Inter-Generational Borrowing

Nick Rowe addresses the problem of inter-generational borrowing at:

http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/12/debt-is-too-a-burden-on-our-children-unless-you-believe-in-ricardian-equivalence.html

The issue is brought up again by Dean Baker: http://www.cepr.net/index.php/blogs/beat-the-press/children-and-grandchilden-do-not-pay-for-budget-deficits-they-get-interest-on-the-bonds

If I read Nick Rowe right, he assumes (using a toy economy based on apples,) that A: Apples don’t last.  And concludes:  B:  Each generation, in borrowing apples from their children,  consumes an increasing share of the apples produced by their children.  That is, each generation consumes more than they themselves produced, taking from the production of their children. (The second generation gives to the first, but borrows even more from the third, etc.) I think this is correct, and is Nick’s point: Inter-generational borrowing is not neutral. Succeeding generations end up short. And Dean Baker, who claims that there is no transfer of wealth with inter-generational borrowing, is wrong.

If I read this right, then the only moral position is to grow the economy at a rate greater than the increase in (real) inter-generational borrowing. ( Of course, this eventually comes up against physical limitations.) That is, plant apple trees at an increasing rate, greater than the increase in inter-generational borrowing. But this requires (it seems to me) that the present generation consumes less than they would if they hadn’t borrowed in the first place.  That is, the present generation must invest more than they borrow.   

But in terms of the present, real value, this just means the present generation should consume less than they produce, and invest the rest. The borrowing of money is irrelevant, except where it affects this. 

In fact, the borrowing of money is rather inverted, because the younger generation is forced to borrow money from the older, established, wealthier generation, pay that older generation back with interest, and thus end up with a diminished share of the  real pie. 

So this is what the government is doing.  It is the younger generation borrowing from the older, who refuse to pay their taxes, and instead consume more than they produce.   Social Security and Medicare notwithstanding,  (Who, after all, will be cheated, if Social Security and Medicare are not adequately funded in the future?) the government, in principle, represents the interests of the young. Its proper purpose is to invest in the future, which is more the younger generation's than the older.

But the government has been co-opted by the older generation, who, instead of holding it in trust, exploit it to their own profit. 

The Republicans’ stated goal, then, and that of Austerians in general, the shrinking of government, (especially those parts of government that pertain to investment,) is to cheat the young out of their interests.   This is what we are seeing in youth unemployment across the globe, so much being taken away that the younger generation is even being decapitalized.  Here in the US, it is seen as higher costs of college, and lower investment in primary education, the neglect of infrastructure, etc.  (Infrastructure is of greater benefit to  the young, since they can expect to use it longer.)

So not only is it the 1% vs the 99%, but it is the old vs the young.  

The problem for the old, of course, is that by decapitalizing the young, they are decapitalizing themselves.  Because it is on the backs of the young the old hope to take their ease.  

 Running a trade deficit is also borrowing from future generations, and is thus also immoral, unless it is done for investment.

The Poor Help Prop up the Middle Class

Push up economics:  Many conservative middle class voters are resentful of the poor, thinking them shiftless and lazy, paying no taxes and often instead collecting unjustified income from the government.  71 percent of Republicans, for instance, in a recent poll, said “they believed the poor should not be exempt from income taxes.”   Well, the poor are not ‘exempt.’   They just don’t make enough income to make it to the positive tax rate.  Do any of the middle class want to trade places with the poor?

The middle class should be grateful to the poor, and the labor they provide.  The poor often work hard, for mean wages, making a significant contribution to middle class welfare.   Also, as consumers, the poor purchase an important portion of the production of the middle class, and help keep the members of the middle class in business and employed.  Many middle class businesses, and their employees, owe their profit margins, and continuing business, to the purchases of the poor. The poor represent at least 15% of the population, and even if their purchasing power is much less, it is enough to make a difference.  And they provide other opportunities for middle class income and activity.  By cutting off supports to the poor, or by raising taxes on the poor, the middle class will do themselves no favor.  Indeed, instead, by providing more opportunity to the poor, by improving their welfare, the middle class will improve their own situation.

More money comes up to the middle class from the poor, than comes down to them from the wealthy.  Indeed, the wealthy take their profit from the middle class.

For a nice summary of some of the functions poverty and the poor serve for the rest of society,  and in particular the middle class, see Herbert J Gans:  “The Uses of Poverty: The Poor Pay All.”: http://www.sociology.org.uk/as4p3.pdf

Private Wealth, Public Debt, and Taxes

Well, well. Over at VoxEU somebody just connected a couple of the dots:

http://www.voxeu.org/article/eurozone-crisis-time-tax-rich

“Increased levels of public debt are accompanied by mounting private wealth, which is increasingly concentrated on the wealthy elite.”

Could there be a connection?  Could the public debt increasingly be held by a wealthy elite?  Could that wealthy elite be charging their sovereigns rent for the use of the sovereigns own money, money only owed that elite in the first place because that elite have used their power over their governments to lower their own taxes?  And the governments have had to borrow to maintain their services, and now they owe that elite too much to ever repay? 

But note the key step:  The elites used their power over governments to reduce their own taxes, and forced those governments to borrow from them instead.  And now those governments owe too much, threatening the very stability of the system which supports their own wealth.  Greed, greed, greed. 

At Vox they propose a one-off tax of 10%  on the assets of the top 8% of wealth.  (The top 10%, in Germany, for instance, own 2/3 of the wealth.)  They figure it will raise 9% GDP. 

Good, but not good enough.  The entire increase in the concentration of wealth since the 1970’s has been engineered by the elites.  They should give it all back.  The top 1% share of the pie more than doubled, for instance, so they should be taxed, on average, 50% of their assets.

It’s quite remarkable.  They demand disproportionate compensation, because they are so important, and they run things.  But when you ask, who’s responsible for the increased inequality, they deny responsibility, and point the finger somewhere else:  Education, for instance.  Globalization.  

They manage the system, and the system is tottering.   They take too much out of the system for a modern economy to support.  But is it due to their mis-management and short-sighted greed? Or can we, they blame circumstances beyond their control?  Well, if they do not run things, perhaps they are paid too much.   

But we know very well who’s responsible for the financial predicament.  Our elites, and their greed.  So taxing their ill gotten gains is good for us.  And good for them.  Stave off collapse of the system, on which they, and the rest of us, depend.  Will they? Or will our elites, who purport to run things, be shortsighted to the end?  If the US elections are any indication…

Super-Majority Requirement makes for Ineffectual Government

It may be that a country with a legislature requiring a super-majority in one of its houses, (here in the US the Senate) is ungovernable.

As the minority, it is in the interests of the Republicans to oppose everything. This will cause the Democrats to be ineffectual in governing, thus increasing the likelihood of the Republicans being elected to the majority in the next election. However, should the Republicans be elected to that majority after the election, it will be in the interests of the Democrats to oppose everything the Republicans try to do.  Thus the Democrats will demonstrate the Republican's  ineffectualness at governing, and so increase the likelihood of their own eventual return to power. Irrespective of which party is in the majority, the government is ineffectual, and in a permanent state of paralysis.

Now the Democrats may see it in their interests to allow the Republicans full play of their pernicious behavior, hoping that the electorate will become aroused by the offenses visited on them, and return to the Democratic fold.   Thus bad laws would not be opposed, but good ones would be. So the country is either ungoverned, or badly governed.

We owe Mitch McConnell a note of gratitude for this lesson in political principles.

(Mostly) posted as a comment at:  http://economistsview.typepad.com/economistsview/2012/08/if-obama-was-for-it-we-had-to-be-against-it.html#comment-6a00d83451b33869e201676932b53b970b

The Party of the Rich has Triumphed in its Spead of Disinformation

The party of the rich has triumphed in its spread of disinformation. Check out this poll by Bob Livingston,  “Poll Results: Higher Taxes for the Rich or More Drastic Spending Cuts,” at personalliberty.com:

http://personalliberty.com/poll-results-higher-taxes-for-the-rich-or-more-drastic-spending-cuts/?eiid=

Of course, Bob is somewhat to the Right of Center, as are his readers and the responders to his poll. See Q5.  But, among his responders: 60% think that higher taxes on the rich will hurt the economy, and only 23% voted to increase taxes on the  richest Americans.  76% voted the government should make significant spending cuts to try to reduce the deficit. 

As for where those budget cuts should come from, 0% voted for cuts in Social Security, Medicare or Medicaid, (except for the 18% who voted ‘All of the above.’)  22% voted for cuts to Foreign aid, which is an insignificant portion of the budget.  A bit of disinformation there.  27%, (the largest,) voted  for the elimination of Federal Agencies (the EPA, Dept of Education, etc.  You know, things to do with our future, and Justice, the Treasury, including the IRS, etc., things to do with running the day to day stuff.)  Only 7% voted for cuts in the Dept of  Defense, despite its legendary wastefulness. 

For a more realistic perspective on what can and cannot be done, check out the NY Times ‘Budget Puzzle’, from Nov 13, 2010: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html

But the real bottom line, of course, is the coddling of the rich. Getting 60% thinking that increasing taxes on the rich will hurt the economy, against all historical evidence, including the evidence of their own experience.   Taxes on the rich haven’t been lower in most of these readers’ lifetimes, and when during those lifetimes has the economy ever been in such sorry shape? This is surely one of history’s great triumphs of propaganda.  Getting a sizeable percentage of the population to think against their own interests, to identify with those who exploit them, and to imagine their interests align with those who, over the past 30 years or so, have taken over 15% of their income, (http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html ) and a greater percent of their wealth, is astounding.

It is also a triumph over logic:  What the rich do not pay in taxes, the rest of the people will have to. What the rich do not pay for defense, or for the common wealth of the people that is the government, the rest of the people will have to. Further, who does the government borrow from?   The rich.  So the rich are giving their money to the government anyhow, but when it is borrowed, they expect it paid back, eventually.  With interest.  And where does that money come from?  The people. 

And who’s services will get cut?  Not the rich’s.  The people’s.  When Education, Health and Human Services, Energy, all get cut, who will be the poorer?  Not the rich.  You can bet the rich will have the money to grease the palms of Congressmen to keep their places at the public trough warm and well stocked. 

And who will be at the front lines when the payrolls of government are slashed?  The Wall Street banker?  Or the Main Street small businessman, who depends on government wage earners, and other government expenditures, directly or indirectly, for a part of his business. 

One of the Main Functions of Government is to Consume Excess Production

One of the main functions of government is to consume excess production, hopefully in a socially constructive manner, and so maintain the price level. Keynes suggested this, as a solution to inadequacies of demand, but it must be done even in 'good' times, and adjusted, for bad. That is, government consumption must be increased during recession or depression.  Further, the government must redistribute even more as industries become more capital intensive.  To do this in perpetuity, government’s debt cannot get out of hand, but must be constrained as a percentage of GDP.  This means collect more taxes, and these must necessarily be collected from the rich.

First, the wealthy consume less as a percentage of their income than the rest of the population. They save more. On the other hand, since the government will spend all it collects in taxes, collecting more in taxes from the rich will be economically stimulatory.   That is, the economic multiplier on taxes on the wealthy is greater than one.    This implies a strongly progressive tax to stimulate the economy. 

Indeed, from the point of view of economic stimulus, there is no point in taking taxes from the poor, or even much of the working class, when their savings is very low.  Any money taken as taxes from the poor would have been spent anyway, and so would not provide net stimulus to the economy.  What is more, a certain rate of savings in the middle and lower classes should generally be seen as desirable, since it would act as an automatic stabilizer.  Money would be saved during good times, helping to slow down the economy, and dis-saved, or spent, during recession or depression, helping to stimulate the economy, thus helping to smooth economic fluctuations.      

Further, as the owners of capital, an increased share of market income will go to the wealthy as industries become more capital intensive.  More demand, that is money, will have to be redistributed to maintain the market, which otherwise would slowly contract as labor is increasingly forced out of the productive process. (The same thing happens in a country as production is off-shored. No country can afford to have a significant proportion of the goods it consumes to be imported, unless it has compensating exports.  Thus the need for balanced trade.  See:  http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html)  Indeed, given the observation that one of the government’s functions is to consume excess production, and running a trade deficit effectively increases that excess,  much of a government’s deficit can be laid at the feet of that trade deficit.)

Now there is no market for labor forced out of the productive process. This is because, as unemployed, they do not represent a market for production.  Supply increases, due to increased capital expenditures, but ultimate demand does not, because there is no increase in the number of consumers, that is, labor. Demand increasingly becomes concentrated at the top. (Of course, the wealthy could spend this money on providing public goods and services to the rest of their community. They instead rail against government, and do not themselves provide the things the community needs.)   

On the contrary, the absence of a progressive tax is/will be depressive, and destabilizing, as wealth becomes more concentrated and inequality increases. One of the causes of this destabilization is that as wealth becomes more concentrated, the market for commodities and financial instruments becomes thinner, and subject to greater fluctuations, as fewer people have the greater concentrations of wealth to invest in the various markets. Meanwhile, the market for production, represented by the middle and working classes, gradually contracts in the absence of a progressive tax.  The government, for a time, may maintain this by running up debt.  But this is regarded by many as unsustainable.

Privatizing government functions is counterproductive, since profits in privatized industries cause an increase in the upward redistribution of income, which must be counteracted with an even greater progressivity of taxes to compensate.  Indeed, a certain amount of inefficiency in government spending is a virtue, as it allows wider dispersion of government expenditures. 

What is important is the efficiency with which government collects taxes from the wealthy, since the primary goal is the constant redistribution of demand throughout the economy.  If it is inefficient in collecting taxes from the wealthy, too much money will remain at the top, and it will be inefficient at redistributing this money to the base of the economic pyramid, where it is needed to stimulate demand.  In particular, the taxes on the wealthy should be increased during recessions and depressions, that is periods of inadequate demand and excess supply.  Of course, that suggests taxes on the wealthy be decreased during periods of inflation, when they are large, but they are now already inadequate.  We are talking about a tax rate centered about 65% or so, and adjusted from there, depending on circumstance:  Higher during bad economic times; lower during good economic times. 

Regulating Oligopoly and Oligopsony

Regulating Oligopoly and Oligopsony

Having concluded there was a need to regulate oligopoly and oligopsony, ( http://anamecon.blogspot.com/2012/03/on-need-for-regulation-of-oligopoly-and.html ) we discuss some ways how it might be done. Other suggestions are welcome.

The problem is the oligopolist produces less than the competitive equilibrium, and at a higher price, while the oligopsonist buys less than the competitive equilibrium, and at a lower price.

 

In dealing with oligopy we wish to decide which oligopies are most damaging.  Those in elastic markets, for instance, would be naturally limited in their ability to extract rents, while those in inelastic markets would have greater opportunity, and given the situation, inclination, to do so.  Similarly, the costs of entry to a market would also set limits on how much extra normal profit could be collected. Low entry costs would limit the extra normal profits to low levels, since higher profits would encourage the entry of other firms into the market.

With damaging oligopy, one way is simply to tax the results. A problem here is getting the receipts back to the damaged parties.  Another problem with this solution is that it would not affect the oligopist’s equilibrium, to produce at higher prices and lower quantity produced than at competitive equilibrium for oligopoly, and to buy at lower prices paid for and a lower quantity than at competitive equilibrium for oligopsony. That is, it would not eliminate bottlenecks in an economy. As may be, this approach would be to tax extra normal profits at a punitive rate, say, 90% of profits over 6% (allowing for a 3% inflation rate.)  The point is, by the time oligopy is manifest, the market is relatively fixed in proportion to the economy as a whole. Yet because of the price scheme of the oligopy, the market is defective in size to the economy, and the rent collected goes into the bank, ie taken out of the economy at large, or goes into buying up assets in the economy at large, increasing the proportion of ownership of the oligop, at the expense of the other members of the economy.  So one would wish to force the oligopy to grow to proportion of and at the growth rate of the economy as a whole.  (This is a mature market problem, not a growing market one.  It is not a problem of a company expanding into an open market, such as Apple, with its product innovations.  Extra normal profits here can still be a problem to an economy, and lead to alterations in the distribution of wealth and power.  But the reinvestment of extra normal profits in plant is also necessary to expand production to meet the demand a smaller company cannot reasonably fulfill.) 

What is desired is that normal profits are allowed to be reinvested in the oligopy, while extra normal profits are returned to the economy at large.  In oligopoly, one might gear the tax to be scaled at 6% on profit per unit produced, (with a 3% nominal rate of inflation, and a 3% rate of growth.). This would be effectively a progressive VAT, or value added tax, on the ologopoly.  This would incentivize the oligopolist to produce to competitive equilibrium, since the maximum profit would then be proportional to quantity produced. (Actually this by itself wouldn’t quite work, as the oligopolist would just be encouraged to internalize costs, so as to reduce his ‘profit’ to the 6%.)   

Another is to institute price floors in the case of oligopsony, or price ceilings in the case of oligopoly, at what one would hope to be nearer the equilibrium price for a perfectly competitive market. One example of price floors, with oligopsonies, is with minimum wage laws.

A problem here seems to be that one loses the use of price signals, although this is actually not a problem with oligopy, since the quantity traded is no longer responsive to prices anyhow.  Or more correctly, the price becomes fixed, and unresponsive over a large variation of economic conditions. In any case, over a large variation, price and quantity do not respond to the demands of the economy. While these price levels could just be legislated, probably a more efficient method would be a competitive buyer, in the case of oligopsony, or a competitive producer, in the case of oligopoly.  In the case of oligopoly, another option might be to subsidize production.  This option, subsidizing production, would fail, however, in all cases but the mildest kinks, that is, where there were numerous competitors in the oligopoly, (or hardly like an oligopoly at all.)  This is because, with a severe kink, the vertical part of the Marginal Cost MC curve extends through the price axis, or at least very close, and thus all or most of the cost of production would have to be subsidized in order to encourage an increase in quantity produced.  Otherwise, the quantity for profit maximization would not change. This would still be useful, in cases like health care, where the goal was universal coverage.  See: http://anamecon.blogspot.com/2010/03/real-problem-with-health-care-in-us.html

Similarly, just buying up large quantities from the oligopoly would be very expensive, since you would be buying at the oligopolist’s price, and providing him his extra normal profit, as is in fact the current US government policy with respect to the health care industry.  Policy should be to force the oligopolist to sell at a price nearer the equilibrium price.  Again, the situation with health care is different, since if you want universal coverage, you want to drive the oligopolist’s price to near zero, and to do so must effectively subsidize the entire production.  That is, make health care a public good. 

In the case of oligopsony, by competitive, we mean a buyer who buys sufficient goods to drive the price up to what it would be under competitive equilibrium.  This buyer would constitute a regulator.  And what would the signals be, that this regulator would look for?  He would seek a normal profit for suppliers. (This assumes that for firms facing the oligopsony, there is no barrier to entry.  If there were such a barrier, we would expect the situation to evolve into one of oligopoly facing oligopsony. Does such a market exist at a competitive equilibrium?  It would seem to depend on the relative elasticities of the supply and demand.)

One way this might be shown would be an equilibrium in firms entering and leaving the market.  This shows how the quantity of suppliers might also be regulated. By increasing the price and quantity bought, firms would be encouraged to enter the market.  By reducing the price and quantity bought, firms would be encouraged to exit the market.

The idea of government being a last resort buyer of labor suggests an alternative to minimum wage laws.  The government would enter the labor market and act as a monopsonist, and bid up wages until the unemployment rate was down to desired levels.  Private industries would have to pay this rate also, or lose employees to the government.

The situation would seem to be more difficult with oligopoly.  The problem with the government producing to competitive equilibrium is that governments are notorious for producing inferior products.  Another problem, as in agriculture and education, is what the government actually does.  That is the government subsidizes production into the face of oligopsonies.   This results in producing a surplus of goods into a buyers market, driving down the prices.  (Indeed, the prices have been driven down so low, in the case of education, that buyers, the institutions of higher education, must be paid to accept most of the production of public education. The prices are negative.  This is an alternative way of looking at the distribution of pricings and cost burdens in education.  On the other end, businesses refuse to pay the universities for the production of the universities, their graduates.  They do not send clear signals as to what they want, except in a few career specific employment and unemployment rates. 

One way to rein in oligopoly is to promote the production of substitute goods.  The development and subsidy of alternative energy sources, for instance, would moderate the action of oil and coal oligopolists, which is one of the reasons they oppose alternative energy sources so fiercely.

   

As another alternative, the government could employ the aggressive use of anti-trust legislation, to prevent the formation of oligopoly. Probably a figure of providing 20% of the market would constitute a member of an oligopoly.  Thus, keeping firms below that size would prevent the kink from becoming too pronounced.  A problem arises, when the oligopoly faces oligopsony, or monopsony, as in retail supermarket chains, with their limited shelf space.   By hindering one, one encourages the other, and oligopsony can be as socially destructive as oligopoly.   

Another possible solution is to separate the functions of the oligopy, making one part into a quasi-utility, and eliminating costs of entry to the other function.  Thus, for instance, (as was done with British rail) providers of cable TVcould be separated into parts, one which merely operated and maintained the cable, and the other which provided the content, paying the operators of the cable a fee.  The operator would be a regulated monopoly, and the content providers would be competitive, the costs of entry, one of the prerequisites for oligopoly, minimized.  The same could be done with cell phones, the towers being regulated, and selling their bandwidth, which they would seek to maximize, for a fee.

Health care in the US is an instance of oligopoly. Actually it is an instance of several different oligopolies.  One is medical equipment supply.  Another is pharmaceutical supply.  Locally hospitals form oligopolies.  (Hospitals are an obvious choice for regulated utility.)  Finally, a limited supply of doctors and other medical personnel creates an effective oligopoly to health care consumers.   Production of health care is restricted, driving up prices. Buying from the oligopoly will not change this, and indeed can be expected to further drive up prices. 

For industries requiring a high level of maintenance of resources, such as farming, further regulation might be required of producers, to prevent depletion of assets in efforts to temporarily acquire extra normal profits.  Progressive taxation would be helpful here, since it increases the present value of future returns, rather than exploitation of the resource for immediate returns.