THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.
When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?
The economy won’t really bounce back until America’s surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.
I agree wholeheartedly. However, I disagree with his conclusions:
We might have enlarged safety nets — by having unemployment insurance cover part-time work, by giving transition assistance to move to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone.
Big companies could have been required to pay severance to American workers they let go and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same, so that all citizens could share in gains from trade.
We could have raised taxes on the rich and cut them for poorer Americans.
The problem isn't that rich people pay only 35% of their income for taxes; the problem is that they don't. Capital gains, which I would venture is a substantial portion of of the top 5% income, isn't taxed. It should be. Ordinary Americans don't enjoy a big chunk of their income being "tax-free". Pack-a-lunch-bucket Americans pay the full payroll tax out of their stagnated paychecks; upper-tier earners are capped. The wealthy can afford to hire top-notch accountants to itemize, depreciate, and generally take advantage of loopholes the rest of us have never even heard of. The solution? Do away with payroll taxes, and only tax purchases. It's the only way that everyone will have a proportional amount of skin in the game.
Despite Reich's wistful plea to cut taxes for "poorer" Americans, how is that possible when over half of Americans pay no income tax at all? Perhaps he's referring to other types of taxes, but to be means-tested before pumping gas or buying a new car strikes me as impossible.
Having the government pay workers to relocate is ridiculous. Have a huge garage sale, pack the car with the what's left, shoehorn in the kids, and hit the road. Stay in a cheap motel for a few weeks if you need to. Americans have been doing just that for many generations; keep Uncle Sam out of it (and Sam's hand out of my pocket).
We can't peg minimum wage to median wage. Companies cannot afford to pay uneducated workers double-digit wages to mop bathroom floors or bag french fries. Many minimum-wage workers are ALREADY overpaid. The American dream has always been to work harder, educate yourself, and climb the ladder based on your talents and merit, not a hand-out and a pat on the head from a socialist gov't. "From each according to his ability, to each according to his need". Sound familiar? And why should American companies be forced to "retrain" and/or grant severance pay to workers they shitcan? Isn't that rewarding incompetence? Companies should be allowed to make their own personnel policies, not have them dictated by the government.
If Obama waved his magic wand and instituted all of Reich's disastrous ideas, our country would complete its tumbling journey to third-world nation by tomorrow.
Perhaps that's the point, and the ultimate goal.
Thoughts? Comments? Coffee? Tea?
The IRS scares the shit out of me. I can't help it. Last year, our taxes were a mess due to several things hitting at one time. We got them done, but it was awful. Too many times the accountant would say, "Well, according to this rule you owe this, and that rule you owe that. We'll take the one where you owe less."
ReplyDeleteWhy is that even an issue? It totally shouldn't be. That means there is too much complexity, obviously.
I used to think the flat rate tax people were weird. Like Paulians. Now, I find myself one of them. I have a college degree. I've had jobs with a huge amount of responsibility. There is no reason that I should not be able to figure out my own taxes.
It's ridiculous.
THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.
ReplyDeleteSo do the little goods elves magically deliver this stuff in the middle of the night? Or do people have jobs because of what the "rich" buy? Maybe the "rich" should stop buying stuff. Let's see what that does to the economy.
And now Reich want the US to tell foreign countries how to run their internal affairs? Isn't it the left that complains about how arrogant the US is for trying to tell foreign countries how to run their internal affairs?
Reich reminds me of what George McGovern said after he was voted out of the Senate and actually tried to run a business. His words were to the effect of, "If I had tried this before I went into the Senate I sure would have voted a lot differently."
ReplyDeleteSo do the little goods elves magically deliver this stuff in the middle of the night? Or do people have jobs because of what the "rich" buy? Maybe the "rich" should stop buying stuff. Let's see what that does to the economy.
Good point, Matt. No, they can't have it both ways.
Reich's ideas are self-evident nonsense - anyone who's ever run a business or been even peripherally aware of what business-running is about is going to see this.
ReplyDeleteSome businesses choose to pay people poorly, and they get the kind of employees they deserve. Some - like Starbucks, and Whole Foods - pay people well, and they're a pleasure to deal with. (Mostly - every big company has exceptions, of course). Personally I like that strategy - but making it a matter of law would be both insane and wrong.
lady red - just a note about capital gains - it is taxed, but at 15%, and only if the underlying security is held for more than a year. Same for dividends. Interest (bond coupons) is ordinary income, except for the tax exempt status of muni bonds and the state tax exemption for Treasury bonds.
Now you could argue that capital gains should be taxed like other income. That seems fair... and the people who we're talking about are in high tax brackets - about 50% when state taxes are included. So sure, if I make a big windfall, why shouldn't it be taxed the same way a lawyer's or doctor's income is taxed?
But I could put this another way: I take a risk investing in a company so they can expand their business. If I'm right, and the company does well, the government takes half. If I'm wrong... I lose, and I take all the loss. (Yes, I can carry losses forward to offset future gains, etc, but if I lose in aggregate, I still lose). That doesn't seem so fair to me. Actually, screw fairness - I just don't think I'm personally a good enough investor to justify that kind of risk taking if the government is going to take half of the proceeds. Maybe I'll just keep my money in the bank or in something unproductive like gold, and spend it down. Sucks, but it beats taking risks, losing, and having nothing.
Some people might call this extortion - lower taxes or the capital markets effectively go on "strike". This is a fair criticism, but if you're going to have a free country, it doesn't mean much if people aren't free to do what they please with their own money - you can't force them to take risks.
It would be easy to over-emphasize the potential impact here - a great deal of money is invested in various markets (public, and private (private equity and venture capital)) through various tax-exempt funds (defined-benefit pensions, 401K and IRA). So the impact to the market will be at the margins. But stocks will be less valuable if taxes on capital gains (and dividends) are raised.
This is my view, but I don't hold on to it very tightly. It's self interested, because investment (including very up-close and personal seed stage investing in local tech companies) is what I principally do.
If I could propose something - it might look like this: tax everything the same - income, interest, dividends, gains, tips, whatever. Simplify the crap out of the tax code - accountants can't do their magic if the tax code is simple.
Raise revenue while you're at it - SRSLY.
Now eliminate all corporate taxes. All money take in by a corporation gets paid out eventually - corporations never "consume" anything. They pay workers, they pay dividends, they pay their bills (to other corporations, most often).
If you tax people, not corporations, it's easier to tax everything once. It's impossible to show favoritism and institute cronyism with "tax breaks" because all corporations pay zero tax to begin with. (E.g., GE would hate this, since they have the system so rigged with respect to their competition).
People like me would end up paying more, but the dividends and the gains would be bigger, and businesses would spend more time doing business and less time screwing around figuring out how to avoid taxes.
Just a thought.
A couple other points on income inequality in general, and corporations in particular...
ReplyDeleteA great deal of inequality came about by the financialization of everything. Households and government (and some businesses) got massively "levered up" during the "great moderation" - the period of declining interest rates from '82 to '08. Financial professionals became more numerous and took home a much bigger piece of the pie. Further - and more insidious - they had an implicit backstop. When they won, they kept their winnings. When they screwed up, they left and took another job. When firms or hedge funds failed, they got bailed out if they presented a danger to the system. Dodd-Frank can be counted on to fix this problem about as well as Obamacare can be counted on to fix the healthcare problem. Financialization and moral-hazard have to go.
The second problem is that the "market" for top corporate talent (of any kind - not just financial corporations) is anything but. It's more of a club, with interlocking directors who approve each other's massive compensation packages. It needs to be broken up. Boards to a crappy job of representing the interests of their shareholders - it's more like they rationalize the looting of the shareholders by management.
I think these criticisms of our current system are pretty consistent with conservative values. The problem is that they are also articulated consistently by the Left. The system I'd like to see reformed is the system they'd like to see destroyed. This doesn't make the criticisms themselves wrong, however.
Further, the establishment Republican party is very much identified with the corrupt status quo. This too is frequently called out by the Left. Of course the Democratic establishment is, despite their protests, just as embedded in this corrupt status quo (TBTF, tax breaks for cronies, big paydays for officials taking revolving-door "private sector" jobs). But simply saying "you guys are just as bad" is not a solution.
The trick will be to articulate these criticisms in the context of a Liberty-forward philosophy. The corporate tax abolishment proposal I made in my comment above has to be part of an overall reform package, not a stand-alone giveaway to be snarfed up by management.
Blink!! Blink!! Lewy saved me a ton of typing and said it all better (and more accurately) by far .. to be expected because he is, on basis, more knowledgeable on the subject, has more in the "game", and generally is not given to visceral explosive rants. Never mind that I agree with him ... blink!! Blink!! again.
ReplyDeleteWhen it comes to the "Hobbit" (Reich) Economist, I tend to teh crazy ... he is 99.9% full of shit 99.9% of the time. I am charitable in giving him 1/10th percent edge because I presume somewhere in his miserable life he got something right.
Now one thing not covered ... the statistics Reich cited from Moddy's Analytics. I outright call bullshit on this citation, but haven't found the data (yet) on Moody's to totally refute it yet in statistical terms...haven't found anything to support it either. I am still "mining" the Moody's Analytic cite to find anything pertaining to his blarney. At best it is cherry picked numbers from data of considerable summary scope, with a ridiculous span of "consumption", global in nature, picked to make an inane argument.
Example of "consumption" I'd question: For example ... Does he count purchases of a yacht from Dutch Feadship as "consumption?" I know we all have been meaning to order ours, ya' know.
Need to add ...
ReplyDeleteRadioMattM said ...
So do the little goods elves magically deliver this stuff in the middle of the night?
Simply on the face of it, presuming Reich's premise assertion, obviously you are right. Reich is beyond demented and short sighted.
Someone posted a link to a column in the NY Times that says that by focusing so much on the federal budget deficit, we are making the unemployment situation worse.
ReplyDeleteRemind me, if I ever suffer serious brain damage I can always get a job as a columnist for the NY Times.
@lr:
ReplyDelete...The solution? Do away with payroll taxes, and only tax purchases.
If it walks like a VAT and quacks like a VAT... Seriously, you've identified the unpleasant necessity of public finance in America today- a VAT coupled with Input Tax Credits and a minimum income credit for all income tax filers. It's inevitable (either that, or a massive gutting out of the public service (including the armed forces) and "entitlements")
Also, I'd recommend a phased-in abolition of mortgage interest deductibility on residential real estate. This tax expenditure acts both to inflate housing prices and causes the misallocation of capital to unproductive, expensive assets.