Monday, December 09, 2013

The Chief Threat to our Great Experiment: Can we reduce disparity without killing market enterprise?

The difficulty of maintaining a civilization of empowered citizenship -- the "diamond-shaped social structure" about which I often speak -- was well described by the famous historians  Will and Ariel Durant, in The Lessons of History.  
"…the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.”   
Consider the efficiency with which the Durants convey multiple ideas there! First, that an open, citizen-based system that I call "diamond-like" may have many of the advantages that Adam Smith wrote about -- e.g. vigorous competitive-creativity and the rapid delivery of positive-sum outputs. But such enlightenment systems as markets and democracy and science are inherently unstable. Unless carefully tuned and maintained, competitive systems inevitably get suborned by cheaters.  Those who may have gained power or position through legitimate competition, but who then connive and use that power to warp all further competition in their favor.
It's called human nature and it is what Adam Smith and the American Framers tried new methods to prevent under moderate regulation, so that mild-creative-competition might continue.
Durant and Smith knew the natural outcome of such cheating, which happened so often in human history that it is the default -- that flat diamonds of egalitarian-competitive citizenship collapse into traditional pyramids of inherited power -- e.g. feudalism -- as happened in  99% of human societies across 6000 years..
Durant went on to say, however, that the people themselves can choose to resist!  When they see this slump taking place, they can either choose calm deliberation or simplistic anger. Reform or revolution.
History shows far more cases of the latter.  And the vast majority of emotional, violent revolutions do not turn out well for Smithian Enlightenment.  Dogmatists rage and raise the ante of ideological fervor, stoking heat instead of light.  The French, Russian, Chinese and most African revolutions followed this pattern, killing the oppressor oligarchs, only to establish new ones, and one result was to spread misery for benighted generations.
Those who are pushing hard to smash our Smithian diamond into a feudal pyramid should take note, and consider that they are not as smart as they think they are, if they are blithely ignoring the possibility of tumbrels.
The alternative that Durant cites would be the relatively rare examples of calm reform that can occur when mature deliberation takes hold, as when Cleisthenes (508/7 BC) led in the creation of the Athenian democracy, or when Themistocles and Pericles kept that democracy laser-focused on the greater good.  Or when the American Framers performed acts of severe 'leveling,' seizing and redistributing a third of the land in the former colonies, so that the new republic would be born in a spirit of lively egalitarianism, instead of cloned-European lordship.  Or when the slave-o-crat plantations of the South were likewise redistributed, in ways that did not undermine the competitive spirit.  Or the far more modest diamond-building activities propelled by Franklin Roosevelt, that left the U.S. both rather-flat and spectacularly entrepreneurial, at the same time.
We face Durant's choice, as that flat social structure -- emphasizing a dominant-empowered middle class -- is now under harsh pressure and threat from all directions. When the pressure becomes unbearable, will Americans respond as their ancestors did?  By calmly performing the next necessary tweaks and fine-tunings… while keeping faith with the framers and with Adam Smith? Encouraging the cornucopia that spills from open, joyful competition?
When disparities get much worse, the other option, of vengeful radicalism, will rear its head, especially among those masses on today's right who Rupert Murdoch believes (naively) he has under tight rein and permanent control. He should know better… but human nature is what it is.
It's not too soon to be working hard on those moderate, rational reforms.
== Stormclouds ==
In a harbinger of things to come, an op-ed piece in the Wall Street Journal, by Roman Hatchuel, describes growing calls -- even among the world's financial elite -- for a re-adjustment of taxes to demand more from the very rich.
Very few intelligent people any more assert the never-right and always-wrong nostrums of Supply Side "economics" - asserting that mega tax largesse for the top 0.01% will translate into high velocity investments in new goods, services and productive capacity. All sane economists can see that the supply side experiment (sometimes misleadingly called "trickle down") has miserably failed. Spectacularly failed, contributing the western nations' fast-rising indebtedness -- now at an average of 110% of GDP.
Some, such as billionaire investor Bill Gross, have been calling for marginal, top-earner income tax rates to return to levels that existed when the economy did best, when entrepreneurship peaked and when the middle class was growing healthier yearly -- not quite the levels of Franklin Roosevelt, but in that range.  A partial measure would be to accept the end of special, fat-cat tax breaks which Democrats in Congress have asked-for in exchange for the GOP's demanded entitlement reforms.  (The demmies are willing to horse-trade, but the goppers are intransigently defending their sponsors, knowing that infamous resource-extraction tax-breaks would be first on the block.)
Some degree of consumption or VAT tax may be an important part of the mix, though this not only affects the already-hurting middle class and poor, but also has the unfortunate effect of reducing the velocity of money.
Much more helpful would be to go after the lowest velocity money of all.  Not so much high incomes as existing and passive pools of staggering wealth.
In October the International Monetary Fund or IMF - not exactly a center of socialism - floated a bold idea that didn't get the attention it deserved: lowering sovereign debt levels through a one-off tax on private wealth. As applied to the euro zone, the IMF claims that a 10% levy on households' positive net worth would bring public debt levels back to pre-financial crisis levels. Indeed, this notion was broached in the US by several billionaires including -- shockingly -- Donald Trump.
The reason to go along is simple. Your billions become worthless if the society that helped you win them collapses. Of course, this is one of the chief determinants as to whether a billionaire votes for and supports Democrats (Gates and Buffett, for example) or actually believes that all the goodies will still flow, once democracy has been stifled into a feudal social order.
== A transparency alternative ==
The wealth tax is interesting, though my own suggestion is a bit different. Instead of seizing assets (which the American Founders did) or raising rates dramatically (per Franklin Roosevelt), let's try something uniquely modern, with-it and in tune with transparency.  It must be done worldwide, but it would not be considered quite as radical as asset taxation.  Indeed, it is blatantly the fairest reform possible. 
Simply pass a universal world treaty declaring:
ownershipIf you own something, you must openly avow and say that you own it. 
That's it. Any property that has not been claimed by a human being, family, or clearly tracked group of humans within three years will revert to the state and be re-sold to pay down the public debt.
Think about it.  What does "ownership" mean, if you are unwilling to state, openly, "I own that"?  So many problems in the world can be attributed to murky title, from peasants abused by a nearby lord to an oil tanker that befouled beaches in Brittany with no owner ever held accountable, because of deeply nested shell companies.
Indeed, no act could ever benefit small stockholders and market capitalism more than for shell corporations to be banned if they are more than three layers deep, forcing hidden puppeteers to come into the open. In other words, no object or land on Earth should be considered owned unless -- just three or less layers down -- you find real, accountable human beings.
Naturally, this reform-treaty would have immediate effects:
1) A whole lot of property would simply be abandoned by owners with murky, illicit or coerced title, or by those who acquired it inappropriately. Like drug lords. The immediate effect would be that one-time pay down of debts.  Indeed, by some estimates the pay down would be so great that tax rates could go down rather than up.  In other words, legitimate property owners should love this plan!
2) The second beneficiary would be many of the world's poor, who would suddenly find themselves vested in land and goods that local lords did not want to publicly claim (for a wide variety of reasons.) Sure, there would be backhanded deals and many of those poor men and women would remain beholden under some degree of informal fealty-compulsion. Still, despite all the nods and winks and collusions, the fact remains; a whole lot of poor people will be better off than before. Especially if many nations respond by enacting reforms like those promoted by the great Hernando de Soto.
3) Okay okay. The third beneficiary group is obvious.  Lawyers.  Just openly declaring "I own that," will result in plenty of other humans declaring "Oh no you don't; that's mine!"  The treaty would have to carry an accompanying onus for all nations to set up fair methods for arbitration of a tsunami of disputes.
And yes, libertarians and conservatives would be right to fear that -- in some nations -- a spirit of radical leveling might take advantage of this sudden transparency of ownership.  To which I respond… so?  Those who try to handle it smoothly and fairly will experience a burst in active market enterprise, as happened in Peru, when de Soto's property vesting reforms took hold.
Those who cater to socialist mobs will experience a few years of recession… then human market forces will re-assert.  BFD.
4) We all would win, however, as capitalism starts to work much better!  As state taxation regimes that are based upon open and publicly accountable knowledge take over from murky cheating.  As Swiss-style banking secrecy is shattered and developing nations get back trillions stolen by kleptocrats.  As the theories of Smith and Hayek finally see fruition in an open system in which all of the players know most of what they need to know, in order to make good decisions.
Of course, any wealth tax would need a reform such as this to happen first, in order to work at all!  The irony being that, once this "I own that!" treaty was in play, the wealth tax would probably prove unnecessary at all.

See also: Solving World Debt Through Radical Economic Transparency.
== One more absolutely necessary tax ==
Oh… I'd also institute worldwide a very tiny, 0.1% financial instruments transaction fee.  It could save the human species from extinction and do more for our children than any other levy!


Alex Tolley said...

Swiss-style banking secrecy is shattered

Not a good example. Swiss banking secrecy isn't even close to what it was. In addition, the US requires that any bank doing business with the US identify and report US citizens. Thus a bank in a tax haven now has to make a choice about secrecy vs US business. That isn't to say accounts cannot still be obfuscated, but it is a lot harder than it was even 20 years ago.

The UK experience of trying to tax wealth completely failed. All it did was to hide it or have it protected by legal means outside of the control of HMG. As you note, taxes on wealth will need international agreement.

Note that drug lords don't want to claim ownership of their product, but they control it anyway through other means. Never underestimate the human ingenuity to gain power and wealth whatever the rules of the system.

I'm not so sure redistribution is enough. What we need is a way to provide meaningful work for anyone who wants it, and that work should remunerate the worker beyond any redistribution to encourage participation. Perhaps a basic minimum stipend could be provided, and supplemented by voluntary work so that there is incentive to participate in society, without the threat of destitution or need to turn to crime.

Carolyn Meinel said...

I could see accomplishing this is many nations. However, an international treaty? When so many nations are controlled by kleptocracies? Please help out with ideas about how we could keep the kleptocracies from enabling people to evade any such treaty, even if the kleptocrats were so sign this treaty (with fingers crossed behind their backs).

David Brin said...

Carolyn the answer is simple. Take a dozen developing nations that are now honestly and sincerely led, and angry at past klepto lords…

… and those 12 or so declare war on Switzerland.

That will do it. Not one person has to die. But the world will change overnight.

Acacia H. said...

Posted this in the other thread before realizing you'd already moved on:

Remember how I keep stating that "American Decline" is a myth and a lie?

Well, I'm no longer alone in this assertion, and the person who wrote a book on the subject had some fascinating things to say about it. One interesting aspect was also that if all the wealth truly is concentrated in 1% of Americans, it WILL cause the economy to falter and THEN we'd see decline.

So. There is hope.

Rob H.

Carl M. said...

Do we need pre Kennedy taxes on earned income? Or do we simply need to return to taxing capital gains at the same rate as ordinary income -- as under Reagan. This would double the tax rate on the super rich even with a top rate of 30%.

(A lower tax rate on investment income would make sense if the inflation rate were back at Carter era levels. Under such conditions, the most of the gains are illusory, and investment taxes constitute an unreasonably high property tax.)

Zen Cosmos said...

Does your property declaration extend to owning cash, financial instruments and capital equipment? If so, this paves the way to a very extensive "owning up", to what everyone has, especially secret bank accounts in places like Switzerland, Cayman Islands, etc. Then if we end unions but ask all corporations to be 51+% owned by its employees-all employees as shareholders-- upon hire, increasing in holding as they get promoted, it gets even better.

David Brin said...

Zen Cosmos very interesting and radical proposal. In the 1970s capitalists were terrified by the fact the Union Pension funds seems to be the main accumulating pools of capital and by 2020 workers would own the means of production that way, organically, without revolution. I believe much of the Reagan and after "revolution" was specifically targeted to end that dire threat. And they succeeded… and not ONE pundit today even remotely sees or mentions this, even though it was much discussed in the 1970s.

But no, I do believe your approach is radical. Let's just go back to the fact that pension funds SHOULD be a major capital pool, not hanging on by a thread.

David Brin said...

Carl M… you are in one of your super-sensible moderate libertarian modes and I love it. Yeah sure. And shift most business taxes from the business to the owners. But I will insist also on real inheritance taxes. The most fair of all taxes, the one that has the most positive Smithian benefits for a diamond-shaped society…

…and the one tax that need NEVER be paid! Only if you are lazy about setting up your charitable foundation. Indeed, if bazillionaires all chose great ways to honor themselves by saving this or that aspect of the world, we might actually see some withering away of the state.

simplex said...

You’d probably have to do something to counter “shell owners”: I don’t want to own up to the oil tanker, so I pay you to own it and let you declare bankruptcy if sued, with a promise to help out afterwards. By, like, paying you to own an oil tanker. However, people are harder to create and much harder to disband than a corporation, so I’d rather have shell owners than shell companies.

You do wave your hands mightily at a very thorny question: How do you determine who is the rightful owner of unclaimed assets? You say “the state”, but which state? Wouldn’t assets in Swiss banks revert to Switzerland? And why would peasants on surrendered lands get title to them instead of (for example) the buddies of Robert Mugabe?

I have a hard time seeing how that gordian knot gets untied, and hacking through it seems unlikely to be just. I suppose the Caymans getting fantastically wealthy doesn’t hurt me much, but it blunts the overall feeling of justice that would presumably give this the momentum it needs to have a chance.

But overall I can actually see this happening if we could get a major player to push it. If you sign the treaty, you get reciprocal legal protections with everyone else in the treaty, like getting your country’s money back. If you don’t join it, that money goes into a public account so that your population can know how much money you’re turning down by not joining. What I don’t see is how to get a major player to push it because, well, you know…

locumranch said...

The difference between 'reformation' and 'revolution' is largely imaginary, especially in a political system toward the democratic end of the spectrum, wherein the former is defined as "the improvement of an existing institution by alteration or correction of abuses' and the latter is defined as "the overthrow or repudiation of a regime, institution or political system by the governed."

Remember also that the concept of 'improvement' resides in the subjective eye of the beholder, that the so-called 'reforms' of the Great Society were made possible by militant workers, veterans & Union Maids who openly defied existing authority with extralegal means, while subsequent oligarchic 'abuses' (railed against by David) were instituted by the Rule of Law in accordance with democratic principles & the short-sighted consent of the governed.


Alex Tolley said...

@simplex How do you determine who is the rightful owner of unclaimed assets? You say “the state”, but which state? Wouldn’t assets in Swiss banks revert to Switzerland?

We actually saw this when a Swiss bank found that they had unclaimed gold (Nazi?) in the vaults a few years ago. The bank wanted to claim it as their own asset.

We are likely to see a similar issue with the recently discovered horde of paintings. It isn't easy trying to prove provenance of stolen art.

Alex Tolley said...

shift most business taxes from the business to the owners

That would make the situation even worse. Corporate taxes are very low (paid, not rates) but still monitored by the IRS and other interested parties. Once the taxes are only paid by shareholders, it would be next to impossible to monitor. Unless you can enforce owners to pay domestic taxes, the tax base will escape.

Recall that favorable tax jurisdictions like Ireland and Luxembourg allow multi- and transnational corporations to escape domestic taxes. It is even easier for wealthy individuals to set up such arrangements and hide behind shells and proxies.

Alex Tolley said...

Addressing an earlier and favorite topic, I'm please to see this in teh Guardian today:
World's leading authors: state surveillance of personal data is theft.
At least some people understand privacy is important and not to be frittered away because surveillance is so easy.

Acacia H. said...

Here, Dr. Brin, I found an article concerning abuses of the intelligence services in the U.S. and the need for transparency that I figured would hit a chord with you. While I was abstracting that article today, I did realize that at least some of us have taken to looking at the NSA abuses of power in a darkly humorous view: when we are using Skype for our Pathfinder roleplaying game, we regularly hear odd noises that weren't made by any of us. So we take to scolding the NSA agents listening in on the game and asking them to be quieter.

I suppose this is just human nature, but it might also be a rather depressing realization that we can't stop this and it will be happening no matter how much we rail against it. So now we just joke about it in an effort to cope.

Rob H.

Jonathan S. said...

My personal favorite reaction to the news of NSA monitoring of online games came from the Star Trek Online community; one player has announced his immediate intention to name his next starship the USS Snowden.

sociotard said...

Kind of funny considering how the NSA has a command center modeled after the bridge of the enterprise D.

Gator said...

FWIW, Switzerland has a wealth tax. If you live in Switzerland you are supposed to declare and pay tax based on your world-wide assets.

IMHO Switzerland has worked hard on maintaining the diamond-like society you advocate. Now that the banking secrecy laws are cracking I don't think having countries declare war on Switzerland would do anything useful. The US rabid right-wingers are the biggest flag bearer for the pyramidal society at the moment.

Can you point to references about the Founders implementing some sort of land reform after the revolution? My weak google-fu only picks up land reform related to Latin American and Chinese revolutions.

locumranch said...

We have allowed our very reasonableness, our desire to accommodate & appease, to place us in an untenable position, so much so that our circumstance will continue to deteriorate as long as we accept the actions of the NSA & the creation of a surveillance state as a given, even though the perpetuation of the existing central hierarchy is NOT a given.

David has said so much, that the perpetuation of the central hierarchy is NOT a given, by pointing out the accelerating trend toward political, social & technical decentralization which will most likely result in the collapse of most central authorities, even though he is loathe to accept this as inevitable.

To this end, David advocates transparency, surveillance counter-balanced by sousveillance, in order to stabilize our centralized social hierarchy, but this is a temporizing measure at best. Decentralization will come sooner rather than later, either by bang or by whimper, and our continued appeasement of NSA-like power structures will only serve to delay the inevitable, making a 'bang' that much more likely, as absolute power corrupts absolutely.


David Brin said...


David Brin said...

Gator. The land reform I speak of happened organically with the seizure or abandonment of vast estates in many colonies owned by absentee lords like the Penn family… and also lesser Tories who had picked the wrong side. Still the EFFECT was exactly as I describe.

And now… onward

Unknown said...

If we are going to have capitalism, explicit ownership seems obvious and necessary to reduce cheating. It sounds good.

But after reading The Culture books, I keep hearing: "Money implies poverty" whenever I read a proposal to cure ails late-phase capitalism. The way Banks wrote about it, especially in "State of the Art", all these suggestions seem like band aids for a cancer patient.

If a good or service can be (nearly) completely automated and provided in great surplus it seems immoral to me to create a forced artificial scarcity. Immoral in the Epicurean sense that unnecessary suffering is evil. Food falls under this, as in the US we waste about 50% and some of that is intentional to create scarcity.

I truly appreciate your thoughts on the "disputation arenas", Dr. Brin and including markets as part of it. I enjoy the optimism mixed with realism of our plight in your novels, especially "Earth". But we are approaching post scarcity - in many ways we have already waded knee deep into the ocean of plenty, and quickly retreated by allowing speculators and capitalists to enforce scarcity.

I am starting a business now (yet again) and am holding my nose both in regard to how large companies can cheat the market, how Wall Street can destroy perfectly profitable and decent companies, and at the bottom of it, how much I desire to live somewhere like Culture - and that in some ways, we could adopt many advantages of post-scarcity right now, but choose not to largely out of dogma.

Data DrivenFP said...

First, the transaction tax is desperately needed, to reduce velocity and instability in the markets. Amen.
Second, I like your concept of ownership and tax on global wealth, as wealth is even more lopsided in distribution than 'income'- and all income should be treated the same. The problem of hiding wealth overseas could be solved fairly simply- if not declared, no effect of it could ever enter the US.
Lastly, though, I think we need to encourage competition and new entry in markets, and to prevent concentration of wealth and power in corporations. To do that, I would propose a graduated 'bigness' tax- simply tax gross income. This would automatically offset the advantages of 'too big to fail'. If a company wanted to reduce its 20% tax burden due to having income 1/10 that of the US govt, it could split into 10-20 (still huge!) entities that would pay less tax. Instant competition, decreased vulnerability to disaster, and an encouragement to innovation.

Data DrivenFP said...
This comment has been removed by the author.
Damien Sullivan said...

"… and those 12 or so declare war on Switzerland.

That will do it. Not one person has to die."

How is declaring war without shooting supposed to do a damn thing?

Also, dude, *you won*. The Swiss have been reforming their banking laws and reducing secrecy. It happened via diplomacy, not the war of _Earth_.

And as mentioned, among themselves the Swiss are highly egalitarian and democratic. If you want to see how to preserve an equal yet capitialist society, you should be learning from them, not clinging to them as your straw men villains from 20 years ago.

Carolyn: "Please help out with ideas about how we could keep the kleptocracies from enabling people to evade any such treaty, even if the kleptocrats were so sign this treaty (with fingers crossed behind their backs)."

The kleptocrats would have to declare any property they owned in treaty countries in order to keep it. So the treaty wouldn't fix the kleptocracies themselves, but it would limit their ability to squirrel wealth out to safe and civilized countries.