The arguments presented by Democrats, the #Occupy movement and others on the left for raising taxes on the rich are based on notions of fairness- the gross inappropriateness of someone like Mitt Romney, making hundreds of millions in an economically useless "job" which no one outside of the children of the very wealthy could ever hope to have, and yet paying a far lower tax rate than the average teacher or industrial worker. This argument is perfectly valid, so far as it goes, but it does not deal with the real reason that this country faces endless brushes with economic doom if it doesn't massively raise taxes on the rich.
The true damage done by the combination of low taxes for rich people and little or no regulation occurs as follows:
The economic world is governed immutably by the law of supply and demand. Accordingly, the prices of commodities, be they real estate, stocks and bonds, manufactured goods, antique furniture, or anything else, are a reflection of the demand for these products. In particular, things like real estate and stocks, whose price is not connected in any way to their cost of production, have a value which, in normal economic conditions, is determined by the common perception of their ability to generate revenue in the future. Commercial real estate, for example, is normally valued at a multiple of its ability to generate rents; people who invest in stocks talk about (or used to talk about) their price/earnings ratio.
This works admirably in a system in which the funds available to investors are pretty much in balance with the available investments. But consider what happens if the money in investors' pockets greatly exceeds any opportunity to invest it rationally. Now, we see the ugly side of the law of supply and demand. Now, the "value" of commodities is driven ever upward as investors compete for the limited available investments. Real estate soars to unsustainable heights as people with too much money to invest compete with each other for limited available properties; stock prices see their price/earnings ratios rise to levels that would have seemed ludicrous a few years before. In the fifties, when the rich paid a top marginal tax rate of 75%, for example, a price/earnings ratio of 16, or maybe 20 for a fast growing company was considered appropriate. During the tech bubble of the nineties, we saw price/earnings ratios routinely soar into triple digits, as money chased the available investments; and these price/earnings ratios have never returned to what was thought previously to be sound.
The truth is, that when poor or middle income people have a little more money, they mainly spend it on necessities, or improvements to their lives. Rich people already have all that. When we let their incomes soar, they have no choice but to try to invest it, competing with other rich people over how much risk they are willing to assume to find a place for their excess cash.
This is how economic bubbles are created. This is how economies are sent into cycles of boom and bust which, when severe, bring untold suffering on ordinary people who had nothing to do with generating them.
I am want to talk about the greatest example of this phenomenon, the Great Depression.
What follows is going to consist largely of quotations, as I wouldn't expect anyone to take my word for this. The quotations below are from Arthur Schlesinger's The Crisis of the Old Order, which I heartily recommend, in conjunction with John Kenneth Galbraith's short book, The Great Crash, which lays out a similar scenario. As you read this, I beg you to think about what has gone on in this country since the days of Reagan.
I will begin with a comment by Schlesinger about Andrew Mellon, Coolidge's Secretary of the Treasury, and one of the richest men in America at the time:
"The government is just a business," said Mellon, "and can and should be run on business principles." The first necessity, accordingly, was to balance the budget, and the second to pay off the debt. But Mellon's greater interest, it soon developed, was somewhat inconsistently in the reduction of tax rates, especially in the highest brackets...Mellon, ever tenacious, kept chipping away each year at rates in the upper brackets."
In fact, during the 1920's Republican administrations managed to cut the top tax bracket by 75 percent, at the same time endlessly complaining about the budget deficit and the national debt.
"Mr. Mellon Himself," as George W. Norris of Nebraska observed of the Mellon bill of 1925, "gets a larger personal reduction than the aggregate of practially all the taxpayers in the state of Nebraska."
And what was the consequence of this largesse to the richest among us? An increase in business development? More jobs created by benevolent tycoons with their gigantic profits?
"...the Mellon penchant for tax reduction served to make more money available for speculation. "A decrease of taxes," as Mellon said, "causes an inspiration to trade and commerce."
The "Job creators."
"With this he injected a few more billion dollars into a boom which hardly needed to be further inspired."
And, of course, what would be the fun of a massive giveaway to the rich, without a gutting of the Federal regulatory structure?
"President Coolidge was prepared further to attest his trust in business leadership by weakening the instrumentalities through which past national governments had sought to regulate business. The regulatory commissions, inherited from more suspicious days, were quickly infused with the new spirit of unity. To the Tariff Commission, for example, were sent men who acted almost as open representatives of protected industries. When the Commission's minority...began to object...Coolidge upbraided them for raising prudish scruples."
Schlesinger quotes W. T. Humphrey, appointed by Coolidge to the Federal Trade Commission:
"...no longer, he said, would the Commission serve as a "publicity bureau to spread socialistic propaganda. Where the FTC had been set up to discourage monopoly, it now espoused the cause of the self regulation of business..."
Overt forms of concentration thrived...Holding companies moved into the utility and transportation fields, chain stores into retail distribution; in all areas big firms swallowed small firms and merged wth other big ones. By 1930, the two hundred largest nonbanking corporations controlled half the total corporate wealth of the country."
An attitude exactly the same as that preached with such fervor by Republicans since Reagan, and one which produced the identical result.
"The output per man-hour rose about 40 percent during the decade. The central economic challenge was to distribute the gains of productivity in a manner that would maintain employment and prosperity.
By the rules of orthodox economics, the reduction in production costs should have brought about either a reduction in prices or a rise in wages, or both...Denied outlet in lower prices because of accumulating rigidities, the gains of technological efficiency were equally denied outlet in higher wages...because of the bargaining feebleness of the labor movement...As a result these gains were captured by the businessmen themselves in the form of profits. Through the decade, profits rose 80 percent as a whole, or twice as much as productivity; the profits of financial institutions rose a fantastic 150 percent.
Fantastic, of course, only to someone who hasn't lived through the last thirty years.
The increase in profits naturally pushed up the prices of corporate securities...As the twenties proceeded, the stock market sucked off an increasing share of the undistributed gains of industrial efficiency...the diversion of the gains of efficiency into profits was bound to result in a falling off of the capacity of the people as a whole to buy."
An exact parallel to the last few years. I find it so painful to read things like this and realize how absolutely clear it was to anyone who cared, anyone with the most shallow knowledge of the economics of the great depression, what the result of Reaganomics and of Bush corruption were inevitably going to be.
"The Mellon tax policy, placing its emphasis on relief for millionaires rather than for consumers, made the maldistibution of income and oversaving even worse. By 1929, the 2.3 percent of the population with incomes over $10,000 were responsible for two thirds of the 15 billion dollars in savings."
And now, to me, the worst of all:
"Yet Wall Street and Washington had few qualms...The torrent of excess money pouring into the market, swept stock prices ever upward. And the leaders of the business community, now heedless of caution in their passion for gain, promoted new investment trusts, devised new holding companies and manipulated new pools, always with the aim of floating new securities for the apparently insatiable market...
In time it would appear that even the leaders of business could not decipher the intricate financial structures they were erecting. But for the moment everyone understood that here was an endless source of money and power, a roulette wheel at which no one lost...
Government officials meanwhile watched the speculative boom with affable approval."
At every step of the way, the Republicans of the Reagan and Bush administrations deliberately recreated the exact conditions which caused the economy to spiral out of control and crash in 1929. And now, to the cheers of the mainstream press, they are preaching the same doctrine of tax cuts and balanced budgets practiced by Hoover between 1929 and Roosevelt's inauguration in 1933, which allowed the economy to continue its downward spiral. And there can be no claim that anyone was unaware of this.
Immediately on Roosevelt's election, Democratic, Keynsian policies started the recovery:
The facts of the Republican mishandling of the country in service to the rich, which caused the Great Depression, were clearly known to anyone with a basic knowledge of our country's economic history. Yet Reagan and Bush, Gingrich, Armey, Delay, McConnell, Boehner and a hundred more Republican servants of the wealthy drove the economy over the same cliff again. And now, the acolytes of the miserable fraud know as the Ryan plan are to be seen throughout the country promoting another dose of Republican pandering to the rich, as the perfect answer to our problems.
This is not mismanagement. It constitutes the most massive deliberate crime ever committed against the American people, for which we will pay for decades; and it at the same time constitutes the worst subversion and betrayal of our country that we have ever seen.
With the mainstream press endlessly promoting the Ryan plan as a demonstration of level-headedness and courage, and with the Democratic party almost inevitably collapsing as it always does in the face of the same old Republican lies, I see no hope for Americans in the years ahead. The Republicans, who were apparently not satisfied with the collapse on their watch in 2008, are now determined to continue their theft until another economic disaster occurs which, like the one in 1929, is colossal enough to motivate the American people to wake up to the endless crime of which they are the perpetual victims.
Let me restate my point: A severe restriction on the wealth of the rich is the only method to protect ourselves from an endless cycle of depressions and near depressions which is the Republicans' sole gift to this nation in the last hundred years. No amount of whining from hedge fund managers, Wal-Mart heirs, etc. can be allowed to deflect us from what must be done to save the country- all of us, rich and poor alike- from certain economic disaster, repeated on a regular basis.
Note: the historical portion of this post is from something I wrote in August, 2010. I think it is important enough to repeat.
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