War and inequality

I’ve been distracted for a few days, first by the ASSA conference in Chicago – of which more in the next post – and then by my eldest son’s wedding. But I’m now eager to read a book that has just arrived at Enlightenment Towers, Walter Scheidel’s The Great Leveler: violence and the history of inequality from the Stone Age to the twenty-first century. “Are mass violence and catastrophes the only forces that can seriously decrease economic inequality?” the inside cover blurb starts. The following 450 pages answer: yes. I’m not expecting it to be a cheerful read.

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By coincidence, there’s a recent VoxEU column supporting the Great Leveler hypothesis. Looking at Europe’s rich since 1300, Guido Alfani concludes that only the Black Death and world wars have significantly reversed increasing inequality. All this new work follows Thomas Piketty’s raising the question in his tome Capital in the 21st Century. Talk about an unpalatable trade-off.

Capital and its morals

[amazon_link id=”0674743806″ target=”_blank” ]Capital Without Borders: Wealth Managers and the One Percent[/amazon_link] by Brooke Harrington, a sociologist at Copenhagen Business School is utterly fascinating. Harrington trained as a wealth manager over a two year period and then conducted 65 interviews around the world with other wealth managers – mainly white middle aged men, mainly from fairly well-off backgrounds themselves. This is a rare window into their world – I’ve often wanted to see more sociology or anthropology looking at the financial markets, and here is exactly such a study.

[amazon_image id=”B01INP11GU” link=”true” target=”_blank” size=”medium” ]Capital without Borders[/amazon_image]

One intriguing aspect is the way families are the organising social structures managing the staggering wealth of the one percent. Harrington notes that the wealth managers’ main role is ensuring assets stay within the family over generations, but adds: “In some cases the fortune that holds the family together may also destroy it.” The wealth managers find themselves arranging payments for mistresses, negotiating divorces, dealing with siblings at war – protecting the family assets in spite of the family.

The book starts with a history of the emergence of the role of the trustee in mediaeval and later English common law – the trust being the main vehicle still for wealth management, with innovations from the likes of the British Virgin Islands. Wealth managers are often lawyers trained in the Anglo-Saxon legal tradition because of this heritage. The history of the role lies in a knightly tradition of loyalty and chivalry, rather bizarrely; certainly, the interviewees emphasise service and loyalty to their ‘clients’. They are far less well paid than many other roles in financial services.

The character of the business is changing, however, with the emergence of so many ‘ultra-ultra-high net worth individuals’ from Asia, who are far less comfortable than, say, traditional British rich families with the idea of handing over control of their assets to a trust structure. As one interviewee comments of the ‘new rich’: “It takes them a while to grasp the idea that it’s not their money once they put it in trust.” They enjoy the fruits but the assets themselves are to be safeguarded for the family and the future. I must say I find this idea that one can control the future strange indeed, but it clearly motivates many of the very wealthy.

The other part of the one percent world view that shines out of the interviews is their absolute belief in the injustice of any claims on their wealth – taxes of course, thieving governments, but also any creditors. The book cites Gabriel Zucman’s excellent [amazon_link id=”B018SQABD8″ target=”_blank” ]The Hidden Wealth of Nations[/amazon_link] on the scale of the tax losses. Harrington writes: “For ultra-high net worth clients, it seems, being obliged to honor their debts, pay the costs of government, and otherwise obey the laws of the land are offenses to liberty.” She adds that this fear of governments, laws, taxes, makes the business of wealth management one of safeguarding assets, rather than growing them. It is a profoundly un-productive business – the parable of the talents comes to mind. By freezing wealth on this scale, productive economic growth is diminished.

London and the British Virgin Islands (a UK territory) are the main hubs of this secretive wealth management business. One wealth manager says Asian clients refer to offshore corporations in general as ‘BVIs’. But there is competition from the up and coming Cook Islands, a speck in the middle of the Pacific – twice blacklisted by the Financial Action Taskforce and criticised by the EU as an ‘unco-operative jurisdiction’. They don’t care: the business now accounts for 10-15% of GDP. The Caymans also get a special mention for creating the Special Trusts Alternative Regime, which can last for ever and in total secrecy. The STAR trusts allow the ultra-ultras their wish to guarantee the continuation of the family’s assets for generations to come, paying no tax, in total secrecy, and with an unusual degree of control.

Harrington asks interviewees about their ethical perspective, given the context of concern about inequality. After all, their training teaches them that discretion is more important than reporting illegal activities by their clients. So, she asks them, are they not concerned about the erosion of the tax base and hence public services, or the growing inequality? Not much, is the answer. Indeed, the wealth managers’ key skill is regulatory and tax arbitrage between different nation states, so how could they agree? Shockingly, a London-based wealth manager she interviews, ‘Drew’, based in a law firm, boasts that his firm employs a significant number of the UK’s 14 Parliamentary Agents. I didn’t know about this role: these are the only non-MPs allowed to address Parliament and the critique draft legislation. They are fixed, hereditary positions. Harrington points out: “It actually gives an institutionalized voice, at the highest levels of government, to the representatives of the richest members of society. While that once meant representing the railroad barons and landed gentry of the United Kingdom, the Parliamentary Agents at Drew’s firm – and others – now typically act as a voice for the interests of high net worth individuals from outside the country.”

My one frustration with the book is that Harrington does not offer any potential solutions – and why should she? However, there is a passing comment that Israel has created incentives for its wealth managers to co-operate with the tax authorities – but she does not explain how this happened or how it works. I’d have liked to know because all national governments clearly need to do the same, and especially the UK’s government, having created the giant maw of illegal finance in London.

 

The moral consequences of economic decline?

In his FT column today, the ever-thoughtful Tim Harford has written about the dangers of moving into a zero-sum world, with the economy heading into a post-Brexit recesssion and in a political atmosphere which is already a game of grievances and blame. The column cites a wonderful book, Benjamin Friedman’s (2005) [amazon_link id=”1400095719″ target=”_blank” ]The Moral Consequences of Economic Growth[/amazon_link]. I’m biased, as Ben was my thesis adviser, but I do believe it to be a truly important book, especially for anyone also concerned about sustainability.

The book asks whether economists are right to care about economic growth, and finds the affirmative answer in political economy and the inter-relationship between growth and institutions. I wrote briefly about the book in 2012, worrying then about the rise of political extremism. Looking at the book again today, I am struck by its warning about the adverse consequences of withdrawing the state from social support, and its concern about the distribution of the benefits of economic growth. This now looks very prescient.

“Broadly distributed economic growth creates the private attitudes and public institutions that foster, not undermine, a society’s moral qualities,” Ben writes. “At the outset of the twenty first century, America’s problem is not unemployment. It is the slow pace of advance in the living standards or the majority of the nation’s citizens.” Rising living standards – for all – make societies more open and democratic. Unfortunately we in the UK seem likely to be testing what happens when living standards are falling, and the already-have-nots find they have even less.

[amazon_image id=”1400095719″ link=”true” target=”_blank” size=”medium” ]The Moral Consequences of Economic Growth[/amazon_image]

Realism and utopia – a guest review

A guest review by Koen Smets

In the same way that most drivers consider themselves better than average, I suspect most people consider themselves realists – not too optimistic, and not too pessimistic. I certainly do, and so I find myself right in the group at which Rutger Bregman’s [amazon_link id=”9082520303″ target=”_blank” ]Utopia for Realists[/amazon_link] is aimed.

[amazon_image id=”9082520303″ link=”true” target=”_blank” size=”medium” ]Utopia for Realists: The Case for a Universal Basic Income, Open Borders, and a 15-hour Workweek[/amazon_image]

It is Bregman’s first book to be published in English, bundling many ideas that he has written about before, notably in regular pieces for the Dutch website De Correspondent. Its subtitle, The case for a universal basic income, open borders, and a 15-hour work week, suggests it is not quite another lightweight campaigning pamphlet, but an ambitious attempt to show not just why these radical aspirations must be pursued but also how they can be realized. My expectations were raised accordingly. Unfortunately, [amazon_link id=”9082520303″ target=”_blank” ]Utopia for Realists[/amazon_link] rather falls short of its ambition.

Bregman starts off with a somewhat breathless catalogue of human achievements in health and wealth: we really have never had it so good. The mediaeval fantasy of the Land of Plenty has become reality. Nevertheless, we’re miserable, and for the first time ever we believe that children will be worse off than their parents. That makes it the ideal moment for a genuinely big project, according to Bregman the optimist.

15 hours per week

“Money is time,” Bregman observes. He channels Keynes and John Stuart Mill, both of whom had predicted we would work less and less, and shows how, for many decades, we have been buying time with our increased wealth. But by the late 1980s we suddenly stopped sacrificing money to get even more free time. Bregman blames social pressure, fuelled by commercial interests. Even so, is this is not simply playing into preferences inherent in human nature? Time is only one of the numerous things we can trade for money.

We may work less than our ancestors, but we are weighed down by stress, and overtime is rife. Bregman bombards the reader with solid and comprehensive research to show where it all went wrong, and his conclusion is straightforward. Working less will solve pretty much all our troubles: stress, climate change, accidents, unemployment, emancipation of women, and the ageing population. “We inhabitants of the Land of Plenty could work fewer than 15 hours a week by 2050, and earn the same amount as in 2000,” Bregman says, echoing Keynes’ prediction from 1930, which foresaw the same for 2030.

But if this is such a no-brainer, why are so few people actually working 15-hour weeks? Have today’s CEOs been abandoned by the enlightenment that made business leaders like Henry Ford and WK Kellogg cut the working week in the 1930s? How come the public sector, outside the harsh commercial realities of private enterprise, is not leading the way?

Bregman points at surveys which found that people from all over the world would prefer two weeks’ extra holiday over two weeks’ extra pay by a factor two. So apparently we want more leisure, but we work more. This is reminiscent of what David Ogilvy said: “People don’t think how they feel, they don’t say what they think and they don’t do what they say.” Bregman’s solution to this paradox is resolutely paternalistic: “Collective action – by companies, or better still, by countries.”

Poverty

The best way of lifting people out of poverty is to give them money, says Bregman. No sign of paternalism here: “Put the choice in the hands of the poor,” he recommends, eloquently dismissing the myth that poor people cannot handle money. But alleviating poverty by giving one-off cash grants to poor and homeless people is hardly a solid case for a Universal Basic Income (UBI) – a steady income stream going to anyone who “has a pulse”.

The problem is not that people will turn into lazy couch potatoes – the Mincome experiment in Canada in the 1970s showed that people are nothing like the neoclassical homo economicus, who simplistically responds to incentives, and who would stop working if there was free money. There was barely a decline in working hours.

The problem is with the sums. Bregman claims that, “For the first time in history, we are actually rich enough to finance a sizable basic income.” But what size? A study by Matt Bruenig estimates the cost for eradicating poverty in the USA at “only $175 million”. Distributed equally over the US population, every person would get about $550 per year, or just over $10 per week.

And even that needs to come from somewhere – technology, Bregman believes. The robots will come and take our jobs, and that is a good thing: it means we can, “Reject the dogma that you have to work for a living.” Just tax the robots. Sounds simple, but it conceals huge complexity: automation applies differently to different jobs and in different countries.

The world came very close to an actual, real, nationwide unconditional income for poor families – in the USA, no less. Bregman devotes an entire chapter to the rise and fall of a seminal UBI under president Richard Nixon in 1969. But thanks to rhetoric, defeat was snatched from the jaws of victory: the prospect of “inciting the poor to even greater idleness”, based on a tendentious analysis of the welfare system in Speenhamland in 1830s England, was the death knell of the proposal.

Unfair wages

Another of Bregman’s bêtes noires is the gap between the wage for a job and its societal usefulness. Why, he wonders, should wealth shifters like bankers earn more than wealth creators like teachers or indeed garbage collectors? He might as well get worked up about the fact that even the most expensive litre bottle of water costs a lot less than a kilo of gold.

Are there really ever more people earning money without contributing anything of tangible value to society? Once all societal needs – food, shelter, healthcare, education – are fulfilled, things shift to the individual transaction level. We may regret the fact that there are so many lawyers in the US, and be puzzled by the fact that this doesn’t mean Americans are better protected than citizens of countries with fewer attorneys. But somehow, every lawyer is – we may assume – deriving her income from someone who willingly pays her for her services, money her client has a choice to spend differently. Unless we can show why this is not a mutually beneficial transaction, value – in the eye of the beholder – is being created.

Bregman’s solution is simple, though: “Higher taxes would get more people to do work that’s useful.” It seems to escape him that a higher tax doesn’t discriminate between the incomes of people who shift wealth and those who create wealth. It penalizes both in the same way.

Redistribution and efficiency

Much of the book is balanced and factual, but on a few occasions Bregman morphs into a campaigner on speed. There is a weird rant against advertising. There is a bizarre attack on the market economy (“The modern marketplace is equally uninterested in usefulness, quality, and innovation. All that really matters is profit.”) There is a peculiar condemnation of our “fixation on ‘efficiency’ and ‘gains’, as though society were nothing but one big production line.” These contribute little or nothing to the central ideas, and the style erodes the credibility of the book’s other arguments..

Bregman – no doubt to the delight of the owner of this blog! – also devotes almost an entire chapter to the most widely used instrument for measuring progress, Gross Domestic Product, taking great relish in demolishing it. But he is really kicking in an open door: the shortcomings of the GDP are well-known and well-documented. None of the alternatives, from Gross National Happiness and the Genuine Progress Indicator to the Index of Sustainable Economic Welfare and the OECD’s Better Life Index satisfy him either.

By now, it should not be a surprise that Bregman advocates a larger public sector: they can leverage activities that “cannot be made more efficient”, such as education and healthcare. He believes that, “The more efficient our factories and our computers, the less efficient our healthcare and education need to be; that is, the more time we have left to attend to the old and infirm and to organize education on a more personal scale.” This is an idiosyncratic interpretation of the concept of efficiency.

Bregman seems to miss the fact that we are economic beings: if we sacrifice something, whether it’s time, effort or money, we want to get something in return that we feel is worth it. We want to be efficient when it’s not the task we are enjoying, but the outcome of the task. That is not only why the Land of Plenty is so appealing, but also why we have made so much progress towards it.

A larger public sector without any notion of efficiency sounds like a dangerous path to take. Yet Bregman says, “Governing by numbers is the last resort of a country that no longer knows what it wants, a country with no vision of utopia,” as if the amount of subsidy the state will give to ‘inefficient’ activities, and the ways in which it will be able to raise the necessary revenue are not numbers that, eventually, matter greatly.

Open Borders

But Bregman also has a libertarian streak. He criticizes conventional aid for spending pitifully small amounts of money to projects with questionable outcomes. If we were really serious about relieving global poverty, we would open our Western borders. That would make the world twice as rich as it is now, and boost wealth by sixty-five trillion dollars.

So what stops us? We are hypocrites, hiding behind fallacious objections. Migrants will take our jobs, they will force our wages down, they are too lazy to work, and they’ll never go back. Bregman counters them all, as in the best parts of the book, with plenty of evidence. But the angst across the EU in relation to a population of refugees amounting to barely 1% of its population shows that we’re some way off accepting the economic logic of the win-win argument of open borders.

A disappointed realist

In the final chapter, Bregman wonders whether he might be caught out by confirmation bias: “If I’m being honest, I sometimes wonder if I’d even let myself notice if the evidence were pointing another way. Would I be observant enough – or brave enough – to have a change of heart?”

Ultimately, the book majors on explaining why its three central radical thoughts are good ideas – and this is indeed a hallmark of confirmation bias. Looking at the arguments against, and putting up solid counterarguments is not enough. “The question is not can new ideas defeat old ones; the question is how,” says Bregman. And on that last question, the answers are sadly lacking.

A realist would have wanted to see how the loss and risk aversion that prevent the West from opening up its borders to economic migrants could be conquered.

People in the rich West have plenty of options to make different trade-offs between time and money. The barriers to adopting a 15-hour week are not high, and both employers and employees would be fools not to take advantage of the apparent win-win situation it offers. Yet it’s not happening. A realist would have wanted to see an explanation for this reluctance, and ideas on how to overcome it.

And above all, a realist would have liked to see solutions to the fundamental issue with a UBI: how to pay for it. The problem, as Bregman explains, is not that the UBI will be a disincentive to work. It is that, in order to raise enough money to provide a UBI that is high enough to live on, it is the taxation on high incomes that will act as a disincentive. “Only a fraction of our prosperity is due to our own exertions,” says Bregman. But the other fraction is not generated without some exertion. And if there is not enough incentive for people to actually put in the effort to produce 100%, even if they’re only personally entitled to 10%, the other 90% remains elusive.

Koen Smets is an accidental behavioural economist, who works as an organization development specialist. He uses elements from both orthodox microeconomics and behavioural economics to bring about behavioural change. He is on Twitter as @koenfucius

Taxing the Rich (how to)

Do you want to raise more taxes from rich people, dear Reader? I thought so. Then a read of [amazon_link id=”0691165459″ target=”_blank” ]Taxing the Rich: A History of Fiscal Fairness[/amazon_link] in the United States and Europe by Kenneth Scheve and David Stasavage is illuminating.

[amazon_image id=”0691165459″ link=”true” target=”_blank” size=”medium” ]Taxing the Rich: A History of Fiscal Fairness in the United States and Europe[/amazon_image]

Apart from anything else, the historical data on top tax rates is fascinating. There have really only been two big moves in top income (and inheritance) tax rates: up, a lot, from the 1920s to around 1950; down, by half of a lot, mainly in the 1980s but drifting down subsequently. It is also interesting to note the contrast between the US/UK top marginal rates and the rest of the developed world – about 40% vs about 60%. As in so many areas, the fact that data and economic research are heavily US-centric has a distorting effect on economic policy debates elsewhere. Extraordinarily, the burden of total taxation on the highest income bracket in the UK reached 90.7% during the second world war (compared to 19.1% for the bottom group). Talk about progressive.

The book discusses the forces driving the trends in taxation of the rich. The authors’ main point is that war has been the principal driver, with the sense of fairness the result of the calls the state made on citizens at those times. It was at times when the government demanded immense sacrifices from the majority of the population that the effective social contract ensured the wealthy paid: “War mobilization changed beliefs about tax fairness. It created an opportunity for new and compelling compensatory arguments that increased support for taxing the rich.” In other words, while the arguments for taxing the rich have always relied on fairness, the notion of fairness has changed at different times. The book demonstrates that as wars created opportunities for profit for capitalists, thanks to wartime production, the demand they should shoulder more of the tax burden gained great traction.

The book challenges the previous consensus that the consensus in favour of strongly redistributive taxation, to compensate for the sacrifice of ordinary people, lasted for any length of time after world war two. And to the extent there was, it anyway steadily crumbled. The book agrees that globalization, and a new emphasis on incentives for economic growth, played a part in reducing tax rates on the rich as the 20th century wore on. But they argue that a more important factor was the weakening of the kind of compenstory arguments that had been available in wartime. “Different compensatory arguments can be made today, but they have a smaller impact. In today’s debates about progressive taxation, observers often fail to appreciate this fact.”

The book reports a representative survey of over 2000 Americans showing that the top marginal tax rate they select is in fact below today’s rate of 39.6%. There appears to be little support from this for higher taxation. To put it another way, Americans don’t see why Silicon Valley should be taxed because Wall Street was bailed out – although they oppose the bailout. The lesson is: ‘fairness’ is not an abstract concept. You have to find a fairness argument with traction, and the compensatory arguments being used by the left today do not have that. Looking back to the 19th century, before the era of global war provided a strong compensatory argument, the principles that enabled increases in taxes on the rich concerned equal treatment for all within the tax system: as existing taxes were raised on land, new mercantile fortunes were untaxed. So taxation was extended in its coverage. The authors suggest looking to the thickets of exemptions and special privileges rather than the headline-grabbing top marginal rates. Interestingly, this is something Jo Maugham emphasised this week. Maybe he had read this very interesting book. David Stasavage also spoke at this recent LSE Conference on inequality.