Monday, December 01, 2008

Larry Summers on Inequality

From David Leonhardt's 11/26 New York Times column on Lawrence Summers, the former president of Harvard, Treasury secretary under Clinton, and now economic adviser to Obama:

INEQUALITY Mr. Summers has spent much of his career tweaking fellow liberals with arguments he considers unpleasant truths — on the dangers of budget deficits, the benefits of capitalism and other subjects. But he seems to have decided that conservative orthodoxies have become a vastly bigger threat to good economic policy than liberal ones. His favorite argument today is one that instead drives some conservatives nuts.

It goes like this: To undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago.

The lack of middle-class income growth during that span is “the defining issue of our time,” Mr. Summers has said, in a tacit admission that liberals were ahead of him on this issue. He is likely to be front and center in Mr. Obama’s push to reduce taxes on the middle class and create good jobs. Mr. Summers may also push the administration to work with foreign governments to crack down on tax shelters.
Fascinating-- you could reverse this and say that the effect of the past 30 years was equal to the bottom 80% of the country each writing a check for $10,000 and contributing it to a big fund that then was drawn on by the top 1 percent. And just to be clear, the effect of such redistribution would not be to create equality, it would just be the lesser degree of inequality we had 30 years ago.

Of course there will always be inequality-- it's just how things work, and how they should work to some extent. But how much inequality is the right amount?


Anonymous said...

I find it interesting that someone who is so open about trying to amass wealth is so willing to discuss the question of "how much inequality is too much". Your site states that, as of 10/31/2008, your net worth was $300,032 with a goal for January of $410,000. How many people out there are jealous of the amount of money you've been able to accumulate? Would you be willing to part with some of the money you've saved if it meant that the nation would be less unequal?

Mr. ToughMoneyLove said...

Isn't it sad that although market forces - not the tax system - controls how much the middle class earns, Summers and others will now propose to use the tax system to compensate. And, after they are through "equalizing" incomes, they will go after net worth, probably by taxing invested assets and creating new death taxes.

stephanie said...

Sounds like punishing a lot of people who invest wisely and save for their futures instead of spending frivolously in their youth . . . I'd be pretty pissed if 20 years from now they want to take away money that I started saving at age 20 to give it to people who lived beyond their means.

And for most of the people making under $120k that's exactly what they are doing - my parents have never made more than $40k in their households (they're divorced), neither contributed much to my college, each have retirement funds and houses. They managed to live within their means and save for the future, even when medical emergencies, etc., have come up. Anyone making more than $30k who can't figure out how to live within their means has a problem that a $10k check from the government is NOT going to solve.

stackingpennies said...

Very interesting. "every household in the top 1 percent of the distribution, which makes $1.7 million on average,"

That really doesn't seem like those are simply people who "invested wisely" rather than spending frivolously.

I'm not smart enough with economics to leave a meaningful comment, but thank you for sharing this.

Chad @ Sentient Money said...

@ Anonymous and Mr. ToughMoneyLove

It must be noted that Summers is not suggesting the government actually make the top 1% write that check. It is only used to illustrate the huge gulf between the classes.

Will they eventually raise taxes on those who make over $250k...maybe, but they have already pulled back on this until the economic crisis is past.

Death taxes are backed by the two richest men (Buffett and Gates), who by all accounts are the two greatest capitalists in recent history. Winning the womb lottery shouldn't entitle you to a life of luxury. This is compeletly against capitalism/market forces, as these lottery winners have added nothing to our economy or society to gain this wealth. It's funny how the "make it on your own merits" argument is used to support acquiring large amounts of money, until they want their kids to gain power/money by doing nothing.

I'm tired of people suggesting that market forces are some magic panacea. It is mearly a tool, a good tool, to use in allocating resources. Is it always right...hardly. If it were then we wouldn't have any bubbles or crashes. You would think there was a Market Forces god out there the way people worship it. I guess he abandoned us about 10 months's just a tool people, get over it.

Optioned Unarmed said...

There is no such thing as absolute pure free-market capitalism in the real world. Math and computer models are perfect, the real world is messy.

Here in the U.S., the government creates the infrastructure for commerce to take place. This includes issuing the currency (via treasury and pseudo-private fed), enforcing contracts and patents (via the legislative branch of government), creating rules for the stock market (via SEC, etc.), permitting individuals to form corporations so that they can take risks without being personally liable for mistakes or losses, etc. And on and on.

The choices that the government makes regarding how this infrastructure functions will have a great impact on how wealth flows through it, and whether or not the system will produce a robust middle class.

People who work hard, innovate, and take risks need to be rewarded for their efforts; otherwise, there would be far less incentive for progress, and we would not have many of the wonderful inventions and products that we currently do have. However, an economic system that leaves huge chunks of the working population too poor to pay for their basic healthcare, childcare, housing and food needs is definitely out of balance. There is a middle way.

Optioned Unarmed said...

oops, meant to write "judicial" branch of the govt, not "legislative". Part of me was thinking about all the time the legislative branch spends on commerce-related issues.