The Price of Inequality: How Today's Divided Society Endangers Our Future (63 page)

19.
See Henry George,
Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth: The Remedy (1879).
With Richard Arnott, I showed that there were conditions in which a 100 percent tax on such rents was, in fact, the optimal tax. See our “Aggregate Land Rents, Expenditure on Public Goods and Optimal City Size,”
Quarterly Journal of Economics
93, no. 4 (November 1979): 471–500. There is one qualification that is important when producers can’t adequately insure themselves against the risks they bear. Then government should not rely heavily on a land tax or any other tax based on fixed quantities, because it will impose a high burden relative to income in bad years, and a low burden in good years. See K. Hoff, “Land Taxes, Output Taxes, and Sharecropping: Was Henry George Right?”
World Bank Economic Review
5 (1991): 93–112; and X. Meng, N. Qian, and P. Yared, “The Institutional Causes of China’s Great Famine,” Yale University manuscript, 2010, available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671744
(accessed March 5, 2012).

20.
The price of such resources can be decomposed into two parts—a rent, plus the cost of extraction.

21.
It is even possible to auction off subsidies, to make sure that they go to where they are valued the most. A provision giving the Department of Agriculture discretion to do so was included in the 1995 farm bill, but never implemented.

22.
As we noted in earlier chapters, a defense of these subsidies is that they increase employment. But as we noted there, too, the responsibility for maintaining the economy at full employment lies with macroeconomic policy (monetary policy and fiscal policy). If macroeconomic policy is managed well, we can have an economy at full employment, without these subsidies. If macroeconomic policy is not managed well, we won’t have full employment, even with the subsidies.

23.
The balanced-budget multiplier is normally assumed to be around unity. But if taxes are increased on the rich, who otherwise would have saved a lot, and expenditure increases are focused on “high multiplier” activities, like investments in education, then the balanced-budget multiplier can be much larger.

24.
Members of the commission do pay homage to the need for a more progressive tax system, but what they recommended was almost surely a less progressive one. They provide an illustrative distributional analysis (which focuses only on the individual income tax changes, not on the impact of the corporate income tax changes or on cutbacks in expenditures). Even in their analysis, the largest percentage increase in average federal taxes is imposed on the second quintile—13.5 percent, compared with 10.4 percent for the top quintile. At the same time, some of their loophole-closing reforms do make an important contribution to increasing progressivity. Almost half of their increased tax revenues come from the top 1 percent—consistent with the recommendations made earlier in this chapter.

25.
For small corporations, there would be a tax increase under their proposal.

26.
For a standard textbook treatment of this issue, see J. E. Stiglitz,
The Economics of the Public Sector
, 3rd ed.
(New York: Norton, 2000).
For the original theoretical analysis, see Joseph E. Stiglitz, “Taxation, Corporate Financial Policy, and the Cost of Capital,”
Journal of Public Economics
2 (February 1973): 1–34.

27.
The Bowles-Simpson Commission, in its final report, was more careful. It argued that the new tax code “must include provisions (in some cases permanent, in others temporary) for . . . mortgage interest only for principle residences, employer-provided health insurance, charitable giving; [and] retirement savings and pensions.”

28.
There is evidence that in densely populated areas—which are precisely the areas in which homeownership is likely to improve communities through higher voting rates and more participation in collective action—the mortgage interest deduction does not increase homeownerhip rates and may actually lower them. Because the supply of housing in such areas is inelastic, much of the mortgage interest deduction is capitalized into housing prices in those areas. At the higher housing price, fewer low- to moderate-income households gain from homeowning rather than renting. See C. A. Hilber and T. M. Turner, “The Mortgage Interest Deduction and Its Impact on Homeownership Decisions,” SERC Discussion Papers, 55, London School of Economics, 2010, available at
http://personal.lse.ac.uk/hilber/hilber_wp/Hilber_Turner_2010_08.pdf
(accessed March 5, 2012).

29.
Most of the proposals did take some account of this, by postponing the implementation of their cuts, but only briefly, perhaps because they had an excessively optimistic view of recovery. Under Bowles-Simpson, cuts (relative to what public spending otherwise would have been) begin in 2012. Yet, as this book goes to press, the Congressional Budget Office projects that the economy will not be back to full employment before 2018, and the Fed is so pessimistic that it has said that interest rates will remain near zero through the end of 2014.

30.
As an obvious example, a tax credit to corporations that do invest provides incentives for firms to invest and provides them the cash to do so.

31.
In a world of perfect competition, prices are driven down ruthlessly to marginal costs, and marginal costs are driven down ruthlessly to the lowest level consistent with current technology. But for a variety of reasons, competition in the health care sector, and especially in health insurance, is far from perfect. One of the reasons that the private sector has such high transactions costs is that companies devote considerable efforts to “cream skimming,” to ensuring that those whom they insure are healthy, or at least healthier than average. Another reason is that, in the presence of excess profits, they spend considerable resources recruiting good customers, e.g., through advertising.

32.
Many of these recommendations are consistent with those of Bowles-Simpson.

33.
Gary Engelhardt and Jonathan Gruber show that increases in Social Security benefits can explain all of the 17 percentage point decline in poverty that occurred between 1960 and 2000. “Social Security and the Evolution of Elderly Poverty,” NBER Working Paper 10466 (2004).

34.
Thomas Ferguson and Robert Johnson, “A World Upside Down? Deficit Fantasies in the Great Recession,” Roosevelt Institute Working Paper no. 7, 2010.

35.
The Obama health care program contains a number of provisions that are designed to bring down the costs of health care. It is too soon to tell for sure how effective these will be.

36.
That’s not quite true: even promised future cuts, if they are credible, may be a damper on the economy now, as households, knowing that Social Security and Medicare are being cut, will have to save more now, to protect themselves; and even though higher saving in the long run is good, the short-run impact—less consumption—will not be good for recovery.

37.
A variant of this, remarkably held by some serious economists, is that they aren’t really unemployed; they’re just “enjoying” leisure. Of course, normally, someone enjoying leisure should be happy, which is not the case for most of those out of a job. But, in this view, that’s a problem for psychology, not for economics.

38.
This is, of course, better than at the worst of the recession, when there were seven applicants for every job. (Bureau of Labor Statistics
http://www.bls.gov/news.release/jolts.htm
). Reportedly, when McDonald’s advertised that it was going to hire 50,000 workers, 1 million applicants showed up! See Leslie Patton, “McDonald’s Hires 62,000 in U.S. Event, 24% More Than Planned,”
Bloomberg
, April 28, 2011, available at
http://www.bloomberg.com/news/2011-04-28/mcdonald-s-hires-62-000-during-national-event-24-more-than-planned.html
(accessed March 5, 2012).

39.
Indeed, there is an argument that unemployment insurance might actually enhance the efficiency of the labor search market, since those who were least desirous of a job and least likely to get a job would be the first to drop out. In doing so, search costs were lowered for others, and those who did get a job were more likely to be better matched. I am indebted to George Akerlof for discussions on this point.

40.
Growth of real GDP (percent change from preceding year) for 2010: United States (2.9), Sweden (5.3), Germany (3.5). Employment growth (percent change from preceding year) for 2010: United States (–0.6), Sweden (1.0), Germany (0.5).

See OECD at
http://www.oecd.org/document/22/0,3746,en_2649_39023495_43221014_1_1_1_1,00.html#taxes
. Chapter 4 explained a variety of short- and longer-term benefits of greater social protection—greater risk taking, greater stability, and more political support for measures, like trade opening, that, if well managed, can help improve economic performance, all of which can contribute to higher long-term growth.

41.
For the position of those opposing public investment to be coherent requires the
additional
assumption that there do not exist public investment opportunities with high returns. But, as we discussed earlier, it is widely recognized that there are many high- return investments in infrastructure, education, and research, among other things.

42.
In addition, most of the examples entail countries with flexible exchange rates. Lower exchange rates generate more exports. The U.S. exchange rate is to a large extent outside of its control: if Europe’s crisis worsens, for instance, the euro may decline relative to the dollar and the United States will have a harder time exporting.

43.
See Arjun Jayadev and Mike Konczal, “The Boom Not the Slump: The Right Time for Austerity,” Roosevelt Institute, August 23, 2010, and their forceful critique of Alberto Alesina and Silvia Ardagna, “Large Changes in Fiscal Policy: Taxes Versus Spending,” NBER Working Paper no. 15438, 2009. The IMF has come to similar conclusions. See also Olivier J. Blanchard, David Romer, Michael Spence, and Joseph E. Stiglitz, eds.,
In the Wake of the Crisis: Leading Economists Reassess Economic Policy
(Cambridge: MIT Press, 2012), and in particular the article by Robert Solow, “Fiscal Policy,” pp. 73–76. See also Jaime Guajardo, Daniel Leigh, and Andrea Pescatori, “Expansionary Austerity: New International Evidence,” IMF working paper, July 2011.

44.
See Domenico Delli Gatti, Mauro Gallegati, Bruce C. Greenwald, Alberto Russo, and Joseph E. Stiglitz, “Sectoral Imbalances and Long Run Crises,” paper presented to the International Economic Association meeting, Beijing, July 2011, and forthcoming in its proceedings. For a more accessible version, see J. E. Stig-litz, “The Book of Jobs,”
Vanity Fair
,
January 2012, pp. 28–32, available at
http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
(accessed March 5, 2012).

45.
See Sumner H. Slichter, “The Downturn of 1937,”
Review of Economic Statistics
20 (1938): 97–110; Kenneth D. Roose, “The Recession of 1937–38,”
Journal of Political Economy
56, no. 3 (June 1948): 239–48; and E. Cary Brown, “Fiscal Policy in the ’Thirties: A Reappraisal,”
American Economic Review
46, no. 5 (December 1956): 857–79.

46.
As we’ve argued elsewhere, however, the financial sector is not fully back to health. Many of the smaller banks, responsible for so much lending to the country’s small and medium-size enterprises, still face problems. Nonetheless, overall, investment outside of real estate has been largely restored to precrisis levels. Private nonresidential fixed investment as a percentage of GDP was around 10.0 percent in the second quarter of 2011, while the historical postwar average is 10.7 percent (though we note that GDP has fallen below trend). Equipment and software investment by firms in real terms was about 8.2 percent of GDP in early 2011 compared with a high of 8.4 percent in 2007 and 6.6 percent at the peak of the crisis in the fourth quarter of 2008.

47.
And it affected judgments about the value of a political battle to get a larger, longer, and better-designed stimulus. A critical weakness of the stimulus was that a third of it went to household tax cuts, which had proven themselves relatively ineffective earlier (the Bush tax cuts of 2008). For a more extensive discussion of the design flaws, see J. E. Stigliltz,
Freefall
(New York: Norton, 2010).

48.
As the crisis has continued, officials have become more cautious. The Fed’s announcement that it expects interest rates to be near zero at least until the end of 2014—saying, in effect, that the downturn for which its precrisis policies bear considerable culpability would last at least seven years. (The recession began in December 2007.)

49.
In a period of prolonged underutilization of capacity, one is concerned not just about the immediate impact of the spending but also about the effects even two or three years down the line, when the economy is still weak. Some of what is not spent today is spent in these future years, stimulating the economy, and the knowledge that this is so may provide even more stimulus to the economy now. See P. Neary and J. E. Stiglitz, “Toward a Reconstruction of Keynesian Economics: Expectations and Constrained Equilibria,”
Quarterly Journal of Economics
98, suppl. (1983): 199–228. Moreover, one of the reasons that money doesn’t get recycled—to increase GDP even more—is “leakages,” to spending abroad. But when other countries (such as those in Europe) are also weak, spending abroad increases
their
income, and they reciprocate, spending more on imports, including from goods from the United States. One is, accordingly, interested in long-run
global
multipliers, not just short-run national multipliers. These multipliers are likely to be large, much larger than the 1.5 number usually used. See United Nations, “Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System”
(also known as the Stiglitz Commission), New York: United Nations, September 2009, published as
The Stiglitz Report
(New York: New Press, 2010). For a recent survey, see Jonathan A. Parker, “On Measuring the Effects of Fiscal Policy in Recessions,”
Journal of Economic Literature
49 no. 3 (2011): 703–18. Many of the statistical studies cited by those claiming a small multiplier are badly flawed, since they rely heavily on periods in which the economy is at or near full employment and/or where monetary authorities have taken offsetting actions—increasing interest rates. The difficulty is that periods of long and deep downturns, such as the Great Depression and the Great Recession, are relatively rare, and that impedes the use of statistical analyses.