Defending the One Percent

http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.21

by scribu • 11 years ago

30 51 11 years ago

pubs.aeaweb.org

A large number (majority?) of people who are proponents for american-style capitalism, advocating for less government intervention, are from big universities around the U.S, and will often earn a relatively high wage. Although it's very hard to quantify, I feel as though these people are very disassociated from the everyday life the claim to be studying. If you live near Harvard earning ~300k a year, how easy is it to imagine (pretend?) that everything is fine and that the skewed income distribution is actually a positive thing. Boiled down - can people who are part of such a skewed system really produce unbiased studies and theories about the system?

They back up their claims with various arguments as to the nature of the average consumer and echoes and remnants of trickle-down economics theories.

Why don't people instead look at the actual world for more accurate evidence? The U.S. is a pioneer of creating highly divided cultures, with the top 1% earning ridiculous amounts of money and living in relative luxury, while having a very large population of people struggling to make ends meet, or even get healthcare due to the associated costs.

At the same time, countries exercising a highly socialistic economic policy (welfare countries), such as the Nordics and Germany to some extent have a far higher "average" quality of life, as well as (arguably) a happier population. Being a taxi driver in Norway or Denmark doesn't mean you live in near-poverty and have to work 80 hours a week to make ends meet.

While I'll try to not get into details of economic theory, and so forth, one question that has always irked me is the following:

Does the evidence not speak for itself? In what country has pure capitalism (or at least as close as we can get), actually worked to produce a happy and harmonious society?

msandford2• 11 years ago

Personally I think that the growth of the banking sector is the problem, as it tends to capture more and more of the profits and allocate them to the pay of the bankers. It's also a brain-drain on other industries. Finally, the banks do occasionally lose everything and then we have to bail them out.

Remove the "bail them out" part of the process and you'd likely see a fair amount of income equality restored. Banking has a concentrating effect on the economy, and the bigger the bank the more concentrating it is.

If we had banks small enough to fail, they'd still concentrate but to a much smaller degree. That'd be good for income equality and good for putting smart people to work in favor of small businesses instead of against them, and good for reducing the tax burden on the non-rich who ultimately fund the bailouts.

walterbell2• 11 years ago

We know when the firewall was turned off:

https://en.wikipedia.org/wiki/Glass–Steagall_Legislation

https://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act

kabouseng2• 11 years ago

Wow lots of strawmen here.

"A large number (majority?) of people who are proponents for american-style capitalism, advocating for less government intervention, are from big universities around the U.S"

Source? So what?

"Boiled down - can people who are part of such a skewed system really produce unbiased studies and theories about the system?"

Can people who are part of the lower earning rung of society give a unbiased opinion of the system?

"Does the evidence not speak for itself? In what country has pure capitalism (or at least as close as we can get), actually worked to produce a happy and harmonious society?"

Yes the evidence does speak for itself. Capitalism worked out pretty great for much of Western Civilization. Everywhere where more socialist approaches were tried it failed. Just ask all soviet countries', Japan, East Germany, China etc. citizens if they are happy.

America is not for nothing the land of opportunity, and it is not for nothing that emigrants are flocking to the USA, Europe and Australia.

Unfortunately the soviets discovered you cannot have a classless society. It is that drive to elevate yourself to a higher class that makes us want to achieve more than the absolute minimum required effort.

johanneskanybal• 11 years ago

Creative quoting on your part but let's not pretend he was talking about communism. It stated pretty clearly [countries with] "highly socialistic economic policy (welfare countries)". All the mentioned countries are successfull capitalistic countries with better safeguards and policies.

tveita• 11 years ago

America is not for nothing the land of opportunity

The U.S. has low social mobility compared to other developed countries. What claim does it currently have on being the land of opportunity?

paulsecwhatt2• 11 years ago

"Source? So what?"

Apologies for that intro, I had planned to delete it but I'll leave it so your comment makes sense. I was planning to expand a thought about how it's always the rich who casually conclude that lower taxes and less welfare will help the economy.

"Can people who are part of the lower earning rung of society give a unbiased opinion of the system?"

In a democracy, yes, they do. Someone who is lower down on the earning rung of society (say earning the median US income), has a far more accurate view of the "average" society than someone who is at the very top, merely because they represent an average citizen.

"Yes the evidence does speak for itself. Capitalism worked out pretty great for much of Western Civilization. Everywhere where more socialist approaches were tried it failed. Just ask all soviet countries', Japan, East Germany, China etc. citizens if they are happy."

East Germany no longer exists and Russia is essentially a dictatorship with a very powerful upper class of plutocrats, not unlike the US. The happiest countries in the world are Switzerland, Iceland, Denmark, Norway and Canada according to the World Happiness index. Do you notice a trend among those countries?

"America is not for nothing the land of opportunity, and it is not for nothing that emigrants are flocking to the USA, Europe and Australia."

Denmark has twice the social mobility of "the land of opportunity" as defined by the probability of someone born in the poorest 25% of society making his/her way up to the richest 25% of society within their lifetime. I don't think America is the land of opportunity, unless you count the children of the rich who were shuttled into Ivy Leagues as those with opportunity.

"Unfortunately the soviets discovered you cannot have a classless society. It is that drive to elevate yourself to a higher class that makes us want to achieve more than the absolute minimum required effort."

I do not disagree, it is impossible to have a completely classless society. But that does not mean that the lowest class cannot have a decent quality of life and financial security. I think it begins with education. After all, only 5.7% of the US population has an education above high-school level. (obviously skewed by <18s, but still a shocking number)

fixxer• 11 years ago

"Boiled down - can people who are part of such a skewed system really produce unbiased studies and theories about the system?"

Those who are part of the 99% exhibit a bias as well. This is the nature of political economy arguments.

cbaleanu• 11 years ago

Please mark as pdf.

patcheudor• 11 years ago

No kidding. I never really pay attention to links on HN because I tend to trust the community. I clicked on this one and a PDF started downloading to my horror. I immediately nuked it from my download folder.

http://www.cvedetails.com/vulnerability-list/vendor_id-53/pr...

Sone7• 11 years ago

This guy's a professor of economics at Harvard?! ...Actually that explains a lot.

murbard22• 11 years ago

Yeah, I was thinking that too... it is really well written, it makes compelling and nuanced arguments and it sets a nice thought framework for the debate. This is really an excellent piece, no wonder he's an econ professor at one of the most prestigious university in the world, that guy is brilliant.

qntty• 11 years ago

haha I think they were implying the opposite

dbingham• 11 years ago

Either you way over did the sarcasm or you and I are reading totally different articles. This thing is full of undefended assertions and logical holes. The thought experiment it opened with is so simplistic that it does little beyond revealing the author's bias and assumptions. Assumptions that are absurdly disconnected from reality (such as all voluntary transactions make both people's lives better).

macspoofing• 11 years ago

Isn't the entire 'one percent' debate (in America) centered around the fact that one party wants to institute a modest tax increase on that group, and the other party wants to, irrationally, keep cutting their taxes even when faced with deficits? Nobody reasonable is actually advocating for 'perfect economic equality'.

I'm generally a free market guy (in that I believe the free market should be the foundation of the economy but not dictate every aspect of it), but I just can't see a reasonable tax increase as being a problem.

I don't see a problem with a reasonable minimum wage either ($12-$15/hr), especially when tax dollars are subsidizing the working-poor with food stamps, students loans, public housing, health-care etc. As much as I'm disappointed with Wal-Mart for not being embarrassed their employees are on food stamps, I understand that they can't raise their wage unilaterally lest it puts them at a competitive disadvantage - which is why you need legislation! Make it fair for everybody.

hga6• 11 years ago

and the other party wants to, irrationally, keep cutting their taxes even when faced with deficits

One thing we've learned is that never, ever happens. Instead, increased revenues, such as provided by Reagan's tax rate cuts, allows higher leverage AKA deficits. So "starving the beast" seems to be the best approach, until, of course, the accumulated deficits are inevitably reneged on one way or another (e.g. inflation "works").

bargl• 11 years ago

It's important to note that they (republicans) tend to want to cut taxes but not services, because they can't compromise and cut both the military and medicare/Medicaid/welfare/etc. They just want to cut the latter.

The lack of compromise leads to neither happening so many republicans really don't want smaller govt. Some do, don't get me wrong. But many don't.

fredophile• 11 years ago

Can you provide evidence that Reagan's tax rate cuts actually improved revenues? Here's a counterargument that they didn't have that effect: http://krugman.blogs.nytimes.com/2008/01/17/reagan-and-reven...

e12e• 11 years ago

The absurd example in the second paragraph put me off, so I didn't really find it in me to read the argument thoroughly. But if the premise is that a single man can "come up with an idea" and magically produce an ipod with comparable personal effort, and no reliance of a third world factory economy -- as an author can come up with a book -- then I don't think the author of the article has the required connection to reality to discuss economics at all.

Earlier today I came across this, which may (or may not) be an interesting counter-point -- or at least make a meta-point: "Exposing the false prophets of social transformation": https://opendemocracy.net/transformation/nicole-aschoff/expo...

hga6• 11 years ago

Did the iPod require a "third world factory economy", or was that merely the best way to make it when it was developed?

Go back to the original Apple II and subsequent products, they were per memory and Wikipedia all made in the US until the late 1990s. The IBM PC was originally manufactured by SCI Systems in Huntsville, Alabama.

eitally• 11 years ago

Woohoo -- thanks for calling out my previous employer, which also built Macs for a good while (in Colorado).

What a lot of folks don't seem to understand about "third world factory economies" is that the prototyping and initial product runs are still frequently done in the west. Some EMS companies, like Flex, even have hardware incubators in Silicon Valley (google "Lab IX" sometime); all of them offer JDM & ODM services, too.

MagicWishMonkey• 11 years ago

Well if they doubled the price of iPods in order to manufacture them inside the United States, no one would buy an iPod and the product would fail.

That's not to say American manufacturing would cause the price to double, just pointing out that where you manufacture something is an important part of the product planning process.

nhaehnle• 11 years ago

I believe the fact that this factory economy is third world is very much besides the point that e12e was trying to make.

Paraphrasing, I think the point is that writing a book and building an iPod are vastly different tasks, and immensely so. A better criticism to what e12e was trying to imply is perhaps that Rowling certainly wouldn't be rich if it weren't for a network of publishers. Like Jobs, she depended on other people for channeling the income she received to her. (Of course, the difference in how that happened is still huge.)

crdoconnor• 11 years ago

A few years ago some of his own students staged a walkout of his lectures because of his innate desire to laud the American oligarchs:

http://www.thecrimson.com/article/2011/11/2/mankiw-walkout-e...

jgoewert• 11 years ago

Oh.. I thought he was going to go on an argument that we need to implement basic income as a method for improving efficiency when his second paragraph included an author who put herself into the one percent by being creative and making a product while being unemployed and on socialist welfare and that by removing a lot of what is effectively the "chaff" of the capitalist workforce the workforce that wants to be part of the workforce improves overall.

I guess since he also included an businessman known for his abhorrent disdain for socialism that he flippantly crams his vehicles into spots designated for people with disabilities, I should have realized the final outcome would be an argument that extreme wealth creates utilitarianism and is more efficient then trying to broaden wealth.

Reminds me of the decay of the Roman empire in the 400's and how the rich started abstaining from the government and society that tried to represent and assist everyone to create micro-communities in their villas and start up the process of feudalism. What shall we call our new era of a society that is now 90% capital deprived and rising? Feudalism 2.0? Feudl.ism? Feu.dl?

CPLX• 11 years ago

Be advised that the most relevant credential for this author is that he was the top economic advisor to the administration of George W. Bush. Defending the 1% is literally what he does for a living.

PythonicAlpha3• 11 years ago

The trouble is not that inequality exists -- I think, that some form is necessary in our world -- but that the inequality is increasing in a rapid rate and that in the current state of our society, not achievements where the society benefits are rewarded by the system, but rather achievements where society looses (e.g. speculations, pure possession of wealth, investing -- whatever frivolous it might be, omitting taxes by using legal holes and off-shore trickery, ....)

Even Buffett spoke out, that his class wins, but it should not (for the good of society). And he said, that something is wrong, when his secretary has to pay a much higher tax-rate as himself.

wtbob4• 11 years ago

Even Buffett spoke out, that his class wins, but it should not (for the good of society). And he said, that something is wrong, when his secretary has to pay a much higher tax-rate as himself.

Did you read the article? Mankiw noted that when CBO statistics are used, taking into account all taxation, not just income taxes, the United States have a very progressive tax system.

jazzyk2• 11 years ago

On paper.

In reality, there are many loopholes (the more money involved, the more fully legal loopholes)

arithma• 11 years ago

Inequality of opportunity is a much bigger problem than inequality of, say, income. An ideal community is a place where every individual's contributions are enabled to the maximum. Capitalistic economies start out that way for a while, and then lock in opportunities to the people who need them the least. Guarantee education, and basic livelihood and the community reaps the benefits.

klahnakoski2• 11 years ago

I could not finish reading this. The paper started with examples of entrepreneurial success that depend heavily upon government regulation; namely the artificial scarcity generated from copyright and patents.

Also the statement "These high earners have made significant economic contributions...", which is an axiom I am not willing to accept without some convincing argument.

I found it impossible to read a paper that started dense with immature postulations and grandiose assumptions. The author should have been aware of the political climate of such a paper and attempted some care of his argument: At the very least admit to the reader that he's making ridiculous assumptions, but the argument will reveal itself with more reading.

JamesBarney• 11 years ago

This article seems to argue "Taxing the rich leads to reduced growth and therefore all of society is worse off for it." That every extra $1 the rich makes leads to a economy wide increase in $1.10. If this were true we would want to reduce taxation levels of the rich considerably. And we would expect inequality to be associated with very strong growth.

Luckily we don't have to just speculate. The IMF has done in-depth research on this topic. And they found found that not only is growth not associated with inequality, but there is evidence inequality actually leads to lower growth rates.[0]

[0]https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

ConfuciusSay• 11 years ago

You know when even the IMF is recommending we tax the rich more, there's probably something to the idea...

wtbob4• 11 years ago

This article seems to argue "Taxing the rich leads to reduced growth and therefore all of society is worse off for it."

No, that's the utilitarian argument, which the article specifically considers unsatisfying, instead proposing an argument from justice.

Defending the One Percent

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