Imagine a giant tidal wave forming even as the tide is rising. There is more water in the general area than before (we stipulated that the average tide is rising), but part of the ocean is rising faster than the rest.
Where does that water come from to form the wave? It must come from the surrounding sea. And so, even while the wave is rising above the average sea level, some area surrounding the wave must be falling below the average sea level.
The average sea level is rising, so these surrounding areas might still be rising a little as well, just less quickly than average. But they might also stay at the same level they were at before the sea started rising. And they could even sink some. All these are possible depending on how fast the tidal wave is growing, how fast the sea is rising, and how wide an area the wave is drawing its water from.
Now imagine that, instead of one large tidal wave, there are several giant growing mounds of water in the sea. And they just keep growing and growing at a rate that’s faster than the rate the overall sea is rising.
These giant stacks of water never dissipate, and they never crash to shore. It gets to the point that 20-25% of all the water in the sea is in these giant standing mounds, and almost all of the new water entering the area is going into those giant growing mounds of water and not into the surrounding sea.
The average sea level is rising. But most of the sea is not.
Now put boats in the scene. There are boats scattered randomly about. One in one-thousand happens to sit atop a giant mound of water. These boats just keep rising and rising, while most of the boats just stay at the same level, and might even be lowered a bit.
What does this mean for the economy? Once we see that the rising average tide represents the overall growth in economic output (G), and the rate at which the giant mounds are growing represents the rate of return on invested wealth (R), then we can see that the rising tide slogan becomes suspect when R >> G.
When R >> G, those who have wealth to invest far in excess of their needs will continue to grow their fortunes at rate R on average (or faster, since the wealthy can invest almost all of their wealth, and they tend to have access to better than average investments), while the wealth of the rest must, on average, be growing at less than G, and might even be shrinking.
Piketty tells us that, historically, R has tended to be about 5% and G has tended to be about 1.5%.
There are, of course, in the economy, not just giant fortunes and people living in poverty. There are many fortunes lying between these extremes. Some people with little capital are earning more than 5% returns. And some with vast wealth in a given year will see returns below 5%. These are long-term, average returns.
And there are also taxes to consider.
Steep inheritance taxes (causing the mounds of water to crash against the shore), capital gains taxes (causing a gentler dissipation out at sea), and other policies, will cut into the 5% growth rate of wealth, and bring the growth rate of the wealth of the wealthy down closer to the overall growth rate of the economy. This prevents much of the water from accumulating into standing mounds, leaving more of it to fill out the surrounding sea.
Unfortunately, we dismantled many of those mechanisms over the last 40 years.
And if rising individual wealth means rising individual power to affect legislation and regulation, then the wealthy can rig things so that even more of all the new wealth goes into the monster mounds of water instead of into the surrounding sea.
And that, my friends, is how a rising tide can fail to lift all boats.
I think it’s understandable that African Americans want some sort of “reparations” from the United States. Even today they are, as a group, economically and socially disadvantaged by current social structures. And it has been, famously, much worse in the past.
I count myself as one who is in principle in favor of some kind of reparation, but my mind threatens to explode when I start to think about how to go about figuring out who benefits, how much, which specific wrongs are being addressed, how far back you go, who pays, how serious a wrong has to be before you litigate like this (since it would set a precedent), and so forth.
So, in the interest of simplifying the matter some, I want to offer an observation or two.
First, it seems reasonable to suggest that, to a first approximation, the gap between black wealth and income, on the one hand, and white wealth and income, on the other, is a good starting point for determining the total amount of reparation owed.
Average African American income and wealth lags average white income and wealth by a large margin. If these gaps are due mostly to past and current systemic injustice, it seems only right to make things square, so that we can at least remove the economic disadvantage that resulted from past injustice, and enable African Americans to participate in the economy just as fully as whites going forward.
Second, any general transfer of wealth from the top 1% to the bottom 80% would, as an indirect byproduct, involve a net transfer from white to black, for the simple reason that African Americans are vastly under-represented in the top 1% and vastly over-represented in the bottom 80%.
So, the suggestion is that general attempts to reduce the extreme inequality we have in the United States today could also be framed as a partial indirect reparation program.
There are some reasons this indirect method of partial reparation might be deemed insufficient. It comes with no explicit recognition of wrong for specific kinds of injustice. And it is not being targeted on the basis of race. Poor whites would benefit as much as poor blacks. And rich blacks would not benefit at all. All that can be said is that “on average” there will be a net transfer from white to black.
But if part of the point is to help African Americans as a group climb out of the hole the United States has put them in, then reducing inequality would go some way toward that goal.
There is another reason a “one-time” transfer would be insufficient. If systemic injustice remains, we could conceivably make whites and blacks square with each other, and then see divergence in the future, because the system is still rigged in favor of whites and against blacks.
I wonder if that’s why Martin Luther King’s prefered vehicle for delivering economic justice to everyone was a Universal Basic Income. That vehicle not only transfers wealth from the top to the bottom, but it does so on an ongoing basis. As such it is a means of continual partial indirect reparation.
So the suggestion is that perhaps a Universal Basic Income, plus continued effort in trying to un-rig the system might be a fairly simple way to move toward justice.
NOTE: after writing this up this morning, I found this: UBI as a Compromise on Reparations
Paul Graham has written some great essays: like here.
But “Economic Inequality” is not one of them.
I’ll make just a few points here.
- Nothing in Paul’s essay is incompatible with a policy of taxing the wealthy more and instituting a basic income in the United States.
- Taxing the wealthy more and instituting a basic income would reduce inequality.
- Taxing the wealthy more and instituting a basic income would not reduce entrepreneurship and wealth creation much at all if any.
- In fact, with the safety net of a basic income in place, more people, not fewer, would be able to get into the entrepreneurship and wealth creation game.
- Taxing the wealthy more and instituting a basic income would make the wealthy a little less wealthy, but leave them still very wealthy.
- You can be concerned about highly concentrated wealth for more reasons than simple envy. Concentrated wealth is also concentrated power. A democracy has some interest in making sure a small collection of individuals doesn’t have too much power over everyone else.
I’ll leave it at that for now, and pass the baton to Russell Okung, who makes some very good points from a different angle:
Human beings do not thrive under conditions of extreme inequality. And, under the guise of “balancing the budget” some politicians are trying to increase the amount of inequality in the United States. They claim that balancing the budget is of the utmost importance, and that it will require “painful cuts” in programs that help people pay rent and put food on the table.
The truth is, it’s not really all that difficult to balance the budget. It’s only difficult to balance the budget if you refuse to raise taxes for the wealthiest members of society and take cuts in military spending off the table.
Then, in order to balance the budget, you have to make painful cuts to programs that help people stay afloat in an economy that already has them on their knees. And balancing the budget that way is doubly painful because it will reduce demand for products and services, which will lead to slower economic growth.
Here are the facts:
- The GDP of the US is $16.8 Trillion.
- Federal expenditures are $3.7 Trillion
- Federal tax receipts are $3.2 Trillion.
That’s a shortfall of a little under $500 Billion. We can debate how bad that is (it’s by no means the end of the world), but let’s assume for now that we want to erase the deficit immediately.
In order to make receipts match expenditures, the effective federal tax rate needs to be 22% (3.7/16.8).
It’s currently 19%. (3.2/16.8)
All we need to do is collect 3% more of GDP in taxes, and we can balance the budget without causing pain to those at the bottom, and without reducing aggregate demand.
Where should that money come from? The average worker? Or the owners of the means of production? Study this chart, and you tell me:
- Charity steals dignity.
- Inheritance gives dignity.
- Charity makes you feel like an outsider
- Inheritance makes you feel like you belong.
- Charity makes you want to hide.
- Inheritance makes you want to engage the world.
- Charity makes you resent those who have been luckier than you’ve been.
- Inheritance allows you to have better luck.
- Charity makes you think about yourself.
- Inheritance makes you want to leave even more to the next generation.
- Means-tested charity discourages productive behavior.
- Inheritance provides the means for productive behavior.
- Charity singles you out as a special-need case.
- Inheritance is given equally to all.
- Charity is REACTIVE and makes you feel like a burden.
- Inheritance is PROACTIVE, and makes you feel like you’ve been entrusted with responsibility.
A natural inheritance (in the form of a basic income) is a much better way to provide a safety net than is means-tested welfare. It would make the poor MORE productive; it would keep everyone out of poverty; it’s easy to afford (I’m working the numbers now ); and it’s only fair. We weren’t there for the initial land grab where some people’s ancestors grabbed an out-sized share of the natural inheritance and cut everyone else out.
Families take care of each other and cut their members in on their inheritance. Tribes take care of each other and share mother nature’s natural inheritance. Why shouldn’t nations (and especially extremely wealthy nations) do the same?
(Not to mention the fact that we have to find a way to share the profits better anyway as machines continue to drive down the value of human labor.)
 For Ed Dolan’s discussion of the matter, read his two part post: The Economic Case for a Basic Income
To my progressive friends, I ask: “If you’re going to both raise the minimum wage, and tax corporations more, how do you propose to encourage corporations to stay here and hire American workers. Are you going to force them to?”
To my conservative friends, I ask: “If you’re going to fight an increase in the minimum wage, and reduce taxes on the wealthy (presumably also gutting social programs), how do you plan to keep people out of poverty in an era where the value of human labor is falling?”
A proposal: Eliminate taxes on corporations that hire Americans, raise taxes on wealthy investors directly, and supplement everyone’s income equally with a modest basic income (framed as a prosperity dividend on one’s natural inheritance) instead of raising the minimum wage.
This solution would increase the number of jobs in the US, it would reduce poverty (without increasing shame), it would be a progressive tax and transfer solution (corporate taxes often aren’t), it would be a scalable solution in the very likely event that the value of human labor continues to fall, and it would restore to everyone a modest natural inheritance that Mother Earth used to provide us for free (before the big land grab happened).
Capitalism is a beast worth taming. And we must tame it, or it will devour us.
Money allows people to get fair compensation for their goods, without having to find someone who both wants what they have and has what they want at the same time. It’s much better than barter on a large scale.
Credit is an amazing invention that allows people with good ideas to act on them even if they don’t have the money on hand to do so.
The public stock corporation is an amazing invention that allows people to spread the risk of innovation and allows people to contribute to ventures on a fluid, piece-meal basis.
These things have allowed us to create pencils, computers, video games, houses, cars, airplanes, spaceships, and so on. These are things no one could create on their own. Try to create a pencil by yourself. Spend a week roaming nature to find the graphite and the rubber and the steel and the wood, and then figure out how to assemble them into a pencil. Good luck. Now go to the store and buy one for ten cents. That’s the beauty of capitalism. It coordinates the activities of billions of people so they can create things no one individual or group could without the market.
If all the capitalist institutions were ripped away tomorrow, the world would plunge into poverty, and we would destroy the environment far faster than we are right now. Imagine seven billion people burning firewood to stay warm. Good bye trees.
Yes, capitalism makes the world go round, and earth has no chance of carrying 7 billion people without it (until we come up with a better idea — which has not yet been done). However, . . .
Capitalism is famously not without problems. Left unregulated, capitalists will pollute, collude, exploit workers, and corrupt the government.
And wealth makes it much easier to make more wealth. Much, much easier. It gives unfair leverage to those who already have wealth.
That’s why it makes sense to me to support both capitalism, AND the need for redistribution, intelligent regulation, and vigilant insulation of our political bodies from the influence of money.
Rich kids start with millions. Poor kids start from near zero. And starting from near zero today is worse (in some ways) than it was for hunter-gatherers. At least then the earth itself provided a natural inheritance of game, roots, berries, and materials for shelter. You rarely fell too far behind your tribe mates, and people didn’t criminalize your attempts to forage for food or construct your own shelter from things you found lying around.
But why should some inherit millions while most inherit next to nothing? Why should anyone start from near zero in a nation as prosperous as the United States? Why not provide a modest natural inheritance to all citizens?
Some people think of a universal basic income as a kind of welfare. But what if we think of it differently? What if we think of it as investment income generated by a natural inheritance? While many people are uncomfortable with the thought of poor people getting money without having to work for it, almost everyone is comfortable with the idea of investors receiving passive investment income without having to work for it .
Some UBI proponents (including yours truly) strengthen the inheritance analogy by defining the benefit in terms of national income. For instance, we might set the benefit at 10% of per capita national income. Currently that comes to about $450/month, and it would go up with every rise in inflation or national productivity. This is like giving people a modest inheritance of 10% of an average individual share of the nation’s wealth, and letting them draw the interest on that investment once they reach adulthood. So construed, it’s like we’re very slightly de-skewing the lottery of birth and inheritance. Rich kids will still inherit millions, but at least everyone will inherit something.
This is why I prefer the label “Prosperity Dividend” over “Basic Income”. If we frame a universal basic income as a stake in the nation’s prosperity, we create a sense of belonging and investment in every citizen who receives it. And we restore some of the natural inheritance we lost when we removed the ability to forage for a living.
 They also have more social capital and margin for taking risks.
 Of course some things are better for today’s poor than for the average hunter-gatherer. We have antibiotics, vaccines, video games, and a greater understanding of how the world works. I personally wouldn’t trade modern life for the life of a forager. But why not try to have our cake and eat it too?
 Investors do put their money at “risk”. This is framed by some as “working” for the money. But the wealthy don’t actually have to take on very much risk to earn a return that matches the rise in per capita national income.
According to Jonathan Haidt (Moral Foundations Theory), progressives tend to care about three main things:
1) the welfare of people,
2) fairness, and
3) liberty (freedom from tyranny).
Conservatives, according to Haidt, care about all three of those things as well, but they also care about three other things:
4) loyalty to their groups,
5) obedience to tradition and “legitimate” authority figures, and
6) purity (avoidance of things and actions they deem “disgusting”).
The progressive vision (and that of many left-leaning Libertarians) is straightforwardly about people’s welfare, fairness, and autonomy. It’s about creating systems that work well for everyone for the most part. And they aren’t all that worried if the new system upsets tradition or enables people to do “disgusting” things. They can also tolerate a little bit of cheating of the system as long as the overall effects are positive.
Progressives are frustrated when conservatives appeal to authorities other than science and reason, and when they hold up “progress” in the name of traditional moral codes, or when their group loyalty gets in the way of cooperating with other groups.
Conservatives are frustrated when Progressives work to undermine their traditions, are permissive about behaviors they consider “disgusting” or wrong, or undermine loyalty to the body politic or reduce the group’s ability to defend itself against other groups.
These portraits are obviously vastly oversimplified, and many individuals on the left and right won’t fit these stereotypes. But as far as generalizations go, they seem both fairly accurate and useful — able to explain both the content and tone of the debates between left and right around the world.
I wonder how this model might help us forge more productive dialogues across the left-right chasm.