Common Pollution Tax: Is it fair?

In chapter 6, Stiglitz proposes that a better alternative framework for curbing global pollution: imposing a common carbon emission tax on all countries of the world. Although his reasoning for such a bold proposal is economically logical, I am a little skeptical about the fairness of it.

Stiglitz himself acknowledges, "[but] the level of emission could well differ from country to country, depending on their circumstances...[a] very hot country might, for example, use more energy for air-conditioning than a country with more moderate temperature" (181). We all know that most impoverished developing countries today are tropical/sub-tropical countries, hence in the exact situation that Stiglitz is exemplifying. Would it be really just to levy heavy tax on the countries whose GDP is so low that its citizens can barely meet daily needs simply because they happen to be living near the Earth's equator?

Also, since Lindesy mentioned G-20 on her blog, here is a picture of Putin and Obama holding koala bears at the summit.

Eric Rosengren: Fed, Inflation, and Unemployment

Since Lindsey has already done a fantastic job of recapitulating Eric Rosengren's talk today, I do not feel compelled to make another summary on my blog.

What particularly interested me was Rosengren's opinion regarding the Fed's recent end of QE. As Lindsey stated on her blog, Fed wants to take a patient approach as to first address the 'slacks in labor market' before attempting to raise the interest rates. I was initially surprised to hear this since the unemployment rate has been relatively much lower since 2008 (5.8% currently, which is quite close to full employment according to Rosengren himself). However, Rosengren argued that much of the drop in unemployment rate was due to the increase in number of people settling for part-time jobs (so 20 hours per week or less). Fed seeks to increase the meaningful matches between jobs and people and thus it is very resolved in continuing to target for the true full employment.

A short blog post regarding today's reading

On page 1391 of the "Colonial Origins of Development", Acemoglu asserts that the prevalent outbreak of Malaria should have insignificant direct effect on a nation's economic performance since many natives would naturally develop immunity. However, I think his argument may be overly simplistic and therefore want to provide a brief criticism on this blog post.

I have read Sach's paper on Malaria that Acemoglu criticizes in this article. Basically, Sach believes that Malaria hinders economic growth precisely because the disease discourages investment in human capital, particularly among children . Since new born infants are yet to develop immunity against Malaria (and Acemoglu also acknowledges this), the child mortality rate remains quite high in tropical/sub-tropical regions where the outbreak is frequent. What is interesting is that the birth rate in these areas is also very high. The reason for this phenomenon is that families living in Malaria infected regions want to ensure that they have a desirable number of 'surviving' children. While this decision at household level seems rational, large number of children per family increases the 'dependency burden', which in turn slows down the macroeconomy. With limited (financial) resources, each household is constraint to provide quality education for all the children, thus reducing the investment in human capital (and we all know what happens to a country with little capital).

Although this is a minor criticism on Acemoglu's research, I just wanted to point out that he cannot discredit Sach solely on the basis of adult immunity.

Japan's Dilemma: Deflation and Sales Tax

Last Thursday, we read an Economist article "The pendulum swings to the pit", which discusses the often overlooked danger of deflation. The Japanese economy since 2008 is probably the best example that illustrates this point. Having experienced the bitterness of liquidity trap, the Japanese central bank and Prime Minister Abe have strived to avoid deflation at any cost; they are currently targeting the inflation rate of 2%.

Furthermore, Japan is now grappling with the newly proposed sales tax rate. Due to deflation, their national debt has grown enormously in real value (in fact, Japan now has the largest debt among the industrialized nations). One particular way that the government has choses to ease the burden is to raise the nationwide sales tax. Last April, they increased the tax rate from 5% to 8%. The hike discouraged consumption, causing an unexpectedly deep 7.1 percent annualized contraction in the second quarter.

However, what is astounding is that the Japanese retail sale growth has accelerated despite the raise for three straight months now. Seeing this growth as an encouraging sign for recovery, the PM is now proposing another hike up to 10% early next year. His decision is causing concern among many who believe that the nation's economy is not strong enough yet to withstand another round of tax increase. Standard & Poor also worries that the country's credit rate might suffer if the tax hike results in crippling the economic recovery.

I find Japanese government in a similar situation to IMF during the Asian Meltdown. As evident to many Keynesians, tax increase will always depress consumption, leading to a recession. It is also too evident that the proposal is not only unpopular but also very risky. However, the Japanese government currently has no better alternative options. Already struggling with the government deficit, it cannot possibly push for an expansionary policy through increase in fiscal spending. Like US Fed, Japan's central bank has been pushing for monetary easing (buying government debt), yet its effectiveness has diminished as to now downgrade the country's credit.

At this point, it is very likely that Japan will end up with the 10% sales tax in 2015. It will be certainly interesting to observe how the economy copes with the change next ear.

Book Review: "Price of Inequality" by Joseph E. Stiglitz

In his recent book The Price of Inequality, Joseph Stiglitz condemns America for its “1 percent problem”. For the past thirty years, the nation has become increasingly divided; the upper class has seen the rapid growth in their income while the lower class has lagged behind. This gap in wealth has expanded so dramatically that by 2007, “the average after-tax income of the top 1 percent had reached $1.3 million, but that of the bottom 20 percent amounted to only $17,800” (Stiglitz, 5).  

Unequal distribution of wealth has always existed in our society. In the past, the relatively higher incomes of the wealthy were justified on the basis of marginal productivity theory. According to the theory, the wealthy owned “a scarce and valuable skill, the market will reward [them] amply, because of [their] contribution to output” (37).  However, there is no compelling evidence that the productivity of the top 1 percent have increased so significantly over time as to justify their outsized bonuses while the average wage for typical laborers has stagnated.

Evidently, the unequal distribution of wealth today requires a new explanation. Stiglitz accuses the failure of market as the main contributor of inequality. A shrewd economist, he acknowledges that the free market capitalism does not always work perfectly. There are negative externalities, imperfect information, and agency problems that cause the market to fail. Stiglitz argues that these distortions of market occur because private incentives and social returns are not in alignment (42). In other words, the private interest of a corporation does not necessarily reflect what is good for society as a whole.

Stiglitz argues that it is the responsibility of government to design policies—taxes and regulations—that make these discrete interests align. However, the top 1 percent has successfully manipulated the political system to favor the persistence of inequality by lobbying, threatening to outsource jobs, and electing the like-minded political representatives to power. As a result, there have been many policies that favor the wealthy such as regressive tax, bank deregulation, and lax corporate governance. Such laws have diminished opportunities for the poor and perpetuated the rent seeking behavior among the top 1 percent. 

One might wonder whether Stiglitz is advocating for minimum government intervention since the wealthy have actively utilized policies to their advantage. Quite contrary, Stiglitz asserts there should be a stronger government that can curb the influence of top 1 percent and create a more competitive economy. He strongly believes that greater equality can lead to a sustainable long-term economic growth as it was when “America grew together—with growth in income in every segment” for thirty years after WWII (5).  Furthermore, greater equality can induce trust among different social sectors and thus save our ‘democracy in peril’ (153). 

In Stiglitz’s view, inequality is problematic because it begets instability. The 2007—2008 Financial Crisis not only revealed the magnitude of inequality but also aggravated it. By transferring money from the bottom up to top, inequality reduced total demand in the economy and therefore increased unemployment (106). Amidst the economic instability, banks engaged in predatory lending, in which they made too many reckless loans. When the housing bubble bursted, the wealth of the bottom and the middle evaporated with the value of their homes. On the other hand, the top 1 percent only lost part of their wealth thanks to the massive government bail out and the Fed’s prompt action to lower interest rates.  In fact, their recovery from the crisis was so successful that “the wealthiest 1 percent...had 225 times the wealth of the typical American, almost double the ratio in 1962 or 1983” (10). In the end, the financial crisis that resulted from the pervasive inequality eventually further deepened it.

What seems particularly interesting to me about this interpretation of the recent financial crisis is Stiglitz’s overly sympathetic attitude toward the borrowers. While he acknowledges that people did spend far more money than they could afford, Stiglitz seems to only portray them as victims. He asserts that many banks took advantage of the “least educated and financially unsophisticated in our society...[by] selling them costly mortgages and hiding details of the fees” (240). Undoubtedly, the US financial system prior to the crisis played an important role in encouraging such excessive consumptions. However, I believe that borrowers also share some responsibility in triggering the recession by underestimating the risk of their investment and poorly budgeting.

In the last chapter, Stiglitz sets out a reform agenda in the last chapter ranging from curbing the excess power at the top to creating more opportunities and investment in the bottom. It is understandable that the deep-seated inequality in our society necessitates a holistic remedy that he recommends. However, I still believe that some changes might be more urgent than others. If I were to have one-on-one with Stiglitz, I would like to ask him what reform policies he thinks should be prioritized among others. It would be interesting to hear what he believes to be the most pressing issue.

In general, Stiglitz does a magnificent job in analyzing the inequality and market failure in the modern US economy. However, I cannot help but feel that Stiglitz could have better organized his book. For instance, there were quite numerous instances in which he accuses the top 1 percent of exploiting politics but does not thoroughly explain ‘how’ they did so each time. He does enlist various mechanisms they use in later chapters, yet these explanations are rather scattered throughout the book. I would have preferred if Stiglitz dedicated a chapter or two to focus mainly on describing how those ruling the economy also influenced politics. Although such a task would have been very difficult given the broad topic he chose to discuss, organizing the book in this way might have helped readers better understand and adopt his argument.