It occurs to me, in the current economic crisis, and in public debt-ridden times to come, more than ever, discussions on public policy conclude in a shoulder-shrugging realization that we knew what to do about it. If only, we could afford to.
I’m getting tired of this resignation, be it in fighting climate change, in improving public education, or in helping out the weak, at home, and abroad.
I want a strong polity that can do these things. I want more, not less government. A better state.
How do we get there? We do what we used to be able to do: we reclaim our responsibility to channel the resources to the goods we collectively value the most.
We redistribute. It’s not a dirty word. It doesn’t hurt growth. It’s not socialism.
And no, it’s not impossible.
The biggest bill
We seem to be in a pretty bad fix, fiscally and economically. Germany has amassed a gross public debt of 63,1% of nominal GDP in 2008 (net is 44,5%) (BMF 2009). IMF/OECD calculations project gross debt to grow to 91% by 2014. To come clean, citizens of Germany, and most other rich countries, would have to work a roughly year-long extra shift, without any pay, or interest for the capital invested.
With the likely collossal fiscal costs of the financial crisis added to the tab, and worldwide economic recession, the outlook today is worse than in any of the decades it took to build up this “biggest bill in history“.
At the same time, we face great challenges, which, to master, will require fresh ideas but also, greater public spending: aging, climate change adaptation and abatement, a growing number of people with insufficient education and little economic opportunity. Added to that are the stimulus imperatives of our current economic slump: to protect consumption, we cannot raise already high indirect taxes much higher, and must sustain public spending. In other words: ”Lord, make us prudent, but not yet”.
What happened?
Let us pause for a minute and think this through. As a society, we possess ever increasing knowledge, command powerful technology and continue to exploit (and slander) a planet plentiful in resources. As a country, we hold great stocks of physical and human capital.
And yet, we feel a sense of impotence, an inability to make the best of these greatest opportunities that we have ever had.
What happened? Maybe it is helpful to again simplify matters. Helpful to remind ourselves, that fundamentally, in our economies we organize our work in much the same way as we divide up the chores in a household, only with a cast of billions. We ask someone to do something for us and deliver some service in return. Or, if we cannot do that right away, we promise to do so at a later point, with an additional compensation for the delay and the risk. The promises we make are, ultimately, consumption checks. Sometimes we also need to amass, or borrow, a great number of these pledged favors to get a bigger project off the ground, for example, when refurbishing an apartment with the help of many friends.
A household with a cast of billions
When our households grow far beyond the immediate, and become tightly integrated as well as vastly expansive economies, we call those consumption checks property, or capital. The extra compensation for delay and risk come as interest payments or dividends. The larger projects, like factories or new technologies, require accumulated capital, orchestrated by a financial system.
Our problem with public finances (leaving all monetary policy aside, assuming its neutrality in the long run) and economic inequality is, we have given out a lot of these consumption checks, which we now have to honor. We have handed them to people (and the people who work for them, and the people who work for them) for work that needed to be done. Sometimes, some of us may have been able to circumvent the system, able to extract checks with extravagant values, for little productive contributions.
It is important to remember, that we all depend on the reliability of these consumption checks. The people who want to let a large bank fail, or inflate our way out of the debt crisis frequently forget: it is hard to tell whose consumption a bounced, or diminished check will ultimately curtail. It could be the new Ferrari of a yacht owner. Or it could be the the small savings account of an old lady.
My thoughts exactly.
Tell this to the state of California. :’( Over $8 billion in cuts to public education (and that’s just the largest category).
And California, by all means and measures, is not a poor state, but one of the richest in terms of wealth and GDP. It’s absurd.
Thanks for your comment, Ashley!
What do you exactly mean with “let’s redistribute”? You can redistribute a lot, from taxes over food to land. You should be more precise on a controversial issue like that to avoid misunderstandings.
Hey Jan-Dirk, thanks for your comment.
I agree that, to be fair, effective and efficient, redistributive policies need to be very carefully designed. I’ll write more on that (progressive consumption tax, for example) soon on this blog.
Generally, I find only redistribution through taxation acceptable – discretionary, or arbitrary redistribution are of course out of the question.
But still, I do think that we need progressive taxation of wealth, consumption and inheritance, which, in effect does mean partial expropriation.
For that purpose alone I want to reclaim the term redistribution.
And let me add one more clarification – I am generally not a big fan of reallocation of property rights from one private individual to another, something that I believe redistribution is often misunderstood to mean.
Direct transfers for consumption (social assistance) is necessary, and may need to expanded (kids) but should always stay minimal, and be regarded as what it is: a last, and unfortunate resort of public policy.
The redistribution we need happens through the state and the public or common goods it provides. Like public education and environmental protection. That’s where we need the “Louis Vitton”-kind of money to go to instead.
First statement that has to be challenged: Why is a more influence by the state per se a desirable objective?
Second topic that I have in mind when talking about redistriution is justice. To what degree should we accept inequality of income and wealth? And on the other hand to what degree is the influence of the state not legitimate in the view of the people who would pay higher taxes?
Hey Joe, first of all: Jaimaica?!? Is that a political statement? Where’d the green come from?
On to more serious stuff.
More influence for the state is not per se desirable. But a potent polity that ensures that common and public goods are plentifully provided, and a fair society that extends equal opportunity to everyone (equality in inputs, not outputs) are desirable. To that end, we can go out and cap some of the extravagancies.
Not swords into plowshares (that too, though), but Mercedes S-Class into schools.
As I said, I’m not necessarily in favor of the state interfering in the market. Those instances should be carefully restricted. But in any case, I want the polity to call the shots, or at least a greater share of the shots that are then provided by the market.
On to the broader question of distributive justice. I think a little more utilitarianism, with all its dangers, is what we need now: inequality of income and wealth are then acceptable only if, and in so far as they incentivize welfare-enhancing activity.
Thank you for sharing your inspiring thoughts. Some points, however, need clarification. Let me formulate 3 questions:
1. Your political intent is clear. Isn’t it time, then, to think and write about realisitic concepts and strategies for an implementation instead of musing about its impossibility?
2. You pose the claim that redistribution is not automatically socialism – at least not in the academic meaning of the word. However, some paragraphs later you write about the market being “inadequately incentivized” for certain tasks and postulate the need for some kind of dirigisme – implying the reallocation of resources to purposes destined by some state authority. Isn’t this is an interference with the market assuming the superiority of the state in deciding what’s good for the people? Isn’t that kind of socialist thinking? Don’t you think there is a broad gray area on the way to socialism? What about e.g. the General Government Total Outlays (as percent of GDP) as a coarse indicator?
3. As you say, your concept of taxing the rich needs international cooperation or even “global consensus” to avoid emigration to tax exiles. I’m always sceptical about pushing some kind of world government for things like taxation. The competition of nations and systems is an important factor for the improvement of civilization. Furthermore, this again implicitly assumes superiority of a central political decision-maker over the natural outcome of free competition. Especially in terms of stability and reliability diversity matters. Large monolithic structures are prone to total failure. In my opinion, there should not be too much unification on a global scale. Hence, for me it is rather the question: Can a single state improve its performance in the long run by taxing the rich – taking into account a short increase of tax emigration in the beginning?
Hey Johannes, thanks for your thoughtful comments.
Here come my responses:
1) You’re absolutely right, this kind of talk is cheap. I’m writing my thesis on progressive consumption taxation and hope to provide helpful detail there. More soon on this blog.
Still, I think it is helpful to set the ground, and to remind ourselves what is inevitable about our political economy, and what isn’t. Extravagant consumption and underfunded budgets aren’t.
I guess I’m a little careful to endorse the goal post “realistic” … for what it exactly means to be a realist depends an awful lot on your inclination to accept the status quo’s boundary conditions as given. I don’t think we should do that too readily.
2) I also agree that continuous treatment of “socialism” (government outlays of GDP) makes some sense.
In preempting the “that’s socialism” criticism, I wanted to point out that a potent polity, and a larger public budget need NOT and must not make a society any less free (certainly not in terms of freedoms TO) and need NOT and must not make competition, wherever feasible less important.
My point is really one of achieving the social optimum under a game-theoretic cooperation problem: Sometimes, if everyone does what is best for herself, the sum total is suboptimal.
In a Prisoner’s Dilemma of global CO2 emissions, yes, dirigism, at the highest level possible, is the only choice to overcome. The same holds true for other policy fields (even if not narrowly as a Prisoner’s Dilemma), such as public education and extending universal opportunity in the face of excessive poverty and social exclusion.
In these cases, people may well know and do what is best for themselves – individually rational, but at the expense of others.
3) First of all – a worldwide taxation regime is probably not something that is meaningful to pursue in the next decade or two, or more (god forbid). So we’re really talking EU-wide coordination, or maybe later OECD-wide consensus.
Secondly, I’m not sure I can even conceive of compelling evidence that competition between states helps progress. One of the basic things you need for competition is for customers to choose producers relatively easily. Does that happen? Do people choose their country, and, if they’re dissatisfied, relocate abroad? Maybe a privileged few, but no more than that.
And so, thirdly, I’d rather go with a potent EU or OECD government, the democratic institutions of which of course would have to be carefully designed. That way, at least, we get to overcome the ruinous tax competition between the states.
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