Must the Rich be Lured into Investing? Who are the Real "Job Creators?"

Why should Mitt Romney and the fabled "one-percent"  pay only a 15% marginal tax on investment income ... half the rate charged to a dentist or auto mechanic on wages earned from work?  This was not the case until recent Republican Congresses slashed taxes on passive, unearned dividends and capital gains.

The rationale for that immense tax cut for (mostly) rich investors was simple and alluring - that super-low rates would entice more of the rich to invest in companies within the U.S., helping them to increase their productive capacity and hire more workers. Moreover, the resulting boom in economic activity would then result in so much new tax revenue, even at low rates, that deficits would disappear.

Let's put this in context with a term you may have heard. "Supply side" economic theory maintained that this flow of investment capital would pump up the factory end of things, increasing the supply of goods and services, offering them cheaper, thus stimulating demand.

In contrast, the standard Keynsian "demand side" model was to fight recession by ensuring that poor and middle class folks had enough cash ("high-velocity" money) in their pockets to buy - or "demand" - goods and services. Whereupon producers would be drawn into greater production.

For a more detailed description of the differences between these two economic models, see my earlier missive  A Primer on Supply-Side vs Demand-Side Economics. (It really is one of the top issues of our day and an informed citizen should know about it.) Here in this place, I'll try to be brief.

Who was right? Blatantly, the Keynsian approach worked in the 1940s, when massive government spending on WWII resulted in a boom that ended the Great Depression.  A boom that then continued for 30 years, till Vietnam crushed it against a wall. Throughout that period, high tax rates and stimulative spending seemed to work, whenever the economy needed a little help. Moreover, during that era, a very flat social structure - (CEOs earned only a few times what factory workers did) - combined with the most rapid growth of the middle class and the most vibrant era of startup capitalism in human history.

That does not make Keynsianism perfect! Critics like Friedrich Hayek, have indeed exposed some faults and blunders that later Keynsians, like Paul Krugman, openly admit and have striven to correct. Still, the Demand Side approach can point to many clearcut successes.

In particular, it is plain that during recessions, when economic activity lags and deflation looms, what you want is "high velocity" money in circulation - money that will pass from buyer to seller and then to another seller and so on.  Not money that just sits.

Does Supply Side have a similar track record? Not even remotely.  Not even once. Simple charts - and hard conclusions from the Congressional Research Service - show that the Supply Side assertion was... and is... utter mythology.  None of its predicted effects ever happened.  And let me reiterate.  Not ever, even once.

Specifically, cuts in tax rates for dividends and capital gains have never had any long-term effects upon capital investment, since records were kept in the United States.  (See this cogent article putting the myth to rest, once and for all. Also my article: A Primer on Supply-Side vs. Demand-Side Economics.)

In fact, this is no surprise, for several reasons:

1) Supply Side assumes that the rich have a zillion other uses for their cash and thus have to be lured into investing it!  Now ponder that nonsense statement. Roll it around and try to imagine it making a scintilla of sense! Try actually asking a very rich person.  Once you have a few mansions and their contents and cars and boats and such, actually spending it all holds little attraction.  Rather, the next step is using the extra to become even richer. Naturally, you invest it.  Whatever the tax rates, you invest it, seeking maximum return.

Instead of enticing the rich to invest, these super low dividend and capital gains rates simply used money taxed from middle class wage earners to give bonuses for speculations wealthy folks were doing anyway.  If anything, the only major effect, other than budget deficits, was a pumping up of asset value bubbles.

2) Now to be sure, some of the rich ... a few... put a fair amount of their wealth into truly bold and risky new enterprises.  I know such men and women, who engage in Venture Capitalism or starting up creative new enterprises. And just so you know that I'm no socialist I believe this kind of investment truly should be encouraged by taxing it at a very low rate!  Not only because of the risk, but also because equity shares that are bought de novo directly from a new firm actually deliver nearly all of that value directly into capitalization and company development.

In contrast, most exchanges through the NYSE or NASDAQ are purchases from other stock-owners who happen to disagree with you about prospects for future capital gains and dividends. It is just as much a betting/gambling system as any Vegas casino, Your trades may marginally raise or lower the posted price, allowing the company to raise a little capital on the side, but almost nothing from your stock transaction actually goes to the company itself, or into new products or plants and equipment.

(Hence, that kind of investing - by far the largest portion - helps industry only at appallingly low levels of efficiency, but diverts management into spending nearly all its time trying to bribe stockholders with short term benefits, ignoring long-term company health.)

No wonder Adam Smith himself expressed contempt for passive investments that he called "rents"... compared to investments in which the owner actually gets involved in starting up or entrepreneurial development of long term company or enterprise health.

3) So what about "targeted investing"?  The towering hypocrisy of supply side tax cuts for the rich is that they are claimed (without a scintilla of evidence) to help create jobs. But then, why treat investments overseas equally to those made in domestic companies? President Obama proposes narrowing the super-low rates to U.S. companies that are (a) startups, or (b) demonstrably adding jobs, or (c) investing directly in new equipment or R&D.  For this he is derided for "picking winners and losers"... even though the list of targeted tax breaks for GOP-favored industries like coal and oil are myriad. (and outrageous.)

4) In fact, we spoke earlier about how stock and equities markets have lately become the tail wagging the dog.  Instead of serving the capital needs of companies, firms like Mitt Romney's Bain Capital show that productive corporations making goods and services are now like cattle, farmed by Wall Street, to be bled or dissected at whim.  Nor is the whim even human anymore! Most trades are now propelled by hyper-aggressive, parasitical "flash trading" computer programs that vastly amplify volatility, sap investor earning potential, and threaten our entire economic system in a dozen ways.

5) The reduction of dividend and capital gains tax rates almost to zero has coincided with the rapid ending of the relatively flat social structure that we inherited from the Greatest Generation of the 1950s and 1960s.  Back then, the rich managers of major corporations earned only ten or twenty times what factory workers got, a situation that still exists in Japan. Only now, American wealth disparities are approaching levels not seen since the American Revolution.

The last thing that the GOP or Fox wants you to do is look across the last 6000 years.  The class that they call "job creators" used to have another name. Lords.

6) The outrageous inherent unfairness of passive dividend-clipping getting far better tax treatment than earned wages is inherently suspect.  It is exactly what you would expect rich and powerful men to lobby for, whether or not their supply side rationalizations were true!  It should be no surprise that, in our money-drenched political system, those with such power and influence have benefited immensely.

But are the arguments and rationalizations valid at all?  At minimum, supply-siders should bear some burden of proof.  Their experiment has been run, now, for more than three decades, and never once has their core predication come true... that cutting taxes on the rich will result in increased overall revenues and a vanishing federal deficit.

Yes, reducing deficits would be good!  Indeed, under Clinton they vanished. The middle class, according to all opinion polls at the time, wanted any surplus to go to buying down debt.  It was the upper caste who used the surpluses as an excuse to demand immediate tax cuts.  So where does maturity reside?

The results are utterly conclusive.

Supply side is disproved, top to bottom.

What we need in this depression - and by most of the metrics it has been a depression, not a recession* - what's needed is what ended the last one. The circulation of high velocity money that goes hand to hand very quickly, generating economic activity with every transaction. Not the exact opposite, money that sits in portfolios, not helping capitalize industry but simply fostering the aggrandizement of a parasitic caste.  One the the founding father of free enterprise - Adam Smith himself - quite despised.

"All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons."

Smith is not talking about charity, but the vigor of trade.  In this case, we "share" by buying from one another.  The middle class is very good at that.  It is the middle class that - assisted prodigiously by technology and science - propelled our economy to be the wonder of the world.

It is the middle class who should get whatever tax benefits can be doled out.  They'll use it to make small startups.  They'll use it to educate bright, competitive kids.  They'll spend it!

They are the real "job creators."

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Addendum: November 3, 2012 - R.I.P. "supply side economics" 

In a November 1 report we learn that that Senate Republicans applied pressure on the nonpartisan Congressional Research Service (CRS) in September to withdraw a report finding that lowering marginal tax rates for the wealthiest Americans had no effect on economic growth or job creation. 

"The pressure applied to the research service comes amid a broader Republican effort to raise questions about research and statistics that were once trusted as nonpartisan and apolitical," the Times reported. Democrats in Congress resurfaced the report. Republicans objected that it underminde the governing fiscal philosophy of the party, that tax cuts for the wealthy will spur growth and benefit everybody.

Changes over 65 years in the top marginal tax rate and the top capital gains rate do not correlate with economic growth. Reduction in top rates appears to be uncorrelated with saving, investment, and productivity growth. However, top rate reductions do associate with increasing divergence of national income going to the top 0.1%

This is important... and was always obvious.  Even in 1776 Adam Smith described what the rich actually do with sudden cash infusions. They put it to work in "passive rent seeking" and only rarely into capital equipment or risky new products and services. (Risk taking can be rewarded in other ways.) And that cash flow to the rich reduces the velocity of money. If there were ever a time not to do that, it is during a recession, when we want high money velocity, put cash in middle class pockets! (In fairness, during runaway inflation, largesse to the rich - reducing money velocity - actually makes some sense.) 

George H.W. Bush called Supply Side "voodoo economics. It was and is.

Walking a Tightrope on torture...

=== lighting the political lamp ===

New York Times Columnist - and fellow Asimov fan Paul Krugman - has my respect at many levels.   But he can sometimes miss the big picture.  Recently, Krugman inveighed against President Obama’s purported lack of courageous leadership on the “torture front.” While Obama has moved toward ending shameful practices, shedding light on the past transgressions, restoring the trust of our allies and setting up procedures to prevent repetition, critics maintain that all of this will remain hollow and hypocritical without vigorous prosecuton and punishment of those who either commanded or else executed the travesties.

“What about the argument that investigating the Bush administration’s abuses will impede efforts to deal with the crises of today? Even if that were true — even if truth and justice came at a high price — that would arguably be a price we must pay.”

Here I beg to differ, appealing to folks like Krugman that they should look at every angle.  Look, I too twinge over letting people have immunity for "following orders." In order to avoid bad precedents, this process should at minimum be confessional, as in South Africa's Truth & Reconciliation process. Bushite immunity doctrines have to be savagely rejected.

But is it possible that Obama is not simply wussing out for political reasons?  Might he have priorities that rank higher than punishing the monsters who despoiled America’s honor, for the last decade?  And no, I am not talking about focusing his efforts on fixing the economy -- even that is less important than Barack Obama’s true, historic purpose...

...which is to end the foul betrayal known as Culture War.  The trumped-up pitting of region vs region, rural vs urban, red vs blue, know-nothings vs science, the future assailed by a mythologized past, and the reflex measuring of all matters  against an insanely simplistic “left-right axis” that no longer even maps onto any sane definitions of “liberal” or “conservative,” anymore.

 This twenty-year campaign to divide America has effectively lobotomized the world’s greatest nation, leaving it bereft of foresight or ability to mobilize its most famous trait -- pragmatism -- toward the solution of a myriad 21st Century problems.  A sensible willingness to innovate and negotiate, shrugging aside dogma in favor of progress, based upon incremental problem-solving that is both hard-headed and good-hearted.  That has been the American genius, for several centuries.  While pragmatic incrementalism has never been easy or smooth, it has ultimately paid off, almost every time.  Moreover, it has never, ever been about faux European silliness like “left vs right.”

 And it has never been more needed than now.

Who would even want to thwart such a magnificent trait?  Only those who find the Western Enlightenment -- and America, its foremost champion -- loathesome.  Heck, I won’t even blame the retro-troglodytes of the fundamentalist/creationist awakening, whose hatred of the Enlightenment is visceral  and deeply psychological. They are adversaries, but sincere ones.  No, let’s go straight to the source -- the oligarchs who have financed culture war via agitprop agencies like Fox News. Those are the real beneficiaries of the Bush/neocon era.  And they are the ones who stand most to be thwarted, if Culture War ends and the nation can get back to business.

Seriously, do you see any other winners, including fundamentalists? Certainly markets, democracy, freedom, even capitalism and the Pax Americana that the neocons claim to love, all of these things have suffered terribly under Bushite misrule.  Only a narrow clade -- a small subset of billionaires -- stand to benefit from a continuation of our national illness.  But they have made it clear, they want culture war to go on.

And that is why Barack Obama must pick his battles.  Think! Any drive to indict and prosecute the “torture memo” writers would be counter-productive in many ways.

1) Obama is trying to rebuild the confidence of a US Civil Service, including our defense and intelligence agencies, who were deliberately savaged during the Bush years.  Having those people continue to think of themselves as Bush Era victims is extremely valuable. No single step is more needed, but it would be rocked back by such a campaign.

2) Attacking right now on the torture front would fall into a trap, allowing Fox & friends to portray it as a “liberal witch hunt” at the very moment when the base of the crazy right is crumbling, with millions of sincere, conservative Americans starting to drift away.

Look, even if we’re talking about some heinous stuff, there is precedent. When The US Government pardoned Jefferson Davis, after the Civil War, this action ran against a massive current of popular passion for vengeance. But the pardon has a practical aim.  Davis had planned to use his trial as a soapbox in which to establish that secession had been legal.  The victorious Union wanted the de facto rejection of that principle to  be accepted as a perpetual assumption, trampling the notion of state supremacy under the boots of half a million parading victors.

Parallels to this era?  Walking a tightrope, President Obama trying to find ways to permanently reject the  horrific moral lapses of the Bush Administration and to shine cleansing light upon them, without going to court trials that would further divide the nation and give rant-platforms to neocons, letting them bask in their favored drug of self-righteous indignation at public expense.  In any event, there are bigger and better fish to fry!

The key point is this:  Why should Obama spend political capital to go after one set of Bush -era crimes, when there ought to be others, just as easy to prosecute, that would bear and supply fresh political capital instead?  I am talking about crimes of direct malfeasance, corruptions and betrayal of trust, e.g. in the vetting of “emergency” government contracts to buddies.  Send up a few dozen on explicitly clear evidence of stuff like this and the shrill cries of “witch hunt” will only rile a fringe, while millions of decent American conservatives continue their veer of revulsion, away from a Republican Party that long ago abandoned any genetic connection to Lincoln, Eisenhower or Teddy Roosevelt.

Those are the crimes we and Obama should be going after, right now. Crimes that demonstrate venality, betrayal, outright criminality and complicity with a program of theft that helped hurt average Americans' livelihoods. That is where indictments will get consensus backing, helping anchor-in Obama's -- and our -- uprising against unreason.
-------

Oh, go hunt down and read this one -- "The GOP: divorced from reality: The Republican base is behaving like a guy who just got dumped by his wife.” By Bill Maher (LA Times OPINIONApril 24, 2009)  A bit extra-partisan, but worth it for the 2nd-to-last paragraph.

*(PS...Someone tell Krugman about FOUNDATION’S TRIUMPH.)

==Self-righteousness & Robustness==

Self-righteousness redux...  Clay Shirky addresses one of my major themes in discussing his own recent outrage over a “crime” purportedly committed by Amazon.com (one having to do with bias against gays, the details of which do not matter here)... one that Amazon actually did not commit.  ”In 1987, a teenage girl in suburban New York was discovered dazed and wrapped in a garbage bag, smeared with feces, with racial epithets scrawled on her torso. She had been attacked by half a dozen white men, then left in that state on the grounds of an apartment building. As the court case against her accused assailants proceeded, it became clear that she’d actually faked the attack, in order not to be punished for running away from home. Though the event initially triggered enormous moral outrage, evidence that it didn’t actually happen didn’t quell that outrage. Moral judgment is harder to reverse than other, less emotional forms; when an event precipitates the cleansing anger of righteousness, admitting you were mistaken feels dirty. As a result, there can be an enormous premium put on finding rationales for continuing to feel aggrieved, should the initial rationale disappear. Call it ‘conservation of outrage.’”

Of course, this has resonance with my own notion, supported by growing evidence, that self-righteous indignation actually triggers many of the same neural-reinforcement processes that underlie addiction. This was already known about rage and gambling. But since indignation poisons inter-human discourse in almost every field — spoiling our natural, pragmatic, problem negotiating skills — this “addiction” may do vastly more damage than all others, put together.

A noteworthy non-anniversary? --  A fan with the wonderful name Francesca Flynn wrote in, pointing out that May 2009 was the date on the mimeographed circulars printed by Godon, the Postman, in his lie-that-became the-truth.  Funny thing; his potemkin “National Recovery Act” had a similar name to a bill now before Congress.  Let’s hope and pray things never get that serious in our real world.

Toward robustness -- I have long complained about trends toward increased brittlness in our civilization.  Surely the “war on terror” should have focused attention upon potential point failure modes that could have devastating consequences?  Back during the Cold War, when “thinking about the unthinkable” became a topic of passionate debate, there was talk of “Fail-Safe” -- a design methodology aiming to ensure that crucial systems, if and when they do fail, would fall back into a safe mode that prevents the very worst outcomes. (e.g accidental nuclear war.)  This meant that, should any of our systems controlling nuclear weapons degrade, malfunction or fall into the wrong hands, those systems would at worst do no harm.  But this doctrine has long ago been set aside, sacrificed on the altar of efficiency and so-called “success-oriented planning.”

This trend - as we’ve seen - can prove terribly dangerous when a Black Swan arrive... the unforeseen event that hits unexpected.  After 9/11 and Katrina, one would think the lesson would be learned.  But the trend continues to be toward ever-greater reliance upon the perfect performance of a caste of expert first responders, with very little allowance for the possibility of massive first-line casualties, or big surprises, or even a nod toward the wisdom of redundancy.  Examples of this growing worry can be seen in the excess-emphasis on professionalism in the military, the over-reliance on zero-inventory “just-in-time” industrial practices... and in the newest hot trend, Cloud Computing -- which offers a long list of advantages, plus some very plausible dangers, should we rush into a system that puts all our information eggs into very few baskets

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Also......See a diverting essay by Rudy Rucker about Stephen Wolfram's 'mazing views of artificial intelligence.  "Wolfram|Alpha looks like a search engine, in that there’s a one-line box where you type in a question.  The output appears a second or two later, as a page of text and graphics below the box.  What's happening behind the scenes? Rather than looking up the answer to your question, Wolfram|Alpha figures out what your question means, looks up the necessary data to answer your question, computes an answer, designs a page to present the answer in a pleasing way, and sends the page back to your computer."

Publicity stunt?  San Francisco-based Pacific Gas & Electric said it was seeking approval from state regulators for an agreement to purchase power over a 15-year period from Solaren Corp., an 8-year-old company based in Manhattan Beach, Calif. The agreement was first reported in a posting to Next100.  Solaren would generate the power using solar panels in Earth orbit and convert it to radio-frequency transmissions that would be beamed down to a receiving station in Fresno, PG&E said. From there, the energy would be converted into electricity and fed into PG&E's power grid.

==And more Cool Stuff==

Then, some lighter stuff -- Derek Benson, the lunchbagdude, draws fantastic lunch bags for his son, every day.  See this one inspired by Startide Rising.  How lucky is that kid!

Sci fi author Greg Bear to feed Halo fans hungry for details.

See Peter Norvig’s terrific “What if Abraham Lincoln had used Power Point at Gettysburg?”

Best thing I ever saw come from Microsoft.  It's a peek at how they expect the world to work, 10-15 years from now.  How do YOU think they are on-target or off-base?