed to the Supreme Court, and the President push for much higher homeland security spending. In recent years, there’s been much discussion over pretty imaginative antitrust action against three of the top 10 richest Americans’ companies: Jeff Bezos’ Amazon, Mark Zuckerberg’s Facebook, and Larry Page’s Google. Some “capture of democracy.”</span></span></p> <p><span><span>Progressive economists tend to focus, of course, just on top taxes and social spending as a proxy, implicitly arguing that the absence of a bigger welfare state with more taxes on the rich is evidence itself that the wealthy have captured politics already. Surely, simple strength of numbers shows the majority should have voted for more progressive taxes to fund transfers to the rest of us?</span></span></p> <p><span><span>But as the chart below shows, across countries there’s no relationship between top wealth shares and social spending. And as top wealth inequality has risen, the welfare state has expanded and not shrank. Indeed, a growing welfare state <a href="https://www.cato.org/blog/larry-summers-wisdom-wealth-inequality">may be</a> a *cause* of higher private wealth inequality.</span></span></p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="2bc1a349-f106-447a-baab-db40d0a56bbd" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="4d000097-a68c-4b87-b9fe-6715a92f676e" data-type="interactive" data-title="Blog version: Wealth Inequality OECD Spending v Wealth Share"></div> </div> </div> <p><span><span>It’s easier for progressives to think that the super wealthy are to blame for their policy preferences not being implemented than to contemplate a more uncomfortable explanation: voters generally do not think inequality a major problem, and to the extent they might, they <a href="https://link.springer.com/article/10.1007/s11109-017-9399-3">do not support</a> big government policies to solve it. <a href="https://news.gallup.com/poll/1675/most-important-problem.aspx">Two percent or less</a> of the public say “the gap between rich and poor” is the “most important issue” facing the country. Estate taxes are <a href="https://www.forbes.com/sites/bowmanmarsico/2017/10/31/eliminating-the-estate-tax-where-is-the-public/">widely loathed</a>, despite how few people pay them. Much evidence suggests the public’s conception of fairness differs strongly from the progressive or socialist worldviews.</span></span></p> <p><span><span>At a <a href="https://www.youtube.com/watch?v=oUGpjpEGTfE">PIIE conference</a> last week, Larry Summers outlined that he thought it extremely unlikely that growing wealth inequality led to a captured democracy. Yes, the rich tend to be more politically involved than the rest of us. But the cost of access to politicians is relatively low. You don’t need to be super wealthy to get on the top donor table. So the key driver of wealth inequality we have seen – rising top wealth – is unlikely to have changed many political outcomes. Vested interests and cronyism are far more important causes, bringing (as they tend to) paths to obtaining money and, more importantly, votes.</span></span></p> <p><span><span>In short, the evidence for wealth inequality leading to democratic capture is extraordinarily thin. A 2019 Cato-YouGov poll found that 62 percent of Americans surveyed do not believe that “billionaires are a threat to democracy.” What hard evidence do Warren and others have to suggest they are wrong?</span></span></p> Thu, 24 Oct 2019 10:00:18 -0400 Ryan Bourne https://www.cato.org/blog/has-wealth-inequality-eroded-us-democracy Democrats Are Wrong: America Does Not Have A Widespread "Monopoly Problem" https://www.cato.org/blog/democrats-are-wrong-america-does-not-have-widespread-monopoly-problem Ryan Bourne <p>Senator Elizabeth Warren vowed not to “let a handful of monopolists dominate our economy.” Senator Amy Klobuchar claimed we were living through “another gilded age.” “In sector after sector…” Bernie Sanders added, “we need a president who has the guts to appoint an attorney general who will take on these huge monopolies.” <a href="https://www.washingtonpost.com/politics/2019/10/15/october-democratic-debate-transcript/">Last week’s Democratic debate</a> showed a clear conventional wisdom in that party: America’s economy is besieged by a monopoly problem.</p> <p>Markets are said to be dominated by ever smaller numbers of firms enjoying rising markups of price over cost. Consumers are supposedly suffering higher prices and less innovation while competitors struggle to stay afloat because of behemoth anticompetitive behavior. The explanation? Supposedly a turn away from anti-monopoly policies over recent decades. Warren buys into the idea that antitrust laws have not been rigorously enforced. And she and others want the federal government to break up or more tightly regulate massive companies.</p> <p>Yet, increasingly, new academic evidence shows meaningful choice has not fallen in most sectors. In fact, the economic trends we do see appear to arise not because of weakly enforced antitrust laws, but because of an ongoing “industrial revolution in services” that is good for consumers.</p> <p>Back in 2016, President Obama’s <a href="https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160414_cea_competition_issue_brief.pdf">Council of Economic Advisors</a> started the narrative about rising “concentration” of industries. Its work concluded that revenue shares of the top 50 firms in ten of 13 very broad sectors had risen between 1997 and 2012. This was not necessarily evidence of weakened competition or harm to consumers, they admitted, but such findings allowed the myth of rising monopoly power to take hold.</p> <p>Such broad industry categories were clearly absurd for thinking about meaningful competition, however. Groupings such as “Real Estate” or “Retail” meant assessing Walmart, IKEA, McDonald’s, and Foot Locker as if they were in the same industry, even though these companies don’t meaningfully compete.</p> <p>But the truth is, even narrower industrial classifications at a national level are not particularly helpful. Most real “markets” are incredibly local. When buying toothpaste, you might purchase from a local CVS, Safeway, Walmart, independent pharmacies, or order online from Amazon or elsewhere. A national concentration of the top 4 pharmacies’ market share says nothing about options in an individual city.</p> <p>Suppose Starbucks opened a new outlet in a rural town, reducing the strength of a local monopolistic café. Meaningful choice will have risen for consumers if the café remains open too, but Starbucks’ new outlet would suggest rising national concentration in the sector. Observing national concentration measures, and presuming them a proxy for consumer welfare (which most economists would warn against anyway), would scream a problem. But locally, competition and choice would have improved.</p> <p>This is, in fact, what has happened across America. A <a href="https://www.princeton.edu/~erossi/DTNLC.pdf">report by economists</a> at Princeton and the Richmond Fed last year confirmed that <em>national</em> concentration has indeed increased across many industries. Yet in sectors accounting for 72 percent of employment and 66 percent of sales, concentration fell in narrower geographical market territories, such as urban areas, county, or ZIP code levels. When Walmart opens a new store, for example, they found local concentration tends to fall and the number of stores in the local discount department store sector rises, on average, despite the giant’s national market share increasing.</p> <p>What’s happening is that top firms are investing in new information technology, <a href="https://www.princeton.edu/~erossi/IRS.pdf">finding efficiencies to serve more local markets</a>. Investments in productive high fixed cost IT are delivering standardization, reducing the costs of serving more locations. National concentration trends are therefore arising for “good reasons,” not anticompetitive behavior. Cheesecake Factory, for example, has invested in technologies that help in improving staffing management, food purchasing, and menu adaptation, allowing them to roll out menu items nationwide in just 7 weeks.</p> <p>Hospital chains, and other service, retail, and wholesale industries are seeing market leaders proliferate geographically too. Employment is rising in industries that are becoming more highly concentrated nationally, suggesting that this isn’t a story about “monopoly power” constraining output and raising prices. Instead, what we’re seeing is the most productive firms serving more places. Economists who coined the term “the industrial revolution in services” estimate that a full 93 percent of the growth in concentration across national industries comes from large firms serving more localities.</p> <p>Choice on the ground then is improving, and big tech is part of that story too. Facebook and Google are giving businesses a new outlet for their adverts, and in turn taking more national advertising market share themselves. But their entry is meaningful competition to local adverts on billboards, TV, and in newspapers. Amazon is providing huge efficiencies in retail too, competing with a range of local stores, and facilitating broader competition through hosting third-party sellers.</p> <p>Yes, national concentration has risen. And, yes, many markups have too. But it’s the adoption of new technologies lowering top firms’ costs of expansion that explains these trends, not underenforced antitrust, or firms raising prices.</p> <p>If correct, this new evidence suggests we don’t need to give more power to regulators, nor do we need a revival of some broader antitrust. What we need, as <a href="https://www.aei.org/economics/googlenomics-a-long-read-qa-with-chief-economist-hal-varian/">Google’s chief economist Hal Varian</a> has intimated, is time to allow these technologies to diffuse through the economy. It takes time for entry in relation to higher markups and for new technologies to become cost effective for other firms to adopt them. When they do, these technological changes will result in widespread efficiencies, and lower prices still.</p> Mon, 21 Oct 2019 10:41:29 -0400 Ryan Bourne https://www.cato.org/blog/democrats-are-wrong-america-does-not-have-widespread-monopoly-problem Larry Summers Wisdom On Wealth Inequality https://www.cato.org/blog/larry-summers-wisdom-wealth-inequality Ryan Bourne <p><span>Chris Edwards argued <a href="https://www.cato.org/publications/commentary/what-warren-sanders-get-wrong-about-wealth-inequality-capitalism">earlier in the week</a> that wealth inequality statistics alone tell us little to nothing interesting about the American economy. It seems <a href="https://www.youtube.com/watch?time_continue=2&amp;v=9hybVbBFth8">Larry Summers agrees</a> (see from 8h 27 mins). </span></p> <p><span>In a speech at PIIE yesterday, the former Treasury Secretary under Bill Clinton outlined why wealth inequality wasn’t a particularly useful measure to consider the justness of a society.</span></p> <p><span>He highlighted, for example, that the arguments about wealth inequality and political power appear to have almost no validity. Interest groups and corporate lobbying are much more important sources of political power than wealthy individuals. In the panel discussion afterward, he pressed economist Emmanuel Saez to give just one example or mechanism of how an extraordinarily rich <em>individual</em> losing a large fraction of their wealth would alter political outcomes. Little meaningful response was forthcoming.</span></p> <p><span>I’ve looked in detail at the supposed relationship between wealth inequality and democracy for a forthcoming Cato paper with Chris Edwards, and the evidence for wild assertions we hear about inequality killing democracy is extraordinarily weak. But more on that next week. What was heartening was to hear Summers deliver some home truths to the left on wealth inequality and the redistributive welfare state:</span></p> <blockquote><p>Wealth inequality reflects many things that happen in a society. Suppose we successfully in the United States adopted a more generous and complete progressive social security system….I would assume that the lower half of the population would have much less need to accumulate or hold liquid assets because they were being properly insured. And so measuring the ratio of the wealth of the wealthy to the wealth of the less wealthy may reflect something about accumulation at the top or it may reflect something about the adequacy or inadequacy of social insurance arrangements.</p> </blockquote> <p>This is exactly right, and supports <a href="https://www.cato.org/publications/commentary/how-government-creates-wealth-inequality">what Chris</a> and <a href="https://www.cato.org/publications/commentary/bigger-welfare-state-makes-wealth-inequality-labour-bemoans-worse">I have outlined</a> about the disingenuousness of those who say wealth inequality shows the need for a more progressive welfare state.</p> <p>Evidence from both here and abroad shows major social programs, <a href="https://www.nber.org/chapters/c9749">not least Social Security</a>, <strong>increase</strong> measured wealth inequality because they leave the non-rich with “proportionately less to save, less reason to save, and a larger share of their old-age resources in a nonbequeathable form than the lifetime rich.” Economists <a href="https://econpapers.repec.org/article/eeemoneco/v_3a77_3ay_3a2016_3ai_3ac_3ap_3a1-25.htm">Baris Kaymak and Markus Poschke</a> estimate that the expansion of Social Security and Medicare caused about one-quarter of the rise in the top one percent wealth share over recent decades.</p> <p>As <a href="https://www.cato.org/blog/welfare-state-causes-wealth-inequality-euro-experience">Chris writes today</a>, the European experience shows the same results. It therefore makes no sense to say you believe reducing wealth inequality is an overwhelming imperative, and that expanding the welfare state is the way to do it.</p> <p>Those who worry about measures of private wealth inequality and want a bigger welfare state therefore face two ways of squaring the circle. Either they can admit that reducing measured private wealth inequality is not an important and overwhelming public policy objective. Or they can seek to incorporate social programs into broader, “lived” measures of wealth inequality.</p> <p>Both would be problematic for them, politically. If goals other than reducing wealth inequality drive their desire for more social spending, it’s much more difficult to argue that concerns about other priorities are illegitimate when discussing top taxes (for example, economic growth). And if you include assessments of the present value of promised government benefits as if they are real wealth, wealth inequality looks much lower and less problematic.</p> <p>What’s dishonest though is to argue that private wealth inequality measures show we need an all-out war on narrowing the wealth distribution and that more social spending is the cure. Kudos to Larry Summers for pointing that out.</p> Fri, 18 Oct 2019 11:53:16 -0400 Ryan Bourne https://www.cato.org/blog/larry-summers-wisdom-wealth-inequality Left and Right Must Confront Uncomfortable Truths about the Economics of Healthcare https://www.cato.org/publications/commentary/left-right-must-confront-uncomfortable-truths-about-economics-healthcare Ryan Bourne <div class="lead text-default"> <p>Few topics elicit as much parochial emotion as the future of the NHS.</p> </div> , <div class="text-default"> <p>Conservatives know in their hearts that its current outcomes are internationally substandard, but are convinced of the electoral imperative to pay homage to it. At their party conference, Health Secretary Matt Hancock declared, heartily: &ldquo;I love the NHS.&rdquo;</p> <p>Ministers, meanwhile, go out of their way to deny Jeremy Corbyn&rsquo;s claim that the NHS is &ldquo;on the table&rdquo; in a future US-UK free trade agreement.</p> <p>Perhaps such positioning is politically smart for the Tories. Polling now suggests trust levels on the <a href="https://www.telegraph.co.uk/politics/2019/09/28/boris-johnson-will-spend-13bn-build-40-new-hospitals/" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">NHS&rsquo;s future</a> are similarly low for both major parties, after all.</p> <p>But one can&rsquo;t help thinking there&rsquo;s a long-term cost to the scramble for the &ldquo;best protector of the NHS&rdquo; summit: too little focus on economic home truths about healthcare, and what they mean for taxpayers and outcomes.</p> <p>Consider these striking facts. Just 100 years ago, healthcare represented 0.3pc of total UK GDP. Today it is 9.6pc of a much bigger pie, four-fifths of which is NHS spending. On unchanged policies, it is predicted to rise to a massive 15pc of GDP in 50 years, primarily because of ageing. We are on course, in other words, for healthcare to be the biggest single industry in the economy.</p> <p>This is primarily something to celebrate, not mourn. Life expectancy in 1919 was just 58 for women, with only 6pc of the population aged over 65. Infectious diseases were the most common cause of death for all &mdash; except those in untypically old age.</p> <p>So successful have we been in eliminating such afflictions that &ldquo;deaths of despair&rdquo; for the young and debilitating conditions for the old are the worries <em>du jour</em>.</p> <p>Better health has improved life expectancy fantastically: one person in four will be over 65 by 2050. By 2070, 8pc of the population will be over 85, with around half a million people over 100.</p> <p>Little wonder we see healthcare spending pressures. Hospital costs surge in the final years of life. If ageing leads to increased morbidity &mdash; the number of years spent in ill-health &mdash; this pressure exacerbates. For a publicly financed, pay-as-you-go system, the coming demographic headwinds for the NHS are thus large. Rising spending is a <em>fait accompli</em>.</p> <p>But it&rsquo;s a mistake to attribute rising spending to date to just demographics or inefficiency. Rising incomes are the most important cause. In country after country, people spend more on their health as they get richer, demanding the best care and treatments available. It&rsquo;s only because we have a socialised system that spending levels are such a political football. When free to choose, people spend more, and that&rsquo;s ok.</p> <p>NHS spending, as elsewhere, tends to rise faster than GDP not because of some uniquely <a href="https://www.telegraph.co.uk/news/2019/10/07/nhs-chiefs-fear-hospitals-will-not-cope-amid-growing-social/" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">British inefficiency</a> (although evidence exists that bang for the buck on outcomes here could be improved at current spending levels), but because healthcare has universally been, to date, a stubbornly labour-intensive sector. Treatment and drug qualities have improved massively, but automation as seen in manufacturing has not been extensive.</p> <p>Economist William Baumol described the effects of this as a &ldquo;cost disease&rdquo;. As other industries become more productive, their workers&rsquo; wages rise. Attracting NHS staff means their wages must rise simultaneously. Since the activities of medical professionals &mdash; the operations, appointments, and more &mdash; are difficult to automate, the cost of health services goes up relative to other sectors and GDP. The <a href="https://www.kingsfund.org.uk/publications/rising-cost-medicines-nhs" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">King&rsquo;s Fund</a> estimates, for example, that staff costs account for around 70pc of a typical hospital&rsquo;s total costs, and rising.</p> <p>We fiscal hawks therefore must confront an inconvenient truth: as we get richer and the population ages, the UK will spend more on health. If the NHS model is maintained, spending will grow, and taxes or other funding will take more from working-age pockets. It&rsquo;s as simple as that.</p> <p>But that reality should shake Labour too. For the only way NHS spending will avoid exploding and necessitating huge across-the-board tax rises will be if an industrial revolution in healthcare can cure, or at least alleviate, the &ldquo;cost disease&rdquo;. Technological progress looks promising. Patient rotating beds and self-monitoring equipment are here already, as are remote operations.</p> <p><a href="https://www.telegraph.co.uk/news/2019/08/08/nhs-receive-250m-boost-ai-development/" target="_blank" rel="noopener noreferrer" data-auth="NotApplicable">Robots and AI</a> are in development for provision of &ldquo;telepresence&rdquo; in distant homes, to assist or undertake surgeries, to dispense prescriptions, to sanitise and disinfect hospital floors, and more. Diagnostic software could facilitate nurses to undertake simple treatments or tests more accurately than doctors today. Driver-less ambulances could free up paramedics. New technologies could allow patients to remain comfortable in their homes for &ldquo;end of life&rdquo;, avoiding heroic but futile resource use in hospitals.</p> <p>Rolling out such technologies cost-effectively here though will necessitate an adaptive, responsive health system. Hospitals will need to change size and location. New service providers will be needed, often at scale. Certain types of doctors and other professionals will not be necessary &mdash; and innovators will need a return, especially if the US goes down the route of socialising its own system, which currently subsidises much medical research for the rest of the world.</p> <p>Unfortunately, the same people who venerate our health service most are those who would object, or side with vested interests against things that could improve it. For now, both major parties focus instead on the modern equivalent of Soviet &ldquo;tractor production statistics&rdquo; &mdash; the number of doctors, nurses, or shiny new hospitals their extra spending has financed.</p> <p>Is big change possible within a system with rationed resources and little responsiveness to patient demands? Taxpayers better hope so. But to start that conversation we need to agree on the basic economic conundrum, with the Right taking the demand-side drivers of healthcare seriously and the Left acknowledging the supply-side challenge.</p> </div> Thu, 17 Oct 2019 11:23:38 -0400 Ryan Bourne https://www.cato.org/publications/commentary/left-right-must-confront-uncomfortable-truths-about-economics-healthcare Underestimate Boris Johnson Again at Your Peril https://www.cato.org/publications/commentary/underestimate-boris-johnson-again-peril Ryan Bourne <div class="lead text-default"> <p>Pundits have consistently underestimated British Prime Minister Boris Johnson.</p> </div> , <div class="text-default"> <p>Just a few short months ago, their consensus was that the European Union would not reopen the withdrawal deal it had agreed upon with former prime minister Theresa May, even though the agreement had been rejected <a href="https://www.politico.eu/article/house-of-commons-rejects-brexit-divorce-deal-for-third-time/" target="_blank">three times</a> by the U.K. Parliament. Commentators, again and again, said that a prime minister threatening to leave the E.U. with or without a deal by the Oct. 31 exit date would not change the E.U.&rsquo;s calculations. Indeed, people claimed a change in prime minister itself would alter nothing.</p> <p>But, as it so often has been in recent years, conventional wisdom was wrong. On Thursday morning, the E.U. and British government announced <a href="https://www.washingtonpost.com/world/europe/brexit-deal-falters-raising-chances-british-leader-boris-johnson-will-have-to-ask-for-delay/2019/10/17/f1ce287e-f049-11e9-bb7e-d2026ee0c199_story.html?tid=lk_inline_manual_6" target="_blank">a fresh withdrawal agreement</a>, stripping away aspects of May&rsquo;s &ldquo;<a href="https://www.washingtonpost.com/world/2019/10/17/what-is-happening-with-brexit-now-boris-johnsons-plans-irish-border-eu-explained/?tid=lk_inline_manual_6" target="_blank">backstop</a>&rdquo; proposal for the border between Northern Ireland and the Republic of Ireland that had most worried Brexiteers.</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>This week’s events have shown Johnson and his team to be nimbler and more politically savvy than commentators believed.</p> </div> </div> </aside> , <div class="text-default"> <p>Now, rather than risking the whole country being locked into a customs union with the E.U. until the latter agreed otherwise, Britain will once again have its own full, independent trade policy. Negotiations on so-called &ldquo;<a href="https://www.bbc.com/news/uk-politics-49662531" target="_blank">level playing field regulations</a>&rdquo; for the environment and social policy have been pushed into stage two talks for a Britain-E.U. free-trade agreement, too. In essence, Johnson has negotiated an exit agreement that points toward a much looser future trade relationship, with more trade and regulatory autonomy for the United Kingdom.</p> <p>Avoiding a hard border between Northern Ireland and Ireland required compromise on both sides. Rather than keeping the whole United Kingdom in the E.U.&rsquo;s customs orbit, the new deal would place customs checks on goods flowing between Great Britain and Northern Ireland, and Northern Ireland would effectively remain in regulatory alignment with the E.U. on goods and agricultural products to avoid in-Ireland regulatory checks. Crucially though, <a href="https://ec.europa.eu/commission/publications/revised-protocol-ireland-and-northern-ireland-included-withdrawal-agreement_en" target="_blank">a tariff-rebate system</a> will mean Northern Ireland is still subject to Britain&rsquo;s full independent trade policy. And there is an exit mechanism for Northern Ireland should this dual arrangement become intolerable. After four years, its assembly will be able to decide its fate by majority vote. This all means a need for border checks is avoided, and there is a meaningful consent mechanism for the people of Northern Ireland.</p> <p>Whether such a deal can obtain the necessary majority in Parliament on Saturday is an open question. Two big factors will determine its success: the position of E.U. leaders and the political calculation of Brexit-respecting Labour Party members of Parliament.</p> <p>If Johnson can convince other European heads of state to credibly commit to reject any further extension of the Brexit withdrawal process, then British MPs will, in principle, face a stark choice: this deal or no deal on the current exit date of Oct. 31.</p> <p>European Union President Jean-Claude Juncker has <a href="https://www.youtube.com/watch?v=OsIyKRbpUaA" target="_blank">tipped his hat in this direction</a>, but it's not for him to decide. So far, Johnson's opponents have convinced themselves that if they defeat his deal, they will trigger <a href="https://www.bbc.com/news/uk-politics-49612757" target="_blank">the so-called Benn Act</a>, which would compel the prime minister to write a letter to the E.U. seeking a further extension. At that point, they say, E.U. heads of state will certainly accept it, rather than kicking Britain out against Parliament's wishes. But if French President Emmanuel Macron strongly suggested otherwise (he even <a href="https://www.france24.com/en/20190405-uk-may-requests-brexit-extension-june-30-european-union-tusk-poll" target="_blank">wavered on the last extension</a>), it could well tip the balance, with MPs unwilling to contemplate a no-deal scenario.</p> <p>If not, the parliamentary arithmetic looks very tight. May's last attempt at getting her deal through Parliament was defeated by a margin of <a href="https://www.telegraph.co.uk/politics/2019/03/29/brexit-vote-result-tory-rebels-mp-voted-mays-withdrawal-agreement/" target="_blank">58 votes</a>, which means Johnson needs a net swing of 30 votes to get a majority. He can probably count on the vast majority of the <a href="https://www.bbc.com/news/uk-politics-47752017" target="_blank">286 MPs</a> who voted for May's deal the last time around, but may lose up to 10 (pessimistically). Because of the changes to the deal, he then will probably gain between 20 and 25 of the Conservative rebels who voted against May's deal. That leaves him requiring about 15 Labour MPs to break ranks with their party's leadership.</p> <p>From a Labour perspective, Johnson's new deal is probably worse than May's for its interests, with less firm guarantees about employment and environmental rights. Labour leader Jeremy Corbyn's team is already <a href="https://twitter.com/OwenJones84/status/1184935854814437376?s=20" target="_blank">making noises</a> that any MP who votes for it will be expelled from the party. That will, undoubtedly, crush some dissent. But with the Conservatives <a href="https://yougov.co.uk/topics/politics/articles-reports/2019/10/16/political-trackers-14-15-oct-update" target="_blank">flying above Labour in the polls</a>, and Johnson now being seen as trying to leave the E.U. in an orderly manner, some may realize that they will look ridiculous voting against this deal, when they previously said their overwhelming aim was to stop a no-deal exit. Blocking Brexit will be electorally disastrous in certain northern Leave constituencies, and one Labour cohort has strongly implied they were <a href="https://twitter.com/CarolineFlintMP/status/1181587520318033922?s=20" target="_blank">wrong to vote against the deal</a> last time.</p> <p>Saturday's vote will therefore be extraordinarily tense. But this week's events have shown Johnson and his team to be nimbler and more politically savvy than commentators believed. Underestimate him again at your peril.</p> </div> Thu, 17 Oct 2019 08:35:50 -0400 Ryan Bourne https://www.cato.org/publications/commentary/underestimate-boris-johnson-again-peril How Can Us Politics Survive No Shared Understanding of the Economy? https://www.cato.org/publications/commentary/how-can-us-politics-survive-no-shared-understanding-economy Ryan Bourne <div class="lead text-default"> <p>We&rsquo;ve all heard the sayings. Whether it&rsquo;s former journalist CP Scott&rsquo;s: &ldquo;Comment is free, but facts are sacred&rdquo;, or the late US Senator Daniel Patrick Moynihan&rsquo;s &ldquo;You are entitled to your opinion, but you are not entitled to your own facts&rdquo;, it&rsquo;s comforting to believe that certain realities are beyond reasonable dispute.</p> </div> , <div class="text-default"> <p>Yet even basic &ldquo;facts&rdquo; about the economy in the US are today wrangled over. Republicans and Democrats there don&rsquo;t just disagree about the wisdom of certain policy ideas or whether observed trends in certain metrics are worrisome. Each side has their very own data and account of the world, creating irreconcilable narratives about the state of the nation.</p> <p>Left-wing Democratic Presidential candidates, such as Bernie Sanders<a href="https://www.telegraph.co.uk/business/2019/10/01/investors-getting-twitchy-elizabeth-warren-making-white-house/" rel="noreferrer" target="_blank" heap-ignore="true"> and Elizabeth Warren</a>, reach for academic work to claim there&rsquo;s been income stagnation for four decades, spiralling inequality, a tax system becoming ever less progressive, and endemic poverty.</p> <p>Republicans reject all these claims, themselves armed with studies from credible university professors and government sources. In a country riven by tribalism, and beset by segmented news consumption, economists fail even to provide politicians with a simple shared understanding of the state of the American economy.</p> <p>Exhibit A comes from a conference in New York this past Monday. On the first panel, progressive economist Joseph Stiglitz (a Nobel Prize winner) claimed that earnings for ordinary American workers had not risen for 40 years. Just an hour later, former Director of the Congressional Budget Office, conservative Doug Holtz-Eakin, said this was totally wrong. Both could call on academic support.</p> <p>Economists Emmanuel Saez and Gabriel Zucman have concluded that the bottom 50pc of Americans have seen no gains in real pre-tax income for four decades. Yet another study by Gerald Auten of the US Treasury and David Splinter of the Joint Committee on Taxation instead suggests the average real income of the bottom half of Americans has risen by nearly one-third since 1979, or two-thirds accounting for all taxes and benefits.</p> <p>Such huge differences turn on assumptions about how to assess income, account for unreported income, or measure inflation - all methodological choices that no politicians will bother analysing.</p> <p>Those same tensions underpin different political narratives on inequality. French economist Thomas Piketty famously concluded that the pre-tax income share of the top 1pc of Americans nearly doubled between 1979 and 2015, increasing from 11.2pc to 20.2pc. But, again, the Auten and Splinter work, using a different measure of income, and correcting some flaws in Piketty&rsquo;s data, concludes the rise has been less aggressive - from 9.5pc to 14.1pc.</p> <p>Taking account of government taxes and benefits, the top 1pc&rsquo;s income share has risen more slowly still, from 7.2pc in 1979 to just 8.6pc in 2015.</p> <p>When income data is disputed, so, inevitably, becomes assessment of current tax policy. A widely trailed new book by Zucman and Saez this week provocatively implied that the US was already close to having a combined &ldquo;flat tax&rdquo;. That is, the total taxes paid by Americans as a proportion of income do not really change much as income rises (ranging from 26pc to 33pc effective rates, and even falling for the top 0.01pc of earners).</p> <p>Splinter&rsquo;s work once more rejects this entirely. Using different income data and accounting for other transfers, he finds instead that the tax system to be hugely progressive: the top 0.01pc of earners facing an effective rate of 50pc, dramatically higher than the 12pc faced by those in the bottom half of the income distribution.</p> <p>It&rsquo;s not just the rich either. Academics can&rsquo;t decide the true scale of how many people in America are poor. US Census data implies that 12.3pc of Americans should be considered &ldquo;in poverty&rdquo;, for example. But former Bureau of Labor Statistics assistant commissioner John Early recently concluded that the official rate greatly overstates poverty by both overestimating inflation and leaving out numerous government benefits. Making those adjustments, he believes the &ldquo;true&rdquo; poverty rate is just 2pc.</p> <p>Now, all countries have political parties with different philosophies. Economic debates are always controversial, with great uncertainty about the wisdom or effects of policy decisions. But American politicians are now not just faced with the challenge of how to interpret or react to established data in formulating their ideas. They are having to select from the work of scholars who themselves often fundamentally disagree on the actual underlying state of play. Inevitably, they select the facts that fit their priors.</p> <p>Hence Bernie Sanders can claim that the &ldquo;very, very rich [are] getting much richer, [the] middle-class struggling, [and] 40 million people living in poverty&rdquo;, while Republicans can say the world is getting better, the middle-class is shrinking because more are becoming upper-class, and redistribution is already extensive and unsustainable. And this is just a microcosm of a broader phenomenon. On multiple other fronts, from market power of companies, to trends in wealth, through to minimum wage assessments, unbridgeable chasms exist in what &ldquo;the facts&rdquo; actually are.</p> <p>All this further divides an already deeply divided country. With these disagreements, opponents&rsquo; policy ideas cease to be just misguided or the wrong priorities. No, they become something that jars with &ldquo;the evidence&rdquo; as you see it. That these methodological debates by economists are important in the search for truth is irrelevant. Most voters will have neither the time nor inclination to parse through detailed information about income sources or deflators.</p> <p>A country can have a robust debate about ideas and priorities, or how to interpret the world as we find it. But can it have a meaningful policy discussion when the intellectual class has no shared understanding of the facts? The next US Presidential election race may show us.</p> </div> Tue, 15 Oct 2019 15:54:32 -0400 Ryan Bourne https://www.cato.org/publications/commentary/how-can-us-politics-survive-no-shared-understanding-economy The Economic Consequences of Sen. Sanders' Stock Confiscation Plan https://www.cato.org/blog/economic-consequences-sen-sanders-stock-confiscation-plan Ryan Bourne <p>Bernie Sanders would <a href="https://www.vox.com/2019/10/14/20912221/bernie-sanders-corporate-accountability-ftc-merger-tax">confiscate 20 percent ownership stakes</a> in 22,000 companies, distributing the stocks to workers through shared employee ownership funds. His “Corporate Accountability Plan,” announced yesterday, should lay to bed <a href="https://www.cato.org/publications/commentary/democratic-socialism-scenic-route-serfdom">any lingering doubts</a> that “democratic socialism” is just about social democracy, or a bigger welfare state. Rather, it amounts to a fundamental attempt to re-order the American economy through federal government edicts.</p> <p>Under Sanders’ “Democratic Employee Ownership Funds,” all publicly traded companies and those with at least $100 million in annual revenue would have to contribute 20 percent of their stock to “workers” over a decade, creating an “employee-controlled fund” that distributes any dividends to employees. Unlike ordinary stocks, workers couldn’t sell or transfer the stocks in their name. Instead, the fund would be managed by elected worker representatives, with ordinary voting rights. Worker representatives would also make up at least 45 percent of boards in firms with at least $100 million in annual revenue, $100 million balance sheets, and publicly traded companies.</p> <p>There are some obvious economic problems with this combined plan:</p> <ul> <li>If we force businesses to compensate employees via collective stock donations, then employers will look to reduce remuneration costs in other ways, most likely reducing wages to offset the cost of said donations. We’d expect Bernie’s plan then to change the composition of remuneration, but not its overall level.</li> <li>If this is correct, most ordinary risk averse employees would be worse off under this plan. They would have preferred the extra wage income for diversification purposes (i.e. the ability to invest their extra income elsewhere). Because the stock is locked in the fund, a company failure now means they lose their jobs’ wages AND the value of the stocks they notionally “own.”</li> <li>True, some companies and employees clearly do prefer stock compensation, especially in Silicon Valley start-ups. This can make economic sense in firms with limited cash that are trying to attract talented workers in businesses with the potential to grow rapidly. It’s evidence from these types of exceptions that is usually used to “prove” that employee ownership improves incentives and business outcomes.</li> <li>If co-operatives and mutuals really did harness dispersed information and align incentives to engender more business success across the board though, then why don’t socialists actively create such firms and outcompete ordinary stockholder businesses, rather than seeking coercive government mandates to facilitate their idea? Indeed, why don’t more businesses decide to mutualize anyway?</li> <li>The reason, surely, is that this ownership structure would create big problems for many companies. Most obviously it would risk inefficient decision-making by worker board members and create severe difficulties in raising new capital (it’s little surprise that most advocates of this type of plan worldwide also suggest new government “investment banks.") <a href="https://iea.org.uk/publications/research/can-workers-manage">In Yugoslavia</a>, where such market socialism was rolled out extensively, <a href="https://www.jstor.org/stable/1942875?seq=1#metadata_info_tab_contents">academic research</a> suggests the country became afflicted with the same inefficiencies, stagnation and impaired capital allocation as seen in other socialist economies.</li> <li>This is unsurprising. Elected worker-owner representatives and board members will result in a political system in business decisions. Workers and their ownership and board representatives have their own self-interests (not least being re-elected) and interest groups would quickly form for both (e.g. worker representation for those with stronger interests in shoring up the pension plan, those workers resisting a plant closure etc.) Since workers aren’t generally tied to a business for life, short-termism might become a problem – trying to raise overall remuneration rather than longer-term investment. Or else investment might be biased towards protecting jobs even though any profits might be socially better invested elsewhere.</li> <li>Of course, firms may seek to also avoid the measures by restructuring businesses to avoid public listing, or separate parts of the company to avoid exceeding the $100 million revenue threshold. Other board members may try to resist dividend payouts until a new president and Congress would overturn the measures too, significantly distorting business decisions.</li> </ul> <p>Employee-owned businesses, mutuals, and co-ops are a perfectly normal part of the rich tapestry of a free economy. Mandating this structure and confiscating and redistributing stock to achieve it is another matter entirely.</p> Tue, 15 Oct 2019 14:00:28 -0400 Ryan Bourne https://www.cato.org/blog/economic-consequences-sen-sanders-stock-confiscation-plan Ryan Bourne participates in the event, "Progressivism, Socialism, Nationalism: Progressivism and Its Agenda," at the Center on Capitalism and Society at Columbia University https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-participates-event-progressivism-socialism-nationalism Mon, 07 Oct 2019 10:50:20 -0400 Ryan Bourne https://www.cato.org/multimedia/media-highlights-tv/ryan-bourne-participates-event-progressivism-socialism-nationalism