James Galbraith Tells Us What Everyone Needs to Know About Inequality

By Polly Cleveland

Inequality has surged in the U.S. over the last forty years; many observers now blame the deregulation and tax cuts for the rich starting with the presidency of Ronald Reagan in 1980. In his new short book, Inequality: What Everyone Needs to Know, James Galbraith explains how this happened through the change in U.S industrial structure:

“In the early postwar period, the dominant American industrial corporation–such as General Motors, General Electric, American Telephone & Telegraph, International Business Machines–was an integrated behemoth that contained within itself not only production, but every phase of basic research, product design, and marketing that was relevant to its mission. Therefore incomes were distributed within the corporation by administrative decisions, governed by the bureaucratic imperatives and prerogatives of those in charge, and strongly responsive to the incentives of a highly progressive income tax structure. Top scientists and engineers, as well as top executives, were paid salaries, and salaries were regulated by the corporation. Tax structures also gave strong incentives for the corporation to retain profits, rather than pay them out as dividends, and to reinvest the proceeds–whether in factories or in the palatial towers that grew up in Manhattan, San Francisco, and Chicago in those years.

All of this changed with the tax “reform” movements of the 1970s and 1980s, which pushed for lower top marginal tax rates, fewer special exemptions from the tax, and for a “shareholder-value” model of corporate compensation. And a special feature of this change was that it created strong incentives to restructure the corporation itself.

“In particular, as the digital revolution came into view, the top technologists in the big corporations realized that they would be far better off if they set off on their own, incorporated themselves as independent technology firms, and then sold their output back to the companies for which they had formerly worked in salaried jobs.…

The effect of this structural transformation on the distribution of household incomes in the United States, as recorded in the tax records, is astonishing. For there were created, mainly in the 1990s, a handful of citadels of stratospheric incomes, previously unknown in the country and concentrated in the tiny handful of locations. One of these was Manhattan, the home of Wall Street and the source of finance. A second was Silicon Valley, a cluster of counties in Northern California. And the third was Seattle, Washington, and its near suburbs.”

Galbraith is describing the same phenomenon that Barry Lynn documented at length in his chilling 2010 exposé: Cornered: The New Monopoly Capitalism and the Economics of Destruction. That is, the transformation from vertically integrated firms to horizontally-integrated monopolistic trading companies, buying inputs from all over the world, squeezing both their suppliers and their customers. But Galbraith adds a new insight: not only did the postwar high-tax regime induce corporations to keep executive pay in check, it also induced them to retain profits and reinvest them in the corporation. With the 1980’s “greed is good” transformation, rates of reinvestment slowed as executives started taking more for themselves—surely helping slow the overall rate of growth.

Wait a moment! High taxes on income and profit produced more investment and growth? That’s the exact opposite of today’s Republican, and often Democratic, mantra that high taxes kill investment and growth. But the postwar taxes that tamed the corporate behemoths were in fact high marginal rates, top rates in a steeply progressive system. These were the very taxes imposed at the beginning of World War II to prevent war profiteering. These were taxes designed to capture the “unearned income” or “economic rent” of powerful corporations and wealthy individuals. It was perfectly logical for such corporations and individuals to “avoid” such taxes by investing money they would otherwise lose.

If high marginal income and profit taxes are so beneficial, is there any prospect—given the political will— of returning to such tax levels? Unfortunately, now that so many multinational corporations and wealthy individuals are registered or domiciled in tax haven countries, any simple effort to impose truly high marginal rates on profits or income will simply lead to more creative evasions, corruption (see Panama), and tax wars.

But, assuming the political will, are there other approaches? Galbraith proposes:

A much older and yet, to this day, still more promising alternative to taxing financial wealth is to tax land value, including the value of mineral and energy resources in the ground. The economic concept behind this idea is that of Ricardian rent–the argument that rents (which are inherently unproductive) flow to the owners of the fixed and non-reproducible asset, namely land. By taxing land and minerals, one reaches the least defensible forms of accumulated wealth, while at the same time doing the least to distort market decisions as between capital investment and hiring of labor. And there is another advantage: unlike financial wealth, land stays put. It exists in fixed jurisdictions with registered ownership; all the taxing authorities need to do is to send an appraiser, and then a bill. Local property taxes already work this way; however, in the United States landowner opposition to land taxes has been fierce, and many states are barred by their constitutions from levying property tax on a statewide basis. In California, notoriously, even local property taxes were capped in the late 1970s by a ballot measure strongly supported by wealthy landholding interests.

Land taxation has been for a century the program of the followers of the 19th century American economist Henry George, whose influence was vast around the world a century ago. One of his followers was the Chinese revolutionary Sun Yat-Sen, founder of the Republic of China in 1911. And Maoist China, by conducting an early war against landlords, ended up having the world economy most like the Georgist program in the modern age. But instead of taxing land value, the Chinese state actually owns it, and collects the land rent for itself. By doing this, Chinese municipalities and provinces have enjoyed ample revenue from which to make capital improvements, which is why Chinese cities have been able to grow like weeds in the reform era…

To this I would add that land taxes weren’t new in China: they financed Chinese empires as early as 2000 BC. Stiff land taxes of four shillings to the pound of assessed value financed the transformation of British finance in 1688; Adam Smith deemed them “the most equitable of all taxes.” Taxes on high profits and incomes and on land values all capture unearned income, or rents, forcing taxpayers to invest productively to pay the tax.

Latest links on Friedman/Sanders, etc.

More posts related to the kerfuffle over our columnist Gerald Friedman’s report WHAT WOULD SANDERS DO? ESTIMATING THE ECONOMIC IMPACT OF SANDERS PROGRAMS:

Alan Harvey, IDEAeconomics, Standard Fare or Fantasy Economics? An excellent and vigorous defense of the plausibility of Friedman’s growth projections and a useful summary of the debate, including Christina and David Romer’s intervention into it. Among the telling points he makes in support of the plausibility 5+% growth rates with the kinds of big, big programs Sanders is suggesting: the fact that “the average growth rate under Democratic presidents prior to Barack Obama was 4.2 percent.” Gee, Friedman estimates a few years of growth 1.1 percentage points higher than the average growth rate under pre-Great Recession Democratic presidents, and suddenly puppies are flying?

Here are some of Harvey’s useful points about the Romers’ critique:

“Romer criticized Friedman for confusing stocks and flows, suggesting – as I understand it – that the Friedman analysis projected multipliers too far into the future. The multiplier is the increment of new activity produced by an investment or government spending program. The stimulus money spent is income to workers and businesses, who each save some, but spend most,
which becomes income to other workers and businesses and results in further spending. …”

“Christina Romer is uniquely qualified to discuss overreach in projections, since she was chair of the CEA during the Obama stimulus period and famously forecast an immediate reduction in unemployment that did not materialize. [Ouch!] This failure was seized upon by Republicans to discredit government stimulus entirely. We can, of course, look back and see the economic effects, which were substantial. But because they did not match the projection, the theory of the projectors suffered. …”

“Romer appears to suggest in the Wolfers piece that multipliers act only during the period of stimulus spending, and she faults Friedman for misunderstanding stocks and flows. It should be obvious, however, that a measure which provokes additional private investment can claim credit for economic activity induced by that additional investment. If Ms. Romer is suggesting otherwise, she is wrong.”

In a nice turn of phrase, Harvey suggests that, contra Larry Summers’ mantra, in the midst of the debates about the appropriate level of stimulus, that stimulus should be “timely, targeted and temporary,” Sanders’ proposed stimulus is (as it should be) “substantial, strategic and sustained.”

James K. Galbraith, Boston Globe, The kerfuffle over Sanders’ economic planA summary similar to his other pieces, but in a forum that will have reached a much broader audience.

James K. Galbraith, interviewed on the Real News Network, Attacks on Sanders Economic Plan By Former CEA Chairs Are Irresponsible.  Some nice detail in this interview, conducted by TRNN’s Sharmini Peries, that hasn’t appeared in his earlier written statements. The summary: “So what we had here was a, what was essentially an academic exercise that produced a result that was highly favorable to the Sanders position, and showed that if you did an ambitious program you would get a strong growth response. It’s reasonable, certainly, for the first three or four years that that would transpire in practice. And what happened was that people who didn’t like that result politically jumped on it in a way which was, frankly speaking, professionally irresponsible, in my view. It was designed to convey the impression, which it succeeded in doing for a brief while through the broad media, that this was not a reputable exercise, and that there were responsible people on one side of the debate, and irresponsible people on the other.And that was, again, something that–an impression that could be conveyed through the mass media, but would not withstand scrutiny, and didn’t withstand scrutiny, once a few of us stood up and started saying, okay, where’s your evidence, on what are you basing this argument? And revealed the point, which the Romers implicitly conceded, and I give them credit for that, that in order to criticize a fellow economist you need to do some work.”

Michael S. Gordon, Boston Globe, Socialists, look to economists at UMass Amherst for support.  In light of the huge uptick in the number of people in the U.S. who call themselves “socialists” (see below), this headline isn’t as snide or marginalizing as it might have seemed a couple of years ago. Look for an uptick in applications to the UMass-Amherst econ department from all those millennial Berniegals and -bros.

Annie Lowrey, New York magazine, Who’s Winning the Great Bernie Magic-Math Battle?  Follow up to an earlier piece (something of a hit piece) by Lowrey, Bernie Sanders Has Started Thinking Like a Republican  (where Bernie is “thinking like a Republican” because “He has no interest in garnering respectability and credibility among Establishment Democrats,” with the suggestion that he is willing to make unrealistic promises). Despite her continued use of the derogatory and tendentious term “magic math,” the more recent piece is more favorable to Friedman:

“The truth is that it seems impossible for Sanders’s economic plans to do what Friedman thinks they would. But the whole debate has underscored that our current growth rates are as much a function of policy as they are of anything else, and that we need not resign ourselves to growing at 2 percent a year, year after year. Maybe the technocrat wonks are right. But maybe Hillary Clinton should be promising to try for 5 percent growth herself. Smarter policies —infrastructure investment, early childhood education, making work pay, rebuilding the safety net, declining to raise interest rates and choke off a recovery — would all help bolster the economy. Five percent growth over a decade might be fantastical, but 5 percent in a few years might not be.”

Two pieces I had missed on the keruffle:

Mark Thoma, The Fiscal Times (Feb. 23), Here’s Why Bernie Sanders’ 5% Growth Plan Isn’t Crazy After All. Another prominent left-leaning economist weighing in on Friedman’s side. Thoma quotes former Minneapolis Fed chair (whose blog posts I linked to in my last post):

“Narayana Kocherlakota argues ‘that there are good reasons to believe that, with appropriate stimulus, it would be possible to achieve growth outcomes of around 5-6 percent per year for the next four years.’ But we won’t know unless we try. The inflation risk is minimal, and we owe the households who have struggled so much during the recession and the long, drawn out recovery the best possible chance we can give them of finding a decent job.”

Greg Ip, Wall Street Journal (Feb. 19), To Match Lofty Growth Goals, Presidential Candidates Need Better Plans.  Discussion of what Ip views as overly optimistic growth promises from both Sanders and Republicans; an early criticism of Friedman’s report, but he appears to have actually read it: “Mr. Friedman claims a big deficit-financed stimulus, increased entitlements and redistribution would achieve this. That seems implausible; Barack Obama, after all, did all three (though by less than Mr. Sanders would), and labor-force participation and productivity growth have trended down. Indeed, in theory, increased social transfers and marginal tax rates tend to reduce labor-force participation, and increased regulation hurts productivity growth.” He concludes: “There’s nothing wrong with outside-the-box thinking. That’s what got the U.S. out of the Great Depression. But so far, what the candidates have offered doesn’t measure up. Either more realistic goals or far more unorthodox thinking is in order.” Sounds good–let’s go for much bigger stimulus and government intervention than Sanders is calling for!

Related Items on Candidates’ Health Care Proposals (or Lack Thereof):

Beverly Mann, Angry Bear, Clinton Announces When She Will Disclose Her Healthcare Insurance Improvement Plan: She’ll announce it just as soon as the Republican presidential candidates tell us theirs.  (Via Naked Capitalism.) See also Ben Mathis-Lilley, Slate, Hillary Clinton Doesn’t Have a Practical Plan, or Any Plan, for Universal Health Care Coverage.  So much for “pragmatism.” As David Sirota pointed out on Twitter, in its efforts to hitch Clinton to Obama’s parade, the Clinton campaign sometimes overstates Obama’s achievements, including on health care: “See this quote from Clinton campaign, then note that 30+ million don’t have health insurance:”

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Find this statement on Hillary Clinton’s campaign site, here.  So maybe the reason Clinton doesn’t seem to have a plan to make health care universal is that she believes her own false claim that it is already universal (and affordable–which Obamacare isn’t either).

Is Clinton much better than Trump on this score? See Roy Poses, Health Care Renewal blog, It Has Come to This? – Donald Trump’s “Truly Absurd,” “Word Salad,” “Gibberish” Health Care Policy. (This also via Naked Capitalism.) This piece makes fun of the “word salad” and “gibberish” in Trumps debate answers about health care, mostly endless repeating that he will “get rid of the lines between states.” More recently, though, Trump has gone beyond revisionist cartography by posting more details about his health care reform ideas on his website. Besides repeal of Obamacare and “[m]odify[ing] existing law that inhibits the sale of health insurance across state lines,” the reform plans include allowing taxpayers to deduct premium payments, plus health savings account. Standard “free-market” fare, but trust him, “It’s gonna be great.”

Meanwhile, Sanders’ plan has gotten more scrutiny than Clinton’s and Trump’s non-plans. In an earlier post I mentioned the piece from WashPo Wonkblog,  Study: Bernie Sanders’s health plan is actually kind of a train wreck for the poor. This is the one that only cited Kenneth Thorpe’s study, and not the critiques of it by Friedman and by Woolhandler/Himmelstein. Where’s the scrutiny for Clinton’s failure to explain how she’s going make Obamacare truly universal?

Our current issue, which just went out to e-subscribers and is being mailed soon to print subscribers, includes a column by Gerald Friedman on Sanders’ health care proposals. I’ll post that to the website soon–probably next week.

Several pieces about the leftward shift in U.S. politics (without a corresponding leftward shift among establishment elites):

Gertrude Schaffner Goldberg and Sheila D. Collins, HuffPo, Diminishing Expectations: For Whom?  Great piece by two friends of D&S (see Trudy Goldberg’s Jan/Feb 2015 cover story, Where Are Today’s Left Movements?: What we can learn from the millions who demonstrated for jobs, government relief, and collective bargaining rights in the 1930s). The first paragraph gives the lie to Clinton’s claim to be the best candidate for people of color: “In a debate with former Secretary of State Hillary Clinton Senator Sanders referred to the achievements of the Nordic countries in providing such things as universal health care and free higher education as models for the United States. Secretary Clinton responded by saying, ‘I love Denmark, but the United States is not Denmark.’ What does that mean? The allusion is not to insufficient economic resources but to unrealistic political expectations. Sometimes the excuse or barrier is our ‘diversity.’ In the final analysis, one might infer from that explanation that we would extend these benefits if it didn’t mean that they would be provided to persons of color, immigrants or other groups somehow regarded as alien and undeserving.” (Clinton’s remark about Denmark is another example of how easily she picks up right-wing talking points against social-democratic goals; this is on par with her criticisms of Sanders for promising “free stuff” and her promise not to raise taxes on the middle class (which would make it hard to replace premium-supported Obamacare with a tax-funded single-payer system).)
This piece reads well alongside Doug Henwood’s Post-Hope Democrats, which I linked to in an earlier post.

Harold Myerson, The Guardian, Why are there suddenly millions of socialists in America?  “It used to be a dirty word. Bernie Sanders helped remove the stigma – but it’s the spectacular failure of capitalism that has really changed people’s minds.” An excerpt:

“Bernie Sanders’s presidential campaign has made clear that many Democrats are inclined to vote for a candidate who proclaims himself a democratic socialist, but even more dramatic and consequential are the many Democrats who say they’re socialists themselves. In a poll on the eve of the Iowa caucuses, more than 40% of likely Democratic caucus attendees said they were socialists. In a Boston Globe poll on the eve of the New Hampshire primary, 31% of New Hampshire Democratic voters called themselves socialists; among voters under 35, just over half did. And in late February, a Bloomberg poll of likely voters in the Democratic primary in South Carolina – South Carolina! – showed that 39% described themselves as socialists.

“Favorable views of socialism aren’t limited to Sanders supporters. The 39% of South Carolina Democrats who call themselves socialists exceeded by 13 percentage points the number who actually voted for Sanders. In a New York Times poll last November 56% of Democrats – including 52% of Hillary Clinton supporters – said they held a favorable view of socialism. Nor was this sway toward socialism triggered by Sanders’s candidacy: as far back as 2011, a Pew poll revealed, fully 49% of Americans (not just Democrats) under 30 had a positive view of socialism, while just 47% had a favorable opinion of capitalism.”

See also: Peter Beinart, The Atlantic, Why America Is Moving Left. An interesting piece, but hard to follow because of the author’s use of the term “liberalism” to mean “left,” and the author’s suggestion that Obama is liberal/left, as in this thesis statement: “There is a backlash against the liberalism of the Obama era. But it is louder than it is strong. Instead of turning right, the country as a whole is still moving to the left.” Shouldn’t he instead say that there is simultaneously a left-wing backlash against neoliberal Obama, and a right-wing reaction against that backlash (and against whatever socially liberal elements or imagined “left” or “socialist” elements there are in the Obama administration)?

Ethan Young, Rosa Luxemburg Stiftung, A Political Revolution for the U.S. Left. Much better piece. “The U.S. Left is in the process of emerging from decades of decline. It entered the Obama years in terrible shape: politically incoherent, cut off from its historical continuity, and organizationally and socially fragmented. Yet in the last years there have been signs of awakening, and in the past few months a new progressive insurgency has appeared, piercing public consciousness in a way not seen in generations.

“The most distinctive form this insurgency takes is the Bernie Sanders campaign for the Democratic Party nomination for president in 2016. Sanders is the first self-proclaimed socialist to win a national audience since Eugene V. Debs ran as the Socialist Party’s presidential candidate in the early 20th century, and the size of his base is arguably greater than that of any socialist leader in U.S. history.”

Two pieces on the Democratic primaries:

Jim Naureckas, FAIR/Extra! blog, NYT Works Hard to Present Primary Race as More Boring Than It Is.  This is a searing critique of the NYT’s post-Super Tuesday piece that originally bore the headline “Wins for Sanders in Liberal Strongholds,” but eventually read Minority Voters Push Hillary Clinton to Victories. As Naureckas rightly points out, it’s ridiculous to call Oklahoma and Colorado “liberal strongholds.”

Corey Robin, from his blog, Super Tuesday: March Theses. Republished at the Jacobin website as The Primary Isn’t Over  (whose title I would have edited to “The Primaries Are Not Over”). Excellent points about how the Super Tuesday results are not as good for Clinton as many have suggested. After Super Tuesday, Clinton has ten states and Sanders has five, but: “[t]he elections in Nevada, Iowa, and Massachusetts were either close or extraordinarily close. A little bit more time here, a little bit more organizing there, and they could easily have tipped his way. In other words, Sanders could very easily have seven states now to Clinton’s eight. He doesn’t, and coulda shoulda woulda is just that. But what this does mean, going forward, is that we have the opportunity to turn potential into actual. We’ve got time, we’ve got organizing, we’ve got money: let’s make use of it all.” Others have pointed out that Clinton’s wins on Tuesday were in the south, states which (with the exception of Virginia) neither Democrat would be likely to win in the general election. So Sanders’ wins in Oklahoma and Colorado may be more significant. What’s more, in the 2008 Democratic primaries, Clinton won CA, NY, NJ, MA, FL, CA, PA, TX, and a bunch of smaller states, and still lost to Obama, as this map shows:

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(*Remember that the delegates assigned from the MI and FL primaries were disqualified, because those states held their primaries earlier than the DNC allowed. Still, the rest of the states I listed are big states.) This surely had to do partly with the (small) margins by which she won those big states and the (large) margins by which she lost the less populous states that Obama won. But all this is to say that it is far from clear that Clinton will inevitably win the primaries. As Robin says, “Clinton’s strongest weapon is the aura of inevitability that she and her supporters and the media have concocted around her.” I would add that one of her weaknesses may be a sense of complacency among her supporters about the upcoming primaries; Sanders supporters can take advantage of that by heeding Robin’s advice to make use of the time, money, and organizing that we have on our side. (I myself canvassed in NH and MA and will make phone calls to likely Democratic voters in upcoming primary states. Maybe you should too.)