Populism, MMT, and Billionaires

A Macro Musings Transcript

David Beckworth: Our guest today is Michael Strain. Michael is the director of economic policy studies at the American Enterprise Institute. Before joining the American Enterprise Institute, Michael worked in the Center for Economic Studies at the U.S. Census Bureau and in the Macroeconomics Research Group at the Federal Reserve Bank of New York. Michael joins us today to talk about recent developments in U.S. economic policy and some of his work on it. Michael, welcome to the show. 

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Michael Strain: Thank you for having me. 

David Beckworth: Glad to have you on. We follow your work. 

Michael Strain: That's kind of you. 

David Beckworth: You're doing great things over there at the AEI. I'd like to know, as I do with all my guests, how did you get into economics and ultimately into the world that you're in right now? 

Michael Strain: Well that's an excellent question. I don't really know how I got into the world I am in now. I do know how I got into economics. A friend of mine in college wanted to minor in business. He had to take principles of microeconomics in order to do that. I was a history and philosophy student, but I agreed to take the class with him because it sounded interesting. The first lecture on the first day of class the professor introduced marginal reasoning and it just blew my mind wide open. He asked who's in favor of eliminating pollution and every hand went up. He said, "How many people think that the socially optimal amount of pollution in the United States is no pollution?" Every little hand went up. He said, "Okay, now let's imagine a world where we've gotten rid of all pollution except for one bubble gum wrapper tumbling through the breeze in the Rocky Mountains, how many teachers should leave their classrooms to track down that bubblegum wrapper? How many fireman should leave their fire stations, how many nurses should leave their hospitals to go get that one final remaining bubble gum wrapper?" Everybody's kind of silent. "Who thinks that we should just forget about that bubble gum wrapper?" All the hands go up. He said, "Well then none of you think that the optimal amount of pollution is zero."

David Beckworth: Mind blown. 

Michael Strain: I'd never thought about it that way before. I kept taking classes and looking back on it I really wanted to learn about policy topics and I never did. I kept taking more classes waiting to learn about it. Finally, in my senior year, I took a public finance course and said okay well here's what I've been wanting. By then I was hooked. I suppose I ended up doing this for a living through this series of chance encounters, but mostly in an entirely conventional way, AEI was hiring, and I applied for the job, and went through an interview process and I had the turn down some tenure track opportunities in order to take that. My reasoning was kind of straight forward. I thought that the AEI door would not be open that often in the future, and universities aren't going anywhere. I thought I'll try this AEI thing out and see how it feels. Here I am years later. 

David Beckworth: You don't look back. So you're the director now of economic policy studies. Tell us a little bit of what you do there, who do you see, you have a staff working for you, what's the job like? 

Michael Strain: AEI follows a university model where our economists and scholars are self-directed. I'm not telling people what to do, and reviewing people's work, approving things for publication, and doing things like that. Somebody has to be in charge, somebody has to make decisions when decisions have to be made, somebody has to keep an eye on the budget, and make sure that research assistants get hired and that sort of stuff. There's a lot of that. 

Michael Strain: To the extent that I'm influencing, the things I'm directly influencing, the broader trajectory of what happens at AEI, it's more through something akin to a portfolio management problem. I kind of look around and say, "Boy, we have some really great economists and scholars studying healthcare, but we have one guy doing energy policy and I'd really like to have a second guy," so then go out and try and hire a second guy, or I'd really like to commission some work on artificial intelligence, so commission some work on artificial intelligence, that sort of thing. That's a lot of what the management looks like. 

David Beckworth: There are probably a number of people who are listening, including grad students, who may want to get into this world someday, a career in the policy world, what would you recommend to them? 

Michael Strain: Boy, that's an excellent question. I would recommend reading a lot. I would recommend studying history and philosophy at least a little bit so you have some sense of historical ... Public policy always takes place in a historical context, and markets take place in a social and cultural context as well, and those contexts vary over time. Having a good sense of history I think is very important, and having a sense of what you believe. If you want to do policy work in economics you need to have excellent analytical capabilities. You need to be able to do what economists do, or at least understand what economists are doing. I think you also have to have a normative vision for what you think policy should be, and that vision is going to be shaped by a larger vision of society and grounded in some political philosophy, and even some moral philosophy. Being rooted in those things, in that sense, I think can help you to do public policy work most effectively. 

David Beckworth: It's more than just having the technical skills? 

Michael Strain: Yes. 

David Beckworth: Okay. Well let's move on to the issues we're going to talk about today. I want to begin with your outlook for where we are in this country, this economy. It's easy to look around and hear different people give very pessimistic, talk about stagnation, inequality, problems here and there, have we made progress? What is our status? 

Michael Strain: I think we're in very good shape. If you look at some very basic markers, incomes are growing, inequality is stagnant, or maybe even shrinking a little bit depending on how you want to measure it, people who want jobs can get them. The rate at which people hold jobs is recovering, wage growth is accelerating, prices are stable. These are all good things. I think if you zoom out and take a longer view then you see some broader challenges that are slower burning and that evolve more slowly, and that are certainly there. Technological advances are having a disruptive effect on labor markets, that's been happening for decades, it's still happening right now, again, a slower burning longer term trend. Globalization can be disruptive as well, been happening for decades. 

Michael Strain: I'm concerned about some cultural issues, the increase in drug use, or at least in drug-related fatalities, what seems to be a degradation in community life and social institutions, like marriage and family. All these things they're in the background shaping the day to day. They've been there for quite some time and they're going to continue to play out. But even with those things happening, I think we're still in very good shape. 

David Beckworth: We've made a lot of progress. At least our world seemed a lot better than they were even a decade ago. The technology we have that- 

Michael Strain: Sure. 

David Beckworth: Improvements in the quality of life. Some people do point to things such as declining fertility rates in the U.S., mix that with, for example, the push back against immigration. Even I wonder what's the future labor force in the U.S. going to be like. Maybe this is the slower burner that you're talking about. 

Michael Strain: It's one of them, absolutely. Yeah, yeah, yeah. 

David Beckworth: Any thoughts on that? What should we be most worried about moving forward? 

Michael Strain: Well I think declining fertility is important. We're seeing the effect of that demographic change on all sorts of things, things a lot of people wouldn't expect it to affect like interest rates, and things of that nature. That has an impact on people's day to day lives, it has an impact on public policy. This big conversation we're having right now about whether we should care about deficits or not is actually informed, to a large degree, by demographic changes like you're talking about. The effects of these trends appear in sometimes unexpected places. 

Michael Strain: I am concerned about the longer term growth outlook for two reasons, because I'm concerned about the productivity statistics and I'm concerned about labor force participation. There are two ways you can get your economy to grow, you can get more people to work and you can have workers be more productive. We are in a period of slow productivity growth, it's not immediately obvious why that is. There are a lot of smart people who think that's probably not going to improve any time soon. I'm not that pessimistic about it, but I also wouldn't bet my house that we're going to get up to 3 percent in the next three or four years. 

Michael Strain: It is hard to grow your workforce when you have baby boomers retiring and people of child bearing age not having as many children. One way to do that is through immigration, and we should be increasing at least high-skilled immigrants. We should be giving out more green cards. We should be taking people who have completed graduate degrees in STEM fields in U.S. universities and giving them green cards rather than sending them home. Some of these things are just common sense. But the current anti-immigrant atmosphere from the Republican Party is really troubling. 

Michael Strain: I think we're doing well. I don't think a lot of people would say I'd be happy to go back to 1975 and live then, and that tells you something. You should take that seriously, the idea that living standards for the overwhelming majority of the population haven't improved in three decades is almost comically ridiculous. But that doesn't mean that we won't face serious challenges in the years ahead. 

David Beckworth: I think it's good to go back and remember every decade had its problems. 

Michael Strain: Absolutely. 

David Beckworth: We're not special this time around. It's easy to get caught up in the here and now and things oh woe is us. But in 70s, stagnation, people were wondering energy future, what we were going to be. Every decade has its issues. We'll probably look back at this one- 

Michael Strain: Being the 27th car in line at the gas station. We don’t do that anymore. 

David Beckworth: Yep, yeah. It sounds like you're a long-term optimist in terms of technology though, that we will at some point ... smart cars, smart grids, all these things at some point we'll take off and lead to more rapid productivity growth? 

Michael Strain: I am a long-term optimist on technology because that really seems to me to be at least what the evidence suggests. That's not to say that technological advances aren't extremely disruptive. It's not to say that some people aren't left behind. It's not say that winners and losers aren't both created. But we have a culture, and we have a set of institutions and we have an economy that really does reward innovation and that rewards creativity. It is also the case that out of every 1,000 human beings walking around out there, there are a few real geniuses who can really do pretty amazing stuff when they're in the right environment and it's the kind of environment that we have. 

Michael Strain: I am optimistic that technology will improve, and that will increase productivity and that will end up accruing to the betterment of society as a whole. I think we need to be careful not to do stupid things  to gum up the works of that process, and I think we need to be proactive and do things that can actually encourage that process from continuing. But one of the reasons I'm optimistic is that you would need to really retreat pretty far from where we are now to stop that kind of innovative creativity. 

David Beckworth: We've got momentum going and it's hard to push back, despite a few presidents here or there, Congresses- 

Michael Strain: Sure. 

David Beckworth: ... that make some really bad mistakes. 

Michael Strain: That's right. 

David Beckworth: With all that said, and I agree with you, I'm optimistic long-term, but there are some short-term adjustment pains. Globalization, as you mentioned earlier, displaces some workers, David Autor's famous work on the "China Shock". Then particularly, you look around the rise in populism, I think Donald Trump and around the world you look at officials like that who want to push back against trade, immigrants. Then on the left, we're seeing a lot of developments just now even, a lot of very, very progressive policies on the left, the Green New Deal, for example. Do you see that emerging for some unease, some angst at some level? 

Michael Strain: I do. I think that Donald Trump was the product of many things, but I think one of them was the intensity of the Great Recession and the slowness of the recovery, and the anxiety that created among a large number of people and the animosity that it created among a large group of people, both to immigrants and to racial minorities, but also to the "elites". I think people were worried about their future and were worried about how they were going to get by, and were frightened by how severe the downtown was. That produced some negative reactions. That's not unique to the United States. We have seen that all over the world and we've seen that over many, many decades that when you have a really bad financial crisis followed by a really bad recession you end up with a surge in populist sentiment. We're seeing that, I think, now as you say, among the Democrats as well manifesting in a different way. There's kind of an underlying impulse that's quite similar, this desire to punish the wealthy. 

Michael Strain: There was a New York times op-ed recently, it's like we should abolish billionaires, that sort of thing. It's hard not to see that development being fueled, at least in part by this surge in populism. 

David Beckworth: Yes, and you had a study you just finished recently on this topic, the title being “Economic Shocks and Clinging”. 

Michael Strain: Yes. 

David Beckworth: Tell us what you found in that study. 

Michael Strain: Well it's interesting, we found that in local areas that were heavily hit by competition with Chinese imports that a hardening of social attitudes took place, social attitudes on the whole were affected relatively less. But if you were in an area that historically had a higher amount of racial animosity, racial animosity hardened. If you were in an area that historically had animosity to immigrants, that animosity hardened. That's kind of what you would expect I think. You look at these areas and these are areas where there was particularly strong economic dislocation and that manifested itself in kind of an entrenchment of these sort of existing attitudes. 

David Beckworth: It's kind of like us against them and you become more cognizant of that when your own situation becomes more severe. The Great Recession was that shock, the basis of that. There's a study, I know you even mentioned this in your columns, "Going to Extremes, Politics After Financial Crisis: 1870-2014" where they go through a lot of countries and they show this pattern, not just an ordinary recession, but a recession tied to a severe financial crisis leads to this rise in populism. 

David Beckworth: Here's a question I have for you, let's do a counter-factual, no Great Recession here or in Europe, do we have a very different world today? 

Michael Strain: Oh I think we have a very different world today if we didn't have the Great Recession for sure. It's hard to know what that world would have looked like, would we have had a different recession, would the recession have been less severe? If there wasn't a Great Recession what would have happened in housing markets? 

David Beckworth: Well let's assume a mild housing correction, but nothing sharp, systemic collapse of economic activity. 

Michael Strain: Yes, I think we would have had a more normal experience. I think we would have had a more normal experience. I think- 

David Beckworth: And less populism is a result. 

Michael Strain: I think there would have been less populism. I think politics would have been more normal. I think that the kinds of policy proposals that politicians are putting forward would be more normal. It would have felt more like the 90s and the 2000s. Now, of course, things happen and what if there was no 9/11 and what would the world look like then? It's very hard to know what the counter-factual would be. There are all sorts of explanations for the rise of Donald Trump and one of them was an extremely crowded field with a lot of mainstream candidates who divided the vote amongst themselves. It's not like President Trump won half the vote in the primaries. He won more like one-third. What if there hadn't been eight people in the- 

David Beckworth: Sure, a lot of things to control for. 

Michael Strain: Yeah. If there wasn't a Donald Trump then would the Democratic Party be reacting how it is right now, it's hard to say. But I think if you look at what's happening in the United Kingdom with Brexit and if you look at what's happening in France with the yellow vests. If you look at what's happening in Germany and Italy with their right wing political parties, if you look at Hungary and Poland, this is an international phenomenon and that's what I think the paper you referenced would predict and that's I think in keeping with the historical record. 

David Beckworth: Yeah. 

Michael Strain: It suggests that Donald Trump was at least in large part a symptom. 

David Beckworth: Yes, of a broader global phenomenon tied to this crisis. We'll make sure to put that paper up on the webpage for the podcast. With that said, that provides a nice segue into a very hot topic here in D.C. and that's the Green New Deal. Tell us about that and your thoughts on it. 

Michael Strain: Well, I think it's another manifestation of the extremism in the policy debate that really didn't used to be there. President Obama wanted to raise the federal minimum wage from $7.25 an hour to $9.00 an hour, and then he went up to $10.10, now we're talking about $15. President Obama wanted to expand the ranks of people who had health insurance and he wanted to do so by creating insurance marketplaces where people could decide what health insurance plans to buy. He wanted those options to be regulated of course, but he wanted people to make choices. Now many Democrats want to abolish private insurance companies and have a single payer system. Republicans have always been a little concerned about low-skilled immigration, or at least some republicans have always been a little concerned about low-skilled immigration and the effect that has on culture and communities, but now we want to build a wall. You can go on and on. 

Michael Strain: The Green New Deal, I think, is just another manifestation of that. Reasonable people can disagree about the merits of a carbon tax or those kinds of measures to address climate change and to address fossil fuel use, but that's very different from saying that we should not have cars and not have airplanes, and whatever else is in there. I think it's actually a nice illustration of where I think we are. It's hard to evaluate it analytically or even just passionately. To me, it's just more aspirational and directional than an actual policy proposal. I don't like to what it's aspiring. 

David Beckworth: In addition to the direction it's going is the question of how it would be financed. You've addressed that and one of the big ways to solve that question is through this new approach, it's not new, but it's more popular now, it’s the modern monetary theory. You have an article titled "Modern Monetary Theory is a Joke That's Not Funny" so tell us why it's not funny. 

Michael Strain: Like every headline, I didn't write it. 

David Beckworth: I was like, "That probably attracted a lot of MMT responses." 

Michael Strain: Yeah, well they're a sensitive group I've discovered. The debate on MMT has been interesting. I don't often make common cause with Paul Krugman, and I particularly don't make common cause with Paul Krugman's characterization of the people he's debating. But in this case, when Krugman says that it's really hard to pin these people down and figure out what they actually think, when you try and advance, and your understanding of what they're trying to say they invariably come back and say that you don't understand. I think that's all right. It is hard to even disagree with MMT because it's hard to know what you're disagreeing with. I think that as a ... If you go back to the functional finance literature, which MMT is incorporated, there are some observations that are correct. It probably is the case that if a country borrows in its own currency it can meet its obligations, at least nominally. I say probably correct because at some point, it's not hard to imagine at some point that somebody would rather have a sack of potatoes from the government than a U.S. dollar. But apart from that scenario- 

David Beckworth: Hyperinflation. 

Michael Strain: Yeah, yeah, exactly. Apart from that scenario I think that's right. I also think that there are some insights that are worth taking, the idea that the most important constraint on an economy is its productive capacity. I think economists know that and that's not new to any economist who thinks about these issues, but it's helpful to pull that front and center. 

Michael Strain: Having said that, as a program for macroeconomic policy, it just seems completely untenable to me the basic idea is that policy should be concerned about inflation and that the monetary authority should be financing government spending, and we don't really need to worry about deficits to the extent that they don't cause inflation, and that therefore it falls to the fiscal authority, which in the United States is the U.S. Congress, to regulate aggregate demand in order to keep inflation in check. This means that if inflation is ramping up Congress should raise taxes and cool the economy down. If inflation is falling or stable then Congress should lower taxes and allow deficits to juice the economy. That just really doesn't seem like it would work. If anything, the incentives are exactly the opposite for politicians. You can imagine a scenario where inflation is rising and therefore, the purchasing power of wages and salaries is falling. Members of Congress might say, "Well geez, we need to cut taxes in order to give these people some more of their money," which is exactly the opposite of what MMT would suggest. More basically, fiscal policy is not nimble enough to respond to changes in aggregate demand and to keep inflation in check, end of story. Maybe the MMT people envision an independent fiscal authority in the same way that we have independent central banks. But now you're really ... Imagine Congress passing a law that gives the power to tax to an independent agency like the fed and the president... 

David Beckworth: Basically, the Treasury has its own counter cyclical committee that meets and- 

Michael Strain: Something. 

David Beckworth: ... decides what to do. 

Michael Strain: It's not a serious prescription for macroeconomic policy. In addition, when you think about it as a political program, or at least the role it's playing in our policy debate, then you start getting into territory that's really actually dangerous. 

Michael Strain: This idea that some Democrats want the government to give everybody a job paying at least $15 an hour plus insurance, anybody who wants that, the federal jobs guarantee. We should have free college for all. We should have free childcare for all, or we should give every household $2,000 per kid every year until the kid's 18, or we should do Medicare for all. These are all actual proposals that actual folks who are running for president or probably will end up running for president are putting out there, we need to do all these things they say. How do we pay for that? Oh well, MMT says that the deficit doesn't matter and that as long as inflation is in check then we don't even need to issue bonds, we can just run the printing press. That has the potential to be really dangerous and to the extent that thinking is reflected among people running for president, should one of them actually get elected president, there's going to be enormous pressure on that person to follow through on these things. Despite what the current fashions are, the debt does matter, and deficits do matter. They matter in terms of their economic effect, but they also matter politically and the laws of political gravity are going to reassert themselves. 

Michael Strain: The Congressional Budget Office predicts that during the next 10 years we're going to end up spending, the federal government is going to end up spending more money on interest payments on the debt than on the military. 

David Beckworth: Interesting. 

Michael Strain: That's serious. 

David Beckworth: Yeah. 

Michael Strain: That's a serious thing. Then politicians are going to notice that and that's going to play a role in our debate. I think MMT is not a helpful influence in the public debate. 

David Beckworth: Well it is interesting to think about how Congress could manage inflation or manage aggregate demand, as you suggested. I would love to hear what their response would be to that because there is this efficiency concern. It's hard to imagine Congress voting in a timely fashion all agreeing that we want to actually raise taxes by a certain percent, because every vote this huge debate, can the vote even get to the floor. 

Michael Strain: That's right. 

David Beckworth: It would be a big mess. But another part of the financing angle, so you have MMT, there's also calls for increasing in taxes, there's an increase in the marginal tax rate up to 70% for those making $10 million or above. I think probably more in general, just higher marginal tax rates in that direction. What are your thoughts there? 

Michael Strain: Well I think 70% is too high of a marginal rate, as a general matter. Then the lower the threshold to which 70% applies, the more concerned I get about it. 

David Beckworth: So it goes below $10 million, maybe $5 million, $4 million- 

Michael Strain: Yeah. 

David Beckworth: ... $1 million. 

Michael Strain: Half 1,000. 

David Beckworth: Right. 

Michael Strain: I think that for lower ranks of income, $400,000 or something like that, if the $400,000th dollar were the dollar where the 70% rate kicked in for a married couple or whatever, there I get concerned about the usual things, do people work less than they otherwise would, do people work less than what would be socially desirable. Is that confiscatory as a normative matter, is it okay that $7 of every $10 that you earn gets taken by the government, is that- 

David Beckworth: After $400,000. 

Michael Strain: Yeah, after $400,000. Yeah, yeah, yeah, but should there be any dollar of income you earn where the government takes 70 cents of that. I have those concerns, but I'm also concerned about things that are much harder to study empirically, but that I think they probably are real effects. Do you fewer people going to medical school if every dollar over $400,000 that they earn is taxed at 70%? Do you fewer people get PhDs in engineering and design better airplanes, and bridges and infrastructure? Do people go into different occupations, do people become paralegals instead of lawyers or nurses instead of doctors? There's nothing wrong with being a nurse or a paralegal if that's what you want to do. The concern is that tax policy shouldn't be the reason somebody does that. Somebody should do that because they want to be a nurse. They shouldn't be a nurse because tax policy- 

David Beckworth: Incentivized them to go [crosstalk 00:37:06]. 

Michael Strain: ... pushes them in that direction. 

David Beckworth: Right. 

Michael Strain: If you start going higher up and now you are taxing income over a $1 million or something at 70%, do you fewer people become entrepreneurs. Becoming an entrepreneur is very risky and people need a potential reward in order to take that risk. Are fewer people willing to do that if they say, "Well the government's just going to take this huge share of my income, so what's the point of risking this?" You go higher up and I start to become less ... I don't think if the threshold is $10 million, I don't think that's going to stop somebody from going to college, but what does that do to savings? You're taxed on income from working, and unearned income tax, you're taxed on income from working, but you're also taxed on income from saving and investing. What does that do to savings in investment? Of course, savings and investment are what drives productivity, and productivity is what drives wages and living standards. I have a lot of concerns about marginal rates that are that high. 

Michael Strain: I also have concerns that are more normative in nature as well. I don't think that we should be treating any group in society as an instrument for the betterment of the other groups, and the rich are included in that. I don't think we should think of the rich as an income generating mechanism through which we can amass tax revenue that we can redistribute to the rest of society. That doesn't sit well with me. 

David Beckworth: Well it's even worse than that. You mentioned that op-ed in the New York Times, it's not just revenue, it's maybe they're wrong, maybe they've been immoral in obtaining it so it becomes a question of are you raising marginal rates to collect revenue or to punish someone. 

Michael Strain: Exactly. I don't think tax policy should be punitive. I have the old fashioned view that we should collect taxes in order to finance the spending that society deems appropriate. That revenue should be collected in the most fair and least distortionary way possible. 

David Beckworth: Pretty simple. 

Michael Strain: There's no room in there for using tax policy to punish people because they are members of a particular group we don't like. Even if that group is the rich, we still shouldn't be using tax policy to punish people because they're a member of a group that we don't like. 

David Beckworth: Yep. I can imagine a surge in the tax avoidance industry. 

Michael Strain: Oh sure, yeah, yeah, yeah. 

David Beckworth: It would be a huge- 

Michael Strain: We're talked about- 

David Beckworth: Huge distortions over there. 

Michael Strain: We talked about normative considerations and economic considerations, of course there are also practical considerations, like the fact that nobody would pay that tax and everybody would just move to a different country. 

David Beckworth: The surgeon becomes a tax lawyer is what happens. 

Michael Strain: That's right. 

David Beckworth: Another way to pay for the Green New Deal, or some version of it, would be wealth taxes. Senator Elizabeth Warren has come out with a proposal for wealth taxes. She's drawn upon the work of Economist Emmanuel Saez and Gabriel Zucman for Berkeley. The numbers I found were 2% on net worth at $50 million and 3% on net worth at $1 billion. Thoughts? 

Michael Strain: I don't really like that either. Actually, for some similar reasons, you can think of a wealth tax as just a tax on capital income. Let's set aside the constitutional issues. There's a debate about whether or not the Constitution allows wealth taxes. The Constitution prohibits direct taxes. The way that we tax in this country is we tax on transactions. You pay a sales tax when you buy something, you pay an income tax when you receive income for exchanging your labor or when you receive income from a capital asset you pay capital gains tax when you sell a stock. There's a question as to whether or not ... Wealth taxes are different. Wealth taxes are the government just comes in and takes some of what you have. 

David Beckworth: We tax the flows not the stock of- 

Michael Strain: Yeah, yeah, yeah, that's right. Then there are questions as to the constitutionality of that, that I'm not an expert on, but my- 

David Beckworth: Interesting, I didn't know that. 

Michael Strain: Yeah. My sense is that the consensus view of constitutional scholars that wealth tax is unconstitutional, but I can't speak authoritatively on that. But regardless, if we had one, those numbers, 2% up to a billion, 3% for a billion or higher, those numbers sound small. I think you hear AOC with a 70% and you think, "Oh boy, 70% is a lot bigger than 2% or 3%." But those small numbers actually mask very large effects when you think about the effect on the kind of flow of income you would receive from wealth. If your stock of wealth earns a 5% annual return and you are hit with a 3% wealth tax, then if the math I'm doing in my head is correct that's actually equivalent to a 60% capital income tax. 60% is a lot closer to 70%. 60% is a very big number, so it sounds small but it's not. The important thing to remember is that it hits your stock of wealth every year. 

Michael Strain: It's not a one-time thing. Every year your assets would have to be valued. Somebody would have to come and say, "Okay, you've got X dollars in this bank account and you hold Y shares of this stock, and the stock price is this, so number of shares times the stock price. You own these pieces of art, and you live in this home and it's worth this, this year. You have this vacation home and it's worth this, this year. You have these cars," whatever. You'd have to figure out a dollar value for your wealth. Then you take 2% or 3% of that in taxes. You do that every year. 

David Beckworth: A growth industry for the IRS tax lawyers. 

Michael Strain: But there are two things about that that are worth noting, I think. One is that it's actually a pretty heavy tax and it's a tax on savings and investment. When rich people have assets, when rich people have savings they don't just sit under the mattress, they're put to work in the economy. They help finance startups. They help entrepreneurs start businesses. They help existing businesses to buy machines, and equipment and structures that can make workers more productive. If workers are more productive then their wages go up and their incomes go up. That's the lifeblood of an economy. That's how living standards rise over time. It's how worker's wages go up. When you're going after wealth in that way, you are reducing the amount of savings in the economy, which will result in less investment, which will result in workers who are less productive, which will result in lower wages, and that's not something we want. 

Michael Strain: The second thing worth noting is the compliance burden is just massive. It's a growth industry for the IRS, as you say. It's very difficult to imagine. Just imagine what would happen to the people. It's hard enough to do this one time per lifetime when a rich person dies and the estate has to be valued. But to do this every year is extremely difficult, even in the absence of avoidance or evasion. Imagine the avoidance—]. 

David Beckworth: Oh man, I was just thinking because the term is net worth, I would find ways to increase my liabilities at the end of the year to match my assets. I'd say, "Oh, zero net worth, there you go." It would be very difficult, I think, to enforce. 

Michael Strain: Yeah, no that's right. Again, I think it speaks to the need to step back and say what are we taxing for? Are we taxing because we don't like billionaires, are we taxing because we think that billionaires have too much political power in our society and too much influence in our society and therefore we need to have fewer billionaires? Are we taxing because we think that democracy is at risk if we have these powerful, wealthy people and we need fewer powerful wealthy people? These are not concerns that should be brushed off even if you disagree with them. I think our democracy is quite strong and I wish there were more billionaires. People make billions of dollars because they are able to provide services, and invent things, and run companies and do all sorts of incredibly productive things that we all benefit from, or write novels. J.K. Rowling is a billionaire, Oprah Winfrey is a billionaire, people who can entertain us, and inspire us and help us to grow. These are good things, these are good things. El Chapo is also a billionaire. Not everything is good, but on the whole, these are good things and you got to figure out how to deal with the bad things. 

Michael Strain: Even though I don't agree with the motivation, in some cases, you want to take the motivation seriously, but it just seems that this is really the wrong way to do that. I think what you want to do if you're concerned about those things is empower people. You don't want to tear down the rich, you want to empower people of lower income. You want to empower the working poor. You want to empower the working class. You want to help more people in those groups make it into the middle class. You want to help more people in the middle class earn higher incomes. You want to be an aspirational society. You want to be a society where there is upward mobility. You want to be a society where people believe that their talents and their efforts are helping them to get ahead, and where their efforts are rewarded and where they're getting what they deserve. That, I think, is where we should be pushing public policy and where we should be pushing our culture and the way that we think about politics, not tearing down any particular group. So wealth taxes are bad. 

David Beckworth: Okay. Let me run a little push back, and I think you probably agree with this push back to an extent. Let's take the Facebook founder Zuckerberg, I think he's provided immense amount of value. Like you, I'm glad he's a billionaire, what he's done. But there's also the potential that once you get there you can abuse that power. There's rent seeking that can occur. One example would be he came before Congress last year because of all the data breach problems and some of the scandals associated with Facebook, and he told Congress, "Hey, give me regulations. I need regulations. Yes, we blew it, give us regulations." When I hear that, kind of take a public choice perspective, a view, I'm like he's saying that because he wants to kick out competition. It's true, he's big, he's powerful, he can get all that ad revenue. There will be no more meaningful competitors, he'll buy up Instagram. Is there not a legitimate concern that once you do become so successful there’s a temptation to get into rent seeking? 

Michael Strain: And we should have policy to make sure that- 

David Beckworth: That's a distinct policy then, let's say a wealth tax. 

Michael Strain: Yeah, yeah, that's right. 

David Beckworth: That's your point, right? 

Michael Strain: That's right. It's good that we have the FTC and the Department of Justice to make sure that antitrust laws are enforced. We should have competitive product markets and we should have competitive labor markets for that matter. We should not encourage rent seeking. But that's why, you want to tax super normal returns. You want to tax monopoly profits. You want to tax economic rents. You want to tax blind luck. Those are the things you want to tax because, for many reasons, you need money, it's a good place to get it. But also, blind luck is not going to respond to the tax rate. It's not going to introduce distortion. There's no question but that monopoly power is a real thing, that economic rents are a real thing, that luck is a real thing. We don't live in this Hobbesian, Adam Smith, platonic ideal of the market. But wealth tax taxes normal returns. 

David Beckworth: That's the distinction, yeah. 

Michael Strain: That's not what we need. We need to step back, why do we tax? We tax to raise revenue, to pay for the spending that society deems necessary and we should tax in the most fair way possible. Very simple principle of taxation, if you tax something you get less of it. If you subsidize something, you get more of it. What do we want less of? We don't want less investment, we want more investment. We shouldn't tax savings. We want more work, not less work, so we shouldn't tax working or the returns to working. If you're really starting over from scratch, tax on consumption is actually a pretty good way to go, and you can do that in a progressive manner so that you're hitting higher income people with a larger tax. It would take quite a bit to get there. That's also an argument for taxing pollution as well. You want less pollution, and so you should tax it. That means that you don't have to tax labor market earnings or things of that nature at rates that are as high. That framework seems to me to be more constructive than which groups do we want to go after. There are all sorts of ways to raise the revenue that we need. 

David Beckworth: In the time we have left, one other development that's I think tied into this movement, this populace movement for attacking the rich, part of the Green New Deal flavor of the month and that is the share buyback proposals. There was an op-ed by Senator Chuck Schumer and Bernie Sanders where they wanted to restrict it. They believed that these buy backs are coming at the expense of corporate long-term growth, employee wages. There's just been a lot of talk about this, so how does this tie into your understanding of what we want to do in terms of wealth creation? 

Michael Strain: Well the controversy over buybacks has been a little bit confusing to me. I think it mostly stems from, at least in my reading, it mostly stems from the 2017 tax law and the coincidence that the aftermath of the tax law found some years with a lot of buyback activity. I think there was this incorrect perception that the way the tax law was supposed to work was that corporate tax rates go down, that creates more money in the pockets of corporations, and corporations were going to give some of that money to workers, and you would therefore see the tax cut increasing wages. Of course, that gets the economics completely wrong. What actually should happen, if you believe economic theory is, that by lowering the corporate tax rate you increased the after tax return to investment. This makes certain investments more profitable, either for get more investment and that can make workers more productive, if workers are more productive workers are more valuable to companies. If workers are more valuable to companies they'll compete harder for them and you'll see wages go up as a consequence. 

Michael Strain: The idea was never to create a pool of money, some of which would go to workers. But in part because of the Trump administration's messaging and in part because of just the general misunderstanding, there was this expectation that- 

David Beckworth: Wages would go up. 

Michael Strain: That wages would go up immediately. The process I outlined takes at least a couple years, that people thought you'd see those wages go up, and why would the wages go up? Well, corporations had more money now, they'll give some of it workers. That happened in some cases, but those were mostly PR stunts. The wage growth statistics that we see every month from the Bureau of Labor Statistics don't show this rapid wage growth following the tax cut. But, there have been a lot of buybacks, so that, I think, made buybacks a political target and a source of genuine concern to people if you bought in to the wrong understanding of how the tax cut was supposed to raise wages. 

Michael Strain: Then, of course, there's this broader post-financial crisis context of concern about big businesses and concern about Wall Street and not liking the elites. It plays into that too. Those things have all combined to create this moment where you've got Democrat senators and now a Republican senator who were expressing a lot of concern about buybacks and why are these companies buying back stocks and giving money to their shareholders instead of investing in equipment and plants, or whatever, that can help workers instead of investing in workers. 

Michael Strain: Buybacks are not bad. Buybacks are good. If you're a business and you don't see profitable investment opportunities then it is better that you return money to your shareholders, who are the owners of the company, then it would be for you to invest in an unprofitable plant or an unprofitable piece of equipment. You want those dollars to go to their highest and best use. If their highest and best use is in a different company, that's fine. 

Michael Strain: The jobs that will be created in that different company are just as good as the jobs that might be created in your company. The increase in wages for workers at that other company are just as valuable to society as a whole as the increased wages for the workers who are working at the company in question at your company. Again, if a company buys back its stock and returns that money to its shareholders, the shareholders aren't putting that money in the mattress. The shareholders are investing that money elsewhere, so exactly what should happen is happening. Those dollars are finding their best and most productive use. The economy as a whole, the individual workers who eventually receive that investment will benefit from it. 

David Beckworth: There's this image I think many people have, that the money from the share buybacks somehow go into this vault, into the mattress, it's like it's just sitting there as opposed to it's being reinvested somewhere, through a bank, through the financial market. I don't know why this image persists. I'm wondering maybe one reason is because we still have the hangover from the zero lower bound environment where that critique might have had more merit. If you have funds you put them into the market, rates can't adjust to make it more attractive, now we're in an environment where rates are positive, so you can imagine putting funds back out into the economy, it lowers rates in the margin, something else becomes more attractive. We're in a very different world than we were a few years ago, or maybe that critique could have applied more. 

Michael Strain: Yeah, that may be. 

David Beckworth: So just maybe some time to get over this. But it is perplexing why people have this image that the money just sits around somewhere, it's not being reinvested. 

Michael Strain: Not a lot of money just sits around somewhere. 

David Beckworth: Yeah. Okay, with that, our time is up. Our guest today has been Michael Strain. Michael, thank you so much for coming on the show. 

Michael Strain: Thank you for having me. 

David Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app. While you're there, please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening. 

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About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.