Thursday, August 18, 2011

The Paradox of Largesse

Keynes spoke of the "paradox of thrift": if everyone saved more, supposedly behaving virtuously, aggregate consumption would fall, leaving everyone worse off. Maurice Lévy, the head of Publicis and of the Association française des entreprises privées, is a very wealthy man--"megarich," in the terminology of Warren Buffet, who is also a member of this club. And like Buffet, Lévy has proposed that he and his kind increase their contribution to the public treasury in this time of troubles: "Il me paraît indispensable que l’effort de solidarité passe d’abord par ceux que le sort a préservés. […] je considère avec la même force qu’il est normal que nous, qui avons eu la chance de pouvoir réussir, de gagner de l’argent, jouions pleinement notre rôle de citoyens en participant à l’effort national."

Opinions vary as to the import of Lévy's gesture. Romain Pigenel reviews them here. Unlike Buffet, as Pigenel points out, Lévy is proposing only an "exceptional" tax increase on the rich. Still, it's yet another breach in the "tax shield" and implicitly a critique of the ideology that the rich will go on strike and cease to "create jobs" or "invest in innovation" unless granted extraordinary incentives by governments. One might want to compare this with Jeff Sachs' sour view of one of the consequences of globalization:
The simple fact is that globalization has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile..., they have been able to convince their home governments to cut tax rates ... in the name of global tax competition. ... In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world.
 Be that as it may, Lévy's largesse troubles me for a rather different reason. To my mind it is motivated by surrender to the overwhelming conventional wisdom of the moment, which is that all our problems will end if only we pay down our debt. So the paradox of largesse is that it is simply the paradox of thrift in disguise. The megarich in their generosity and far-seeing wisdom would set an example for the rest of us by submitting quietly to the supposedly self-evident need for austerity, more austerity, always austerity.

But what if the real problem isn't debt but the distribution of income in normal times? What if the decline in labor's share has put downward pressure on demand that asset bubbles at first disguised and now, having collapsed, exacerbate? Then M. Lévy's admirable generosity would be misplaced; rather than fill the state's coffers so that they can be emptied again to pay off bondholders, he would do better to add a swimming pool to his villa or a helipad to his yacht, putting idle workers to work and allowing them to purchase goods that will enrich others who will spend in turn, multiplying the effect of private self-indulgence (not to say private vice, which would be putting it pejoratively) and transforming it into public virtue.

The job of the rich is to consume. The proper role of the government is to craft tax laws that keep the engine of consumption running, which in fairness to the greater number may require higher rates of contribution by the better-off. But it should not be left to the better-off to decide when and how much they wish to contribute. The tax system should be made optimal for all, not flattering to any one class's concept of virtuous citizenship.

Delors Sounds Alarm on Euro

Joining the chorus.

ECB as Lender of Last Resort

Why it is needed discussed here.

European bank liabilities as percentage of GDP: