Monday, 4 March 2013

CONSERVATIVES: TALK BY THE FIREPLACE (WITH JAMES, PART 3)

This is the on-going discussion James and I are sharing on Conservatism and what motivates people who do not immediately stand to gain from tax cuts designed to favour the top 1% (at most. It's really benefiting the top 0.01%) to vote for conservative policies (especially the US case, though the conversation has drifted towards UK and France as well).

This is a pretty long post so, if you're in a hurry, you can jump all the way down to my conclusions ('till James' replies)...

By the way, if you think I am exaggerating about this 0.01% thing, please look at the following graph: The rich are certainly doing better than the rest of us but it is the super-rich who are gathering speed and pulling away from even the rich (let alone, of course, the rest of us). Welcome back the plutocracy...


But, anyhow, back to James' comments!

James said: You’re right that many people are shockingly ill-informed about the candidates and policies they’re voting for, but this is true across the spectrum of political opinion.

Me: I'll concede that point. I've seen the tape on Obama voters and it was indeed embarrassing. Basically, people start with the assumption that whatever their man/their side say is correct/good and go from there.

What I was trying to focus on or express was that US Republicans, with the Ryan Plan and their obsession with cutting tax on the wealthy seem to be lying through their teeth. But maybe I am wrong and you're right and the politicians sincerely believe that "tax cuts pay for themselves" and 'trickle-down' economics, even if most of their own economists and advisers don't.
James: I was aware that Republican states receive more money from the federal government than Democratic ones. However, I don’t think that this is relevant to the arguments for and against progressive taxation.

Me: ???! I'd say that's strongly making the point that Republican voters are squarely shooting themselves in the foot. Why are they doing so? Either because they're unaware of what they're voting for (my belief) or because they have a dedication to the public good as they see it that supercede their own self-interest (what you're saying, if I understood you?). I just find the second proposition unlikely. As you said, "people react to incentives"...

James: (...) most retired people have paid for whatever perks they enjoy in old age through a lifetime of taxes.

Me: Small point but that's actually not true. I cannot find the article I am looking for with the exact numbers (damn it, I should have saved it!) but the point was that people retiring now or recent pensioners will take out a lot more than they put in, pension and healthcare-wise. Basically, it's confirming that the baby boomers had it very very good indeed.

James: However, I think that Romney’s broader point was correct: people who receive government benefits without paying anything back in tax don’t have much reason to care about government efficiency or whether the tax burden is tolerable.

Me: The funny thing is that people care about taxes even if it doesn't affect them. For example, in France, a socialistic country if there ever was one, 80% or so of people approved of a Sarkozy law reducing inheritance taxes. That's despite the fact that most economists hated that reduction (inheritance taxes are often seen as 'economically efficient') and, the cherry on the top, 80% of French weren't going to benefit from that tax cut because they were below the previous threshold for inheritance tax anyhow. Basically, it was a 80% approved gift from the 80% poorest French to the richest 20%.

And that's, in my opinion, why you get tax-exempted SS pensioners depending on Medicaid to vociferously criticise any tax raise on the richest...

It may make no logical sense but most people just hate taxes with a passion beyond reason. And not just the taxes affecting them.

James: This can be a dangerous thing, as it risks creating a group of voters for whom the welfare state is an endless free lunch, and for whom taxes are something which only happen to other people. 

Me: But these people still actually pay taxes, if not income taxes. They pay VAT and they pay payroll taxes. They pay local (and, in the USA, state) taxes. They pay duties and fees. Don't worry, they pay. And these are the most regressive taxes around. Overall, the steeply progressive income tax compensate for the regressive nature of all the other taxes to provide a "mildly" progressive tax system (in the USA at least but I doubt the UK is very different). 

James: These people certainly aren’t representative of the broader socialist movement. However, I suspect that such people generally vote overwhelmingly in favour of socialist parties as a means to the end of securing an ever-increasing stream of government entitlements. In this sense, they are a constituency which the left has manufactured for itself (at the taxpayer’s expense), who can be relied upon to lend the weight of their votes to its ideological agenda.

Me: This is an oft-repeated claim but it has relatively little empirical support. As we've established above, people who most benefit from the federal government are Red States and voters within. You cannot claim simultaneously that left-wing voters just follow their interests and vote themselves entitlements while the fact that, in some cases at least, it is right wing voters who benefit most from said entitlements is actually irrelevant to the discussion...

In the US, there is a clear case of minorities voting for Democrats and minorities are, of course, on average, poorer than whites. But I don't think minorities vote Democrat to guarantee themselves an 'ever increasing stream of entitlements'. They do so because the Republicans are going out of their way to antagonise them. Though it'll be interesting to see what happen now that the Republican heads have realised they're doomed if they do not reach out at least to the Hispanics, a naturally socially conservative segment of the population.

In the UK, there is definitely a split across classes but that's what I would expect and find normal (people voting their perceived self-interest) and that's why I am so surprised at middle class people voting conservative on economic grounds. They're violating that premise, that people ought to vote for their self-interest.
And, in my opinion, this is because there is a disconnect between what people think is their self-interest and what it actually is. Now don't think I am renegading on a previous concession - I'll address that issue in greater detail again later on and try to prove my case, which is not the  simplistic 'duped' hypothesis you rightly decried.

James: You might feel that the comparison is unfair, but I’d say that’s more or less where this woman is now (i.e. milking the benefits system for everything she can get out of it): http://www.telegraph.co.uk/news/uknews/9880720/Unemployed-mother-of-11-is-keeping-horse.html

Me: I had seen that story when it appeared. And, yes, this is a case of abuse and she certainly isn't the only one. But I think we should still keep things in proportion.

First, how much do we spend on social programs for the non-working poor? It's not that simple to calculate but some people did the maths.

http://www.motherjones.com/kevin-drum/2012/02/how-much-do-we-spend-nonworking-poor

Basically, 5% of the federal budget go to non-working poor ($235 billions). Even if every single one of them was a sponge and a feckless cheater, it's still a relatively small percentage of federal expenditure. And it's roughly the money the federal government get from corporate income taxes, by the way...

James: Shifting to a flat-rate or regressive tax system could help to mitigate this problem, by ensuring that everyone feels some of the sting of taxes

Me: I think that re-establishing an aristocratic/plutocratic system is too high a price to pay for the pleasure to kick that woman out of her 'mansion' and confiscate her horse(s)...

In general, though I think this is an interesting point. Part of the appeal for conservatism's economic policies seem, to me, based on the fact that people truly hate 'spongers' like that woman, far more than they resent corporate tax dodgers or white collar criminals.

I am not sure why this is the case as I am the opposite way - Personally, the undeserving rich get on my nerves far more than the undeserving poor because I think the amounts involved and the seriousness of the consequences of these 'abnormalities' don't even begin to compare.

But I am clearly in the minority. Even after the worst crisis since the 1930s, with corporate greed and malfeasance clearly illustrated, you can still get crowds in a frenzy over 'benefit cheats' and 'scroungers' while outrage at the bankers has faded so much you can't find people in an uproar about HSBC white collar criminal executives who laundered money for Mexican drug cartels, breached the embargo on Iran and participated into the LIBOR fixing scheme for at least a decade... 

If I was forced to hazard a guess, I'd say it has to do with proximity. Most people know a benefit cheat or an undeserving sponger. Few people get exposure to crooked high ranking corporate executives. Most people know what it is to get or not get housing benefits or access to social housing. Few get exposure to our executives' lifestyle.

James: For a hopefully interesting tangent, which might also help to answer your point about why some people on lower incomes support right-wing policies, you might like to check out “we are the 53%”:

http://the53.tumblr.com/

http://www.buzzfeed.com/jpmoore/we-are-the-53-16-examples-of-the-conservative

Seriously, click those links

The common theme between many of those posts is people who are (or have been poor) but who don’t want government hand-outs and are determined to make their own way in life on their own merits. I think that this shows that there is still a strong current of individual self-reliance in the US (which doesn’t exist in the same way here in Britain). For what it’s worth, I suspect that most of those people are going to be very successful in achieving their ambitions.

Me: Yes, I had actually read some of them when they first came out. And I took away a very very different lesson from them than you did. My reaction was best summarised by a Forbes article: "The 'We are the 53%' Tumblr is Heartbreaking".

To wit: "For one thing, most of the fifty-three-percenters are probably not actually in the 53%. Many describe a life of hardship, unemployment or underemployment, and dependence on government jobs and services.

(...) After this young woman’s father was diagnosed with thyroid cancer, he was told by the doctor to take it easy since he’s a manual laborer. Yet he went back to work full-time, working 12 hours a day, six days a week. She writes, “The cancer still grows. That is the American dream.”

The notion that this is the American dream, that men diagnosed with a horrible cancer should work 72 hours a week to support their families, is deeply tragic. There ought to be better visions of society than this."


As you said, these people wear their hardships like a badge of pride. In my opinion, this taps into a deep religious idea that "suffering is good for the soul/is ennobling". This is not an idea that I approve of. I do see society as Humanity's response to an hostile environment, entirely dedicated to reducing hardship and random suffering, no matter how good it might be for our souls.

But my biggest issue, though, is with your sentiment that 'most of these people will be very successful in achieving their ambitions'.

No, they won't.

Inter-generational mobility is down in the US and in the UK i.e. people born poor stay poor. This is the anti-thesis of The American Dream and against conservative's ethics and their supposed objective of making hard work pay. This is the opposite of meritocracy, a value shared both by liberals and conservatives.

Furthermore, when people are cycling in and out of low paying jobs, you simply cannot separate the working poor and the non-working poor and create distinct 'deserving' and 'undeserving' categories. With insecure temporary work, zero-hours contracts and agency work a reality for millions of people, including so many of these 53% tumblr posters, people move in and out of employment, fast, just as they sometimes move in and out of criminality. There's no 'bad' poor who steal or cheat and 'good' poor who work and starve. It's the same people, most of the time. Some just get caught.

And that's the key. I can tolerate hardships and people struggling if they/we have a good chance of seeing it paying off - That's the whole point of our supposedly meritocratic society and that's why I don't think there is such a difference in 'values' between conservatives and liberals when it comes to 'hard work' in particular and economics in general. We all want a level playing field and hard work paying off.

It's about how we get there and, in my opinion, conservative economic answers are unsatisfactory, to say the least even if I am willing to concede they may have a point on the social side with their focus on family and 'values' (I would add or say that the main thing is 'education' but stable middle class family values tend to favour investment in children's education anyhow).

James: I’d be genuinely interested to find out more about what people mean when they say that they view financial stability as a condition of marriage (and, unfortunately, this is a point which the article doesn’t explore).

Is this just a case of young people thinking “I’ll get married and have kids in about 10 years, once I’ve got my career sorted”

Me: James, we're not talking about people thinking or able to have 'a career'. They are and will remain low income all their lives if we don't change the system fairly radically.

I’d struggle to understand this sentiment being expressed by people who already had children outside of marriage, unless what they’re really saying is “I can’t afford to get married”. That is certainly something which is occasionally heard in the UK where people are able to claim benefits as single parents which they would not be able to claim if they married their partners. I don’t know whether the US benefits system works in the same way.

Me: Well, you got an interesting summary by no less than the very right wing Heritage foundation. I obviously don't agree with the way they attribute silly ideas to the left but it references this very interesting study. I especially like this tidbit from the Heritage summary:
 

"Low-income men and women greatly value marriage and aspire to be married. However, they no longer believe it is important to be married before having children. They idealize marriage, viewing it the same way the upper middle class might view a trip to Paris: an event that would be wonderful in the future but is not necessary or important at the present time".

James: Did you follow any of the commentary which followed the publication of Charles Murray’s book Coming Apart: The State of White America ? Murray blames the welfare state for contributing to the collapse of poor American families.

The book isn’t available online, but there’s an article on it here: http://www.realclearpolitics.com/articles/2011/04/12/coming_apart_at_the_seams_109527.html

Here’s another article which talks about welfare causing similar problems in the African-American community: http://www.washingtonpost.com/wp-dyn/content/article/2011/02/04/AR2011020404934.html

Me: Honestly, no, I wasn't particularly following those articles or the book. I note that it's interesting that, in the first case, Murray concentrates on the Whites - and find the poor are not doing well and the second article concentrates on the Blacks - and find that the poor are not doing well. One would start to suspect that race or ethnic origin was less important than social class...

In general, we've seen this regularly. Socially conservative commentators attributing increased economic hardships to a decadence of social values.

This thesis probably has some validity (work ethics, thrift and a capacity to project oneself into the future are clearly important) but far less than usually thought: Northern European countries, France, Germany are amongst the most atheistic/agnostic, the least socially conservative countries around. The USA is the most socially conservative, especially those Red States. Yet, it is the USA which is doing less well when it comes to poverty measures and especially it is the Red States which are the worst. Clearly, being socially conservative isn't enough to pull them through.
James: I don’t agree with your premise that it’s no longer possible for people to better themselves through hard work. I graduated from university during the recession, and that hasn’t been my experience.

Me: Sure, it's never going to be a 100% thing. Just like your tumblr people. You think they'll do well. I am pretty convinced they'll do badly. But as a group. Of course, some will always be lucky and succeed or radically improve their conditions, just because of the law of large numbers.

But that's why we got statistics. To see the truth beyond our own experiences. And statistics seem to indicate my pessimistic take is more correct than your optimistic one.

 

So is it an unmitigated disaster? No. But going to college in the US, what with the rising tuition fees described in earlier blog posts, is starting to look a bit more like rolling the dice with a potential nice pay-off rather than the sure thing it used to be. And, by the way, as a result, enrollment is dropping... People are no longer taking universities' promises of future riches as given.

James: However, you’re right that we are likely to see continued social unrest over the coming years, because people have been led to expect things which might no longer be achievable.

Me: Right there, I would question why things might no longer be achievable? Have we lost technologies? Gone through a war? Destroyed factories and buildings? No. So why are things no longer achievable?

James: I recently watched a television programme (“Free Speech”), in which a panel of politicians and entrepreneurs took questions from an audience of young people in south Wales (many of whom were unemployed).

One of the interesting things that struck me about it was the sense of entitlement which many of the audience displayed in their response to the panel’s answers. No, they weren’t willing to relocate to London to find work (as many people from Eastern Europe have done). And they had no interest in starting their own businesses (as one of the panellists had done when he’d been unemployed after leaving school in the 1980s).

Me: Well, in all honesty, I don't have much patience for this either, given that I have spent 5 years away from my family for work-related reasons. But I note that being rooted in their communities ought to be approved of by Conservatives. You cannot complain about the atomisation of society on one hand and scowl people who refuse to move too far from their roots on the other.

As to starting a business, 75% or so fail within 5 years (In one of my MBA classes, a professor had said '95%' and I remember a French professor saying it was 90% in France - a lower number is not necessarily good, by the way. It means less entrepreneurs/less risk taking - but I cannot find confirmation through a Google search; 75% is the number I can find). Starting a business is not a good way to fight unemployment at the individual's level. 

James: Incidentally, have you read Robert Gordon’s article “Is US economic growth over?” (http://www.voxeu.org/article/us-economic-growth-over) Gordon admits that his premise is deliberately provocative, but it seems to have struck a chord with a substantial number of people. I’d be interested to hear your response to it.

Me: I've read similar arguments (called The Great Stagnation hypothesis) made by Tyler Cowen - a blogger and economic professor I quite like. I'll respond to that specific side-point in great detail in another blog post. But, to answer you fast, I don't believe in it all that much. See my blog post on Robots, Labour and sciences-fiction

James: Most of those things can’t (and shouldn’t) be blamed on the Thatcher and Reagan governments.

We’ve seen a process of cultural change, which began long before either of those governments took office, which has seen the West move away from socially conservative values and towards a more permissive society.

This trend certainly continued during the 1980s, but neither government was the root cause of it. It isn’t realistic to blame conservative governments for the continuation of these pre-existing trends while they were in power: cultural change is impossible to legislate against, and can therefore be extremely difficult for a government to address.

The example of the Thatcher government dismantling the British coal industry is a specific example in which a conservative government demolished what could in certain ways have been regarded as socially conservative community (although the miners themselves would probably have taken umbrage if you’d described them in that way.) However, I doubt that many of people who identify as social conservatives would see the Thatcher government’s decisions as having been in any way contrary to their values

Me: So I agree with you that social changes were afoot from well before the 80s and are on-going and generally have favoured the liberals' social agenda (though, with some serious push-back, in the USA notably) but see above the counter-examples of Nordic countries, Germany and even France. Social conservatism and values, while playing a role, can't explain the economic results. The second half of the XIXth was social conservatism's paradise and it was wrecked by financial and economic crises. The 50s are the social conservatism's "good ol' days" and, if there was such growth back then, it was due to a mixture of facts indeed but a pretty crucial one was that it was the time when workers were getting their share of the productivity gains.

As to your point about "social conservatives would not see Thatcher's decisions as having been in any way contrary to their values", yes, that's the whole problem I am trying to get at here. They took decisions they thought in line with their values and these decisions destroyed a socially conservative biosphere - a pretty adverse result, including from a conservative point of view. So either the values are wrong (not my argument) or the decisions are wrong and the world doesn't work as Thatcher and her conservative advisers thought it does (that's my argument).

To quote Greenspan,"I found a flaw (...) in the model that I perceived is the critical functioning structure that defines how the world works".
 
James: Where I do agree with you is that neither of these governments, once elected, had much interest in doing anything more than throwing the occasional bone to the socially conservative wings of their respective parties (we could perhaps draw a comparison with the Blair government’s relationship with socialists within the Labour Party).

The problem as I see it is not that right-wing politicians are duping their supporters into conservatism, but that they often have no interest in promoting the legislation which their conservative supporters want to see enacted once they have been elected.

Me: You're quite right but frankly, here, I am not that interested in the social agenda of conservatives. I am talking about Thatcher's and Reagan's economic policies. Besides, as you said, it's pretty tough to legislate 'values' without the government turning very fast at least authoritarian or even worse.

James: (...) One other thought which struck me while writing this reply is that over the past few decades we’ve moved from living in a community-based society to an increasingly atomised one:

For most of the post-war period people would have worked in the same offices and factories as their neighbours, drank in the same pubs and worshipped in the same churches. Many of them would also reasonably have expected to live within those communities for their entire lives. They were therefore part of an extended social network in their extended communities, which must have made the notion of “social responsibility” (whether in a social democratic or a one-nation conservative sense) a relatively easy sell to most people.

That simply doesn’t describe the society we’re living in today. Most of us don’t live in communities in any meaningful sense. We don’t know our neighbours (and don’t want to know them): the only time we’re really aware of their existence is when they do something which inconveniences us. What we do have are more mutable social networks through family, friends and colleagues.

In that sense, classical liberalism seems a better fit for modern Britain insofar as it has always taken an atomised view of society as its starting point (i.e. a society in which individuals formed loose connections with each other through friendships and business contracts, rather than being bound to each other through any deeper community ties.) This would, obviously, be less true in some parts of the US and of mainland Europe, which still cleave to an older social model.

Me: All very true and therefore let's see where this line of thought leads us, economic-wise. 'Classical liberalism' is fine when it comes to its legal philosophy and civic rights but its 'laissez-faire' approach to the economy is mostly disastrous. Look what deregulation in the financial markets and banking brought us. See Greenspan's quote above. And it's not like we have not experienced 'laissez-faire' before - in the XIXth century. The results were not pretty and actually gave rise to revolutionary socialism/Marxism and terrorist acts.

More generally, though it pretends to draw on Adam Smith, 'classical liberalism' ignores one key limit Adam Smith himself had identified. His 'Invisible Hand' needs competitive markets to work out. Even if you don't believe in the extremes marginalists went through to mathematicise Adam Smith's competition (the hypotheses for 'perfect competition' are other-worldly in their in-achievability) and even if it is hard to believe from a left-wing guy, I am actually in agreement with Adam Smith: That is to say that, when markets are relatively free and relatively transparent, market forces will ensure that profit margins are small i.e. the market will be 'competitive' and everyone trying to follow his self-interest will lead to the general well-being.

But here is the key difference between me and 'laissez faire' ideologues: I do not believe that that many markets are that transparent and thus that competitive. Barriers to entry, asymmetry of information, collusion etc all contribute to reduce the competitive nature of many markets.

I think that society/government has a key role to play into putting in place regulations to stop the imperfection of markets turning many of them into rents that established politically connected companies can exploit.

In the US, there was a recent article on health care costs. Conclusion by Matt Yglesias? "American health care costs a lot because the prices Americans pay for health care services are very high. And hospitals charge those high prices for the same reason any other business would — because they can". (emphasis mine) 

Basically, the whole piece by Brill and the conclusions by Yglesias (and others) is simply that US hospitals are exploiting the bargaining weakness of sick patients to charge them as much as they can.

And health care is far from being the only market where competition is so far from being perfect that leaving those markets 'free' leads to very bad social outcomes.

Basically, I am saying that market failures are far more common and widespread than 'laissez faire' economists are willing to recognise or accept.  

James: It strikes me that socialists, like social conservatives, might find themselves increasingly swimming against the tide if the precepts of their ideology are fundamentally at odds with the way in which our society now operates. This would obviously be a long-term cultural trend, rather than something which would happen immediately.

Me: I think socialist ideals can be adapted for a more atomised society. And, though I have  never bothered to think all that much about them, I suspect the same is true for social conservatism.

With regards to socialist ideals, the transition ought to center around the fact that as an independent individual, you can be subject to lots of unique, unforeseeable 'bad stuff'. Serious illness. Unemployment. Bankruptcy. Etc. And, with the disparition of extended family ties and clannish-like organisations, society is basically an insurance policy where, to avoid selection bias and adverse selection effect, all are required to be insured/participate.

IMO, conservative ideals could be re-incarnated in 'happiness economics'. Basically, people tend to be happier when they are married, part of a solid group - or network etc. So the networks might be a bit more nebulous and evolving than before but they remain important and modern life's atomisation is mostly A Bad Thing (TM). At the very least, it needs to be tempered. I could see a whole new social conservative discourse around this idea of strengthening and deepening people's networks.

James: I suspect that a disproportionate percentage of all tax revenue is still paid by the top few per cent of the population. This doesn’t necessarily mean that they pay a higher percentage of their income in tax, but does mean that they pay a disproportionate percentage of the total amount which HMRC actually receive from each income group in cash terms.

Me: That's correct, of course. I also don't see it as being relevant. Reasoning ad absurdum, if the top 0.01% had confiscated a 100% of the wealth, they'd be paying a 100% of the taxes. It still wouldn't be A Good Thing (TM) as far as society was concerned. Unless those taxes represented, say, 99% of the wealth and wealth creation was redistributed like that. 

James: The CPS report is an interesting one because it compares what people in each income group are paying in taxes (in pounds sterling) with the value of the services which they are receiving from the state in return (in pounds sterling). And, to be honest, I think that’s the way we should be looking at it: the top few per cent are (for the most part) already more than pulling their weight

Me: See above and my ad absurdum reasoning. Sorry but this is definitely not the way to be looking at it. See below as well as to why.

James: Socialists often try to conjure up a sense of class warfare by insisting that the rich are screwing the rest of us over. However, the only conceivable sense in which this could be true is if from a perspective akin to Marx’s “from each according to his ability, to each according to his needs” (i.e. if you insisted on seeing individuals’ wealth as the something which belongs to society as a whole, rather than as their private property).

Me: So, again, this is a classic issue. I have no problem with the small time entrepreneur or corner shop owner pointing out to his cute little shop or factory and saying "this is mine!". I don't think he's built it all of his own but, by all means, let him enjoy the fruits of his labours. And I am not about to suggest confiscating one person's house or nice car, to "equalise" everyone. But I do think that your local shopkeeper is not on par with Mittal, Abramovich, the Duke of Westminster or Sir Philip Green. See my comments above about the Invisible Hand stopping people from accumulating so much... unless there is a market failure.

I don't see why we should reward rent extraction. That's not hard work. That's maybe a bit of luck mixed with a lot of ruthlessness.

How come that conservatives are so dead-set against spongers but have no problems with corporate welfare and inexistant inheritance taxes? How is that related to 'hard work' and 'a fair day's wage for a fair day's work'? 

Basically, I don't see why it is so hard for some people to accept that Sir Philip Green's businesses (and so many others) depend on public infrastructure to the extent that it is very hard to say "who contributed what to whom".

I am happy to exclude small businesses in some kind of economic equivalent to a tax threshold (say, if your business has less than $10 mil in Sales/Revenues?) but, above "a certain number", I do believe that it's not all 'private property, mate, keep your hands off".

My personal preference would be to abolish income-based (whether earned income or capital gains) taxation and instead apply a progressive scale to businesses' income profit.

I am not sure it could work in actuality or the exact numbers to plug in to make a nice model but I would find it intellectually neat - All wealth is created by 'companies' (even 'companies' of a single person in the case of some independent workers) so apply a threshold to avoid taxing 'the little guys' who are anyhow in a competitive market (if they weren't, they wouldn't be 'little guys') and tax the big boys more and more as their profit margins get bigger (as the market they operate in is less and less efficient/competitive).

James: Now, to elaborate on that in response to the points from your earlier post:

1. I don’t agree with the idea that investors haven’t earned the income which they receive on their investments.

To take this back to its most basic level: creating a profitable company will require the input of both labour and capital (i.e. investors who are willing to risk their savings to finance the company). The one is insufficient without the other.

So, if someone invests their savings in a company (whether directly through buying shares themselves, or through a third party such as a bank which will then invest the money which they have deposited on their behalf) then they are earning whatever return they receive on that money.

And that’s as true of the billionaire with a fortune in stocks and shares as it is of the pensioner with a more modest savings account.

Me: Well, I find investment actually difficult to treat, intellectually. There is very little comparison between investing directly or indirectly in a small business with a cumulative death rate of 75 to 95% and investing in the stock of the FTSE100 or DJIA30 companies with their tiny probability of default. It doesn't even do the same thing as far as the economy is concerned (investing on the stock market, a secondary market, does not provide funds to the companies). Furthermore, capital gains aren't the same thing as dividend or coupons.

As I said above, I'd prefer to stop taxing individuals and gather money closest to the 'source' (of wealth) i.e. indexed on companies' profit and especially according to their profit margins and, on top, this would allow me to ignore the conundrum of having to tax income differently depending on whether it is a salary, dividends, coupons or capital gains..

James: 2. I agree with you that the government should do more to stamp out tax evasion, and to simplify the tax code to limit companies’ scope for tax avoidance.

You’re also right that billionaires would be little better off than the rest of us if we were living in a state of total anarchy (i.e. Somalia). (Although it’s worth noting that even failed states such as Somalia have their own hierarchies which are based in part upon inherited wealth, and in part upon individual ability.)

However, this analogy simply doesn’t describe the world we’re living in: the choice for multi-national companies and extremely wealthy individuals is not “do we want to invest in a country with a stable government or in a Hobbesian state of nature”, but rather “will we gain most from investing in this country which has a stable government, or in that one which also has a stable government”. Imposing punitive rates of taxation would achieve little more than encourage investors to divest in one’s country (I’ll return to this point in greater detail later…)

Me: Already answered, Your Honour. There are things a state can do to stop corporations playing them one against the other. If they don't do these things, this will only be a race to the bottom. Ireland is already screwing much of Europe that way. The UK, Luxemburg, Switzerland... We've let it happen. It's time to reverse the tide. The only serious problem is the UK as they are the only country with a military worth something. We can steamroll the rest, if we really have to.

James: It’s also worth noting that the overwhelming majority of government spending in a modern in a modern welfare state is on areas (such as welfare and healthcare) from which investors derive comparatively little benefit. To answer your point about Philip Gates: I suspect that most large retail consortiums would find paying for their own garbage collection far cheaper than paying tax on the entirety of his income at the rates currently demanded by the British government

Me: They actually derive great benefits from having a healthy workforce that is not forced to preventively save for life's accidents. If you had to constitute a safety net to parry the worst eventualities (unemployment, serious illness etc), what portion of your salary would you save? A higher portion than at present, that's guaranteed. Chinese consumption is low for a variety of reasons but the lack of social safety nets and thus the need for Chinese to 'save (a lot) for a rainy day' is a big part of the explanation.

As to organising their own garbage collection? Let it happen. Let them repair the roads, let them provide their own security, let them privatise the totality of the government services they're using. They'd go bankrupt!

Look at Walmart. The Walton family is amongst the richest of America and Walmart is making $15 billions in annual profit. Yet 80% of  its workforce is on food stamp and dependent on welfare programs. 

What would happen if there were no such welfare programs for Walmart to offload its responsibilities? Either they'd have to start paying a living wage or the Walton family members would have to start serving customers all by themselves... all 5.2 billions of them annually. Good luck to them...

James: 3. I think you’re misunderstanding the fundamental nature of conservatism: I believe in property rights, and this includes a willingness to extend the same rights to others (however wealthy they might be) that I wish to enjoy myself

Me: So do I. But do you believe in aristocracy, in the fact that birth should determine your fate? What about war criminals, autocrats and robber barons from emerging countries? Should we respect their property rights, no matter how they acquired their wealth? If you look at the richest men in the UK, you got Mittal, Usmanov, Abramovich, the Hinduja brothers, Blavatnik, Bertarelli and the Duke of Westminster. A common theme for most of them is that they were either born rich or got rich by buying assets on the (very) cheap in the collapse of the Soviet Union... In Ukraine, right now, the son of President Yanukovych is growing very rich indeed. I guess it's okay and we should respect his property rights? After all, he is more or less legally gathering most of the country's assets into his hands... 

James: On a more practical level, the risk with introducing punitive rates of taxation is not so much that they’ll cut back on their hours but that they’ll either leave the country themselves or move their wealth overseas.

Me: Yes. And, as I said, there are ways to deal with that. Just blocking them from producing and selling in western countries would get them on their knees, without even mentioning more... muscular options. After all, all these guys who made it big in the collapse of the USSR must have, more or less by definition, committed some crimes or other... I find the UK (and the rest of the western world, to be fair) to be conveniently amnesiac when they are not forced to confront their wealthy newcomers. I mean, Gaddafi's son must have felt so cheated. Not to mention Mubarak's son too...

James: The other problem is that they can afford the best tax advisers, who will always be able to find ways for them to reduce their tax liability. Taxing the ultra-rich is dependent, to a certain degree, upon their goodwill and acquiescence to being taxed at the rate in question.

Me: And your conservative solution is to bow to our new masters? I don't think so... Not as long as we got more muscle than they do...
James: 4. The problem with this is that the sort of international co-operation which this plan requires simply doesn’t exist

Me: Very true. But I am not just about 'what's possible'. I am talking about what's economically correct and what's not. If we agreed here that we adopt conservative economic outlook & solutions just because liberal solutions are more correct but too hard to implement, I would be happy. This is a blog about economics, not a realistic politico-economic program.

James: You could call this a “race to the bottom”, but it could equally fairly be characterised as the French government having priced itself out of the market.

Me: I do call it a race to the bottom and it will eventually not be to anyone's advantage. After all, France may have foolishly priced itself out of the market - for a time - but, surely, the French people will realise the errors of their way and go back to groveling for crumbs like the rest of Europe? And the UK is already uncompetitive compared to Ireland or Luxemburg. I think you should campaign to lower corporation taxes further. If 20-24% is great, surely, 10-12% would be even better? 

James: Protectionism of the sort which your post seems to envisage (i.e. requiring any company which wants to sell goods or services in one’s country to be registered to pay tax there) would risk creating a trade war with whichever foreign countries found their corporations locked out of your markets. 

Me: The US have managed to get the Swiss to bow and kiss their asses with regards to Swiss banks and their tax evasion schemes in the USA doing just that. It can be done. And I don't believe it can lead to a trade war because corporations only locate profits in those tax advantageous zones, not production capacity or even sales outfits. If we blockade Ireland or Luxemburg for sheltering Microsoft Europe's profits, with whom will we start a trade war? It's not like Luxemburg or Ireland weight anything trade-wise and it's not like Microsoft actually produce or sale anything for real from these locations...

Okay, it's been a long long post.

To summarise, I'd like to run through a couple of key points:

1- While liberal voters may be just as uninformed as anyone else and while liberal politicians can be just as personally fallible/corrupt as anyone else, I feel that conservative politicians, especially in the USA, are not being entirely frank with their own people when it comes to their policies and its consequences.

2- Furthermore, in both the cases of conservative ideologues and conservative voters, I think the world does not quite work the way they think it does, especially in terms of economics - Deregulation, 'laissez faire', trickle down etc are all pejorative ways liberals describe major components of supply side economics but it was George H. Bush, not exactly a raging liberal, who actually called Reaganomics 'voodoo economics'.

3- This is not, in my opinion, a matter of 'values'. We all want hard work to be rewarded, we all believe in meritocracy, we all dislike spongers and, for the non Marxist among us, we all enjoy and want to keep private property alive. But it is a matter of whether we believe that markets are competitive enough 'naturally' or not and here it seems to me that the experience in the developed Western world is clear - While 99% of companies are small or medium, a handful of very big corporations have an outrageously big foot print and this is a clear proof of market failure - Major corporations might be less than 1% of all companies but they represent nearly 50% of GDP.

Finally, speaking of values, I would say it's uncontroversial conservatives are staunch defenders of 'personal responsibility'. Thus, they reasonably ought to be for a meritocratic system i.e a system where the early risers and hard workers get what they deserve and so do the lazy and the feckless.

But, if the world worked like that, if wealth inequality was nothing but a reflection of people's natural abilities and willingness to pull themselves up by their bootstraps, how come there is such a correlation between wealth inequality and inter-generational (im)mobility?

  

(And that's from the Telegraph, not your average raging liberal rag: http://blogs.telegraph.co.uk/news/danielknowles/100159296/equality-of-opportunity-is-a-buzzword-designed-to-get-around-talking-about-inequality-of-income/)