Friday, April 1, 2011

Good Policy Suggestions

Here are some are good policy ideas to improve the efficiency and equity of our economy from Joseph Stiglitz, a Nobel prize economist, professor at Columbia University, and former chief economist of the World Bank.

Below are some selected quotes and paraphrases from this paper by Stiglitz published on December 2, 2010 through the Roosevelt Institute, which was focused on the political problem of reducing the deficit. I do not believe that the deficit is the issue, but rather the long term overall situation of the economy and Stiglitz seems to agree though this paper has as its explicit goal improving the economy through reducing the deficit, though I believe his implicit goal is not so much concerned with deficits as it is with overall economic well-being. I hope the quotes and paraphrases will illustrate what I mean. I added emphasis to the points I thought were most striking or important and I believe these ideas are largely in accord with Catholic Social Teaching, particularly the goals of social justice and economic welfare for the society as a whole.
Politically the task of deficit reduction is enormously difficult.

At the head of the list of reforms are measures which increase both efficiency and equity.

Given the enormous increase in inequality that has occurred in the U.S. over the past three decades, any measure that harms those at the bottom should also be unacceptable.

What matters is not the deficit itself or the short-run national debt, but long-run levels of the national debt. The single-minded focus on deficits and short-run debt is thus fundamentally misguided.

There is no magic number that represents the appropriate size of the federal government.

A larger government, but one focused on investments, could be associated with a smaller deficit.

This paper is not about political compromises, [but about] principles of efficiency and equity.

These first ideas in particular are based on the premise that what is important is the long-run national debt, not the short-run deficit. Just like it may pay for a business to borrow in order to increase long-run profitability.

Public investment can yield high returns.

Three factors contributing to opportune investments today: 1) there has been underinvestment for years, 2) the borrowing interest rate is at record low levels, and 3) the economy is operating significantly below capacity.

Historically, public investments in education, technology, and infrastructure have yielded returns that are in excess of 7.5%.

Corporate Welfare
Corporate welfare consists of billions of dollars to enrich the coffers of corporations.

The net beneficiaries of such corporate welfare are by and large wealthy Americans.

Two categories in general need to be addressed: subsidies to agriculture and agribusiness and subsidies to producers of fossil fuels.

Most of the money of agricultural programs goes to corporations and Americans who are better off than average.

There are easy fixes, e.g., by limiting the benefits to those whose income is below $100,000 and limiting payments to, say, at most $100,000 per farm.

[Particularly bad are] the excessive payments to the pharmaceutical companies under the provisions of the Medicare bill, which restricted the government’s ability to bargain with them on prices.

Efficient auctioning of the rights to use natural resources can lead to greater efficiency.

Our tax system is neither fair nor efficient.

Much corporate welfare takes the form of special treatment within the tax code.

A small increase in the tax rate on the top 1%, say 5% of their income, would generate revenues equal to between $1 and $1.5 trillion. Currently, most of these individuals pay effective tax rates that are far below the “official” rates because of their ability to take advantage of tax preferences and loopholes. Eliminating these tax preferences and loopholes would go a long way towards achieving this limited increase in taxation.

One proposal that has been widely discussed is to tax all forms of income the same, i.e., eliminate the preferential treatment of dividends and capital gains, the benefits of which go disproportionately to upper income Americans.

In the end, the special treatment afforded to dividends and capital gains did not have the benefits promised: instead of household savings increasing, the savings rate plummeted to new lows after the enactment of the Bush tax cuts.

There is moreover no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.

Rather than an across the board reduction in the corporate income tax, far better would be a tax reform that would encourage investments in jobs in the United States, and that would encourage investment in research and development.

There is a class of taxes that actually increases economic efficiency—taxes which discourage activities which generate negative externalities sometimes referred to as Pigouvian taxes.

The repeated bailouts of banks have led to a distorted and inefficient economy. Taxes can be used both to undo these distortions and contribute to deficit reduction.

Probably nothing did more to enhance the sense of injustice around the world than the receipt of huge bonuses by those responsible for the economic crisis, even as the banks were being bailed out by taxpayers who bore the brunt of the costs of the banks’ misdeeds.

A well-designed bonus tax could thus encourage incentive structures that align behavior of those in the financial sector with the long term interest of society, contribute to a broader sense of societal fairness, and simultaneously contribute to deficit reduction.

Among economists there is a broad agreement that the repeated bailouts have led to a problem of moral hazard with excessive risk taking and an excessively large financial sector.

The Obama administration at one point talked about a tax based on leverage and size, designed to discourage excessive leverage and size.

More Efficient Expenditure
There are some areas of public expenditures where the objectives of the government programs could almost surely be achieved at lower costs.

The single most important area of discretionary expenditures is military. Americans could obtain more security at lower cost.

We spend billions on weapons systems that don’t work against enemies that don’t exist. With America’s military spending approximately equal to that of the rest of the world combined, it is clear that there is a lack of balance.

America’s moral authority is more important than its military power.

Military expenditures do not contribute to our economic strength.

Direct conflicts impose costs that extend decades into the future, through health care and disability costs for the returning vets.

Final Points
Deficit reduction, it should be remembered, is not an end in itself, but a means to other objectives. If done the wrong way, our growth can be impaired, our society can become more divided, and the capacity of both our country and our government to deal with the challenges facing it can be impaired.

The reason that we have the myriad of the distortions and inequities that we have identified is because of the influence of special interest groups who so far at least, have been willing to sacrifice the national interest to their own.

Other data:
The effective tax rate was 23% for the top 1% and 21% for the top 5%, markedly lower than the legislated rate of 35%.

Median income has declined by some 5% over the past decade and was in decline before the recession.

Poverty has increased from 11.9% in 1999 to 14.3% in 2009.

The upper 1% of Americans accounted for an average of some 22% of the nation’s taxed income during 2004-08.

65% of the income growth during the Bush expansion was captured by the top 1% of families.

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