Bollettino

Life under W.

A couple of weeks ago, the NYT reported that the nation's criminal CEO's and their multimillion dollar minions were really, really going to be prosecuted soon. Some day. As in, the forces of goodness are closing in.

Well, we knew it was a crock. Most Valuable fraudster Richard Scrushy, late of HealthSouth, was the man named as most likely to face a trial. Since then, though, Scrushy has shown with what contempt he takes the feeble efforts of the underfunded, bad faith Feds. The NYT reports, today, that his attorney told a House Panel to take this subpoena to testify and shove it. Meanwhile...



"Meanwhile in Alabama, where Mr. Scrushy lives and HealthSouth has its headquarters, Mr. Scrushy is maintaining a high profile.

Last month alone, he bought a $3 million yachting marina on the Alabama Gulf Coast; joined with Donald Watkins, one of his lawyers, to buy a Cessna jet; and sponsored a powerboat race in the Gulf, placing second piloting his $450,000 Skater motorboat Monopoly, which is painted like the board game with "Go" across the deck.

Some of Mr. Scrushy's legal foes say that he is being deliberately provocative. He and Mr. Watkins are "thumbing their noses at people pursuing him and his money," said Doug Jones, a former United States attorney in Birmingham who is representing shareholders suing to recover their losses on HealthSouth stock."

In the nineties, there was a lively discussion in centrist circles about "ending equality" -- as Mickey Kaus put it. The Clintons, arch policy wonks, loved the idea that liberalism could be redefined without the ideological baggage of equality. It meant that you could hobnob with the moneyed while training your liberal sensibilities on such things as the symbols of identity politics. Tony Blair is the last survivor, perhaps, of this mindset.

However, in a bust it is much harder to swallow the contradictions of a liberalism of unequal outcomes than it is in a boom. In fact, even hardcore inequalitarians pointed to the lowering of the poverty rate and the narrowing of the income gap (however miniscule) between the working class and the wealthy as a sign that Clinton's economic policies were sound.

There's an interesting discussion, here, of the economic groundwork that preceded the institution of progressive income tax. The idea, according to Martin Daunton, is a gloss on one of Adam Smith's precepts concerning "equality of sacrifice". The question that derives from Smith is how to count units. Is taking 5 dollars from a man earning 5,000 dollars the same as taking 5 dollars from a man earning 500,000? Interestingly, the terms of the debate were changed by the coming of marginal utility theory, which seemed to give a model for conceptualizing linear changes within a system -- or, in other words, giving us a sense of the variables that are subsumed by the thing sacrificed.

"Alfred Marshall's Principles stressed the marginal costs of producing another unit of output, and the marginal satisfaction to be derived from consuming it. In this approach, an additional pound did not produce the same satisfaction for someone in receipt of an income of �1,000 as for someone in receipt of an income of �100. The meaning of equality of sacrifice was more complicated than writers in the past had appreciated. Did equal sacrifice mean each taxpayer should surrender the same proportion of their total utility?

"That is, the aim should not be to take 10 per cent from all income levels (�5 from an income of �500 and �10 from an income of �1,000), but rather to extract the same proportion of happiness or satisfaction, which varied according to income. Or did it mean an equal marginal sacrifice in order to produce minimum disutility? By this definition, the aim was to calculate the additional satisfaction produced by the final increment of income, and to ensure that the rate of taxation on that income imposed the same loss of utility or satisfaction. Thus the final �10 of income for someone earning �500 might produce three times as much satisfaction as the final �10 for someone earning �1,000, so that the tax rate could be three times as high on the larger income with the same marginal disutility."

Ourselves, we find the theology of marginal utility cumbersome and ultimately unsatisfactory, here. But it is important to understand that this was the economics standing in the background during the first wave of progressive tax legislation. And that legislation, in turn, codified the idea that income was a variable that does not effect the social and political position of the income earner. In other words, the only principle that should count in supporting a scale of larger percentages of tax on income as we scale upward is to enforce Smith's equality of sacrifice. From an institutional economics viewpoint, however, this abstraction ignores the embedding effects of wealth -- that is, embedded wealth has a direct effect on the political system that decides questions not only of taxation, but of disbursement. The effects are manifold -- and none moreso than the effect on justice. There is no such thing as a graduated scale of legal services that would allow us to model an equality of sacrifice for legal agents. Those who earn 5,000 dollars simple won't be able to afford the lawyers available to those who earn 500,000 dollars. Since the judiciary is a point of direct contact between citizen and state, this is a much more important point for the state than, say, the same disparity that might be supposed for, say, transportation or clothing or shelter. Granting, for the moment, the liberal assumption that such things are best left to the sphere of the market, you have a special case when the market is determining quality of legal service.

Taunton provides an excellent little resume of how the cause of progressive taxation mirrored a change in economics theory:

"Economic ideas provided a large part of the meanings and vocabulary of political debate, and limited possible alternatives. The point is apparent in 1909, when opponents of Lloyd George's 'people's budget' turned to Alfred Marshall to supply them with intellectual authority - which was not forthcoming. He refused to denounce the budget as socialist, as a device to remove responsibility from individuals and pass it to the state. Instead, Marshall believed that cautious redistribution from poor to rich would be beneficial. 'For poverty crushes character: and though the earning of great wealth generally strengthens character, the spending of it by those who have not earned it, whether men or women, is not nearly an unmixed good.' In 1902 he asked, 'Is the share of the total price of products which goes to manual labour as large as is compatible with a wholesome and "free" state of society? Could we by taking thought get the work of our great captains of industry and financiers done with rather less of their present huge gains?'

One hundred years later, we see the massive effects of the embedding of advantage to the wealthy in a system that is effected to a great degree by the greater inputs of the wealthy. The Kaus's of the world could well counter that we are misconstruing those inputs -- that the system is only manipulable by inputs of cash, and that such cash could result from the aggregation of small sums. That is not completely untrue, but it is true for only a narrow range of government structures. This is something to come back to.