Income Distribution

Key Issues What is the existing distribution (USA) What is the solution: growth or distribution? Rationales for income distribution –Ethics and Justice –Efficiency –Stability –Democracy Redistribution mechanisms –Aid to poor TANF Medicaid –Corporate welfare –Distribution of rent

What is the existing distribution in the USA?

Distribution of wealth

Income Distribution

The Myth of Upward Mobility? Lies, damn lies and statistics OR ideology and academics –Figures on income class mobility from textbook ignore life time income cycle and trends Is Horatio Algier Dead? –1930s-40s: The great compression – , CBO data: Average real income of bottom 90% fell by 7%, income of top.01% rose by 599% –Business Week Article 2003: Waking Up from the American Dream: Meritocracy and Equal Opportunity Are Fading Fast “economy slowly stratifying along class lines” –University of Chicago economics professor and Nobel laureate James J. Heckman: "the big finding in recent years is that the notion of America being a highly mobile society isn't as true as it used to be." –Federal Reserve Bank of Boston economists: the number of people who stayed stuck in the same income bracket -- be it at the bottom or at the top -- over the course of a decade actually increased in the 1990s.

New York Times, June 26, 2003 Very Richest's Share of Income Grew Even Bigger, Data Show By DAVID CAY JOHNSTON The 400 wealthiest taxpayers accounted for more than 1 percent of all the income in the United States in the year 2000, more than double their share just eight years earlier, according to new data from the Internal Revenue Service. But their tax burden plummeted over the period. The data, in a report that the I.R.S. released last night, shows that the average income of the 400 wealthiest taxpayers was almost $174 million in That was nearly quadruple the $46.8 million average in The minimum income to qualify for the list was $86.8 million in 2000, more than triple the minimum income of $24.4 million of the 400 wealthiest taxpayers in 1992.

Distribution by factors of production Human capital: –Returns to labor = wages-70% –Returns to entrepreneurship = profit- 20% Built and Financial Capital: –interest- 8% Natural capital –rent-2% (is natural capital under priced?) Social capital?

Current trends: The enclosure of the commons Values produced by nature and society –Non-renewables: minerals and energy –Renewables: Goods and Services –Air waves, orbits etc. –Private property –Land –Knowledge and information –Money and seigniorage

Rationales for Distribution

Can we grow our way out of poverty? Real GNP doubles every generation Poverty declined through most of US history, until 1970s

Ethics and distribution Role of charity in most religions Maximin Should a nation be judged by the welfare of the richest or the poorest?

Justice and distribution Are outcomes just? –Role of luck and heredity –Sexism, racism, etc. –Winner take all economy Is the process just? –Are markets fair? –Are the resources of the commonwealth distributed fairly? –Should individuals be able to capture benefits of societies efforts?

Distribution and efficiency Law of diminishing marginal utility Different Pareto Optimum for every different initial distribution. Desirability of outcome is no better than desirability of initial distribution Status and negative externalities of wealth –Ecological impacts of status

Public Good Benefits Economic stability –What is currently keeping the economy afloat? –What caused the great depression? Relationship between income inequality and crime

Distribution and Democracy "We can have a democratic society, or we can have the concentration of great wealth in the hands of the few. We cannot have both." –Supreme Court Justice Louis Brandeis

Redistribution Mechanisms

Temporary Assistance for Needy Families 1996 welfare reform that replaced AFDC –Why? Not an entitlement Time limits Work requirements Block Grants Benefit reduction rates Is it working?

Earned income tax credit Negative income tax High marginal tax rate as people earn more Many people who are eligible do not apply Substantial new hurdles beginning this year According to Wall Street Journal, applying for EITC triples chances of audit, and new legislation increases this EITC fraud estimated at 3% of tax fraud

Medicaid Largest spending program Administered by states, funded by states and fed Medicaid notch “Magic of the market”, 1997 reform –Skimming the cream

Corporate Welfare Payments to private sector corporations –Direct payments e.g. $300 million to market Chicken McNuggets –Insurance coverage e.g. Price Anderson Act –Subsidized loans e.g. eximbank –Subsidized research e.g. “clean coal” –Tax breaks e.g. “clean coal” –Quotas e.g. sugar and peanuts More money than aid to poor What are the justifications? –Job creation –Competition among states

National Forests Historical record Tongass article Timber Salvage Rider Healthy Forests Initiative

Grazing Lands Grazing lands rented at far below market rates Arizona fires Lump sum payments to end subsidies

Foreigners Control Fifth of Mineral Wealth in American West, Study Shows By FELICITY BARRINGER Published: May 12, 2004 WASHINGTON, May 11 - About 20 percent of the mineral wealth of the American West is claimed by foreign companies, most of them Canadian, according to a new analysis and online database released Monday by an environmental organization. The report, produced by the Environmental Working Group, also shows that of all the uses of federal lands, hard-rock mining returns the least to the federal Treasury: 2.3 percent of sales, compared with 13.2 percent for oil and gas development, 14 percent for grazing and 66 percent for timber sales. "For as little as $0.84 an acre, more than 28,000 companies and individuals have gained control of precious metals and minerals on 5.6 million acres of public land across 12 continental Western states," the report says. "Some of these companies are foreign-owned. None of them will pay anything to the federal government for the value of the minerals they extract from public property." Advertisement Mining Law of 1872

Agriculture policy CSM: The Heavy Thud of American Cotton “Between 1995 and 2002, for example, a total of $1.68 billion was paid to 285 cotton exporters and millers under one part of the cotton program…. A handful of corporations got an average of $80 million apiece. Allenberg Cotton Co. of Cordova, Tenn., was paid $106.9 million.”

Pollution policy Mining clean up Super fund sites CO2 emissions SO2 emissions Mercury emissions

Georgist Economics: A More Just and Efficient Alternative?

Basic Principles People keep what they earn with the sweat of their brows Wealth created by nature and society distributed equally –Public goods replaced with public goods Those who benefit most from government services pay the most –One of the most important services of government is the protection of private property

Natural capital: redistributing Rent Rent= unearned income Land Non-renewables Renewables- natural dividend

The land tax The land tax

Non-renewables: Oil to income

Renewable resources: Ecosystem Goods

Renewable resources: ecosystem services Set scale, auction off quotas Pollution taxes Taxes on ecological degradation Who should be compensated? –Public good replaced with public goods

Financial Capital: Bank loans at interest vs. seigniorage What is seigniorage? Reserve requirements Who should get it? –e.g. Burlington Bread

Built capital: The stock market What do owners of stocks produce? About 5% of stock purchases provide capital for new investment. Peter Barnes estimates about 30% of value of IPO is generated by public sector investments (social capital?) ESOPs