First Class Fissures

EconTalk Extra
by Amy Willis
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Richard Epstein on Cruises, Fi... Yuval Levin on The Fractured R...

This week, EconTalk host Russ Roberts welcomed back New York University's Richard Epstein. The focal point of their conversation was a recent New York Times article by Nathan Schwartz , describing a "money-based caste system" in the travel industry. Does tiered service such as that Schwartz describes make day-to-day interactions between classes less frequent, and perhaps less comfortable? Should we be concerned about the new segregated luxuries the wealthy can enjoy? Should the rich be taxed at higher rates to reduce this segregation? What are the incentive effects of higher taxes?

Conversations with Professor Epstein are always a whirlwind, and this one is no exception. So how did you experience it? As always, we'd love to hear from you.

1. Two economics-related points both Epstein and Roberts come back to are the notion of such "luxury guests" sharing the fixed costs with their fellow passengers and the distinction between competitive and political markets. How do each of these concepts inform your reading of the Schwartz piece?

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2. To what extent does Epstein fairly characterize Schwartz's NYT column? (H/T to commenter Greg G.)

3. What is the message that Roberts wants us to get from the Stateroom Scene from the Marx Brothers's "Night at the Opera?"

4. Why does Epstein favor a consumption tax over income-based taxes? To what extent do you agree?

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COMMENTS (8 to date)
Greg G writes:

I trust I made my views clear enough on the second question already so I will address the first.

Different levels of service sharing fixed costs are good for all the reasons described in this podcast. And if you view excessive inequality of wealth and income as having some negative effects (I do) then you should welcome the idea that wealthy people might spend their money on very expensive products and services and thus be relieved of some of it so it can flow back through the economy and into the hands of the people employed in providing the various things they buy. Surely that is better than the rich hoarding their money. The real victims of inequality won't be found on cruise ships anyway.

As for the differences between competitive economic markets and competitive political markets, I think that one tends to get overdrawn here. To be sure, economic markets are the more competitive of the two in most ways but the similarities are too often overlooked.

There is a reason why modern democracies have consistently been the form of government most congenial to economic prosperity and human flourishing. The reason for that is, compared to all other forms of government, democracy requires the most competition among aspiring political leaders.

I often read on sites like this one complaints that politicians can't fail the way businesses do. Well, not exactly but they can and do fail by losing elections. In fact, politicians lose elections a lot more often than corporate directors do. Corporations use the Soviet style of democracy with only one slate of candidates.

Both government and business face serious principal agent problems. Corporate officers and directors in public corporations tend to run those businesses in their own personal interest to the extent they can get a way with it and keep their jobs. Politicians tend to run governments in their own personal interest to the extent they can get away with it and keep their jobs. In both cases there is a procedure which works imperfectly for removing those who push their selfish interests too far.

jw writes:

Greg G.

The rich do not "hoard" their money. They invest it, which creates jobs.

In the US, national politicians do not lose elections. Look up the reelection rates for congressmen and Senators. Losing is very rare.

Many businesses fail, most of them start ups or small businesses. Large businesses do not fail as often, not because of corruption, but because to become that large they usually have found a need to be filled or a service to be rendered and they are better than their competitors at fulfilling those needs. Corporate directors are not nearly as important to this process as the employees.

Greg G writes:

jw,

There are quite spectacular amounts of excess bank reserves at the Fed earning negative real interest rates. In what sense is that an investment? How is that creating jobs? What would be hoarding in your view?

Our biggest and most successful companies Google, Apple and Microsoft are sitting on spectacular and unprecedented amounts of cash that they really don't have investment ideas for on how to employ.

Every time there is a presidential election a national politician loses. The incumbent congressional representative for the district I live in has changed in each of the last three Congressional elections. National incumbents usually do get re-elected but not as reliably as corporate directors. It's still easiest to win when you are unopposed.

Craig Miller writes:

Wait a minute Greg G, bank reserves aren't wealth assets owned by the banks or the bankers (perhaps you're confusing reserves with capital). Reserves are liabilities owed to a bank's depositors which are available for banks to lend (creating a bank's asset). Banks are reluctant to loan those reserves out to individuals and run the risk of second-guessing by the regulators. Banks are alternatively content to earn something less on safe loans (assets) made to the Fed and not expose themselves to regulatory criticism. In my view this is a constraint on velocity and one reason why we are experiencing such mediocre economic growth (and low inflation).

As for companies with retained earnings, there isn't an investment smorgasbord just sitting out there, especially in today's regulatory and technological environment. I would suggest that Google and Apple have taken advantage of opportunities as they have come along. It just doesn't necessarily happen on your expectation schedule.

Greg G writes:

Craig,

I am well aware of the difference between bank reserves and bank capital. I have been an outside director at a small community bank for the last 16 years.

The reserves now held at the Fed are wildly in excess of what is required by regulators. The Fed is paying interest on reserves but that interest is well below the inflation rate.

Investments are normally thought of as money put at risk in an attempt to achieve an increase in the purchasing power of that money. Losses in purchasing power are virtually guaranteed on excess reserves and on many of the bonds now being sold in the marketplace. This describes the storage of money more than the investment of money. There are more savers seeking a return on their money than there are credit worthy borrowers right now and it's been that way for a while. Savers would prefer a positive return in purchasing power but they will pay what is effectively a fee for safe storage if they don't see better options available.

I don't have any particular expectations for the investments schedules of Apple and Google. I am simply observing that our most innovative companies used to borrow and invest. Now they accumulate cash for opportunities that haven't "come along" yet.

jw writes:

Greg G.

The excess reserves are Fed created, not "hoarded" savings.

Apple and Google's cash are corporate, not individual rich people's "hoarding". The corporate cash is a direct result of government policies, the companies are rationally reacting to government disincentives to invest.

jw writes:

4. As a thought experiment, consumption taxes might produce better results than the current income tax. You would never want to have both (like most of Europe) as you just end up with two high tax rates.

But it would not be the panacea that Epstein describes. The only monetizable asset that politicians have is their influence on taxes and regulations. It would not be long before someone's consumption would be more equal than someone else's consumption and then tax breaks (and campaign contributions) would flow.

Lobbyists would never want to have the tax code change that drastically. They have their breaks bought and paid for, the expense of repurchasing them would be prohibitive.

(I'm beginning to think that I might be becoming a little cynical about politicians...)

Greg G writes:

jw,

All banks, not just the Fed, create money when they lend. Excess reserves at the Fed represent real wealth owned by real people. That wealth is effectively being stored. Excess reserves are not being used in an attempt to make a profit. In fact a loss on the purchasing power of those excess reserves is virtually guaranteed right now.

Apparently you object to the term "hoarding." I am using the term to describe behavior that is intended to save money for future use without attempting to increase its purchasing power during the time it is being stored. Are you unaware this is happening on a large scale? I am not saying it is irrational. I am just saying it is happening and it is contributing to inequalities in wealth.

Apple and Google corporate cash is a real asset of real people who own their stock. Not all of them are rich but a significant amount of that corporate cash is effectively the assets of rich people.

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