Peter Lindert & Jeffrey Williamson: Will the rise in inequality ever stop?

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By Peter H. Lindert and Jeffrey G. Williamson

Could the steep rise in the share of income gains falling into the hands of the top one percent of Americans since the 1970s have been stopped, and will the rise stop in the near future? A newly revealed history of American growth and inequality suggests the answer is yes to both questions.* What is exceptional about recent American experience is that inequality has risen faster than in other rich countries. Furthermore, it has happened twice in our history – before the Civil War, and again since the 1970s. Without some exogenous crisis like revolution, war, and great depressions, does America have the political will to stop the widening of income gaps between the very rich and the rest?

How hard would it be to stop, or even reverse, the trend? The economics is easy. The politics may be harder. However, to make the policies politically acceptable, just follow a simple equality-growth rule: Make life chances more equal in a pro-growth manner. Prioritize those economic policies that have been shown to equalize people’s opportunities without doing any damage to the growth of our average incomes.

$100 bills lying on the sidewalk

Finding such win-win policies is easy. To see why it’s so easy, just remind yourself: Has our political system seized all the chances to make us richer and more equal at the same time? Of course not. Throughout American history politicians have failed to cash in on equitable growth opportunities, even though they are all around us like so many $100 bills left lying on the sidewalk.

Four easy win-win choices stand out when we compare our experience with that of other countries – and yes, the United States can learn positive lessons from other countries.

Early and basic education for all. The United States has slipped down the rankings in its delivery of early education since the 1960s. At the primary and secondary levels, other countries have caught up with us in years of school completed, and we rank about 27th among all tested countries in the quality of the math, science, and reading skills that students actually learn by age 15.

We are also below the OECD average in the enrollment of three- and four-year olds in early education-plus-care institutions, mainly because we are also below average in our commitment to both public and private funds in pre-primary education. A growing body of evidence shows high returns to early education. Providing it to all serves both equality and growth.

Investing in the careers of young parents with newborns. Our country lags behind all other developed countries in public support for parental work leave. We are failing to invest in both child development and mothers’ career continuity. All of society gains from the better nurturing of our children and the extra career continuity of their mothers, and all of society should help pay for parental leave, not shoving the whole burden onto the young parents or their employers. Other countries figured this out long ago.

Equal opportunity and the inheritance tax. We should return to the higher federal tax rates on top inheritances that we had in the past. This would force rich children receiving bequests to work harder, make Americans more equal, and, by leveling the playing field for new generations a bit, even promote economic growth. A return to a policy which dominated the twentieth century would deliver on the American claim that “in our country, individuals make their own way, with their own hard work and abilities.” To honor that claim, we should make sure that the top economic slots are not reserved for those born very rich. We have done it before. Our top rate of inheritance taxation was 77 percent from 1942 to 1977, years when American incomes grew at the fastest rate this country has ever attained. We haven’t achieved that growth performance since the policy was changed in the 1970s.

Taxing high inheritances is not anti-growth. Instead, it promotes productive work by those who would have inherited the top fortunes. Statistical studies have demonstrated the strength of the “Carnegie effect”. Carnegie was right: passing on huge inheritances undermines the heirs’ work incentives. We also need to stress that bigger inheritance taxes do not take income away from any living rich citizen who has earned it.

Riding herd on the financial sector. Since our Independence, the United States has been above average in its history of financial meltdowns. One could even say that America has been “exceptional” in that regard. Frequent bubbles, booms, and crashes have done great damage to our growth and our equality. The danger of future meltdowns remains, because the Dodd-Frank reforms of 2010 are weaker than the tougher regulatory reforms of the 1930s, which served us so well until the ill-advised de-regulation of the 1980s. More regulatory vigilance, government liquidation authority, and capital requirements are needed to prevent financial breakdowns that tax the non-rich to bail out the rich, and make the poor also pay by losing their jobs.

History is also clear on the inequality connection. When the financial sector was closely regulated in response to the Great Depression disaster, the incomes of the rich in the financial sector fell to more moderate levels. After de-regulation in the 1980s, incomes of the rich in the financial sector soared.

Picking up the easy money takes time – and votes

Implementing just these four win-win policies may or may not be enough to stop any trend toward more inequality, or to raise growth rates from their now-modest levels. We will have to push against a strong headwind coming from competition with poorer countries. Lower-skill jobs in this country will continue to suffer from the competition produced by the long-overdue catching up rise in Asian economies since the 1970s, and from Africa in the future. This new global competition is to be welcomed. There is no reason to wish that poor countries remain hobbled by the bad institutions that have impoverished them for so long. Yet the rising competition challenges the United States to continue to upgrade its own skills to keep ahead. All the more reason to upgrade our human capital.

It will take some time to do these things. Politicians and voters hate to wait for good results that are more than two years away. And such policies may face opposition from those who would not directly gain from such win-win policies.

Still, our democracy can achieve reforms that promote both growth and equality. We’ve done it before. We can do it again. That’s what elections are for.

* The findings reported here are substantiated in Peter H. Lindert and Jeffrey G. Williamson, Unequal Gains: American Growth and Inequality since 1700 (Princeton University Press, 2016).

unequal gains lindert jacketPeter H. Lindert is Distinguished Professor of Economics at the University of California, Davis. His books include Growing Public: Social Spending and Economic Growth since the Eighteenth Century. He lives in Davis, California.

Jeffrey G. Williamson is the Laird Bell Professor of Economics, emeritus, at Harvard University. His books include Trade and Poverty: When the Third World Fell Behind. He lives in Madison, Wisconsin. Both are research associates at the National Bureau of Economic Research.

Together they have written Unequal Gains: American Growth and Inequality Since 1700.

Lee Alston: Is Dilma Rousseff’s impeachment a coup or Brazil’s window of opportunity?

Brazil in Transition book jacket(This article was originally published on The Conversation. Lee Alston is co-author of Brazil in Transition)

“Brazil’s young democracy is being subjected to a coup,” said Dilma Rousseff after the Senate on May 12 voted 55 to 22 to remove her as president and move forward with impeachment.

Is this really a coup, as Rousseff and her supporters believe? Coups usually entail the violent overthrow of a government or a trampling of constitutional rules and procedures. In Brazil, there has been no involvement by the military other than to keep the peace.

And the major players in this real-life Brazilian telenovela – Congress, the judiciary, the federal police and the Federal Accounting Office (TCU) – are all playing by the constitutional rules. This is testimony to strong institutions in Brazil and a victory for checks and balances.

Far from being a coup, the current tumult, I believe, offers a chance for Brazil, with the right leadership, to return to the policies initiated in the mid-1990s that put the country on a virtuous trajectory of rising growth and falling inequality. The middle class expanded dramatically and the political system became more transparent.

Such policies first and foremost conform to monetary and fiscal orthodoxy but also promote social inclusion through programs such as the one that pays mothers to keep their children in school.

I call this economic model “fiscally sound social inclusion,” and it’s a topic my coauthors and I explore in our forthcoming book, “Brazil in Transition: Beliefs, Leadership and Institutional Change.” Such policies helped make Brazil one of the world’s largest and fastest-growing economies.

Can Brazil’s new leader, Vice President Michel Temer, use this window of opportunity to restore economic growth and also reduce inequality under the mantle of fiscally sound social inclusion?

How we got here

Prior to the reelection of President Rousseff in October 2014, two decades of economic and political development were beginning to founder on the shoals of a decline in commodity prices and a corruption scandal involving Petrobras, the state-owned oil company.

With the country’s economy in decline and the election drawing nearer, the president submitted rather rosy-looking public accounts to the TCU – basically a federal budget watchdog similar to the U.S. General Accounting Office but with the power to approve or reject them. Rousseff’s accounts suggested the government’s finances, although deteriorating, were not far off track.

But in a historic ruling following her narrow election victory, the TCU unanimously rejected the accounts, asserting that Rousseff understated the public deficit in the year prior to the election.

It is plausible, as her critics have argued, that Rousseff would not have won reelection had the voters known the true fiscal state of Brazil.

Although the impeachment trial technically entails prosecution for violating the fiscal responsibility law, in the eyes of the public, more is at stake, including the mismanagement of the economy and the corruption scandal at Petrobras, where Rousseff was board chair prior to her election.

Markets remain optimistic

Where does Brazil go from here?

Again, playing by the rules, former Vice President Temer, who belongs to a different party than Rousseff, is now the interim president while the impeachment prosecution proceeds. If Rousseff is impeached or resigns (never, she claims), Temer’s position will become permanent, and he will serve out her term, which expires in 2018.

Impeachments (and certainly coups) generally send economies into a tailspin. Yet, this hasn’t happened in Brazil. As the impeachment gained steam this year, the Brazilian real (the national currency) actually appreciated, as did the stock market.

Since the beginning of the year, the real is up by 10 percent and the stock market by 23 percent. And even when the real was tanking in late 2015, foreign direct investment surged, a sign of confidence by outside investors in the underlying fundamentals of the economy despite the political turmoil.

It may also signal confidence that Temer will institute market-friendly reforms. It’s important to note that in Brazil presidents have much stronger agenda-setting powers than in the U.S.

Temer is not popular in Brazil, but he is known as a “dealmaker,” one who is capable of managing a coalition in a multiparty Congress.

This all sounds promising, but before looking forward it is important to understand the past.

From military rule to fiscally sound social inclusion

From 1964 until 1985, Brazil was ruled by a military regime.

The military imposed order in its early years and embarked on an ambitious top-down development plan that turned Brazil into a “miracle economy” in the 1970s. However, growth began to sputter by the end of the decade, and inflation soared.

As growth weakened and the opposition became more vocal, the military’s oppressive reaction failed to suppress a growing populism, forcing it to pave the way for a return to democracy.

This helped usher in a new belief: social inclusion, which meant everything for everyone. The constitution of 1988 is one of the most detailed in the world, especially in terms of human rights. The decision-making process codified these beliefs around social inclusion as every interest group got to hang its ornament on the “Christmas tree” constitution.

Unfortunately, this didn’t work so well for the economy. From 1986 through 1993, governments spent generously on wasteful pork barrel projects, financed by printing money, leading to hyperinflation in the thousands of percent. Social inclusion was great in principle but bad in practice.

Several stabilization plans aimed at reining in inflation dramatically failed, and Brazil’s first democratically elected president since military rule, Fernando Collor, resigned during an impeachment trial in 1992.

This marked a turning point for Brazil and its economy after Fernando Henrique Cardoso, a self-exiled socialist during the military regime, was appointed finance minister by Collor’s replacement.

Cardoso and his team swiftly tamed inflation and instilled confidence, especially among businesses. This helped him win reelection, following which he passed the cornerstone of fiscally sound social inclusion: the fiscal responsibility law, aimed at ensuring that state governments could no longer spend more than their budgets allowed.

At the same time, Cardoso never abandoned the concept of social inclusion. Rather he merged it with his orthodox fiscal and monetary policies, such as keeping inflation in check, reforming pensions and controlling the budget. This led to modest economic growth and a growing middle class.

Yet his party lost the 2002 election to the charismatic Lula da Silva, who campaigned on a platform of largesse for the lower class and workers in general. Fortunately, high commodity prices helped da Silva run successive fiscal surpluses during his two terms, even as he expanded programs for the poor started by Cardoso. In other words, he continued and solidified a policy of fiscally sound social inclusion.

It was on da Silva’s crest of popularity and economic growth that Rousseff took the helm in 2010. But she abandoned many of his “fiscally sound” policies by increasing government expenditures and subsidies as well as expanding the role of state-run companies like Petrobras and the Brazilian Development Bank. And as commodity prices plunged, the economy fell with them, eventually exposing the holes in the government’s finances.

The traits of a leader

So the question now is will (and can) Temer restore those socially inclusive yet fiscally sound policies that put Brazil on course to becoming a truly developed country?

So far, foreign and domestic investors have reacted favorably. But Temer faces a difficult task in resurrecting trust amongst the population and investors. Meanwhile he also faces his own allegations of corruption.

To me, whether he can successfully navigate the ongoing bumps in the road and stay the course of reform or not depends on whether he has the necessary attributes of a leader to rise to the occasion.

In “Brazil in Transition,” my coauthors and I pose three questions to help us assess whether a leader such as Temer has what it takes: does he know what policies are needed to recover from the shock? Can he coordinate a coalition that includes economic and political actors as well as citizens to embrace those policies? And is he trusted and does he possess moral authority?

To this, I add two more: can he adapt to unforeseen bumps to stay the course? Does Temer (including his policy team) possess imagination to see solutions that were not on the table?

Temer has recognized the heart of Brazil’s dilemma: policies need to be fiscally sound. This means accepting some austerity, as Argentina recently did. On this score he wins points for naming Henrique Meirelles, a well-respected former head of the central bank and a Wall Street veteran, as finance minister.

Can Temer coordinate among Congress and other powerful players in Brazil, such as industry and unions, and convince them to play ball? Being known as “the dealmaker” means he should be able to “coordinate and adapt” as opportunities arise. Temer was also trained as a constitutional lawyer, which means he knows well both the law and rules of the game in Congress.

However, he lacks the moral authority of both Cardoso, who was a vocal critic of the military regime, and da Silva, who with a fourth-grade education rose to the presidency as a strident union leader. But leaders can build moral authority; they need not come to the job with it in hand. (Not everyone can be a Nelson Mandela.)

Finally, does Temer have the “imagination” to come up with extraordinary ideas capable of breaking through the gridlock and bringing about reform? In his first hours in office, he demonstrated imagination by cutting his cabinet by a third, to 22 from 31, and, controversially, he picked only white men. This move could backfire, but it at least shows he’s willing to take risks and is not afraid of some controversy.

So does this suggest he has the “right stuff” to seize the window of opportunity of a new government and return Brazil to its virtuous trajectory?

His early moves may please markets, but to satisfy Brazil’s diverse citizenry, he will need to demonstrate that he is not abandoning social inclusion. On this as well as his own fate in the ongoing corruption scandals: the jury is still out.The Conversation

Lee Alston, Professor of Economics, Indiana University

Taxing the Rich

Taxing the RichIf you didn’t file your taxes on April 15th, you can breathe a sigh of relief. Thanks to the Emancipation Day holiday in the District of Columbia, the tax deadline was switched to April 18 this year. Already ahead of the game? While the final hours tick down, we have just the history of fiscal fairness for you.

In Taxing the Rich, Kenneth Scheve and David Stasavage analyze the history of taxes and take a look at when and why countries tax their wealthiest citizens. The authors argue that governments don’t tax the rich simply because of striking inequality—they do it when its citizens believe that such taxes compensate for the state unfairly privileging the wealthy. What matters most is society’s views on how the inequality is being generated in the first place.

The Atlantic recently wrote about the book, including quotes from Scheve and Stasavage:

Relative to the past 200 years of U.S. history, how heavily are the rich being taxed today? Kenneth Scheve and David Stasavage, professors of political science at Stanford University and New York University respectively, looked into when countries have taxed their wealthiest citizens most heavily, and what societal conditions might have produced those tax rates. In a project that took five years, the two constructed databases of tax rates and policies in 20 countries over the last two centuries in order to answer those questions. They recently published this research in a book, Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.

One of their motivations for starting the project was a disconnect they noticed between rising inequality and static tax rates. “With inequality rising over the last three or four decades, why have there not been public policies that seem to address that in an important and substantive way?” says Scheve. But while it would seem intuitive that taxes would increase at the times when inequality is highest, Scheve and Stasavage found that this relationship hasn’t held true over the course of history.

You can read the full piece in The Atlantic here, and an exclusive interview with Scheve and Stasavage here.

L. Randall Wray to sign books at BOOM BUST BOOM

Terry Jones (of Monty Python fame) presents a new documentary called BOOM BUST BOOM, an analysis on why economic crashes keep happening despite all the tools we have to forecast and avoid them. Economic insight, puppetry, and song combine to make a complicated issue accessible to everyone. The show runs from March 11 to March 15 in NYC.

All week there will be special events to complement the show, including Q&A’s with key participants and a book signing with PUP author L. Randall Wray. He will be signing copies of Why Minsky Matters, an introduction to an economist whose ideas are more relevant than ever in our global society.

Minsky

In honor of the US premiere of BOOM BUST BOOM, we’ll be giving away copies of Why Minsky Matters over the course of the next two weeks. Simply follow the instructions in the box below and wait to see if you’ve won! Good luck to all our entrants and be sure to check out BOOM BUST BOOM.
a Rafflecopter giveaway

The decline of American growth is no local matter

GordonRobert J. Gordon‘s The Rise and Fall of American Growth may focus on an American economic phenomenon, but the book has grown into a major force internationally since becoming a New York Times Best-Seller this week. Gordon uses past economic revolutions to analyze whether economic growth could possibly continue at the exponential rate at which it exploded in the past. The book is at once a tribute to a century of radical change and a harbinger of tougher times to come. Its message has universal implications that have captivated people across the world.

In France, Le Monde interviewed Gordon and noted that his analysis of the economy could stand for any industrialized country, not just the United States. Gordon speaks here about how the golden age of growth is in the world’s past. Today’s innovations fit into a comparatively small percentage of the overall products used and produced, so any economic change that may occur will be exceptionally slow.

Over in Holland, NRC Handelsblad refers to how unique The Rise and Fall of American Growth is in its stance against the popular opinion that today, progress is moving at a faster rate than ever before.

The Financial Times reports that “As an economic historian, Gordon is beyond reproach”. Looking to the future, Gordon also leaves room in his argument for inventions that haven’t quite reached the market yet. And yet he warns that creations like robots and driverless cars will not lead to any great leap forward in economic progress. Read more in the article to to see Gordon’s argument for the pervasiveness of the stagnation of the economy.

Prospect Magazine calls the book “an extraordinary work of economic scholarship”. Complete with compelling charts, the article explicates the economic issues and facts as presented in The Rise and Fall of American Growth, supported by Lawrence Summers’ personal experiences growing up after the economic turn.

Robert J. Gordon is the Stanley G. Harris Professor in the Social Sciences at Northwestern University. His books include Productivity Growth, Inflation, and Unemployment and Macroeconomics. Gordon was included in the 2013 Bloomberg list of the nation’s most influential thinkers. His most recent book is the New York Times Best-Seller The Rise and Fall of American Growth.

 

The Rise and Fall of American Growth is a New York Times Best-Seller!

GordonWe’re thrilled to announce that The Rise and Fall of American Growth by Robert J. Gordon will enter the New York Times Best-Seller list at #18 this month. Gordon’s book, which makes a critical contribution to debates surrounding economic stagnation, has been generating a wave of interest, with Adam Davidson’s New York Times Magazine piece on the book set to appear in print on Sunday. Davidson writes that the book “is this year’s equivalent to Thomas Piketty’s ‘Capital in the 21st Century’: an essential read for all economists, who are unanimously floored by its boldness and scope even if they don’t agree with its conclusions.” Robert Atkinson also mentioned the book in the Harvard Business Review, where he calls the stagnation of productivity “the central economic issue of our time.”

Gordon argues that economic growth cannot and will not continue unabated, demonstrating that the life-altering scale of innovations between 1870 and 1970 were unique, and can’t be repeated in our modern society. He contends that the nation’s already-slow productivity growth will be further held back by rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government:

Gordon infographic

Robert Gordon asks: Has the era of unprecedented growth come to an end?

This will be the fifth appearance of a PUP book on the New York Times bestseller list since 2000. The list includes our classic titles Irrational Exuberance, by Robert Shiller, On Bullshit, by Harry Frankfurt, This Time is Different, by Carmen Reinhart and Kenneth Rogoff, Alan Turing: The Enigma, by Andrew Hodges, and, now, Robert Gordon’s The Rise and Fall of American Growth. Congratulations to Robert Gordon and the Princeton University Press staff who have worked hard to bring this important book the attention it deserves.

Joel Brockner on “bad process” in the Yahoo layoffs

Many feel that upper management in some of the most prominent companies has lost touch with how to care for employees on every rung of the ladder.  In his book The Process Matters: Engaging and Equipping People for Success, Joel Brockner addresses managers who want to promote a high-quality work environment for employees. Today he writes about the problem of management manipulation in the case of Yahoo’s recent, unexpected rash of layoffs. Brockner insists that it was the method used by management rather than the action of firing the employees that lead to such an outcry.

Yahoo Lawsuits Begin Over Management Manipulation

by Joel Brockner

Process matters jacketYahoo has been going through tough times so we shouldn’t be surprised to hear, as the New York Times recently reported that, “More than one-third of the company’s work force has left voluntarily or involuntarily over the last year.” It also comes as little surprise that among the involuntarily departed, some are suing for wrongful termination. It’s tempting to chalk up the negative reactions of former employees to economic considerations. After all, when people’s livelihood is at stake, it’s understandable for them to be looking elsewhere or for giving their former employers hell to pay.

However, many studies show that it’s not simply decisions that are economically unfavorable that are causing the upset. Rather, the combination of economically tough decisions and people’s perceptions of the decisions being handled poorly are putting them over the edge. Those filing suit at Yahoo claim that the way in which the layoffs were implemented was unfair, in several respects. First, the layoffs allegedly violated both state and Federal law which requires 60 days advance notice. Furthermore, there was considerable consternation about how it was decided which employees would be laid off and which would remain. On paper, it is hard to argue with Yahoo’s method: based on their Quarterly Performance Review (QPR), those people who received the least favorable evaluations were the ones targeted for dismissal.

The problem, however, is not with making layoff decisions on the basis of (de)merit, but rather, with people’s perceptions of the way in which the QPR was done. According to the New York Times, “The Q.P.R. process was opaque and the employees did not know who was making the final decisions, what numbers were being assigned by whom along the way, or why those numbers were being changed,” the lawsuit says. “This manipulation of the Q.P.R. process permitted employment decisions, including terminations, to be made on the basis of personal biases and stereotyping.”

I suppose we also shouldn’t be terribly surprised to hear that the combination of a bad outcome and a bad process makes people very upset. After all, there is an expression in everyday life that captures such a state of affairs: “Adding insult to injury.” People feel injured by the bad outcome, and they are insulted by the way in which it was carried out. However, one thing we are learning from research and experience is that the expression, “adding insult to injury” doesn’t do justice to how aggrieved people feel when they find themselves in that situation. In mathematical terms, the expression, “multiplying insult times injury” is more like it. This is why I advise people in authority positions (executives, as well as teachers and parents) that whenever they have to make the tough decisions they should do whatever they can to ensure that the process for making and carrying them out is as high-quality as possible. This is not to say that that those on the receiving end will be happy; grudging acceptance comes closer to how most people will take it. But, grudging acceptance is a lot better than what authorities are likely to encounter when those on the receiving end feel like they have had the injury of an unfavorable outcome multiplied by the insult of an unfair or otherwise flawed process.

So, the Yahoos of the world who are faced with having to be the bearers of bad news have a choice. By investing in a well-handled process, they can minimize (read: not eliminate) the ire that translates into actions like lawsuits. Alternatively, by ignoring the quality of the process, they are at peril for more lawsuits or other expressions of discontent. Over and above the ethical imperative of handling the process well, there is an economic one: would you rather spend resources needed to handle the process well, or the far greater resources you are likely to need to defend yourself in a court of law?

Joel Brockner
 is the Phillip Hettleman Professor of Business at the Columbia Business School. He is the author of A Contemporary Look at Organizational Justice: Multiplying Insult Times Injury and Self-Esteem at Work, and the coauthor of Entrapment in Escalating Conflicts. His most recent book is The Process Matters: Engaging and Equipping People for Success.

Q&A with Kenneth Scheve and David Stasavage on Taxing the Rich

Taxing the RichWho to tax, how much to tax, and what the taxes should pay for are questions sure to elicit an array of responses in today’s politically charged climate. Kenneth Scheve and David Stasavage combine forces on this comprehensive history and reflection on how the rich have (or haven’t) been taxed. Taxing the Rich: A History of Fiscal Fairness in the United State and Europe tackles what is sure to be a hot election topic using an approach that manages to showcase both sides of the often contentious issue. Recently the authors took the time to answer some questions on their book.

Why did you write this book?

KS & DS: Taxing the rich is a subject of considerable political conflict today. There has been a great deal of debate about what government should do in this area, but we know far less about the reasons why some governments actually do tax the rich and others do not. We think answering this question requires a long run historical perspective, and one that doesn’t just look at developments in the United States. Our book considers income, inheritance, and other taxes from 1800 to the present in a set of twenty countries.

What’s your main argument?

KS & DS: Countries tax the rich when the public thinks the state has failed to treat citizens as equals and in so doing has privileged the rich. [a more colloquial version: Countries tax the rich when people think the deck is stacked in favor of the wealthy and the government has done the stacking.]

Debates about taxation revolve around self-interest (no one likes paying taxes), economic efficiency, and fairness. We argue that fairness considerations center on what it means for the state to treat citizens as equals in income tax policy. Historically, there are three main fairness arguments that have been used for or against taxing the rich. Equal Treatment arguments claim that everyone should be taxed at the same rate just like everyone has one vote. Ability to Pay arguments contend that states should tax the rich at higher rates because they can better afford to pay when compared with everyone else. Compensatory Arguments suggest that it is fair to tax the rich at higher rates when it compensates for unequal treatment by the state in some other policy area. We argue that over the last two centuries compensatory arguments have been the most powerful arguments in favor of taxing the rich.

What are examples of compensatory arguments in history?

KS & DS: Compensatory arguments were important in the early development of income tax systems in the 19th century when it was argued that income taxes on the rich were necessary to compensate for heavy indirect taxes that fell disproportionately on the poor and middle class. But the most significant compensatory arguments over the last two centuries have been arguments to raise taxes on the rich to preserve equal sacrifice in wars of mass mobilization. These conflicts, particularly World War I and World War II, led states to raise large armies, often through conscription, and citizens and politicians alike adopted compensatory fairness arguments to justify higher taxes on income and wealth. Mass war mobilization led governments of both left and right to tax the rich.

When have countries taxed the rich?

KS & DS: Well, one thing our book shows is that governments haven’t taxed the rich just because inequality is high, nor have they done this simply because the poor and middle class outnumber the rich when it comes to voting. The main occasion when governments have moved to tax the rich is during times of mass mobilization for war, especially in democracies in which the norm of treating citizens as equals is held more strongly. The real watershed for taxing the rich for many countries came in 1914. The era of the two world wars and their aftermath was one in which governments taxed the rich at rates that would have previously seemed unimaginable.

How do we know that the effect of wars was due to changes in fairness considerations?

KS & DS: We show in the book that when countries shift from peace to war, or the reverse, there has also been a big shift in the type of fairness arguments made in favor of taxing the rich. During times of peace debates about whether it is fair to tax the rich center on competing equal treatment and ability to pay arguments. During times of war supporters of taxing the rich have also been able to make Compensatory arguments. If the poor and middle class are doing the fighting, then the rich should be asked to pay more for the war effort. If some with wealth benefit from war profits, then this creates another compensatory argument for taxing the rich. These compensatory arguments had the biggest impact in democracies that are founded on the idea that citizens should be treated as equals. The fact that war had a much bigger impact on taxes on the rich in democracies than in autocracies also suggests that the rich weren’t being taxed out of simple necessity. It was because war determined what types of fairness arguments could be made.

What are the implications for future tax policies in the United States?

KS & DS: Don’t expect high and rising inequality to necessarily lead to a return to the high top tax rates of the post-war era. What really matters is what people believe about how inequality is generated in the first place. If it is clear that inequality has risen because the government failed to treat citizens as equals in the first place, then there is room for convincing compensatory arguments. Today, in an era where military technology favors more limited forms of warfare — drones rather than boots on the ground — the wartime compensatory arguments of old are no longer available. Absent new compensatory arguments, we expect some to argue for taxing the rich based on ability to pay, but this probably won’t suffice to produce radically higher tax rates. More politically plausible reforms include those that involve increasing taxes on the rich by appealing to the logic of equal treatment to remove deductions, exemptions, and cases of special treatment.

Kenneth Scheve is professor of political science and senior fellow at the Freeman Spogli Institute for International Studies at Stanford University. He is the coauthor of Globalization and the Perceptions of American Workers. David Stasavage is Julius Silver Professor in the Wilf Family Department of Politics at New York University. He is the author of States of Credit: Size, Power, and the Development of European Polities (Princeton). Together they wrote Taxing the Rich: A History of Fiscal Fairness in the United States and Europe.

Introducing the trailer for The Little Big Number

Check out our book trailer for The Little Big Number by Dirk Philipsen for an introduction to why the concept of GDP has become harmful in our modern world.

Philipsen

In one lifetime, GDP, or Gross Domestic Product, has ballooned from a narrow economic tool into a global article of faith. It is our universal yardstick of progress. As The Little Big Number demonstrates, this spells trouble. While economies and cultures measure their performance by it, GDP ignores central facts such as quality, costs, or purpose. It only measures output: more cars, more accidents; more lawyers, more trials; more extraction, more pollution—all count as success. Sustainability and quality of life are overlooked. Losses don’t count. GDP promotes a form of stupid growth and ignores real development.

How and why did we get to this point? Dirk Philipsen uncovers a submerged history dating back to the 1600s, climaxing with the Great Depression and World War II, when the first version of GDP arrived at the forefront of politics. Transcending ideologies and national differences, GDP was subsequently transformed from a narrow metric to the purpose of economic activity. Today, increasing GDP is the highest goal of politics. In accessible and compelling prose, Philipsen shows how it affects all of us.

But the world can no longer afford GDP rule. A finite planet cannot sustain blind and indefinite expansion. If we consider future generations equal to our own, replacing the GDP regime is the ethical imperative of our times. More is not better. As Philipsen demonstrates, the history of GDP reveals unique opportunities to fashion smarter goals and measures. The Little Big Number explores a possible roadmap for a future that advances quality of life rather than indiscriminate growth.

Dirk Philipsen is a German- and American-trained professor of economic history, senior fellow at the Kenan Institute for Ethics, and a Duke Arts and Sciences Senior Research Scholar at Duke University. He is the author of We Were the People: Voices from East Germany’s Revolutionary Autumn of 1989. He lives in Durham, North Carolina.

What should the presidential candidates be reading? WSJ: Robert Gordon’s book

Election_Blog_Series_Banner2[1]gordon jacketAccording to this piece in the Wall Street Journal, “Every presidential candidate should be asked what policies he or she would offer to increase the pace of U.S. productivity growth and to narrow the widening gap between winners and losers in the economy. Bob Gordon’s list is a good place to start.”

What does Gordon say about growth? For starters, he challenges the view that economic growth can or will continue unabated. So how would today’s presidential candidates meet this challenge? Read the Wall Street Journal article here:

In his new book, “The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War,” Northwestern University economist Bob Gordon argues that the century between 1870 and 1970 was exceptionally good for U.S. households (particularly 1920 to 1950) but that the years since 1970 have been disappointing and the future looks disappointing too.

His postscript includes a few thoughts that deserve immediate attention in today’s economic policy debates: Whatever the causes of the distressing slowdown in the growth of productivity (the amount of stuff produced for each hour of work) and the increase in inequality, what policies might both increase productivity and decrease inequality?

Many years ago, economist Art Okun argued that we had to choose between policies that increased efficiency and those that increased equity. Perhaps. But  if there are policies that could achieve both, it’s time to try them.

Mr. Gordon lists several at the end of his book, some conventional and others less so.

To read what these policies are, continue reading the Wall Street Journal article here.

Robert J. Gordon is the Stanley G. Harris Professor in the Social Sciences at Northwestern University. His books include Productivity Growth, Inflation, and Unemployment and Macroeconomics. Gordon was included in the 2013 Bloomberg list of the nation’s most influential thinkers.

New Economics & Finance Catalog

Our Economics & Finance 2016 catalog is now available.

 

AkerlofShiller In Phishing for Phools, Nobel Prize-winning authors George A. Akerlof and Robert J. Shiller reveal the dark side of the free market, including the role that manipulation and deception play in it.
Gordon Robert J. Gordon explores the period of economic boom following the Civil War and the impact it had on society in The Rise and Fall of American Growth. Then, he argues that this era has now come to a close, analyzing the causes and effects of economic stagnation.
Sandbu Check out Europe’s Orphan by Martin Sandbu, a defense of the beleaguered euro and an analysis of what must be done to achieve prosperity in Europe.
Deaton Nobel prize-winning author Angus Deaton analyzes the remarkable progress that some nations have made over the course of the past 250 years and addresses what steps ought to be taken to aid those nations that have had less success in The Great Escape, now available in paperback.

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Finally, if you’re in San Francisco for the Allied Social Science Associations Meeting, visit PUP at booth #205.

Economist Diane Coyle on the role of the global University Press

We were thrilled to see that noted economist Diane Coyle mentioned Princeton University Press in a new post on her blog, The Enlightened Economist that touches on the role of the globalized university press, the coming “disruption” in higher education, and open access:

Last week I attended the European Advisory Board meeting of Princeton University Press, the theme of the discussion being the role of university presses in the globalized 21st century. A while ago Sam Leith had an interesting article in the Guardian praising university presses for their stewardship of non-fiction publishing at a time when many commercial publishers have become fearful ‘me-too’ merchants. It could seem paradoxical: the university presses’ freedom from short term commercial pressure has created the conditions for longer term success, at least for some. Happily, Princeton University Press is one of those that’s thriving. There is a huge appetite for ideas, and the scholarly presses publishing books that address a wider audience than only academics and their libraries have been there to meet it. The appetite is also global, and again a small group of university presses have addressed the global market (much of PUP’s recent growth has been outside its home market in the US).

The other question is what will the ‘university’ part of ‘global university press’ look like in a decade or two? Higher education is ripe for disruption. It seems clear now this will not take the form of MOOCs, although they will have their market. Yet who knows what shape exactly it will take. One of my advisory board colleagues suggested publishing could be able to provide the true interdisciplinarity modern global issues require, whereas traditional university departmental silos discourage it. My hunch is that keeping a clear focus on the ‘product’ being the provision of ideas and scholarship to readers of all kinds around the world, and being agnostic about the exact means of delivering those ideas, will be the way to ride out disruptive technologies. A ‘freemium’ approach looks a good bet too: for example, the open access Digital Einstein website alongside the Quotable Einstein along with many other of his books for sale. (I note by the way there’s a holiday discount at the moment on purchases via the PUP website!)

My latest three books have been published by Princeton, and I’m delighted to be associated with such a distinguished purveyor of ideas to the world.

Thanks, Diane! Suffice to say, we’re delighted too. Read more on The Enlightened Economist.


 

Diane Coyle is the author of a number of books, including GDP: A Brief but Affectionate History, The Economics of Enough and The Soulful Science: What Economists Really Do and Why It Matters (both Princeton). She holds a PhD in economics from Harvard and is a visiting research fellow at the University of Oxford’s Smith School of Enterprise and the Environment.