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CP | By Julian Beltrame, The Canadian PressPosted: 02/26/2014 10:33 am EST | Updated: 02/26/2014 3:59 pm EST
OTTAWA – A new paper by researchers at the International Monetary Fund appears to debunk a tenet of conservative economic ideology — that taxing the rich to give to the poor is bad for the economy.
The paper by IMF researchers Jonathan Ostry, Andrew Berg and Charalambos Tsangarides will be applauded by politicians and economists who regard high levels of income inequality as not only a moral stain on society but also economically unsound.
Labelled as the first study to incorporate recently compiled figures comparing pre- and post-tax data from a large number of countries, the authors say there is convincing evidence that lower net inequality is good economics, boosting growth and leading to longer-lasting periods of expansion.
In the most controversial finding, the study concludes that redistributing wealth, largely through taxation, does not significantly impact growth unless the intervention is extreme.
In fact, because redistributing wealth through taxation has the positive impact of reducing inequality, the overall affect on the economy is to boost growth, the researchers conclude.
“We find that higher inequality seems to lower growth. Redistribution, in contrast, has a tiny and statistically insignificant (slightly negative) effect,” the paper states.
“This implies that, rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect.”
While the paper is heavy on the economics, there is no mistaking the political implications in the findings.
In Canada, the Liberal party led by Justin Trudeau is set to make supporting the middle class a key plank in the upcoming election and the NDP has also stressed the importance of tackling income inequality.
Stephen Harper’s Conservatives have boasted that tax cuts, particularly deep reductions in corporate taxation, are at least partly responsible for why the Canadian economy outperformed other G7 countries both during and after the 2008-09 recession.
In the Commons on Tuesday, Employment Minister Jason Kenney said the many tax cuts his government has introduced since 2006, including a two-percentage-point trim of the GST, has helped most Canadians.
Speaking on a Statistics Canada report showing net median family wealth had increased by 44.5 per cent since 2005, he added:
“It is no coincidence because, with the more than 160 tax cuts by this government, Canadian families, on average, have seen their after-tax disposable income increase by 10 per cent across all income categories. We are continuing to lead the world on economic growth and opportunity for working families.”
The authors concede that their conclusions tend to contradict some well-accepted orthodoxy, which holds that taxation is a job killer.
But they say that many previous studies failed to make a distinction between pre-tax inequality and post-tax inequality, hence often compared apples to oranges, among other shotcomings.
The data they looked at showed almost no negative impact from redistribution policies and that economies where incomes are more equally distributed tend to grow faster and have growth cycles that last longer.
Meanwhile, they say the data is not crystal clear that even large redistributions have a direct negative impact, although “from history and first principles … after some point redistribution will be destructive of growth.”
Still, they also stop short of saying their conclusions definitively settle the issue, acknowledging that it is a complex area of economic theory with many variables at play and a scarcity of hard data.
Instead, they urge more rigorous study and say their findings “highlight the urgency of this agenda.”
The Washington-based institution released the study Wednesday morning but, perhaps due to the controversial nature of the conclusions, calls it a “staff discussion note” that does “not necessarily” represent the IMF views or policy. It was authorized for distribution by Olivier Blanchard, the IMF’s chief economist.
The gap between the rich and poor continues to grow. The wealthiest 1 percent held 8 percent of the economic pie in 1975 but now hold over 20 percent. This is a striking change from the 1950s and 1960s when their share of all incomes was slightly over 10 percent. A study by Emmanuel Saez found that between 2009 and 2012 the real incomes of the top 1 percent jumped 31.4 percent. The richest 10 percent now receive 50.5 percent of all incomes, the largest share since data was first recorded in 1917. The wealthiest are becoming disproportionally wealthier at an ever increasing rate.
Most of the literature on income inequalities is written by professors from the sociology departments of universities. They have identified factors such as technology, the reduced role of labor unions, the decline in the real value of the minimum wage, and, everyone’s favorite scapegoat, the growing importance of China.
Those factors may have played a role, but there are really two overriding factors that are the real cause of income differentials. One is desirable and justified while the other is the exact opposite.
In a capitalist economy, prices and profit play a critical role in ensuring resources are allocated where they are most needed and used to produce goods and services that best meets society’s needs. When Apple took the risk of producing the iPad, many commentators expected it to flop. Its success brought profits while at the same time sent a signal to all other producers that society wanted more of this product. The profits were a reward for the risks taken. It is the profit motive that has given us a multitude of new products and an ever-increasing standard of living. Yet, profits and income inequalities go hand in hand. We cannot have one without the other, and if we try to eliminate one, we will eliminate, or significantly reduce, the other. Income inequalities are an integral outcome of the profit-and-loss characteristic of capitalism; they cannot be divorced.
Prime Minister Margaret Thatcher understood this inseparability well. She once said it is better to have large income inequalities and have everyone near the top of the ladder, than have little income differences and have everyone closer to the bottom of the ladder.
Yet, the middle class has been sinking toward poverty: that is not climbing the ladder. Over the period between 1979 and 2007, incomes for the middle 60 percent increased less than 40 percent while inflation was 186 percent. According to the Saez study, the remaining 99 percent saw their real incomes increase a mere .4 percent between 2009 and 2012. However, this does not come close to recovering the loss of 11.6 percent suffered between 2007 and 2009, the largest two-year decline since the Great Depression. When adjusted for inflation, low-wage workers are actually making less now than they did 50 years ago.
This brings us to the second undesirable and unjustified source of income inequalities, i.e., the creation of money out of thin air, or legal counterfeiting, by central banks. It should be no surprise the growing gap in income inequalities has coincided with the adoption of fiat currencies worldwide. Every dollar the central bank creates benefits the early recipients of the money—the government and the banking sector — at the expense of the late recipients of the money, the wage earners, and the poor. Since the creation of a fiat currency system in 1971, the dollar has lost 82 percent of its value while the banking sector has gone from 4 percent of GDP to well over 10 percent today.
The central bank does not create anything real; neither resources nor goods and services. When it creates money it causes the price of transactions to increase. The original quantity theory of money clearly related money to the price of anything money can buy, including assets. When the central bank creates money, traders, hedge funds and banks — being first in line — benefit from the increased variability and upward trend in asset prices. Also, future contracts and other derivative products on exchange rates or interest rates were unnecessary prior to 1971, since hedging activity was mostly unnecessary. The central bank is responsible for this added risk, variability, and surge in asset prices unjustified by fundamentals.
The banking sector has been able to significantly increase its profits or claims on goods and services. However, more claims held by one sector, which essentially does not create anything of real value, means less claims on real goods and services for everyone else. This is why counterfeiting is illegal. Hence, the central bank has been playing a central role as a “reverse Robin Hood” by increasing the economic pie going to the rich and by slowly sinking the middle class toward poverty.
Janet Yellen recently said “I am hopeful that … inflation will move back toward our longer-run goal of 2 percent,” demonstrating her commitment to an institutionalized policy of theft and wealth redistribution. The European central bank is no better. Its LTRO strategy was to give longer term loans to banks on dodgy collateral to buy government bonds which they promptly turned around and deposited with the central bank for more cheap loans for more government bonds. This has nothing to do with liquidity and everything to do with boosting bank profits. Yet, every euro the central bank creates is a tax on everyone that uses the euro. It is a tax on cash balances. It is taking from the working man to give to the rich European bankers. This is clearly a back door monetization of the debt with the banking sector acting as a middle man and taking a nice juicy cut. The same logic applies to the redistribution created by paying interest on reserves to U.S. banks.
Concerned with income inequalities, President Obama and democrats have suggested even higher taxes on the rich and boosting the minimum wage. They are wrongly focusing on the results instead of the causes of income inequalities. If they succeed, they will be throwing the baby out with the bathwater. If they are serious about reducing income inequalities, they should focus on its main cause, the central bank.
In 1923, Germany returned to its pre-war currency and the gold standard with essentially no gold. It did it by pledging never to print again. We should do the same.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
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Frank Hollenbeck teaches finance and economics at the International University of Geneva. He has previously held positions as a Senior Economist at the State Department, Chief Economist at Caterpillar Overseas, and as an Associate Director of a Swiss private bank. See Frank Hollenbeck’s article archives.
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oftwominds-Charles Hugh Smith: Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve
The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.
The issue of income/wealth inequality is finally moving into the mainstream: which is to say, politicos of every ideological stripe now feel obliged to bleat platitudes and express cardboard “concern” for the plight of the non-millionaires with whom they personally have little contact.
I have addressed the complex causes of rising income/wealth inequality for years.Indeed, my book Why Things Are Falling Apart and What We Can Do About It is largely about this very issue.
Here is a selection of the dozens of entries I have written about rising income/wealth inequality.
Income Inequality in the U.S. (August 22, 2008)
Made in U.S.A.: Wealth Inequality (July 15, 2011)
Let’s Pretend Financialization Hasn’t Killed the Economy (March 8, 2012)
Income Disparity and Education (September 26, 2013)
Is America’s Social Contract Broken? (July 17, 2013)
Rising Inequality and Poverty: Can They Be Fixed? (August 15, 2013)
How Cheap Credit Fuels Income/Wealth Inequality (May 30, 2013)
Why Is Debt the Source of Income Inequality and Serfdom? It’s the Interest, Baby(November 27, 2013)
While many key drivers of declining income are structural and not “fixable” with conventional policies (globalization of labor and the “end of work” replacement of human labor by robots, automation and software, to name the two most important ones), the financial policies that create wealth/income inequality are made right here in the U.S.A. by the Federal Reserve.
We should start addressing wealth/income inequality by eliminating the primary source of wealth/income inequality in the U.S.: the Federal Reserve.
The Fed generates wealth/income inequality in three basic ways:
1. Zero-interest rates (ZIRP) and limitless liquidity creates cheap credit that enables the super-wealthy to buy rentier income streams that increase their wealth.
The closer one is to this gargantuan flood of “free money for cronies,” the wealthier one can become by borrowing from the Fed for near-zero and buying assets that yield returns well above zero. If your speculative bet goes bad, the Fed will bail you out.
2. Zero-interest rates (ZIRP) and limitless liquidity feeds financialization, broadly speaking, the commoditization of debt and debt instruments. The process of commoditizing (securitizing) every loan or debt greatly increases the income and wealth of the financial sector and the state (government), which reaps higher taxes from skyrocketing financial profits, bubbles and rising asset values (love those higher property taxes, baby!).
There is no persuasive evidence that cheap credit enables legitimate wealth creation, while there is abundant evidence that cheap credit fuels speculation, credit bubbles and a variety of financier schemes and scams that create temporary phantom wealth for crony capitalists and impoverishes everyone who wasn’t in on the scam.
The housing bubble was not just a credit bubble; it was a credit bubble enabled by the securitization/financialization of the primary household asset, the home.Those closest to the Fed-enabled flow of credit reaped the gains of this financialization (or were subsequently bailed out by the Fed after the bubble burst), while the households that believed the Fed’s shuck-and-jive (“There is no bubble”) suffered losses when the bubble popped.
This chart of income inequality depicts the correlation between the Fed’s easy-money credit expansion and the extraordinary increase in income inequality.Please note the causal relation between income and wealth; though it is certainly possible to squander one’s entire income, those households with large incomes tend to acquire financial wealth. Those with access to cheap credit are able to buy income-producing assets that add to their wealth.
Financialization is most readily manifested in the FIRE sectors: finance, insurance, real estate.
You can see the results of financialization in financial profits, which soared in the era of securitization, shadow banking, asset bubbles and loosened or ignored regulation:
Here’s how cheap, abundant credit–supposedly the key engine of growth, according to the Federal Reserve–massively increases wealth inequality: the wealthy have much greater access to credit than the non-wealthy, and they use this vastly greater credit to buy productive assets that generate income streams that increase their income and wealth.
As their income and wealth increase, their debt loads decline.
The family home is supposed to be a store of wealth, but the financialization of housing and changing demographics have mooted that traditional assumption; the home may rise in yet another bubble or crash in another bubble bust. It is no longer a safe store of value, it is a debt-based gamble that is very easy to lose.
Credit has rendered even the upper-income middle class family debt-serfs, while credit has greatly increased the opportunities for the wealthy to buy rentier income streams. Credit used to purchase unproductive consumption creates debt-serfdom; credit used to buy rentier assets adds to wealth and income. Unfortunately the average household does not have access to the credit required to buy productive assets; only the wealthy possess that perquisite.
The Fed’s Solution to Income Stagnation: Make Everyone a Speculator (January 24, 2014)
As a direct result of Fed policy, the rich get richer and everyone else gets poorer.
3. But that isn’t the end of the destructive consequences of Fed policy: the Federal Reserve has also created a neofeudal society in which debt enslaves the masses and enriches the financial Elites.
Put another way, not all wealth is created equally. Compare Steve Jobs, who became a billionaire by developing and selling “insanely great” mass-market technologies that people willingly buy because it enhances their lives, with a crony-capitalist who reaps billions in profits from risky carry trades funded by the Fed’s free-money-for-cronies policy or by selling phantom assets (mortgages, for example) to the Fed at a price far above market value.
Clearly, there is a distinction between those two fortunes: one created value, employment for thousands of people, and tremendous technological leverage for millions of ordinary people. The other enriched a handful of financiers. This financial wealth could not be conjured into existence and skimmed by Elites without the Federal Reserve.
This Fed-enabled financial wealth destroys democracy and free markets when it buys the machinery of governance. To the best of my knowledge, Jobs spent little of his time or wealth lobbying Big Government for favors, special laws eliminating competitors with regulatory hurdles, etc.
Compare that to the millions spent by the “too big to fail” banking industry to buy Congressional approval of their cartel’s grip on the nation’s throat: Buying Off Washington To Kill Financial “Reform”.
Much of the debate about wealth inequality focuses on whether the super-wealthy are “paying their fair share” of the nation’s taxes. If we refer to the point above, we see that as long as the super-wealthy can buy the machinery of governance, then they will never allow themselves to be taxed like regular tax donkeys.
Unfortunately, only the top 1/10th of 1% can “afford” this kind of Fed-funded “democracy.” As of 2007, the bottom 80% of American households held a mere 7% of these financial assets, while the top 1% held 42.7%, the top 5% holds 72% and the top 10% held fully 83%.
The income of the top 5% soared during Fed-enabled credit bubbles:
Since all these distortions originate from the Fed, the only solution is to abolish the Fed. Those who have absorbed the ceaseless propaganda believe that an economy needs a central bank to create money and manage interest rates.
This is simply wrong. The U.S. Treasury (a branch of government actually described by the Constitution, unlike the Fed) could print money just as it borrows money. Should a liquidity crisis squeeze rates higher, the Treasury has the means to create liquidity and make it available to the legitimate financial system.
All the Fed’s regulatory powers were power-grabbed from legitimate government agencies defined by the Constitution.
The Federal Reserve is the primary engine of income/wealth inequality in the U.S.Eliminate “free money for cronies,” bailouts of the “too big to fail” banks that own the Fed, manipulation of markets, the purchase of impaired private assets at high prices, and all the other tools of financialization the Fed wields to enforce its grip on the nation’s throat–in other words, abolish the Fed–and the neofeudal structure that feeds inequality will vanish along with the feudal lords that enforced it.
We don’t need to “fix” things as much as remove the obstacles that are blocking the way forward. The Federal Reserve is the primary obstacle to reducing income/wealth inequality. Those who support the Fed are supporting a neofeudal arrangement that widens the income/wealth gap by its very existence.