Some of our current economic policy debates can be likened to the (largely apocryphal) charge of Polish cavalry against Nazi tanks: Seeking to shape a world of rapid technological, economic, and social change, political leaders are obstinately applying recipes that are outdated and bound to be ineffective.
This failure of imagination afflicts the entire political spectrum, in Europe as in the United States. Retreating from the globalized world into cocoons of sovereign nation-states, as much of the populist Right wants to do, is simply retrograde. But equally tired are the mantras of the technocratic center, several of which were on full display in Davos last month. And, for all their social media panache, the rising generation of left-wing firebrands, exemplified by congresswoman Alexandria Ocasio-Cortez (AOC), suffers from much the same problem: not just playing fast and loose with the facts (of which AOC is hardly the worst offender), but also offering policies that are past their sell-by date—no matter how effective they are rhetorically or how much they move the Overton Window.
In reality, imposing steep marginal tax rates on top income brackets would not hit oligarchs and billionaires very much (and could in fact help entrench already existing wealth disparities). My AEI colleague Aparna Mathur has estimated that under plausible assumptions about how the wealthy would react, a 70 percent rate imposed on annual incomes above $10 million would generate a measly $5.4 billion in additional tax revenue. The rich do not simply receive a steady stream of income in their bank accounts. Rather, they hold portfolios of assets that can be structured to minimize the resulting tax liability.
The problems that the Left seeks to address are real. The interplay of the new economic environment and the outdated rules of the economic game has entrenched incumbents, denied economic opportunity to many, and keeps the economy from realizing its full potential. But those cannot be effectively addressed by tweaks to the tax code or by bringing back Glass-Steagall.
In one sense, then, the problem with the radical Left is that it is not radical enough. But if the movement is serious about trying to bring new and imaginative thinking into the public conversation, its representatives might consider giving a careful read to Eric Posner’s and Glen Weyl’s recent book, Radical Markets: Uprooting Capitalism and Democracy for a Just Society. The authors, a well-known legal scholar and a maverick economist at Microsoft, share the Left’s discontent with crony capitalism, capture, and inequality. Yet, unlike the left, they offer a set of radical policy proposals that are counterintuitive, grounded in solid social science, and fly in the face of both right-wing and left-wing orthodoxies.
Consider one source of systemic injustice that has haunted economists since time immemorial: the existence of rents from immobile, fixed resources—traditionally land. A landowner who happens to own a plot adjacent to a new development may have done nothing to improve his land, yet they will see their wealth rise as a result of other people’s efforts. It only seems fair (and economically efficient) to heavily tax such gains insofar as they are not result of owner’s conscious decisions. Already in the 19th century, thinkers including Henry George and Pierre-Joseph Proudhon sought to tax rents from unimproved land.
Today, business projects are often forestalled for similar reasons, with property owners (or patent trolls, for that matter) seeking to extract as much revenue as possible for themselves. Worse yet, property owners may lobby for policies that will keep property prices high even when it means artificially restricting the supply of housing, usually to the detriment of the working poor and middle classes.
Posner and Weyl claim that this twofold problem of unfairness and stasis can be tackled through a mechanism inspired by modern auction theory, pioneered by the late Nobel Prize-winning economist William Vickrey: A common ownership self-assessed tax (COST) could be imposed on some fixed assets such as land and real estate, but also on radio frequencies, patents, and internet domain names. COST would be different from George and Proudhon’s idea insofar as it is not just a tax. The system would require each owner of assets to declare their monetary value—a necessarily subjective valuation—as the taxable base. But here comes the twist: The system would also enable anyone to purchase the asset in question at the declared price.
Because owners would be taxed at some percentage of the declared value, they would no longer have the incentive to inflate the self-declared value of their assets, as patent trolls or property owners in the Bay Area do, creating hold-out problems. In fact, it can be demonstrated formally that COST would incentivize owners to reveal the true value of their assets, much as certain kinds of auctions do. There would, of course, be plenty of ways for the wealthy to avoid being taxed—mostly by sticking to mobile forms of capital not subject to COST. But even the wealthy have to live somewhere. Given the amount of investment, some of it speculative, into real estate in cities such as London, New York, and Miami, including by oligarchs from authoritarian regimes, there appears to be a lot of low-hanging fruit ripe for the plucking by fiscal authorities.
More importantly, unlike other forms of taxation, COST would also help move resources to their most valued uses, resulting in a culture where constant churn, instead of holding on to assets indefinitely, would be the norm. Finally, it would provide a significant mechanism for redistribution, as the tax would be levied both on assets and related liabilities (resulting thus in a subsidy for homeowners whose property has suddenly fallen in value).
Posner and Weyl also take a hard look at antitrust law—a subject of considerable neglect among policymakers. The problem they identify is the rise of institutional investors—the likes of Vanguard, Black Rock, State Street, and Fidelity—as the most significant groups of shareholders across the economy. Their growth started in the 1970s, driven by the rising popularity of index funds, and leveled off in the late 2000s at around 26 percent of the entire stock market’s valuation.
By their nature, index funds are diversified across firms and sectors. Whether it is important banks, airlines, or manufacturing businesses, institutional investors are frequently the single largest shareholders in such firms. This means that firms are no longer owned fully independently and their managers are incentivized to engage in tacit collusion, driving up prices, lowering wages, lobbying more, and innovating less. That creates monopoly profits that accrue to those holding disproportionate amounts of capital—especially to households in top brackets of income distribution.
Posner’s and Weyl’s solution is relatively straightforward: update the existing legislation and enforcement to prevent institutional investors from acquiring large market shares. True, such restrictions would reduce the degree of diversification available to investors but those costs would be tiny. Holding as few as 50 different stocks can generate as much as 90 percent of the total benefits of diversification across the entire market. Back-of-the-envelope calculations suggest that a more stringent antitrust enforcement would not only increase the efficiency of oligopolistic industries but also transfer around 2 percent of national income from capital owners to the wider public.
There is more, including a proposal for a “data labor movement” that would push—perhaps through a global “strike”—digital giants to compensate users for the valuable data which they provide to such platforms for free. With current technology, there is no reason why effective payment schemes could not be set up to give back to users some of the economic surplus that they create. Posner and Weyl discuss immigration too, as well as the idea of “quadratic voting”, which would enable voters and other decision-makers to assign weights to their votes, according to the salience of issues at stake.
Although based in rigorous social science, not all of their proposals are equally novel or compelling. Furthermore, the authors themselves recognize that the complexities of the social world tend to get ahead of even the best thought-out theories. As a result, the radical nature of their proposals needs to be balanced by moderation and incrementalism in implementing them. Local experiments, rather than irreversible federal schemes, are the way to go. But whatever the results, even if Radical Markets inspires just a handful of people— Right, Left, and center— to step out of their ideological and tribal ghettos, Posner and Weyl will have rendered a hugely valuable service to public debate in the United States and beyond.