Tag: joseph stiglitz

All About Industrial Policy, Part 3

Part 1 is here, and Part 2 is here.

And here’s a brief recap of the story so far. Part 1 covers what industrial policy is, and why it is important. Part 2 helps us understand that India’s industrial policy, at least in terms of outcomes, has not produced great results.

Now let’s answer the question that really and truly matters: what should India’s industrial policy look like going forward?

We argue in this essay that we are at a turning point in development strategy. Strategies that worked well in the past are unlikely to do so in the decades ahead. In particular, the manufacturing- and export- based growth strategies that drove East Asia’s development miracles are no longer suited for today’s low-income countries; at the very least, they are insufficient. New technologies, the climate challenge, and the reconfiguration of globalization require a new approach for development emphasizing two critical areas: the green transition and labor-absorbing services. Unfortunately, policy makers do not have ready-made recipes or successful models to emulate. Confronting this challenge head-on will require therefore also building greater capacity to learn about new opportunities, constraints, and what works and doesn’t as governments experiment with new policies on a number of fronts.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

Dani Rodrik and Joseph Stiglitz have a new essay out on just this topic, called A New Growth Strategy for Developing Nations. And they begin by telling us that what worked in the past may not work in the future. And the reason for that in this instance, they say, is because of:

  1. New Technologies
  2. The Climate Challenge
  3. The Reconfiguration of Globalization

New Technologies

New technologies may well make you think immediately about AI and robotics, which we have covered yesterday and the day before. But the authors aren’t just talking about AI and robotics. They are trying to make a broader point:

The primary culprit was skill- and capital-biased technological changes in manufacturing. These changes increased labor productivity substantially in the advanced economies where innovations originate. But they also undercut the comparative advantage of low- income economies in traditionally labor-intensive manufacturing. The quality and technological standards set by leading firms in GVCs rendered labor-intensive production in export-oriented sectors even less viable.6 The result was that globally competitive formal manufacturing sectors in developing countries ceased being labor-absorbing sectors. They turned into “enclave” sectors where very few of these economies’ excess low-skilled labor could be employed. In countries where manufacturing output held its own, manufacturing employment shrank (as a share of total employment). In the few cases where manufacturing employment registered an increase, the rise was concentrated in small, informal, and low-productivity enterprises, while large, internationally-competitive firms generated little demand for labor.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

By the way, these trends have had somewhat surprising, but with the benefit of hindsight, entirely predictable consequences:

Mr Maskin’s theory relies on what he calls worker “matching”. Unskilled workers can be more productive when matched with skilled ones—that is, when they work together. Assigning a manager to a group of workers can do more for total output than just adding another worker. He places workers into four classes: skilled workers in rich countries (A); low-skilled workers in rich countries (B); high-skilled workers in poor countries (C); and low-skilled workers in poor countries (D). Crucially, he thinks low-skilled workers in rich countries (the Bs) are likely to be more productive than high-skilled workers in poor ones (the Cs).

Before the current wave of globalisation started in the 1980s, skilled and unskilled workers in developing countries—the Cs and Ds—worked together. Mr Maskin gives the example of a rural Indian man, fluent in English, who helped local farmers understand modern agricultural methods. Wage growth of high-skilled workers (Cs) was weak, because poor transport and communication links made it hard for them to work with skilled workers in rich countries. But low-skilled workers (Ds) did well: their interactions with the Cs boosted total output, which let them demand higher wages, so pushing down inequality.

The latest bout of globalisation has jumbled the pairings: high-skilled workers in poor countries can now work more easily with low-skilled workers in rich ones, leaving their poor neighbours in the lurch. Take “intermediate goods”, the semi-finished products that account for about two-thirds of world trade. The production processes outsourced by big companies in factories or call-centres are by rich-world standards unskilled. But when jobs are sent offshore, they are snapped up by C workers, the relatively skilled ones. According to research from Cornell University, the typical call-centre employee in India has a bachelor’s degree.

Globalisation in its latest guise means such workers come into more regular contact with less-skilled people in the rich world. The Anglophone Indian cited by Mr Maskin may go to work in an export factory where he meets tight deadlines laid down by its American owners. The Cs work with Bs and end up being more productive. The Ds are left by the wayside.

https://www.economist.com/finance-and-economics/2014/08/23/revisiting-ricardo

Question: Who do you think the D’s are likely to vote for in their countries the world over? Who do you think they have been voting for these last ten years or so?

Industrial policies have consequences, children.

Tread (trade?) carefully.

Hello, services.

And because of rapid advancements in technology and the resulting changes in patterns of globalization, the good ol’ industrial policies recommended and implemented in places ranging from America in the 1770’s to South Korea in the 1950’s no longer work. Also, I should note, because of climate change, as Rodrik and Stiglitz discuss in their paper.

And so, they say, services is where it’s at. It is the service sector that will have to absorb all the young people who are going to come of age in India oer the next two decades.

But there is (of course) a problem. The problem is that the kind of service sector growth you and tend to think about (IT/ITeS/BPO/KPO) has “limited potential to create large numbers of employment for the typically low-educated, low-skilled workforce of a developing economy. These new jobs, they say, are a “hodge-podge of largely self-proprietorships or micro/small firms, typically non-tradable and often informal”.

Now this is a major problem, because as they themselves say earlier on in their essay, their entire attempt is focused on answering what they describe as their key strategic question:

Where will the better, more productive jobs come from?

The footnote associated with this question confidently asserts that “Our concern here is not with the overall quantity of jobs or with full-employment, but with the structure of jobs. Reasonable macroeconomic policies (along with “flexible” labor markets) will ensure full employment, but the resulting structure can be sub-optimal from a developmental standpoint and not growth-promoting. We focus, therefore, on the creation of more jobs in the more productive sectors of the economy as a vehicle of structural transformation and growth, analogous to the role that industrialization has played historically”.

But that, alas, doesn’t resonate with the “hodge-podge, non-tradable and often informal” service sector. And that is going to be a challenge along two fronts (at least).

First, this will have an impact on inequality. When the authors say that the best that can be hoped for is that some service sector firms will see an increase in productivity, but the vast majority will not, they are also saying that some workers will see a rapid increase in their wages, but others will not. Maskin’s model will continue to have legs in this brave new world of ours.

Second, expectations setting becomes even more important. Based on what we currently know, growth via even the most successful industrial policy won’t be as impressive as it was in the second half of the twentieth century. Short, brutal version: yes, India has missed the proverbial bus.

Even in the best-case scenario, a services-based model is unlikely to deliver growth rates approaching those experienced in East Asia. For one thing, increasing productivity in labor-absorbing services is likely to prove more difficult than in manufacturing, even if the strategies outlined previously prove successful and even if there remains a significant gap in productivity in the services sector between developed and developing country. This is because manufacturing technologies are more standardized and have proved easier to copy despite large differences in the context of developing countries. But there is another general-equilibrium reason as well. Under manufacturing-led growth strategies, a succession of export- oriented sectors – wigs, toys, garments, autos, steel – could take off one after the other without regard to domestic demand. By contrast, the expansion of non-tradable services – those that are most likely to absorb employment — is ultimately limited by the size of the home market. Individual service sectors cannot keep growing if other service sectors are not also expanding and increasing their productivity; the growth of retail, say, depends on the growth of personal services, hospitality, and the rest of the economy. Otherwise, the profitability of the more rapidly expanding services would soon collapse. This complementarity on the demand side necessitates balanced growth and lowers the ceiling on the potential growth rate of the economy.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

But Not Doing Anything Ain’t An Option

Why can’t the markets just “figure it all out”? Isn’t that what they’re supposed to be good for in the first place? Why bother with industrial policy at all?

Rodrik and Stiglitz recommend against letting markets do their thing, because there are things that stop the market from working the way it is supposed to. We call this market failure. And that is why, the authors say, all of the most rapidly growing economies of the past have relied heavily on industrial policies promoting productive diversification and the growth of new industries.

I actually prefer their argument in the very last paragraph of their essy, where they say that choosing not to have an industrial policy is also an industrial policy. You might well think that this is a most brilliant idea, but try telling that to the B and D workers in Maskin’s world.

So What Should We Be Doing?

The significant uncertainties in technological evolution, heterogeneities among production units, and the highly dynamic setting in these new areas require a new model of iterative, strategic collaboration between firms and government agencies (national and sub-national). The focus would be on experimentation and learning, with objectives, instruments, performance criteria and institutions developed and shaped over time. Government capacity would be accumulated in the process, rather than presumed as given.

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/a_new_growth_strategy_for_developing_nations.pdf

In plain simple English, this is what it means:

  1. “Significant uncertainties” means “We don’t really know what a new industrial policy will look like”.
  2. “Iterative and strategic collaboration” is academic speak for “We’ll figure it out as we go along”.
  3. “The focus would be on experimentation and learning, with objectives, instruments, performance criteria and institutions developed and shaped over time” means we are not joking about pt. 2
  4. “Government capacity would be accumulated in the process, rather than presumed as given” means “We know that governments don’t know anything about this either, but they’ll have to learn, same as the rest of us.”

So that paragraph is really saying this:

We don’t know what a new industrial policy will look like, but we will figure it out as we go along. We have to, we have no choice. And that includes you too, government!

Now, you may think that I’m being facetious, but I assure you that I am not. They’re quite right!

We really don’t know what the world is going to look like with the advent of robotics and AI. We really don’t know what impact climate change will have during and beyond the time-frame of us getting used to a world with AI. But employment markets are likely to be volatile, and there may well be job losses, particularly in the manufacturing sector. Generating twenty million jobs every year, year after year, for the next twenty years is going to be tough, but we have to do it. Otherwise, we are screwed. Manufacturing probably won’t do it for us, so we have to figure out how to make it work using a combination of manufacturing, export oriented services, and non-tradable services.

India’s challenge is to not just catch up with those who went before us, but to do so on a brand new map. Technology has torn up the old one, you see. We have to do it starting about five years ago, if not earlier. We have to do it with our current state of state capacity, and for a larger number of people than has ever been attempted before (including China from twenty five years ago). And we have to do it while contending with climate change, and in geopolitical scenarios that are crazier than they have been in a long, long time.

Let’s wish ourselves luck, because we’re going to need it.

All About Industrial Policy, Part 1

In 1961, India’s income per person was $86, South Korea’s was $94 and China’s was $76. India was right in the middle of a very poor pack of countries. India’s income per person today is around $2300, China’s is around $12,500 and Korea’s is around $35,000.

Rajan, Raghuram; Lamba, Rohit. Breaking the Mould: Reimagining India’s Economic Future (p. 47). Penguin Random House India Private Limited. Kindle Edition.

Pictures are worth a thousand words, no?

And as I always say whenever this chart comes up in a class I’m teaching, I don’t think it is possible to look at this chart and not ask “Saala, what did they do that we didn’t?”. And because I like to play around with words, I say that some of the students might also wish to ask what we did that they didn’t.

So what did they do?

They enacted “government policies directed at affecting the economic structure of the economy”, in the words of Joseph E. Stiglitz and Justin Lin Yifu. Or if you prefer shorter, simpler phrases, they had better industrial policy.

So what are these government policies directed at affecting the economic structure of the economy? Why are they needed, what effects do they have, who came up with them, and is there anything special about industrial policy as regards India? Let’s deal with each of these questions in turn, one at a time:

What is industrial policy?

Rapid sustained economic development, Rodrik and Stiglitz tell us, requires an explicit strategy.

And almost always since we came up with the idea of rapid (it’s not always been sustainable in more than one sense of the term, alas, about which more later) economic development, the strategy has always had one goal: how can we industrialize better?

Why industrialize at all is a fair question to ask, of course. And the answer is that it is painfully clear to us that you cannot hope to be a developed nation without industrializing first. This becomes clear by doing lots and lots of complicated econometric studies, or by looking at a chart with a lovely title.

It’s a chart called What The Fuck Happened in 1750? And the answer is industrialization. Industrialization happened, starting 1750. Or there and thereabouts, at any rate:

And so what we would like to do is make sure that as many countries industrialize as quickly as possible, so that the citizens of all countries can live a longer, healthier and more productive life. Or that’s the plan hope, at any rate.

So what is industrial policy? It is a policy aimed at industrializing a country as quickly as possible. And if you go and take a look at the India, China and South Korea chart again, you can now look at it as three separate industrial policy experiments. One of them clearly worked when it was implemented, one figured it out a little while later, while the third is beginning to hit its straps only now.

So did these three countries differ in terms of their industrial policy, or did they have the same type of industrial policy, but different qualities of implementation?

Think diets, if that helps. If three of your friends are comparing their weight loss, were they on different diets, and therefore lost weight at different rates? Or was it the same diet, with some of your friends being better at sticking to it? And in the case of the the countries, it turns out they were implementing wildly different types of industrial policy.

Which begs the question: how many types of industrial policy are there anyway?

Types of Industrial Policy

Dani Rodrik and Mariana Mazzucato present a framework for evaluating the different types of industrial policies in their paper, Industrial Policy with Conditionalities: A Taxonomy and Sample Cases. On pp 8 and pp9 of their paper, they present a simple framework, based on which I have created that picture you see above.

Industrial policy depends, they say, on the answer to these four questions:

  1. What type of firm behavior are you targeting through your industrial policy?
    • Do you hope to ensure equitable access to the products and services that will result from your industrial policy?
    • Or do you hope to direct firms’ activities towards socially desirable goals?
    • Or do you hope to get the successful firms to share their returns with you, the government (via royalties, perhaps, although other options are also available)
    • Or do you plan to require that profits be mandatorily reinvested into productive activities?
  2. How do you plan to work out the conditionalities associated with the program? Are they up for negotiation, or are they cast in stone?
  3. Is the upside from the program split? Is the downside split? (When I say split, I mean between the firm in question and the government).
  4. Finally, what about measurement criteria?

Using this framework, Rodrik and Mazzucato say, you can figure out the type of industrial policy at play.

Here’s how their framework can be applied to the case study of the now famous Oxford/AstraZeneca vaccine program, for example:

https://drodrik.scholar.harvard.edu/sites/scholar.harvard.edu/files/dani-rodrik/files/conditionality_mazzucato_rodrik_0927202.pdf, Table 2

So all right, there’s industrial policy, which is about industrialization, and South Korea seems to have done a better job of it than China and India (so far), and that’s because they used a type of industrial policy that worked better. Speaking of types, there’s lots of different types possible. But it still begs the question: what was South Korea’s industrial policy, exactly?

South Korea’s Industrial Policy

Understanding South Korea’s industrial policy requires a book length treatment, and there are more than a few that have tried to tackle the subject. As you might imagine, it is difficult to compress all of that material into a single blog post. But here’s what can be said:

  • South Korea’s industrial policy was inspired in part by the Meiji Reformation in Japan
  • The Meiji Reformation was in part based on the historical school of economics from Germany.
  • This historical school took part of its inspiration from… and this might surprise you a bit… Alexander Hamilton(!)
  • In particular, you might want to focus on a specific report:

One that has become especially well known was the ‘Report on the Subject of Manufactures’ submitted to Congress in 1791. In the report, he stressed that the United States needed to develop its manufacturing sector in order to grow its economy, bolster its military, secure its sovereignty, increase productivity, and absorb labour. He also stressed that industrialization was necessary to avoid being disadvantaged in trade with European nations, especially Great Britain, the industrial superpower at the time. The way to do this, according to Hamilton, was for the United States to protect and nurture its manufacturing sector through active use of industrial and trade policy. More specifically, industrialization was to be achieved by strategically applying tariffs and import bans on imported manufactured goods.

Hauge, Jostein. The Future of the Factory: How Megatrends are Changing Industrialization (p. 35). OUP Oxford. Kindle Edition.

And so the outline of South Korea’s industrial policy was to protect and nurture its manufacturing sector. Here are two questions worth asking:

  1. Protect it from whom?
  2. Nurture it for what purpose?

It is the answers to these questions that helps us understand where India and South Korea differ in terms of their industrial policy from the second half of the twentieth century.

The Carrot and The Stick

Both South Korea and India, you see, were clear about the answer to the first question. Both of their domestic industries needed to be protected from foreign competition.

But their answer to the second question could not have been more different. South Korea said that the protection and the nurturing was necessary so that South Korean firms could one day become world-beaters.

India, on the hand, ended up protecting its domestic manufacturers in perpetuity. Or least until 1991, at any rate.

We have names for both policies (of course we do). The South Korean policy was about export promotion – protect domestic firms until they learn to play with the big boys on their own turf. The Indian policy was about import substitution – if you’ve ever seen a mollycoddled spoilt Indian kid, that was India’s domestic firms until 1991. (As always, it’s a more complicated story than that, but hey, this post is long enough already. Some other day, maybe, we’ll dive deeper into this)

In other words the South Koreans got their incentives right – they held out the carrot, but didn’t hesitate to wield the stick when necessary. The carrot was pretty much whatever it was that the South Korean firms asked for – cheap labor, state supported finance, guaranteed power, great roads, you name it.

But Rodrik and Mazzucato’s framework comes into play here, because access (pillar 1) was given to export oriented firms, based on strict and non-negotiable conditionalities (pillar 2), with explicit and clear measurement standards (pillar 4):

The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used to encourage exporters.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (pp. 76-77). Grove Atlantic. Kindle Edition.

And if the measurement in pillar 4 didn’t come up to the expected level, pillar 3 kicked nito play, and how:

North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up. This might have meant a forced merger with a more successful firm, the withdrawal of capital by a state-directed financial system, withholding – or threatening to withhold – production licences, or even the ultimate capitalist sanction, bankruptcy. Since the 1970s, there has been much talk about state industrial policy in western countries being an attempt to ‘pick winners’ among firms, something that most people would agree is extremely difficult. But this term does not describe what happened in successful developing states in east Asia. In Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers.

Studwell, Joe. How Asia Works: Success and Failure In the World’s Most Dynamic Region (p. 77). Grove Atlantic. Kindle Edition.

India? We have the Industrial Disputes Act, which makes it difficult for us to shut down loss making firms, let alone those firms that are not exporting.

The protection to labour in larger firms is extremely high in India and translates into excessively high effective labour costs. As an example, Chapter V.B of the Industrial Disputes Act of 1947 makes it nearly impossible for manufacturing firms with 100 or more employees to lay off workers under any circumstances. Such high protection makes large firms in labour-intensive sectors, in which labour accounts for 80 per cent or more of the costs, uncompetitive in the world markets. Small firms, on the other hand, are unable to export in large volumes.

Panagariya, Arvind; Bhagwati, Jagdish. India’s Tryst With Destiny . HarperCollins Publishers India. Kindle Edition.

So we’ve learnt:

1. What Industrial Policy is…

2. What types of industrial policy there are…

3. What South Korea’s Industrial Policy looked like back in the day…

4. The importance of negative incentives in designing effective industrial policy (and that India sucked at getting the negative incentives right)

OK, cool. So CTRL-C and CTRL-V the South Korean awesome sauce idea into India and we’re sorted. Right?

Right?

To be continued tomorrow!

All About Taxation

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation((do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.)) And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran((note that I am excerpting the outline of the argument, please visit the blog to read it in full)):

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.

And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.