By Rumplestatskin, a professional economist with a background in property development, environmental economics research and economic regulation. Follow him on Twitter @rumplestatskin. Cross posted from MacroBusiness
As my online debates with ‘well-trained’ economists continue with full force I will again use this blog as an outlet to expand on arguments that can’t be made in 140 characters or less, or those that simply attract religiously-held views via comment pages.
On Facebook an otherwise innocuous comment, that it is “undeniable there is an equity-efficiency tradeoff” really leapt off the screen at me. Why would a sophisticated economic analyst make such a strong statement that has little to no empirical support. Could it be that this little book has had such an enduring impact on the discipline?
What is rarely taught in the haste for economics departments across the Anglosphere to pump out energetic graduates are the numerous build-in assumptions of the core models that lead to this apparent trade-off. Nor are alternative models presented that parcel together different, and often more realistic assumptions, and arrive at far different conclusions.
In simple terms, the reason such a trade-off exists in economic models is because it is assumed that society is already at the production frontier and that any efficiency-increasing policy has already been undertaken. It’s a bit like saying once there are no win-win policies for equality and efficiency left, then there become a trade-off between them. Well, obviously. But that’s not real life, and we know that as soon as we leave this theoretical frontier almost anything goes (the theory of the second best).
To be more concrete, if there really is a real life equality-efficiency trade-off at a broad level, then there should be no single regulatory change that can increase both equality and efficiency, since if there exists such a reform, or set of reforms, it negates the entire aggregation to a macro level trade-off. Nor should you be able to simultaneous decrease efficiency and equality, as this leaves the door open for reversals of such policies.
An alternative, and my preferred, way to approach such problems is to consider the set of institutions that lead to the current level of equality as a whole. The evaluate the costs of these institutions against alternative institutions that result in greater of lesser equality.
Now one might interject at this point and say that the shifting nature of equality is a product of technology change, education or some other such thing. I’ll leave it to Matt Bruenig to address this point
When we talk about how economic changes, technological swings, and even education will affect the distribution of income in society, we always sort of assume away our government’s distributive policy as if it will or must remain static. But that’s not true at all. At any time we can change the huge set of policies that direct the distribution of income in society to something else.
The last few decades of median income stagnation didn’t have to happen. Even if you say it was caused by international competition or technological change or whatever else, the point is that if we had put a different set of distributive institutions into place, we could have avoided the maldistribution of income that we have seen. It is not like the median incomes stagnated because the economy as a whole stagnated. Quite the contrary: the economy is much larger on a per capita basis now than it used to be. If we had wanted to make sure median incomes continued to rise, we could have done that. We would have just needed different distribution policy.
Let us now consider a couple of important cases in the set of reforms that, by most estimates, would increase both equality and efficiency.
First is shifting the tax base to land (and other resource monopolies). This is probably the simplest in terms of administrative simplicity, and the one reform that would have the greatest efficiency boost and equality gains. Unfortunately it is also the one reform that, by virtue of its distributional impact, is the least palatable to the wealthy and therefore the least palatable politically.
The reason for the win-win nature of land taxes is that deadweight losses from taxation are reduced, increasing efficiency, while at the same time the tax will fall on those entities with the largest ownership claims to the natural wealth of a country.
The second case is actually any of a suite of investments that can be undertaken by government which would benefit the poor to at a higher proportion than their wealth. I’m thinking here of, say investment in a fibre optic communications network to all homes, or public investments in parks and community services in poorer neighbourhoods, or any number of things. These investments would then be provided free of charge or at token prices.
The policy space is vast, and economic thinking often limits it. Consider the case of gifts of land and accessible government-backed construction finance to households on low incomes. Such a scheme would provide the poorest in society an asset they can use to support themselves – to borrow against, to invest in, as a cushion in times of financial distress. We did it once before, with the soldier resettlement programs, for slightly different reasons.
In the case of Australia I might even suggest intervening in currency markets to keep the AUD low and foster local investment.
That’s a nice handful of policy ideas that appear to negate the apparent ubiquitous equality-efficiency trade-off.
Why do these ideas still hold so much sway? Why do we teach that the usual case is for a trade-off, when it is equally valid to teach that the usual case that there is no trade-off? Why constrain the thinking of graduates in this way?
I can’t provide a complete answer to these questions now. I can only do my part to expand the thinking of receptive readers of this blog.
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What is efficiency? No really, what is it?
The definition usually describes resource usage to accomplish an objective. So what’s the objective? Rising standard of living? Environmental security? Equitable distribution? Lack of ‘waste’? What’s waste? Who gets to define it?
Until you, me, the economics profession, and everyone out there can agree on a definition, anyone who uses efficiency in their blog posts needs to have this question put to them. It certainly doesn’t help our understanding to have debates when we don’t have the foggiest what we’re debating about.
Bingo.
well done. With no standard or even accepted definition, everyone using the term can be right, and wrong, at the same time. Useless cacophony ensues
Exactly. The only definition of economic efficiency that I have heard of is efficiency in clearing markets by linking buyers and sellers. That’s a pretty narrow standard.
I think economists do have a definition of efficiency, unfortunately it differs from the engineering/scientific/whathaveyou definition which is: using the least materials possible to accomplish a given task.
I can see how your ideas would work in Canada with all that Tar Sands activity being taxed at source and all the migrants from the poorer provinces who go to work there being provided with affordable housing. Instead, we will probably have a permanent loss of population from the poorer provinces with some of the now wealthier workers returning to live in the poor provinces from which they left.
The Fracking debate in New Brunswick would look much different too if those seismic crews (from Texas) had to pay to do their work so that the landowners would obtain something for the work being done on their land. When Fracking starts, then there should be more taxation for every bit of water being used and every bit of land being misused. There should not be any of this activity taking place where the watersheds provide drinking water for individuals or for towns and cities. That would have required a great deal of water mapping as NB has a proliferation of creeks, rivers, watercourses, tributaries, streams, rivulets, brooks, rills, runnels, freshets, etc., and underground reservoirs of water. Our politicians lack the cojones to do any of this.
Canada and Australia certainly run a heightened risk of being inflicted by a staples trap or resource curse. This is so because of their immense wealth of natural resources. Given that both countries have experienced a rather pronounced swing to neoliberal orthodoxy of late, I would say this risk has reached acute proportions.
Nevertheless, Rumplestatskin’s observations still hold for places like the US and Europe that are not so immensely rich in natural resources.
Michael Hudon makes the argument for higher land, fuel and mineral taxes here:
“Financial Predators v. Labor, Industry and Democracy”
http://michael-hudson.com/2012/08/financial-predators-v-labor-industry-and-democracy/
David Harvey has also consistently advocated for increased land taxes. This book review by Benjamin Kunkel summarizes Harvey’s thinking:
“How Much Is Too Much?”
http://www.lrb.co.uk/v33/n03/benjamin-kunkel/how-much-is-too-much
Thank you, from Mexico, for the links!
Great post, Rumplestatskin.
The idea that the “invisible hand” of instrumental rationality magically and mysteriously produces a “rational” distribution of goods and services — at the expense of the everday world of human bonds, beliefs, and feelings in which love, loyalty, politics, family relations, and friendships shape a moral life — has to be one of the most cold blooded con jobs ever foisted on a gullible public.
I don’t like the new much-smaller print. It is harder to read. If I am the only one who thinks so, then it doesn’t matter. If enough other people also think so, and say so; will this blog go back to the previous larger print?
Agree.
I find the smaller print easier to read, easier to scan too. FWIW.
If other people agree they should say so. If everyone who feels one way or the other says what they feel, Yves Smith and the blog design helpers can decide if one side outweighs the other by enough that the new print size should be kept or changed back to what it was.
For my part, even when I tried the “control” “plus” hold-down-at-same-time which I found in another thread, the print was still small enough and “light” enough to be deeply eye-hurtful and reader-hostile to me. If a vast enough preponderance of other people feel the same way, and say so . . . then it might be changed back.
If there is a problem with the smaller print, try keying Ctrl+
That will magnify the text.
Control-plus (Ctrl+) works well for me. On the third iteration, the text even went bold. Control-minus (Ctrl-) reverses the process. I repeated (Ctrl-) the same number of times I hit (Ctr+) and that brought it back down to the original size..
I agree- even though I can increase the size fairly easily on my Ipad, it’s a pain…
This piece needs to be edited. Too many typos and non-sentences. For example: “The evaluate the costs of these institutions against alternative institutions that result in greater of lesser equality.”
If I substitute “To” as the first word of the sentences and “greater or lesser” for “greater of lesser”, it still makes no sense.
And what does “there become[s] a trade-off between them” mean?
Everything here needs copy editing. In the land of the 24-hour news cycle, it seems speed trumps comprehensibility every time.
Should be “Then evaluate…” and “greater or lesser”
“Quite the contrary: the economy is much larger on a per capita basis now than it used to be. If we had wanted to make sure median incomes continued to rise, we could have done that. We would have just needed different distribution policy.
The economy is larger but people cannot afford to buy the products of the larger economy.
Its a simple idea.
If you are familiar with the concepts of inputs into a energy balance sheet and REAL total final demand you can get your head around this.
Car / finance companies are now willing to give 0% finance for their products …..what does this tell you ?
People cannot afford to buy the products that the Industrial system is selling.
We have a breakdown of the production / distribution / consumption system.
Otherwise known as a Industrial collapse.
In the search for efficiency of production the system has scaled up to a global level.
However it has neglected the concept of redundancy …..one small rise in inputs somewhere along the now vast supply chain and all the previous investments become worthless.
To my way of thinking, what they’ve neglected is inherent in the phrase “supply side economics”. They’ve completely ignored the question of how demand for products exists. When people don’t have money, they can’t buy things. Every familiy needs a refrigerator, but a family that earns ten times what the average family does won’t typically need ten refrigerators.
“first is shifting the tax base to land (and other resource monopolies). This is probably the simplest in terms of administrative simplicity, and the one reform that would have the greatest efficiency boost and equality gains. Unfortunately it is also the one reform that, by virtue of its distributional impact, is the least palatable to the wealthy and therefore the least palatable politically.
And Georgist land tax drive in a debt money system is the worst of all worlds – it destroys the wealth of the last section of society somewhat independent of finance.
It will kill all of the remaining hobbits.
Growing up in a state where schools are financed by special property tax levies, I would yearly watch the levies being voted down, usually by retirees with grown children who still owned the houses they had purchased while working and now could barely afford. Owning property (especially residential) doesn’t necessarily make you a good source for taxes.
So you disagree with Michael Hudson? He argues that if you *don’t* tax property, it frees up that money to go to the finance sector as economic rents…
That’s a good point and the big problem in acceptance of LVT. If a person has worked hard and bought a reasonable (modest) home for retirement it seems unfair to be bumped out of their home by LVT. Then again if someone had a windfall win on the stock market and was living in an oversized house doing nothing productive, it seems reasonable to expect that person to move somewhere else and downsize.
Retirees have time on their hands, feel vunerable and are very vocal. LVT will be impossible to implement without some kind of tax credit for retirees. There needs to be a universal tax credit equal to median household LVT for retirees and other neccessary beneficiaries such as the unemployed, sick and disabled.
LVT? Cant’ even get rid of Prop 13, despite it being a disaster.
Land taxes eh? Well here in Crook County Illinois land taxes already account for 20 to 30 per cent of the gross
income for multifamily buildings. It is not possible to have an 80/20 mortgage even with depressed property values and be paid for your work providing people housing.
As far as single family land tax rates, in my community, you pay between $900.00 per month to $4,000.00 per month for the pleasure of living in an inner ring suburb with a non-top 50, in the state, high school. Couple that with rates rising each and every year to 50% of the property taxpayers. This results in 50% of the people each year complaining about the increase and 50% staying silent because they didn’t get one. Now the taxing bodies are demanding 55% of the projected property taxes in the first installment so the 5% increase in the second installment appears as a wash. It is not sustainable for the landlords and rents can’t rise fast enough to cover the property tax increases.
The fleecing continues.
“Catch-22 says they can do anything we can’t stop them from doing.”
Property tax and land tax are not the same thing. A land tax has nothing to do with what is built on it, just the value of the land. This also includes mineral taxes.
Awhile back, I created this chart from US government data. If there’s any relationship between the minimum wage (one means for acheiving economic inequality) and GDP growth, I sure can’t see it. Yet we’re continually told such relationships exist. Any relationships seem to be theoretical, at best.
Villify Vilfredo Pareto for the idea of equality-efficiency tradeoffs assertion. Or mindless extension of Pareto-ism.
On the idea of a land tax, exactly what about the land is being taxed? In the US, it is legally possible to segregate the land into different rights that can be sold to different owners. Mineral extraction is done by those with mineral rights, either directly or through lease. Logging rights and fishing rights are separable in some jurisdictions. And the “fee simple” owner of the property might have little recourse when the exercise of those rights destroy the remaining rights in the property. People from coal mining areas in the US understand this.
So who exactly is getting taxed and for what rights in a land tax?
In the US, many jurisdictions tax property (including undeveloped land) at the value of the “highest and best use”. That drives owners to sell and flip the use of land from vacant to agricultural, from agricultural to residential, or from residential to commercial or industrial in order to capture the appreciation of the land value. It also causes owners of land with large stands of trees to log in order to pay the local taxes and not necessarily on the basis of the market.
Have the folks advocating a land tax thought through all of the environmental implications of that proposal and how that might affect the way the tax legislation is structured?
The absurdity of the European car supply chain………..
http://www.youtube.com/watch?v=gZH0tbmbF2Q
Extending to Morocco , Turkey and Russia now…..
There was a time when almost the entire English car PRODUCTION supply chain was centered on a rectangular box about 100 km by 300km orbiting Coventry.
Now the English car CONSUMPTION market is the only large car market in Europe – simply expanding because it is at the center of the financial vortex / rent system.
This is so simple to figure out – one does not need a advanced degree or something.
Wage inflation in the 1970s era
Less efficient but more robust + a more human &local or at least national or smaller banking union world.
http://www.youtube.com/watch?v=fWpVJU1K2-c
“Tell me Seamus , have you ever worked in management”
Land taxes would actually be the worst possible tax system, especially from a human / ecological standpoint.
Since land would be taxed heavily, owned land must then produce a far greater income to offset the cost. This would drive intensive land development for resource extraction, would drive up agricultural prices, and would migrate humans to larger cities where land ownership for the less wealthy would be very rare. Land with no or negative value would be abandoned, and that with the highest value would be strip-mined or over extracted, using preciously expensive petroleum distillates in increasing quantities. This would reduce the overall tax base for governments.
In short, such a tax focus drives increased rent extraction, aggregates productive land to the most connected elites, and sequesters humans into cities where they become consumers/cattle to be farmed. While this might be the ecological pipe dream of malthusians who hope to see the population of Earth reduced to 500 million or so, I would not choose to be a party to the horrors (in the true sense of the word) that would await the average human under such a system.
People come up with solutions for the resource curse without examining the effect that their proposed solutions have on the population, given human nature. But then isn’t that the criticism the author is making of economists in general?
Just make tax exemptions for the following:
1) Organic agricultural land
2) Primary residential properties for retirees
3) Land being rehabilitated according to ecological principles
I think that would cover it.
bluntobj- If I understand Michael Hudson’s argument, I think he would say that higher land taxes would reduce the size of economic rents the banks could capture; since they are only able to extract what the buyers can bear. Banks lobby for lower land taxes so they can capture that freed-up revenue stream. If that’s true, to me that says the overall cost paid by the buyer would not change that much, it would just be re-directed from the banks to the government.
PS
Not that I am advocating the inflation of the 70s.
This was a result of banks producing credit for cars and stuff – destroying capital and the simultaneous production of fiscal stuff to somehow balance this then smaller banking vortice.
We can only get out of this current life support crisis if we ban free banking and produce demand notes to sustain a lower tempo of commercial activity on a local level.
“First is shifting the tax base to land (and other resource monopolies). This is probably the simplest in terms of administrative simplicity, and the one reform that would have the greatest efficiency boost and equality gains. Unfortunately it is also the one reform that, by virtue of its distributional impact, is the least palatable to the wealthy and therefore the least palatable politically.”
Sounds like We have identified yet another avaricious labor/property rights destroying Asshole that thinks I have a duty to support the education, health care, feeding and general welfare of numerous other people regardless of their habits or ethics simply because I have toiled for years to make mortgage payments on a modest 60+ year old home.
This is yet another reason why I am a proponent of fire-arms and incendiary devices ownership…
I propose a true DEATH TAX. -One designed so that it might promote a true meritocracy.
No need to tax the living…
Total 100% confiscation and liquidation of ALL assets upon Death.
Minimal provision for inheritance: say receipt of a maximum $100,000. lifetime possible under any circumstance from any and all estates/persons/etc.
Almost EVERYTHING goes up for sale/distribution at large upon expiration of the Owner.
An end to dynastic wealth! An end to political and economic aristocracy!
Political and economic power should not be inherited by the progeny of crony capitalists and criminals that avoid divestiture or taxation by any means…
Of course power could continue to reside/devolve with the Sons of former drug dealers/rum runners and Walmart Heirs…
How’s THAT for Property Rights? -You CAN’T take it with You and the little inbred bleeders and horse fuckers don’t get to wear crowns and rule England anymore…
1. How would you prevent people from giving their wealth to their children before their death?
2. How would you prevent the money being stored over seas, and then given to their children through banks in other countries? It would be easy for the rich to get around in the current system. The middle class would be the ones who would get screwed.
Im all for excessively high estate tax though, but im not sure 100% is the way to go. What about 5-60% on everything above 1mil?
If anything, im worried that 100% might just make the rich get around using loopholes/other countries, actually decreasing what they pay…
This is a global neoliberal world: Its not like the rich dont ALREADY run around getting multiple citizenships and/or store their money in other countries…
This would just result in everything being owned by corporations, which don’t die like real people do.
Ok, I take the bait. If there is not an equality/efficiency trade off then why is the author comparing policy instruments?
Growth in economic terms is a money version of production gains. The world produces more because of resources, energy, labor, land, improvements, equipment, and knowledge. Those by any measure have grown globally for 150 years. Regardless of future growth or no, the global trend is independent of other factors
Efficiency may come from inequity in the short run in the same sense that wealth comes from theft. It is moving things from one pocket to the other. But I see no long term correlation between long term global growth and long term equity (and for that matter long term regional percent of the pie.) They are each independent cycles. Growth shifts around based on local conditions, but growth will exists until there is a planet wide cap, such as war, drop in food or fuel production, or a global freeze on capital movement.