Sanders, Warren and politics of grievance

A wealth tax and a ban on hydraulic fracking, both of which have the support of Bernie Sanders and Elizabeth Warren, would address seemingly separate issues. Yet they stem from a common impulse, one that also undergirds the current trade war: to use the tax code to punish those seen as responsible for unfairness, even if doing so hurts the average American worker.
Almost every attempt to model the economic implications of the wealth tax concludes that it would lead to a huge drop in US savings. Some say that this would also result in a large decrease in wages as US investment collapses.
My own research suggests that while the wealth tax would lead to a huge savings decline, it would largely be supplanted by an inflow of foreign investment. So Sanders and Warren would succeed in freeing US workers from under the thumb of the US billionaire class — only to place them under the thumb of foreign billionaires.
This process would also generate a large trade deficit. When there is an increased inflow of foreign capital, there is a corresponding shift in the flow of goods and services across the border. What’s difficult to determine from economic models is what form this shift will take.
According to Sanders and Warren, the answer is that the US will become a net importer of energy. This is not necessarily a good thing.
The US has long been the world’s largest consumer of energy. Fifteen years ago, the US was also projected to be the world’s largest importer of energy, with petroleum imports rising by 2025 to 18.7 million barrels per day, or $341 billion per year at current prices.
A ban on fracking would bring a reversal of this trend — but do little to change the actual US consumption of oil. Like financial capital, the price of oil is determined in international markets. Eliminating US oil production would drive up those prices, although the global production of oil would probably rebound sharply,
mitigating the effect.
That would leave a world in which the US is poorer, foreign billionaires are richer, and the job prospects of many Americans — particularly those in the heartland — are worse. At the same time, little would have been done to address the underlying issues, namely the concentration of wealth in the US and the emission of carbon into the atmosphere.
Both of these proposals — a wealth tax and a ban on fracking — are driven not by a compulsion to improve underlying conditions, but to punish bad actors. That may make for better sound bites, and in fact both policies may be emotionally satisfying. In the modern world of globalised markets, however, they are self-defeating. Worse, as these policies failed to produce the desired goals, they would increase the demand for exactly the kind of protectionism that is currently holding back the US economy.
What the US needs to do is turn away from the politics of grievance, whether against
imported products, domestic
billionaires or fossil-fuel companies. Instead, it needs more focus on policies — housing deregulation, wage subsidies, carbon taxes, to name a few — with a less visceral appeal but a more constructive impact.
—Bloomberg

Karl W. Smith, a former assistant professor of economics at the University of North Carolina and founder of the blog Modeled Behavior, is vice president for federal policy at the Tax Foundation