Unbound (part 3)

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The next part of Heather Boushey’s Unbound discusses how extreme inequality subverts our economy. She emphasizes two aspects of this: first, the subversion of fiscal policymaking, the government’s taxing and spending policies that can support a thriving economy; and second, the subversion of the kind of market structure that can sustain competitiveness and innovation. Each of these two gets a chapter.

Public spending

Here Boushey begins with the effects of tax cuts on public resources and the government’s ability to spend on public goods. Advocates for tax cuts often claim that any lost revenue due to lower tax rates can be offset by growth in the tax base through higher personal saving and investment. In opposition to that view, Boushey cites the example of Kansas under Governor Sam Brownback. He dramatically cut taxes between 2015 and 2017 in his widely publicized “red state” experiment.

Within the first two years of the tax cuts, the state’s funding levels for schools, healthcare, and other public services fell by 8 percent and the state transferred almost $1 billion from its Highway Fund to its General Fund, postponing numerous transportation projects indefinitely.

In 2017, growing public opposition to these policies led the legislature to repeal the tax cuts over Brownback’s veto.

At the federal level, tax cuts have generally favored the wealthy by reducing the top-bracket rates, as well as reducing taxes on investment income. The evidence does not show a correlation between such cuts and rates of economic growth. What it does show is that such cuts increase federal budget deficits.

Not surprisingly, wealthy people more often support the tax cuts from which they benefit the most. This may also reinforce income inequality, since the rich may fight harder for additional compensation if they know it will be lightly taxed. Since top executives often serve on interlocking boards of directors, they are often in a position to support one another’s pay increases. Wealthy donors usually dominate campaign contributions. Boushey cites a New York Times report from the 2016 presidential campaign showing that “just 158 families and the companies they control [accounted for] nearly half of all donations at that point.” Both parties have to be responsive to the policy priorities of wealthy donors to some degree, but the Republican Party does so “overwhelmingly”.

In contrast to the old argument that less government means a stronger economy, Boushey emphasizes the legitimate role of government in public investment—investing in things that are good for the economy but that private firms don’t find profitable to pay for. Among these are the human capital investments discussed in the first part of the book, such as education and affordable health care. By depriving government of revenue, tax cuts for the rich may discourage human capital investments and undermine the productivity of our workers compared to those in other countries. Other economically important public goods are infrastructure improvements and new technologies whose profit-making potential is not yet clear to private firms. For example:

Leslie Berlin, in Troublemakers: Silicon Valley’s Coming of Age, points to Global Positioning System technologies and touchscreen capabilities as immensely valuable discoveries that required such large investments of resources, and offered so little certainty that the research would lead to anything commercially important, that no private sector business pursued them.

Public opinion on fiscal policy is shifting, with less support for tax cuts and more support for public initiatives like Obamacare. Only about one-third of the country supported Donald Trump’s 2017 tax cuts. The biggest complaint people now make about taxes is not that they are too high, but that rich people and corporations don’t pay their fair share. Opportunities to avoid taxes are much greater for rich people with complicated financial profiles than for ordinary working people whose incomes are reported on their W-2s. “Tax noncompliance costs the US government more than $400 billion annually—more than twice what we would need at the federal level to cover the costs of both a paid family and medical leave insurance program and a universal childcare program.”

Since Boushey wrote that, the IRS estimate of lost revenue has risen to $600 billion a year, and Biden’s Inflation Reduction Act has allocated $60 billion for increased enforcement. Such enforcement efforts bring in much more revenue than they spend. Nevertheless, many Congressional Republicans are insisting on cutting that enforcement spending as a condition for raising the debt ceiling. That would force the country to choose between two forms of financial irresponsibility: either cut tax enforcement and lose revenue to tax cheats , or refuse to pay the bills that Congressionally authorized spending has already incurred. (Either would increase the national debt, the first by losing revenue, and the second by damaging our credit and increasing interest payments.)

Market Structure

Here Boushey’s main concern is that concentration of economic power in a small number of corporations within industries makes the economy less competitive, less innovative, and less fair to workers and consumers.

Many traditional economic models have assumed a state of perfect competition, in which no one firm has power over prices or wages. Economists have acknowledged exceptions—“situations where one monopoly firm—or an oligopoly of a few firms—has enough market power to set prices, limit competition, or dictate conditions for suppliers.” But they haven’t been considered common enough to contradict the general theory. Boushey believes that market concentration has become too large to ignore. She discusses several industries now dominated by a small number of firms, including health care, pharmaceuticals and telecommunications.

Economists have put forth conflicting hypotheses about the relationship between economic concentration and innovation. Some have said that oligopolistic firms do not have to innovate as much, since they face less competition. Others expect them to innovate more, since they can afford to make longer-term investments that may only pay off at a later time. The evidence is mixed, but the findings from recent studies point more toward the first hypothesis. In the recent era of increasing concentration, new investment has lagged relative to the financial valuations of companies, the number of new startups has declined, and productivity growth has slowed.

Market concentration reinforces other forms of inequality. Dominant firms have more power to mark up prices above costs to increase their profits. They can then spend those profits on higher executive pay and greater rewards for shareholders. But since reduced competition also gives them more power over workers, they can “pay non-executive employees lower wages and provide worse working conditions without losing staff.” This period of increasing concentration is also noted for generally higher profits and a decline in labor’s share of national income.

Dominant corporations have the means to influence legislation through expensive lobbying campaigns. Often they obtain favorable tax breaks or block inconvenient regulations. “Since 2010, the number of mergers filed has increased by more than 50 percent, but appropriations to the agencies that enforce the antitrust laws have been flat in nominal terms.” However, in 2021 President Biden ordered government agencies to step up antitrust enforcement, so times may be changing there too.


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