Search Results for: redistribute

U.S. workers need more power

June 29th, 2020

By Lawrence H. Summers and Anna Stansbury

Covid-19 has brought into sharp relief the contrast between the experiences of the higher-income Americans who receive deliveries and the lower-income Americans who fulfill them, between those who can work safely from home and those who must expose themselves to risk, often with inadequate protection, between those who have the power to safeguard their health and their living standards and those who do not. More broadly, it has highlighted the long-standing trends in the U.S. economy toward a falling labor share of income, rising income inequality and slow wage growth for most workers — even as corporate stock market valuations and profitability rise.

Economic analysis often ascribes these trends to some combination of globalization, technological change and rising monopoly power. But our research suggests that a more compelling explanation is the broad-based decline in worker power. As workers have become less able to share in the profits generated by their firms, income has been redistributed from employees to the owners of capital. That has contributed to higher income inequality along class and race lines.

The evisceration of private-sector unions is the most obvious example of the decline in worker power. At the peak, one-third of the private-sector workforce belonged to a union; that number is now 6 percent. But other factors also affect the degree to which workers can share in firms’ profits. Because of increased shareholder activism, rising levels of debt, increases in private equity and changing corporate norms, businesses are increasingly run for shareholders rather than their stakeholders. Ruthless management tactics involving precise measurement of workers’ day-to-day activity have become widespread.

Meanwhile, workers at large firms or in highly paid industries (such as manufacturing, construction or transportation) used to earn large wage advantages, as they shared in the profits generated by their companies, but these benefits have declined by half since the early 1980s. An increasing number of workers are outsourced domestically, employed by staffing or temp agencies or misclassified as independent contractors, reducing their ability to share in the profits of the main firm they work for. And the real value of the minimum wage is lower than it was in the 1970s.

Why did this happen? Some portion of the decline in worker power may have been an inevitable outcome of globalization or technological change. But our research — which examines shifts in labor shares and corporate profits across different industries — indicates that changes in policy, norms and institutions are the most important explanatory factors. This view is supported by the fact that the legal and political environment has been tilted substantially in favor of shareholders and against workers since the 1980s, a trend exemplified by the expansion of state right-to-work laws undermining unions’ ability to fund themselves and the increasing corporate use of union avoidance tactics, both legal and illegal. The fact that the decline in unionization, the rise in income inequality and the fall in labor’s share of income have all happened to a greater extent in the United States than in much of the rest of the industrialized world also suggests an important role for U.S.-specific explanations.

What should be done? A traditional economic argument is that policy should let markets function competitively and then rely on progressive taxation and spending to redistribute income afterward. It is this kind of thinking that lies behind advocacy of negative income taxes or, more recently, for a universal basic income. But progressive institutionalists have long argued for pre-distribution alongside redistribution, strengthening worker power by changing the structure of labor market institutions.

We believe both ingredients are required. Strengthening worker power can be an important countervailing force against firms’ dominance in product and labor markets, as argued famously by John Kenneth Galbraith. And it’s not necessarily the case that it is more efficient to reduce inequality through after-the-fact transfers and taxes than by strengthening unions beforehand. After all, taxes create distortions and alter incentives — and moving to a system with more centralized bargaining may actually reduce the distortionary effects of taxation. When something is a big problem — as is inequality in America today — it is appropriate to tackle it from multiple angles.

Of course, there is a risk that by raising wages, such policies might lead to an increase in unemployment. Indeed, our research suggests that the decline in worker power may have contributed to the long-term decline in average U.S. unemployment (until the current crisis). The risk of increased unemployment should not be dismissed lightly, particularly as unemployment disproportionately affects lower-income people and people of color. But it is possible to bolster the power of labor without excessively restricting hiring. There is reason to believe, for example, that allowing bargaining at a broader level than just the individual firm — such as sectoral collective bargaining — would reduce the negative effects of unionization on unemployment. We must also consider the type of unemployment that policies might create; an increase in short-term unemployment as workers spend more time searching for good jobs is less problematic than the development of a two-tier labor market where unprotected “outsiders” spend long periods in unemployment or are unable to access good jobs at all.

Overall, we believe that increasing worker power must be a central and urgent priority for policymakers concerned with inequality, low pay and poor work conditions. If we do not shift the distribution of power toward workers, any other policy changes are likely to be short-term and insufficient.

US tax reform is vital but Trump’s plan is flawed

January 8th, 2017

Corporate tax reform has rightly been identified by both the President-elect and Congress as an immediate priority. There is no doubt that the status quo — where America has the highest statutory rate among major countries and companies hoard cash overseas — can be improved on. Unfortunately, the reforms identified by Paul Ryan, speaker of the House of Representatives, and Donald Trump appear set to damage the tax base and the US and global economies.

The central concept put forward by Mr Ryan, which appears to have the support of Mr Trump, is to turn corporate income tax from a tax on the return to capital into a tax only on extraordinary profits. This would be done by taxing corporate cash flows. In addition to the major reduction of the overall rate, the system would change in three fundamental ways. First, all investment outlays can be written off in the year they occur rather than over time. Second, interest payments to bondholders, banks and other creditors will no longer be deductible. Third, companies will be able to exclude receipts from exports in calculating their taxable income and will not be permitted to deduct payments to foreign suppliers or affiliates from income.

Unlike some of Mr Trump’s other economic ideas, the corporate cash flow tax is supported by some experts in both political parties. However, it has four major — probably fatal — flaws.

First, the tax change will exacerbate inequality, with more than half the benefits going to the top 1 per cent of Americans. Eliminating the corporate tax on the returns to capital and substantially scaling back the rate on extraordinary profits is a radical step that might be defensible on grounds of eliminating double taxation in a world where capital returns are effectively taxed at the individual level. But it is very hard to justify in the current world, where exclusions and preferences mean that most corporate income is not taxed at the individual level and where the estate tax, which could be a backstop, is easily avoided and may well be eliminated.

Second, the tax change will capriciously redistribute income, increase uncertainty and place punitive burdens on some sectors. Think of a retailer who imports goods from abroad for 60 cents, incurs 30 cents in labour and interest costs, and then earns a 5 cent margin. With a 20 per cent tax, and no ability to deduct import or interest costs, the taxes will substantially exceed 100 per cent of profits even if there is some offset from a stronger dollar. Businesses that invest heavily, hire extensively and export a large part of their product will have negative taxable income on a chronic basis. It is hard to imagine that the political process will allow annual multibillion-dollar refunds, so they too may be victimised. Then there are the still unresolved questions of what the rules will be on interest deductibility for banks and of the treatment of businesses organised as partnerships that do not pay corporate taxes.

Third, the tax change will harm the global economy in ways that reverberate back to America. It will be seen by other countries and the World Trade Organisation as a protectionist act that violates US treaty obligations. Proponents may argue that it should be legal because it is like a value added tax, but the WTO is very clear that income taxes cannot discriminate to favour exports. While the WTO process would grind on, protectionist acts by other nations would be licensed immediately.

Proponents of the plan anticipate a rise in the dollar by an amount equal to the 15 to 20 per cent tax rate. This would do huge damage to dollar debtors all over the world and provoke financial crises in some emerging markets. Since US foreign assets are mostly held in foreign currencies, whereas debts are largely in dollars, American losses with even a partial appreciation would be in the trillions. Ironically, China, with its huge reserve hoard, would be a winner.

Fourth, the combination of a sharply lower rate, new opportunities for tax arbitrage and the fact that any revenue gains from bringing overseas cash home are one-shot means the Federal revenue base would erode. The result would be cuts in entitlement payments to consumers who spend heavily, tax hikes on individuals and reductions in government spending. Over time, this will slow growth and burden the middle class.

There is no need to reinvent the corporate tax wheel. Let’s fix the tax we have by cutting rates, closing shelters, broadening the base and cracking down on tax havens. That would be an important step to making our economy grow faster. It would also be fairer.

Trump’s tax plans favour the rich and will hamper economic growth

December 5th, 2016

Just as Ronald Reagan’s landmark 1986 bipartisan tax reform increased simplicity, fairness and economic efficiency by broadening the tax base and reducing rates, today reform of the system has the potential to help American families and the economy.
Properly designed, revenue-neutral reforms could help to offset the dramatic increases in inequality that have taken place over a generation, repair a business tax system that globalisation has rendered dysfunctional, reduce uncertainty and promote growth.
Unfortunately, what we know of the intentions of the president-elect and congressional leadership suggest that they risk pushing through the most misguided set of tax changes in US history.
The proposals from the presidential campaign, reiterated last week by President-elect Donald Trump’s choice for Treasury secretary, will massively favour the top 1 per cent of income earners, threaten an explosive rise in federal debt, complicate the tax code and do little if anything to spur growth.
A core principle agreed to by all in 1986 was that reform would not reduce the tax burden on high-income taxpayers. Reagan achieved this objective while reducing top marginal rates because he raised capital gains rates, scaled back investment incentives, increased corporate tax collection, curtailed shelters and left estate and gift taxes alone. Unfortunately, neither the Trump plan, nor the one put forward by Paul Ryan, speaker of the House of Representatives, provides for nearly enough base-broadening to finance all the high-end tax cutting they include.
Steven Mnuchin, Treasury secretary-designate, asserts there will be no absolute tax cut for the upper class because deductions would be scaled back. The rub is that totally eliminating all deductions for those with incomes over $1m would not even raise enough revenue to cover reducing their marginal tax rates from 39 to 33 per cent, let alone offset their benefit from huge rate reductions on business and corporate income, and the elimination of estate and gift taxes.
Estimates of the Trump plan suggest that it will raise the average after-tax income of the 0.9 per cent of the population with incomes over $1m by 14 per cent, or more than $215,000. This contrasts with proposed tax cuts for those in the middle of the income distribution of $1,000, or about 2 per cent.
The repeal of estate and gift taxes is especially problematic because it would provide a window for the very rich to use gift and trust structures to ensure that their wealth passes without tax not just to their children but to their grandchildren and great grandchildren, regardless of subsequent legislation.
The Reagan tax reform simplified the code by eliminating the need for rules distinguishing ordinary and capital gains income, because these were taxed at the same rate, and by doing away with industry-specific shelter provisions. In contrast, the Trump proposal creates sheltering opportunities by reducing to 15 per cent the tax rate on any income that can be characterised as coming from an incorporated entity. Rather than reducing targeted subsidies, it would establish a highly dubious 82 per cent credit – the highest in the world – for financial equity investments in infrastructure.
This would mean not only disproportionate tax reductions for the upper-income group that has seen its incomes rise most rapidly over the past generation. It would also mean grave damage to federal budget projections. The envisioned Trump tax cut is about the same size relative to the economy as the 1981 Reagan tax cut. It is worth remembering that Reagan, hardly a fan of reversing course or raising taxes, found it necessary to propose significant tax increases in 1982 and 1984 (the equivalent in today’s economy of $3.5tn over a decade) due to concerns about federal debt.
Today’s budget situation is much more worrisome. The baseline involves much higher levels of debt and deficits. Then the economy was suffering from a deep recession; now it approaches full employment. If extreme tax cuts are legislated in the next months, uncertainty about the federal budget and about further tax adjustments is likely to rise. Finally, I can find no basis in either economic history or logic for Mr Mnuchin’s claim that the proposed reforms would increase the economy’s growth rate from its current 2 per cent rate to the historical 3 to 4 per cent norm. Adult population growth has slowed by nearly a percentage point, the gains generated by more women entering the workforce have been exhausted, and it is far from clear why tax reform will hugely spur productivity growth.
Indeed, because the Trump proposal would redistribute after-tax income towards those most likely to save it, push up long-term interest rates because of debt pressures, increase uncertainty and the advantages of overseas production, it is as likely to retard growth as to accelerate it.
In the 1980s, treasury secretary Don Regan said the first Reagan reform proposal was written on a word processor to signal the administration’s openness to negotiation and radical alteration. We should all hope the Trump administration follows Reagan’s approach on both tax policy principles and a commitment to bipartisan negotiation.

America risks becoming a Downton Abbey economy

February 16th, 2014

February 16, 2014 

Inequality will have to be addressed, with free markets playing a pivotal role

Inequality has emerged as a major issue in the US and beyond. A generation ago it could reasonably have been asserted that the overall growth rate of the economy was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.

The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalized and budget deficits have at last been addressed.

President Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective. Presidents from Franklin Roosevelt to Harry Truman railed against the excesses of a privileged few in finance and business. Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns. Richard Nixon used the same weapon in 1973, announcing tax investigations “of the books of companies which raised their prices more than 1.5 per cent above the January ceiling.” All were reacting in their own way to a phenomenon that Bill Clinton has described best: “Although America’s rich got richer . . . the country did not . . . the stock market tripled but wages went down.”

Given the widespread frustration with stagnant incomes, and an increasing body of evidence suggesting that the worst-off have few opportunities to improve their lot, demands for action are hardly unreasonable. The challenge is knowing what to do.

If income could be redistributed without damping economic growth, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately this is not the case. It is easy to think of policies that would have reduced the earning power of Bill Gates or Mark Zuckerberg by making it more difficult to start and profit from a business. But it is much harder to see how such policies would raise the incomes of the rest of the population. Such policies would surely hurt them as consumers by depriving them of the fruits of technological progress.

It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.

It is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play. The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor. For example, last year’s increase in the stock market represented an increase in wealth of about $6tn, of which the lion’s share went to the very wealthy.

It is unlikely that the government will collect as much as 10 per cent of this figure. That is because of a host of policies that favour the rich, such as the capital gains exemption, the ability to defer tax on unrealized capital gains, and the fact that gains on assets passed on at death are not taxed at all. Similarly, the corporate tax system allows value to flow through it like a sieve. The ratio of corporate tax collections to the market value of US corporations is near a record low. The estate tax can be more or less avoided with sophisticated planning.

Closing loopholes that only the wealthy can enjoy would enable taxes to be cut elsewhere. Measures such as the earned income tax credit can raise the incomes of the poor and middle class by more than they cost the Treasury, because they give people incentives to work and save.

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

He is on Twitter @LHSummers

 

 

America Risks Becoming a Downton Abbey Economy

February 16th, 2014

February 16, 2014

Inequality will have to be addressed, with free markets playing a pivotal role

Inequality has emerged as a major issue in the US and beyond. A generation ago it could reasonably have been asserted that the overall growth rate of the economy was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.

The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalized and budget deficits have at last been addressed.

President Barack Obama is right to be concerned. Those who condemn him for “tearing down the wealthy” and engaging in un-American populism are, to put it politely, lacking in historical perspective. Presidents from Franklin Roosevelt to Harry Truman railed against the excesses of a privileged few in finance and business. Some have gone beyond rhetoric. Confronted with rising steel prices, John Kennedy sent the FBI storming into corporate offices and is widely thought to have ordered the authorities to audit executives’ personal tax returns. Richard Nixon used the same weapon in 1973, announcing tax investigations “of the books of companies which raised their prices more than 1.5 per cent above the January ceiling.” All were reacting in their own way to a phenomenon that Bill Clinton has described best: “Although America’s rich got richer . . . the country did not . . . the stock market tripled but wages went down.”

Given the widespread frustration with stagnant incomes, and an increasing body of evidence suggesting that the worst-off have few opportunities to improve their lot, demands for action are hardly unreasonable. The challenge is knowing what to do.

If income could be redistributed without damping economic growth, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately this is not the case. It is easy to think of policies that would have reduced the earning power of Bill Gates or Mark Zuckerberg by making it more difficult to start and profit from a business. But it is much harder to see how such policies would raise the incomes of the rest of the population. Such policies would surely hurt them as consumers by depriving them of the fruits of technological progress.

It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.

It is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play. The current tax code is so badly designed that it is very likely to be having the effect of reducing economic growth. It also allows the rich to shield a far greater proportion of their income from taxation than the poor. For example, last year’s increase in the stock market represented an increase in wealth of about $6tn, of which the lion’s share went to the very wealthy.

It is unlikely that the government will collect as much as 10 per cent of this figure. That is because of a host of policies that favour the rich, such as the capital gains exemption, the ability to defer tax on unrealized capital gains, and the fact that gains on assets passed on at death are not taxed at all. Similarly, the corporate tax system allows value to flow through it like a sieve. The ratio of corporate tax collections to the market value of US corporations is near a record low. The estate tax can be more or less avoided with sophisticated planning.

Closing loopholes that only the wealthy can enjoy would enable taxes to be cut elsewhere. Measures such as the earned income tax credit can raise the incomes of the poor and middle class by more than they cost the Treasury, because they give people incentives to work and save.

It is ironic that those who profess the most enthusiasm for market forces are least enthusiastic about curbing tax benefits for the wealthy. Sooner or later inequality will have to be addressed. Much better that it be done by letting free markets operate and then working to improve the result. Policies that aim instead to thwart market forces rarely work, and usually fall victim to the law of unintended consequences.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Why stagnation might prove to be the new normal

December 16th, 2013

By Lawrence Summers

December 15, 2013

In the past decade, before the crisis, bubbles and loose credit were only sufficient to drive moderate growth

Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion – the old idea of “secular stagnation” – recently in a talk hosted by the International Monetary Fund.

My concern rests on a number of considerations. First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth.

Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.

Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.

The implication of these thoughts is that the presumption that normal economic and policy conditions will return at some point cannot be maintained. Look at Japan, where gross domestic product today is less than two-thirds of what most observers predicted a generation ago, even though interest rates have been at zero for many years. It is worth emphasizing that Japanese GDP was less disappointing in the five years after the bubbles burst at the end of the 1980s than the US GDP has since 2008. In America today, GDP is more than 10 per cent below what was predicted before the financial crisis.

If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications. But before turning to policy, there are two central issues regarding the secular stagnation thesis that have to be addressed.

First, is not a growth acceleration in the works in the US and beyond? There are certainly grounds for optimism: note recent statistics, the strong stock markets and the end at last of sharp fiscal contraction. One should also recall that fears of secular stagnation were common at the end of the second world war and were proved wrong. Today, secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned. Yet, it should be recalled that the achievement of escape velocity has been around the corner in consensus forecasts for several years and we have seen several false dawns – just as Japan did in the 1990s. More fundamentally, even if the economy accelerates next year, this provides no assurance that it is capable of sustained growth at normal real interest rates. Europe and Japan are forecast to have grown at levels well below the US. Across the industrial world, inflation is below target levels and shows no signs of picking up – suggesting a chronic demand shortfall.

Second, why should the economy not return to normal after the effects of the financial crisis are worked off? Is there a basis for believing that equilibrium real interest rates have declined? There are many a prior reasons why the level of spending at any given set of interest rates is likely to have declined. Investment demand may have been reduced due to slower growth of the labor force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher; logic is supported by evidence. For many years now indexed bond yields have been on a downward trend. Indeed, US real rates are substantially negative at a five year horizon.

Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

 

Why stagnation might prove to be the new normal

December 15th, 2013

December 15, 2013

In the past decade, before the crisis, bubbles and loose credit were only sufficient to drive moderate growth

Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion – the old idea of “secular stagnation” – recently in a talk hosted by the International Monetary Fund.

My concern rests on a number of considerations. First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth.

Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.

Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.

The implication of these thoughts is that the presumption that normal economic and policy conditions will return at some point cannot be maintained. Look at Japan, where gross domestic product today is less than two-thirds of what most observers predicted a generation ago, even though interest rates have been at zero for many years. It is worth emphasizing that Japanese GDP was less disappointing in the five years after the bubbles burst at the end of the 1980s than the US GDP has since 2008. In America today, GDP is more than 10 per cent below what was predicted before the financial crisis.

If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications. But before turning to policy, there are two central issues regarding the secular stagnation thesis that have to be addressed.

First, is not a growth acceleration in the works in the US and beyond? There are certainly grounds for optimism: note recent statistics, the strong stock markets and the end at last of sharp fiscal contraction. One should also recall that fears of secular stagnation were common at the end of the second world war and were proved wrong. Today, secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned. Yet, it should be recalled that the achievement of escape velocity has been around the corner in consensus forecasts for several years and we have seen several false dawns – just as Japan did in the 1990s. More fundamentally, even if the economy accelerates next year, this provides no assurance that it is capable of sustained growth at normal real interest rates. Europe and Japan are forecast to have grown at levels well below the US. Across the industrial world, inflation is below target levels and shows no signs of picking up – suggesting a chronic demand shortfall.

Second, why should the economy not return to normal after the effects of the financial crisis are worked off? Is there a basis for believing that equilibrium real interest rates have declined? There are many a prior reasons why the level of spending at any given set of interest rates is likely to have declined. Investment demand may have been reduced due to slower growth of the labor force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher; logic is supported by evidence. For many years now indexed bond yields have been on a downward trend. Indeed, US real rates are substantially negative at a five year horizon.

Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Land of Opportunity Can Fight Inequality

October 9th, 2012

July 15, 2012

Even if the process proves protracted, the American economy will eventually recover. Yet even as cyclical issues cease to dominate the economic conversation, it is likely that inequality will move to the forefront.

There is no question that income is distributed substantially more unequally than it was a generation ago, with those at the very top gaining a greater share as even the upper middle class loses ground in relative terms. Those with less skill – especially men who in an earlier era would have worked with their hands – are losing ground not just in relative but also in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardises the legitimacy of our political and economic system. They argue that a time when the market is generating more inequality is no time to shift tax burdens from those with the highest incomes to the middle class, as has taken place in the past dozen years. And while recognising that innovators such as Apple co-founder Steve Jobs earned their billions providing great value to consumers and making substantial contributions to the US and global economies, they assert that the social value associated with the activities behind many other fortunes, especially in finance, is less apparent.

Conservatives argue that, in a world where everything is increasingly mobile, high tax rates run more risk than they once did of driving businesses and jobs overseas. They highlight the central role of entrepreneurship in advancing economic growth and note that, since most new ventures fail, the returns on successful ones have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion there is something wrong with success on a grand scale. And they worry that policy measures taken to combat inequality directly will have perverse side effects.

Unfortunately, the points on both sides of the argument have considerable force. While I support moves to make the tax system more progressive, the reality is that inequality is likely to remain high and continue to rise, even in the face of all that can responsibly be done to increase the burden on those with high income and redistribute the proceeds. Measures such as allowing unions to organise without undue reprisals and enhancing shareholders’ role in executive pay-setting are desirable. But they are unlikely even to hold at bay the trend towards increasing inequality.

Where does this leave the public policy agenda? The global record of populist policies motivated by inequality concerns is hardly encouraging. Equally, passivity in the face of dramatic economic change is unlikely to be viable. Perhaps the focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity. It is hard to see who could disagree with the aspiration to equalise opportunity or fail to recognise the manifest inequalities in opportunity today.

By definition, the number of children not born in to the top 1 per cent who move into the top 1 per cent must equal the number of those born into the top 1 per cent who move out of it over their lifetimes. So a serious programme to promote equal opportunity must both seek to enhance opportunity for those not in wealthy families, and to address some of the advantages enjoyed by the children of the fortunate.

The most important step that can be taken to enhance opportunity is to strengthen public education. For the past decade we have focused on ensuring no child is left behind, and this must continue. But if we are to ensure everyone has a real chance of great success, we must also ensure every child in the public system can learn as much and go as far as their talent permits. This means judging schools on measures beyond the fraction of students who exceed some minimum. The leading universities have in the past 40 years, with the encouragement and support of the federal government, made a significant effort to recruit and support students from ethnic minorities. This should continue.

But as things stand a student from a minority group who has strong admission text scores is considerably more likely to apply, and be admitted, to a leading university than a low-income student. It is time the best institutions undertook the kind of commitment to economic diversity that they have long mounted towards racial diversity. It is not realistic to expect that schools and universities dependent on charitable contributions will not be attentive to offspring of their supporters. Perhaps, though, the custom could be established that, for each “legacy slot”, room would be made for one “opportunity slot”.

What about the perpetuation of privilege? Parents always seek to help their children, and it is not realistic to think privileged parents will do any differently. But there is no reason why the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth continue to be legal.

These are some ideas for advancing equality of opportunity. There are many more. It is an aspiration those of every political stripe should share.

The writer is Charles W. Eliot university professor at Harvard.

Copyright The Financial Times Limited 2012.

Land of Opportunity Can Fight Inequality

July 15th, 2012

July 15, 2012

Even if the process proves protracted, the American economy will eventually recover. Yet even as cyclical issues cease to dominate the economic conversation, it is likely that inequality will move to the forefront.

There is no question that income is distributed substantially more unequally than it was a generation ago, with those at the very top gaining a greater share as even the upper middle class loses ground in relative terms. Those with less skill – especially men who in an earlier era would have worked with their hands – are losing ground not just in relative but also in absolute terms.

These issues frame an important part of the economic debate in this election year. Progressives argue that widening inequality jeopardises the legitimacy of our political and economic system. They argue that a time when the market is generating more inequality is no time to shift tax burdens from those with the highest incomes to the middle class, as has taken place in the past dozen years. And while recognising that innovators such as Apple co-founder Steve Jobs earned their billions providing great value to consumers and making substantial contributions to the US and global economies, they assert that the social value associated with the activities behind many other fortunes, especially in finance, is less apparent.

Conservatives argue that, in a world where everything is increasingly mobile, high tax rates run more risk than they once did of driving businesses and jobs overseas. They highlight the central role of entrepreneurship in advancing economic growth and note that, since most new ventures fail, the returns on successful ones have to be very large if entrepreneurship is going to flourish. They take umbrage at the suggestion there is something wrong with success on a grand scale. And they worry that policy measures taken to combat inequality directly will have perverse side effects.

Unfortunately, the points on both sides of the argument have considerable force. While I support moves to make the tax system more progressive, the reality is that inequality is likely to remain high and continue to rise, even in the face of all that can responsibly be done to increase the burden on those with high income and redistribute the proceeds. Measures such as allowing unions to organise without undue reprisals and enhancing shareholders’ role in executive pay-setting are desirable. But they are unlikely even to hold at bay the trend towards increasing inequality.

Where does this leave the public policy agenda? The global record of populist policies motivated by inequality concerns is hardly encouraging. Equally, passivity in the face of dramatic economic change is unlikely to be viable. Perhaps the focus needs to shift from inequality in outcomes, where attitudes divide sharply and there are limits to what can be done, to inequalities in opportunity. It is hard to see who could disagree with the aspiration to equalise opportunity or fail to recognise the manifest inequalities in opportunity today.

By definition, the number of children not born in to the top 1 per cent who move into the top 1 per cent must equal the number of those born into the top 1 per cent who move out of it over their lifetimes. So a serious programme to promote equal opportunity must both seek to enhance opportunity for those not in wealthy families, and to address some of the advantages enjoyed by the children of the fortunate.

The most important step that can be taken to enhance opportunity is to strengthen public education. For the past decade we have focused on ensuring no child is left behind, and this must continue. But if we are to ensure everyone has a real chance of great success, we must also ensure every child in the public system can learn as much and go as far as their talent permits. This means judging schools on measures beyond the fraction of students who exceed some minimum. The leading universities have in the past 40 years, with the encouragement and support of the federal government, made a significant effort to recruit and support students from ethnic minorities. This should continue.

But as things stand a student from a minority group who has strong admission text scores is considerably more likely to apply, and be admitted, to a leading university than a low-income student. It is time the best institutions undertook the kind of commitment to economic diversity that they have long mounted towards racial diversity. It is not realistic to expect that schools and universities dependent on charitable contributions will not be attentive to offspring of their supporters. Perhaps, though, the custom could be established that, for each “legacy slot”, room would be made for one “opportunity slot”.

What about the perpetuation of privilege? Parents always seek to help their children, and it is not realistic to think privileged parents will do any differently. But there is no reason why the estate tax should decrease relative to the economy at a time when great fortunes are increasingly dominant. Nor should tax-planning techniques that are de facto tax cuts only for those with millions of dollars of income and tens of millions in wealth continue to be legal.

These are some ideas for advancing equality of opportunity. There are many more. It is an aspiration those of every political stripe should share.

The writer is Charles W. Eliot university professor at Harvard.