Here is his latest with my rebuttals.
Liberty, Equality, Efficiency
MARCH 9, 2014
Paul Krugman
Most people, if pressed on the subject, would probably agree that extreme income inequality is a bad thing, although a fair number of conservatives believe that the whole subject of income distribution should be banned from public discourse. (Rick Santorum, the former senator and presidential candidate, wants to ban the term “middle class,” which he says is “class-envy, leftist language.” Who knew?) But what can be done about it?
Rick Santorum is right about there being no middle class; where is it? What we have is a textbook case of the 80-20 rule. Far from banning discussion, we should force the pols to tell folks what the distribution really looks like and make the show the before/after results of their policy proposals.
He is also correct that class structures are constructs of the left (Marx); Krugman should know this, he himself being a leftist mouthpiece allegedly familiar with economics.
The standard answer in American politics is, “Not much.” Almost 40 years ago Arthur Okun, chief economic adviser to President Lyndon Johnson, published a classic book titled “Equality and Efficiency: The Big Tradeoff,” arguing that redistributing income from the rich to the poor takes a toll on economic growth. Okun’s book set the terms for almost all the debate that followed: liberals might argue that the efficiency costs of redistribution were small, while conservatives argued that they were large, but everybody knew that doing anything to reduce inequality would have at least some negative impact on G.D.P.
Okun is best known in particular for promulgating Okun's law, an observed relationship that states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP.
In Okun's book, society's concern for human dignity can be directed at reducing the economic deprivation that stains the record of American democracy—through progressive taxation, transfer payments, job programs, broadening equality of opportunity, eliminating racial and sexual discrimination, and lowering barriers to access to capital; the first three items being the keys to the liberal playbook, no doubt endearing him to LBJ.
Okun says "Other economic systems have attempted to solve this problem; but the best of socialist experiments have achieved a greater degree of equality than our mixed capitalist democracy only at heavy costs in efficiency, and dictatorial governments have reached heights of efficiency only by rigidly repressing their citizenry."
But it appears that what everyone knew isn’t true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
Highly doubtful since Okun is historically correct, but read on.
Let’s start with the evidence.
It’s widely known that income inequality varies a great deal among advanced countries. In particular, disposable income in the United States and Britain is much more unequally distributed than it is in France, Germany or Scandinavia. It’s less well known that this difference is primarily the result of government policies. Data assembled by the Luxembourg Income Study (with which I will be associated starting this summer) show that primary income — income from wages, salaries, assets, and so on — is very unequally distributed in almost all countries. But taxes and transfers (aid in cash or kind) reduce this underlying inequality to varying degrees: some but not a lot in America, much more in many other countries.
Only those not paying attention don't know that differences in income equality in advanced economies are primarily the result of government policies.
As usual, Krugman doesn't expect us to read his referenced material. Both the abstract and the conclusion of the Luxembourg data say this:
"We observe a sizeable increase in primary household inequality in all 20 countries over the last 25 years with the exception of Ireland. In most countries, the extent of redistribution has increased as a whole too."
This is a stark refutation of Krugman's premise; inequality rises with redistribution.
"So does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund, which is hardly a leftist organization. The first study looked at the historical relationship between inequality and growth, and found that nations with relatively low income inequality do better at achieving sustained economic growth as opposed to occasional “spurts.” The second, released last month, looked directly at the effect of income redistribution, and found that “redistribution appears generally benign in terms of its impact on growth.”
Once again, the IMF study does not say what Krugman says it said. It says:
"A key implication of these results is that it is difficult to separate analyses of growth and income distribution. The immediate role for policy, however, is less clear. Increased inequality may shorten growth duration, but poorly designed efforts to lower inequality could grossly distort incentives and thereby undermine growth, hurting even the poor."
The second IMF paper builds on the uncertainty of the first in concluding:
"We need to be mindful about over-interpreting these results, especially for policy purposes. It is hard to go from these sorts of correlations to firm statements about causality. We have not accounted for the possible effects that redistribution may have on market inequality. We have emphasized the uncertainty caused by the scarcity of reliable data, particularly about redistribution."
The second paper, moreover, seems more like a funding request by ending with "further insight into the mechanisms at play would help sharpen our understanding and policy recommendations. Our results here highlight the urgency of this agenda."
In other words, give us more money and we'll step up the bullshit.
In short, Okun’s big trade-off doesn’t seem to be a trade-off at all.
This statement is totally unsupported by the provided evidence.
Nobody is proposing that we try to be Cuba, but moving American policies part of the way toward European norms would probably increase, not reduce, economic efficiency.
Au contraire! Increasing redistribution to combat inequality is exactly what he's proposing.
At this point someone is sure to say, “But doesn’t the crisis in Europe show the destructive effects of the welfare state?” No, it doesn’t. Europe is paying a heavy price for creating monetary union without political union. But within the euro area, countries doing a lot of redistribution have, if anything, weathered the crisis better than those that do less.
Once again, this audacious claim is not supported by his own reference (the figure below is from his cited reference; his own blog). None of the Eurozone countries with larger redistribution policies except Slovenia (really?), Switzerland and Austria have fared as well as the US since the 2008 meltdown.
Okun is best known in particular for promulgating Okun's law, an observed relationship that states that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential GDP.
In Okun's book, society's concern for human dignity can be directed at reducing the economic deprivation that stains the record of American democracy—through progressive taxation, transfer payments, job programs, broadening equality of opportunity, eliminating racial and sexual discrimination, and lowering barriers to access to capital; the first three items being the keys to the liberal playbook, no doubt endearing him to LBJ.
Okun says "Other economic systems have attempted to solve this problem; but the best of socialist experiments have achieved a greater degree of equality than our mixed capitalist democracy only at heavy costs in efficiency, and dictatorial governments have reached heights of efficiency only by rigidly repressing their citizenry."
But it appears that what everyone knew isn’t true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
Highly doubtful since Okun is historically correct, but read on.
Let’s start with the evidence.
It’s widely known that income inequality varies a great deal among advanced countries. In particular, disposable income in the United States and Britain is much more unequally distributed than it is in France, Germany or Scandinavia. It’s less well known that this difference is primarily the result of government policies. Data assembled by the Luxembourg Income Study (with which I will be associated starting this summer) show that primary income — income from wages, salaries, assets, and so on — is very unequally distributed in almost all countries. But taxes and transfers (aid in cash or kind) reduce this underlying inequality to varying degrees: some but not a lot in America, much more in many other countries.
Only those not paying attention don't know that differences in income equality in advanced economies are primarily the result of government policies.
As usual, Krugman doesn't expect us to read his referenced material. Both the abstract and the conclusion of the Luxembourg data say this:
"We observe a sizeable increase in primary household inequality in all 20 countries over the last 25 years with the exception of Ireland. In most countries, the extent of redistribution has increased as a whole too."
This is a stark refutation of Krugman's premise; inequality rises with redistribution.
"So does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund, which is hardly a leftist organization. The first study looked at the historical relationship between inequality and growth, and found that nations with relatively low income inequality do better at achieving sustained economic growth as opposed to occasional “spurts.” The second, released last month, looked directly at the effect of income redistribution, and found that “redistribution appears generally benign in terms of its impact on growth.”
Once again, the IMF study does not say what Krugman says it said. It says:
"A key implication of these results is that it is difficult to separate analyses of growth and income distribution. The immediate role for policy, however, is less clear. Increased inequality may shorten growth duration, but poorly designed efforts to lower inequality could grossly distort incentives and thereby undermine growth, hurting even the poor."
The second IMF paper builds on the uncertainty of the first in concluding:
"We need to be mindful about over-interpreting these results, especially for policy purposes. It is hard to go from these sorts of correlations to firm statements about causality. We have not accounted for the possible effects that redistribution may have on market inequality. We have emphasized the uncertainty caused by the scarcity of reliable data, particularly about redistribution."
The second paper, moreover, seems more like a funding request by ending with "further insight into the mechanisms at play would help sharpen our understanding and policy recommendations. Our results here highlight the urgency of this agenda."
In other words, give us more money and we'll step up the bullshit.
In short, Okun’s big trade-off doesn’t seem to be a trade-off at all.
This statement is totally unsupported by the provided evidence.
Nobody is proposing that we try to be Cuba, but moving American policies part of the way toward European norms would probably increase, not reduce, economic efficiency.
Au contraire! Increasing redistribution to combat inequality is exactly what he's proposing.
At this point someone is sure to say, “But doesn’t the crisis in Europe show the destructive effects of the welfare state?” No, it doesn’t. Europe is paying a heavy price for creating monetary union without political union. But within the euro area, countries doing a lot of redistribution have, if anything, weathered the crisis better than those that do less.
Once again, this audacious claim is not supported by his own reference (the figure below is from his cited reference; his own blog). None of the Eurozone countries with larger redistribution policies except Slovenia (really?), Switzerland and Austria have fared as well as the US since the 2008 meltdown.
Slovenia has a GDP smaller than Connecticut ($45 billion vs. $250 billion) with 71% of Connecticut's population; they have nowhere to go but up. Who's to say they wouldn't do better with less redistribution; I suspect Connecticut would!
Switzerland is one of the world's most stable economies; small deficits, low debt and government spending at only 33.8% of GDP (versus nearly 40% in the US). Its policy of long-term monetary security and political stability has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment.
Austria outperforms everyone by eschewing the Keynesian economics favored by Krugman!
On the opposite front, Spain is sinking under the weight of sovereign debt, caused by the policies promoted by Krugman. The UK is sinking under the weight of pensions and it's health care system; they need to cut spending by 25% or raise taxes from 38% to 53% of GDP.
The US suffers from all three of these problems thanks to the sage advice of the Krugman's of the world and a liberal media that equates frugality with mean-spiritedness.
Think, in particular, about the ever-popular slogan that we should seek equality of opportunity, not equality of outcomes. That may sound good to people with no idea what life is like for tens of millions of Americans; but for those with any reality sense, it’s a cruel joke. Almost 40 percent of American children live in poverty or near-poverty. Do you really think they have the same access to education and jobs as the children of the affluent?
Poppycock. It's half of that (21.8%); basically the children of the bottom 20% of earners. The solution to this isn't redistribution. For starters, stop having kids if you can't afford to support them. For finishers, stop subsidizing parents who have children they can't support.
These kids could have opportunity if we did the safety net differently:
In fact, low-income children are much less likely to complete college than their affluent counterparts, with the gap widening rapidly. And this isn’t just bad for those unlucky enough to be born to the wrong parents; it represents a huge and growing waste of human potential — a waste that surely acts as a powerful if invisible drag on economic growth.
Once again, Krugman misstates the cause cited in his reference:
"This rising inequality was mostly a female phenomenon, and a relatively new one. For those born in the early 1960s, there was little variation between men and women in terms of college completion. For those born in the early 1980s, women outperformed men at all income levels, but especially at the higher income levels. "In college entry, persistence, and completion, women in the top-income quartile have pulled away from the rest of the population," the authors write."
Excluding the high-income female phenomenon, college graduation rates in the lowest quartile increased 4%; led by women.
Now, I don’t want to claim that addressing income inequality would help everyone.
Based on this article and all evidence, it's not clear that Krugman's diatribe addresses income inequality in the slightest or that what he suggests would help anyone.
The very affluent would lose more from higher taxes than they gained from better economic growth. But it’s pretty clear that taking on inequality would be good, not just for the poor, but for the middle class (sorry, Senator Santorum).
Krugman didn't show any path to economic growth for anyone; just higher taxes.
Addressing inequality is better handled by policies designed to increase wealth, not just capricious income from government redistribution.
In short, what’s good for the 1 percent isn’t good for America. And we don’t have to keep living in a new Gilded Age if we don’t want to.
Once again, Krugman is dead wrong.
What’s good for the 1 percent is absolutely good for America.
If he were to read what his colleagues write, he'd know that centuries’ worth of data, from dozens of countries can be distilled to a simple historical regularity: The of return to capital (wealth) - understood broadly to include machinery, land, financial instruments, housing and everything else is usually higher than economic growth.
This was particularly true before the Industrial Revolution, when economies didn’t really grow, but it prevailed even after economic growth took off in the 19th century.
This means that the income from wealth usually grows faster than wages. As returns from capital are reinvested, inherited wealth will grow faster than the economy, concentrating more and more into the hands of the owners.
For example, if Social Security were savings-and-interest based instead of the lame pay-as-you-go scheme foisted upon us, even a lifelong minimum wage earner retiring last year would have accumulated over $160,000.
With a payout of $916/month (current payout for SS for minimum wage earners), well over half could be left to heirs. With today's policy, no wealth can be accumulated or transferred.
Same goes for property (wealth) taxes. A low earner who manages to buy a home worth, say, $125,000 and an economy car will pay about $2,000/year in property tax. Over 30 years this consumes a great deal of wealth; event at today's anemic rates of 2.25%, this money would be worth another $88,000.
If the minimum wage stayed at $7.25, 45 years at 15.3% withholding (current FICA rate) at the same 2.25% interest gives $176,000.
Just these two changes yield $264,000 at retirement; far more than the $165,000 ($916/mo x 12mo x 15 years) that the current system pays leaving $98,000 for medical expenses or inheritance.
This is about right, according to this report from the NIH; women (blue) need $100,000 and men (green) need about $90,000 between ages 65 and 80 (80 is the typical life expectancy in the US).
However, if we also throw in the effects of saved (with interest) sales, fuel and sin taxes ($114,000 over 45 years) and the interest on all accumulated wealth after age 65 after subtracting retirement living expenses (current Social Security payout plus $6,667/year in medical expense ($17,659 total)), we get this:
Keep in mind that in the absence of property, sales, fuel and sin taxes the current Social Security payout goes a lot farther.
This means that minimum wage earners could leave behind about $210,000 to their heirs; compare that to the big fat goose egg that today's policies permit!
According to George Will, for-term New York democrat senator Daniel Patrick Moynihan said that if one-third of the money for poverty programs were given directly to the poor, there would be no poor. Let's see if he was right by applying my 20-Year Plan.
.png)
This means that minimum wage earners starting at age 45 could still leave behind about $210,000 to their heirs after spending $10,000 of the $15,000 on health insurance and whatever else.
Moynihan was right although it worked at 29% instead of 33%.
If I apply the same rules for the young worker starting at age 20, I get this:
.png)
This means that minimum wage earners starting at age 20 could still leave behind about $560,000 to their heirs after spending $10,000 of the $15,000 on health insurance and whatever else.
The median wage earner starting out at age 45...
.png)
...would leave behind about $210,000 to their heirs after receiving none of the $15k but getting the $3,140 FICA boost for 20 years. The property, sales, fuel and sin tax savings are higher ($9,000 versus $3,000). The retirement expense is higher at $27,700 (Social Security equivalent of $1,753/mo payout plus $6,667 for health insurance).
Finally, the median wage earner starting out at age 20...
.png)
...would leave behind about $210,000 to their heirs after receiving none of the $15k but getting the $3,140 FICA boost for 20 years. The property, sales, fuel and sin tax savings are higher (ramping to $9,000 from $3,000 as wages increase from minimum wage to $42,000/year). As before, the retirement expense is higher at $27,700 (Social Security equivalent of $1,753/mo payout plus $6,667 for health insurance).
Let's try it!
Switzerland is one of the world's most stable economies; small deficits, low debt and government spending at only 33.8% of GDP (versus nearly 40% in the US). Its policy of long-term monetary security and political stability has made Switzerland a safe haven for investors, creating an economy that is increasingly dependent on a steady tide of foreign investment.
Austria outperforms everyone by eschewing the Keynesian economics favored by Krugman!
On the opposite front, Spain is sinking under the weight of sovereign debt, caused by the policies promoted by Krugman. The UK is sinking under the weight of pensions and it's health care system; they need to cut spending by 25% or raise taxes from 38% to 53% of GDP.
The US suffers from all three of these problems thanks to the sage advice of the Krugman's of the world and a liberal media that equates frugality with mean-spiritedness.
Poppycock. It's half of that (21.8%); basically the children of the bottom 20% of earners. The solution to this isn't redistribution. For starters, stop having kids if you can't afford to support them. For finishers, stop subsidizing parents who have children they can't support.
These kids could have opportunity if we did the safety net differently:
In fact, low-income children are much less likely to complete college than their affluent counterparts, with the gap widening rapidly. And this isn’t just bad for those unlucky enough to be born to the wrong parents; it represents a huge and growing waste of human potential — a waste that surely acts as a powerful if invisible drag on economic growth.
Once again, Krugman misstates the cause cited in his reference:
"This rising inequality was mostly a female phenomenon, and a relatively new one. For those born in the early 1960s, there was little variation between men and women in terms of college completion. For those born in the early 1980s, women outperformed men at all income levels, but especially at the higher income levels. "In college entry, persistence, and completion, women in the top-income quartile have pulled away from the rest of the population," the authors write."
Excluding the high-income female phenomenon, college graduation rates in the lowest quartile increased 4%; led by women.
Now, I don’t want to claim that addressing income inequality would help everyone.
The very affluent would lose more from higher taxes than they gained from better economic growth. But it’s pretty clear that taking on inequality would be good, not just for the poor, but for the middle class (sorry, Senator Santorum).
Addressing inequality is better handled by policies designed to increase wealth, not just capricious income from government redistribution.
In short, what’s good for the 1 percent isn’t good for America. And we don’t have to keep living in a new Gilded Age if we don’t want to.
Once again, Krugman is dead wrong.
What’s good for the 1 percent is absolutely good for America.
If he were to read what his colleagues write, he'd know that centuries’ worth of data, from dozens of countries can be distilled to a simple historical regularity: The of return to capital (wealth) - understood broadly to include machinery, land, financial instruments, housing and everything else is usually higher than economic growth.
This was particularly true before the Industrial Revolution, when economies didn’t really grow, but it prevailed even after economic growth took off in the 19th century.
This means that the income from wealth usually grows faster than wages. As returns from capital are reinvested, inherited wealth will grow faster than the economy, concentrating more and more into the hands of the owners.
For example, if Social Security were savings-and-interest based instead of the lame pay-as-you-go scheme foisted upon us, even a lifelong minimum wage earner retiring last year would have accumulated over $160,000.
With a payout of $916/month (current payout for SS for minimum wage earners), well over half could be left to heirs. With today's policy, no wealth can be accumulated or transferred.
Same goes for property (wealth) taxes. A low earner who manages to buy a home worth, say, $125,000 and an economy car will pay about $2,000/year in property tax. Over 30 years this consumes a great deal of wealth; event at today's anemic rates of 2.25%, this money would be worth another $88,000.
If the minimum wage stayed at $7.25, 45 years at 15.3% withholding (current FICA rate) at the same 2.25% interest gives $176,000.
Just these two changes yield $264,000 at retirement; far more than the $165,000 ($916/mo x 12mo x 15 years) that the current system pays leaving $98,000 for medical expenses or inheritance.
This is about right, according to this report from the NIH; women (blue) need $100,000 and men (green) need about $90,000 between ages 65 and 80 (80 is the typical life expectancy in the US).
However, if we also throw in the effects of saved (with interest) sales, fuel and sin taxes ($114,000 over 45 years) and the interest on all accumulated wealth after age 65 after subtracting retirement living expenses (current Social Security payout plus $6,667/year in medical expense ($17,659 total)), we get this:
Keep in mind that in the absence of property, sales, fuel and sin taxes the current Social Security payout goes a lot farther.
This means that minimum wage earners could leave behind about $210,000 to their heirs; compare that to the big fat goose egg that today's policies permit!
According to George Will, for-term New York democrat senator Daniel Patrick Moynihan said that if one-third of the money for poverty programs were given directly to the poor, there would be no poor. Let's see if he was right by applying my 20-Year Plan.
This means that minimum wage earners starting at age 45 could still leave behind about $210,000 to their heirs after spending $10,000 of the $15,000 on health insurance and whatever else.
Moynihan was right although it worked at 29% instead of 33%.
If I apply the same rules for the young worker starting at age 20, I get this:
This means that minimum wage earners starting at age 20 could still leave behind about $560,000 to their heirs after spending $10,000 of the $15,000 on health insurance and whatever else.
The median wage earner starting out at age 45...
...would leave behind about $210,000 to their heirs after receiving none of the $15k but getting the $3,140 FICA boost for 20 years. The property, sales, fuel and sin tax savings are higher ($9,000 versus $3,000). The retirement expense is higher at $27,700 (Social Security equivalent of $1,753/mo payout plus $6,667 for health insurance).
Finally, the median wage earner starting out at age 20...
...would leave behind about $210,000 to their heirs after receiving none of the $15k but getting the $3,140 FICA boost for 20 years. The property, sales, fuel and sin tax savings are higher (ramping to $9,000 from $3,000 as wages increase from minimum wage to $42,000/year). As before, the retirement expense is higher at $27,700 (Social Security equivalent of $1,753/mo payout plus $6,667 for health insurance).
Let's try it!
Finally, the median wage earner starting out at age 20...
Let's try it!
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