Teaching Case-Executive Briefing Note: President-Elect-Strategy to Solve Inequality by Dave Barrows

It has been quite an adventure so far. A classic middle class background with an undergraduate degree at Harvard and a PhD at MIT. The PhD was not required for what I wanted to do but it made my parents happy. I could also teach in the Boston area. I am 43 years old, married with two children, and an almost billionaire in Silicon Valley. Now is the time to make some serious money.

Harvey called. We have remained friends since our undergraduate days at Harvard. Harvey wants to save the world and has chosen politics as the way to accomplish his mission. Harvey is now a senior member of the president-elects team. After my meeting with the president-elect I was offered the position of Secretary of Health and Human Services (a Cabinet level position). The pay is Level I, $219,200 per annum. It is so trivial that I have donated my stipend to charity. This will be an expensive move: find accommodation in Washington, private school for the children and there is the opportunity cost of not continuing my career in the Valley.

The Secretary of War was a member of the President's cabinet, beginning with George Washington's administration. With the passing of the National Security Act of 1947, the Secretary of War was replaced by the Secretary of the Army, What a wonderful job: no ambiguity and no need for program evaluation. The question is simple: did we win or lose.

The president-elect was clear. My job is to evaluate and “solve” the problem of inequality. Inequality encompasses many areas: inequality of opportunity, inequality of income, inequality of wealth, etc.  Of course, all of these aspects of inequality are interrelated. No null sets here.

It is amazing to me. Senior people in Washington do not understand the difference between a problem and an issue. Problems can be solved but issues must be managed. Issues never really go away they change form and structure. Issues are always there and require sophisticated and ongoing management. Unfortunately, these capabilities are in short supply in Washington. For them everything is a problem which requires a solution. I suppose it is a function of their interaction with the media and the election cycle. All media discussions are 3 to 5 minutes. There is no opportunity for nuance.

To complicate matters my undergraduate degree was in mathematics and my PhD in computer science. I have no academic training in the social sciences. I am on the board of directors of my local hospital. The hospital provides service to affluent Californians. I have no background in this field.

So, what to do? Harvey suggests that I have extensive briefings with the civil servants, academics, community organizers, etc. I refuse to be briefed by stakeholders with their own agendas. I will start by doing my own research as I have always done.

Here is what I have found in no particular order of importance:

1. Euthanasia is a terrific idea. It has been employed since the dawn of humankind to forcibly remove unwanted people. It is still utilized to this day. However, the international community has concluded that genocide is no longer an acceptable public policy hence the need for The International Criminal Court in The Hague.

Well, if you cannot kill them why not institute enforced sterilization. That should slow the number of individuals that have the potential to be disadvantaged. Compulsory sterilization in Sweden was administered without a valid consent of the subject, during the years 1906–1975 on eugenic, medical and social grounds. Between 1972 and 2012, sterilization was also a condition for gender reassignment surgery. In most of the world enforced sterilization is now viewed as inappropriate public policy.

2. What is inequality and why is it bad? The World Bank defines absolute poverty as a set standard which is consistent over time and between countries. First introduced in 1990, the dollar a day poverty line measures absolute poverty by the standards of the world's poorest countries. As of 2015 the World Bank international poverty line is $1.90 a day. This is a serious global issues but, largely, irrelevant in America.

Jesus said “The poor you will always have with you, but you will not always have ME" (John 12:8). If we define the poor as the lowest quartile then Jesus was right. The poor will always be with us by definition! John Diefenbaker was campaigning to be elected Prime Minister of Canada. During one of his speeches he reportedly said “If I am elected Prime Minister no Canadian will have an income below the national average”. And he was elected!

3. Perhaps some data will help:

  • In 2019, 79.1% of the US population had a smartphone.
  • As of 2019, 90% of adults in America use the internet, either irregularly or frequently. The United States ranks #1 in the world with 7,000 Internet Service Providers (ISPs).
  • In 2018, 91.3% of US households had access to a vehicle.
  • According to the USDA's latest Household Food Insecurity Report, more than 37 million people in the United States struggled with hunger in 2018. In 2018, 14.3 million American households were food insecure with limited or uncertain access to enough food. The United States 2020 population is estimated at 331,002,651 people at midyear. Over 11% of US citizens struggle with hunger. Seems unacceptable to me.
  • What does the Congressional Budget Office say? “The CBO builds on its past analyses of the distribution of household income in the United States by projecting what that distribution would look like in 2021 under current law and comparing those projections with the actual distribution in 2016. In particular, this analysis focuses on how two factors—means-tested transfers and federal taxes—affect the distribution of income. Means-tested transfers are cash payments and in-kind benefits from federal, state, and local governments that are designed to provide assistance to individuals and families with low income and few assets. Such transfers include benefits provided through programs such as Medicaid and the Supplemental Nutrition Assistance Program (SNAP) but not social insurance benefits, such as Social Security and Medicare. Federal taxes consist of individual income taxes, payroll taxes, corporate income taxes, and excise taxes. Average inflation-adjusted household income is projected to grow for all groups. Growth in average income—both before and after means-tested transfers and federal taxes are accounted for—is projected to be fastest for households in the highest quintile (or fifth) of the income distribution. Growth in income after transfers and taxes is more skewed toward higher-income households than is growth in income before transfers and taxes”. Thanks to the Federal government the rich get richer!
  • The Organization for Economic Co-operation and Development ("OECD") ranks social welfare spending by country as a percentage of GDP. In 2020 the United States ranked 23rd in the world. Nothing to be terribly proud of.

4. Two Harvard philosophers debated the configuration of a just society in the context of inequality. John Rawls was a proponent of contemporary liberalism. Citizens do not deserve to be born into a rich or poor family or to be born more or less gifted than others. The initial distribution of natural assets is undeserved. Wealth creation is a cooperative enterprise, and all social goods are to be distributed equally. Wealth and power would be distributed equally except where inequalities work to the advantage of all. Rawls theory of justice is within the social contract tradition of Locke, Rousseau and Kant.

Robert Nozick believed in the minimal state. In this philosophical approach legitimate use of power by the state is limited to preventing fraud or the use of force. It does not include the power to tax or to confiscate property. Taxation by the state to finance projects other than protection violates individual rights to decide how one's property is disposed of. Taxation without consent is equivalent to forced labor. Socialism and liberalism redistribute wealth to achieve social justice. This imposes the redistribution of goods which ignores the history of how goods have come to be produced and distributed through trade, labor, purchases, gifts, etc. To take those goods away from people would be unjust, as long as the initial acquisition of the goods was just (e.g., one's own labor, inheritance). The state has the obligation to protect property and to punish those who violate property rights.

 

5. Why are we here? What constitutes inequality and why is inequality undesirable. The Stoic philosopher Marcus Aurelius argued:

  • Was it for pleasure, then, that you were born, and not for work, not for effort.
  • We’re not put on earth to feel pleasure. You don’t exist to eat delicious foods, to see exotic places, or to ‘feel good.’ You exist for your fellow man and woman.
  • What brings us true happiness in life? It isn’t just filling us with pleasure. Rather, it is helping others and doing what we were made for. A man’s true delight is to do the things he was made for (Kamtekar, 2018).

Unfortunately, Stoic philosophy is a “tough sell” for the American public. It is hardly the basis for a major policy initiative to “solve” the problem of inequality.

 

6. We enjoy inequality in inherited attributes. Cristiano Ronaldo is a Portuguese professional soccer player with a net worth of $460 million. Ronaldo earns a base salary of $64 million. Off the field he earns an additional $40 million from endorsements. He is 34 years of age. He kicks a ball. Is that fair? How much should he be paid for kicking a ball? How will this value be determined? Jeff Bezos established Amazon on July 5, 1994. Amazon has created market value of over $ 1 Trillion for shareholders. Amazon has created jobs for750, 000 employees. Bezos is worth over $100 billion. Is that fair? What is a better number and why? In Economics 101 we learn that the marginal value of labour is the marginal product of labor multiplied by the value of the items produced. Why is that not applicable here?

The argument is that free markets can fail. The extreme case of market failure is slavery. Research from the Walk Free Foundation, based on its Global Slavery Index of 2018, estimated that there were about 40.3 million slaves around the world. The population of Sweden is, about 10 million; the number of slaves in the world is equal to, about, 4 Sweden’s. The Walk Free Foundation reported in 2018 that slavery in advanced democratic nations is much more common than previously known, in particular the United States and Great Britain, which have 403,000 and 136,000 slaves respectively. Obviously, we must make this a priority for resolution.

Labour markets can fail due monopsony. The power of labor unions rests in their two main tools of influence: restricting labor supply and increasing labor demand. Through collective bargaining, unions negotiate the wages that employers will pay. Do we want to enhance the power of unions? Is that good public policy? Are there alternative approaches to address labour market failures?

Empirically the elimination of inequality is impossible. In 1573, Tusser observed: “A foole and his monie be soone at debate, which after with sorrow repents him too late”. This is the earliest known version of the proverb: A fool and his money are soon parted. Two great American philosophers noted:

The numbers do not work. The Pareto distribution is a power-law probability distribution that is used to describe a number of social, scientific, geophysical and actuarial observations. With respect to the distribution of wealth in a society, the fitted trend indicates that a large portion of wealth is held by a small fraction of the population. This Pareto distribution has become known as the Pareto Principle, or 80-20 rule. This rule states that 80% of the wealth of a society is, generally, held by 20% of its population.

 

7. Well, what about all that nature versus nurture debate (molecular genetics)? A recent National Bureau of Economic Research paper concluded  “ researchers have inferred the genetic component of portfolio decisions by employing the classic “twins” approach, that is, by comparing the similarity of monozygotic (i.e., ‘identical’) twins to dizygotic (i.e., ‘fraternal’) twins in the Swedish Twins Registry. … recent advances in molecular genetics have allowed scientists to identify genetic markers associated with specific phenotypes (i.e., observable characteristics or traits). Using a large panel data set from the Health and Retirement Study that includes individuals’ financial, psychological, social and biological data, i.e., DNA characteristics, our analysis allows us to not only attribute heterogeneity in risk aversion, return beliefs and equity market participation to specific genetic factors, but also to estimate the role of those genetic endowments… we examine composite genetic scores (known as polygenic or genome-wide scores) associated with cognition (Educational Attainment, General Cognition), personality (Neuroticism, Depressive Symptoms), health (Myocardial Infarction, Coronary Artery Disease), and body shape (BMI, Height)”.

 

So, genetics matter. Therefore, all that is required is a bit of enforced genetic re-engineering. Three problems with that: 1.The technology is not available.  2. Many Americans will not take proven inoculations for measles. It is hard to imagine much public support for enforced genetic reengineering. 3. Sooner or later race and ethnicity will be added to the analysis. What a nightmare! Nonetheless, research in this area should be accelerated for humanitarian and future public policy purposes.

8. Whatever we decide to do will cost a fortune. In the private sector we reallocate resources on a continuous basis. Companies that do not respond to changing market conditions die: JC Penny, Kodak, Lehman Brothers, etc. Not so easy in government. At one time, in Italy, the government had a department to serve widows of World War 1 veterans. There were more civil servants than widows!

Modern Monetary Theory (MMT) argues that a county’s currency is a public monopoly for the government and that unemployment is evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy desired savings.  MMT is an evolution of chartalism and can be viewed as a version of functional finance.

Functional finance is often referred to old Keynesian. Functional finance is based on effective demand principles and chartalism. Government should finance itself to meet explicit goals such as achieving full employment, ensuring growth, and low inflation. As a result governments should:

  • Intervene because economies are not self-regulating.
  • Ensure a prosperous economy.
  • Managed the money supply
  • Direct fiscal policy to ensure a prosperous economy, balancing revenue and spending is of secondary importance; prosperity is the primary goal.
  • Tax based upon economic impact, rather than to raise revenue.

If one accepts the notion of endogenous money (or MMT) then it cannot be assumed that successful fiscal adjustment (lower deficits) will lead to lower interest rates, since those rates are managed by monetary authorities. The Central Bank manages the short-term rates, and can directly intervene on long rates, as it did during the Great Depression, World War II, and with Quantitative Easing.

Consistent with MMT, Blanchard notes that when the interest rate on the public debt is lower than the GDP growth rate the debt follows a stable process. The debt-to-GDP ratio tends to decline because borrowing ‘pays for itself’. Historically, in the US, the interest rate has often been lower than the growth rate. Governments could, therefore, use the budget to stabilize the economy when it is slowing down and to undertake productive public investments.

Modern monetary Theory (MMT) suggests that national debt which resides in the central banking system is irrelevant. The central bank can “forgive" the debt of the national government by simply pressing a button. Alternatively, the national government can repay the debt. The central bank can collect these payments and return the proceeds to the national government. MMT must be used with caution due to:

1. The threat of inflation. Inflation is less likely in a global economy with numerous supply opportunities, such as China, India, etc., which did not exist during the period of Stagflation.  Kuznets was correct. The potential for supply constrained inflation is contingent upon the world production possibility frontier. 

2. A greater concern is for asset-price acceleration. This is especially relevant in the international housing market. Such real estate price inflation is pure economic rent. A Ricardo-George tax solves the problem; admittedly a Ricardo-George tax is politically difficult to implement.

3. The law of unintended consequences with the potential for Black Swan events.

Proof of MMT is the national debt of Japan. This is held, primarily, internally and has had no impact on domestic inflation. In fact, the major concern for Japan has been deflation.

Of course MMT policy is the responsibility of the Treasury and the Federal Reserve. They will go nuts and resent my intrusion onto their turf (Obama’s stay in your own lane theory of management). I will persist. How else can this be financed.

The president-elect is from the Reagan school of management: a one page briefing note. If you can’t explain yourself on one page you do not know what you are talking about. One excellent page is infinitely superior to a 100 PPT slides. Well time to write.

Executive Briefing Note: President-Elect

Strategy to Solve Inequality

Inequality is multidimensional ………………………….