Borrowing, Taxes & Deficits – A Discussion Continued

In my post of November 2, 2011 entitled "Borrowing, Taxes & Deficits – A Discussion," I referred the reader to an article written by Professor Robert Malchman and posted on his blog entitled "Real Interest Rates," and the exchange that followed, which appears as four comments below the post. In my post referred to above, I rebutted the view of Professor Malchman, and to a greater extent those of Bunny42.

(I interrupted that exchange to focus on the controversy regarding "Contraception, Abortion and Komen.")

My rebuttal was reproduced on that blog and provoked two more rebuttals by Bunny42 below the post, which you can find here.

I thought that her rebuttal was so misguided that I feel it incumbent upon me to respond to it, and so here is my rebuttal:

Bunny, you have every right to be taken seriously because you do not run away from opinions that are contrary to yours. I can assure you that most people close their ears when confronted with contrary views, and only want to hear opinion, and indeed facts, that reinforce their views.

Furthermore, you are far more knowledgeable than most people. You are familiar with the Keynesian economic theory. Please watch this video on YouTube. You say that “(Your) impression has been (and still is) that reducing taxes on industry allows for expansion, and that includes new jobs.” It is no wonder that this is your impression, since this has been the message repeated over and over again. It is part of what is known as staying on message. But that doesn’t make it true and it isn’t. Right now corporations are sitting on $2 trillion and are not investing according to a New York Post, [a News Corporation subsidiary (i.e. Rupert Murdoch's)] article that goes on to say: “US consumers are stretched financially. Rosenblatt says there's no incentive for many companies to expand. Why go out and make 110 widgets when I can only sell 100?" he asked. Which sums up the situation.” See here. See also here.

Taxes have nothing to do with it. In fact right now we have one of the lowest tax rates in our history. When Eisenhower (R) was President (1960) the top rate for all those making over $400,000 was 91% and our economy did very nicely, thank you very much. When Ronald Reagan was President and after he sharply reduced taxes (1985) the top tax rate was 50% on incomes over $169,000 (See here) and our economy did very nicely, thank you very much. When Clinton became President he inherited a slow down and increased taxes and the economy boomed. But I said all this in my previous posts, but apparently it didn’t sink in. Impressions are hard to shake.

Consumer spending accounts for 70% of US economic activity. See here. When consumers spend, businesses make products to sell. When consumers don’t have the money to buy, business contracts, and jobs are lost. During inflationary times, when consumers want to buy more than business can produce the emphasis must be on increasing production. During deflationary times or during recessions when business capacity is greater than the demand, emphasis must be on increasing demand, not supply. That is not only economic theory. It is common sense.

It is not a coincidence that in 1929 just before the great depression the income disparity was huge just as it is now, or to quote from the Center on Budget and Policy Priorities, “Taken together with prior research, the new data suggest greater income concentration at the top than at any time since 1929.” See here. Henry Ford, not known as a left wing radical said, “One's own employees ought to be one's own best customers. Paying high wages is behind the prosperity of this country.” See here.

But as I write this, I begin to wonder if I am giving you too much credit, Bunny. It seems like I am going over much of what I covered in my last post, which essentially you ignored, as undoubtedly you will ignore the facts here, because they do not comport with your “impressions.”

You say that, “One of our problems involves not having enough skilled labor available to fill those jobs.” This is not the major problem in our economic malaise, but it illustrates another problem in our society – we are not spending enough money on education, we have fallen way behind the rest of the world in educating our young, and college education, has become far too expensive. When I climbed out of poverty to a prosperous upper middle class existence, my college was free. Without that I could not have moved up. But we no longer have those rungs on the ladder.

Bunny, you are entitled to your opinions, but not if they are based on misconceptions. You talk about a slippery slope. But you ignore that the slippery slope has been in the opposite direction. It’s not a little tax there and a little tax here. It a big tax cut and another big tax cut. I have shown you how much taxes have been reduced over the years, but it makes no impression on you. You refuse to focus on the facts.

“Remove Incentive” worries you. But nothing in the present or the past would remove incentive. Look at the facts!!! “(You) dispute my assertion that most of the wealthy have inherited their money. According to Forbes “The top 0.1% -- about 315,000 individuals out of 315 million -- are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.” What does that mean. It means that the very rich are making their money, not by working, but from the returns on their wealth. Now where did they get their wealth? By working? Not likely! Even the “captains of industry” make only millions. Billions are acquired on a multigenerational basis, i.e. through inheritance. Yes, some like George Soros and Warren Buffett and Bill Gates have made it in one lifetime, but most inherit it and they live off their money. Nothing makes money more easily than money, and because of that more and more wealth concentrates at the top, and when we tax such money at a lower rate than money earned working, it exacerbates it all the more.

What we are getting is something very similar to the inherited monarchies that we rebelled against. A permanent, wealthy aristocracy and their subjects, with elections getting more and more meaningless because money controls that too. Power goes to money, and money goes to power, ad infinitum.

From the Gotham Gazette:

The median personal income of those who do not receive any unearned income is $15,000 while for those that do, it is at least $191,200 (and may be much higher.) Only about one-quarter of those who are receiving such income are working, and about 10 percent are making more than $100,000, so many members of the group choose to spend their time in other ways. Indeed, very few report social security income, business or farm income, retirement income or wages and salaries. In short, their investment income is their main source of income. They are substantially older than all New Yorkers older than 15, but even among the younger ones only a small fraction work.

Unfortunately, we can not put together a picture based on the statistical data of how they spend their time, though we know that only a few are working full-time. Some undoubtedly volunteer their time, spend time at vacation spots, or work at jobs that pay relatively low wages, such as docents in art museums or other rewarding pursuits. There are very few surveys that would have enough information to even begin to depict the idle rich.

Donald Trump pretends that he made his money, but what he shows is how to “make yourself richer when you inherit an established business and have millions of dollars plunked into your waiting hands after your Dad has sent you to Wharton.” See here.

You mention that your mother depended on Medicaid. Do you really want that eliminated? It’s taxes on the rich that make it possible. It isn’t funded by Bill Gates, nor could it be. Nor could our schools, or our libraries, or the agencies that protect our health, and our food and our children’s toys. Yes, you are entitled to whatever philosophy suits you, but you shouldn’t base a philosophy on total misconceptions of facts.

Now let me take your comments on Social Security and Medicare, and how you paid into them all your life. Yes you did, but unless you die early you would get a multiple of what you paid in. The way it works is that each succeeding generation supports a previous generation. You are not being paid out of the money you paid in. That was used to pay another generation. Your payments come out the money accumulated by generations later than yours and that money is there. They have not been “pillaged, misused and depleted.” How can you have sound opinions when your facts are so wrong? That money has been invested in Treasury bonds, the safest investment in the world with the Full Faith and Credit of the US behind it. The same bonds China invests in. The problem Social Security faces is that with people living longer, the baby boomers coming into the age where they draw on Social Security, and our young population not growing fast enough to meet the demands, the disbursements of the trust fund are projected for the first time ever to become larger then the income being generated. This means that the SS payment are coming out of the trust fund, or soon will be, and the trust funds assets will slowly be depleted.

Thus unless we find a way to either decrease the disbursements, e.g. increase the retirement age, or increase its income, i.e. increasing the top income from which taxes must be paid, (it is now capped at $106,800 of gross wages, and capital gains income is exempt) it will not be possible to continue paying the benefits after a certain time. No Bunny, “Government run amok has (not) created this problem.”

Your idea of voluntarism sounds wonderful, but it doesn’t work in the real world. If taxes were voluntary, very few would pay them. Social Security could not exist if all people were not required to pay their FICA taxes. The military could not function, if only volunteers were sent to the front. They obey orders. Our government could not exist with voluntary taxes, and could never get enough revenue without getting it from those who can afford to pay it, without hardship.

Bunny, it isn’t a question of your being entitled to have whatever opinion you choose. But your opinions should be based on an understanding of the facts, not on misconceptions. Horatio Alger was an author who wrote fictitious stories of people coming out of poverty into the middle class. These happen occasionally in real life, but the chance I had, was because of a government that gave me my chance with a free education, and cheap public transportation. Sadly, this is long behind us, and Republicans are trying to make it harder and harder to succeed unless you are born into it or, as Rick Santorum did, by being elected to Congress, and after retiring from it, selling your connections. See here.

If you truly want a country where your status in life is determined by who your ancestors are, and where very few overcome the barriers keeping them from rising up in our class structure, then I have no problem with your views. What do you think your chances, or those your children, of making it to the top are?

Comments are welcome and will be distributed with attribution, unless the writer requests that he/she not be identified.