07/17/2017

Wealth And Work

Russell Muirhead, City Journal

In the old economy, generating wealth required physical work, and lots of it—often backbreaking, dangerous, dirty, and exhausting work. Consider General Motors, a company that creates wealth the old-fashioned way: by making things. Last year, General Motors employed about 200,000 people. After making 10 million cars, it earned about $42,000 in income per employee.

Compare that with the Blackstone Group, a publicly traded asset-management firm that last year employed 2,200 people and made $490,000 per employee. With a hundredth of the workforce, Blackstone makes more than ten times more per worker than GM.

With the impact that automation and robotics will soon have on manufacturing and retail, one can imagine all firms radically improving their productivity through technology. As businesses become more like Blackstone and less like General Motors, the economy will generate more and more wealth—and, many worry, less work.

This transformation seems to challenge traditional understandings of economic justice. In the old economy, justice was about a give-and-take. Prosperity required everyone to contribute as one could, and the idea was that those who help create value should receive a fair share of that value. Exactly what counted as a fair share was a matter of argument, but the general premise that there should be some proportion between contribution and benefit was the foundation of traditional conceptions of economic justice.

What happens, though, if creating wealth no longer requires everyone to pitch in? Does the logic of reciprocity still hold when the economy needs only a few hands? Some would say that, regardless of whether everyone contributes, everyone should share in prosperity. One version of this idea is the universal basic income—where one is paid, in essence, for being alive. The idea here is not reciprocity, but compensation for the bad luck of not having the rarefied skills that the new economy needs.

This kind of thinking has a certain logic to it, but it is based on a profound mistake.

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The Reagan Tax Cuts Worked

Thanks to "bracket creep," the inflation of the 1970s pushed millions of taxpayers into higher tax brackets even though their inflation-adjusted incomes were not rising. To help offset this tax increase and also to improve incentives to work, save, and invest, President Reagan proposed sweeping tax rate reductions during the 1980s. What happened? Total tax revenues climbed by 99.4 percent during the 1980s, and the results are even more impressive when looking at what happened to personal income tax revenues. Once the economy received an unambiguous tax cut in January 1983, income tax revenues climbed dramatically, increasing by more than 54 percent by 1989 (28 percent after adjusting for inflation).

 

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