The real story is growing equality

Here’s some data on Chinese incomes:

In 2011, the per capita total income of urban households was 23,979 yuan. Specifically, the per capita disposable income of urban households was 21,810 yuan, the nominal growth was 14.1 percent, or a real growth of 8.4 percent. Of the per capita total income of urban households, the year-on-year growth of wage income was 12.4 percent; transferred income 12.1 percent; net income from business operation 29.0 percent; and 24.7 percent from property income. The per capita net income of rural households was 6,977 yuan, up by 17.9 percent, or 11.4 percent in real terms. Specifically, the growth of wage income was 21.9 percent; household operation income 13.7 percent; property income 13.0 percent; and 24.4 percent from transferred income. Taking the per capita net income of rural households as 1, the ratio of urban-rural income in 2011 was 3.13:1, while that in the previous year was 3.23:1. The total number of migrant workers in 2011 was 252.78 million, an increase of 10.55 million, up by 4.4 percent. Specifically, the number of local migrant workers was 94.15 million and outbound-migrant workers 158.63 million. The average monthly income of outbound-migrant workers was 2,049 yuan, up by 21.2 percent.

That means the migrant worker population (almost as large as the US population) got roughly a 15% pay increase last year in real terms.  Have so many people gotten so much richer in such a short time in all of human history?  I doubt it, although you could argue that human welfare increased even faster in the early 1980s, after Deng freed up Chinese agriculture.  Why will this story receive little attention in the press?

1.  Nationalism.  We care more about growing inequality in America than shrinking inequality in China.

2.  Euro-centrism.  The pain inflicted on a few million Greeks due to austerity is a more interesting story to reporters of European descent that the welfare of hundreds of millions of East Asians.

3.  There’s no such thing as good news.  If it’s not bad, it’s not news.  The only exception is if something really bad ends in a particularly dramatic way—say the fall of the Berlin Wall.

4.  It’s a contrarian story that doesn’t fit the dominant narrative.  The Chinese move toward capitalism really did make things more unequal in China during the 1990s (but not the 1980s), and perhaps (this is debatable) even in the US.  The recent reversal in China toward increasing equality was inevitable, but just doesn’t fit our current concern over inequality.

5.  People don’t believe the story is true.  Actually it is (roughly) true, but I find that when contrarian data is presented, people don’t like to adjust their prior beliefs, they’d rather argue the Chinese government is faking the data.  Even though this is the same government that 10 years ago was reporting increased inequality and near-zero wages for the poor.

The world is rapidly transitioning from a place where residents of rich countries can’t even comprehend the way of life in poor countries, to one where people will all live recognizably similar lives.  The current inequality trends in the US look bad, but it wouldn’t surprise me if we saw a reversal in those trends as well.  The entire world is evolving toward a near 100% service economy in terms of jobs (not output.)  I can’t imagine why low-skilled workers would not be able to do the “jobs of the future,” (which will be serving others) but perhaps I’m missing something.  I’m more worried about my job being replaced by the Khan Academy.  I suppose the big public policy issue will be deciding who should get to allocate all the wealth that will be accumulated by those with great ideas (or rents.)  Should the government or the wealthy get to decide which charities are most deserving?

Consumption inequality won’t be a big issue, especially if there are luxury taxes on big houses, yachts and private jets.  Bill Gates doesn’t need 750 washing machines.

HT:  Free Exchange


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46 Responses to “The real story is growing equality”

  1. Gravatar of John John
    25. January 2012 at 06:40

    Great post Scott. It’s interesting how many people assume manufacturing jobs are somehow more important than service sector jobs. Economists need to remind them that this isn’t necessarily so. If it was true that manufacturing jobs were so important, Manhattan would be a very poor place rather than a very rich place.

  2. Gravatar of mbk mbk
    25. January 2012 at 07:24

    Spot on Scott. And I agree with John above too. There seem to be certain mystical qualities to manufacturing jobs in folk mythology (previously reserved for farming only, as well as the ideal of autarky). What’s a mere service job, say, in scientific research, compared to the glory of manufacturing, say, car tyres?

  3. Gravatar of Rob Rob
    25. January 2012 at 07:49

    For a minute I thought you were channeling more than a few of Matt Yglesias’ posts, in regard to the future being service jobs.

    I agree completely. I’m sure there might be issues transitioning to a service economy for the subset of the population best described as… “cranky”. But that’s another topic.

  4. Gravatar of Will Will
    25. January 2012 at 07:56

    “Nationalism. We care more about growing inequality in America than shrinking inequality in China.”

    I love your whole post, but the first point is perhaps the most worth repeating. While everyone complains about the world falling off a cliff: Global GDP per capita has effectively doubled over the last 10 years! African/Asian countries have grown during this recession in profound ways.

    The expansion of smartphones (internet+phone+camera+data storage) across the globe has “flattened” the world and we are confusing the redistribution of unnecessary excesses to more useful economic actors as a problem. It’s almost laughably backwards. Folks – we are entering a world where the outputs of 3 billion people are being unleashed and we’re upset?

    LEARN TO BE HAPPY FOR OTHERS!

    There you go. That’s how to end the malaise of the disenchanted Western capitalists. Accept the productivity of your neighbors and welcome the collaboration opportunities. Finally – recognize that the final barrier to the “free” market is freeing the people who are not from your homeland. This will be the civil rights struggle that turns the young and old against each other in the coming decades. We will need to teach coddled Westerners how to accept the success and proliferation of people not like themselves. Migration patterns will change, and the social welfare state will need to adapt to this new way of living.

    I’m really quite optimistic. America at it’s heart has always been a country of immigrants, and while a few cranks might complain about “off-shoring” and “American exceptionalism”, the culture we export sanctifies individual liberty and openness. I look forward to global citizenship. Here’s hoping we don’t get scared of the future.

  5. Gravatar of Benjamin Cole Benjamin Cole
    25. January 2012 at 07:59

    It is not news unless it is bad….right.

    I remember Sumner (and myself) commenting that federal tax and regulatory burdens in the 1970s were higher than today in the USA. There used to be 90 percent top tax rate, and telecom, finance and transportation were regulated in ways foreign today. You remember passbook accounts with fixed interest rates? Fixed stockbroker commissions? Airline tickets at fixed rates?

    You never hear the above narrative, for partisan and emotional reasons.

    It is odd that even Democrats never recall the robust economy of the 1960s and the 90 percent top tax rate. I assume that is because Dem officeholders are largely millionaires too, not because they want capital formation or another worthy goal.

    And no one in either party calls for progressive consumption taxes. Ever. Except Milton Friedman, when he was alive.

  6. Gravatar of Jim Jim
    25. January 2012 at 08:04

    Scott missed the fundamental reason: the story does not fit our cultural meme. Americans, and American companies, are heartlessly condemning China to slave labor status in the cold, sociopathic world of capitalism.

    Price discovery and productivity and Say’s Law has nothing to contribute to such a story.

    We need to redistribute wealth. Not discover and create it.

  7. Gravatar of UnlearningEcon UnlearningEcon
    25. January 2012 at 08:46

    Of course, it’s not at all possible that local and global inequality are created by the same system. It’s also not possible that we can have increasing local equality and increasing global equality at the same time.

  8. Gravatar of Morgan Warstler Morgan Warstler
    25. January 2012 at 09:21

    “Morgan, Imagine a no tax scenario where you earn $200,000, invest if for 10 years, then end up with $2.2 million. Now lets put a 50% wage tax in place. Now you have $100,000 after paying the wage tax, you invest it for ten years and have $1.1 million. The tax effectively cuts in half the future value of your investment, even with only a wage tax. But our system is worse, taxing your wage income, and then taxing your capital income. So now you must pay 1/2 of the million dollar gain, leaving you only $600,000, compared to $2.2 million in the no tax case. That’s the sense in which your future consumption is double taxed. You can consume barely a fourth of the amount you could consume without taxes.”

    No Scott, I’m not going to imagine that.

    You asserted all capital gains were double taxation. I get to poke holes and make you do the hard work of caveats.

    I said a very REAL example:

    Invest $100K, one year later sell for $1.1M, capital gain of $1M.

    Show me where the $1M was already taxed.

    Look, the problem is you think about capital gains in a very personal “high saver” way. As if it is about some yearly salary earner setting aside savings vs. a big consumer.

    I think about them in a VC, Hedge Fund, high risk high return, short term investment way. Where there is NO previous taxation on that $1M. You can’t find it, because it isn’t there.

    So please focus on the caveats you need to make the assertion true.

  9. Gravatar of Morgan Warstler Morgan Warstler
    25. January 2012 at 09:23

    “We need to redistribute wealth. Not discover and create it.”

    Jim, you need to move someplace far away.

  10. Gravatar of K K
    25. January 2012 at 10:18

    Scott: Great piece! (Mostly) bang on.

    “Consumption inequality won’t be a big issue, especially if there are luxury taxes on big houses, yachts and private jets.”

    This is a fallacy. Rich people move large portions of their wealth offshore and spend it there later. The benefit accrues at the moment the wealth gain occurs. You *have* to tax it then, not hope it sticks around to be taxed later.

    Morgan: “Show me where the $1M was already taxed.”

    I don’t suppose it was. But it *will* be. The capital gain is the expected value of future *after tax* earnings.

  11. Gravatar of johnleemk johnleemk
    25. January 2012 at 10:32

    “You *have* to tax it then, not hope it sticks around to be taxed later.”

    I think you’re assuming that the only way to tax consumption is to levy a tax on the transactions which facilitate consumption. But I think Scott’s argued before that a payroll tax is equivalent to a consumption tax.

  12. Gravatar of BW BW
    25. January 2012 at 11:09

    1. It’s hard to blame people for not trusting official Chinese data. They do make things up. Not saying they are doing so here, but questioning the veracity of Chinese economic data is not exactly crank territory. It’s worth noting that this data relies on estimates of Chinese inflation, and there is reason to believe their estimates are (intentionally or not) too low.

    2. If it’s true that real incomes are going up this fast, it’s about damn time. The hoarding of wealth by the Chinese government over the past two decades has been outrageous, and certainly had a bigger impact on human welfare than hedge fund greed.

    3. “The real story is . . . “? What you’ve told is a real story. Not the real story. There can be many real stories, some of them heartening, some of them not.

    4. You’re right that this story won’t get coverage in the press. But really, our “current concern” over inequality doesn’t have much to do with it. Abstract economic data rarely makes for good press.

    5. Don’t celebrate prematurely. These are, after all, migrant workers. They may be making more cash, but they still don’t have permanent homes. If the economy of China is evolving so as to increase the number of migrants, it’s not clear that inequality is easing even if their real incomes are rising.

    Urban households are making more money, but of course we should also consider productivity and not income alone. A 10% increase in income for 15% more work isn’t unambiguously an increase in wealth, economically defined.

    6. I hope you are right about the global trends. But they can reverse themselves again. In India, the past decade and a half of growth has translated into negligible living standard improvement for the country’s very poor. That’s starting to change, partly as a result of active government policy. Let’s hope that trend continues.

  13. Gravatar of K K
    25. January 2012 at 11:30

    johnleemk: “a payroll tax is equivalent to a consumption tax.”

    But that’s not right. Consumption is financed from wages *and* profits. The incidence of a payroll tax (whether employer or employee side) is on wages. In a closed economy, a progressive consumption tax might be better because it falls on both labour and capital. But where the owners of capital have significant leeway to escape from taxation, they do so. In the case of consumption tax, escaping is a no-brainer.

  14. Gravatar of Shane Herron Shane Herron
    25. January 2012 at 11:50

    So let me get this right: communist China is at the vanguard of a gradual transition to a society in which the products of capital are shared equally among all the peoples of the world in peace and harmony? Maybe Rothbard was right to suspect Friedmanites of closet socialism!

  15. Gravatar of Alan Katz Alan Katz
    25. January 2012 at 13:09

    I know this isn’t really related, but since I could find 0 ways of contacting Scott, here’s a quote from today’s Fed statement:

    “The maximum level of employment is largely determined by non-monetary factors that affect the structure and dynamics of the labor market,” the Fed statement said. “These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specific a fixed goal for employment.”

    All I could think was, “Sumner’s gonna blow his gasket when he reads that”

  16. Gravatar of Why fear labour market globalisation? » TVHE Why fear labour market globalisation? » TVHE
    25. January 2012 at 13:16

    [...] It is possible that, as globalisation in labour markets gets underway, we experience stagnant or even lower wages in the Western world.  However, this is because people who are currently STARVING are now getting the opportunity to pull out of abject poverty and consumer some resources.  Globalisation of labour markets will reduce global income inequality, improve the lifestyles of the worlds most poor, and increase the size of the “economic pie” – this is a great thing.  As a result of this we may see a hollowing out of the middle class in developed countries in the near term – so what.  We could make the argument that the middle class that was artificially holding up their claim on resources by restricting the ability of the very poor to get themselves out of poverty – when we frame it that way does your opinion about what is “morally right” [Good post on this sort of issue on Money Illusion] [...]

  17. Gravatar of Becky Hargrove Becky Hargrove
    25. January 2012 at 13:42

    Optimism is sorely needed now. I keep hoping that the developed world can learn to recreate wealth within local knowledge-based non-tradable sectors, so that it will no longer need to be envious of where manufacturing goes. When every individual is allowed to be a responsible, participating citizen, governments will no longer need to remain in debt, and no one need think of business as wealth monopolizers.

    When I read that South Carolina set up factories with complex machines(skilled labor) to compete with China, it made sense why China was able to hire so many people: miles and miles of machines operable by unskilled labor. What a huge bonus for everyone.

    I don’t think that knowledge-based communities would take your job away. Rather, knowledge would be allowed to trickle-down so as to be usable and applicable by people at local levels. That’s where new and stable wealth has so much potential. You said, “I can’t imagine why low-skilled workers would not be able to do the jobs of the future…serving others.” No kidding.

  18. Gravatar of RobbL RobbL
    25. January 2012 at 13:55

    “Consumption inequality won’t be a big issue, especially if there are luxury taxes on big houses, yachts and private jets. Bill Gates doesn’t need 750 washing machines.”

    This is not the historical pattern. Why do you think that it will be true in the future. The service workers that Apple employs in the US (for example in their stores) aren’t able to consume much today. Why would that change? I pick apple for an example since Apple is very picking in their hiring and has money to burn.

  19. Gravatar of RobbL RobbL
    25. January 2012 at 13:57

    picky not picking, sorry

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. January 2012 at 15:27

    The Physiocrats thought only farming produced real wealth. They were followed by a long series of folk who thought (and think) that manufacturing produces real wealth in a way that services do not. (A view usually proclaimed by people paid to provide services: interesting levels of self-loathing or self-blindness required.) The some form of production is “special” seems to be a view that never goes away.

  21. Gravatar of Morgan Warstler Morgan Warstler
    25. January 2012 at 18:09

    Alan Katz,

    I doubt Scott cares at all about that. He doesn’t actually care about unemployment per se.

    Once there is a 4-4.5% level target for NGDP, Scott will automatically make the same argument the Fed is making. That the problem is structural (bad gvt. policy).

    Personally, I’m glad the Fed was so clear about unemployment being a stupid measuring stick.

    Scott I STILL haven’t gotten your answer on the $1M.

  22. Gravatar of RueTheDay RueTheDay
    25. January 2012 at 19:38

    @Morgan Warstler

    “I said a very REAL example:
    Invest $100K, one year later sell for $1.1M, capital gain of $1M.
    Show me where the $1M was already taxed.”

    He can’t, because it hasn’t been taxed.

    It took me a little while to disentangle the logic behind this double taxation nonsense, but it’s essentially this:

    1. The current market price of an investment asset is the discounted present value of all future (after tax) cash flows yielded by that investment asset.
    2. Any increase in the current market price of an investment asset is due to an INCREASE in the EXPECTED future (after tax) cash flows yielded by that investment asset.
    3. Since that future expected increase in investment yield is GOING TO BE TAXED IN THE FUTURE, taxing the present value of that increase (the capital gain) would be double taxation even though right now, in the present, it hasn’t even been taxed once.

    You could drive a Mack truck through the holes in this argument.

    1. Those FUTURE EXPECTED increases in cash flows may never materialize, and thus never be taxed. Meanwhile, the present capital gain was realized but never was taxed. In this case, not only do we not have double taxation, we don’t have single taxation either. No tax was paid.

    2. The person realizing the capital gain today is different than the person receiving the increase in investment income in the future. Both receive a return on their investment, why should only one pay the tax? When I buy a car, the car dealer pays tax on the income represented by my purchase, even though I paid tax on it when earned it.

  23. Gravatar of John S. John S.
    26. January 2012 at 00:14

    Morgan/RTD:

    Think of it this way: two people earn $150 each, are taxed down to $100. One spends the $100 on donuts and the other spends it on “money in the future” (or invests it–same thing, different terms). The expected present value of the $100 investment can’t differ a priori from $100. So whether you buy $100 of donuts or $100 of “future-money,” you get $100 worth of “stuff.” (Yes, maybe EMH is wrong and some people get lucky and discover opportunities to buy $101 of present value for just $100, but that’s clearly the exception, not the rule.)

    The guy who earns $150 and buys $100 worth of donuts pays $50 in income taxes and that’s it. The guy who earns $150 and buys $100 worth of future-money pays $50 in income taxes and a few bucks in capital gains taxes.

    Two people. Same endowments. They purchase goods with equal value. And they are taxed differently.

    Morgan, regarding your question about the $100K investment and the 1.1M return, only a very risky investment would provide such a large return. A priori, the present value of that risky return was only $100K. If you think this is systematically wrong, I hope you are taking your fantastic opportunity to borrow a few million dollars and invest it more wisely than the rest of us are capable of.

  24. Gravatar of RueTheDay RueTheDay
    26. January 2012 at 03:24

    @John:

    “The guy who earns $150 and buys $100 worth of future-money pays $50 in income taxes and a few bucks in capital gains taxes.”

    If I strictly follow your example, the guy who buys $100 worth of future money has not YET paid “a few bucks in capital gains taxes”. He will pay that in the future, if and only if, he sells the “$100 worth of future-money” for a sum greater than $100, in which case you will need to figure in the difference when you calculate his tax base.

    The disagreement we are having is that you want to treat the $100 in future-money as equivalent to $100 in donuts consumed today whereas I want to treat the $100 as an asset that yields returns.

  25. Gravatar of Morgan Warstler Morgan Warstler
    26. January 2012 at 05:12

    John you are wrong.

    First of all forget the concept of Interest here. This is not about fixed savings and high-savers (like Scott thinks about things).

    This is about EQUITY INVESTORS – VC, hedge funds, private equity.

    Not weirdo bond buyers who “invest in America” – altho if you want to toss in PIMCO fine, we can discuss this later.

    At that point, Scott doesn’t have a leg to stand on.

    A previously taxed dollar is a muscle, a tool and every dollar that it earns is a brand new dollar.

    One more point: it is funny that Scott insists oin trying to force us to accept inflation as a fact of life.

    Start with a non-inflation model and you get NO future value consumption changes.

    And since Scott wants to USE INFLATION to force people to spend their money – he certainly doesn’t get to insist that desire he has is the reason the capital gains are double taxed at personal level.

    —–

    Look, I WANT SMB serial entrepreneurs to receive a best-in-class “capital gain” tax rate – like 10%, if not zero (like 1031 real estate guys should not get).

    I WANT to treat the “labor” of those guys who start the 2% of companies that have a shot at becoming something as an investment in themselves, who’s profits from that labor shouldn’t be taxed at all.

    And we can’t get there, if Scott is standing in my way worrying about the goofballs who never start anything, just work like cogs and have a high savings rate.

    Capital gains is about equity investing, it is about owning a piece of a company, but higher than that it should be about owing a piece of a company that you actually invest your time into as well – that’s the highest order of investing.

    SCOTT, still now answer from you on the $1M.

  26. Gravatar of ssumner ssumner
    26. January 2012 at 05:57

    Thanks John and MBK.

    Rob, I thought Matt channeled my posts. :)

    Will, Great comment

    Ben, Good point.

    Jim, Good point, but I think my point 4 was close.

    UnlearningEcon, I presume that’s sarcasm?

    Morgan, You said;

    “Show me where the $1M was already taxed.”

    I did. You just didn’t accept my answer.

    K, No, even if they try to spend it later on big houses boats and jets, they hit the luxury tax. They should just pay the regular VAT on stuff like washing machines.

    There is nothing anti-social about putting money offshore, it should go where the highest returns are.

    BW, I certainly oppose Chinese economic policy, which treats the migrant workers unfairly–so I agree with you there.

    There’s no doubt the real wage data is roughly correct. There were huge wage gains to migrant workers in plants all across coastal China (I knew that last spring.) When you are dealing with 250 million people, it’s pretty hard to hide that news under a rock, or fake it.

    K, He’s right, a consumption and a payroll tax have the same long run incidence. That’s standard public finance theory. And difference would be due to the ability to illegally cheat on each tax. Admittedly, that might be a factor.

    Shane, That’s a really stupid comment.

    Alan, I strongly agree with that statement.

    Becky, Good point.

    RobbL. Not every job in the service economy will be a good job. Certainly I wouldn’t expect to raise a family on a job as a cashier.

    RueTheDay, If you are right you’ll be winning a Nobel Prize in economics, as it will revolutionize public finance theory. Or, you might be wrong.

    Lorenzo, Good point.

  27. Gravatar of RueTheDay RueTheDay
    26. January 2012 at 08:24

    Let’s assume that instead of spending the $50 on either donuts or the purchase of an investment asset, he spends it on lottery tickets. The $50 still represents the purchase of future dollars (a $1 million prize next month multiplied by the probability of winning, discounted to today). He wins the lottery next month. The arguments put forth by Scott et al would have us not tax the $1 million winnings. Let me know where I can pick up my Nobel. ;-)

  28. Gravatar of Rob (the other) Rob (the other)
    26. January 2012 at 09:02

    So it looks like the Rob’s are multiplying. :)

    “Why will this story receive little attention in the press?”

    You might add “US press”…. The other part of the story that’s still about the third derivative is the fact that the rest of the developing world IS keenly aware of the China model. And to channel my inner Brzezinski, the income equality angle apparently is part of an attractive narrative in places like Africa, where Chinese FDI outpaces all other (as wary as some Africans are about this). I hope we Americans can steer clear of self-absorbed ideological debates and gain a tad more clarity around economic geography, so that we might fully participate in the world’s next round of growth.

  29. Gravatar of Morgan Warstler Morgan Warstler
    26. January 2012 at 10:13

    Scott,

    That’s not an answer. And you KNOW it.

    After tax $100K invested, sells 1 year later for $1.1M, capital gain of $1M… the deferred $100K consumption still exists in the “after-tax” pile.

    The $1M has not been taxed yet at all, and will only be hit with 15%.

    Without changing the model, without changing the subject, without assuming blueberries will be worth 1/10 as much…

    just say you made a mistake in your absolute.

  30. Gravatar of Brian Moore Brian Moore
    26. January 2012 at 10:36

    @ScottSumner

    “The current inequality trends in the US look bad”

    I was pretty persuaded by the following link that this was not the case, which argues that only household level inequality has risen, while at the individual level (since 1994) has remained the same. I assume that this reflects increasing marriage selection?

    http://politicalcalculations.blogspot.com/2011/10/real-story-behind-rising-us-income.html

  31. Gravatar of K K
    26. January 2012 at 10:52

    Scott: “even if they try to spend it later on big houses boats and jets, they hit the luxury tax.”

    Sorry, I wasn’t clear. The luxury yachts and jets are purchased offshore and they stay there. Rich people spend a disproportionate amount of the latter parts of their lives offshore. Even if they live here most of the year, the jets and yachts are registered abroad. They have no intention of repatriating those assets. *Ever*.

    “There is nothing anti-social about putting money offshore, it should go where the highest returns are.”

    You can hold offshore assets in a US vehicle. And you can hold US assets in an offshore vehicle. Moving funds offshore has nothing to do with holding foreign assets. It’s about (not) paying domestic taxes. Lots of Cayman island accounts hold US securities. It’s a tradeoff between taxes vs fees and risk of getting caught (if you are cheating).

    “He’s right, a consumption and a payroll tax have the same long run incidence.”

    I don’t get it. What if there is no domestic labour. Lets say we are a nation of capital owners who outsource the labour to foreigners (or robots, whatever). Consumption is financed from profits, so a consumption tax must be incident on the owners of capital. That’s a limiting case. But it ought to be sufficient proof that even in a less extreme scenario, where labor gets a small fraction of income a payroll tax cannot have the same incidence as a consumption tax. The consumption tax would fall at least partly on the owners of capital. No?

  32. Gravatar of dwb dwb
    26. January 2012 at 12:17

    manufacturing, agriculture, and services are artifical and romanticized distictions. manufacting is nothing more than paying someone to provide the service of fabrication or assembly for something i do not have time to build myself (computers can be bought as do-it-yourself kits like ikea furniture) or which are too expensive as a custom job (because the capital needs to be spread over many goods to be profitable, like the capital needed to produce computer chips). the farmer and butcher are providing a nice service whereby they’ve raised and butchered the cow so i do not have to hunt every day ()raise your hand if you know how much work this is, in exchange for little green pieces of paper that they can subsequently blow on an ipad.

    1- manufacturing in the US is not dead, there is plenty of it and it thrives when its competitive. capial goods are a big export item (about 60% of caterpillars capital expenditures are in the US). yes, there are “fewer jobs” in manufacturing but thats not the right metric, since it takes about 1/3 the hours today to produce a ton of steel than in 1980. about 60% of the trade deficit is just oil (and recently the US became a net exporter of refined products), we do export substantial manufactured items. its all about productivity. labor costs are only a small fraction of the value-added of imports.

    2- lets not forget that by exporting some of these jobs we are also exporting pollution, and the other issues that go along with these jobs. that is not a trend that will remain so indefinitely either. yes, one can “call up” 3000 workers to live in dorms to manufacture ipads (which, by the way makes a lot of workers who clean the glass with solvents sick, evidently). invariably as people become wealthier, they want a job that wont make them sick and that will allow them to spend free time on, you know, family and hobbies. convergence of consumption also means convergence of health and quality of life…there is a reason you cannot find 3000 people in CA to live in dorms to run an ipad sweatshop., no matter how high unemployment is. I expect (hope) in my lifetime the pool of people willing to work like this will be substantially depleted (meaning they are wealthy enough to say no or demand better conditions).

  33. Gravatar of Shane Shane
    26. January 2012 at 14:17

    Hahaha–but why don’t you tell me what you are really thinking Dr. Sumner? Hahaha–but why don’t you tell me what you really think Dr. Sumner? Actually I was joking and trying to mock Rothbard for calling Friedman a socialist (although perhaps you were got that and just thought it was not funny).

    But on a serious level, I do think that it is remarkable that the notion that a better, more equal future is inevitable–once a key argument on the left–is increasingly only found on the right. I think that’s what attracts progressive readers like me to your blog–you’re actually laying out ideas that make that more equal future sound possible, if not inevitable, just as the left used to believe. That was the serious import of my failed joke.

  34. Gravatar of Shane Shane
    26. January 2012 at 14:22

    Although I am obviously too stupid to figure out how to write in the box here. Sorry for nonsensical repetition (why no delete comment function?)

  35. Gravatar of Jim Jim
    26. January 2012 at 15:05

    I believe the example of double taxation is wrong.

    The tax is paid once by the corporation who earned the profit from the investment. It is then paid again by the investor who receives the dividend.

    I humbly suggest forgetting where the money came from to invest in the first place. It is irrelevant to the argument.

    @Scott
    Yes, your point 4 was close; although I considered it too mild. As is being illustrated in Davos, and in OWS London, these people are very serious about killing market economies now. Anything that threatens the ‘we are slave traders for profit’ meme will never be heard, even though China and India are the economic stories of the last 50 years; we are making the Industrial Revolution look like a child’s game.

  36. Gravatar of John S. John S.
    26. January 2012 at 19:59

    RTD, that is a fantastic example of why you are wrong. Think it through:

    For simplicity, let’s assume the lottery takes place immediately, so we don’t need to worry about present value, just expected value. Also assume that the lottery itself has no costs–we just pool the money and then give it all to one lucky guy.

    1000 people buy $1 lottery tickets. The winnings will not be taxed.
    What is the expected value of a single lottery ticket? $1000/1000 people = $1.

    1000 people buy $1 lottery tickets. The winnings (minus the $1 cost) will be taxed at a rate of 15%.
    Now what is the expected value of a single lottery ticket? $850.15/1000 = ~85 cents.

    Conclusion: a tax on lottery winnings is the equivalent of a smaller tax on lottery tickets.

    By *exactly* the same logic: a tax on capital gains is the equivalent of a smaller tax on investment.

    I buy a $100 investment. There is no CGT.
    What is the present value of that investment? $100.

    (Morgan says I’m wrong and provides the “counterexample” that isn’t–a case of a $100K investment worth $1.1M the following year. I’ll make it simple–a 1% chance of earning one dollar is worth somewhat less than a dollar. If Morgan can consistently identify investments with present values above their asking price, I once again suggest that he take advantage of that brilliant investment opportunity.)

    Okay, now I buy a $100 investment. The next day, there’s an exogenous increase in the CGT.
    What is the present value of that investment? Less than $100.

    And what might we call it when government first taxes income, then imposes another tax on investing (saving) that income?

  37. Gravatar of ssumner ssumner
    27. January 2012 at 06:25

    RueTheday, If you want to tax the winnings, you should make the investment in lottery tickets tax deductable.

    The same is true of any investment. My 401k investments are made with before-tax income, and hence my future withdrawals should be taxed.

    Don’t forget that gambling losses are not tax deductable, which means winnings shouldn’t be taxed. Of course the lottery system is really just a giant tax which puts lots of revenue into government coffers, arguably on the consumption value of the excitement produced by gambling.

    Rob, I agree, but my point wasn’t that we weren’t aware of the Chinese model, but rather we aren’t aware of the fact that rural areas and migrant workers are seeing the largest income gains in China. I’ll bet even most economists don’t know that.

    Morgan, If I admit I made a mistake, then all other economics professors will also have to admit that, because I’m merely presenting the standard view.

    Brian, Good point, the income data grossly overstates the amount of inequality in the US.

    K, I doubt that’s a big issue, for several reasons. First, most rich Americans live in the US, and don’t move. Second, lots of rich foreign people buy houses in the US. Lots of billionaire Russians buy expensive Manhattan homes, whereas very few rich Americans buy expensive Moscow homes.

    Jets and boats are a better example, but I don’t see the difficulty in taxing those assets as being any different from the difficulty the US has in taxing investment income held in the Cayman Islands or Liechtenstein.

    I don’t see the relevance of your second point.

    The consumption and payroll tax are the same in the long run. At the point of implementation a payroll tax exempts all previous labor income. The current capital stock is not taxed. In contrast, a consumption tax is like a payroll tax, plus a lump sum tax on the current capital stock.

    dwb, All very good points. The US manufactures lots of Big Macs every year. I don’t see how that’s different from manufacturing sneakers or cans of Campbell’s soup (which are both treated as “manufacturing.”)

    Shane, Sorry for missing the joke–readers need to include smiley faces because I get lots of comments that seem like jokes, but are dead serious. :)

    Jim, What example of double taxation?

  38. Gravatar of Morgan Warstler Morgan Warstler
    27. January 2012 at 07:34

    John S. & Scott, we don’t use EMH as a base assumption to then determine in the long view whether income is double taxed.

    We look at $100K, we see the following year a capital gain of $1M off that investment.

    We say OUT LOUD that $1M (that EXACT $1M) has not been double taxed, and then whatever the hell else you want to say, you say.

    You are welcome to construct long term view of what happens later in that guys life, and narrate past it, but you are not allowed to use a future forward justification to redefine the currently untaxed money as taxed.

    —–

    Here’s the mistake you make… entrepreneurs INVEST IN THEMSELVES. They employ themselves and the return on their investment is NO DIFFERENT than someone investing in their company for equity.

    As I have said, my discussion is really not about what investors are facing it is about what entrepreneurs are facing.

    Investors are meant to be second class citizens, after all they didn’t invent or create anything.

    And IN THE LONG VIEW, the entrepreneur needs to pay a LOWER TAX RATE on the ROI of their labor than anyone else pays on their ROI on their cash investment.

    See Scott’s note today about Eugene White…. incentives are the thing. Always incentives. Always.

    So in that model, the question of the $1M beng taxed is oly important, so that we can ask ourselves how we shall tax the guy the investor invested in… his pay will be $1.1M ($100K for working and $1M as ROI) and current tax law doesn’t correctly see this.

    AS SUCH, when we view the investors $1M, we say OUT LOUD it hasn’t been taxed, so that we can bash him, and raise up the entrepreneur.

    You keep wanting to think about the “high consumption” guy – and he’s not important to the discussion.

    Both the high saver and the high consumer take a back seat to the entrepreneur.

  39. Gravatar of John S John S
    27. January 2012 at 10:58

    Morgan–does the capital gains tax decrease the value of any given investment? Then it is a tax on every investment, whether a particular bet later yields 1000% or -100% or 0% ROI and regardless of whether EMH is true. And that’s really all there is to it.

    Go ahead and point to the guy whose $1M ROI is not taxed (he doesn’t send a $150K check to the government). I point to the ten other guys whose *negative* $100K ROI was also not taxed (they don’t send a $15K bill to the government).

    Finally, there is no way to tax only one side of a transaction. You want to bash investors and promote entrepreneurs. Cool. Unfortunately, a tax on investment is equivalent to a tax on borrowing, just like a sales tax on retailers is equivalent to a sales tax on consumers. The exact incidence will vary; if you have compelling evidence that an investment tax is primarily borne by lenders and not by the entrepreneurs we all love, I’m all ears. If you don’t have that evidence, your promotion of the capital gains tax is more about signaling your support for entrepreneurs than actually promoting their welfare.

  40. Gravatar of RueTheDay RueTheDay
    27. January 2012 at 14:52

    @Scott – Thank you for clearly articulating the specific taxation “events” in the double taxation argument.

    Here’s where I object – in the example of consumption (the $50 spent on donuts) we ignore the taxation on the production of donuts; we simply stop the logic at the consumption of the donuts. The donut manufacturer pays taxes as well. For simplicity’s sake, if we assume a tax on the sale of donuts (rather than an income tax) and assume demand for donuts is perfectly inelastic (just so we don’t get distracted with having to calculate the exact incidence of taxation) we can make the exact same argument with regard to the consumption of donuts that you just made with regard to the taxation of capital gains. Namely, that consumption is double taxed. In real terms, the guy in our example can consume half as many donuts as he would otherwise as a result of the fact that the tax on the donut producer is passed onto him.

  41. Gravatar of RueTheDay RueTheDay
    27. January 2012 at 14:53

    Sorry, that should have been @John.

  42. Gravatar of John S John S
    28. January 2012 at 01:23

    @RTD – Well, I actually agree with you there. To be honest I find the idea of “double taxation” fairly meaningless. The idea that every unit of economic production should be taxed exactly once seems impossible, incoherent, and not necessarily desirable. Though yeah… I really shouldn’t argue that “the CGT is double taxation” and then turn around and say “double taxation is meaningless.” I saw the argument as 99% “is there a difference between taxing capital gains and taxing investment?” and 1% “taxing investment is called double taxation,” and didn’t want to sidetrack the discussion.

    Anyway. The important part is that a tax on capital gains is functionally the same as a tax on investment. Once we accept that, we can decide whether we want to use an investment tax to raise revenue. I think more investment and less (current) consumption is more socially desirable, so decreasing the incentive to invest isn’t the best option. I’d rather use a progressive consumption tax to raise the same level of revenue without decreasing the marginal incentive to save.

    Thanks for the interesting discussion!

    Oh, and “Once had a blog comment mistaken for Scott Sumner’s” might go on my resume.

  43. Gravatar of RueTheDay RueTheDay
    28. January 2012 at 06:16

    Thanks John, the feeling is mutual.

  44. Gravatar of ssumner ssumner
    28. January 2012 at 07:33

    Morgan, Income taxes double tax capital income, except when there are things like 301Ks, That’s the standard model.

    If it’s wrong, go show people and win your Nobel Prize in economics.

  45. Gravatar of Becky Hargrove Becky Hargrove
    2. February 2012 at 12:59

    There is discussion today (2/2/12) about the way China breaks down its measurements of economic activity (Yglesias, etc.) Apparently infrastructure is included in the tertiary industry. Are all other building measures included in that third level?

  46. Gravatar of Headlines You Didn’t Read Today, Good News Edition « uneconomical Headlines You Didn’t Read Today, Good News Edition « uneconomical
    28. June 2012 at 10:04

    [...] All the news about the GDP figures is bad, the recession worse than expected, etc etc; but every blogger must try to be contrarian.  After all, “if it’s not bad, it’s not news.” (Sumner, naturally). [...]

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