End Of The Year Thoughts On Inequality And Its Remedies

We could have constructed our trade deals differently. Instead of putting manufacturing workers in competition with their counterparts in the developing world, we could have designed our trade deals to put doctors, dentists and other highly paid professionals in direct competition with their counterparts in the developing world. This would have meant standardizing licensing requirements in ways that ensured safety standards, while making it as easy as possible for foreign professionals to train to meet these standards and then practice freely in the United States.

While doctors are not among the super-rich, their average pay is close to $280,000 a year, putting them in the top two percent of wage earners.  They also earn roughly $100,000 more annually than their counterparts in other wealthy countries. If we got doctors’ pay down to the levels in Germany or France, it would save us close to $100 billion a year. That comes to $700 per year per household.

When I have raised this issue with other progressives, many first dispute the idea that we could get foreign doctors that meet our standards. When I convince them of the absurdity of this position (there are plenty of very smart people in places like Mexico and India who would be happy to train to our standards for the opportunity to practice medicine here), they often respond with comments like people like their doctors or that they personally like their doctor.

I get that, but there is some serious logic missing. I like the person who cuts my hair; she doesn’t earn $280,000 a year. Essentially, these progressive types are expressing class solidarity with very highly paid professionals. They are welcome to do so, although it is an odd position for people who consider themselves progressive, but there is a more fundamental and simple point at stake.

The fact that autoworkers have to compete with low-paid workers in the developing world, and doctors don’t, is a political choice. This was not the result of an exorable process of globalization, it was the result of how policy types chose to structure globalization. No one should be surprised if manufacturing workers, and workers without college degrees more generally, who have been hurt by the loss of good-paying manufacturing jobs, are resentful of this decision. 

The Financial Sector: Economic Bloat and the Bloated

The financial sector is the source of many of the country’s great fortunes, it is also a source of enormous waste. Finance is an intermediate good, like trucking. It is very important to the economy; we need an industry that allocates capital and makes payments. But just as we want as few resources as possible involved in shipping our goods from Point A to Point B, we also want as few resources as possible tied up in the financial sector. 

In fact, the financial sector has exploded in size relative to the rest of the economy over the last five decades. We have seen a massive increase in financial transactions, as new financial assets are being constantly created and the existing ones are being traded more frequently. It is difficult to see much gain to the real economy from this explosion in the size and complexity of the financial sector, even if it has meant big fortunes for many people in the sector.

My favorite remedy is a financial transactions tax, which can be thought of as equivalent to the sales tax we impose on most of the goods we buy. A modest tax could easily raise $100 billion a year (0.5 percent of GDP), which would come almost entirely at the expense of the industry.

I find that many people have difficulty understanding how the tax would come at the expense of the industry and not investors. They insist that that banks and brokerage houses will just pass on the tax to investors. This is largely true but it misses the point.

There is considerable research showing that the volume of trading falls roughly in proportion to the increase in the cost of trading. This means that if the cost of trading rises by 40 percent, then the number of shares bought and sold will fall by roughly 40 percent. This means that, for a typical investor, the increase in the cost per trade due to the tax will be offset by the reduction in the number of trades they or their fund manager make.

This means that the total amount that they spend on trading will be little changed, but money they used to pay to the industry for carrying through trades will instead be paid to the government in taxes. Since trades are on net a wash (every trade has a winner and loser, this averages out for all but the most astute investors), investors will not be hurt by a reduction in trading volume.

This one often leaves people baffled, since if they aren’t gaining from trading now, they could reduce their volume of trading and save money. That view is correct, they could save money with fewer trades, but nonetheless many people choose to bet that they, or a fund manager will be able to beat the market.

Anyhow, the point here is that if we just applied similar tax treatment to the financial sector as we apply to most goods and services we buy, we would have a radically downsized sector and many fewer great fortunes being earned there.

The other simple quick fix would be to crack down on private equity funds, which are a source of great fortunes for fund partners. My colleague Eileen Appelbaum, along with Rose Batt, has documented many of the abuses the industry has developed to maximize their returns.

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