Back in 2009, I looked at the implications of the GFC for retirement income, working on the assumption that retirees could safely aim for a 2 per cent real rate of return. The bottom line was that current workers need

double contributions, to 20 per cent of income and shift the work-retirement balance, so that you work from 25 to 65 to finance an expected 20 years of retirement income.

Since then, the real rate of return on safe investments like government bonds has fallen to zero (maybe below). That means that you can treat your net worth at retirement as being equal to the amount you have to live on for the rest of your life. In particular, if you work from 25 to 65 and want finance 20 years of retirement income holding your consumption constant, you need to save one-third of your income.

When I wrote in 2009, the general view was that we were saving too little, so the increase in required savings seemed like a good thing for the economy in general. Now, the reverse is probably true.

I have a couple of articles responding to the most momentous budget in Australian history. For those who’ve forgotten, it was introduced on Tuesday.

Here’s one in The Conversation on environment and energy policy (heavily edited and done in a hurry, so there are a few points I would have written differently).

And here’s one in Independent Australia, headlined Budget like its 2019, on the government’s failure to learn from the catastrophes of the last year.

Another in my series of extracts from my book-in-progress, Economic Consequences of the Pandemic. So far I’ve looked at luck the limited relationship between returns and social value and the fact that risk-taking is mostly done (involuntarily) by the poor, not the rich. Now I’m going to consider possibilities for reform

The biggest lesson of the pandemic, and indeed of the decade since the Global Financial Crisis is that (just about) anything is possible. The decades in which the ‘Washington Consensus’ held sway narrowed the range of thinkable policy options to the marginal differences between hard (think Newt Gingrich and Margaret Thatcher) and soft (Bill Clinton and Tony Blair) versions of neoliberalism.

Economic policies that had prevailed during the decades of widely shared prosperity in the decades after 1945 were simply ruled out as the kind of thing governments don’t do any more. This was particularly true in relation to income distribution.

Let’s start with the minimum wage. When the Federal minimum wage of $0.25 cents an hour was introduced in 1938, national income [more precisely, Gross Domestic Product] per person was $674 per year. Over the next thirty years, the minimum wage grew roughly in line with GDP, reaching its maximum purchasing in 1968. Since then, the minimum wage has failed to keep pace with inflation, let alone income per person, which reached $65000 in 2019. If the minimum wage had risen at the same rate, it would now be just under $25/hour. In fact, the Federal minimum wage is $7.25/hour. Many states have higher rates, but the average is still only $11/hour.

Minimum wages set a floor, but for most workers, what matters is the bargain they can strike with their employers. In the mid-20th century, labour’s side of this bargaining process was mostly undertaken by unions – even non-union workers benefitted from this process. Unions have vanished from most of the US private sector today, a development paralleled to a greater or lesser extent in much of the developed world.

In the neoliberal framing of the issue, the decline in unionism is the inevitable consequence of a modern flexible economy. In reality, the primary cause of declining union density is the passage of anti-union laws, beginning with the Taft-Hartley Act in 1948 (outside the US, the process began later and is less complete, but the sequence of events is generally the same). As the International Monetary Fund (long a guardian of economic orthodoxy) has observed, the weakening of unions may be responsible for as much as half the decline in the labor share of national income.

Similar points may be made about income tax rates. Work by economists such as Diamond and Saez suggests that income tax revenue would be maximized with a top marginal rate of 70 per cent. And, on almost any plausible assumptions about the relative value of additional income to the rich and the poor, the socially optimal marginal rate would be only marginally above this.

It’s true that there were plenty of loopholes (though perhaps fewer than today). Still it seems clear that a good many high income earners faced an effective marginal tax rate equal to or greater than the 70 per cent rate recommended by economists like Diamond and Saez. They may have reduced their work effort as a result, but any impact on the economy as a whole was undetectable.

High minimum wages, strong unions and progressive taxes worked well in the past. But in considering the possibilities for a post-pandemic world, we need not think in terms of turning back the clock, even if doing so would be an improvement on the disasters wrought by decades of neoliberalism. Rather, we can imagine new paths that combine the best of the past with innovations made possible by the advance of technology.

Some of these new possibilities, such as Universal Basic Income and guaranteed free access to college, have already been raised, notably in the context of the Democratic Party primary campaign. Others, such as the need to redress growing inequality between potentially home based information workers and in person service providers, are emerging from the pandemic. Much remains to be worked out but one thing is certain: a return to the pre-pandemic economy, neither possible nor desirable.

(links to come when I get some more time).

I happened to mention on Twitter that I now use the word “reform” without scare quotes, even when I think the reform in question is a bad one. In fact, that’s my default assumption when I see the word, at least in the context of economic policy. That led me to think about how much fof the 1980s and 1990s microeconomic reform program still stands up. Here’s the result from Threadreader (via @ScooterBodgie)

Having privatised telecomms and (most electricity), government is now building/commissioning broadband network and electricity generation and storage. Competition and choice in human services comprehensively disastrous with for-profit providers (aged care, VET)

PPP model broken ever since GFC (based on UK PFI, which Conservative government tweaked, then dumped altogether)

Outsourcing has been disastrous in many cases, most recently quarantine and contract tracing (again, UK further down this road, moving to insourcing). Outsourcing policy advice a particular problem

Financial deregulation produced GFC, hugely costly financial sector, promised benefits never delivered

Labour market reform has made workers worse off (OK, this probably counts as a success for those who introduced it).

So, far I’ve argued that the inequality of incomes in our society is largely a matter of luck rather than inherent personal ability, and that it is only distantly related to the social value of the contributions people make through their work. These conclusions undercut the idea that taxing those on high incomes will harm society by reducing incentives to work for the most able and social valuable workers. Although the evidence was already strong, the pandemic has brought these points into even brighter relief.

Now I want to consider the claim that we need inequality in order to encourage people to take risks. The simplest response is to point to the empirical fact that high income earners take (or, more accurately, are subject to) less risk than average not more[1].

Hardy and Ziliak (confirmed in general terms by many other sources) give the numbers https://onlinelibrary.wiley.com/doi/full/10.1111/ecin.12044?casa_token=2_dvANjFw2EAAAAA%3AiKxuB6Tn34GJBIOZlN9Hs55w9MxJlkgR0Ns1z-1UAPIosDi2G8Yq3WF9hjUTVy8HQb95t9DwLzCRel8vyg

in any given year since 1996 the level of volatility among the bottom 10% was 81% higher than the volatility among the top 1%, and this level nearly doubled since 1981

Here’s a graph illustrating this point.

https://onlinelibrary.wiley.com/doi/full/10.1111/ecin.12044?casa_token=2_dvANjFw2EAAAAA%3AiKxuB6Tn34GJBIOZlN9Hs55w9MxJlkgR0Ns1z-1UAPIosDi2G8Yq3WF9hjUTVy8HQb95t9DwLzCRel8vyg

This graph shows that those at the bottom of the income distribution experience higher variance than anyone else. But using the variance as a measure understates the problem, since what matters most in an assessment of risk is the discretionary income remaining after unavoidable commitments have been met.

The statistics confirm what anecdotal evidence tells us every day: once someone has made it to the top of the income distribution, they will never become poor as a result of bad luck or business mistakes. Failed business owners wash their debts away with bankruptcy and return to the scene only marginally diminished. Failed CEOs are given multi-million dollar parachutes to soften their fall. Even personal bankruptcy isn’t commonly a problem: careful use of homeowner exemptions, irrevocable trusts and well-timed (but not too obviously well-timed) gifts can allow a bankrupt 1 percenter to live far better than a solvent member of the (shrinking) middle class, let alone a poor person.

If anything, our institutions encourage too much risk-taking at both ends of the income distribution. The rich can take risks secure in the knowledge that (with the current tax system) they will keep most of the benefits of bets that payoff while shifting most of the losses from unsuccessful bets to others. The poor take more voluntary risks because any chance of escaping the bottom of the distribution in a highly unequal society is worth a shot. And freely chosen risks seem less worrying when you are subject to so much risk that is out of your control anyway.

As usual, the pandemic illustrates this point in spades. Throughout his career, Donald Trump has relied on his ability to cash in his (relatively rare) winning bets while shifting the losses onto others. Now having gambled with his own safety and that of anyone who listens to him, he is guaranteed the best medical care money can buy, while thousands of less fortunate victims of the pandemic die every week.

fn1. The idea of the top 1 per cent as entrepreneurial risk-takers is part of a complex of spurious factoids, including ‘executive stress’ and the idea that this stress in turn causes ulcers.