Monday, June 12, 2017

New Mercantilism--State Sponsored Income Redistribution Favors the Rich

Vijay K. Mathur

According to Professors Robert Ekelund, Jr. and Robert Hebert in their book on economic history, Mercantilist writers between the 16th and 18th centuries were a group of merchants in Western Europe who were primarily interested in pursuit of their own material ends in alliance with the monarchy. They were concerned about the nation-state’s power, as long as it promoted their accumulation of wealth.

Mercantilists advanced the cause of nationalistic international trade regime and import tariffs that allowed them to accumulate export surplus. They were in favor of keeping wages as low as possible because, as Professors Ekelund and Herbert state, they believed that “suffering is therapeutic”. Poverty makes workers industrious. High wages would make labor lazy and hence supply less work.

Mercantilists were in favor of selective regulations, subsidization and taxation of industries, and monopoly in some sectors. Benefits to them guided their efforts and support for such state actions. In summary, Mercantilist thought represented distribution of income from labor and the poor to the rich.

Mercantilist thought, among many Republicans in the Congress and the Trump administration, runs through some of the actions they have implemented so far and are proposing to implement in the near future.
One of the most egregious Congressional actions that is pro- rich and anti middle and low-income is the American Health Care Act (AHCA) passed by House of Representatives on May 4, 2017. The AHCA increases the number of uninsured among low income, disabled, elderly and poor people. It eliminates 14 million people from Medicaid by cutting $800 billion (2017-2026), according to CBPO estimates, March 13, 2017. The bill reduces all taxes and fees that are part of the Affordable Care Act (ACA-Obama Care) and paid primarily by people with high income. They were used to subsidize those low-income people who could not afford to buy health insurance before ACA.

The Congressional Republicans’ claim that their health care bill is based upon principles of free market is “phishing for phools” strategy, as elaborated by Professors George Akerlof and Robert Shiller (Nobel Prize winners) in their book Phishing for Phools. Akerloff and Shiller cogently argue that “phishing for phools” occurs in the free market as well as in politics. In politics such a strategy succeeds when the typical voter is ill informed, and the campaign donors are well informed. Since the health care bill is so complicated, many voters, except the “donor class”, would be ill informed about the contents of the bill. Even the Congressmen who voted for the bill were not sure about the contents of the bill. Therefore, there is a great deal of room for phishing for the ill informed phools.

Republicans in Congress and the Trump administration have such a disregard for the plight of the non-rich that they are proposing to give wealthy Americans the largest tax breaks, while severely cutting health care funding for low income and poor Americans. Such policies would not only result in large budget deficits and concentration of wealth, but are ethically bankrupt and economically damaging to the nation in the long run.

Proposed tax cuts for the rich are large in absolute as well as in percentage terms, relative to middle and low-income people. Also, marginal tax rates are reduced from 35% to 15% on “pass through incomes”, such as incomes in S corporations, partnerships and proprietorships that mostly benefit the rich. It would also encourage formation of such organizations to avoid taxes. Eliminating estate taxes benefits only 0.2 percent of estates (Center for Budget and Policy Priorities, April 27, 2017). Their hope that it would result in a growth rate of 3% is based on fictional evidence, given average total productivity growth rate below 2% for decades (see Robert Shackleton, CBO working paper, March 2013).

Trump’s world view on international trade is more Mercantilist and is mixed with distrust of free trade and World Trade Organization (WTO). Trump’s administration and Congressional Republicans are also on a rampage to rescind many of the past regulations and laws in order to benefit businesses, without regard to harmful effects to the general public. It is ironic that these politicians, who publically pronounce the virtues of the free market, would defy regulations on pollution control and financial and consumer protection that promote efficiency of free markets.

Republicans are completely oblivious to the fact that one of the most productive resources a country has is its human capital. A country with mostly sick and unhealthy people cannot be productive. Substitution of technology has limitations, and it cannot be efficiently utilized without human capital. Unlike physical capital, investment in human capital starts at a young age and continues through adulthood, and it pays off over generations.

It seems that Congressional Republicans have succumbed to the will of the rich and powerful. Since the Citizen United decision the power of dark money, the title of the book by Jane Mayer, has corrupted political decision-making in the Congress. More emphasis is on appearance, rather than contents, of policies that are pro rich and against poor and lower income people.

I hope politicians realize the corrupting influence of dark money. But if they do not it is at their own peril, and consequently the peril of all Americans and Democracy.

Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.

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