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Home Publications Blogs Beat the Press Larry Summers Is Half Right in Saying That Growth Would be Affected If We Reduced the Incomes of the Very Rich

Larry Summers Is Half Right in Saying That Growth Would be Affected If We Reduced the Incomes of the Very Rich

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Monday, 17 February 2014 08:36

Unfortunately he is wrong about the direction of change. Apparently Summers has missed the downturn in the last six years and the weak growth since the turn of the century. In his post column today he warns readers:

"If total income were independent of efforts at redistribution, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately, this is not the case. It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses. But it is much harder to see how such policies would raise the incomes of the remaining 99.9 percent of the population, and such policies would surely hurt them as consumers."

It's interesting Summers picked Bill Gates. Back in the early 1990s Microsoft helped to lock in its monopoly on operating systems by contracting with major manufacturers so that they paid Microsoft for each computer they shipped that had a competitors' operating system. Needless to say, such deals strongly discouraged Dell, Hewlett-Packard and other major manufacturers from experimenting with niche operating systems that might have potentially had larger uses. Had the Justice Department taken anti-trust law seriously we might have better software today and Bill Gates would be considerably less wealthy.

We could also impose a modest sales tax on financial transactions as even the I.M.F. has advocated. This would both hit many of the fortunes being collected on Wall Street and also reduce the enormous amount of waste in a financial system that consumes five times as large a share of GDP as it did forty years ago.

We could cut back on the fortunes in the pharmaceutical industry and tech sector and get better drugs and technology by moving away from patent supported research. (Yes, there is such a thing as the National Institutes of Health and everyone agrees it does great work.) We could also make it more difficult to bring frivolous patent suits so that Apple, Samsung and the rest will have to compete to make the best products, not in the court rooms.

And we could cut back on the Walton family's fortunes by pushing China and other developing countries to raise the value of their currencies. This would reduce their profit margins on low cost imports. It would also have the great advantage of moving us toward more balanced trade creating millions of jobs and increasing growth. In addition, by getting us closer to full employment, tens of millions of workers would be in a position to get wage gains. 

So Summers is absolutely right. Total income is not independent of distribution and many of the steps we might want to take to equalize distribution would also foster growth.

Comments (21)Add Comment
...
written by fresno dan, February 17, 2014 10:40
Right on!
The Microsoft monopoly is a great example of how "free market" purists are anything but. What Microsoft did was restraint of trade. What is galling is that who whine the most about letting the markets be free are the ones who most demand the heavy, heavy hand of government to extent and enforce trademark, patent, and copyright protections. What ever happened to letting people be free to produce? Bill Gates did not write windows, and like a lot of capitalists, his real talent is financial legerdemain, and being a master of economic rent seeking.
It is a tremendous propaganda victory that those who do the most to restrain the market manage to paint themselves as paradigms of free market virtue...
I Despise Summers' Arrogance!
written by Dave, February 17, 2014 11:37
I knew this was coming when Summers recently decried the rhetoric about the class war. He said that nobody is made better off by making anyone less wealthy. He is absolutely clueless on this. I've seen enough of his other ideas over the years to fully realize that he barely seems to have a grasp of macroeconomics.

He can fight for the rich over the poor with the worst of them.

There's a tendency of the neoliberals to recognize vast inequality as the proper outcome of capitalism, and in this area is where they have ruined the Democratic party and they should go away forever. Go away neoliberals. You aren't as smart as you think you are.
Financial transactions tax
written by dct, February 17, 2014 11:48
How about a financial transactions tax that got less based on how long the asset was held. Hold it for five years, no tax. Hold it for five seconds, significant tax. Might even encourage longer term thinking!
Summers knows a thing or two about IP infringment...
written by David M, February 17, 2014 12:42
...apparently, since he tweaked his language just enough in the FT version of his column. Here's what he said there and the comment I left:

“It is easy to think of policies that would have reduced the earning power of Bill Gates or Mark Zuckerberg by making it more difficult to start and profit from a business. But it is much harder to see how such policies would raise the incomes of the rest of the population. Such policies would surely hurt them as consumers by depriving them of the fruits of technological progress.”


In a rather jarring move, Summers shifts from talking about the majority population as wage earners to framing them as consumers, perhaps to distract us from his totally unfounded assertion about risking “the fruits of technological progress.” In fact, he may be correct that policies that hurt Gates and Zuckerberg won’t help out lower wage workers, but weakening government granted IP monopolies (as well as utlity monopolies and protections of speculative land values) would certainly benefit consumers on the whole by increasing their purchasing power.
Every dollar spent buying a legal copy of MS Office enriches Gates but does virtually nothing to improve consumers lives more than if that same copy was unpatented and free. But the fear of legal retribution keeps Gates rich while _limiting_ innovation. Talking about income inequality as a result of free markets is inane without taking into account the vast distortions caused by government protections of IP, utility profits, and rents.
...
written by Last Mover, February 17, 2014 12:52
"It is easy to conceive of policies that would have reduced the earning power of a Bill Gates or a Mark Zuckerberg by making it more difficult to start, grow and globalize businesses."


Oh please Louise. Does Larry Summers really think that if the Bill and Melinda Gates Foundation didn't have $20+B in economic rent slush funds laying around to give away to the world, it would have made it more difficult to start, grow and globalize Microsoft?
lessee ...
written by Squeezed Turnip, February 17, 2014 1:05
Gates wins free license to Xerox patents, secures funding from his Dad (one of the top 10 wealthiest Americans at the time). And yet Summers frets about redirection of capital to where it's needed, in the labor market? Take the blinders off, Larry!
Reason for Zuck and Gates' success
written by Dave, February 17, 2014 1:14
Bill Gates achieved his massive wealth through monopoly. Period.

Zuck won the battle for social network because he got in through the Harvard, blow hard crowd, a crowd that think Bill Gates made his wealth through sheer innovation and superiority, which is an absolutely laughable idea.

Just because Summers knew Zuck before he was successful, just because he witnessed the rise and perhaps aided it, doesn't mean he knows anything at all about the tech industry. It doesn't take an understand of tech to get rich from it, all it takes is having the right friends.
Hillary needs distance from Summers and Bill
written by Dave, February 17, 2014 1:24
If Hillary has any chance of winning in 2018, she has to distance herself from Bill and Summers' economic policies through a narrative of learning. The public has learned of and is quite aware of the very real damage that Summers and his cohorts, with Bill as the faithful follower, did to the economy and all workers.

If Summers or the Citicrats are associated with her campaign, they will not have my support, and I suspect they could very well lose. If they haven't actually learned from mistakes, we're not going to vote for them. Even if it risks plunging deeper into the abyss temporarily by enabling even worse candidates to win, it will be worth it in the long run.

If we're going to break the hold the rich have, each voter should start by questioning support for the 2 major parties that support that hold.
Oops, 2016 rather, not 2018
written by Dave, February 17, 2014 1:31
2016, that is.

Generally, though, if a person disagrees with me they'll point out that I'm a fool because I said 2018 rather than 2016. That is the level of the public debate.

...
written by watermelonpunch, February 17, 2014 1:47
Maybe I would listen to Summers for 5 seconds if any of his examples of innovators included people with parents who worked in factories or housekeeping.

What struck me most about that is his rattling off the past presidential rhetorics...
Nowhere does he defend it as, um, right, for a president to be in favour of a bulk of the average citizenry that president is supposed to represent.

???

This is what he said:

More such examples abound. It is neither unusual nor un-American to be concerned about income inequality, the concentration of wealth or the influence of financial interests.


What I heard is this:

It's not unusual for presidents to politically pay lip service to the general citizenry of the population they're supposed to be representing. Don't worry if the president speaks in support of them - he's still got the backs of the rich people all the way, and here's why & how we'll explain that away...
Summers was born when?
written by Kye, February 17, 2014 2:07
Summers states in his op piece:“If income could be redistributed without damping economic growth, there would be a compelling case for reducing incomes at the top and transferring the proceeds to those in the middle and at the bottom. Unfortunately this is not the case........Such policies would surely hurt them (the population) as consumers by depriving them of the fruits of technological progress.”

Will someone explain to me how this country survived during the 1930?s, 1940?s, 1950?s, 1960?s, 1970?s and early 1980?s when we had a top tax rate of 70-90%.
Apparently according to Summers we had little technological progress and economic growth during this period. Summers should be shocked to know that America was acknowledged to be the leading technological power in the world during most of this period.

Apparently Summers was not around when Reagan cut the top tax rate by more than half in the 1980?s. Since that time the growth rate has not increased at all. A Congressional Research Service study found no correlation between top tax rates and economic growth. The only correlation they found was that low top tax rates increased income inequality. http://graphics8.nytimes.com/n...conomy.pdf

So what is the “case” that Larry is talking about.
Nationalistic "Rawlsian" econ policy very scary....
written by pete, February 17, 2014 2:52
The idea that redistribution within the U.S. is some sort of efficiency is silly. As Keynes points out, the reason for a sufficiently high base income is to deter revolution. Hayek agrees...there is always the need for a safety net. We are far from revolution. When Wall Street was bailed out, we had two grass roots movements shouting in horror. The Democratic Party squashed the occupy movement successfuly, while the Tea Party has remained a thorn in the side of the Republican party. Otherwise, there is no cohesive movement toward redistribution. If it starts on the left, it will be squashed as it has since the 1960s by the Democratic machine. If it gets going on the right, a more likely scenario, it will be a scary populist/nationalist movement, something a la Pat Buchanan or Ross Perot on steroids.

Otherwise, for efficiency, think about the folks around the world making $5 a day or so. Then we can speak of real inequality, U.S. wages vs. Bangladesh wages. Fix that first.
Summers betrays own goal, of only policies raising middle class & poor income
written by jaaaaayceeeee, February 17, 2014 3:46

Summers seems to be arguing that raising income for the middle class and poor is desirable, but anything else that reduces inequality isn't. Summers gives only one example, of taxing capital gains a bit more and shifting tax subsidies from the richest, to raise the EITC.

Can Summers really be claiming that anything other than curbing tax benefits/loopholes of the richest wrongly thwarts free markets?

Is Summers really calling unamerican full employment policies, stronger safety nets, and better regulation of executive pay, globalization, financialization, anti-trust and anti-labor policies, with a blind eyes to fake free trade pacts, double irish/dutch sandwich and other tax evasion schemes?

Summers needs to demonstrate his goal of raising middle class and poors' income, with more than closing loopholes and increasing capital gains tax rates to raise the EITC.
...
written by skeptonomist, February 17, 2014 3:55
Modern economies are based on consumption by the masses, not the aristocracy. If anyone is going to invest in factories to build cars, iPads or whatever, there have to be lots of people with money to buy them. Currently rich people and corporations have lots of capital, but unemployment remains high and income for most people remains low, so there is not enough demand to justify investment and hiring. When production facilities are sitting idle and people are unemployed, the economy is not operating efficiently. The main problem in the US itself is a bad distribution of money. The US economy has operated at a higher level in the past when rewards were not so disproportionate - claims that high taxes (for example) kill incentive are absolutely false.

If Summers were really a smart and useful person he would be trying to think of ways of redistributing the money instead of justifying the high incomes of bankers and financiers. He may be smart, but since what he says is largely determined by the enormous amounts of money he gets from banks and Wall Street, he is not useful to the rest of us.
...
written by watermelonpunch, February 17, 2014 6:08
written by jaaaaayceeeee, February 17, 2014 3:46

Can Summers really be claiming that anything other than curbing tax benefits/loopholes of the richest wrongly thwarts free markets?

Yeah, that's exactly what I read.

written by skeptonomist, February 17, 2014 3:55

since what he says is largely determined by the enormous amounts of money he gets from banks and Wall Street, he is not useful to the rest of us.


Yeah, that's exactly what I read.

...
written by watermelonpunch, February 17, 2014 6:20

Upon thinking...

If I had titled this blog post, I would've said "Larry Summers is Half-Assed".

Larry Summers is the pits.
That's all that anybody really needs to know.
Upon thinking
written by John Parks, February 17, 2014 7:41
@watermelon punch

You are at your best when you're brief. Well done.
......
written by djb, February 17, 2014 11:05

Inequality can help increase innovation and productivity.....but keynes showed that in the here and now if we are below full employment redistribution of a percentage of the money supply from rich to poor and middle class will increase total income
So of course distribution of money supply is related to income
Great points on Gates
written by winstongator, February 18, 2014 6:52
Microsoft has never created a ground-breaking product. Before Word, there was WordStar and WordPerfect. Before Excel, Lotus123. Was it really Microsoft that made word processors and spreadsheets better, or did they ride improved computing and increased availability RAM to improve? They definitely bullied others out of the market. Plus, Gates did little actual coding when Microsoft was really improving. His wealth was not a necessary condition to their growth. Microsoft the company needed wealth to attract talent, but that talent were people actually writing code.

Cut Summers some slack. He was in the administration that botched the MSFT anti-trust prosecution. The browser wasn't the issue - it was the abuse of selling both the OS and the business suite. They should have been forced to spin off either the OS or Office business and make it a legally separate entity. Then, today, we would have a competing OS for PCs and an alternate to Office.
...
written by dax, February 18, 2014 10:51
+1 Dean.
...
written by Bill, February 20, 2014 1:34
There was a time that demonstrated the value of balanced income distribution. America 1946 - 1980. Very successful/

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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