17 October 2014

The middle class is dead, long live the middle class

Many people blame crooked politics for the growing (and ridiculous) income and wealth gaps between the 1% and 99%. I totally agree that corrupt politicians are a big part of the problem, but exogenous pressures from globalization and technological change are also transferring power and money from labor to capital in ways that nobody can stop (except by ending trade and innovation). Those exogenous pressures are affecting people, worldwide, so they will disrupt life in well-managed countries at the same time as they push dysfunctional countries even further towards class warfare (economic chaos and social disruption).*

I'm not going to dispute the claim that technology is cannibalizing "middle class" jobs (law, accounting, engineering, teaching, etc.), as the patterns are already clear. Instead, I am going to offer some ways to offset the inevitable, negative impacts.

Technology is going to result in even stronger gains in income to the creative and capital classes who design the widgets we buy or collect a few pennies from billions of fans. Coming from the opposite direction, we're going to see more people chasing fewer jobs, as technology automates more tasks. Computers are now faster than us at many things (most teens can barely add or subtract these days), but new software is going to make computers smarter than us at many things (doctors are already losing credibility to expert systems). It's not clear that people will enjoy a middle class lifestyle on lower class wages.

There are three possible policy responses to these forces: denial, opposition and coping.

I'm pretty sure that US politicians will go with denial, as their pro-rich policies serve them well [pdf]. Most Americans still believe in "the American dream," even as they commute further for a lower standard of living and smaller chance of their children rising above their socio-economic status. The same goes for politicians in other corrupt, plutocratic countries (Russia and China spring to mind), since they don't really care about average citizens.

Politicians in other countries will go for opposition, in a foolhardy attempt to either soak the rich or block technological change. I'm pretty sure this is the case in Italy, Spain and Greece, where politicians are busy "defending" wages and punishing businesses. Those actions will merely push more activity into the black market and offshore.

Politicians will try to cope with these imbalances in countries where exogenous forces are understood and balanced though social welfare programs. It seems that the Netherlands and Scandinavian countries fall into this category. Coping will mean extending existing programs for job training, unemployment insurance and social housing, but these will need to be augmented.**

Perhaps the best idea is to implement a "basic income" support for all citizens that will (1) help them pay for necessities and (2) work fulfilling jobs that pay less due to automation, offshore competition, etc. Such a program would support work in human services (health, learning, psychology), the arts and other areas that are considered hobbies today. I cannot put enough emphasis on benefits of this program, in terms of human security, fulfillment and cooperation.

I think that a basic income program should be funded with property taxes. Higher taxes on income are unlikely to work, as the rich and corporate can evade/avoid them in numerous ways.*** Higher taxes on consumption would merely push transactions underground. Taxes on property are easy to collect, regardless of ownership or use, since property cannot be hidden and property values are fairly easy to estimate when there's a property market.

Bottom Line: The gains from globalization and technological evolution are going to a smaller group of people. Politicians should allow this process to continue for its economic benefits, but they should tax capital (land) to provide financial support to the masses who must (and should) find their own, not-so-profitable ways of living with dignity in a harmonious society.

* The Economist recently wrote on this topic: Introduction, rewards to capital, losses to labor, the end of development-through-industrialization and potential solutions

** Econtalk has many episodes on labor. This recent one discussed how "technology is a complement for the high skilled but a substitute for the low skilled." They also glossed over a troubling problem, i.e., the last technological wave did not cause huge social problems because people displaced by agricultural innovations could move into industrial and service jobs, but where will those people go when technology destroys those jobs?

*** I reckon that half the corporate fraud and lobbying would disappear if corporations were not taxed. The economic theory supporting such taxes only makes sense in the context of income taxes (i.e., shifting income back and forth between real and corporate "persons").


  1. I have been trying to have that debate locally. I meet with denial all the time. Denial is cheaper for the person than opposition or coping.

    When I ask what jobs there might be that companies are waiting to fill and that would be middle class, I get no answers at all. There is not even shame in the person that they have no answers.

    Maybe opposition comes later and the process is like Kubler-Ross' stages of grief, which, though wrong, are a useful framing.

  2. Part A: I am going to speak here about the situation in the US because I am not as certain about the figures for other countries. I agree with the idea of a minimum income. I would like to see it coupled with a negative income tax. I do not favor federal property taxes, and higher taxes are not necessary to accomplish a minimum income.

    As of 2011 in the US, means-tested welfare programs (which excludes Social Security and Medicare) cost the federal government over $746 billion a year. The states kick in another $283 billion. Social Security cost the federal government $750 billion and Medicare cost $480 billion. Altogether that's about $2.259 trillion that is being redistributed every year. I think there are about 122 million households in the US, so you could give every household a straight $18500 a year without raising a cent in taxes.

    Going back to the $746 billion in means-tested federal spending plus $283 million in state spending, that totals a little over $1 trillion. Which, divided by the number of US households in poverty, equals over $61000 a year. That amount is more than the before tax median income of $50000 a year.

    Bottom line Part A: a negative income tax that guaranteed a minimum income could replace all the welfare programs, giving the beneficiaries more while costing less. In addition, the negative income tax's built-in incentives for people to better themselves is socially better than a myriad of eligibility requirements that punish workers, savers and stable two-parent families.

    Part B: Property taxes are bad for poor people, encourage urban sprawl and lead to higher concentrations of wealth in many cases. I've already shown that additional taxes in the US are not necessary, and I believe that they can be cut (I favor a 20% flat tax and a replacement of corporate taxes with pollution taxes), so the point is whether property taxes are good.

    The points you mention about the ease of collecting and difficulty of cheating are correct. Some very modest taxation of property at the local level is OK. However, if property taxes are raised to the level needed to be the primary income source of governments, there are serious problems.

    In raising the carrying cost of owning land, the most basic asset there is, property taxes move the use of land toward higher income producing uses and owners who can afford the carrying costs. People who are not wealthy but may have inherited a house or a farm cannot afford to keep the land because they lack the cash resources to pay the taxes. In addition, many poor elderly people, some who have paid off their mortgages to the bank, cannot afford sometimes their rent to the government (property tax), and so lose the only valuable asset they have.

    The pressure put on people who may have variable incomes from farming and that own land near valuable urban areas to sell their land is enormous, leading to urban sprawl. Their property taxes are forced higher because the value of the adjacent land, which has just been developed, has risen, so the value of their land has risen too. They end up selling to wealthy developers because they cannot afford their taxes.

    Bottom line Part B: Property taxes, as they are now levied, prevent cash-poor people from retaining land, which over time is a good way to build wealth. Two measures could improve property taxes: an income exemption for lower-income land owners and tax rates that do not depend on the value of the land but only on the acreage.

  3. @Rich -- thanks for your extensive comment. On Part A, I agree that the "net burden" need not increase, but (1) soc sec does not "cost" the government as much as represent an obligation based on a promise to retirees. We all know that SS was set up as a pyramid scheme (PayGo), but it's not right to talk about SS as if retirees are getting a gift. (I've written elsewhere about SS reform.) (2) The WHOLE point of a basic income is that it is NOT means-tested, as that burden leads to controversial decisions at the margin. Many right-wingers fear "exploitation" by welfare queens. It's easier to increase its volume by putting everyone in, even if some people pay in more than they take out. (3) There's considerable space for extensive administrative reform by swapping MANY programs for a single basic income program, but we also know that special interests (e.g., farmers with food aid) will be upset to lose their "special" market. (4) basic income is far easier to administer than a negative income tax that relies on the ridiculous tax code.

    On B, I disagree with "bad for poor people" as this confounds ownership with the stream of payments. Renting, all else equal, is the equivalent of owning once you consider risk, cash flow, etc. Second, the ENTIRE GOAL of taxing property is that property be put into beneficial use. I'd tax non profit land, church land, and even government land. Such a system would move land into highest and best use. Farmers who cannot generate enough cash to pay their taxes would be replaced by better farmers (oh, yes, let's axe the Farm Bill while we're at it). If there's no extra profit to be made, then property values would be at their correct value. Third, older people who lack cash flow could buy reverse mortgages to cover the taxes until their death. The market will provide. Your last point -- about sprawl and re-zoning land -- does not depend on the tax base as much as land use rules. The current system results in land that's worth 5x neighboring plots due to its residential/commercial development value. Would local governments want to rezone land to increase their tax take? Perhaps, but that effect would be mitigated if property taxes were going to the federal govt, with only a small share to local governments. Local governments would then focus on maximizing the value of living in their area, which creates a different, pro-community dynamic.

    Finally, tax values that do not depend on value would lead to the same tax/acre in downtown Manhattan as Utah's desert. Are you sure that's the right outcome?

  4. I wish that I could get a few ideologues to understand simple subtraction. They think that a county can spend more on county services even though tax revenues are declining; they think that companies will hire millions of 'middle class' workers for whom the company has no work; they think that increases in the minimum wage are paid for by magic fairies and do not have to come from somewhere real. The list goes on.

  5. [ND via email:] I just went to an energy conference in Berkeley, and it was ... startling to hear the difference between politicians (or ex-politicians) and experts (academics, investors, and industry) on how to tackle sustainable energy. The video is not up yet, but Jennifer Granholm was a keynote speaker, and it made me sick the number of times she mentioned jobs (https://www.youtube.com/watch?v=GMynksvCcUI is the same speech)... She talked about comparative advantage (some states may be better suited for different energy innovations) yet maintained that we need to keep clean energy jobs in America, lest the rest of the world "take" our jobs. What will it take for politicians (and even harder, for the public) to realize that good climate policy does not mean maximizing employment? Heck, maximizing employment is not necessary for reducing inequality and increasing well-being. I totally agree with your post about how a basic income would enable people to work necessary, fulfilling, but low-paying job.

  6. Re: 1) Social Security pays more to its beneficiaries than what they paid in. This means that it is to some degree indeed a gift, and recipients need to be told the truth about that: “You are getting more out than you paid in. The money you are getting is not yours because your money paid your parents' benefits and your benefits are coming from your children. Time to thank them.” 2) I understand the point of basic income, my reference to means-tested programs is they are what will be replaced. 3) I think we could swap every program if the program is structured correctly. That includes Social Security, Medicare, Medicaid and farm support programs. Some special interests will have to be bought out. Kind of how companies sometimes reduce their workforce by buying out employees. 4) I think we should replace the current income tax system with a 20% flat tax and a negative tax that guarantees a minimum income, provides incentives for people to do more for themselves, and includes credits for housing and medical expenses that essentially fully subsidize medical care for low income people. However, I would be interested to hear more about how you would structure a basic income program.
    About property taxes: whether or not renting or buying is the same depends on circumstances. For someone who moves a lot, renting makes more sense than buying. For someone who is not going to move, buying is better . After the mortgage is paid off, the remaining costs are much lower unless property taxes are exorbitant. The decision to rent or buy depends on how long the asset will be held, the value the asset will hold over time and the carrying costs of the asset. People who are tied to the land, whether its a small lot in a city, or a larger acreage in a rural area, know that wealth can be built over generations in great part by buying and holding land. Even the poorest person, if they own some land mortgage free and can pay the taxes on it, has somewhere to go. For those of us who have been close to being homeless, knowing that we have somewhere to go no matter our income is important.
    High property taxes are essentially a repudiation of the right to own property. We all become renters from the state. However, the wealthier people then become nobles whose land is held at the pleasure of the king, while the rest of us become serfs in a nation-wide company town who pay the rents for the wealthy by paying our rents to them. It is property ownership, free from onerous taxes, that ensures freedom and some measure of economic independence.
    And what exactly is the “best” use of land? High property taxes favor only one definition of “best” use. But “best” use is a preference. Some might consider not using the land a best use. This would essentially be an environmental or preservation use. But property taxes preempt preservation.
    Saying high property taxes encourage best use like saying that high business registration fees encourage only the most sure-fire businesses to get started. That may be true, but is that really a good thing? High taxes on bicycles would mean only the people that would get the best use out of them would buy them. Do we really want to keep kids from getting bikes for Christmas? Is the best use for bikes just commuting to work? And we could raise carrying costs on land enough so that only a handful of farmers are efficient enough to survive. But is that really a good outcome?
    And the fact that Manhattan and Utah land is taxed the same is exactly the outcome I want, because it would mean that a poor homeowner whose grandparents bought their home in 1921 is not going to be forced out because the state wants to take it and have a higher paying “customer” use it, no matter where they live.
    Bottom line: The state should not manipulate the market by adding excessive costs and force poor people to give up the one asset they can pass on to their posterity.
    Rich Mills

  7. @Rich -- On (4), I still disagree, as your proposal requires the income tax (and ll its accounting). Basic income is EASY to administer, in comparison. Subsidies for medical and housing are also gov't picks winners types of programs.

    On RE, we perhaps disagree, but I'll note that zoning affects values, which is an easy way for govt (even via popular input) to separate urban and ag lands. Those values (found in markets) will determine the tax burden ($), but note the rate (say 2% of value). I totally disagree on your nobles and slaves analogies, as they can be found in any corrupt system

  8. Great talk for a basic income.
    “Higher taxes on consumption would merely push transactions underground. “

    The idea of a “consumption tax” is, that all goods and services are produced through “us”. Us is the community, country, area or what else. - If someone takes from this fruits, he should give a little (money) back to the community which produced all these goods.

    Also in a basic-income society you will have tax audit. And it is easier to find out, that someone has not paid the consumption tax, than it is with income tax. - Consumption tax should be low for all necessary goods to live a humanly life, and high for Maseratis, Castles and Gucci articles.

    Income taxes are bad for the productivity of a country, because “work” is under taxation. And it has the effect to prevent people to take on responsibility. - It is a good idea to abolish these taxes. Productivity and engagement will rise after that.


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