Posts Tagged ‘economics’

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Donald Trump doesn’t know what he’s talking about. But he owned Hillary Clinton during the first part of Monday’s debate. And his attacks on free trade are in fact resonating among working-class voters.

That, and the fact that the polls show the presidential election much closer at this stage than anyone expected, has finally made others sit up and take notice.*

I weighed in back in July, trying to move the debate beyond the free trade-protectionism terms in which it has been framed. Now, we have Peter Goodman, who understands that “Trade is under attack in much of the world, because economists failed to anticipate the accompanying joblessness, and governments failed to help.”**

Goodman makes a number of good observations—about the role “libraries full of economics textbooks” played in promoting free trade and the fact that, even if manufacturing plants returned to the United States, “robots would probably capture most of the jobs.”

But what really interests me about Goodman’s article are the comments from readers. Here is a small sample:

From Mitch Gitman (in Seattle)—

Economists failed to anticipate the job losses stemming from unleashing a Hobbesian race to the bottom on the global economy?! I think they all knew full well, but they weren’t so concerned because it wasn’t their jobs being lost. Just like these economists don’t belong to the generations that are going to be bearing the brunt of the environmental impacts of this sudden race to burn all the fossil-fuel resources that our only planet has taken hundreds of millions of years to accumulate.

Economists are supposed to be the professionals who are smart enough to see the big picture, but economists have to pay the bills too. And there was never going to be a demand for an economist with the simple common sense to see the really big picture, that being able to buy marginally cheaper goods at Walmart is the classic case of knowing the price of everything and the value of nothing.

Bill Maher had a great line from his commentary at the end of last Friday’s episode of his HBO show “Real Time.” To people who ask, “Why doesn’t our economy work for people like me?” His response: “Because it’s not designed to.”

From Kate Flannery (in New York)—

At it’s barren heart, it’s not about trade, it’s about profit at any cost to the public good or just simply human life.

We wouldn’t need lower cost consumer goods, if people had decent income to purchase what they need or want in a sustainable way. Products that are cheap, but fall apart after a year is not the way life should be, nor is it environmentally just.

Every economic lie and political spin about the glories of globalization is just that – a lie to enable corporations and the rich to have even more. American agricultural giants wanted more markets for their horrible products, sending corn into Mexico, a country that didn’t need it. This drove Mexican farmers out of business and destabilized workers who fled north to find work, or crowded into cities to become slave workers for corporations at minimal wages. And that’s just one small example of its immoral and devastating effects.

Globalization and its attendant trade are a main contributor to environmental degradation around the globe as well.

The whole idea of glorious trade and globalization and all the rest, is just a monumental lie serving to enrich the few at the expense of the many. It’s been sold to the public at extraordinary cost. But people are waking up and realizing that those we elect to protect and serve the interests of society have only their self interests and those at the top of the food chain – corporations and finance – are just hollow men and women.

It’s about profit. Nothing else.

And LindaP (in Boston)—

It breaks my heart that the city where I grew up –Fall River, MA, the Spindle City– is a Trump stronghold. It is against the self-interest of those supporters, but as one who lived through the shut down of a city and the hopelessness that ensues, I (kinda) get it.

On hot summer vacation days in the ’60s, we kids would walk through the city. Factory windows would be open. The clack and whir of sewing machines and other manufacturing equipment was as familiar as crickets in the evening. Both my parents — my entire family, actually — worked in those mills.

No one was rich, living in three-deckers and saving up for the American Dream of owning a home, which many went on to do. In those neighborhoods of three-deckers there was cleanliness, pride of place, community, and a real knowledge (not false hope) that you could progress and make a better life for your family. No one was looking to live in a gilded tower — just a nice home, good schools, a living wage, and a better life for ones children.

Then the mills went dark, one by one. Everyone I knew who made their lives in those jobs had to move on. There were still other union jobs to get in the late 60s, so we survived. By the time my parents retired, I saw opportunity dry up for those behind them.

The loss of manufacturing allowed poverty, addiction, and a true hopelessness to take hold. Maybe you have to live it to know how devastatingly true that is.

There’s more wisdom in those comments, about the causes and consequences of free trade, than one will find in Trump’s speeches and the libraries full of mainstream economics textbooks—or, for that matter, in the revised policy positions on Hillary Clinton’s web site.

 

*Clearly, the Brexit vote has also had an impact.

**To be clear, mainstream economists are the ones who failed to anticipate the negative effects, and both Democratic and Republican governments failed to help workers.

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More than 400 thousand Philadelphians live in poverty. The United States, even after the latest decline, still has more than 43 million men, women, and children below the poverty line. And nearly one half of the world’s population—more than 3 billion people—are poor (more than 1.3 billion of them in extreme poverty).

And yet the policy debate remains the same: how do we get poor people to get themselves out of the “culture of poverty”?

Not how do eliminate poverty? Or, alternatively, how do we create the economic and social institutions that don’t, on a regular and sustained basis, drive millions of people into and keep many of them in poverty?

Instead, what we get from Steve Volk [ht: ja] on Philadelphia, just like from Abhijit Banerjee and Esther Duflo (in their book Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty) for the Third World, is a focus on the pathologies of the poor and the strategies that can be tested and implemented so that poor people can find their way out of poverty.

Now, I’ll admit, Volk writes (of Mattie McQueen and other poor Philadelphians) with more heart than Banerjee and Duflo seem to be able to muster. But it’s the same basic idea—that there’s something enduring about poverty, which pertains to poor people and “their” culture and which needs to be disrupted with the right sort of economic interventions.

In Volk’s case, the problem is “generational poverty”—such that poverty is passed down through two or more generations. And the solution is the “two-gen” strategy, such as the HIPPY (Home Instruction for Parents of Preschool Youngsters) program Bill Clinton celebrated at the Democratic National Convention.

In practical terms, the strategy means providing educational support to kids while offering the full range of housing, social, mental-health and economic services to their parents. “In hindsight, this way of approaching generational poverty looks kind of obvious,” says Susan Landry, director and founder of the Children’s Learning Institute in Houston, Texas. “Everyone wants to help children. What the two-gen strategy recognizes is that children exist in families.”

Educating children without stabilizing the home, says Landry, puts kids in an impossible position — requiring them to lead their parents. Making a child’s home safer and less stressful yields huge benefits in the child’s ability to learn. And two-gen strategies are gaining support among conservatives and progressives alike. Republican governors like Bill Haslam of Tennessee and Gary Herbert of Utah champion the two-gen approach for imparting a sense of responsibility to parents and streamlining government — parking disparate social agencies under one roof. Paul Ryan, Republican Speaker of the House, recently told NPR that helping children requires helping their families — a truism of two-gen thinking.

What is true of all such programs—the ones Volk writes about as well as those that are tested through randomized control trials by Banerjee and Duflo—is they focus on improving individual decisions and household environments, not on the history and dynamics of larger economic and social structures that create and perpetuate mass poverty. In other words, it’s all about individual, not social, responsibility and outcomes. The goal, it seems, is to change individual decisions and promote the mobility of a select few up and out of poverty—and, by the same token, to avoid an analysis of the kinds of changes that need to be made in the economy in order to end existing poverty and prevent its recurrence in the future.*

The problem, as I see it, is not a culture of poverty. It’s a culture of poor economics.

 

*I am reminded of an early World Development Report (unfortunately, I don’t remember the exact year) in which it was shown that a redistribution of productive assets (such as land reform) was much more likely to end poverty than other reforms (such as universal schooling). However, the authors of the report argued, land reform often faces social and political opposition, especially from landlords, and therefore needs to be set aside since it is an unrealistic strategy.

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Has the policy consensus on economics fundamentally changed in recent years?

To read Mike Konczal it has. I can’t say I’m convinced. While some of the details may have changed, I still think we’re talking about different—liberal and conservative—versions of the same old trickledown economics.

But first Konczal’s argument. He begins with a pretty good summary of the policy consensus before the crash of 2007-08:

Before the crash, complacent Democrats, whatever their disagreements with their Republican peers, tended to agree with them that the economy was largely self-correcting. The Federal Reserve possessed the tools to nudge the economy to full employment, they thought. What’s more, government programs, while sometimes a necessary evil, were likely to be an inefficient drag compared with the private market. Inequality was something to worry about, sure, but hardly a crisis, and policies were correspondingly timid and market-focused.

And it’s true: the debate about the conditions and consequences of the crash—after Occupy Wall Street, in the midst of the Second Great Depression—challenged that consensus, by focusing much more attention on inequality and disrupting the idea that the growing gap between rich and poor is somehow natural and necessary and by calling into question the idea that capitalist markets are self-stabilizing and full employment can be guaranteed by relying on markets.

In all honesty, that’s the least that can be expected, especially on the liberal side of mainstream political and economic thinking in the United States.

But then, when Konczal outlines the policies that make up what he calls the “new liberal economics,” embodied in Hillary Clinton’s campaign and the current Democratic Party, the evidence is very thin. In terms of specific policies—like following the dual mandate for the Fed of stabilizing prices and maximizing employment and supporting paid family and medical leave—the new liberal economics looks a lot like the old liberal economics of the Great Society programs (and, for that matter, of the Nixon administration). And while the policies Democrats support are certainly different from those of current Republicans (which Konczal summarizes as a “mix of Kempism, austerity, and favorable taxes and regulations for businesses that characterizes Paul Ryan’s ideas” and “Trump’s agenda of mercantilism and a chauvinistic welfare state”), they aren’t evidence the existing policy consensus represents a radical change.

That’s because the consensus before the crash, and now seven years into the recovery, has been based on trickledown economics. On both sides of the political and economic aisle.

The overarching idea, shared by liberals and conservatives, is that the existing economic system—with the surplus being appropriated by a small group at the top, who then decide what to do with it—will eventually deliver benefits to everyone, including those at the bottom (through, e.g., more jobs and higher incomes).

There are differences, of course. While the conservative view of trickledown economics emphasizes individual decisions and private markets, the liberal view is based on the idea that individual decisions are constrained by larger institutions and structures and and government programs are necessary to achieve desirable social outcomes. But, in both cases, the benefits created by existing economic arrangements are supposed to start at the top and trickle down to the bottom.

The consensus before the crash was that the liberal and conservative approaches to trickledown economics represented the limits of the relevant debate about economic policy. And now, seven years into the recovery from the crash, the debate that takes place between those limits remains the policy consensus.*

So, to my mind, there’s nothing new about the “new liberal economics.” It’s just a different mix of policies that together make up the latest version of liberal trickledown economics.

 

*If the existing policy consensus has been disrupted, it’s only because Donald Trump has highlighted the fact that trickledown economics, in both its versions, represents an unfair hustle.

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On one hand, Dave Elder-Vass is absolutely right: “we should see our economy not simply as a capitalist market system but as a collection of ‘many distinct but interconnected practices’.”*

As I have explained before, that view of the “iceberg economy”—which has been highlighted in the work of J. K. Gibson-Graham—represents a fundamental challenge to neoclassical economists, for whom

the entire economy is visible and consists of capitalist markets—or unwarranted constraints on capitalist markets, which should be eliminated. According to iceberg economists, capitalist markets are only the tip of the iceberg, and there’s a proliferation of noncapitalist economies below the waterline.

But Elder-Vass also uses it against Marxists who, in his view, see “one central mechanism in the economy: the extraction of surplus from wage labour by capitalists” and leave out ethical issues.

The problem is, while Elder-Vass credits J. K. Gibson-Graham, especially their book The End Of Capitalism (As We Knew It), with the idea that unified, totalizing metaphors of the economy (like a “capitalist market system”) can make it difficult to think outside the box and imagine alternatives, he forgets that Gibson-Graham themselves used the categories of the Marxian tradition—including the idea of class defined in terms of surplus labor—to decenter the economy.**

He also overlooks the fact that Gibson-Graham (as well as others who have worked with and alongside them in the larger Rethinking Marxism tradition) have insisted on the ethical dimensions of the Marxian critique of political economy—which includes, but of course is not limited to, a critique of the social theft associated with capitalist and all other forms of exploitation (that is, areas of the economy—whether capitalist, slave, feudal, and so on—in which those who perform surplus labor are excluded from appropriating their surplus labor).

In fact, according to two of Gibson-Graham’s close associates, Jack Amariglio and Yahya Madra, ethics are central to Marx’s critique of capitalism and mainstream economics.*** But Marx’s commitment to communism is not governed by an actual model or a fixed morality. Rather, they argue,

The ethical is embodied in Marx’s enduring faithfulness to sustaining a critical position toward the existing state of affairs, not in his particular and changing dismissals of capitalism or in his obscure, partial formulations of the shape communism might take. The lesson of Marx is that, facing the abyss of an unknown communism, the ethical is the will to risk a different social organization of surplus.

To put it in terms of the iceberg economy, the ethical is the will both to recognize the noncapitalist forms of economy below the waterline and to risk a different social organization in which capitalist exploitation ceases to be the exclusive or even predominant mode of appropriating and distributing the surplus.

Contrary to Elder-Vass, then, seeing the economy “not simply as a capitalist market system” is consistent with the Marxian critique of political economy, including the ethical stance that is informed by and embodied in that critique.

 

*I will try to be careful here because I have not yet had a chance to read Elder-Vass’s book,  Profit and Gift in the Digital Economy. I am relying, instead, on Daniel Little’s review of the book and Elder-Vass’s response.

**Gibson-Graham also borrowed from other traditions, such as feminism, queer theory, and poststructuralism to create their iceberg economy.

***See their entry on “Karl Marx” in the Handbook of Economics and Ethics, ed. J. Peil and I. van Staveren, 325-32 (Edward Elgar, 2009).

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According to the norms of both neoclassical economic theory and capitalism itself, workers’ wages should increase at roughly the same rate as their productivity.* Clearly, in recent years they have not.

The chart above, which was produced by B. Ravikumar and Lin Shao for the Federal Reserve Bank of St. Louis, shows that labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. In fact, real labor compensation per hour in the nonfarm business sector was 0.5 percent lower 20 quarters after the start of the recovery, while labor productivity had increased by 6 percent.

Clearly, the gap between worker compensation and productivity has grown during the current recovery.

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But the authors go even further, showing that the gap in the United States between compensation to workers and their productivity has been growing for decades.

labor productivity has been growing at a higher rate than labor compensation for more than 40 years. As Figure 3 shows, labor productivity in 2016:Q1 is 3.8 times as high as that in 1950:Q1; labor compensation, on the other hand, is only 2.7 times as high. In other words, the gap between labor productivity and compensation has been widening for the past four decades. The slower growth in labor compensation relative to labor productivity during the recovery from the two most recent recessions is part of this long-term trend. (reference omitted)

The data in Figure 3 show that the productivity-compensation gap—defined as labor productivity divided by labor compensation—has been increasing on average by approximately 0.9 percent per year since 1970:Q1. Based on this long-term trend, the gap would have been 51 percent higher in 2016:Q1 compared with 1970:Q1; in the data, the gap is actually 47 percent higher.

The fact is, labor compensation has failed to keep up with labor productivity after the Great Recession. But, as it turns out, there’s nothing unique about this period. The gap has been growing for more than four decades in the United States.**

Clearly, the recent and long-term trends of productivity and labor compensation challenge the norms of neoclassical economics and of capitalism itself. But we are also seeing the growth of another gap—between the promises of both neoclassical theory and capitalism and the reality workers have faced for decades now.

 

*Neoclassical economics—in particular, the marginal productivity theory of distribution—is based on the idea that the factors of production (land, labor, capital, and so on) receive in the form of income what they contribute to production. So, for example, as labor productivity increases, real wages should also rise. Similarly, capitalism is based on the idea of “just deserts.” That idea—that everyone gets what they deserve—is essential to the very idea of fairness or justice in the way the economy is currently organized.

**The authors’ analysis is based on the gap between labor compensation and productivity. If we look at real wages (as in the chart below) instead of compensation (which includes benefits, and therefore the portion of the surplus employers distribute to pension plans, healthcare insurers, and others), the gap is even larger.

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According to my calculations from Fed data, since 1979, productivity has grown by 60 percent while real wages have increased by less than 5 percent.

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A constant refrain among mainstream economists and pundits since the crash of 2007-08 has been that, while the state of mainstream macroeconomics is poor, all is well within microeconomics.

The problems within macroeconomics are, of course, well known: Mainstream macroeconomists didn’t predict the crash. They didn’t even include the possibility of such a crash within their theory or models. And they certainly didn’t know what to do once the crash occurred.

What about microeconomics, the area of mainstream economics that was supposedly untouched by all the failures in the other half of the official discipline? Well, as it turns out, there are major problems there, too—especially given the obscene levels of inequality that both preceded and have resumed since the crash erupted, not to mention the slow economic growth that rising inequality was supposed to solve.

In particular, as I have written many times over the years, the idea that a rising tide lifts all boats—along with its theoretical justification, marginal productivity theory—needs to be questioned and ultimately abandoned.

But you don’t have to take my word for it. Just read the latest essay by Nobel Prize-winning economist Joseph Stiglitz.

Stiglitz first explains that neoclassical economists developed marginal productivity theory as a direct response to Marxist claims that the returns to capital are based on the exploitation of workers.

While exploitation suggests that those at the top get what they get by taking away from those at the bottom, marginal productivity theory suggests that those at the top only get what they add. The advocates of this view have gone further: they have suggested that in a competitive market, exploitation (e.g. as a result of monopoly power or discrimination) simply couldn’t persist, and that additions to capital would cause wages to increase, so workers would be better off thanks to the savings and innovation of those at the top.

More specifically, marginal productivity theory maintains that, due to competition, everyone participating in the production process earns remuneration equal to her or his marginal productivity. This theory associates higher incomes with a greater contribution to society. This can justify, for instance, preferential tax treatment for the rich: by taxing high incomes we would deprive them of the ‘just deserts’ for their contribution to society, and, even more importantly, we would discourage them from expressing their talent. Moreover, the more they contribute— the harder they work and the more they save— the better it is for workers, whose wages will rise as a result.

Then he argues that three striking aspects of the evolution of the United States and most other rich countries in the past thirty-five years—the increase in the wealth-to-income ratio, the stagnation of median wages, and the failure of the return to capital to decline—call into question the neoclassical story about the distribution of income.

Standard neoclassical theories, in which ‘wealth’ is equated with ‘capital’, would suggest that the increase in capital should be associated with a decline in the return to capital and an increase in wages. The failure of unskilled workers’ wages to increase has been attributed by some (especially in the 1990s) to skill-biased technological change, which increased the premium put by the market on skills. Hence, those with skills would see their wages rise, and those without skills would see them fall. But recent years have seen a decline in the wages paid even to skilled workers. Moreover, as my recent research shows, average wages should have increased, even if some wages fell. Something else must be going on.

As Stiglitz sees it, that “something else” is a combination of rent-seeking (especially land rents, intellectual property rents, and monopoly power) and increased exploitation (especially the weakening of workers’ bargaining power, based on weak unions and asymmetric globalization).*

The result is that the rising tide has only lifted a few boats at the top and left everyone else behind.

But Stiglitz is not done. He also explains that not only is growing inequality not necessary for growth; it actually has negative effects: it leads to weak aggregate demand (and, in an attempt to solve that problem, asset bubbles), less equality of opportunity (thus lowering growth in the future), and lower levels of public investment (since the rich believe they don’t need things like public transportation, infrastructure, technology, and education).

It should be noted that the existence of these adverse effects of inequality on growth is itself evidence against an explanation of today’s high level of inequality based on marginal productivity theory. For the basic premise of marginal productivity is that those at the top are simply receiving just deserts for their efforts, and that the rest of society benefits from their activities. If that were so, we should expect to see higher growth associated with higher incomes at the top. In fact, we see just the opposite.

Neoclassical marginal productivity theory was never a plausible explanation of the distribution of income in capitalist societies. And, as Stiglitz explains, it is even more questionable in light of the spectacular growth of inequality in recent decades.

The only conclusion is that we live in strange times—when the illusion of a rising tide that lifts all boats (and, with it, trickledown economics, “just deserts,” and the like) has been shattered, and yet mainstream economists continue to teach (and use as the basis of economic policy) its theoretical underpinnings, marginal productivity theory.

There’s nothing left but to declare that both mainstream macroeconomics and microeconomics—as basic theory and a guide for economic policy—have failed. There’s simply nothing there to be fixed. Both mainstream macroeconomics and microeconomics need to be set aside in favor of very different analyses and explanations of capitalist instability and inequality.

 

*Elsewhere (e.g., herehere, and here), I have raised questions about the rent-seeking argument and showed how it is different from the alternative, surplus-seeking explanation of inequality.

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You’d think a Harvard economics professor would be able to do better than invoke horizontal equity as the sole argument for reducing the U.S. inheritance tax.

But not Gregory Mankiw, who uses the silly parable of the Frugals and the Profligates to make his case for a low tax rate on the estates of the wealthiest 0.2 percent of Americans who actually owe any estate tax.*

I’ll leave it to readers to judge whether or not it’s worth spending the time to compose a column on a tax that affects such a tiny percentage of rich—very rich—American households. And then to argue not for raising the tax, but for lowering it.

Me, I want to raise a few, more general issues about how mainstream economists like Mankiw think about inheritance taxes.

First, Mankiw presents one principle—horizontal equity, the “equal treatment of equals”—and never even mentions the other major tax principle—vertical equity, the “unequal treatment of unequals,” the idea that people with higher incomes should pay more taxes. Certainly, on the vertical criterion, those who receive large inheritances (for doing nothing more than being born into and raised within the right family) should pay taxes at a much higher rate than those who do not.

Second, even the notion of horizontal equity—that equals must be treated fairly—depends on an assumption that we each have come fairly to where we now stand. If that principle is violated (as it often is, e.g., because an estate represents the accumulated wealth based on other people’s labor, their surplus labor), then we need to ask if there is even an a priori principle of horizontal equity. The alternative is to judge everyone’s entitlements and burdens, including those occasioned by large inheritances, according to a single theory of equity or justice.

Finally, and perhaps even more important, both the horizontal and vertical equity standards presume that tax justice can be achieved by minimizing the coercive relation between the citizen and the state, which is then counterposed to the freedom guaranteed by a system of voluntary exchange. As Paolo Silvestri explains,

if the problem of the legitimacy of taxation as coercion is posed in terms of ‘voluntary vs coercion’, or freedom vs coercion, the maximum that one can ask it is to minimize coercion and maximize possibilities for voluntary exchanges, and / or minimize the role and size of government and leave as much room as possible to the private sector.

The alternative, of course, is to imagine a very different economic and political relationship, one in which both exchange and taxation—and thus notions of freedom and obligation—are understood in terms of an alternative logic. Consider, for example, the gift. If there is indeed something that the literature on gift economies has revealed it is the fact that social reciprocity—literally, creating and reproducing social relationships through gift exchange—configures the relationship between freedom and obligation in a manner quite different from that presumed by Mankiw and other mainstream economists.

What Silvestri makes clear is the circulation of the gift involves the free recognition (or non-recognition) of the obligation or debt occasioned by the gift, “in the sense that human freedom is asserted as such at the very moment in which it recognizes (or not) his debt.” Taxation, in particular, can be represented as an act of “giving back” to society, the recognition of a relationship of living together beyond the family—which, while never finally solving the tension between obligation and freedom, creates and recreates relations of mutual trust and living in common. It thus redefines the issue of equal or unequal return—the accounting framework of giving and taking embedded in notions of horizontal and vertical equity—in favor of asymmetry and an unending cycle of producing and resolving instances of justice and injustice across society.**

To which the only possible answer is further giving—and thus the freedom of those who have managed to amass great fortunes to comply with the obligation, after they have died, to pay taxes at a high rate based on large accumulations of the social surplus.

 

*There are many other facts about the estate tax Mankiw conveniently leaves out (according to the Center on Budget and Policy Priorities): the effective tax rate is much lower than the statutory rate, only a handful of family-owned farms and businesses owe any estate tax, the largest estates consist mostly of “unrealized” capital gains that have never been taxed, most other rich countries levy some form of estate tax, and the estate tax is the most progressive part of the U.S. tax code.

**My concern here is with the inheritance tax. Silvestri takes his argument in a related but different direction: “the European economic crisis, the restrictive fiscal policies and their social consequences [that] have done nothing but to sharpen the citizen’s distrust in such legal-political institutions, increased their resentments, and even undermined the very possibility of a democratic discussion on taxes.”