Monday, October 20, 2008

But bullshit spreads like warm butter

In a recent homily at the website of the Minnesota Free Market Institute, titled You Can't Spread Wealth Around, David Strom says, well, the title says it all. What Davey is talking about is the redistribution of wealth, Robin Hood style. But we've been doing a "reverse Robin Hood" for a long time now, concentrating wealth in the hands of the few. Davey's theory is that the rich know what to do with money while the hoi polloi does not:

Wealth redistribution schemes are a scam. By taking from the “rich” and giving to the “poor” the people in power get to appear to be the good guys, even as they hurt you. Handing out checks is a good way to get credit for making people better off. But it doesn’t take a genius to see that long-term prosperity can never be built on a foundation of wealth redistribution simply because it requires taking the money from wealth creation.

This is - unsurprisingly  - just a version of the old trickle down supply-side theory from the heady days of Ronald Reagan.

And Davey, it doesn't take a genius either to know that when things get sufficiently out of whack, we have a problem:

Ravi Batra's book "The Great Depression of 1990" has excellent discussions on a number of different cycles that lead to depressions, including social cycles, cycles of monetary growth, government regulation, as well as concentration of wealth. The book is well worth the read, in spite of its title (and very cheap at used book stores because of it). Batra points out that there is a large body of economic literature upholding the theory that recessions are caused by unequal distribution of incomes and concentration of wealth.

It works like this: As savings rise, consumption falls. Since the rich save more money than the poor, the concentration of wealth in fewer hands increases savings and decreases consumption. As demand drops, and economic growth fails to keep pace with growth in the labor force, unemployment rises. Classically, this is a self-correcting process; labor costs eventually adjust, excesses are flushed out of the system, and growth begins anew. But in a depression, the above process is accompanied by a collapse of the financial system. A recession is a normal, necessary part of the business cycle and will not, in itself, cause a healthy financial system to collapse. However, as wealth becomes concentrated, it has a detrimental effect on the financial system. As Batra goes on to explain, in a sound financial system, banks make loans only to credit-worthy customers who are unlikely to default on their loans. But when wealth becomes concentrated, the number of less affluent people increases, as well as their borrowing needs. These less affluent people, who now make up the majority, have fewer assets and are thus less credit worthy. Even in such an environment, banks cannot afford to be choosy -- they must make loans in order to stay "competitive" with their peers and simply to stay in business. Thus, as the concentration of wealth rises, the number of unhealthy banks with shaky loans also rises in a dangerous spiral, increasing the possibility of systemic failure.

A perverse side effect of the growing wealth disparity is the rise in speculative investments. As a person becomes wealthy, his aversion to risk declines, so the number of risky investments by the rich also increases. Money doesn't mean so much to the rich, so they're willing to take a wild chance on a flyer, if it will double, triple or quadruple their money. As Charles Kindleberger puts it:

The object of speculation may vary from one mania or bubble to the next. It may involve primary products, or goods manufactured for export to distant markets, domestic and foreign securities of various kinds, contracts to buy or sell goods or securities, land in the city or country, houses, office buildings, shopping centers, condominiums, foreign exchange. At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without a real understanding of the process involved. Not surprisingly, swindlers and catchpenny schemes flourish.

(This is from a commenter on the website of a dealer in precious metals, but it is readable and squares with a lot of other analysis that Spot has read and agrees with.)

Does the above sound familiar, boys and girls? It should. The article was written in 2005, which makes the author look prescient.

Which brings Spot to Joe the Turd Herder. Joe is not only not wealthy, but he's apparently a license short of being a plumber, too. But he's going to be rich one day, after he gets his license and spends a lifetime unclogging toilets. And when that day comes, man alive, Joe doesn't want his taxes raised!

If Spot had a dollar for every moke he ever met who intended to be a millionaire, why, he'd be one himself.

Davey, naturally, thinks Joe is a great economic thinker:

Joe was worried because Obama’s plans to increase taxes on the “wealthy”—him—in order to give “tax breaks” (really just government checks) to people who make less than he does. Obama argues that doing this will somehow help create wealth from the “bottom up” instead of the “top down.”

Sadly, says Davey, Obama is wrong:

Obama’s “Robin Hood Economics” is based entirely upon the idea that taking money from job creators and giving it away to preferred groups will somehow “spread the wealth around.” That’s simply bad economics. In reality, taking money away from the small- and medium-sized businesses that Obama counts among the “wealthy” will hobble the engine of job creation and ultimately hurt our own income.

It might be nice to get that government check in the mail, but the price we will pay is fewer jobs, slower economic growth, and less investment and innovation in the economy. That’s what you’ll get by raising taxes on the so-called “wealthy.”

That, boys and girls, to mix our scatological metaphors, is so much happy horse pucky. As the quoted material above suggests, it is the people at the lower end of the economic spectrum that are necessary to create the demand that drives the economy, not the plutocrats who "deploy" their capital. Remember, there are four elements that are necessary for an economy: land (or bricks and mortar and equipment), labor, capital, and entrepreneurship.

That is why, not coincidentally, Ben Bernanke and Henry Paulson suggested today that another financial stimulus plan - on the demand side - ought to be considered.

One last point. As Spot has written until his paws ached, progressive taxation is not simply "Robin Hood economics" as Davey and his ilk suggest. It is simple fairness: the government provides much more that is valuable to the wealthy than the poor: the SEC, the banking system (such as it is these days), transportation infrastructure for the transport of goods, and the list goes on. Even national defense protects the assets of the wealthy abroad.

Davey, can you even say "equal marginal sacrifice principle of taxation?"

A thump of the tail to the 'Farian for the link to the NYT article and helping find the "Turd Herder" by a pipefitter.

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