Thursday, August 25, 2011

Reaganomics Author Sees The Light: Bruce Bartlett's Call For Higher Taxes On The Wealthy

That's not just anybody. Bruce Bartlett called for tax increases on the wealthy. Bruce Bartlett! Bruce Ron-Paul-Staffer Bartlett. Bruce Supply-Side-Author Bartlett. The man wrote one of the first books advocating Reaganomics. Advisor to President Reagan. Senior fellow at the Heritage Foundation. Treasury official under President Bush I. Worked at the Cato Institute. We're talking about a major figure in tax reduction efforts in the 80s and 90s, responsible for convincing many to support lower taxes.

But here we are now with the lowest taxes in 60 years. We've got lax demand. The supply-side approach clearly failed for the past decade that we've had tax cuts. As Mr. Bartlett put it in answer to the question "Are Taxes in the U.S. High or Low?", "The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment." With tax rates already low and the economy not doing as well as it was under higher rates, there's no reason to think it'll do any better with even lower tax rates.

But now he's gone even further and, like Warren Buffett, Mr. Bartlett called for tax increases on the wealthy. That's major. That's fresh facing of reality from one of those who sold us the lower taxes idea in the first place. Even Bruce Bartlett -- an architect of Reaganomics -- has apparently seen the light. Given enough such calls for rationality, maybe we can get past the "starve the beast" insanity and start doing what needs to be done. All those folks who bought Grover Norquist's bill of goods can take Mr. Bartlett's realization as a wake-up call. It's not too late to get a grip on our situation, fix up our ridiculously low tax rates, rebuild our infrastructure, and get the American economy back in gear.

Sunday, August 21, 2011

The Wealthy Don't Create Jobs; Good Jobs Create The Wealthy

What came first, the wealthy or the building blocks of wealth? This is no idle "chicken or the egg" question. Major political players base real policies with serious impact on their own answer to the question. What if most of them are getting it wrong? What if getting it wrong could wreck the system and ransack wealth?

To get the answer, the GOP base are obviously looking at wealthy investors. Our tax-cutting crowd clearly thinks they're the starting point. They say that getting more money to them will mean more jobs. The idea runs that investors bet their capital on starting or expanding a company that can then hire folks, thus jobs. This seems to pass for unquestionable truth among the "starve the beast" set. They figure that the more money the wealthy have the more they'll put into creating jobs. Even leaving aside the question of whether they'd likely choose to invest their money elsewhere, the anti-tax set need to reconsider two questions: 1) Is that usually how jobs are made? and 2) Where'd the capital come from in the first place? These two questions are necessarily linked. You can't explain where the capital came from without considering ways to make jobs without capital.

So where'd the first capital come from? Unless you think it was somehow handed over to man by divine intervention -- capital raining down from heaven or appearing from nothing -- it had to come from work. We can set aside the factor of inherited wealth, since somebody had to collect it in order to pass it down to lucky heirs. That first capital accumulating work -- whatever it was -- was collecting and/or making something that could be sold or traded. In short, it was a job. It may not have been a modern job, but close enough for our question. Somebody did some work. It may have been all on his own. Or the work may have been getting others to do things for him. But whatever it was, somebody did some work that produced a surplus. Perhaps that surplus was then -- directly or through heirs -- reinvested by getting other folks to do more work to produce more surplus. At root, the workers involved still created the surplus. The worker-created surplus was then used to spur more work to create more surplus. The job came first. The assets produced were just a product of the job that lets that job contribute to even more jobs. Get together a lot of surplus produced from a lot of jobs, and you've got wealth. Even if you then use that wealth to spur more work that creates more wealth, the wealth still didn't create itself but rather came as the sum effect of the work ... the jobs.

"Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased." -- Adam Smith 

Ultimately, the idea that wealth comes from somebody investing in business is a myth. If I build a factory and hire 50 people to make widgets, I'm not going to get any return on my investment unless there are people who can be interested in widgets and have enough money to spend on my widgets. If my widgets aren't essentials, those people will only have enough money to spend if they're making a surplus beyond the cost of living. Even if the widgets are essential, folks who don't have an income aren't going to be buying many widgets. If I don't have enough potential customers to break even, I'm not going to be employing those 50 widget makers for long. But if I have enough customers to make a profit, I'll keep employing them. And if I have too many customers for them to keep up, I'll hire more. Then who really created the wealth I reap from my factory? Sure, I made the factory investment that allowed me to sell widgets. But without the customers, that investment would have just been a foolish building that couldn't support long term jobs. It's the customers who really make the difference.

Jobs further wealth in two ways. Obviously there's the surplus collected by the initial business owner. But there's also the circulation of resources wherein the worker's share of surplus is spent at other businesses. The worker's paycheck allows him to be a customer contributing to other jobs that yield other surpluses for other business owners. The paychecks from those other jobs may in turn be spent at yet further businesses or even end up winding back to the initial business. Jobs have no choice but to create wealth, even when they fail to do so directly for a specific employer. Unless they're inefficient jobs, they'll create a surplus. And even if they're inefficient jobs they'll mean money for workers to spend at efficient businesses yielding surplus. The job just can't hold itself back from contributing to the creation of wealth. Wealth, on the other hand, can sit idle. It can be stored in some valuable thing that'll sit collecting dust. Sure, wealth may be further invested in jobs and help yield more wealth. But it can also hang on the sidelines for years or even centuries and do nothing productive.

Clearly it's the job that creates the wealth. We can use that answer to figure out what to do to get our economy rolling again. We want wealth and jobs. We need to push the one that creates the other. If we change our tax structure to get more money to the wealthy, we're just tinkering with accelerating redistribution of income to the rich who may just sit on it. That risks having it grind to a halt if too much money is removed from the system to just sit idly in the stockpiles of the wealthy. I'm all for building wealth, but not at the cost of having all the money locked down to the point where it no longer flows from business to business through employees and customers. Since wealth ultimately comes from jobs, those of us who want both more jobs and more wealth need to focus on jobs in order to get both. With more wealth, there doesn't necessarily have to be more jobs. With more jobs, there will be more wealth.

Now we've got a situation where there isn't enough demand for products and services to spur widespread hiring. Too many people don't have enough money to spend. And unemployment causes much of that current lack. Private industry can't fix the situation because it won't make any sense for them to hire until there's demand for products and services. There's only one credible way out: govt must step in to fill the void. Govt must stop hiding their heads in the sand and pretending that we can count on the wealthy to hire out of the goodness of their hearts -- without enough demand causing it to make sense as an investment -- if we just help a bit more money stick in their accounts. Govt must stop laying off workers and start hiring so there will be more paychecks to spend on goods and services. And to do that, govt is going to have to start leveling with us and facing that we'll have to rack up a future bill in order to make things work here and now ... and for the future.

Thursday, August 18, 2011

What Can We Really Learn From Estonia?

S&P Downgrade of U.S. and Upgrade of Estonia Inspires Misguided Admiration

In the wake of a few recent S&P decisions, fans of budget cuts are practically waving the Estonian flag. They point to Estonia's recent austerity measures and it's Q1 2011 growth as some sort of vindication. "Look, look ... we've got a positive example!" Ah, but if only it were that simple. There's more to Estonia's austerity and growth than meets the eye of the starve the beast crowd who would have us emulate their example. Estonia chose "internal devaluation," including wage cuts. So keep in mind what following the Estonian script would mean: big wage-cuts and a lower standard of living. Who really wants to sign up for that?

But more importantly, one should take a closer look at the impact on the Estonian economy before declaring them a model that everyone should copy. I'd swallow some short-term pain if it made the overall situation better for my country in the long run. But in the case of Estonia, the trouble didn't entirely end with the turn-around from the -13.9% plummeting GDP in 2009 to the 1.8% growth in 2010 and varying more-or-less positive growth forecasts for their future. While Estonia has returned to GDP growth, they're doing so on the backs of their neighbors. The one bright-spot in their economy is exports, which were up 43% from a year earlier in June. (Although June's figures showed a drop from the previous month.) Their unemployment remains high. Their retail sales and non-govt construction are both still down significantly. The domestic market isn't looking so good there. But in Sweden, Russia, and Finland demand is rising. All three of Estonia's biggest foreign markets saw significantly higher GDP growth in 2010 than Estonia. The strong growth continues in Sweden in particular ... plenty to explain why Estonian producers have still had a market in the face of lower internal demand. Having growing trading partners is great. But in the long run it's a poor substitute for steady internal demand. Estonia's internal devaluation has made them even more dependent on their neighbors. Should the growth in Sweden, Finland, and Russia cease or even slow down significantly, Estonia could find itself in deep trouble with no fuel for its economy. That sort of dependence on -- and vulnerability to -- foreign trade partners has lots of drawbacks. Sacrificing domestic demand to gain foreign demand means a weakened domestic economy.

So what can we really learn from Estonia? Mainly that it's good to have trading partners who have money to spend on what you're making. That's not a lever we (or anyone else) can control. It's up to our trading partners to keep their economies moving. Aside from maybe lending the occasional wrench, we can only look to get our own engine revving again. But we can also learn that worrying too much about increasing our exports can cause a nation to become export dependent -- at the mercy of the whims of foreign markets. While that may be nice when those markets are thriving, do we really want to count on them completely and make ourselves export dependent? Wouldn't you rather we fixed our domestic shortage of demand instead of sacrificing what's left of it in the vague hope for an uncertain boost to exports?

Saturday, August 6, 2011

Tax Me!

I want patent protections for my business to keep an advantage from its inventions. Patent registration and enforcement costs money. Tax me!

I want my company to be able to hire qualified workers. That means education can't put students in such debt that education isn't a worthwhile investment. Subsidizing education costs money. Tax me!

I want quality schools for my business to have competent workers. That costs money. Tax me!

I want quality schools for MY CHILDREN to be able to compete in the global market. That costs money. Tax me!

I want safe foods. Maybe most farmers mean well, but agribusiness has demonstrated time and again that it does not always do a good enough job of safeguarding food without govt oversight. That costs money. Tax me!

I want safe cars. Reputation helps motivate good engineering, but not enough. Govt standards have made a huge difference. Developing and enforcing good standards costs money. Tax me!

I want good roads on which I don't have to pay per trip. Private industry won't give me that. Roads cost money. Tax me!

The same goes for bridges and tunnels. Tax me!

I want to be able to breath clean air. Developing and enforcing air pollution controls costs money. Tax me!

I want to be able to drink clean water. Developing and enforcing air pollution controls costs money. Tax me!

I want at least basic flood control measures built around rivers. Private industry has no profit motive to give me that. Tax me!

I want police protection, both for my company's assets and my own personal assets. Tax me!

I want military protection so that I have no worry that some despotism beyond the reach of my vote might try to mess with us. Tax me!

I want military protection so that pirates -- who are quite active in parts of the world these days -- will expect that attacking our ships would mean that massive naval force would be breathing down their necks. I want them to expect that attacking American citizens in any waters anywhere would soon result in Navy Seals jumping up out of the water into their boats -- after the Seals finished snacking on great white sharks -- to teach 'em a lesson about picking on innocent folks. Training Seals costs money. Tax me!

I want veterans who risked their life & limb to defend my country to be well care for, medically and otherwise. Tax me!

I want to be able to say my govt was largely responsible for finding the cure(s) for cancer. Tax me!

I want to be able to say my govt was largely responsible for finding the cure for AIDS. Tax me!

I want to be able to say my govt was largely responsible for finding the cure for anything else horrible. Tax me!

I want there to be no hunger from poverty in my nation. Private charities haven't managed to cover that alone. And private industry isn't either. Tax me!

I want there to be nobody in my nation who can't find shelter when they need it. It doesn't have to be nice, but it has to keep 'em dry and not too cold. Tax me!

I don't want monopolies eliminating all competition, driving up prices, and reducing my product/service choices. I particularly don't want my company to have no chance to compete on the quality of our output just because some other company has 99.9% of the market. Anti-trust efforts cost money. Tax me!

I don't want various industries dumping dangerous chemicals into my drinking water, crop land, playgrounds, parks, etc. And by the way, without govt interference, lots of industries do that. Tax me!

I want violent crimes to be investigated and the criminals to be prosecuted. Tax me!

I want the innocent to be protected from unreasonable prosecution, even if they don't have the money to defend themselves. Tax me!

I want diplomats on the task of making sure American companies can compete fairly abroad. Tax me!

I want consular services making sure that when I travel abroad -- whether for business or pleasure -- I can expect my govt to be looking out for my interests even there. Tax me!

When I take a domestic flight, I want to be able to expect the air traffic to be well coordinated. Tax me!

I want investment in research and development that will grow American business. Tax me!

I want to be able to say my govt recently built things as impressive as the Hoover Dam, the federal highway system, and all those other great things of the past. No -- strike that -- I want to be able to say we built and did things far better than anything done before. Tax me!