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“Is Vast Inequality Necessary?”: Inequality Is Inevitable; The Vast Inequality Of America Today Isn’t

How rich do we need the rich to be?

That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.

Now, recent experience has not been kind to the conservative position. President Obama pushed through a substantial rise in top tax rates, and his health care reform was the biggest expansion of the welfare state since L.B.J. Conservatives confidently predicted disaster, just as they did when Bill Clinton raised taxes on the top 1 percent. Instead, Mr. Obama has ended up presiding over the best job growth since the 1990s. Is there, however, a longer-term case in favor of vast inequality?

It won’t surprise you to hear that many members of the economic elite believe that there is. It also won’t surprise you to learn that I disagree, that I believe that the economy can flourish with much less concentration of income and wealth at the very top. But why do I believe that?

I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.

First, we could have huge inequality because individuals vary hugely in their productivity: Some people are just capable of making a contribution hundreds or thousands of times greater than average. This is the view expressed in a widely quoted recent essay by the venture capitalist Paul Graham, and it’s popular in Silicon Valley — that is, among people who are paid hundreds or thousands of times as much as ordinary workers.

Second, we could have huge inequality based largely on luck. In the classic old movie “The Treasure of the Sierra Madre,” an old prospector explains that gold is worth so much — and those who find it become rich — thanks to the labor of all the people who went looking for gold but didn’t find it. Similarly, we might have an economy in which those who hit the jackpot aren’t necessarily any smarter or harder working than those who don’t, but just happen to be in the right place at the right time.

Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.

As I said, the real economy contains elements of all three stories. It would be foolish to deny that some people are, in fact, a lot more productive than average. It would be equally foolish, however, to deny that great success in business (or, actually, anything else) has a strong element of luck — not just the luck of being the first to stumble on a highly profitable idea or strategy, but also the luck of being born to the right parents.

And power is surely a big factor, too. Reading someone like Mr. Graham, you might imagine that America’s wealthy are mainly entrepreneurs. In fact, the top 0.1 percent consists mainly of business executives, and while some of these executives may have made their fortunes by being associated with risky start-ups, most probably got where they are by climbing well-established corporate ladders. And the rise in incomes at the top largely reflects the soaring pay of top executives, not the rewards to innovation.

Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.

And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.

In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking: People may be willing to prospect for gold, even if a successful foray won’t make them quite as rich as before, if they know they won’t starve if they come up empty.

So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, January 15, 2016

January 18, 2016 Posted by | Economic Inequality, Tax Revenue, Taxes on the Wealthy | , , , , , , , , | Leave a comment

“How ‘Public Servant’ Hastert Got His Riches”: An Indictment Of D.C.’s “Revolving Door” Money Culture

Not-so-frequently Asked Questions About the Hastert Indictment.

It’s clear that the indictment of Dennis Hastert has raised more questions than it’s provided answers. But I suspect a lot of people are asking the wrong ones. Hastert’s “misconduct” may turn out to be of sexually predatory nature, in which case talk of how much his reputation is worth is picayune compared the nature of the crime. But there are questions about what he did that are applicable to the entire industry he represents.

The most obvious question, that’s also the least relevant for most Americans: What is the “misconduct” that Hastert is alleged to have been trying to cover up?

This is an important question, to be sure, but indicting Hastert on the financial charges and lying to investigators rather than on whatever misconduct occurred seems to indicate that those charges were the best investigators could come up with. Presumably, if the misconduct was illegal, they’d have mentioned that—and indicted him for it. If the conduct was sexual abuse, as sources are saying, then the statute of limitations has run out. It follows that Hastert wasn’t paying hush money to stay out of jail, he was protecting his reputation.

A better question, and one that many Washington watchdogs leapt on quickly: How did Hastert happen to have enough money lying around that paying out $3.5 million was even within the realm of possibility?

Hastert’s ability to participate in the blackmail is, after all, itself a general indictment of D.C.’s “revolving door” money culture, in which former lawmakers move easily from government into lobbying. In Hastert’s case, the ability to profit off of one’s legislative position is especially galling: While in office, Hastert used the earmarking process to turn his investment in some Illinois farmland into a profit of 140 percent when a federal highway project just happened to make its way through those very fields. Indeed, it was this instance of a completely legal form of insider trading that helped prompt Congress to end earmarks.

And, of course, Hastert made even more money once he was out of office. One study found that, on average—and when the information is publicly available—former lawmakers get a 1,425 percent raise when they make the jump from Capitol Hill to K Street. Hastert, who was worth between $4 million and $17 million when he left Congress, was making $175,000 as a representative. His K Street bump would be to almost $2.5 million a year.

Okay, he made his money as a lobbyist, doing presumably sneaky lobbyist things. That raises the next question: How can Hastert’s reputation even be worth $3.5 million?

Hastert is a former member of Congress known to have profited off of a shady land deal and he’s a registered lobbyist—these are already the two professions that Americans regard as the most disreputable careers available. They are literally last (lobbyist) and second-to-last (congressman) on Gallup’s list of what jobs Americans regard as “honest” and “ethical.” What would one have to do to be thought even less of?

Given the ickiness of what has been reported, it might not be good to think about that question too hard, so let’s turn that question on its head: What kind of reputation could be worth spending $3.5 million to protect?

To consider $3.5 million a reasonable sum to spend on protecting one’s reputation, presumably it has to be worth a lot more than that. And, indeed, in the context of the lobbying world, $3.5 million just isn’t that much money. Especially considering that Hastert was apparently making pay-offs over time. Special interest groups spent almost 1000 times that—$3.2 billion—in 2015 alone. If Hastert viewed protecting his reputation as a kind of investment in future earnings, $3.5 million is on the scale of buying an alarm system for your home, not buying a whole other house.

And, it’s important to remember, what Hastert was covering up with that hush money was not a “reputation” as an average citizen might conceive of it: something akin to honor or trustworthiness or fidelity. A lobbyist’s reputation, after all, actually hinges on his or her established lack of principles. A lobbying client for someone who is a former member of Congress is paying a premium for that person’s willingness to engage in barely-legal favor-trading. A lobbyist’s prices go up the more corrupt he is. Who wants to hire an honest one?

 

By: Ana Marie Cox, The Daily Beast, May 30, 2015

May 31, 2015 Posted by | Congress, Dennis Hastert, Lobbyists | , , , , | 1 Comment

Are Members Of Congress Engaged In Insider Trading?

When Congress isn’t sending billions in taxpayer money to bail out Wall Street firms, some of its legislators appear to be using information unavailable to the general public to personally profit on stock trades.

So says a study just published in Business and Politics. A portfolio that imitates the stock purchases of House members outperforms the market by more than 6 percent in the course of a year, its authors found. “A previous study of the stock returns of U.S. Senators in a leading finance journal indicates that their portfolios show some of the highest excess returns ever recorded over a long period of time, significantly outperforming even hedge fund managers,” they wrote. “Until now, there has been no similar study of Members of the U.S. House of Representatives.”

Now we know that from 1985 to 2001, the specific interval used to generate the data, senators do the best, House members follow, and the average American investor brings up the rear. In defense of Congress, however, most legislators weren’t exploiting their advantage: on average only 27 percent of senators and 16 percent of House members bought and sold common stock. Interestingly, in the House “by far the most successful traders were those Representatives with the least seniority.” The authors acknowledge that result is counterintuitive, and posit this explanation:

Whereas Representatives with the longest seniority (in this case more than 16 years), have no trouble raising funds for campaigns, junkets and whatever other causes they may deem desirable owed to the power they wield, the financial condition of a freshman Congressman is far more precarious. His or her position is by no means secure, financially or otherwise. House Members with the least seniority may have fewer opportunities to trade on privileged information, but they may be the most highly motivated to do so when the opportunities arise.

So what should be done?

It’s presented as a thorny problem. “To restrain Members from taking personal advantage of non-public information and using their positions for personal gain, Congress has decided that such unethical behavior is best discouraged by the public disclosure of financial investments by Representatives and the discipline of the electoral process,” the authors point out, but “to form a reasonable opinion of a Representative’s conflicts of interest, voters must familiarize themselves with their Representative’s personal asset holdings, the details of each law under consideration in the House and the voting record of the Representative. This could be difficult for any voter.”

That’s why faster disclosure would work best here. Forget filing periodic reports. Just force Members of Congress to be transparent about their stock trades in real time. Voter oversight wouldn’t even be needed — the idea is that self-interested traders would closely monitor the buying and selling of stock by legislators, who’d thereby lose a lot of their ability to get a jump on other investors.

Right?

By: Conor Friedersdorf, The Atlantic, May 27, 2011

May 30, 2011 Posted by | Capitalism, Congress, Democracy, Elections, Government, Lawmakers, Middle Class, Politics, Regulations, Voters | , , , , , , , , | Leave a comment

   

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