Thursday, January 1, 2015

spelling out my bias for Stiglitz’s preface

Stiglitz’s preface does not bode well for his 2012 book “The Price of Equality” to accomplish very much, nor to open up new discussions, nor to impress enough decision makers about the value of his work. In the preface, he points to a downward spiral of inequality corrupting the political and business processes of a country. This corruption leads to less efficiency for the markets and less stability for the markets. With markets being less efficient and less stable then there is growing inequality and then more corruption. I want to see how Stiglitz develops this theory, and what evidence he can offer to convince his readers. But then for the rest of the preface, he seems to be whining, “It’s unfair, it’s unfair, it’s unfair, and it’s unfair,” like a second-grader. And then I saw him slip in the idea of government redistribution of wealth.

Life is unfair, and if he expects to undo that reality, then I am biased against his book and I need to deal with my bias against him before continuing the reading. Holding on to my bias is not going to allow me to read and best understand what he does have to offer. I will write out this essay so that I can work out my bias, and then maybe I will be able to read and better appreciate what his book has to offer.

And get off the idea of government redistribution of wealth!!! Before government can lay their hands on wealth, capital, assets, or possessions, they have to offer due process. Through due process a government can claim imminent domain, or public goods, or “the needs of the many out weigh the needs of the few or the one.” (Star Trek reference there, and I think Gene Roddenberry had a beautiful vision for a future economic system.) Wealth should be out of the reach of the government. Income meanwhile is within reach, through monitoring and through taxation (payroll taxes apply with every paycheck and April 15 is coming). But wait, the government can not know what’s best for the redistribution of the income. We cannot trust a corruptible government to best decide what to do with one person’s income in assigning it to other people!! If we are striving for efficient markets, then what about allowing the markets to decide about the redistribution of income?? (Specifics on how can come in a bit.)

First we much realize that all questions of income and markets and economics are rooted in micro-economic questions. Let’s toss out Stiglitz’s downward spiral and replace it with the micro-economic story. Individuals are the only ones who act within an economic system. Maybe a statistician or scientist can spot a trend based on watching and measuring the actions of many individuals, but you can realize that the individuals act. Within a corporation, individuals act to create the value that is marketed and sold to individual customers. Within the stock market, individuals write the code for the computerized buying programs and then individuals decide the prices that will trigger bids to buy and to sell. Individuals in representative bodies and in executive offices decide to lead on a legislative initiative, or to vote one way or the other. All those individual actions accumulate together to play out the economic system. This is micro-economic actions playing out to cause macro-economic trends and realities.

Individuals will act based upon perceived incentives which should pay off compared to risking some investments of time, labour, skill, strategy, reputation, weighed against other opportunities and other dimensions of a decision to act. If the incentives can be increased for growing numbers of people, then more might risk starting their own businesses, more might risk an embarrassment in front of a supervisor and a work team to offer a revolutionary production method, more might risk investing in a new home, real estate or new vehicles and equipment. If more incentives can be offered to more individuals, then the economy can grow based on what opportunities the individuals seek (not based on the government’s corrupted notions). From this micro-economic view, the growth of the economy is based on individuals perceiving and acting upon greater incentives which drives those prospering individuals to seek out even more opportunities and understanding the incentives that keep compelling them to make economic investments and striving for greater efficiencies and stability and to all the more appreciate predictable markets, those being the markets that do not fail so often and probably that have less volatile business cycles.

Of course when we say incentives, we mean cash. We mean getting more money out in front of more people. We mean offering them more income, that is what is meant by incentives. (Along with prestige, and individual autonomy, and self actualization, but economists don’t do well at measuring those things. We measure money.)

(Are we a bit further on yet? Can we now turn to the specifics of how income can be redistributed if not by government?)

What’s needed then is some extra incentives, but where can they come from?? They will not magically appear.

If inequality is an unwanted outcome, is there a way to lessen the inequality as a method for increasing the incentives for more people? Is there a way to lessen the inequality as a method for increasing the incentives for 99 percent of the people? Income can be taxed. But we don’t want the income to go to the corruptible government as tax revenue. What if instead of a tax, we capped all individuals so that no one in the whole world could earn more than 10 million Euros in a year, or no more than $15 million in a year, or the equivalent per country in a year (remember countries wish to keep their sovereignty)? What could corporations do with those revenues that no longer can be offered to their executives, their superstar employees (a term from Freeland‘s book “Plutocrats”), to their board members, to their consultants, nor to their richest investors? How would corporations and businesses redistribute those revenues?

Now how would a cap work?? Well, yeah, . . . let’s call it a tax. After earning the income up to that annual cap within a year, all further individual income will be taxed at 100 percent. This is a tax that the government does not want to collect -- how awful it would be to allow the government to collect that money!!!! And it is a tax that no millionaire would want to approach or to deal with! After all, not only is the millionaire loosing all of that extra income, but one would still have to deal with the costs of accounting for the money earned over the cap. So the tax rate really would feel like 102 percent or 105 percent when you figure in the accounting costs. Then there would be the embarrassment among ones peers should they find out you tried to earn money over the annual cap (which they are all denied) and then got busted by the feds!! Yes, we’ll call it a tax that is never intended to be collected. This will be a 100 percent tax on all income over the annual cap.

What could corporations do with those revenues that no longer can be offered to their executives, their superstar employees, to their board members, to their consultants, nor to their richest investors? How would corporations and businesses redistribute those revenues? Would corporations and their markets find some efficient means for steering funds toward more research and development? Efficient means for raising the pay of deserving employees who are not near the annual cap? Efficient means for investing in equipment, real estate and manufacturing opportunities? Efficient means for green and sustainable developments? Efficient means for greater training, education, workplace safety? More creative ideas on serving customers, earning greater loyalty and reducing the risks to the lives of customers?

I believe in the markets, and in people’s abilities to recognize economic opportunities and incentives. Things would still be unfair with an income cap in place, would still be unfair regardless of how society evolves (even if guided by Roddenberry himself). But I do want to understand the price of inequality in economic systems, and I hope Stiglitz can help open my eyes.