Maximilian Held bio photo

Maximilian Held

researches, teaches and advocates (progressive) tax reform and (deliberative) democracy. Twitter Facebook Google+ LinkedIn Github Stackoverflow

It occurs to me, in the current economic crisis, and in public debt-ridden times to come, more than ever, discussions on public policy conclude in a shoulder-shrugging realization that we knew what to do about it. If only, we could afford to.

I’m getting tired of this resignation, be it in fighting climate change, in improving public education, or in helping out the weak, at home, and abroad.

I want a strong polity that can do these things. I want more, not less government. A better state.

How do we get there? We do what we used to be able to do: we reclaim our responsibility to channel the resources to the goods we collectively value the most.

We redistribute. It’s not a dirty word. It doesn’t hurt growth. It’s not socialism.

And no, it’s not impossible.

The Biggest Bill

We seem to be in a pretty bad fix, fiscally and economically. Germany has amassed a gross public debt of 63,1% of nominal GDP in 2008 (net is 44,5%) (BMF 2009). IMF/OECD calculations project gross debt to grow to 91% by 2014. To come clean, citizens of Germany, and most other rich countries, would have to work a roughly year-long extra shift, without any pay, or interest for the capital invested.

With the likely collossal fiscal costs of the financial crisis added to the tab, and worldwide economic recession, the outlook today is worse than in any of the decades it took to build up this “biggest bill in history”.

What Happened?

Let us pause for a minute and think this through. As a society, we possess ever increasing knowledge, command powerful technology and continue to exploit (and slander) a planet plentiful in resources. As a country, we hold great stocks of physical and human capital.

And yet, we feel a sense of impotence, an inability to make the best of these greatest opportunities that we have ever had.

What happened? Maybe it is helpful to again simplify matters. Helpful to remind ourselves, that fundamentally, in our economies we organize our work in much the same way as we divide up the chores in a household, only with a cast of billions. We ask someone to do something for us and deliver some service in return. Or, if we cannot do that right away, we promise to do so at a later point, with an additional compensation for the delay and the risk. The promises we make are, ultimately, consumption checks. Sometimes we also need to amass, or borrow, a great number of these pledged favors to get a bigger project off the ground, for example, when refurbishing an apartment with the help of many friends.

A Household With a Cast of Billions

When our households grow far beyond the immediate, and become tightly integrated as well as vastly expansive economies, we call those consumption checks property, or capital. The extra compensation for delay and risk come as interest payments or dividends. The larger projects, like factories or new technologies, require accumulated capital, orchestrated by a financial system.

Our problem with public finances (leaving all monetary policy aside, assuming its neutrality in the long run) and economic inequality is, we have given out a lot of these consumption checks, which we now have to honor. We have handed them to people (and the people who work for them, and the people who work for them) for work that needed to be done. Sometimes, some of us may have been able to circumvent the system, able to extract checks with extravagant values, for little productive contributions.

It is important to remember, that we all depend on the reliability of these consumption checks. The people who want to let a large bank fail, or inflate our way out of the debt crisis frequently forget: it is hard to tell whose consumption a bounced, or diminished check will ultimately curtail. It could be the new Ferrari of a yacht owner. Or it could be the the small savings account of an old lady.

Let’s Bounce Some of Those Consumption Checks

So, what can be done?

We could treat the yacht owner and the holder of a small savings account differently. Bounce or diminish the consumption checks held by those individuals who have relatively many of them and protect those who own but a precious few.

Redistribution, it is, an old idea fallen into disrepute. It ought not, for it simply allows us to reclaim a greater responsibility on how we use the scare resources collectively available to us all. To make sure that a greater number of people benefit from our achievements, and that we, as societies, make the most of the opportunities that hard work and innovation have brought.

It should be a little easier. Just a little easier. – Father of a college student speaks with fictious White House Communications Director Toby Ziegler on Aaron Sorkin’s TV show The West Wing

No, This Won’t Hurt Growth

Many politicians and economists are saying, we cannot increase taxes, for it would hurt economic growth. This ideological shortcut need not hold true. A higher tax burden will dampen economic growth only if labor or capital can avoid the tax by relocating to another country, or if the tax really reduces incentives to take risks with your capital, or work with your hands. Quite often, real-existing tax regimes do these things.

There are however, intelligent taxes, like a progressive consumption tax or progressive wealth tax, who minimize these negative effects, when implemented in many countries.

Still, there will be no proverbial free lunch: Some people will get to consume less. But these people, whose lunch gets redistributed likely already had their opulent meal anyway.

The lunch metaphor is also instructive in understanding that progressive taxation does not necessarily reduce incentives for risk-taking or work. One must ask, how much lunch do you really need to look forward to, to work eagerly every weekday morning? It seems reasonable, if sobering, to assume that people will always be motivated by that extra desert dish they could earn, that we rightfully expect some additional reward for a great effort. There is no reason, let alone justification, for these rewards to become arbitrarily high. Thorstein Veblen even suggested that as conspicuous consumers, we are driven merely to be relatively better off than our neighbor, or co-worker.

So there really is no reason to assume that redistribution done right would hurt economic growth one bit. No consumption checks would be let to waste, or lie idle, they would merely be redirected, be it to the consumption of needier individuals, or, preferably, public investment.

Redistribution done right will not hurt economic growth, and it must not. For notwithstanding the unsustainable manner in which we may currently measure and understand growth, in a world of scarcity, growth is still a necessary, if not a sufficient condition for welfare. What we do not earn, we cannot redistribute, what we cannot direct towards the provision of cherished public goods.

Redistribution done right will enhance and make sustainable economic growth, by providing those public goods currently in short supply and by extending opportunity.

No, This Ain’t Socialism

A frequent refrain to this agenda of redistribution will be: “it’s socialism”, exclaimed both in fear and disgust. For starters, it really isn’t.

As any tenth-grade social studies student ought to know, socialism is the state or direct ownership of the means of production. Even the most radical redistributive system has nothing to do with these centrally planned economies and societies, that have historically failed to provide for and be accountable to their citizens.

Redistribution, vigorous competition between producers, and an allocation of resources guided by supply and demand wherever feasible, are compatible.

There are public goods, of course, which the state may find the market to be inadequately incentivized to provide, requiring public investment out of the consumption checks taken from the rich. Fighting climate change, providing economic stimulus and equal opportunity education are some examples.

Redistribution does not make a state or an economy a socialist one, and it must not.

Where the state does take public investment decisions on behalf of its citizens, it must do so through competitive public procurement.

And the state must not tax people so much that all investment decisions are made by the state. We need individuals to do that, and they will be rewarded or punished for their choices. When production is organized by the state in the absence of a compelling reason to do so, it frequently fails. And even given a strong rationale, as my teacher Dr. Mildner does not tire of repeating, sometimes, states fail at providing optimal solutions just like markets do.

No, This is Possible

The cynical (or “realistic”) assessment of such redistributive reform is, of course, dim. It’s not going to happen.

And indeed, without EU, or better OECD, or even better, global consensus, none of this is going to happen, unless we want to close our borders again, at great political and economic cost. And still, such soberness as a programmatic platform is a declaration of political bankcruptcy.

“Poverty has no utility. – Ferdinand Lasalle

States used to be able to decide about how to run their households, what to produce, whom to reward, and how much.

In fact, any political community, at whichever level it is meaningful, ought to be able to do this. To decide on and produce what they collectively value the most, and to allocate their resources accordingly.

And these resources, these consumption checks, are needed today, as ever. To alleviate undeserved hardship, to extend opportunity and to provide the public and common goods of our planet and societies to sustain and improve the quality of all our lives.

A democratic society and economy, like any household, ought to be able to look at how the chores and rewards are redistributed, in which state the commons are, and to act on that impression.

With today’s sophisticated administration, overall affluence and advanced technology, we are of course able to do this. And still, for all practical purposes, it appears to remain a naive utopia.

Let’s just keep in mind: There is nothing self-evident, let alone justifiable, about an economy that is potent, but unsustainable, about a policy that is laissez-faire, but of grotesquely unequal opportunity, about shops and services that are extravagant, put conspicuously consumptive.

Redistribution done right – and an efficient and adequately equipped state is possible. This is what we live up to, or choose not to.

This is the real economy of our political economy.