Tax the Rich, part II

Is the New Supply Side Better Than the Old? by Austan Goolsbee is getting a lot of play in the econoblogosphere today. It’s an interesting article that points out some of the weaknesses in the supply-side argument for cutting income tax rates on the highest income people. One small point of correction, however: when referencing the fact that top incomes soared after the tax cuts of the 1980s and 2001, but also soared after tax hikes in other periods, Goolsbee says:

Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces.

One might note the impact of the policy climate in various periods, as well. Since the 1980s, it hasn’t just been tax policy that has favored high-income earners over their less fortunate fellows, but deregulation and lax enforcement on a broad range of policies including labor and the environment, as well as overt war-on-the-poor measures such as welfare reform.

Hat tip to Mark Thoma.

Econ-Atrocity: Do The World’s Poor Countries Finance the Rich Ones?

By Amit Basole
CPE Staff Economist

Global Charity
In the year 2000, the richest 10 per cent of the world’s population held 85 percent of its total income and wealth. The bottom half owned a mere 1 percent. Such glaring global asymmetries have long justified redistribution of wealth from the “Global North” to the “Global South” in the form of development aid and loans. So much so, that the stock image of a developing country that springs to mind (particularly in sub-Saharan Africa) is that of a heavily indebted economy which continually borrows simply to repay its old loans and receives food and other forms of aid to feed and clothe its “naked and hungry masses.” Persistent poverty is often blamed on inadequate aid, and rich countries are periodically exhorted to donate more generously. This form of global charity is visible to all. But there is another flow of wealth across national borders, greater in magnitude and more clandestine. This is the flow from poor countries to the rich. Yes, the world’s poorest countries are today financing the richest. Far from being heavily indebted, many developing countries are net creditors vis-Ã -vis the rest of the world. How is this possible?

Who is financing whom?
Recent analysis of flows of income and wealth across national borders reveals a startling and different story than that of global charity towards the South. Economists have found that more money flows out of developing countries in the form of interest payments, profits of foreign corporations, and clandestine investments in financial markets of the rich countries than flows into them as loans, aid, and foreign direct investment. According to a recent United Nation’s report, in 1995 the net inflow of money into developing countries was $40 billion, but by 2006 this had reversed to a net outflow of $657 billion! The global financial system is sucking wealth out of developing countries, making them poorer in the process. Sub-Saharan Africa in particular is associated with highly indebted poor countries. Indeed, in 1996 the combined external debt of 25 countries of sub-Saharan Africa, owed to rich countries and to institutions such as the IMF and the World Bank, stood at $178 billion””a large sum indeed. But even more significantly, the flow of wealth out of these same countries over 26 years (1970-1996) equaled more than $193 billion. To make matters worse, much of this wealth flowing out of poor countries ends up in the US economy, which absorbs two-thirds of world savings. The ecologically-damaging consumption boom in the world’s rich countries is financed by its poor countries where consumption is a matter of survival. The insanity of this situation puts a question mark on the entire logic of the international financial system.

How does this happen?
But wait a minute. We might wonder, aren’t developing countries poor by definition? How then do they have resources to transfer to rich countries? We must remember here that although the majority of the population in a developing country is indeed poor, most countries have a small elite class that owns a disproportionate share of its income and wealth. In other words, the poor are poor precisely because the rich are rich. Further, a government may be highly indebted but what about its private citizens, in particular the rich ones? Several African leaders have amassed personal fortunes even as the governments they head have incurred large debts. At least in part these extraordinary assets are held abroad in rich countries. The problem is that while public debts are scrupulously recorded, many private assets are just as scrupulously concealed. To take just one famous example, the Swiss bank accounts of the family of General Sani Abacha, who ruled Nigeria for five years, reportedly contain as much as $2 billion.

This phenomenon is also known as “capital flight.” There are several avenues by which money flows from the poor countries to the rich. Repayment of earlier debt and accumulation of foreign exchange reserves with Central Banks in developing countries are two big ones. Since reserves often take the form of US treasury bills, reserve accumulation essentially means lending scarce capital to the US, a classic case of the poor lending to the rich. But there is yet a third, more hidden, avenue as well. This is trade mis-invoicing: under-reporting exports and over-reporting imports. Exporters in a country may understate the value of their export revenues, so that they can retain abroad the difference between their true value and their declared value, while importers may over-state the value of their imports to obtain extra foreign exchange, which can then be transferred abroad.

What can be done?
Should we simply chalk this up as a typical case of Third World mismanagement and corruption, a problem of “failed states,” a lack of democratic accountability and transparency? It is all that, but that is not the whole story. Rich country governments and international lending institutions are often complicit in maintaining corrupt rulers and in transferring their assets abroad. The Financial Times remarks in an editorial on the freezing of General Abacha’s bank accounts, “Financial institutions that knowingly channeled the funds have much to answer for, acting not so much as bankers but as bagmen, complicit in the corruption that has crippled Nigeria.”

If development aid is used to amass private fortunes while external creditors look the other way, why should a developing country’s poor citizens be forced to pay the price of painful “reforms” such as cutbacks in government spending on essential services, when most of that aid has not benefited them at all in the first place? Rather citizens of developing countries and their governments could tell their foreign creditors that old debt will only be treated as legitimate if the creditors can provide evidence for how the money was used for genuine development goals. This shifts the burden of proof onto the lenders. Needless to say, such a proposal would be extremely unpopular with rich country governments as well as with the IMF and the World Bank.

In addition to “bottom-up” approaches to development, such as strengthening government accountability and democracy from below in developing countries, there is a role for us here in the developed world to play: we can do our bit by raising awareness about capital flight and odious debt, and holding our own governments accountable for who they lend or give aid to and how that money is spent.

Sources:

1. Isabel Ortiz (2007) Putting Financing for Development in Perspective: The South Finances the North, IDEAS Network (http://www.ideaswebsite.org/news/nov2007/Putting_Financing.pdf)

2. World Economic Situation and Prospects, 2007- United Nation Development Policy and Analysis Division (http://www.un.org/esa/policy/wess/wesp.html)

3. James Boyce and Leone Ndikumana (2000) Is Africa a Net Creditor? New Estimates of Capital Flight from Severely Indebted Sub-Saharan African Countries, 1970-1996. (http://www.umass.edu/economics/publications/econ2000_01.pdf)

Missing the recession boat

Today’s NYTimes article on Federal Reserve Chairman Ben Bernanke’s testimony to Congress yesterday, and the simultaneous drop in the stock market, includes a few noteworthy passages:

The stock market plunged again on Thursday on bad economic news, taking little comfort from reassuring words by the chairman of the Federal Reserve or an emerging consensus about a stimulus plan that many worry could be too late.

On a day when stocks were pushed down another 3 percent on reports of more weakness in housing and manufacturing “” bringing the decline this year to a stomach-churning 9 percent “” all the major players in Washington agreed on the need for putting extra money into people’s hands quickly.

President Bush publicly confirmed for the first time that he would propose a package of emergency measures, outlining its basic principles on Friday, in an effort to restore the eroding confidence of investors and consumers. The package is expected to include more than $100 billion in one-time tax rebates for individuals and an opportunity for businesses to rapidly write off their capital investments.

Adding to the pessimism, which drowned out the reassurances by Mr. Bernanke that a recession could be averted, were reports that manufacturing activity could be slowing even more than analysts had expected, and that housing starts dropped 14 percent last month and reached their lowest level in 16 years.

Mr. Bernanke insisted that despite concerns about “slowing growth,” the economy remained “extraordinarily resilient.”

I say “noteworthy” in light of Dean Baker’s ongoing crusade to right the wrongs in mainstream media reporting on the economy–and in mainstream economists’ ability to figure out what exactly is happening in the real world. Several of his recent posts deal with the failure of most economists to recognize when a recession begins until long after the fact: “economists have an enormous bias against seeing recessions. Virtually no economist saw the recession coming in 2001, even after the stock bubble was already well on its way to deflating (okay, none of them saw the bubble either). This includes all the official forecasters, CBO and OMB both projected solid growth in 2001.” Scroll through all of Dean’s recent posts and you’ll see more of the same clear-eyed view.

In light of this, how reassured should anyone be when Bernanke says a recession can be avoided? What are the odds that a year from now, the economics establishment won’t have determined that the recession actually started a few months back in 2007? And on top if it all, given that it took the stock market five years (and a terrorist-induced recession and boondoggle war) to largely deflate from the peak of the 1990s bubble (only in 1995 did the S&P 500’s price-to-earnings ratio drop down to the 25-year average — and even that average is well above the longer-term average [pdf chart]), how shocking can it be when it tumbles again and again in face of reality?

Peter Barnes’ new book: Climate Solutions

My day job is as an assistant editor at Chelsea Green Publishing. I’ve been particularly excited about one book that we’ve been working on, Peter Barnes’ Climate Solutions: A Citizen’s Guide: What Works, What Doesn’t, and Why. Well, it’s just shipped from the printer, so now’s your chance to get a copy and check it out.

[update] I just came across a little BusinessWeek article focusing on Barnes’ ideas for a carbon dividend. They don’t get all the details quite right (all the more reason for you to read the book!) and they don’t mention the book (curses!), but “cap-and-dividend” just might be turning into a powerful and politically relevant meme.

Candidates with hairstyles on economic policy

Paul Krugman has a NYTimes op-ed column on the economic policies of all the big-name presidential contenders. One of his final comments is, “on Sunday Mr. Obama came out with a real stimulus plan. As was the case with his health care plan, which fell short of universal coverage, his stimulus proposal is similar to those of the other Democratic candidates, but tilted to the right…. I know that Mr. Obama’s supporters hate to hear this, but he really is less progressive than his rivals on matters of domestic policy.”

A friend had sent me a link to Krugman’s column, and knowing that she’s been torn between backing Clinton or Obama I replied to her

Go Hillary! (Right?)

Or,

Go Barack! (Not right but Left!)

To which she replied

Haha, I don’t know…I mean, maybe slightly right on economic policy isn’t such a bad thing…? There sure are a lot of moderately right leaning economists…I just thought it was an interesting (and new) way to compare the candidates

To which I replied

No, slightly right on economic policy is bad. Slightly right on economic policy means slightly closer to:

  • ever-growing government deficits and/or slashed social services
  • ever-growing economic inequality
  • greater turbulence in the economy thus increasing risks of more frequent and deeper recessions
  • more frequent and larger government bailouts of high-risk corporate losses (see point above)
  • and a total ban on all cheese. [My friend loves cheese more than life itself.]

There are a lot of moderately right leaning economists because most economists have never been exposed to any genuinely left economic thinking and there’s a tendency for left leaning people who might otherwise become economists to instead become sociologists. They think Paul Krugman is a lefty when in reality he’s only mildly left leaning.

Just thought I’d share. Feel free to add more bullet points in the comments.

(And if you’re wondering about my mention of hairstyles in the title of this posting, just read Krugman’s column and you’ll see.)

Taking bets on new tax cuts

The first President Clinton focused his 1992 campaign with the motto, “it’s the economy, stupid.” As the second President Bush enters his final year in office, with the pressure on to prevent a total rout of the Republican Party next November, he’s discovering a new concern for the economy himself.

President Bush said Tuesday that he is watching very carefully to see if the struggling U.S. economy needs a short-term boost from the federal government.

“We’re listening to different ideas about what may or may not need to happen,” he said. “We’ll work through this. We’ll work through this period of time.”

He wouldn’t comment on any specific ideas he is considering, such as tax cuts aimed at lessening the chance of a recession. “We’ll look at all different options.”

On Monday, Bush talked about recent indicators that have been “increasingly mixed,” a new recognition of the challenges now facing the economy, primarily resulting from a severe housing crisis. Previous Bush statements have paid attention to the financial fears of many American families and the effects of the housing slump, but focused on what he calls the strong fundamentals underpinning the economy… [cont’d]

How shocked! shocked! will we be if he ends up pushing for new tax cuts designed to work some trickle down magic?

Forecast for 2008

We are living in a period of unprecedented corporate wealth. This is similar to the 1890s and the 1920s, but the extreme disparity is far worse today. We have a growing number of billionaires in our society and the numbers of the poor and homeless are growing. Most people are in debt with credit cards and mortgages and car loans. There are few people with substantial savings. Labor unions are weak and most Americans like to ignore the realities of class in our society.

Consumerism is the engine that keeps the cornucopia flowing and consumerism is having a head on collision with the environment. Global warming is a real phenomena and that is why the oil and energy companies are denying it. They know that it is real, but their business depends on selling oil. Their main partners the automobile companies are trying to get the public to ignore the global warming activity that is caused by carbon burning vehicles, aircraft and ships.

I think we will need to break out of the old ways of doing things. Corporate capitalism is the main problem and governmental intervention is the only way to rein it in. I don’t see Hillary doing this. Edwards and Obama have the potential to change things. I think a major economic shock will be necessary to reorient the economic system. Cf. The 1930s.

We still have a number of New Deal era reforms in place to cushion the shock, but the Reagan/Bush era has waged an outright war on the New Deal and the usefulness of government in peoples’ lives. The Reagan/Goldwater ideology opposes the welfare state in the name of liberty. But in the name of security it asks the federal government to support a bloated military machine. This military machine is the main reason we have international trade with cheap goods from abroad. It requires massive amounts of oil to run on and that is why we are in the Middle East with guns blazing away. Our oil based war machine is designed to protect oil and to continue using massive amounts of it in ships, planes, tanks, etc.

2008 will be a turning point because of the mortgage crisis, decline of housing starts, decline of housing market values. The price of oil will continue to rise.

I think we are headed for a serious recession and the Federal Reserve will not pull us out of it. A change in fiscal policy, not monetary policy, is required. Fiscal policy involves raising or lowering taxes and initiating expenditures. The right wing fears fiscal policy because it is a threat to their privileged inequality.

I see the Democrats building a larger majority in both houses this Fall. The Democrats will win the Presidency. Getting out of Iraq will be a consensus position, if it is not already. (The military is having serious problems recruiting soldiers and retaining existing ones.) The future health of the economy will be the main concern and this will require a greater role for the federal government.

To conclude, there are similarities with the 1890s and the 1920s and both of those boom eras ended in serious recession/depression. We are headed for a serious accounting for the past 8 reckless years of Bush and Company. Not exactly a rendezvous with destiny, but very similar. My main worry is whether we will remain a democracy as we go through the crisis.

I see this as a realistic, not a pessimistic, analysis of our current situation.

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