Anti-Capitalist Sentiment (with some morality)

[wufwugy]

Wuf, it doesn't trickle down.

https://www.imf.org/external/pubs/ca...spx?sk=42986.0

Thank you so much for posting this. It provides a new avenue that we have not discussed here before, and something I didn't have that great of a grasp on just a month or so ago.

Also this post is a monster, but I only made it because it's all new stuff, no repeating of the same old argument.

Before we get started, this study does not find that wealth doesn't trickle down. What it finds is that when wealth goes to the rich and doesn't go to the poor, it is that way because, well, it is that way. There is no determination of causality. My explanation is probably much more confusing than it should be. The paper is looking at situations where capital acts a certain way and then says "hey look it is acting this way". It is essentially saying "when it doesn't trickle down, we don't see effects of trickle-down". Ho Lee Shit Batman!

Now onto the concept for why trickle-down is a thing. First off, "trickle-down" is a dysphemism. Economists talk about policies regarding supply, and the media has attached this misnomer. It doesn't help that a politician favorable to supply expansion reforms first coined the term. It isn't exactly off base, but it is just a metaphor that is honestly very misleading. I will refer to supply-side from now on instead of trickle-down.

Economic growth happens only when the nominal economy increases in size. It doesn't grow when any of just prosperity increases, real GDP increases, inflation increases, money supply increases, productivity increases, production increases, etc. It grows only when any combination and quantity of those things turn the nominal value of the economy into a bigger number than previous. This is important because supply-side reformers are concerned with growth specifically (I'll explain why later). Now, with this understanding of growth, what happens when we redistribute? Well, you could say the middle gets bigger and the top gets smaller. If true, the math still adds up to no growth. It is popular today to claim that this would spur growth by putting more resources into the hands of consumers. But this would only be true if it came from growth. If it didn't come from growth, we have just created magic and the only thing we need to make everybody as prosperous as humanly possible is to spend as much as possible. Clearly there is something wrong with this idea.

Hopefully we can agree that the economics profession agrees that growth is the focus and that we don't really have much mechanism to expand prosperity for any group except through growth. What they want is growth to be made up of is productivity and production (instead of something like hyperinflation), because those are the only known reasonable metrics by which to evaluate prosperity increases.

So let's assume you agree with this. You're probably still confused as to why reducing top tax rates are the preferred mechanism to achieve this growth. I mean, it honestly sounds ridiculous in common sense terms. But regardless of what it sounds like, there are specific technical things in play that entirely change the scenario. It's not unlike how quantum mechanics is as wrong as you can get when it comes to common sense, but it is still technically correct.

The technical concept behind this is margins, more specifically the marginal utility of each new dollar/product (or each tiny piece of new economic growth). Economic growth occurs on the margins. Always, with zero exceptions. Real economic growth also occurs only when production increases. This piece is more complex than that, but the bottom line is that if there is not more supply in an economy, it has not grown in real value.

Trickle-down is a narrow view of a much broader supply-side approach. The theory for it is that by reducing marginal tax rates, increased production is incentivized. This is to say that people who enter the marginal brackets, at lower tax rates, would have a greater incentive to work more, and thus this additional work would create more product and create economic growth. And it all "trickles down" because that's "just" how it works. Economists don't like that they don't better understand growth, but it is universally understood that real growth disperses throughout the entire economy. This is so universally understood that I'm pretty sure they have equations to back it up. I just don't know them.

Now a question may be "why not reduce tax rates for the middle instead". It is a reasonable point. You could technically incentivize the middle brackets to work more by reducing their penalties for production. But there are three problems with this (at least when we discuss trickle-down specifically): (1) the middle already works near or at its peak. Not that many people who already work full-time will choose to work more because of a reduce penalty. The incentive for them to work more at current tax rates is already really high, but also the incentive to not work beyond full-time is much higher. Leisure and family time has higher marginal utility to the middle class worker who already hits full-time.

(2) As a corollary to (1), the marginal utility of work to those in the top bracket is higher than those in the middle brackets because they don't work as much already. The utility of every new dollar achieved by work to the rich is lower than the utility of every new dollar achieved by work to the non-rich. This is sorta similar to what we had discussed a few weeks ago when Renton was looking at investment incentives. It's complex because incentives and utilities are always relative and always moving around. Like, the rich have lower marginal utility with each new dollar than the poor, but the poor have much higher marginal utility of leisure than the rich. All of this means that if we want to grow the economy through tax rates, we won't be able to do it much by increasing the marginal utility of work for the poor/middle, but we can do it by increasing the marginal utility of work of the rich.

Which brings us to (3): the marginal utility policy-wise and politically of reducing top tax rates is much higher than for middle/low rates. When comparing top rate cuts to middle rate cuts, the top rate cuts reduce total taxation by a much smaller percentage and achieve a higher percentage of production. Where middle bracket tax cuts would grow the economy if coupled with govt spending cuts and reduced regulations, they would not incentivize much in more hours worked. But rate cuts at the top spur growth with that one additional technical factor that the middle bracket doesn't have so much: marginal utility of extra production.

To wrap it up, economists, the wealthy, most politicians, and market-oriented voters do not support marginal tax rate cuts just because they want the rich to get richer. They want the economy to grow, and marginal rate cuts are among the easiest way to achieve them. Additionally, we have the last several decades of evidence to show that they're probably right. I'm sorry that I couldn't find it again (it's buried in Sumner's blog), but there is a ton of data showing that the US has outperformed Europe for the last approximately four decades. The primary correlation discovered is *cough* Reaganomics *cough* (also known for its primary focus of reducing marginal rates).

Thanks for listening. I hope this helps.

[rong]

Thank you so much for posting this. It provides a new avenue that we have not discussed here before, and something I didn't have that great of a grasp on just a month or so ago.

Also this post is a monster, but I only made it because it's all new stuff, no repeating of the same old argument.

Before we get started, this study does not find that wealth doesn't trickle down. What it finds is that when wealth goes to the rich and doesn't go to the poor, it is that way because, well, it is that way. There is no determination of causality. My explanation is probably much more confusing than it should be. The paper is looking at situations where capital acts a certain way and then says "hey look it is acting this way". It is essentially saying "when it doesn't trickle down, we don't see effects of trickle-down". Ho Lee Shit Batman!

Now onto the concept for why trickle-down is a thing. First off, "trickle-down" is a dysphemism. Economists talk about policies regarding supply, and the media has attached this misnomer. It doesn't help that a politician favorable to supply expansion reforms first coined the term. It isn't exactly off base, but it is just a metaphor that is honestly very misleading. I will refer to supply-side from now on instead of trickle-down.

Economic growth happens only when the nominal economy increases in size. It doesn't grow when any of just prosperity increases, real GDP increases, inflation increases, money supply increases, productivity increases, production increases, etc. It grows only when any combination and quantity of those things turn the nominal value of the economy into a bigger number than previous. This is important because supply-side reformers are concerned with growth specifically (I'll explain why later). Now, with this understanding of growth, what happens when we redistribute? Well, you could say the middle gets bigger and the top gets smaller. If true, the math still adds up to no growth. It is popular today to claim that this would spur growth by putting more resources into the hands of consumers. But this would only be true if it came from growth. If it didn't come from growth, we have just created magic and the only thing we need to make everybody as prosperous as humanly possible is to spend as much as possible. Clearly there is something wrong with this idea.

Hopefully we can agree that the economics profession agrees that growth is the focus and that we don't really have much mechanism to expand prosperity for any group except through growth. What they want is growth to be made up of is productivity and production (instead of something like hyperinflation), because those are the only known reasonable metrics by which to evaluate prosperity increases.

So let's assume you agree with this. You're probably still confused as to why reducing top tax rates are the preferred mechanism to achieve this growth. I mean, it honestly sounds ridiculous in common sense terms. But regardless of what it sounds like, there are specific technical things in play that entirely change the scenario. It's not unlike how quantum mechanics is as wrong as you can get when it comes to common sense, but it is still technically correct.

The technical concept behind this is margins, more specifically the marginal utility of each new dollar/product (or each tiny piece of new economic growth). Economic growth occurs on the margins. Always, with zero exceptions. Real economic growth also occurs only when production increases. This piece is more complex than that, but the bottom line is that if there is not more supply in an economy, it has not grown in real value.

Trickle-down is a narrow view of a much broader supply-side approach. The theory for it is that by reducing marginal tax rates, increased production is incentivized. This is to say that people who enter the marginal brackets, at lower tax rates, would have a greater incentive to work more, and thus this additional work would create more product and create economic growth. And it all "trickles down" because that's "just" how it works. Economists don't like that they don't better understand growth, but it is universally understood that real growth disperses throughout the entire economy. This is so universally understood that I'm pretty sure they have equations to back it up. I just don't know them.

Now a question may be "why not reduce tax rates for the middle instead". It is a reasonable point. You could technically incentivize the middle brackets to work more by reducing their penalties for production. But there are three problems with this (at least when we discuss trickle-down specifically): (1) the middle already works near or at its peak. Not that many people who already work full-time will choose to work more because of a reduce penalty. The incentive for them to work more at current tax rates is already really high, but also the incentive to not work beyond full-time is much higher. Leisure and family time has higher marginal utility to the middle class worker who already hits full-time.

(2) As a corollary to (1), the marginal utility of work to those in the top bracket is higher than those in the middle brackets because they don't work as much already. The utility of every new dollar achieved by work to the rich is lower than the utility of every new dollar achieved by work to the non-rich. This is sorta similar to what we had discussed a few weeks ago when Renton was looking at investment incentives. It's complex because incentives and utilities are always relative and always moving around. Like, the rich have lower marginal utility with each new dollar than the poor, but the poor have much higher marginal utility of leisure than the rich. All of this means that if we want to grow the economy through tax rates, we won't be able to do it much by increasing the marginal utility of work for the poor/middle, but we can do it by increasing the marginal utility of work of the rich.

Which brings us to (3): the marginal utility policy-wise and politically of reducing top tax rates is much higher than for middle/low rates. When comparing top rate cuts to middle rate cuts, the top rate cuts reduce total taxation by a much smaller percentage and achieve a higher percentage of production. Where middle bracket tax cuts would grow the economy if coupled with govt spending cuts and reduced regulations, they would not incentivize much in more hours worked. But rate cuts at the top spur growth with that one additional technical factor that the middle bracket doesn't have so much: marginal utility of extra production.

To wrap it up, economists, the wealthy, most politicians, and market-oriented voters do not support marginal tax rate cuts just because they want the rich to get richer. They want the economy to grow, and marginal rate cuts are among the easiest way to achieve them. Additionally, we have the last several decades of evidence to show that they're probably right. I'm sorry that I couldn't find it again (it's buried in Sumner's blog), but there is a ton of data showing that the US has outperformed Europe for the last approximately four decades. The primary correlation discovered is *cough* Reaganomics *cough* (also known for its primary focus of reducing marginal rates).

Thanks for listening. I hope this helps.

I haven't had time to read the paper, just an article on it in the guardian, but I find it interesting that it seems we all use it to confirm our polarised views.

[CoccoBill]

Now a question may be "why not reduce tax rates for the middle instead". It is a reasonable point. You could technically incentivize the middle brackets to work more by reducing their penalties for production. But there are three problems with this

I don't think anyone expects people to work more if taxes are lowered, they expect them to spend more. The poor and a large part of the middle class would immediately spend every extra dollar they get, unlike the 1-percenters.

[wufwugy]

I don't think anyone expects people to work more if taxes are lowered, they expect them to spend more. The poor and a large part of the middle class would immediately spend every extra dollar they get, unlike the 1-percenters.

I covered this. The reason decreased marginal tax rates are favored by many economists is because it is expected to increase work; whereas, decreasing the lower brackets would not. Also no economists think that there would be more immediate spending with lowered taxes. The government already spends that money. What economists think is that private spenders are more productive than government spenders.

The wealthy do spend all of their money. Savings and investment ARE consumption. They are much more productive forms of consumption.

Without a government (legislative, judiciary etc. branches), what laws exactly would there be?

Lots. Have you ever even heard of businesses doing anything without contracts? People would choose to pay for their laws instead of their laws being paid for them by force.

Keep in mind that we already do this, just with horribly ineffective tools. Pro-democracy people love saying how they have the ultimate power because of their vote (which they technically do), so I find it incredibly frustrating when they deride a far more effective method to give people the same kind of power that their vote does.

For some reason the first thing that popped in my mind was Alabama overturning the Voting Rights Act, since you know, racism doesn't exist anymore so it isn't needed. Again, history knows a lot of examples of times when there was no government or organized police, and those times mostly aren't known for their lack of crime. Why is that? Wild west would have been a lot less wild without those damn sheriffs?

You've misunderstood my argument. Nobody proposes a lack of security. I propose that we more effectively use one of the things you value the most (the ability to choose) in order to get another thing you most value (security). This isn't about order vs chaos, it's one level of order vs a much more effective level of order.

Also, my understanding is that the US already is pretty much run by lawyers and accountants, sounds awesome that in the future the need for them would skyrocket.

That's really just a guess by me. I don't guess that often, but I did that for JKDS, who may like the idea of more lawyers, or at least more experts. Regardless, I don't want to go down this route because I don't like arguing for things based on a relatively weak guess.

"First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work
has shown that income inequality matters for growth and its sustainability. Our analysis suggests
that the income distribution itself matters for growth as well. Specifically, if the income share of the
top 20 percent (the rich) increases, then GDP growth actually declines over the medium term,
suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the
bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class
matter the most for growth via a number of interrelated economic, social, and political channels."

I already addressed this. The study just shows that when distribution is a certain way, it is that way. No economist argues that the reasons behind why certain distributions happen don't matter.

[CoccoBill]

I covered this. The reason decreased marginal tax rates are favored by many economists is because it is expected to increase work; whereas, decreasing the lower brackets would not. Also no economists think that there would be more immediate spending with lowered taxes. The government already spends that money. What economists think is that private spenders are more productive than government spenders.

The wealthy do spend all of their money. Savings and investment ARE consumption. They are much more productive forms of consumption.

That's assuming that building a luxury yacht is better for the society than shopping groceries for the same amount. It also assumes that the highest economic growth rate, regardless of who directly reaps the benefits of it, is the most favorable option. There is no evidence of a trickle-down. Savings by definition is income minus consumption.

You've misunderstood my argument. Nobody proposes a lack of security. I propose that we more effectively use one of the things you value the most (the ability to choose) in order to get another thing you most value (security). This isn't about order vs chaos, it's one level of order vs a much more effective level of order.

Not really a misunderstanding, more like my personal opinion of the outcome. Not everyone has equal ability to choose due to lack of resources. Security works a bit like vaccinations, there's herd immunity if you live among people with high security. The opposite is true for lower security areas, which would lead to ghettofication. I'll leave out the whole conversation of knowing on a personal level what the most practical and cost-effective security measures to invest in are, and assume all people would become security experts.

I already addressed this. The study just shows that when distribution is a certain way, it is that way. No economist argues that the reasons behind why certain distributions happen don't matter.

Then why is the distribution that way, which regulation is cockblocking the trickle-down?

[wufwugy]

That's assuming that building a luxury yacht is better for the society than shopping groceries for the same amount. It also assumes that the highest economic growth rate, regardless of who directly reaps the benefits of it, is the most favorable option. There is no evidence of a trickle-down. Savings by definition is income minus consumption.



Not really a misunderstanding, more like my personal opinion of the outcome. Not everyone has equal ability to choose due to lack of resources. Security works a bit like vaccinations, there's herd immunity if you live among people with high security. The opposite is true for lower security areas, which would lead to ghettofication. I'll leave out the whole conversation of knowing on a personal level what the most practical and cost-effective security measures to invest in are, and assume all people would become security experts.



Then why is the distribution that way, which regulation is cockblocking the trickle-down?

When you say things like "there is no evidence of trickle-down", you're rewriting economics by your own parameters. Earlier I tried explaining why the misnomer "trickle-down" has been pulled out of consensus economic theory of growth.

Us going back and forth isn't going to yield any fruit. Your points are reasonable from several logical perspectives, but that doesn't mean they are reasonable from an economics perspective. For example, you say "That's assuming that building a luxury yacht is better for the society than shopping groceries for the same amount." The answer to this statement is that the incentives behind this spending is what makes one better or worse. To the non-economist, groceries obviously look more productive than yachts, but because the behavior is economic in nature, groceries aren't always more productive than yachts, and the non-economist perspective is simply wrong. This is why I have often said "economics doesn't care about our morals". Economics is a science just like physics. Physics doesn't give a fuck what we think it should do. It does what it does and that's the bottom line and we just have to conform. Economics is no different.

Physics is a more obvious experimental science than economics, so it's easier to not disagree with physics and economics has more unknown holes than it otherwise would. But they're both still sciences dependent on the same type of methods of discovery and theory development.

[CoccoBill]

When you say things like "there is no evidence of trickle-down", you're rewriting economics by your own parameters. Earlier I tried explaining why the misnomer "trickle-down" has been pulled out of consensus economic theory of growth.

Us going back and forth isn't going to yield any fruit. Your points are reasonable from several logical perspectives, but that doesn't mean they are reasonable from an economics perspective. For example, you say "That's assuming that building a luxury yacht is better for the society than shopping groceries for the same amount." The answer to this statement is that the incentives behind this spending is what makes one better or worse. To the non-economist, groceries obviously look more productive than yachts, but because the behavior is economic in nature, groceries aren't always more productive than yachts, and the non-economist perspective is simply wrong. This is why I have often said "economics doesn't care about our morals". Economics is a science just like physics. Physics doesn't give a fuck what we think it should do. It does what it does and that's the bottom line and we just have to conform. Economics is no different.

Physics is a more obvious experimental science than economics, so it's easier to not disagree with physics and economics has more unknown holes than it otherwise would. But they're both still sciences dependent on the same type of methods of discovery and theory development.

I think I was unclear about what I meant with that. From what I understand the argument is that in order to help the poor, we should give more money to the rich. I have let myself be told, that this only increases income inequality, that while it may be the best thing for the growth of the economy as a whole, it will only give marginal benefits for the majority, while giving enormous benefits to the rich. If you look at the Gini coefficients of countries, you'll find that the countries with the lowest value (least income inequality) are the western prosperous countries, and the highest values are found in the third world. Looking at the trends you'll see the Gini coefficients lowering linearly with economic growth. If we measure overall well-being with the size of the economy without looking at the distribution, we're getting a distorted view.

[wufwugy]

I think I was unclear about what I meant with that. From what I understand the argument is that in order to help the poor, we should give more money to the rich. I have let myself be told, that this only increases income inequality, that while it may be the best thing for the growth of the economy as a whole, it will only give marginal benefits for the majority, while giving enormous benefits to the rich. If you look at the Gini coefficients of countries, you'll find that the countries with the lowest value (least income inequality) are the western prosperous countries, and the highest values are found in the third world. Looking at the trends you'll see the Gini coefficients lowering linearly with economic growth. If we measure overall well-being with the size of the economy without looking at the distribution, we're getting a distorted view.

I think you made two different points here, so I'll split them up.

I think I was unclear about what I meant with that. From what I understand the argument is that in order to help the poor, we should give more money to the rich. I have let myself be told, that this only increases income inequality, that while it may be the best thing for the growth of the economy as a whole, it will only give marginal benefits for the majority, while giving enormous benefits to the rich.

Giving money to the rich is a bad idea. I don't know of anybody who proposes doing that. Supply-side reformers propose marginal rate reductions for all income brackets (Reagan focused on all brackets even though this is often unnoticed) for the purpose of incentivizing more work. Supply-side reformers also propose regulation reductions that will reduce the quality and quantity of products/services and/or reduce their costs. The only people who are "given" money in our economy appears to be many of the poor through welfare and some rent seeking corporations through "corporate welfare". It should be clear that reducing tax rates is not giving anybody any money. It is reducing the amount taken from them, partly in an attempt to incentivize more work.

When one group of people work more than another, you haven't "given" them anything. Their increased production benefits everybody. If we disagree with this, to be logically consistent, we should probably start doing things like blaming urban poverty on Asian Americans since they are more productive than other Americans. Clearly that would be ridiculous. Everybody benefits from increased production, and the people who benefit the most are those who do it personally. Redistribution just reduces production and makes everybody less prosperous.

If you look at the Gini coefficients of countries, you'll find that the countries with the lowest value (least income inequality) are the western prosperous countries, and the highest values are found in the third world. Looking at the trends you'll see the Gini coefficients lowering linearly with economic growth. If we measure overall well-being with the size of the economy without looking at the distribution, we're getting a distorted view.

This tells us that something is a certain way, not why that something is that way. These correlations don't tell us that redistributing funds could change things for the better. Marxism and the Soviet Union was dependent on the view that redistribution would change this sort of thing for the better. The USSR hit the ideology as hard as you could, and the entire thing collapsed into destitution because of it. To contrast this, supply-side reforms have overwhelming evidence showing they work in both industrial and pre-industrial nations. One need to look no further than China. But I will admit it's very hard to find this stuff for non-economists since the media never talks about them. I see it from time to time on economists' blogs, but I don't save them and they get buried.