I'm not going to slam Obama for anything, for better or worse, he's my president. The most remarkable thing, to me, is that he's about to take office with an incredibly solid majority in both houses, and virtually every major FDR New Deal program has collapsed under its own weight or is on the verge. I seriously doubt that they can use their legislative power (and no veto) to apply band-aids to the gushing wounds caused by those programs. He's got to be pragmatic about leading his party to implement things that aren't the finishing blows on the nation as we know it. Fannie Mae was established in 1938. Now look at it. In fact, look at the entire banking sector which has been heavily managed and regulated. FDIC, FSLIC, HUD, FHA, Fannie, Freddie, et al have all failed their core mission - to prevent exactly what has happened and has been happening for decades. Let's throw in the SEC and the Fed, too, which have had enormous power to regulate the economy and markets, most of which seem to be on the verge of collapse (the stock market has already had a massive crash). The FDR programs were supposed to prevent these things! The managed economy in the manufacturing sector has led to outsourcing and driven the largest (historically) companies in the economy to borrow themselves into oblivion. I happen to be pro union in some form, but not in the current form by any stretch. The "system" is so entrenched in the way those companies can address the expense side of the P&L equation, that their only choice has been to ride with the companies into the ground. "Concessions" in dire times don't cut it, if there were an actual free market for goods and services, the companies might be able to get quite creative in their compensation models. Like paying for some part of the employees' wages in the form of ownership (e.g. stock as capital). It's looking to me like the taxpayers (making $20/hour or whatever) are going to have to foot the bill at a cost approaching the Iraq War costs (per year) just so Detroit can continue to pay auto workers $78/hr. The effect of a similar managed economy can be seen in the nature of public education. Tenure rules instead of skills at teaching kids. Wages are dictated by unions whose interests are in job security for their members (fine, that's their role) and those interests are in direct opposition to the interests of the children. The results are all over the public record in terms of our kids' ability to read and add numbers or rank well in achievement tests compared to lesser (powerful/rich) nations. Social Security has been in deep trouble for a long time if you care to look at even the simplest of projections. Most people don't understand the concept of looking at projections 5 years out or longer... Just because it's been solvent as it's headed for a massive crash in a few years doesn't mean it's working! The liabilities for the govt. have always been huge and soon they will be coming due. When it was founded, there were like 30 workers for every retiree, now it's down to 2 workers per and it'll be 1 worker per. That's a huge red flag that it's doomed, folks. When it does become insolvent, the govt. will repeatedly be doing $700B sized bailouts EVERY year to avoid screwing over the people who paid into the system for 45 years or more. The effect will be that this $700B won't be available to build roads or bridges or finance the big kinds of projects only govt. is good for. Medicare is in even worse shape than Social Security. The liabilities for that program are off the charts. The piper must be paid eventually, and "eventually" is in my lifetime. I'm one of the oldest guys posting here, too. It's going to affect the younger crowd for most of their lives. Most of these programs are simply bad ideas in the first place that are so entrenched in the way the nation works that we haven't had the willpower to put an end to them and put something together that makes sense for 2009 instead of for 1939. But at least the lights are on in Appalachia! In various forums, I've been making the same kinds of proposals for the past 20-30 years that I'm about to make here. First, Reagan was right - the govt. should be our safety net. What is a safety net by definition? INSURANCE. If the light bulb hasn't gone off yet, I suggest the govt. should become little more than an insurance company. Yep, they should offer fire insurance, homeowners insurance, malpractice insurance, health insurance, etc. Not exclusively though - they should compete with any private companies (blue cross, for example) who want to offer a better service (govt. service sucks!). Offer to insure peoples' bank accounts, too, for a monthly fee. Offer, even require, that people buy an annuity to replace Social Security. Second, since people would be paying premiums to buy their various kinds of insurance, we won't need to tax the way we do. A sales tax nails everyone who buys anything (but food and medicine) be they rich or be they illegal aliens. If the rich spend a lot of money on big ticket items, they pay big tax. The govt. adds no value by knowing everyone's books (right down to the families). Taxing consumption encourages savings, which is a good thing. Third, govt. should forget about the idea of Welfare, e.g. direct payments to people based upon qualifications. Pay EVERYONE equally a dividend as any insurance company would. If the govt. takes in $2T and pays everyone $4K, it's progressive! The rich get a pittance compared to the checks they typically write, while the poor might get 4 months of extra pay. Fourth, if we are going to continue with an income tax, make it flat and also have a flat tax rebate. The flat tax is regressive, the rebate is progressive. It follows what I wrote above about the rich/poor getting $4K. Why do we still need some sort of tax? The govt. does have to fund infrastructure programs and the space program, the military, and other smaller things typically funded by taxes today. Last point before I get off my soapbox. I said I'm pro union, but not in the sense that they exist today. I have zero issues with collective bargaining or the people having the right to assemble. Unions, in theory, provide certain benefits for their members: insurance, higher wages, safer workplaces... The only real issue I have with unions as constituted is that participation is mandatory (forced assembly is not right to assemble).
I just have a couple of thoughts about the tax portion... For ease of math, I'll say there're two households making 100k each. One rents, doesn't give to charity and doesn't have a small business. The other owns a home (investment in a community), gives 10% of his income to charities/churches, owns a small business (creating jobs and bringing money into the community). I'm biased since I'm in the 2nd group, but if I'm already directly investing my time and money in the community (as opposed to spending cash on "consumables"), it feels as if I'm double-taxed. If I'm giving 10k to charity/churches, I don't understand why that would count as "income" as if I'm spending it on plasma TV's, or putting into mutual funds, etc. If I'm putting money into getting a business off of the ground, again it's not a "consumable", so I don't see that it should count as "income". Other than that, I agree with you on a bunch of your proposals. France has a 20% tax on things you buy. As far as unions go, though, I don't quite understand it. How is it that GM, Ford, and Chrysler make it sound like they're bent over a barrel from UAW, but Toyota doesn't even recognize unions in their American factories? I'm a union member, and I don't even understand it.
I am not an economist - but I do know how to read time-series data and look for correlations - and the most obvious issue seems to be the top-tax rate and distribution of assets (the second is a by-product of the 1st). History in the last 90 years has told us that the country really humms when the top-tax rate is between 40 to 50%, it fails when it goes over or under - unless it is for short periods of recovery times. In 1920 - the top-tax rate in the country was 50%. We had the roaring 20s. In 1925 the top-tax rate was cut to 25%. By 1929 the top 10% of the country owned 70% of the assets, we had an artificial bubble in the stock market and an economic collapse. In 1979, under Carter, the top-tax rate was in the 70% - there was no growth in the market and the economy was bad. In 1981 Reagan cut the top-tax rate to 50% and by 1983 we had an economic boom. In 1986 Reagan cut the top-tax rate to 28%, we had a bubble in the junk-bond market and an economic melt-down in 1988. In 1993 Bill Clinton brought the top tax rate to 40% - and by 1996 we had a big economic boom. In 2001 Bush brought the top tax rate to 33%, we had the housing bubble and in 2008 the top 10% of the country owned 72% of the assets and the pattern continues - we have an economic melt-down. Our economy is a consumer based economy (70% of the economy is based on consumer purchases). When the middle class is hurting - consumption falls and the economy suffers. As I said - I am not an economy major - but my guess is that we need to make the size of the "poor" segment of the population smaller - so they are not draining the economy by being supported and we need to make the middle-class sector of the economy bigger and more prosperous - so it can consume and fuel our consumer based economy. The only reasonable way to fund this and help move some people from the poor class to the middle-class to open their purse springs is to create jobs and stability - the way you get this money is by increasing the tax load on the top 10% of the population and tie company tax breaks to job creation. The idea of the Bush administration that you give money to the rich and it will trickle down when they invest in the economy and create jobs failed because globalization has allowed them to invest the money in companies that used cheaper labor out of the country - so the country gave money that went abroad. Bush tried to add consumer money to the economy by lowering the threshold for housing related loans - of course, since housing is a limited resource - it lead to a bubble in housing prices where the consumer class (the one that basically funds our economy) went into debt to be able to afford housing or used it to fund other expenses. A valuation bubble, by definition, is one where something is prices above it's true value - and that's what happened. The only reasonable thing to do is to make the ugly decisions of taxing the top income earners and promote job creation. We will see if Obama is smart enough and strong enough to do that. Hopefully he does - because it is the only way to go forward.
Outstanding post, Denny Crane. As Reagan said, never trust someone from the government who says, "I'm here to help." By the way, what's with all this "Denny Crane" business? I went to your blog, and even there you are pretending to be Denny Crane. Maybe it's some kind of inside joke that I'm missing, but it seems very bizarre . . .
I'm not sure that "creating jobs" will decrease the number of poor. I for one know that Engineering jobs at a major aerospace firm in the Puget Sound area are unfilled every day, provided you meet the educational requirements. If we're having 50% or so of kids that can't pass the WASL upon graduation, having more low-paying jobs isn't going to help people too much, imo. Increasing education level (and I don't mean education funding), rather that giving cash, seems to be the way out. But that's long-term rather than reactionary...strategic rather than tactical. And that's on all of us...kids, parents, government, community, etc. In response to the outsourcing, I agree that it's not great...but if I "invest in" Toyota, who then builds a factory in KY or something, doesn't that create American jobs? Likewise, if I invest in McDonald's, allowing them to open up stores in Cairo and Djibouti, does that help out Americans?
Charity is charity Meaning, you should sacrifice some of your worldly goods to help others. The charity would pay the sales tax, BTW, when they spend your money on goods. Unions are like FDR's programs. Designed for a much different time (like, they needed goons to fight the company goons a long time ago), but nothing's changed over the decades as they should have.
Something to read: http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm Reagan's tax cuts were 50% for everyone across the board in 1981. The top 20% of taxpayers went from paying 48% of all taxes to 58% over that period (thru 1988). But here's the flaw in your thinking. It was the elimination of mortgage interest deductions in that first Reagan tax cut that forced more of the rich to pay taxes. Before that, the rich could pay $0 in taxes by simply owning enough real estate. After that, only 1st and 2nd homes were deductible.
William Shatner plays Denny Crane on the TV series Boston Legal. It's quite popular in more than a cult way. Denny is hilarious, IMO, on the show. The series finale is Monday night
There is no flaw in the thinking since it is a clear fact that there is a correlation between top-tax rate and economic boom/bust cycles. What you argue - which could be right and I am certainly not the person to talk about it - since I am not an economist - is that this is not the only element. Generally speaking - I would argue that it is not - it is just an indication that the rich should pay more of the taxes for the economy to thrive - and the fact that the top 20% if the taxpayers were paying more of the taxes just proves my theory that in a consumer economy - the larger the middle-class is - the better the economy does - and that the idea that giving tax breaks to the rich and hoping for a trickle-down effect is just bad economic thinking.
Actually, balancing the budget is typically followed shortly by recession or worse. FDR grew the national debt to something like 2x GDP during WW II. Today's equivalent would be on the order of $25T - $30T! We're at ~$10T for comparison. From 1945 to 1960, all that debt was basically paid down, but the govt. still ran a modest deficit. In 1969, LBJ produced his "guns & butter" balanced budget (FY 1969, proposed and passed in 1968) and the 1970s followed. Clinton's balanced budgets ended with a major stock market crash and a recession. I wouldn't have envied either Bush or Gore in 2001, as I figured the economy was in a world of hurt. The govt. threw every possible thing at staving off the inevitable, but we're where we are today anyway. The flaw in your thinking is tying anything to tax brackets. It's ultimately the % share the rich pay, not the rate the govt. extracts the money from them
The flaw in your thinking is to assume that I am the one doing the correlation - historical data is the thing that is doing it. I am just observing it. Al Gore, for all of his follies, has said in the 2000 elections that we need to increase taxes on the rich and give tax relief to the middle-class. Bush supported cutting the top-rate for the rich with the idea that it would spark the market and create trickle-down by job creation. It did not - since there was no incentive to create jobs locally - they just went to cheaper labor markets in the east. Since Bush's policy of creating money for the middle class (which is the vast majority of the consumers - and let's remember, we are a consumer based economy) failed - he dropped interest rates on housing with the idea that this money will be used to stimulate the economy - which it did for a short amount of time - but since the source of the "cheap money" was tied to a finite resource (housing) - it created a bubble of the housing market. When this bubble collapsed - it was just a question of time until the economy caught up with it and collapsed. The fact of that matter is that the only way to reduce top-tax revenues from the super-rich and not have an issue - is to reduce the services the government provides - something that the Bush administration did not do - especially when they decided to run two wars simultaneously instead of the one that was forced on them. At this point there was really no other alternative than to try and fund these "services" (wars) by increasing the tax on the biggest income group - something they decided not to do. It is not a wonder that we had a collapse from there on. Since it is unlikely that we will be able to reduce the government spending any time soon (given the amount of money needed to end the war and restore the economy) - the only reasonable solution is to increase the tax on the big income earners and to encourage the rebuild of the middle-class by encouraging local employment - probably by associating corporate tax breaks to local employment creation - this at least is the way I would look at it if it was my responsibility.
The upper tax bracket during the Clinton boom years was below 40%. The real correlation is between economic growth and tax cuts. I don't see how it makes any sense that taxing the rich, or taking money out of the hands of those who build or invest in companies, makes jobs. That flies in the face of logic. The govt. needs to stop meddling and fabricating markets where sound fundamentals - like profitability - are downplayed in favor of ... something else (behavior?)
The top tax rate during the Clinton era was 39.6 - so I rounded it up to 40. .. and the assumption that the economy is created by those that build is true to a point - and that point is that there is a need to have consumers to consume what you build in order to have an economy. If by some magic of time and space Henry Ford was transported to the dinosaur era his ability to create model Ts would not an economy create... When the money is distributed evenly no matter what one does - it leads to communism and lack of reason to work and failed economy. When money is distributed in a manner where we get Shaq's body on Lisa Sparks legs - the economy is going to topple over. As for what makes sense to you or not - it makes no sense that the flat earth we stand on is part of a round world, but it is. It makes no sense that the speed of light is a constant as well - but observations of this fact lead to the development of the theory of relativity - based on these observations. It makes no sense that in very small distances relativity breaks down and we have to work with probabilities - leading to Quantum mechanics. What makes sense and what really happens are not always one and the same - sometimes we do not have the tools to see what is really happening and special cases in limited scope condition what we think of as "making sense".
There is no law of relativity that says that you can sell widgets for $.01 that cost you $.02 to make, and make up for the losses with volume. Which is what govt. interference has made out of the economy. You simply can't tax the rich enough to make up for the losses when you're bailing out everyone, including the rich. But not to worry, the way things are headed, there may not be any rich people anyway. Glad you brought up Henry Ford. He figured out that he needed middle class workers to buy his products without the govt.'s help and before unions. He both paid them enough to afford his product and made his product at a price people could afford. Before there was welfare, big govt., and Obama's kind of proposed programs. As far as distribution of money goes, who cares? As long as the rich have 99% of it and the 1% that's left is enough for everyone to have XBox and cars and automobiles, then it doesn't matter in the least.
