Solutions: Everybody Has One

NOTE: During an edit, I completely mangled this post, and the previous one was eaten by the internet…I’m trying to get it back together, so forgive me for the lack of links and poor formatting at the moment.

Over the past week, I’ve provided plenty of commentary regarding the “inequality of wealth” video that has become quite a hit. In my first post, I expressed my confusion as to how otherwise intelligent people, who should know better, were getting taken in by such a poorly made video. My second post expressed frustration that the wonkiest of wonks — Ezra Klein, himself — cited the video uncritically and ended up stumping for a wealth tax. My third post, along the same lines, corrected some (I suspect ideologically driven) errors in reporting. Finally, my fourth post was critical of Noah Smith’s article, which was a great article nonetheless.

So yea, yea, yea…it’s easy to sit back and identify problems. Where’s your solutions? Well, that is what this post is going to delve into. So bear with me for another post that could be meandering. This post is going to be about solutions to addressing the needs of the poor and (to a lesser extent) middle income. Any effect that my policy solutions have on inequality (income or wealth) is purely coincidence. There are a few reasons for that:

  1. Income (except in an extremely narrow definition) is a misleading concept that muddles the issue.
  2. Wealth inequality is a more-or-less natural outcome of any system that features competitive allocation.
  3. Inequality is simply not one of my hobby horses. Though I guess you’d be surprised to discover that, given the past week.

From the outset I want to make clear; my first-choice “solution” to the issue of addressing the needs of the poor from a income support standpoint is simple cash transfers through a EITC-style tax rebate scheme fully-funded by a progressive consumption tax. For everything. That means no food stamps, no rent control, no housing assistance, no cell phone program, no child care assistance. Nothing but a periodic cash endowment to supplement income. This cash grant would fade over a wide income range, as to minimize marginal tax rates at the low end. Once the cash is dispensed, people can do with it what they will, and no post hoc complaints. The outcome of peoples’ actions after the endowment is completely upon them. The end.

However, it is highly unrealistic to expect that situation to be a stable equilibrium in a democracy. I’ll also be very clear, it is not an answer to poverty. Under such a system, I suspect that there would less, but still plenty of poverty. That program simply satisfies the utilitarian requirement that we act to minimize suffering. To move further means we need to start building an apparatus with the idea of cash transfers at its core.

As a note, I am going to be assuming the position that the type of poverty that is endemic to wealthy countries is of the recalcitrant type, and often exacerbated by self-defeating behavior on the part of the (current) poor, which leaves future generations at a severe disadvantage, creating a cycle in which the low-income population are unable to build a base of intergenerational wealth. Also, this won’t be an in-depth analysis of the philosophy and economics of the ideas, just an overview.

Let’s start with transfer payments. The big problem with transfer payments in cash is that once the cash is dispersed, it is out of the control of those who are dispersing it. Try as you might, you can’t force the person you just gave $10 to not go buy a pack of cigarettes with it. The data on endowments is certainly not encouraging. A second-best solution is to provide vouchers, ensuring payment for the intended consumption…but this doesn’t at all address the issue of building intergenerational wealth, and leaves you with the problem of policing secondary markets in vouchers…even though that’s obviously misguided (and shows your policy is misguided from the start). As James Tobin once said:

…while the concerned laymen who observe people with shabby housing or too little to eat instinctively want to provide them with decent housing and adequate food, economists instinctively want to provide them with more cash income…this answer rarely satisfies the intelligent egalitarian layman. He knows, partly because he has learned it from economists, that there are pragmatic limits on the redistributive use of taxation and cash transfers.

It is clear that in order to deal with poverty through cash transfer, the system is going to have to be designed in a way that, first and foremost, aligns incentives with goals. However, it is important that this program be a program that allows individuals to succeed by imposing self-binding constraints. That is why I advocate what could be termed a “graduated income transfer system”. Under this system, there is a (and small) cash grant, guaranteed income, if prefer. This is given to everyone under a certain threshold regardless of their intentions. However, to move into the more generous system of cash transfers, individuals (or families) will be required to sit down with a DHHS financial planner to create goal thresholds. Payment of subsequent tranches of income support will be contingent upon successful completion of these goals. While there may be some “automatic” goals that make it in the list, the idea is for people to adapt the goals to their personal situation. In this way, we aren’t so much imposing the heavy hand of the nanny state upon people, but rather creating a system whereby people who suffer from hyperbolic discounting can credibly commit to a self-binding strategy. Nearly every successful petro-state has elected to lock up the rewards away from people and politics, so they will not be plundered.

Moving forward, one of the most pernicious roadblocks confronting poor people is just how expensive it is to be poor. Part of this expense is because what is lovingly named the “poverty industry” has mastered the art of extracting rents from impatient people. That’s right, not imprudent, not impoverished, impatient. It certainly is the case that poverty doesn’t afford you the luxury of patience…but all things considered, a payday lender would rather lend to adrenaline junkie making $1,000,000 a year with a gambling problem than someone with a tentative job in fast food. That means competition expanding competition in low-income financial services. We are getting there, as many employers no longer issue checks, but cash cards to their employees that opt for no direct deposit. WalMart is certainly eager to serve the financial needs of the poor, but faces road blocks at every turn. Failing actual competition, I wouldn’t object to government-provided financial services.

Finally, the other biggest area to deal with is health care. You can read my views on health care here and here.

I’ll close with something I said in a previous post. Many people are agitating for a ‘wealth tax’. Regardless of the impossibility of actually taxing wealth (reminder: wealth taxes simply income taxes, and Chamley-Judd), what these people really want is to capture a share of the consumption of the wealthy on things that wealthy people spend their money on. Doubleplusgood if you’re capturing a large share of the surplus from competitive consumption. In that case, what you want is a strongly progressive consumption tax, and do away with the inheritance tax, and taxes on capital. People set their sights on equality, but I don’t view this as the proper goal, even though it may be an unintended outcome of simply trying to fulfill a utilitarian duty to maximize utility and minimize suffering.

Hopefully you found this saga at least an enjoying read, if not enlightening. I know I enjoyed writing (most) of it!

P.S. Note, there is no mention of “education” here. I have no problem with providing financial education along the lines of what Noah Smith advocated in his Atlantic column. It will select for those who are interested in said education. I do not believe that education will make much of a difference at all in the populations that most need financial help.


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