Why inequality matters (2014)
gatesnotes.com
gatesnotes.com
The biggest take away: "Where you are born is more predictive of your future than any other factor", which has been discussed on HN too [2].
[1] https://www.gatesfoundation.org/goalkeepers/report/2019-repo...
Except consumption taxes are naturally regressive.
If Bill really wanted a progressive tax I think he probably would have suggested more naturally progressive taxes (like property or capital gains) rather than the one tax that has to be massively hacked in order to not be extremely regressive.
It could also be that an increase in consumption leads to a decrease in investment, but the conditions for this are more limited.
Overall, growth in consumption tends to go with growth in investment in modern free economies.
In other economies, for example, export led economies that practice forced savings, there is a general policy to tax consumption and subsidize investment. That may or may not work out. It often works out in the short term but not the long term. It works better for small economies that can export a surplus than for large economies that have a hard time exporting the surplus. It can also destabilize the rest of the world.
In the modern world, the most precious commodity is demand, not investment, and suppressing demand is generally foolish.
Savings is deferred consumption, as a basic identity it merely represents value that is not consumed. This is what would happen if someone put cash under the mattress (discounting inflation/deflation). However most people put savings in a bank account (which traditionally pays interest and was long ago transformed into a form of low-risk investment) and the savings multiply at the interest rate because the bank loans their deposits out and those deposits are paid back with interest.
I’m not sure what you mean by “investment creates savings.” What is being invested, if not value that has not been consumed (i.e. savings)?
> It could also be that an increase in consumption leads to a decrease in investment, but the conditions for this are more limited.
Consumption and investment/savings are mutually exclusive and collectively exhaustive. There is a scarce amount of resources and each unit can be either consumed (in which case it disappears) or saved/invested.
> Overall, growth in consumption tends to go with growth in investment in modern free economies.
It seems we are using different definitions for these words. I am using standard economic definitions. What definitions are you using?
> In the modern world, the most precious commodity is demand, not investment, and suppressing demand is generally foolish.
I’m not sure I understand what you mean. Demand without means of exchanging for the object of the demand is a bad thing. Demand is only good when the person demanding can pay for the thing demanded, otherwise their demand is not met or they are the recipient of a charity or welfare.
No, this is false. Banks do not "loan out deposits". A deposit is an IOU from the bank. It is a liability of the bank. Like all IOUs, they are created out of "thin air". The only difference between a bank creating an IOU and you creating one is that the bank must meet strict regulatory requirements to do so. Those requirements are primarily that the asset on the other side of the deposit (your IOU) meets the lending criteria of the bank. Usually this involves some collateral and an ability to pay, together with some portion of risk capital held by the bank, which is usually a government bond equal to a percentage of the value of the loan not otherwise pledged for some other loan. Alternately capital can constitute a long term loan borrowed by the bank -- exactly what is considered capital and how much capital must be pledged by the bank is controlled by regulation. See, for example, Basel 2 regulations.
So if you wanted to create a bank, all you would need is some capital, say a million bucks, and you are good to go to start making loans. That million bucks could support 100 million in real estate loans, for example. You don't need to wait for anyone to deposit anything, and the amount people deposit does not go into the decision of whether you as the bank can make a loan. This doesn't mean the bank has no lending standards, but checking on how many deposits are in the bank simply is not done as part of the decision tree to make a loan or not, because it is irrelevant.
As long as the bank believes the the risk adjusted return on your stream of payments will exceed the obligation of their IOU, and as long as they have a sufficient amount of capital pledge to cover a percentage of the loan (usually a few percent, again depending on the riskiness of the loan. A non-collateralized business loans requires more of a capital pledge than a collateralized loan) they will go ahead and issue the IOU and create a deposit in your name at the bank for the amount of the loan. Then you can use that deposit at the same bank to pay for the investment you want. Banks create money out of thin air (but not willy-nilly). The amount of money banks create is not constrained by how many deposits they have -- rather the lending of money creates deposits.
Fun Fact: Government borrowing also creates deposits -- enough deposits to buy the bonds the government sells when it borrows. This is why governments can (operationally) always borrow (although it may not be a wise policy for them to do so).
So again, you are reversing causality. Loans create deposits, not the other way around. Deposits, in and of themselves, create no loans.
Money deposited in a bank is "dead money" if not spent by you, and does not fund any investment and thus does not create any aggregate savings. You are merely depriving someone else in the economy of income. The investment happens elsewhere, and hopefully the amount invested is enough to cover everyone's savings demands (see below).
> "I’m not sure what you mean by “investment creates savings.”"
The sum total that an economy spends on investment is equal to the sum total that ends up being saved, regardless of how much people in the economy wanted to save. You, as an individual, can of course choose to put a portion of your income in the bank instead of buying some good, but that decision deprives the seller of the good of their income. So while individuals can choose how much of their income to save, their individual decisions in aggregate also determine how much income they earn. If too many people try to save at the same time, total income is reduced and they fail to save. So whether or not the individuals in an economy succeed in reaching their savings targets depends on whether a sufficient amount of investment occurs or not. So you better hope that there is enough investment happening in the economy to meet everyone's savings goals otherwise some people will fail to meet their targets. (Laid off people tend not to achieve their savings targets.)
Thus it is investment that determines savings, not the other way around. This is what I mean by "Investment creates savings."
> "I am using standard economic definitions. What definitions are you using?"
I am using standard economic definitions. I don't think you are using standard definitions (see below).
> "Demand without means of exchanging for the object of the demand is a bad thing. Demand is only good when the person demanding can pay for the thing demanded"
Demand is defined as the willingness and the ability to pay. Just wanting something in a store window you can't afford is not demand. That is a wish.
The ability to pay is determined by your income, which falls if everyone tries to save at the same time. Therefore the spending of money, whether by directly making investments in the sense of purchasing real capital goods, or directly purchasing newly produced consumption, is a key part of determining income and thus setting demand. Merely abstaining from spending money and letting your financial savings sit idle in a bank deposit does not cause anyone to purchase an investment good, because banks don't lend deposits and deposits don't create loans (see above).
It's just a very odd belief and I can't understand why econ texts don't describe this correctly. Yes, the full answer is a bit more complex, but surely econ textbooks can spend a few pages explaining this stuff. It's not that complicated.
But then again, economists historically have not done well with understanding the financial system -- it seems to be a blind spot, as evidenced by their performance in the great financial crisis. There are alt economists like von Mises and the Austrian school that really harped on loans create deposits, but mainstream economists tend to ignore how the financial system works.
For literature, I'd take a look at this educational primer published by the Bank of England. In general you need to turn to literature published by the banking industry. Here's a link:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Here is a quote:
"In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
* Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
* In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance."
See [0] for an explanation why this is false.
> As long as the bank believes the the risk adjusted return on your stream of payments will exceed the obligation of their IOU, and as long as they have a sufficient amount of capital pledge to cover a percentage of the loan (usually a few percent, again depending on the riskiness of the loan. A non-collateralized business loans requires more of a capital pledge than a collateralized loan) they will go ahead and issue the IOU and create a deposit in your name at the bank for the amount of the loan. Then you can use that deposit at the same bank to pay for the investment you want. Banks create money out of thin air (but not willy-nilly). The amount of money banks create is not constrained by how many deposits they have -- rather the lending of money creates deposits.
This is false, the amount is constrained by regulation and the the regulation requires that loans are made up to a limit of a multiple of deposits on hand.
> The sum total that an economy spends on investment is equal to the sum total that ends up being saved, regardless of how much people in the economy wanted to save. You, as an individual, can of course choose to put a portion of your income in the bank instead of buying some good, but that decision deprives the seller of the good of their income. So while individuals can choose how much of their income to save, their individual decisions in aggregate also determine how much income they earn. If too many people try to save at the same time, total income is reduced and they fail to save. So whether or not the individuals in an economy succeed in reaching their savings targets depends on whether a sufficient amount of investment occurs or not. So you better hope that there is enough investment happening in the economy to meet everyone's savings goals otherwise some people will fail to meet their targets. (Laid off people tend not to achieve their savings targets.)
None of this contradicts what I was saying.
> The ability to pay is determined by your income, which falls if everyone tries to save at the same time.
Only when measured from a baseline where there is no savings.
> Merely abstaining from spending money and letting your financial savings sit idle in a bank deposit does not cause anyone to purchase an investment good, because banks don't lend deposits and deposits don't create loans (see above).
You keep repeating this falsehood but even in a fiat system where money is created out of thin air the amount loaned is tied to the amount deposited by regulation. Other things you have said are quibbles and do not address my points. Savings is defined as deferred consumption and is necessary in order that there be surplus value available to invest. This is basic economics and is true as a matter of identity (if you consume everything there is nothing left to be invested).
[0] https://en.wikipedia.org/wiki/Fractional-reserve_banking
Please read the BoE explainer, then go back and ready my original post, then go back and read the BoE primer until you understand how this stuff works.
Merely refusing to understand and repeating the misconceptions that the BoE (and anyone who understands this stuff) repeatedly says are false -- is not a good look and does not further the debate. You need to reassess your understanding of how banks work, or just stop digging in this thread.
Also, knock off with the "basic economics" when declaring things that are obviously false.
Also, the mutual exclusivity of savings and consumption is basic economics and easily verifiable in an undergrad textbook.
I’m not interested in debating matters of fact when the references are clear and you persist in advocating clearly false characterizations.
Value lost how? If I spend $50k in cash on a car, I give up the $50k in cash in return for a $50k car. And that $50k payment go to the car company to pay employees and invest in future R&D.
> If I spend $50k in cash on a car, I give up the $50k in cash in return for a $50k car. And that $50k payment go to the car company to pay employees and invest in future R&D.
If you use that car to make money (e.g. commute to a job) then it was an investment and it contributes to your income (return on investment). If you drive the car on the track exclusively as recreation, you enjoy the experience (consumption) but the car experiences mechanical wear and eventually breaks down into components.
These are economic identities, if you get a return on your investment then it was a wise investment, if you do not then it was consumption.
From the perspective of the car manufacturer the factory/raw material/etc. was an investment and the $50k you spent on the car is their return. They wouldn’t get that return if they had not invested in a factory because they preferred to consume those resources.
So, transformed.
A bit like how capital is transformed into capital investments.
Yes, it is consumed when it is transformed into waste heat or other things that are not of value. It is invested when it is transformed into the means of production.
> A bit like how capital is transformed into capital investments.
if a thing of value is transformed into capital investment, then that is investment and therefore not consumption. If it is not transformed into the means of producing more things of value, then it can be saved (not consumed) or consumed (consumption).
Deflation and increased rates of saving (opposed to consumption) is the hobgoblin of the mainstream economy. It makes the money lie dormant, doing nothing.
Read about the multiplication effect if you forgot the idea. Money must circulate as fast as possible to help produce most value. This absolutely needs constant consumption.
No it isn't. Almost by definition consumption means value has been exchanged not lost.
>savings and investment cause value to multiply.
Equally fallacious. There's no way payday loans are multiplying value, for instancr. They're simply extracting it.
Consumption is value that is lost by definition, there is no “almost” about it. Value is either consumed or not. If it is not consumed, it can be saved or invested in capital. Investment in capital (when successful) multiplies value because the capital makes labor more productive, meaning more value is created.
> Equally fallacious. There's no way payday loans are multiplying value, for instancr. They're simply extracting it.
Payday loans are extractive and this does not contradict anything I have said.
We already do that in Canada. We also give payments back to low income people to offset their spending in categories that are taxed. Net-net, low income people in Canada pay very little in consumption taxes.
The tax refund part isn't really needed.
Consumption taxes force you to choose between simplicity and progressiveness. Now, That's a great feature of a tax system if you live to exploit the loopholes.
https://www.theguardian.com/business/2019/jan/16/crumbs-judg...
The nice thing about consumption taxes is you capture even black market money. And the wealthy will pay the overwhelming majority of the tax.
Taxes on categories of things might be easier to implement, but you could do that on consumption (yachts, steaks, golf equipment) as easily as investments (cap gains, property).
Isn't that way electricians make more in SF than they do in Memphis Tennessee? Isn't that why engineers get paid more in California, but have to take a pay cut if they work remote from Ohio?
This makes me wonder how effective the progressive tax system is.
It's orders of magnitude harder to do it with consumption tax. The tax authorities essentially have to form an opinion on the "luxuriousness" of each good. That's a monumental administrative pain.
This is a feature, not a bug, if you come at it from the perspective of somebody creating or exploiting tax loopholes (I.e. you're bill gates).
Wouldn't you need to submit your every purchase to the government, banning cash and barter?
If it was applied across the board to everything a high value item tax would be an absolutely terrible component to competitiveness however given that large capital outlays are how first world industry stays competitive and produces large real utility returns on investment. It would encourage more 'sweatshop' style production instead of a mechanized line let alone automated production lines.
Didn't we already destroy the US boat and plane industries this way in the 80s/90s, without generating significant tax revenue? This WaPo article from 1993 seems to mirror my recollection:
https://www.washingtonpost.com/archive/business/1993/07/16/h...
Not saying that luxury taxes are bad, but luxuries tend to be optional and rich people can just not buy them. Or buy them abroad. I know people with 8 and 9 figure net worths and they have the same phones I do and drink (mostly) the same wine I do. Their houses are nice, but real estate taxes are already massively progressive given that they buy expensive homes in the first place.
If you really want to soak the rich you need to tax things like "luxury vacations abroad" - which has jurisdictional issues and also screws all us poor schmucks who have to save up for our travel.
I'm not seeing how this is easy.
You don’t want to overly tax the creation of new wealth. I think history has shown that to be counterproductive. It slows innovation down drastically since it disincentivizes innovation and investment and therefore the pie as a whole doesn’t grow as fast. See the growth in the US and China vs Europe.
See https://www.gatesnotes.com/About-Bill-Gates/Year-in-Review-2...
Reading them side by side, it really seems like his more recent opinion just wasn't thought out, which is surprising given that he clearly thought about the topic 5 years earlier. My guess is he decided to support what he felt was going to be supported by mainstream Democrats anyway, instead of the economically correct views he clearly understood in 2014.
> We should shift more of the tax burden onto capital, including by raising the capital gains tax, probably to the same level as taxes on labor. (2019)
vs
> I agree that taxation should shift away from taxing labor. It doesn’t make any sense that labor in the United States is taxed so heavily relative to capital.
> But rather than move to a progressive tax on capital, as Piketty would like, I think we’d be best off with a progressive tax on consumption. (2014)
He does seem to have reconsidered the utility of a yacht sales tax.
For adjacent book recommendations I highly recommend Goliath by Matt Stoller on the subject of capital and monopoly power in the US over history.
Where all those countries stagnant before the virus? Of course not.
His point on 1780 rentiers just doesn't hold since most of the wealth in the world was created since the 1950s.
Also, Bill Gates's favored solution, a tax on consumption, will not do anything to counter the problem of exceedingly wealthy people who have so much money that they can't spend it all, even with a "lavish lifestyle".
His argument is that dynastic wealth doesn’t persist in the United States. If it did, then wealth would STILL have accreted to renters even if most of the wealth was created since the 50s.
Furthermore you didn’t bother reading or noticing that he is in favor of an estate tax.
America doesn't really have people who've been billionaires for 7 generations.
But America does have people who were born into enough money to never have to worry about finances ever, had children with the same benefit, and had grandchildren in similar circumstances. Plenty of people in politics are the son or grandson of a line of rich politicians. Plenty of comfortable millionaires got their start from a lineage of inherited wealth.
It's not enough money to rank on Forbes 400 and build private castles that'll last centuries, but it's definitely wealth and status being passed down. It's safe money. Many people who became billionaires aren't there through safe, steady, risk-free financial management.
Even if you ignored inflation, how much cash would someone have to accumulate in order to sustain a middle-class lifestyle for their family for multiple generations, if they weren’t investing and managing those investments?
- Marrying well i.e. marrying smart and successful people so that your progeny’s genes are the best they can be.
The British aristocracy was famous for doing this. Marrying old blood to new blood. However, many cultures do the same. That is why marriage was so often a negotiated affair.
The problem is not that some people have all their needs and wants met with plenty left over. The problem is that some people do not, and there are systemic and often-insurmountable difficulties in moving people from the latter category to the former.
A tax on consumption will have a bigger impact on less wealthy people whose income is spent towards basic needs, whereas more wealthy people hoard their capital (and profit out of it). I fail to see how a focus on consumption should be favored?
Its quite useful in bank accounts because those banks make loans to businesses, which secure the loan with collateral and invest the loan in expanding their business, offering more goods and services at more competitive prices, Thereby generating more value. This is investment.
> A tax on consumption will have a bigger impact on less wealthy people whose income is spent towards basic needs
Perhaps so, but taxing investment also hurts less wealthy people to a greater extent, because they have less money to invest and so the investment tax makes it more difficult for them to catch up to more wealthy people by investing.
> whereas more wealthy people hoard their capital (and profit out of it).
This is why they are wealthy and this behavior should be emulated by the less wealthy if they wish to have more money available for consumption in the long run.
> I fail to see how a focus on consumption should be favored?
Because the aggregate effect of tax incentives shapes the market and investment increases the amount of value created by a given unit of labor, and the amount of value available in the market at all price levels. Incentivizing consumption (by taxing investment more than consumption) causes more people to consume more of their value. Incentivizing investment causes more people to invest more value, creating more aggregate value.
We need to address it for our own self-preservation or it may become one of those issues that dooms what has been a good system.
I have to see the problems of inequality manifesting in concrete ways, because otherwise the concept of it isn't a priori bad to me. As people create wealth (a good thing), just the fact that others haven't managed to isn't a problem to me. That is inevitable and happens with any system. But when it gets to this level, it is causing problems:
-- Wealth accumulation allowing people to buy 2nd homes or more (esp. investment homes), in really expensive places partly with speculative goals, which makes it harder for not just the poor, but everyone in general, especially young people, to afford housing (and not even talking ownership, but rentals)
-- the ability of people with wealth to choose to back symbolic causes with money, at little cost to them but with great cost to the targets of those causes. It cuts both ways mind you, so don't be so glad to embrace this point. I think of the (admittedly mundane) example of people donating $10k to random people on crowdfund sites to buy tents for the homeless because of the symbolism of it, that then litter the streets of other people's cities.
-- Related to that, the political discourse becoming more mirroring of the economic situation, in that people's attention gets focused on (and distracted by) the growing extremes of society. It's hard to resist. They dominate the headlines and discussion. Political opinions of the ultrawealthy and their companies, rare but attention-getting exceptions to the norm. On the more silly end, people's dumb luxo-rich envy feeds on instagram making people upset and setting unrealistic expectations...
-- And finally, vague but real: the new serfdom/perpetual servitude that people with bad education, or back luck early in life are condemned to because they can't do anything to dig out of a $15/hour job serving relatively rich people who are angry at the shoddy level of customer service these days... I actively see this in people I employ.
It's a problem. Not to say we need to abandon capitalism, and not to say that any of the current solutions out there would fix it in ways without unintended consequences. But it is a problem needing attention and some smart solutions put forth that can get people to realize it's our own necks on the line if we don't.
Others will observe that the problem with inequality is not that the wealthiest experience continually greater q.o.l., but that their influence is often seen to deprive the least wealthy of what they once had, and that the process tends to put more and more of us in circumstances of precarity.
The awkward truth is that we have always had an impact on others even back in ancient times wrongly considered isolated arcadias in tune with their environment. Mega-fauna didn't become extinct from running out of food but from humans running out of them as food, and the Sahara fertilizes the Amazon rain forests.
You're the only one pretending that?
Of course, 0-impact is impossible, except the scale at which we are destroying our environment is unprecedented. Hunting of mega-fauna has occurred over thousands of years. Two-thirds of the world’s wildlife has been lost since 1970 (70 years) :
https://www.euronews.com/living/2020/09/10/wwf-proposes-plan...
The pitchforks wouldn't be sharpened nearly as often if the basic humanities in first world nations were minimally guaranteed: food, water, shelter, medical care.
But the US isn't really a first world country. It seems to be straddling the boundary with the old second world, particularly the USSR: military power projection, effectively a single party with respect to the politically connected/rich, vast inequality, functional contempt for the common man despite propaganda.
It does have food on the shelves, unless the paper thin warehousing of the modern supply chain is disrupted.