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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.  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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Guest Thinkers Contemplate Culture War and the Hijacking of Capitalism

Continuing in a political vein… I’ll hand over the floor to a few Large Minds – some of them pals – offering them a chance to lay some politically redolent thoughts on you.

== Two Successful Capitalists Decry The Hijacking of Capitalism ==

Let’s hear from two fellows who are unabashed capitalists and acolytes of Adam Smith… just like Warren Buffett and Bill Gates (and me!)… starting with one of the world’s top/respected pundits on technology industry, Mark Anderson, CEO of the Strategic News Service:

“For me, there is no more poignant example of the Bush 9.11 era, and the need to get beyond it now. Like two slides, I picture, first: an army of soldiers surrounding bin Laden in the mountains of Tora Bora, and then being ordered by Team Bush to wait until the locals can get there and participate, at which point the enemy has escaped.

 “I compare that slide to the story of this year: after a year in secret investigation and preparation, Team Obama finds a likely target compound in Pakistan, orders in Seal Team Six via stealth choppers, uses overwhelming force, and shoots to kill. DNA samples are taken to confirm ID, and the body is dumped ignominiously in the ocean, with no propaganda pics for the enemy, and no burial process or site to rally round.” What a difference.  And yet, which man is called a “wimp”?”

(I will soon put up an essay appraising the different ways that democrats and republicans use military might and wage war.  You’ll be astonished by how stark it is, like night and day. Almost like two different species.)

Another guest voice is venture capitalist Nick Hanauer, a solid member of the 1%, explains the problem of wealth disparity:

There can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. ….I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages. … Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.”

Now, this one-percenter is a hero.  I like him and agree with ehat he says.  But still, just among us chickens, the point he’s trying to make is a bit more complicated than it appears.  Supply Siders do not expect 1%ers to help the economy by buying stuff (which is high velocity stimulation), but rather by investing in new “supply” systems like plants and equipment and factories and inventions.

The irony?  This is exactly what Hanauer and other venture capitalists are doing!  Indeed, I believe that what they do – (starting new companies that create new goods and services) – should be rewarded with very low capital gains taxes.  It is risky and does a lot of good. And does that make me a supply-sider?

The problem is that the Supply Side cult as a whole is wedged. It envisions ALL one-percenters to be risk-taking primary investors in new enterprises and new employment and new productivity, like Hanauer. Instead most are passive recipients of dividends and capital gains from established stocks, and beneficiaries of immense tax-breaks. They do not use increased income to create new productive enterprises, or jobs. They use it to get richer. Period.

This is catastrophic during a depression, when you want money to be high velocity, not clutched tight or sitting in a vast scrooge portfolio, but passed from dockworker to barber to dentist to grocery chain to janitor to gas station. Supply siders tout the he lowest-velocity use of money, rewarding the least economically useful activity, which has never ever ever done what the supply siders claim it would do.

== Why Culture War? ==

Yes, Phase Three of the American Civil War has been foisted on us by powerful, cynical men for their own political and economic gain.  But there have to be deeper things going on.  Psychological drives that those men cleverly exploit.

Our next guest, researcher and science fiction author Dr. Charles Gannon, has offered his own diagnosis of Culture War and why so many millions of our neighbors nod along with Glenn Beck, marching willingly to enlist in the Great Big War on Science… and on teachers, doctors, journalists, civil servants, and so on, biliously hating every American knowledge profession.

(Go ahead and ask your crazy uncle to name ONE major center of American intellect and knowledge that isn’t under attack by Fox & co. Make it a wager!)

Chuck Gannon suggests that in this modern, dizzying age, people respond to that most primal of all fears: fundamental loss of control.

“In short, people are realizing more and more that they know less and less about almost everything in their lives. How many people understand what is going on with the euro and how that’s part of a much bigger picture? How many understand ANYthing about how their smartphone works–not what it does, but how it WORKS?  What are the ethics of cloning? Of copyright? Of no child left behind versus the death of rigor and excellence?

“Head in hand, they feel the grey matter between their hands threatening to explode. And they want relief. And  they have their eureka moment. “I know! I will adopt a stance! And so what if I can’t figure out my own stance? I can BORROW one! 

“I will shop amongst the bazaar (bizarre) of demagogues and choose the one that says the things I like best. And the details–well, they’re only details. Someone else will think about those–and besides, I’m fed up with details. (Secretly, where they can’t even hear it: “all those details I don’t understand make me feel stupid….”)

“I suppose, at some level, it has ever been thus. However, I think the Tofflerian Waves and Culture Shocks geometrically amplify the discomfort. The distance between the haves and have nots is growing, yes–but I think the separation between the knows and know-nots is growing just as fast. It is not that they ARE stupid, but they feel that way. 

“And in a culture which panders to couch-potato passive consumption of media and goods, dumbs down the critical reasoning component of schools (and life), and in which an integrated view of “reality” moves further and further beyond the reach of even the most cognitively proactive folks, they hardly have the role-models or encouragement, or preparation to FIGHT through the tides of uncertainty in their lives and set sail upon the high seas of perpetual indefinitude that is the modern world.”

Worth pondering.  Thoughts anyone?

== Call the GolgaFrincham B-Ark! ==

Our next guest, my cousin Jonathan Baskin, has some pretty cool insights into the pathetic world of Public Relations spin-doctoring.

“The public relations industry’s trade association is running a campaign to come up with a new definition for PR. I can see the problem, since social media technologies have democratized the tweaking, spinning, and obfuscating of the truth that used to be the exclusive purview of PR professionals. In an age when anyone can be an expert on anything, every opinion is as valid as the next and no fact need go unchallenged, contradicted, or ignored. The mediascape has become a truth free zone. You’d think the PR people would have died and gone to heaven, but there’s no money to be made when nobody needs an intermediary to peddle access through those Pearly Gates.

“We’re all PR people now.”

== Good News? ==

In 2010 there were 34.3 births among every thousand girls between the ages of 15 and 19. That’s down 9 percent from 2009. And it’s the lowest number in nearly seven decades of reporting. The figure comes from a new report from the Centers for Disease Control and Prevention called Births: Preliminary Data for 2010. [Brady E. Hamilton, Joyce A. Martin and Stephanie J. Ventura] And it’s filled with interesting stats. For one, teen births have hit that record low. And that statistic includes more good news – birth rates are at record lows for all ethnic and racial groups, and even for younger teenagers.

The number of births to unmarried moms also declined. And pre-term births declined. The trend towards lower numbers is general – the birth rate fell overall by 3 percent. It’s also down for women in their twenties and thirties, according to a recent article in Scientific American.

So…let’s see. In addition to all this good news… crime has plummeted. So has illegal immigration. (See below for details.)

The Soviets are gone and the terrifying muslim world is democratizing. Osama’s dead.

Federal taxes consume less of the national income than at any time since 1950.

Tax rates are the lowest in 80 years.

So why are these the areas people scream about?  Instead of all the ways things have genuinely gone worse?

== A Prediction I wish Never Came True…. Has ==

Shock as retreat of Arctic sea ice releases deadly greenhouse gas.  There are truly vast amounts of hydrated methane ices on the ocean floors.  As temperatures rise, these will be released. And methane is far more powerful a greenhouse gas that CO2.

== And finally… some political potpourri ==

* Said it before and I will keep saying it: I want a second “clock” set up next to the National Debt Clock, showing what our debt would have been by now, if the US government had been allowed to collect royalties, like a business, on its own inventions. Like the Internet, communications satellites, weather satellites, pharmaceuticals, microchips, weather forecasting, aeronautics and jet engines, and so on…. All were given to businesses and the world for free!

And that’s not a subsidy? Not socialism? Or better — is it proof of the value of a mixed social contract, in which vigorous entrepreneuialism and competitive creativity have been fostered by a generally benign and responsive government? Do you doubt that the Alternative Debt Clock would be in the black and running backward?

If nothing else, it would graphically repudiate those now proclaiming that neither science nor government have any value.

* It’s 1999. America rides high, making so much $$ off innovation we use WalMart to uplift a world middle class. Our Pax is unchallenged. A rich, scientific people. What mistakes would an enemy lure us into making, to change all that? Repeat Vietnam? Repeat our Civil War? Wreck our science and expert classes? How about all three? Read The True Cost of 9/11, by Joseph E. Stiglitz.

* See a vastly detailed and deeply disturbing article in Bloomberg about the Koch brothers — getting richer with secret Iran sales. Seriously, read at least the first ten paragraphs or so.

* Think Adam Smith would have approved? Goldman-Sachs manipulates the world’s aluminum supply AND makes money renting the storage space.

* Evidence for influence of the Saudi Royal House in American affairs has piled high, such as the way President George W. Bush openly spoke of having been “partly raised by” Prince Bandar bin Sultan and walks with him holding hands – a friendliness that showed whenAmericans were forbidden to fly for two days after 9/11, but every well-connected Saudi was rushed out of the U.S. and away from the reach of FBI interviewers, on luxury charters at taxpayer expense.

Lately, we’ve seen how Rupert Murdoch’s top partner at News Corp. and Fox is Prince Al-Waleed bin Talal, whose direct sway at Fox is not related in a recent article by Accuracy in Media.  But connect the dots.  The same media empire that is drumming up Culture War and spite toward all American scientific or intellectual castes… and the same one that pushed for the US to get mired in a decade of draining land wars in Asia. Hm.

* Wow, this was more interesting than I expected it to be. “On Debt, Democracy, and all that...” by Michael Hudson

 * “Mitt Romney and Newt Gingrich have promised to complete a nearly 1,950-mile fence to secure the U.S. border. Michele Bachmann wants a double fence. Ron Paul pledges to secure the nation’s southern border by any means necessary, and Rick Perry says he can secure it without a fence — and do so within a year of taking office as president.”

Meanwhile, the actual rate of illegal immigration is plummeting.   Many sources, including the Pew Hispanic Center, agree that the number of illegal immigrants in the United States peaked at 12 million in 2007, but then dropped by almost 1 million through 2009, and has largely held steady since then at about 11.1 million. Border Patrol apprehensions of illegal immigrants have also fallen sharply. In fiscal year 2011, which ended Sept. 30, the Border Patrol captured 327,577 illegal immigrants on the southwestern border — the lowest total in four decades.

* President Obama recently gave a speech in Osawatomie, Kansas, the same place where, back in 1910, Theodore Roosevelt said: “We grudge no man a fortune in civil life if it is honorably obtained and well-used,” Roosevelt said, but added: “We should permit it to be gained only so long as the gaining represents benefit to the community.”

Describing what he called a “new Nationalism,” Roosevelt said it “regards the executive power as the steward of public welfare. …It demands of the judiciary that it shall be interested primarily in human welfare rather than in property, just as it demands that the representative body shall represent all the people rather than any one class or section of the people.”

* And finally, from Scientific American: “The Horn of Africa is in the midst of its worst drought in 60 years: Crop failures have left up to 10 million at risk of famine; social order has broken down in Somalia, with thousands of refugees streaming into Kenya; British Aid alone is feeding 2.4 million people across the region. That’s a taste of what’s to come, say scientists mapping the impact of a warming planet on agriculture and civilization.”

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