Redistributing Wealth and the US Election

In their book Innovation Economy, authors Robert D Atkinson and Stephen J Ezell talk about the competing ideologies with regard to the tax system and wealth redistribution between the Democratic and Republican parties that were clearly debating points in this closely fought US presidential election of 2012. They say that

Washington economic politics has become a redistributionist battleground between ...the Right, seeking to funnel resources to their Main Street members (small business), and ... the Left, seeking to funnel resources to their Main Street members (low- and moderate-income Americans).

Behind this tussle between the Left and the Right in America is a fundamental question about what grows the economy. The Democrats using the arguments of John Maynard Keynesian essentially believe that growth occurs by supporting demand from the middle class. The Republicans borrowing from the thinking of Robert Mundell and Arthur Laffer and supported by Milton Friedman believe that growth comes by supporting the supply side of the economy through entrepreneurs and small business.

Atkinson who also wrote the book Supply-side Follies has been arguing that this debate is the wrong one to have. Borrowing from the ideas of Joseph Shumpeter, Douglass North and Mancur Olson, he believes that the reason why the US economy has stagnated in recent years has been because of existing policy failures to encourage investments in technology and innovation.

Over time, he believes the US tax system has diminished the incentives for innovative activity. The problem was created by economic advisers of both parties who advocate for flatter tax rates with a broader base. In line with this, broad based tax cuts have been offered to corporations and small business owners in exchange for disallowing tax deductions for productivity enhancing measures.

As a result, much of the tax cuts aimed at the top income bracket have been wasted on businesses that don't trade with the rest of the world or invest in productivity enhancing innovation. Rather than squander these tax cuts on the wealthy, it would be better spent targeting future wealth-creators. This includes entrepreneurs that are forced to innovate in order to remain internationally competitive as well as universities and research institutions that prepare scientists and engineers to become innovators.

This targeted approach for spurring innovation through tax policy is what is missing from the current debate which has focused more on the justification for auto bailouts, renewable energy companies, and the loosening of business regulation. Not a lot of attention has been devoted to what really drives growth in the economy, structural as opposed to cyclical growth. And that is perhaps why the race is so dead even.

A Penchant for Redistribution

I am taking the liberty of recycling the following article from my drafts bin from three years ago when the debate in America was raging over healthcare. This post could have been written yesterday given the way things have played out, which is why I am posting it here:

Many commentators have opined that America under Pres Obama is re-casting itself in the mould of European socialist regimes. As Alan Wolfe observes,

the covers of National Review ("OUR SOCIALIST FUTURE"), The Nation ("REINVENTING CAPITALISM, REIMAGINING SOCIALISM"), and Newsweek ("WE ARE ALL SOCIALISTS NOW") have--respectively--lamented, heralded, and observed the coming rise of socialism (Obama vs Marx, The New Republic, April 01, 2009).

From his statements, Richard W Stevenson surmises the intent of Obama to reshape capitalism by

diminishing the consumerism that has long been the main source of growth in the United States, and encouraging more savings and investment. He would redistribute wealth toward the middle class and make the rest of the world less dependent on the American market for its prosperity. And he would seek a consensus recognizing that an activist government is an acceptable and necessary partner for a stable, market-based economy (Redefining Capitalism After the Fall, New York Times, April 18, 2009).

A High Tolerance for Inequality

Politically the cover for undertaking redistributive policies in the US is being provided by the current crisis. According to Alberto Alesina and Paola Giuliano who have studied income and wealth inequality, Americans are less “inequality intolerant” by nature compared to the Europeans. This is due to the perception that prevails in the US that social mobility is possible (the World Values Survey found that 60%, compared to 40% in Europe, believed in the possibility of improving their standing income-wise).

Only during the “Great Compression” lasting from the mid-40s to the 70s has the US seen inequality decline continuously; that is apart from what seems now to be a blip that lasted from the mid-90s to the early 2000s. Franklin Foer and Noam Scheiber write in The New Republic that

(b)eginning in 2004, the data gradually began to undermine the Clintonites' central assumption: that the benefits of growth would accrue to the poor and middle class ... Workers' wages had once tracked productivity growth. Now workers were producing more, but only the wealthy were reaping the rewards; everyone else's income had basically flattened out.

Alesina and Giuliano tell us that by August 2008, inequality in the US had returned to its previous level in the 1920s. Following the crisis which is widely perceived to be the fault of financiers at the top of the income pyramid less tolerance for inequality will ensue as

voters (will) demand especially strong action to reduce inequality, even in a country like the US, where inequality is much more tolerated than in Europe.

While there is a greater appetite for social levelling, it is the extent of that levelling that will be determined soon. Alesina again:

(w)ill Americans turn into “inequality intolerant” Europeans? Probably not, but this crisis may imply a turning point towards more government intervention and towards redistribution.