Their Fair Share
When we set out to tax, what is the best way to go about it? Classic 'progressive taxation' advocates argue that, in order for a tax system to be fair, it has to charge progressively higher tax rates as a person's income increases. The reasoning is simple: you obviously have a boatload of money, and it's society's job to use all that money to help provide for the poorest among us. Downward redistribution, in other words, is not just nice, it's the right thing to do, and the government is one of the most efficient providers of things like food stamps, unemployment assistance, subsidized housing, Medicaid.... etc. What's not to love?
The answer is: a lot. Conservative thought makes the argument that progressive taxation is inherently unfair exactly because of the tax-rate disparities between high earners and low earners. It's understandable that the rich pay more, they say, but unfair to ask them to pay a greater proportion of their income into the system.
How do we resolve that issue? For one, we can take a look at another metric, which I would argue is at least important as using income: wealth. Whereas conservatives argue that the income redistribution effect of progressive taxation is inherently unfair, for example by claiming that "the top 1% of households earned 19% of income, but paid over 28% of the nation's taxes." When we look at the wealth metric, however, the reason it's fair is much more obvious:
Yeah, that's right, those same top 1% we are supposed to feel oh-so-sorry-for possess more than one-third of all America's wealth. And there is no tax on that. (This data is from 2004, so as you can see it has become even more skewed toward the top thanks mainly to the Bush-era tax cuts, which by the way added a trillion dollars to the US debt.) Now we see why asking the nation's top earners to pay a bit more is completely fair, and, in fact, a bit skewed in their favor.
(Photo: Jeff Sandquist)
Contra Bernanke, Inflation Edition
Yesterday Ben Bernanke was asked about central banking inflation targeting during a media Q&A. Questions of higher inflation targets have been making the rounds for central bankers as interested parties wonder, for example, whether higher inflation (and the associated higher interest rates) should be deployed in order to give the Fed more room to cut those rates during a downturn.
My own rationale for increased inflation is more wide-reaching than the suggestion that it strengthen's the Fed's future policy instruments. I believe that, fundamentally, an increased inflation target will provide much more of a financial safety net in the general sense, as well as encouraging growth during economic expansions.
The first suggestion, that greater inflation is a better safety net, is primarily concerned with finding more room to avoid the possibility of deflation, which the US economy made a dangerous brush with throughout 2009 and that has plagued post-bust Japan for nearly 20 years. Deflation is an infinitely more dangerous beast than overinflation because the problem is not symmetrical - it does not simply represent a negative interest rate. Deflation changes cash from being a lossy asset into one with real returns, since if tomorrow's prices are lower, you can hold a dollar and buy more with it tomorrow. This encourages both consumers and investors to hold onto money rather than spend it, dragging down demand and causing prices to fall even further, etc. A moderate level of permanent inflation helps to ward off this possibility even if the money/credit supply contracts as it has.
Higher inflation also allows pricing imbalances to be more rapidly corrected by letting some prices stay constant rather than experiencing a price decline in any given sector. By avoiding micro-deflation in this way, inflation reintroduces price flexibility into markets where it has been historically absent, such as labor markets. If one is to make the argument that overpaid laborers in, for example, Greece, are the cause of economic troubles, additional inflation is one of the few ways to pay them less without ever having to broach a contract.
The other key argument for increased inflation is the general investment and growth experience of the broad economy. When businessmen realize that the Fed is going to clamp down on money/credit growth to maintain its inflation target, even when competitive forces are driving inflation upward, the ability of entrepreneurs to finance new ventures falls as loans are expected to become relatively more expensive. This reduces expectations both of profit and growth, which can in turn reduce actual profit and growth (the idea of 'animal spirits'). A higher inflation target allows a healthier upswing to occur rather than stifling it, satisfying both entrepreneurs (who can invest more) and workers (who will have more work to do). This is where the term 'reflation' makes most sense, as prices are being allowed to adjust upward rationally rather than being artificially restricted. At some point, however, the costs of the inflation can outweigh the gains, and this is the level that must be carefully determined.
On a side note, inflation also underwrites national borrowing. It gradually devalues the debt which the government has already accumulated, improving its ability to react to financial panics by decreasing its real liabilities. This in and of itself is no reason to pursue an inflationary policy, because by this method inflation simply becomes an alternative vehicle for taxation (and this is why the independence of the central bank is so important). At moderate levels, however, the effect on this relationship is likely to be smaller than the additional safety and growth of industry.
Bernanke et al have maintained that a 2% target is an optimal level to achieve these goals. But judging from experience, I believe that a more appropriate level would fall between the 4 or 5 percent mark. The increased flexibility that such a target would afford our economy in times both good and bad make a sensible case for the higher target. The argument that we "aren't starting from scratch" on the inflation target, and hence have even more reason to stay at the current level, simply doesn't resound with me. Instead, I'm more inclined to think that, for exactly that reason, we have found that those 2-percent theoretical levels are simply too low to give us the maneuvering room we need in an unstable real economy, and that raising it would make a great deal of sense.
(Photo: kevindooley)
Why We Can’t Cut
Sullivan asks: "If the Brits can do this after a deeply divided election, why can't Obama offer his own fricking plan to cut the debt over ten years?"
Answer: it's all in the political structure. The folks who run Britain's government departments also sit in its Parliament, and the Prime Minister essentially has the authority to fire any of them from their Cabinet posts if they cross him on policy. These posts are extremely valuable to hold - they're the path up the political ladder - so party discipline is extremely high.
Imagine the situation if both Obama and Biden still sat in Congress, Joe Lieberman ran the Department of Homeland Security, Barbara Boxer ran the EPA, Blanche Lincoln ran the USDA, etc.... and Obama could let any of them go from their special appointments at any time. You'd see a lot less infighting and public positioning, and a lot more party-line votes on cleanly prenegotiated compromises that everyone can take credit for. Plus, when you have just one legislative house and a bare majority requirement, things run much more smoothly, procedurally speaking.
The US system has no central authority like the Prime Minister. The President is a powerful figurehead with a great deal of responsibility on the "getting things done once they're already law" side of the equation, but he simply has very few credible threats against the sitting Congress.
Now, this is all intentional. The Constitution was written to utterly confound the attempts of any person or group to get just about anything done in the US - hence not just two legislative houses, but different determinations of representation in each. Hence three co-independent branches. Hence the veto power, and the override. The filibuster, which developed much later, only makes it that much worse. We are not meant to have a single unified government as the British do, and in times of crisis we find out why that can sometimes be a bad thing.
(photo: ktylerconk)
Wrong on States’ Rights
Pursuing a lawsuit against the federal government over the recent health care law, Virginia Attorney General Ken Cuccinelli claims: "[It] is a very basic right of a sovereign state to pass its own laws and to protect those laws. And that’s what we are doing in this lawsuit."
Unfortunately the law in question is one in which Virginia attempted to declare the federal law null and void within its territories - nullification, a doctrine which was discredited over 150 years ago. Cuccinelli knows this: "Normally the supremacy clause would have the federal law trumping" - uh, yeah - "but it is our position that because the federal law is unconstitutional that Virginia’s law should trump."
Now that's a tangle - because this lawsuit is the very one which seeks to have the federal law declared unconstitutional. So the case is only justified ex post by its own decision in favor of the plaintiff. This is extremely shaky, and a good reminder for why we have the Supremacy Clause to begin with. The centralized, federal government can make these sorts of decisions, which are binding on all agreed states, without the fear that one of them will renege later: collective action for dummies.
Cato Strikes Back
After a week of bludgeoning by the media at large (with the exception of some defense from Republicans), Rand Paul is on the defensive over his Civil Rights Act comments on the Rachel Maddow Show on Wednesday. Now, however, things are getting interesting. The initial outrage has died down, and think tanks and commentators are beginning to more fully evaluate Rand Paul's policy stances.
The Cato Institute stands at the ideological center of the debate as the nation's prominent libertarian think tank. Over the past few days they've been building up a formal response to the fallout. It began with the evasive, two-handed take on the civil rights issue as a whole in Newsweek. Then there was David Boaz's defensive "people still hold libertarian views" piece in response to a WSJ quote. But at last Cato has come out swinging: their chairman, Robert Levy, let loose a Politico op-ed today building directly off the work of the others.
The Politico piece is a definitive statement of policy, and it is hard-hitting: "[Paul's] position is ... intellectually honest, unlike those who insist that, because the Civil Rights Act is beneficent, it must necessarily be constitutional." Levy goes on to take a shot at the philosophy endorsed by this very blog: "The essence of collectivism is force. The essence of libertarianism is choice."
But he's wrong. Collectivism isn't about force. Collectivism is about cooperation - choice constrained by social contract for the net benefit of society. Unrestrained choice has, time and time again, shown itself to be an inefficient way of life. Besides the actual-historical examples, which the Newsweek piece accepted, it can be mathematically and theoretically demonstrated.
About midway through the above-linked presentation is the proof: there exists a class of situations where increased choice yields worse outcomes. It carries over quite nicely to reality; the simple fact is that a whole society full of actors making unrestricted choices can be less efficient than one which has some measure of centralized regulation.
This is not "force." It is true that the laws are underwritten and legitimized by the military/police power of the state, but these implements are a part of the social contract that allows a coherent society to maintain order against those who would disregard the rules in a selfish pursuit. A law is not a gun to your head - it is a legal agreement among citizens. The more important piece of the logical puzzle is the very idea of representative government: the bills and votes of our Senators and Congressmen represent our own implied agreement to the social contracts at issue.
When we agree that everyone must have health insurance so that aggregate costs may be kept down, we engage in collectivist legislation. When we agree that the ownership of assault weapons is a danger to public society that exceeds even the guaranteed freedoms of the Second Amendment, we protect ourselves by collective action. When we, as Ezra Klein and then Rachel Maddow so eloquently stated, ban child labor, or inspect food, or set minimum wages, we as a people are agreeing that some of us can surrender our personal freedoms in exchange for a better overall society.
Yes, this requires a broadly empowered government, and a plain reading of the Constitution enables just that: "The Congress shall have Power To ... provide for the common Defence and general Welfare of the United States ... And To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers."