Are Increasing Concentrations of Wealth a Good or Bad Thing?

[MediumTex]

Any thoughts on this topic?

Increasing concentrations of wealth seem to be a symptom of an economy that is not especially healthy. 

Increasing concentrations of wealth also contain obvious seeds of eventual social unrest.

I'm sort of torn on the topic myself, but I do sometimes wonder how the top .01% of people controlling a more and more disproportionate share of a society's wealth actually translates into something that is beneficial for the vast majority of people who live in such a society.

I understand why concentrations of wealth are beneficial in theory, but I look at economies like Russia and wonder what mechanism there really is for these concentrations of wealth to be of any benefit to the vast majority of people who live and work in these countries.

[moda0306]

I don't like it, and I tend to think the trend towards fewer people controlling more wealth is one of the most significant errors our market produces, but I hesitate to say I know when to interrupt the principals of private property and free markets to avoid it. 

Between the federal reserve giving banks subsidies and encouraging poor people to have children (increases the number of people either in poverty or the middle-class (denominator) and decreases the wealth of that group (numerator)), I don't even know if government is making the problem better or worse.

[Pkg Man]

Moda I think we are in more agreement on this topic.

Increasing concentrations of wealth are clearly a bad thing in my view.  And more often than not exacerbated by government actions, certainly more-so than alleviated by government actions.

But there are different types of concentrations of wealth.  If wealth is becoming more concentrated but the median income is rising, that is clearly preferred to a situation where the median income is flat but wealth is becoming less concentrated.  But I am not convinced that all politicians view it this way.

[moda0306]

Pkg man,

Can you illustrate how the median income piece plays a significant role?  I think I'm getting it but am not sure I'm visualizing the effect correctly.

[MediumTex]

Now that the ability to live off of home equity and other credit gimmicks is pretty much over, I think more and more members of the U.S. middle class are going to start asking these questions.

They are going to begin to wonder why it matters if the whole economy is growing if it isn't translating into more jobs and breaking the decades-long stagnation in middle and working class wages.

If I own a company I am going to be interested in offshoring jobs.  If ALL companies do this, however, there would be no consumers left to buy the crap being assembled in China by the offshored workers.  It's sort of like the globalization version of the paradox of thrift.

I don't know what the answer is, but I think that society is going to have to come up with some sort of response to this issue, because what we are doing now only seems to be working well for a tiny portion of the population. 

I think that a couple of decades of easy credit served as a relief valve for the pressures that this sort of thing would have otherwise generated, but that relief valve is probably not going to work nearly as well going forward.

[Pkg Man]

Pkg man,

Can you illustrate how the median income piece plays a significant role?  I think I'm getting it but am not sure I'm visualizing the effect correctly.

Sure.  I'm using the median income as the reference income for the average joe.  If the median income is rising, but incomes for the wealthiest are rising at a faster rate, that is still an improvement for everyone.  I would prefer to see my income and the income of the top 1% rise, than to see my income stay flat while the income of the top 1% declines. 

Some economic psychologists may say differently, but in my mind that is an improvement in societal wealth.

[Storm]

Increased concentrations of wealth are definitely a bad thing.  They lead to a future similar to many 3rd world countries, where the wealthy live in gated, barb-wire communities with assault rifle toting guards protecting them, while the rest live in shanty towns constructed of scrap wood.

A strong middle class is the antidote to this scenario, and this is what made America thrive in the last century.  As they say, a rising tide lifts all boats.  A rising middle class with spending based on savings, not credit, can create a strong, healthy economy that benefits even the poorest in our nation, as well as the wealthy, because of course they have a huge market for their products.

What has happened is that the greed of the bankers and the anti-regulation of (corrupt) government has allowed them to create credit products that are too difficult for the middle class to understand, and they have been essentially siphoning off the wealth and savings of the middle class for decades now.

Most of us on this board are intelligent people and save for our future.  We look at people with Option-ARM mortgages and "pay what you feel like" credit debt as foolish people, who should have known better, but the simple fact is that most people don't read the fine print on contracts that they sign.  How many people read every document at their home mortgage closing before signing?  I admit, I read all of them, and annoyed the hell out of my agent and mortgage broker, but I can read pretty fast.  How many people were fooled by this?

I'm not sure where the line should be drawn between regulation protecting people from themselves and personal accountability.  It is tough for me to say when to regulate the credit industry, but clearly we have let things get out of hand, and this has created wealth disparity.

[fnord123]

I'm largely in agreement with Pkg Man's position (as long as median income is going up, it isn't so bad) in the general case.

In the case of the USA however, I think the government deficits point in combination for the very large wealth disparity points to a need for higher taxes at the very top end to try to reduce that disparity.  Specifically:

• Inheritance taxes should go up significantly above $10M
• Income taxes should go up above $2M a year
• Income taxes should go up a lot about $20M a year (e.g. 90%+)

While I agree with the republicans that $250K/year is not rich and is small-business owner territory (Joe the plumber), and that small businesses are an important economic engine for the USA.  However, I think once someone has take-home pay over $2M/year, it is no longer small-business.  For $20M+ a year, most of the people who earn that much (Wall Street types) have not added that much value to the economy - they've arguably destroyed trillions with the Great Recession.

I object to taxes in general, but to me these are low hanging fruit that the USA should think about given our horrendous Federal deficits.

[6 Iron]

I would counsel caution in the tax the rich, take more of their estates meme. The following two editorials by Mankiw and Sowell discuss the downsides of this way of thinking:

http://www.unionleader.com/article.aspx ... can+get%3F

http://www.dallasnews.com/opinion/sunda ... e-5598.ece

There is no doubt that we need a strong middle class. It is also true that what we call poor today is quite different than what we would describe as poor in 1900 in the US. Government and life work best when everyone has skin in the game.

[Pkg Man]

I'm largely in agreement with Pkg Man's position (as long as median income is going up, it isn't so bad) in the general case.

In the case of the USA however, I think the government deficits point in combination for the very large wealth disparity points to a need for higher taxes at the very top end to try to reduce that disparity.  Specifically:

• Inheritance taxes should go up significantly above $10M
• Income taxes should go up above $2M a year
• Income taxes should go up a lot about $20M a year (e.g. 90%+)

While I agree with the republicans that $250K/year is not rich and is small-business owner territory (Joe the plumber), and that small businesses are an important economic engine for the USA.  However, I think once someone has take-home pay over $2M/year, it is no longer small-business.  For $20M+ a year, most of the people who earn that much (Wall Street types) have not added that much value to the economy - they've arguably destroyed trillions with the Great Recession.

I object to taxes in general, but to me these are low hanging fruit that the USA should think about given our horrendous Federal deficits.

fnord I understand your position, it is basically my father's view, but you should consider the effect on incentives if something like this were to pass.  If marginal tax rates where extremely high, say 90%, beyond $2M, why would anyone ever work beyond that point?  I really don't think we can assume that no one is worth that much money; that should be left up to the market place.  If it requires paying someone $2M or $20M to get them out of bed in the morning and be productive, so be it.

I don't know the exact figure, but close to 50% of the populace pays no income taxes.  I'm not sure how increasing that even further would lead to less inequality over the long run.  The best way to reduce income inequality is to improve the educational system, which IMHO would require government to exit the education business, at least as a direct provider, not more redistribution.  

That said, I do believe that taxes will have to be increased at some point (on everyone) in order for the US to avoid defaulting on its debt.  But as a means of reducing income inequality I don't think it is a long term solution.

[TBV]

Raising revenue is not the same as raising tax rates.  The latter often results in lower revenue flows, while the former has often occurred when rates were cut.  In fact, lowered rates are more, not less, likely to shift tax incidence onto the wealthy, since their share of declared income usually increases when rates dip. So, if revenue growth is the goal, the most effective path is clear.  However, a desire for soak-the-rich income redistribution all too often contaminates left-of-center tax policies.

Long-term tax revenue growth is best accomplished by giving citizens voluntary incentives to earn more, not engaging in zero-sum games to seize their assets.  Remember that when Britain had a top marginal tax rate of 90%, the result was an exodus of well-heeled rock stars to France, Monaco, and the US.  When marginal productivity is punished, citizens will sit on their hands or vote with their feet.

[moda0306]

TBV,

What you are talking about is the Laffer curve... basically, there's a point at which raising taxes decreases incentives so much that it actually decreases revenues.  I believe we are far from that point, though some evidence may seem to point the other way.

For instance, Bush came into a bad economy in 2001.  He proceeded with defecit spending, lowering taxes, and the federal reserve drastically eased monetary policies.  Often, some combination of these events are done during economic downturns.  I am not saying spending and fed easing are good in the long term, but both, in my opinion, tend to be more effective than tax rate cuts in the short-term to bring the economy back around and bring tax revenues back up again.  Even Greenspan, who's a republican and has repeatedly backed tax policy of republicans, has said that the US should raise taxes (I think on the wealthy, if I remember right).

[moda0306]

Also, tax rates on the wealthy were extremely high from the 40's-70's (70-90%)... many years of which were extremely prosperous for the vast majority of Americans.  I didn't see CCR and Lynyrd Skynyrd moving to Mexico.

[Pkg Man]

I agree TBV.  We clearly need to be very mindful of incentives, which 90% marginal tax rates would certainly distort.  But let's be careful to not fall into the trap of thinking that we can increase tax receipts by lowering tax rates (as moda says, known as the Laffer Curve and named after Arthur Laffer, a man I've met and admire).  I wish it was true that I could have more take home pay and at the same time the government could have increased revenue, but I am afraid it is not.  I am certain that there are times when this would in fact be the case, as it probably was before Reagan cut marginal rates, but I don't think that it applies with the rates that exist today.  

I fear that we have the worst possible fiscal policy in that one party refuses to make even modest cuts in expenditures, while another party refuses to consider any tax increases.  It is this situation that makes me concerned with having 25% of my wealth in 30-year Treasuries sitting in my 401K, although I do so just the same.

The US is an immensely wealthy nation.  Only in a rich nation do you see the spectacle of the Super Bowl, people driving cars that cost as much as I paid for my house, impeccably manicured lawns, and outdoor cafes heated by propane lamps.  It is clear to me that we could ask for more revenue to fund the government.  While the current spending priorities are no where near my own, I would rather see my taxes rise than for the debt/gpd ratio continue to rise to the heavens.  

IMHO we have reached the point where everyone (rich and non-rich alike) will need to pony up additional revenue AND that every single government department (not just the ones I don't particularly like) will have to accept lower revenue in order for us to dig our way out of our current mess.

[TBV]

For much of the 1940's we had an overwhelmingly government-controlled economy, with austerity not prosperity. Even when things improved after the War, the efficiency of marginal tax rates often depended on the alternate opportunities available to taxpayers.  Shifting one's assets to Europe, China, or Latin America was not a wise move then, nor was it for decades to come.  Now it's a different story, which is why American corporations park billions in profits overseas rather than repatriate them and be subject to higher tax rates here.

Even high-tax states like Pennsylvania, New York, and Massachusetts see the handwriting on the wall. That's why they offer (usually better-off) federal retirees a tax holiday on their pensions to keep them from moving to Texas, Nevada or other low-tax states.  Since such taxpayers can easily pack up and leave, these states have no choice but to offer an incentive.

[TBV]

Presumably, we all want to see increased investment and job creation.  My question is this, where in the US is this occurring and what distinguishes these states from the others?

One more thing: what evidence is there that increased tax rates (or tax revenue) will lead to lower deficits?

[Pkg Man]

Presumably, we all want to see increased investment and job creation.  My question is this, where in the US is this occurring and what distinguishes these states from the others?

One more thing: what evidence is there that increased tax rates (or tax revenue) will lead to lower deficits?

You make some valid points.  But there is a difference between what happens at the state level and the national level.  It is much easier to pack up and move from Illinois to Tennessee than to move to Chile.  But you are correct, incentives do matter, particularly in the long run.  I just don't think we have the luxury of the "long run" to fix the problem.  But in no way am I advocating a "soak the rich" policy.

Your second point is also valid.  I can only hope that at some point the public will understand that we can't continue down this path.  Note that I said the public, not politicians.  For what happens is ultimately up to the people. 

[MediumTex]

Presumably, we all want to see increased investment and job creation.  My question is this, where in the US is this occurring and what distinguishes these states from the others?

One more thing: what evidence is there that increased tax rates (or tax revenue) will lead to lower deficits?

One very fundamental problem we are facing is that our entire society made promises in the past that were premised upon more or less endless levels of dramatic economic growth in the future. 

The federal government did it with Social Security.

The state and local governments did it with their retirement programs.

General Motors and many other industrial companies did it with their retirement programs.

Well, the future is now arriving, and it's not as rosy as everyone thought it would be; in fact, in a lot of ways it kind of sucks--flat stock market for over a decade, cash yielding zero, terrible public finances, etc.

None of the projections upon which those past promises were made considered the possibility of what is actually happening right now.  For reasons I still don't entirely understand, actuaries don't take demographic shifts into consideration when modeling future returns and retirement program funding needs.

Where are jobs in the U.S.?  Texas is doing okay.  We have much more favorable demographics than much of the country, and taxes are low.  The state legislature is, however, currently wrestling with a large deficit, and significant cuts in government services are on the way.

There is no evidence that higher tax rates will lead to lower deficits.  What determines the deficit, IMHO, has more to do with how much the government spends rather than what the tax rates are.  The problem we have is that so much of the federal budget is entitlements that cutting spending in any meaningful way without touching entitlements is basically impossible.

The federal government has been doing the same thing as many households for decades now--it has been spending more than it takes in on the assumption that there will always be more credit available to keep the thing going in the future.  Like so many other clever schemes in life, though, it works until it doesn't, and then a lot of people look very foolish.

[brick-house]

Great topic for my morning coffee.  IMHO - increasing concentrations of wealth are a bad thing.  It seems that the meaning of enough has been lost.  

Two never ending wars and bloated military spending would be nice budget items to address.  Why are we committing so much blood and treasure, plus creating blood feuds with the people we kill?  Beyond that - why is there a ten year war without a draft, everyone should have some skin in the game.   It is not fair to the poor/middle class -who enlist to proudly serve, but also to improve their human capital - to be put on ready reserve that forces multiple tours of duty.  Meanwhile, the rich kids get MBAs in finance and learn how to trade paper.   So it goes...

Yet, as much as I complain and worry - I am continually amazed at the improvements in living standards (technology, medical, communication, building, learning, etc).  Speaking of that, just downloaded CCR's Fortunate Son for my Ipod.

"Some folks are born silver spoon in hand
Lord don't they help themselves, oh
But when the taxman comes to the door
The house looks like a rummage sale, yes. " - John Fogerty

[fnord123]

But let's be careful to not fall into the trap of thinking that we can increase tax receipts by lowering tax rates (as moda says, known as the Laffer Curve and named after Arthur Laffer, a man I've met and admire).

The Laffer curve exists, but the shape of it what matters. It could be that the curve is heavily skewed to the right, in which case raising tax rates would indeed raise tax receipts.  So mentioned the Laffer curve actually doesn't inform this argument at all.

It's interesting you found him admirable - in the only appearance I've seen of Laffer, he was completely wrong about everything he said. Peter Schiff nails what is going to happen, and Laffer says "I've never heard so many mistakes in my life," "he doesn't know the numbers," etc.  Also, at least to me, Laffer comes off as a pompous jerk" and not someone to admire.

Link: http://www.youtube.com/watch?v=IU6PamCQ6zw

[moda0306]

MT,

Despite being much more dependent on the financial industry, New York's unemployment rate is almost identical to Texas'.  Raising taxes and spending may not improve budgets, but raising taxes, when looked at alone, at this point (at the federal level for sure, and somewhat less the states), seems to me is a reasonable option from a purely budgetary point of view.  If you look at the states doing well economically, and ones doing poorly, they span the political spectrum (Nevada, Arizona, and the deep south (Texas not included) have some real problems).

That's not to say that it's moral to redistribute wealth through taxation... I like to break up the moral and scientific/economic portions of my conclusions, because they often don't necessarily line right up.... but I think we should dispense with the argument that we can increase revenues by lowering taxes.  Recessions decrease tax revenues, no matter what rates are at the time... When recoveries have come, it is usually from a combination of fed easing, government spending, and lower taxes, so we can't always conclude it's the taxes increasing revenues IMO.  In fact, I'd argue that lowered tax rates on the wealthy don't do much to spur on the economy during demand-based recessions, and that middle-class people spending is what brings the whole economic machine (as credit-driven and artificial as it may prove to be) back into a revenue producing stream again.

Take a look at Ireland... low regulations, previously balanced budgets, and low taxes really aren't helping them out too well right now.

[MediumTex]

Raising taxes and spending may not improve budgets, but raising taxes, when looked at alone, at this point (at the federal level for sure, and somewhat less the states), seems to me is a reasonable option from a purely budgetary point of view.

What would that do to people who already don't have enough money to pay for all of their bills?

It's a catch-22 if ever there was one.

[moda0306]

I'm talking about progressive taxes.  Raising taxes on the well-to-do.  Mind you, this is simply a budgetary debate for me, not one of morality.

[fnord123]

One more thing: what evidence is there that increased tax rates (or tax revenue) will lead to lower deficits?

This is an important question but nearly impossible to answer, due to there being many confounding factors.  Taxes were higher and deficits were lower under Clinton versus Bush II, but the economy was booming and we were not tied up in two wars at the time.  

I would argue the state vs. state comparison moda0306 made to be an excellent data point showing that at least somewhat higher taxes than we currently have do not lead to less workforce participation.

[moda0306]

I'm not arguing that those who want to raise taxes will lower our government defecits, simply that all else being equal, especially at the federal level, raising taxes on higher incomes will improve revenues and therefore the budget.

I find it interesting to look at states, because one would think that they're microcosms that can be used to decide what our federal policy should be for a fair, free society.  That's hardly the case, though.  For every low-tax state you show me with a great economy, I'll show you a high-tax state with a great economy and a low tax state that's a complete cess-pool.