Sunday, November 25, 2012

Reverse Austerity and Trickle-Up Economics

Now that the election is over, attention in Washington is turning toward the fiscal cliff and the supposed dangers of our large budget deficit.  Economists worth listening to (such as Paul Krugman and Dean Baker) don’t think that in our current circumstances budget deficits are a problem.  The United States is able to borrow at historically low interest rates, indicating that investors around the world want to buy U.S. government bonds, which would not be the case if we were in real budgetary trouble.  Rather, budget deficits are being used as an excuse in yet another attempt to cut the major working- and middle-class public programs, Social Security and Medicare.  The argument is that we can’t afford to sustain the modest programs that we already have, much less expand them to help out people during tough economic times.  Therefore, regular working people have to “tighten their belts” to prepare for the “tough decisions” that comfortable lawmakers and their wealthy backers say are needed in order to avoid fiscal catastrophe.  It sounds right, but is driven by ideology, not actual budget realities.  Instead, we should have a major Keynesian stimulus, to include expansion of Social Security and Medicare benefits, in order to kick-start the economy. 

However, let’s say for the sake of argument that we actually were in a situation that required cutting incomes, benefits, and programs.  The argument that cuts should come from the poor, working, and middle classes, rather than from the wealthy, is exactly backwards: you should cut from those who can most afford it first, for both moral and economic reasons.  It’s common sense, and just humane, to make economic cuts first from the top, only then working your way down the ladder to those at the bottom once those above them have faced their fair share of cuts.  In principle, this would mean that you cut from the wealthiest person until his or her income is equal to the second wealthiest, and then from both of them until their income is equal to the third wealthiest, and so on in stepwise fashion, until you get to the very bottom.  Let’s call this “Reverse Austerity.”

You can see how Reverse Austerity would work in the graphs below.  Imagine that we have a simple, small company with a highly-paid CEO, well-paid mid-level managers, and less-well-paid regular workers.  If cuts are needed, they must start at the top and work their way down; it is only when the situation is really dire, so that executive and manager salaries have been equalized with those of workers, that cuts to the already-low workers’ wages are justified. This model is, of course, a very simplified one, but it is meant to be in order to illustrate the general principle.  In the real world, more complex variation in incomes would require more involved accounting to apply it.  But this would not be beyond the capabilities of modern accountants and computers, for it would only require listing salaries in descending order and cutting from the top down, in stepwise fashion.  And while my illustration depicts a business enterprise, it could just as easily describe the distribution across society as a whole. 

The same method would hold true in circumstances of economic growth and plenty when there are income gains to be distributed, mutatis mutandis: income gains should go to those at the bottom first, until they are elevated to the level of those with higher incomes, continuing stepwise, reserving raises and bonuses for CEOs until the very end after everyone else has already caught up. Let’s call this variant “Trickle-Up Economics.”

Someone might object that this is unrealistic: we’re not going to raise the incomes of millions of common workers to the extremely high levels that business executives currently enjoy.  And that’s exactly right; we’re not going to turn every worker into a multi-millionaire.  Rather, this only shows how obscenely extreme executive compensation has become, and highlights the need to bring it back down to earth -- something that Reverse Austerity would do very well. 

Recently, in another context I wrote about political philosopher John  Rawls’ theory of justice, with his idea of the veil of ignorance.  Rawls’ just distribution principle is called the difference principle, and states that inequalities are to be to everyone’s advantage, and in particular they are to be of the greatest benefit to the least advantaged members of society.  I previously summarized why Rawls argued for the difference principle: if society’s rules were set up in a just and impartial way, the difference principle would guarantee that no one would fall into poverty and that the gains of social and economic cooperation were to the benefit of all. 

Reverse Austerity and Trickle-Up are both applications of the difference principle: they shift incomes in a way that is to the most benefit of the least-well-off.  Austerity should be applied to those at the top first, and only to those at the bottom later, once things have equaled out.  The opposite would be true when raising incomes: raises should start at the bottom, and then work their way up to the top.  Both of these result in the greatest gain to those at the bottom.  This would have the effect, over time, of pushing incomes toward equality -- which is precisely what Rawls expected the difference principle to do.  We should acknowledge, however, that Rawls’ principle does allow for inequalities, when they are to the benefit of all, especially the poorest, so Reverse Austerity and Trickle-Up would not be the only principles that would apply; we would have to adjust them to allow for beneficial inequality, such as rewarding innovation or public service.  But in the current circumstances of the United States, with major, long-lasting economic stagnation, high unemployment, and extreme inequality, the priority should be on making sure that the least-well-off are bolstered rather than looking for exceptions to the rule.  The wealthy can most afford cuts, and the poorest most need gains.

Therefore, I think that we should put in place a law that requires business enterprises to cut pay and benefits from the top first before cutting worker pay or firing workers, and that likewise requires raises for common workers before CEOs get pay increases and bonuses.  Practically speaking, demanding that incomes equalize in a stepwise way as I have described might be unrealistic, but we could say something like Reverse Austerity and Trickle-Up must apply until executive pay is within a range of five or six times average worker pay, and only then could executive pay rise again (until it exceeded that range again). 

Furthermore, if we did make it a legal requirement to cut from the wealthy first throughout society more widely, we would certainly see fewer calls for austerity, more active investment of society’s capital, and the emergence of a more egalitarian society over time, one more conformable to healthy democracy.  Thus, while I am 100 percent against regular austerity, I am 100 percent for Reverse Austerity. 

1 comment:

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