“I have a plan for that.”
There’s little doubt that Elizabeth Warren, the woman with a plan, is a force. She’s witty, sharp, and, most often, direct. She commands our attention. And she now holds the considerable prospect of securing the Democratic nomination. I do not question the sincerity of Warren's supporters, yet I am convinced that nominating her will be a profound mistake. That is not because as between Elizabeth Warren and Donald Trump I personally would decline to cast a ballot for her or would throw away my ballot on a third party candidate. Of course, I would do neither. Instead, I would vote for Warren, and then, as a responsible citizen, I would commit to spending the next four years, should she win, using this blog and other venues to oppose several of the most prominent planks in her campaign platform. Whereas some readers today regard me as hard left, without changing my political views or policy positions, I suspect future readers would recast me as hard right. Neither side would be correct concerning my frankly moderate political views. That’s what happens when opposing extremes take turns running the country.
The problem with Elizabeth Warren certainly is not a lack of ideas or plans. Rather, the problem is her abundance of plans to implement deeply flawed ideas. Were I to label Elizabeth Warren a socialist—she calls herself a capitalist—some of her supporters would balk. To be sure, she is not seeking state ownership of the means of production. And yet, her implicit framing of the economy centers on socialist tenets. At the heart of that framing resides an implicit model demanding, simultaneously, two diametrically opposing premises. The first premise—broadcast widely on the campaign trail—regards wealthy individuals and successful firms as driven by excessive greed. The second, typically overlooked, premise insists that the same persons and firms are nowhere near greedy enough. Without both premises, her socialist engine falters.
In an earlier post, I explored this theme by addressing Alexandria Ocasio-Cortez’s claim that whereas workers are paid as low as $7 per hour, they typically earn employer firms closer to $60 per hour. I explained that AOC’s claim requires that firms are so greedy as to systematically suppress wages to the tune of $53 per hour. And at the same time, the claim requires that firms are so altruistic, benefitting competitor forms, that each individual firm declines the tremendous and obvious profit-maximizing opportunity to compete for workers who will earn the firm vastly greater returns for the remarkably suppressed market wages those workers are presently paid. If firms were less altruistic, seeing to profit by attracting workers from other firms, the result would be to gradually bid worker wages upward toward a more sustainable equilibrium. As worker wages begin closing the gap between what workers earn for firms versus what workers are paid, the non-altruistic firms earn more profit at the expense of those unwilling to similarly compete.
Elizabeth Warren’s socialistic world view similarly embraces opposing premises, albeit on a vaster scale. Warren proposes universal health care (eliminating private insurance), free college, universal childcare for children under five, and tax credits for parents working at home to care for their children or others. None of this, she insists, will impose greater financial burdens (or greater tax burdens, although this is unclear) on the hard-working middle class. Instead, this will all be funded with a combination of higher marginal tax rates on the truly wealthy, coupled with a two percent wealth tax on those with more than $50 million in assets, rising to three percent wealth tax for the even more rarified class of persons holding $1 billion or more in assets. Somewhat surprisingly, this combined pitch has caused Warren, generally known for her forceful and direct speech, to evade: on Medicare for All, she speaks to cost burdens, but has thus far been unwilling to answer, forthrightly, the simple question whether taxes on the middle class will rise, which, of course they will, by a lot. This is somewhat surprising, especially in light of Bernie Sanders's more candid acknowledgment that his largely equivalent Medicare for All plan will, of course, result in higher taxes, even if offset, as he claims, by reduced out-of-pocket medical expenses. By contrast, Warren repeats, over and over, that taxing the wealthiest will generate sufficient revenue to cover these costs with no added cost burdens on the hard-working middle class. This is a fantasy.
Warren’s platform is to tax the wealthiest and distribute broadly, including those who will be college educated, so not merely the poor. This is leftist populism, just as surely as Trump's is rightist populism, except instead of targeting the imagined deep state of Washington insiders, Warren targets the deep state of corporate greed. For Warren’s scheme to succeed, those subject to the tax must capitulate, as opposed to finding strategies that avoid being hit so hard. How hard is the hit? If we assume a 5% return on capital, a 3% wealth tax is equivalent to a 60% earnings tax. Simply put, the hit is huge, so much so that the rational response, given the high financial stakes, is to figure out how to get out from under the weight of it. Of course, Warren knows this, and so to ensure compliance, she also proposes a 40% exit tax for those who seek to relinquish citizenship, and to flee with their assets worth $50 million or more. This all assumes that the wealthiest and most powerful will stay out of the political game, enabling the proposals to be successfully vetted in Congress and sent to the oval office for her signature. For the scheme to succeed, the wealthiest must simultaneously be so greedy as to amass huge fortunes, and so altruistic as to allow Warren and Congress to conspire to gradually (2 or 3 percent at a time) take it all away.
The left claims to be, and often aspires to be, fact-based; after all, one of the soundest criticism of the modern hard right is how it has turned sadly anti-factual at nearly every turn, from imagining climate change is a hoax to having Trump tell his followers to disregard what they see with their own eyes. And yet, the evidence on these matters is diametrically opposed to Warren’s implicit assumption that the wealthiest will sit idly by, allowing themselves to fund her ambitious progressive agenda. Of twelve nations that have tried her wealth-tax approach, the centerpiece of her broadest proposals, only four still have it. And the scheme appears to generate meaningful revenue only in one--Switzerland. Those on the left are correct that data matter, but it also matters as applied to them. There’s no doubt that successful firms and wealthy individuals can be expected to behave as rational economic actors.
A famous insight from public economics posits that persons can be expected to spend up to the value of “rents,” defined as returns above the opportunity cost of assets, seeking to procure those rents or, having procured them, to avoid having the rents taken away. This means that whatever the anticipated losses associated with the wealth tax—or higher marginal tax rates—we can rationally expect those potentially subject to it to invest up to the anticipated losses lobbying in opposition. The process, called “rent seeking,” involves a purely wasteful dissipation of assets, including a depletion of the very assets that Warren wishes to collect, two or three percent at a time, to fund her ambitious agenda.
But let’s imagine for the sake of argument that Warren succeeds in having her proposals passed. And let's further imagine that due to such lobbying efforts among the wealthiest, or through various financial or tax schemes that effectively shield income or otherwise taxable wealth, Warren's revenue projections fall seriously short. We have seen that even a Republican President and Republican Congress struggled to overturn Obamacare. It is terribly difficult to repeal enacted programs. Public economics also reveals a stickiness to enacted legislative policies. Should this happen respecting Warren's agenda, we would then find ourselves locked into a series of ambitious programs that demand funding, yet meet with predictable shortfalls year after year. The obvious means of overcoming that shortfall include further deficit spending or higher taxes, including on the middle class. And, of course, deficit spending is really a form of postponed taxes or postponed inflation, itself a form of postponed tax.
On health care, the problem is exacerbated by the fact that cost estimates for expansive health coverage are notoriously prone to understatement. As the net of coverage widens, more people are subject to having diseases identified, with additional financial burdens associated with treatment. Longer lives lead to greater burdens overall on the health care system. Of course this is wonderful from the perspective of public health, and that cannot be overstated. It is also true that single payer systems hold notable efficiencies, at least in theory, arising from beneficial pooling among insureds. This is what makes them attractive, although it is offset by bureaucratic red tape and the corresponding diminution in competition for more cost-effective solutions to common problems. As a general matter, promises to save money by cutting waste have proved illusory. Single-payer plans have considerable merit, but failing to have a serious, and candid, conversation about actual costs, does not. Promises of Medicare for All, with imagined costs imposed only on the wealthiest, are almost deliberately, misleading. And it is not uncommon for politicians to take credit for grand policies enacted on their watch, while leaving the burdens of those plan on future political actors.
Based on social media feeds, I anticipate some might say that in this post, I am channeling Republican talking points. I am not. It is possible to intensely oppose Trump and Trumpism, to embrace a generally liberal or moderate-liberal perspective, and yet to oppose acquiescing in implausible and unrealistic suppositions about how the economy and the government actually function.
Trickle-down economics has earned a terrible reputation. This is partly due to its misleading name and a failure of understanding. Beneath the criticisms, however, lies an essential kernel of truth. The greater a person’s wealth, the higher the savings-to-consumption ratio. Poorer persons typically spend all of their income just to live, and as people earn more and more, they are able to save more and more. Those savings, however imperfectly, feed investments in the economy. Those at the top of the income and wealth ladder undoubtedly spend enormous sums consuming lifestyles few of us can ever imagine. They also hold enormous savings, including various forms of investment, which are, after all, a critical spur to economic growth.
The danger of the wealth tax is not merely rent seeking, but also the exit of capital, and the discouragement of incoming capital. As smaller amounts of investment capital remain in the US, all in an effort to avoid the rising tax burdens on the middle class, economic growth is apt to decline. A higher tax rate on lower earnings will not fulfill Warren’s remarkably ambitious platform. The real trickle down will not be a gradual cascade of wealth arising from returns on investment; rather, the promise of the tax burden on the wealthiest class will, ironically and inexorably, trickle down to higher and higher tax obligations on the very hard working middle class Warren seeks to protect.
Neither Democrats nor Republicans have a monopoly on bad or good ideas. Economic insights cannot be the domain of the right. And the fact that Republicans have allowed themselves to go terribly astray politically cannot imply that all ideas coming from the left are meritorious. Some are; others are not. The political stakes in 2020 are the highest in modern history. Many understandably thirst for a charismatic and inspiring candidate capable of generating wide-spread enthusiasm. I get it, even as that is not what particularly drives me personally. Even so, enthusiasm for profoundly mistaken ideas, or ideas that are not candidly discussed, is far worse than selecting a candidate who can (1) win, and (2) not risk wrecking the economy after doing so.
A final comment: Some early readers have responded that Warren is fighting for positions that she doesn't actually believe will happen politically. She is out there to gin up enthusiasm. Perhaps. But if we are going to pursue more moderate policies, let's have a candidate who is truly committed to those policies and who understands the real dangers, politically and financially, of governing by extremes. There are some within the Democratic field. Joe Biden, Amy Klobuchar, and Pete Buttigieg are among them, and there are others as well. I am not making an endorsement, but I am encouraging my readers to think deeply about the options we confront.
I welcome your comments.