Nontrivial Pursuits

Ron Paul is one of those Libertarian enthusiasts who says The Government is stealing when it collects tax payments from citizens under the threat of imprisonment for failure to comply.

They claim that compulsory taxation by The Government is a violation of their “property rights.”

The fundamental flaw in the Libertarian argument can be found in their foundational assumption that an individual’s right to property (or anything else, for that matter) is something that that individual possesses “within himself.”

As a matter of fact, no individual is blessed with “rights” as a natural consequence of existing.

Any right you might ‘have’ is not something that you actually have possession of; it is something that can only be granted to you by others.

To say that an individual or group has a right is actually just another way of saying that everybody else is obligated to behave [or not behave] in a certain way with respect to that individual/group.

Why might ‘everyone’ feel persuaded to grant you any kind of right [to their obligated behavior] at all?

Answer: they would do such a thing only if they perceived that they would benefit if they all agreed to behave [or not behave] in the same way.

In other words, they would only agree to grant you a right if they believed it was a moral thing to do.

How can it be determined whether or not an act [or a decision to not act] is moral? There is a simple test we can always apply…

An act [or a decision to not act] is moral if everyone would be better off if everyone were to act [or choose not to act] in the same way.

If everyone would be worse off if everyone acted [or chose not to act] in the same way, then the action [or decision to not act] is immoral, by definition.

If everyone would be neither better off nor worse off if everyone were to act [or not act] in the same way, then the action or failure to act is neither moral nor immoral.

That is as simple as it gets…THE definition of what is moral and what is not.

The ultimate reality you are dealing with, Libertarians, is that you do not have any rights if the majority of the tribe does not want to bestow them upon you (i.e., if the rest of the tribe does not believe that they will be better off as a consequence of granting you the right that you think you should be entitled to.)

One of the reasons why Libertarians are confused re: the topic of rights, is the fact that governments often bestow legal rights upon certain individuals/groups that are not necessarily moral rights.

Example: the property rights that were granted by the U.S. government to slave owners.

In their opposition to government taxation, Libertarians seize upon certain legal rights that governments have established (like the legal right to own property), and then speak of them as if they are ‘natural rights’ which are implicitly assumed to ‘belong’ to wealthy individuals, no matter what the rest of the tribe might think about it.

In that belief, they are profoundly mistaken.

Now, it is true that ‘everyone’ may believe that they are better off if you [and everyone else] are granted the exclusive right to decide the disposition of a certain amount of the property that you/they have been able to accumulate.

But it is also true that they are also likely to believe that they would all be better off if you were required to give up a significant portion of your “excess dollar wealth” to the commonwealth, if your accumulations are substantial, and if it would harm you very little to give them up at a time when many others are in great need.

Are you listening, Ron Paul?

You actually have no right—-granted by everyone else—-to the $$ property that is appropriated from you by government tax collectors.

It is not ‘theft’ when the government takes it from you, because “everyone else” has only granted you rights of ownership/disposition over that portion of your income that is left after you have met your tax obligations to the commonwealth.

You are no more a ‘victim’ than any criminal would be who is forced by the government to give up monies that he obtained through fraud or extortion.

Your ‘right’ to the $$ you owe the government [according to the tax code] is no more legitimate than an embezzler’s ‘right’ to $$ he stole from his employer.

That money just ain’t yours, no matter how much you might enjoy thinking otherwise.

(The continuation of my rather lengthy response to my affluent Republican brother, Steve, re: tax hikes on rich people)

Cutting the taxes of rich people is a profoundly inefficient way to put more dollars into the hands of individuals/firms that want to invest. And what about the money that banks get from savers? According to Republican economic mythology, increasing the amount of money that is put into banks by savers is a great way to get those $$ into the hands of entrepreneurs and firm managers. The reality is that very little of the money that rich people put into banks ends up in the hands of the people who make economic investments.

Empirical evidence reveals that:

1) Between 1988 & 1997, an average of nearly 85% of the money that corporations spent on investment came from retained earnings or other internally-generated funds. (Brealey & Myers, Principles of Corporate Finance, 2000, pp. 383-384)

This empirical fact strongly refutes the Republican suggestion that firms are desperately dependent upon borrowed money (and therefore upon savings) when they want to make investments. What is the ultimate source of the internally-generated funds? It would be the spending of consumers and firms and government, not savings. If the government increases its spending to a high enough level, firms will finally have the incentive they have been looking for—-an increase in demand for their products—-and will begin to invest the money they’ve been saving.

(Simply throwing more money at businesses [tax cuts and subsidies] when demand for their products has not picked up is a ridiculous waste of government dollars. Over the past couple of years, firms have been showing us—-once again—-that simply making it ‘cheaper’ for them to invest is not enough of an incentive for them to actually do it, not when demand for their products is stagnant.)

2) Between 1998 & 2001 (years that included cyclically high levels of business investment) the combined borrowing of all non-financial corporations and all non-corporate businesses varied between 20-34% of total borrowing nationwide. During the same period, the household sector of the economy accounted for 20-30% of total borrowing.

These statistics tell us that only a fraction of total savings is directed, ultimately, to the noble purpose of improving economic efficiency. Much of the money that is saved is ultimately spent on credit card loans and installment purchases. If firms find that interest rates are too high, is it necessarily because there is a shortage of savings, or is it perhaps because lending institutions are quite happy to starve the supply-side of the economy if they can get higher yields by lending to consumers?

3) Savings are not the only source of loanable funds

The ultimate determinant of the supply of loanable funds in the U.S. economy is the Federal Open Market Committee of the Federal Reserve System. Whenever The Fed buys securities in the open market, it pays for them with money that it creates out of thin air with a keystroke. It does not draw the money from some reserve account that is limited in size. It is “new money” that did not exist prior to the keystroke that created it. With any of its purchases of securities, the Fed provides loanable funds to banks that were not saved by any saver.

There is no limit to the amount of money The Fed can inject into the loanable funds market. If savers were to suddenly pull most of their money out of banks and put it under their mattresses instead (equivalent to a dramatic reduction in savings), The Fed would still be able to easily maintain the supply of loanable funds or even increase it by simply buying every sort of debt instrument offered in the credit markets. Even if The Fed bought up all of the nation’s debt—-something that would never happen—-and there was still a shortage of loanable funds, it could maintain/increase the money supply by buying buildings or land or anything else it fancies.

The facts I’ve mentioned above help to explain why it does not hurt the economy when the government taxes the excess savings of the richest Americans. When can we know that there are excess savings in the economy? It’s fairly simple, actually. Whenever there is any level of unemployment, like during a recession, it is because the economy is suffering from excess savings. How do we know that is true? Simple logic.

Fact 1: Virtually all jobs in the economy are ultimately dependent upon SPENDING. Almost all of the money that ends up in paychecks or profit margins can be ultimately traced to the expenditure decisions of consumers, firms, or governments. When aggregate spending drops, jobs disappear. That’s what a recession is: a drop in spending (GDP).

Fact 2: By definition, all money-income that is NOT SPENT, is money SAVED.

Fact 3: Combining Fact 1 and Fact 2, whenever there is any level of unemployment, it is because aggregate spending has dropped, and when aggregate spending has dropped, by definition, savings are at excessive levels.

Some of the money that has been saved needs to be spent to keep the excessive savings from hurting the entire economy. One way to do that is to borrow the savings; another way is to increase the tax obligations of the wealthy. It is simply not true that there is no limit to the amount of savings an economy can safely tolerate.

When there is too much saving in the economy, this does not mean that everyone is saving too much money. The problem is that some people are saving too much money; even while others are not saving enough. In effect, these Super Savers (generally, the Uber-Rich) are ‘hogging all of the available savings’ that the economy can safely tolerate (without creating or worsening an unemployment problem).

Two things happen if we tax the incomes of the Uber-Rich at steeply progressive marginal rates: (1) the government has all the money it needs to finance increased spending on public ECONOMIC INVESTMENTS, and (2) all the rich people who are paying higher tax rates do not end up losing any of the purchasing power of their incomes.

(Since they are all paying the same extra percentage in taxes, none of them loses his/her ‘ranking’ within the hierarchy of all disposable incomes. Since they still have more disposable dollars than everyone else, they still get to consume the scarcest goods/services/experiences that the economy is able to produce. There aren’t any fewer luxuries or miles of beach front property when rich people start paying higher taxes; the prices of all luxuries simply drop to a level that the now-poorer rich folks can afford with their reduced disposable incomes. In real terms, the rich give up nothing** when they pay significantly-higher marginal tax rates.)

**Nothing, in terms of lost purchasing power, in terms of material possessions and lifestyle.

The problem with the current recession is that a major source of aggregate spending has disappeared, perhaps forever: the reckless lending practices that banks became accustomed to when they owned the Bush administration. When the Republicans slashed the taxes of the wealthy under Bush, most of those extra disposable dollars ended up in the financial markets and the banks were awash with cash to lend.

With lax regulation and extra dollars to lend, banks happily took on riskier loans (including mortgages) because higher risks earned higher profit margins. For whatever reason, banks have now become very stingy in their lending practices, and that is perhaps a good thing. The only problem is that the $$ that those risky loans contributed to aggregate demand were substantial and they have to be replaced.

The best solution: increase the tax rates of the richest Americans and spend the money on ECONOMIC INVESTMENTS, e.g., infrastructure, human capital (education, health). Economic growth gets a big stimulus, unemployment drops, our standard of living improves, the national debt is paid down, and the rich actually give up nothing in real terms from paying the higher taxes. It’s a solution that not only makes the non-rich better off, in real terms, but it also makes the rich better off, in real terms.

Yes Ron, I still entertain the hope that I will someday have a chance to explain it all to Steve and he’ll [somehow] see the truth of what I am saying. I’m sorry that the political party he came to identify with is so profoundly wrong in its economic prescriptions, but if it is any consolation to him, most Democratic politicians have been equally misguided in their understanding of the economy.

(My apologies for neglecting this blog for so long. It’s my ‘book’ on Human Nature that I plan to publish in the next 2-3 months. I’m trying, trying, trying to find the time to finish up. So I thought I could at least re-post some of my old stuff that more recent readers are not familiar with, beginning with this…)

MY RESPONSE TO MY AFFLUENT REPUBLICAN BROTHER

The other day my oldest brother, Ron (I have four), emailed me the following request:

The following is an argument by our brother, Steve, for not increasing taxes on the rich. Can you help me out with understanding how much he is (or isn’t ) confused about this?

Steve is my youngest brother. He has become the most outspoken Republican in our family. Ron was asking for my help because I have a Master’s Degree in Economics and have studied economics at the Ph.D level.

I suppose part of the reason why Steve embraces Republican economic mythology is because his sales business took off about ten years ago. From what he has told me, I figure he has been earning between $150,000 and $250,000 annually over the past several years. Ron was trying to tell Steve that he probably wasn’t going to be paying higher taxes when the Republican tax hike goes into effect in January 2011. Steve responded with the kinds of arguments many of us have become familiar with, including…

My concern isn’t for just myself. I think that it is completely asinine to suck huge amounts of money out of the private sector when we’re in the middle of a recession. Lower taxes free up venture capital which creates jobs. More jobs create more buyers (demand). More demand leads to higher production. Higher production leads to more jobs, and so on.

I decided to publish nearly all of my response to Steve’s arguments in this diary, since Ron seemed to find it quite helpful. As I told Ron, I could simply respond with a list of counter-claims, but I thought Steve would want to debate all the underlying assumptions, so I provided him with the following lengthy, detailed response.

Steve says that he thinks it is a bad idea to “suck huge amounts of money out of the private sector” when we’re in the middle of a recession. He says this because he assumes, incorrectly, that all of the money that the government will be collecting from rich Americans in January [when the Republican tax hike takes effect] is money that would otherwise be put to productive use by the earners of that income.

Rich Republicans want very much to believe that the money they put into ‘savings’ or ‘investments’ is doing all kinds of wonderful things for the economy. Unfortunately, this belief is based on little more than wishful thinking. To understand why they are so very wrong, people need to understand the difference between financial investments and economic investments.

Economic investments are the kind of investments that actually end up “growing the size of the pie” They occur when money is spent on capital goods or other economic resources [like humans] that are then used to produce more capital goods or more of the final goods that consumers find desirable. In other words, economic investments either increase output or expand the supply-side’s productive capacity. This happens whenever firms purchase machinery/equipment to improve productive efficiency or when they spend money on the construction of new stores or factories or on the salaries of new employees. However, not all firm expenditures are economic investments. (e.g., money spent by firms on advertising that either (a) misleads consumers or (b) does nothing to help them with their purchasing decisions.)

Financial investments are purchases or commitments of money that provide the “investor” with an income stream. Saving money is a financial investment because it provides interest income; purchases of assets can be financial investments if they eventually provide a capital gain. Economic investments made by firms are usually also financial investments because they generate income that exceeds their cost. The economic investments made by governments that improve infrastructure or human capital are not financial investments because they do not provide the government with an income stream.

Some financial investments are also economic investments, but many of them are not. The purchase of a piece of land, for example, is a financial investment if it appreciates in value over time, but it is not an economic investment if it just sits there, undeveloped. Purchases of stocks in secondary markets (e.g., NYSE, NASDAQ) are clearly financial investments if the stocks appreciate in value, but they are not economic investments because they involve nothing more than exchanges of titles of ownership of already existing assets. They do not typically put any money into the hands of firm managers that could be used for economic investments. That normally happens only when stocks are first sold by companies to underwriters, prior to an initial public offering.

Supply-Side theorists have taken advantage of the impreciseness of the word investment to craft tax policy proposals that sound as though they are beneficial to the economy, but actually are not. The famous Capital Gains Tax Cut, for example, is frequently promoted as an incentive that would stimulate “investment.” Unfortunately, the only “investment” that such a tax cut is likely to stimulate is increased financial investment in stocks and other real assets. One financial investor hands money over to another financial investor for a piece of paper. Very little if any of the money involved in these transactions ends up being spent on capital goods that would increase output or the productive capacity of the economy.

When do firms need special incentives to motivate them to invest in new capital goods? The answer is never. In modern market economies, competition provides firm managers with the most powerful motivation to continually invest that they will ever need: fear. They ultimately face both the fear of bankruptcy and the fear of lost opportunity. If your competition lowers its costs by investing in new equipment, or improves the appeal of its products by incorporating new innovations, then you’d better do the same or you will soon find yourself driven out of business. With only a few exceptions, additional government-provided financial incentives are nothing more than an unnecessary waste of tax dollars.

Entrepreneurs do not need special additional incentives provided by the government to encourage them to assume the risks of creating a new business. True risk takers believe that their ideas will succeed in the market and have so much of their identities invested in them, they really don’t care if they receive any return at all on their invested time and money, sometimes for several years, as long as they have hope of eventual success. The problem for them is not that they lack motivation; it’s that they can’t find someone who is willing to provide them with a loan that banks, venture capitalists, and angel investors find too risky.

In confronting this situation, Congress has a couple of options. It can choose to do nothing and simply allow the marketplace to reward firms-that-make-wise-investments with the market share of firms-that-do-not. The other option would be for lawmakers to help entrepreneurs [and already-established firms that are judged by banks to be ‘too-risky’] to obtain the funding they need in the hope that they might end up becoming competitive with better established firms. The rational way to do this would be to provide these marginal firms with targeted investment tax credits or perhaps with government guarantees on private loans.

These kinds of initiatives would put the money directly into the hands of those who will be economically investing the money. Compare this to the insane idea of throwing hundreds of billions of extra disposable dollars at wealthy savers in the hope that some small fraction of their extra savings might somehow make their way into the hands of true economic investors when private banks have already rejected their borrowing plans as too risky. Very little, if any, of those billions of dollars would actually end up helping needy entrepreneurs and firm managers.

(To be continued…)

In recent days/weeks, Paul Krugman has repeatedly focused attention on the similarities that exist between the Debt Crisis Craziness that has transfixed Europe and the Debt Crisis Craziness that The Republican Party has been foisting on the American people since they took over control of the House of Representatives.

In both situations, you hear ‘conservative’ voices from within the Investment Class solemnly declaring that Austerity is needed in order to eliminate the excessive debts of the governments involved.

They don’t even try to suggest that the austerity measures will be painless; they simply suggest that members of the lower classes should be willing to endure them in order to ‘restore confidence’ [within the Investment Class], which they claim is a pre-condition that must be met in order for a return to prosperity to take place.

You will even find quite a few Democrats in Washington who agree with this reasoning. Unfortunately, the DINO’s who agree with their Republican buddies also agree that a painful period of austerity is needed in order to make our crippled economy healthy again.

Of course, The Republicans in Congress are only interested in one approach to balancing the government’s budget: reduce the government’s need to borrow by reducing the amount of money that it spends [on needy people who don’t happen to be rich].

These bozos are not just wrong; they are horrifyingly wrong. They are dangerously wrong. They are wrong in a way that seriously threatens millions of Americans needlessly.

Here is what they are missing…

If all major sectors of the economy (households, businesses, governments) all decided to stop borrowing and start saving for their purchases, instead, the result would be an economic collapse worse than the Great Depression of the 1930’s.

This is because, without the phenomenon of borrowing, the practice of saving large amounts of money during a period of high unemployment is a threat to the entire nation.

When public officials start to talk about the nation’s borrowing habits, they need to keep a few key economic facts in mind:

Number 1: ALL JOBS IN THE ECONOMY ARE DEPENDENT ON SPENDING, the spending of households, firms, and governments. That’s where the money comes from that pays everyone’s salaries.

Number 2: MONEY SAVED IS MONEY NOT SPENT. A decision to save is a willful decision to not spend.

Number 3: IF THE MONEY THAT IS SAVED IS NOT RETURNED TO THE ECONOMY THROUGH THE SPENDING DECISIONS OF BORROWERS, THEN THERE IS A NET LOSS OF MONEY FROM THE ECONOMY AND JOBS DISAPPEAR.

When money is saved, it is removed from the economy, where it is no person’s income, since it is not spent. Whenever there is a shortage of jobs in the economy, it is either because too much money has been saved or because not enough of the money that has been saved is being lent out to borrowers.

Under current economic conditions (9% unemployment) it is insane for a government to reduce its borrowing-financed-spending, since that would simply increase unemployment if nothing else is done to get some of that saved money spent.

What else could be done?

Well, the smart thing to do during a recession is for the government to increase the tax obligations of the nation’s biggest savers, i.e., the Top 10%-15% of income earners, in order to finance major spending initiatives on true economic investments: infrastructure and human capital.

“No! No! No!”, say The Republicans. “That would take money away from the Job Creators!”

Oh really? Says who?

Since we know that all jobs are dependent upon spending, how does it make any sense to call the economy’s biggest savers job creators when their [money saving] actions do precisely the opposite? Since the lower- and middle-classes spend nearly all of their incomes, are they not the true job creators?

Contrary to the insinuations of Republican politicians, roughly 85% of all corporate spending on investment is financed by retained earnings and other ‘internal’ sources of revenue, and not by borrowed funds (i.e., not by the ‘Job Creators’).

The money removed from the economy by wealthy savers is not desperately needed by businesses for most of their investment plans. What does stimulate business investment is an increase in demand for their products.

In an economy suffering from 9% unemployment, it is clear that a lot of the money that has been removed from the economy by savers is not being lent to borrowers, or else the economy would certainly be booming.

Now if/when the federal government increases the tax obligations of the Top Fifteen Percent of income earners, it will collect a great deal of money from the nations Biggest Savers. If Congress is smart, it will spend ALL OF THOSE FUNDS on desperately-needed public investments.

Understand clearly the net result of taxing the rich more during an economic recession: money that would have been removed from the economy by the nation’s biggest savers gets spent, instead, by the federal government.

That, my friends, is a net increase in aggregate spending, and a direct creation of jobs, at a time when jobs are desperately needed. Yes, it’s true that increasing the tax rates of the Top Fifteen Percent would cause a drop in some of their consumption spending, but that drop in spending would be more than made up for by the total increase in the government’s spending. dec C < inc G

One more thing to keep in mind…

Assume for a moment that there was some way ‘they’ could guarantee that all money removed from the economy by savers was promptly lent right out to borrowers who would spend it. Under such assumptions, wouldn’t any reduction in aggregate borrowing have to be accompanied by an equal reduction in savings in order to avoid unpleasant imbalances?

Do you think it will ever be possible to teach politicians that saving and borrowing go hand in hand? E.g., if you want more saving to occur in your economy, then you must also want to see more borrowing occur, or else you must ultimately be in favor of economic contraction.

Right?

What is the current state of Republican Tax Stupidity? Let’s ask Eric Cantor, House Majority Leader, who is heading to the University of Pennsylvania to give a speech on the subject.

According to Jake Sherman, of Politico, Cantor will explain how the Republicans in Congress like him can “...make sure the people at the top stay there.” Also…

“He’ll talk about the various socioeconomic classes and how Washington should stop pushing different people down the economic ladder and instead can work together to ensure that all people have the ability move up”

Idiots! (head shaking) We know from this little ‘heads up’ precisely what Cantor is going to say in his speech. He is going to say—-or insinuate—-that higher taxes on the top 1%-15% of income earners would “push” those successful people “down the economic ladder” when it would actually do nothing of the sort.

Like most stupid Republicans, Cantor is oblivious to the fact that because we have a market economy it is not possible to deprive the Top 15% of their privileged positions at the top of the ladder through progressive income taxation. In terms of the purchasing power they wield within the domestic economy, they lose absolutely nothing

There is not even any debate about it, among those who are fully informed re: the facts. Even if Congress were to establish the top marginal rate at 99%, with no deductions, exemptions, or allowances, the people who are currently occupying the top 15 rungs of the economic ladder would still be there, fat and happy as always.

How can such a thing be true? It’s because we have a market economy. The sellers of all those things/experiences that the wealthy buy, that none of the rest of us can afford, will have no choice but to charge lower prices for the items they sell.

The same number of goods/services/luxuries will be brought to market as before (before the wealthy started paying much higher tax bills); they’d just be sold at lower prices. Prices would simply drop to a level the the “supposedly poorer” rich people would be able to afford, but not so much that the “near-rich” would be able to afford them.

It makes you think that the Republicans in Washington don’t understand how marginal rates preserve every taxpayer’s “purchasing power” within the economy. From my lengthy article on this subject, THE PROGRESSIVE INCOME TAX: Theoretical Foundations:

Imagine that one year Bill Gates is the top income earner with a gross income of one billion dollars. If all of that income were taxed at a 99% rate, he would be forced to somehow get by on 1% of a billion dollars, or $10,000,000. Let’s say that Paul Allen earns $800,000,000 in gross income that year and all of that income is taxed at a 98% rate.

This would leave him with $16,000,000 of disposable income. Such a result would be extremely unfair because Bill would end up with less disposable income ($10,000,000) than Paul ($16, 000,000) after taxes even though he earned more than Paul in gross income.

This kind of result does not occur, however, when you employ marginal tax rates, like we do now with our current tax code. Let’s say that in our imaginary scenario the first 800 million dollars of income is subject to a 98% marginal tax rate. That means that both Paul and Bill would pay the same amount of taxes on the first $800,000,000 of their income.

But Bill would pay more in taxes than Paul because he made an extra $200,000,000 in income. In a marginal income tax system, Bill would pay the 99% tax rate only on that extra $200,000,000. This would leave him with $2,000,000 more in disposable income than Paul would end up with.

What about within a tax bracket? Well, if Warren Buffett grosses $900,000,000 the same year, he would also pay the same amount of taxes as the others did on the first 800 million dollars of their income. He would also pay 99% on the extra $100,000,000 that he earned.

This would leave him with $1,000,000 more in disposable income than Paul ends up with, but with still $1,000,000 less than Bill ends up with. The comparative bidding positions of all three men within the hierarchy of national income distribution would be preserved.

With the Progressive Income Tax, taxpayers do not need to be concerned about the shrinking of their disposable incomes. They can know with certainty that prices will drop to levels they can afford if all consumers have their disposable incomes reduced in a way that preserves everyone’s relative ‘bidding positions.’

The ultimate reason why prices must drop is because 1) there will not be enough dollars in the hands of buyers to sell everything at the higher pre-tax prices, and 2) markets work. Smaller disposable incomes end up buying just as much as higher disposable incomes did previously.

Eric Cantor is an idiot and a fool, as are all the other Republicans who offer similar “irrationalizations” to justify their efforts to prevent any increase in the tax bills that the Top One Percent are required to pay.

May the Occupation of Wall Street finally awaken the Republicans from their blissful slumbers in Stupid Land.

I am an ‘economist’ who is such a big fan of Paul Krugman, I have even proposed that he run for President next year (not a serious run, of course, but merely a symbolic one for the purpose of getting the nation to discuss the virtues of a Progressive Economic Agenda).

There is really no economist on the planet whom I hold in higher esteem. But alas, my hero has come up short in his most recent blog entry in which he said this about Congress’ 2008 bailout of institutions that were considered TOO BIG TO FAIL:

...there are in fact very good reasons to intervene to support banks during a financial crisis…the only feasible strategy is guarantees and a financial safety net plus regulation to limit the abuse of those guarantees. It’s imperfect; it faces the constant threat of regulatory capture; but it has worked in the past, and it’s the only game in town.

No, Paul, no. Arrrgh! Bailing out privately-owned, for-profit banks when their gambling has—-once again—-gotten out of control is not the only game in town. What you are telling the Occupiers of Wall Street is that the big banks they are standing in front of really were Too Big To Fail.

I guess the economic gods simply forgot to tell Paul about the other option that was available to Congress back in 2008, the one that never got discussed by members of Congress or by Obama’s team in the White House simply because the representatives of Wall Street and the Banking Industry who met with them didn’t tell them that any other options existed.

No surprise there.

But now that the Occupy Wall Street protesters—-and Senator Bernie Sanders—-have again focused the attention of the nation on The Outrage of 2008, perhaps another opportunity exists for the public to learn that another alternative was available to Congress that would have (1) protected the interests/jobs of Main Street, at the same time that it (2) allowed the banks and Wall Street firms that created the crisis to crash and burn in a Moral Hazard Nightmare of their own making.

Instead of buying up the worthless paper assets of failing banks and insurance companies in order to make their balance sheets again look acceptable to bank examiners, Congress could just as easily have created its own bank, a Taxpayers’ Bank, which would have been the one healthy bank in the country that could have provided for all of Main Street’s borrowing needs at a lower total cost than it took to bail out the private banks and insurance companies.

At the same time that major financial institutions were all facing bankruptcy, Congress could have passed legislation that would have authorized the Secretary of the Treasury to use funds provided by Congress (= Taxpayers) to buy up the assets of Bank of America (and any other bank facing the same fate) at fire sale prices and then operate the bank in the name of The American People, to serve the general public interest. Of course, the best time to buy up the shares of a failing bank is when they are worth only pennies.

After all the worthless paper assets (e.g., credit default swaps) were ‘written off’ the books, the bank could then have been fully capitalized with Taxpayer funds. After the board of directors and other key personnel were sacked and replaced with employees beholden to Congress and the American People (perhaps some Academic Idealists?), the bank’s retained ‘essential personnel’ would then have been directed to begin lending with enthusiasm to the Main Street customers that their former employers were either unable or unwilling to lend to.

This Taxpayers’ Bank could have provided Main Street with all the liquidity needed to maintain the economy on a prosperous path at the same time that privately-owned financial corporations were all allowed to fail utterly. Single-home owners could have been provided with refinancing of their mortgages on favorable terms, all non-financial businesses could have been provided with loans, and consumers could have been approved for big-ticket purchases.

If Congress had pursued this alternative, it would have been the equivalent of hooking the economy up to a “Heart-Lung” machine that would have allowed the “life-blood” of the economy to continue to flow, even while the privately-owned heart of the economy was undergoing a cardiac arrest. Such a move by Congress would—-alone—-have prevented the kind of economic contraction that would most certainly have occurred if private lending had been completely cut off.

But just to make sure that none of the citizens of Main Street were hurt by the sins of Wall Street and the FIRE (Finance, Insurance, and Real Estate) sector, the Democrats in Congress should have also spent an additional $1 trillion on REAL ECONOMIC INVESTMENTS—-infrastructure and human capital (education, health care, the environment).

Increased government spending on such a scale would have driven the Main Street economy into high gear, making it possible for the American People on Main Street to enjoy an ECONOMIC BOOM—-low unemployment and high demand for business’ products—-at the very same time that the criminals of Wall Street and FIRE were forced by the marketplace to pay the ultimate price for their incompetence and excessive greed.

They would have lost their companies, billions of dollars, their reputations, and MORAL HAZARD would finally have been restored to the financial services industry. After the meltdown had run its course, the few survivors would be free to return to the business of banking and insuring, but this time there would be a Public Option available to the Main Street consumers of banking services, the Federal Government.

Private bankers have always found this kind of banking rather boring and may not want to compete with the Federal Government, since the government wouldn’t be looking to take any profits, but they would still be free to monopolize the niche that investment bankers always got so excited about: chasing the higher yields that higher levels of risk brought into their coffers.

Of course, this time, they’d know that they wouldn’t be able to count on the government to bail them out—-moral hazard, you know—-so they would be far more prudent about how they roll the dice with other people’s money.

The protesters occupying Wall Street many not know it, but this is really a key component of the kind of change they want. It provides the kind of Economic Justice that they seek, economic prosperity, and security from future financial disasters.

In order for Congress to give the Occupiers of Wall Street a reason to break up and go home, it needs to make it clear to the American people that it intends to enter into the banking industry as a major player itself, the next time the private banking industry begins to threaten Washington and the American People with economic terrorism. It would finally bring an end to the TOO BIG TO FAIL Era, the TOO BIG TO FAIL Lie.

I’ve been trying to spend more time on my “book” recently [at the expense of my blog] but I simply must take the time to comment on the exciting events taking place in Manhattan’s financial district.

I am speaking, of course, of the daily massed demonstrations that protesters are calling Occupy Wall Street!

I call this exciting news because it has given me hope that I haven’t felt for years. Real hope. Why? Because I can see this thing getting Big. Really, Really Big.

Like maybe a couple of million people physically massed around the citadels of corporate power, breathing down the necks of the Privileged Elite, screaming and yelling their demands for JUSTICE.

Make no mistake about it, if the crowds start to swell to the hundreds of thousands, it could definitely have a major impact on the 2012 Elections next November.

Once that happens, and if polls show that a majority of voters support the protesters, it will suddenly give a lot of politicians the courage they never knew they had to get behind the protesters and call for the election of a Reform Congress that will commit itself to the kind of major reforms that the protesters are demanding.

What is it that the protesters are demanding? That’s a topic I want to address in my next post…

From Stupid Rich People (Part 3):

Being stupid, themselves, they don’t even realize that the agendas they propose are guaranteed to deprive the wealthy of real gains in their standard-of-living, gains that would have been possible, if only they had not been so stupid.

Did I say deprive the wealthy of real gains in their standard-of-living? Yes I did. The key word to focus on here is real.

Thanks to the efforts of Republican politicians, all rich people in America over the past 30-years or so have experienced huge gains in their disposable incomes, which means that none of them made any real gains in their purchasing power.

The only wealthy people who actually did experience an increase in their purchasing power were those who experienced an increase in disposable income that most other rich people did not also receive.

It is only when your household’s gains in disposable income are exceptional, compared to all other affluent people, that you have actually experience an increase in purchasing power (i.e., an improvement in one’s ranking within the hierarchy of all disposable incomes).

(We can’t all improve our rankings with respect to each other. You can only achieve a real improvement in purchasing power if/when your household’s position within the hierarchy of all disposable incomes improves at some other household’s expense.)

What kinds of real improvements in the standard-of-living of rich people are possible? Or should I say, what kinds of real improvements in the standard-of-living of rich people would have been possible if the Republicans had not cut the taxes of all rich people in recent decades?

Well, let’s think about the lifestyles of the rich and famous for a moment. Having more disposable dollars to spend than other people allows you to outbid them for the scarcest of luxury ‘experiences’ that are available in the marketplace.

So your mansion will be filled with all sorts of rare objects of art, etc.

But what about your estate? Isn’t it worth something—-a lot, actually—-to rich people to be able to beautify their surroundings, to hire people to maintain their estates in an especially satisfying way? Of course it is.

And shouldn’t it provide a lot of satisfaction to a rich person if he/she could drive through his province, his state, his country and see beauty instead of blight? Of course it would. Seeing ugliness and poverty and disrepair when you pass through your country is not something that is likely to give a rich person much satisfaction.

For some reason I do not understand, rich Republicans seem to be oblivious to the fact that they would be improving their standard-of-living in real terms if they were to spend some money—-through their government—-on hiring unemployed people and putting them to work improving the appearance of the national “view.”

By themselves, rich people do not have enough money to clean up the blight that they see across the country, but if they were to pool their resources, they could do it.

Instead of seeing the federal government as their enemy, rich people should be viewing it as a very helpful institution that provides them with a way to raise the funds needed for real wealth creation in a way that does not deprive any of the wealthy of any of their purchasing power.

With the progressive income tax, money is collected from rich people in a way that does not deprive any wealthy tax payer of any of his/her purchasing power. They all end up with smaller disposable incomes, but those smaller disposable incomes will end up buying them just as much as their higher disposable incomes did previously.

The prices of all luxuries will simply drop to a level that they can afford. All rich people would maintain their rankings within the hierarchy of all disposable incomes; their comparative “bidding positions” would be unchanged. Those who had more (or less) taxable income than you before taxes were paid would still end up with more ( or less) disposable income than you after taxes are paid.

If rich Republicans weren’t so stupid, they would see unemployed Americans as an opportunity for them to start spending more money—-through their government, using progressive taxation—-on improvements in their standard-of-living.

Optimal levels of real wealth production and real wealth consumption are only achievable when/if all able-bodied and all able-minded individuals are working, producing something of value.

Rich people need to understand that, as long as there is any level of unemployment in the economy, it is still possible for them to make themselves richer in real terms by putting those people to work on creating and producing and beautifying.

Stupid rich people (most of them Republicans) think that the best way to impress the rich people of other countries is to be able to claim that their tax rates are lower than the tax rates of rich people in other countries.

They stupidly celebrate this fact as though it has some significance, even though it has done nothing whatsoever to improve their purchasing power within domestic markets.

Smart rich people would prefer to be able to boast that their poor people are all working at productive tasks, providing for their own needs, and helping to create a beautiful nation with modern infrastructure and a clean environment.

They’d like to be able to brag that they know how to take care of their poor people and improve their own standard-of-living at the same time.

Rich Republicans, on the other hand, just seem to keep getting stupider and stupider and stupider….

I thought I might interrupt my Stupid Rich People Series to share my thoughts on this 10th Anniversary of the tragic attack on the World Trade Center towers by “suicide warriors” under the direction of Osama bin Laden.

Ever since the Viet Nam War, when I developed a political conscience at 18 years of age, I have been especially suspicious whenever our political leaders tell us that there is some great threat overseas that we need to worry about, that our nation must get involved in.

I may not be a strict pacifist, by definition, but I am pretty close to it. I believe in fighting to defend my country from invasion and I believe it is a good idea to keep our military strong enough to discourage any potential attacker, but I absolutely question the wisdom of this nation getting involved in almost any foreign dispute between rival nations/tribes.

On September 11, 2001, when I found out that Osama bin Laden was responsible for the attacks, I became angry, just like a lot of other Americans. But unlike many Americans, I did not let George Bush direct my anger at some mysterious foreign threat.

My anger was directed at the string of American leaders—-Presidents, Senators, Members of Congress, both Democrats and Republicans—-who had first gotten us involved in the Israel vs. Palestine dispute several decades ago and who had kept us involved, on the side of Israel, ever since. And now it had finally come to this.

American civilians dying by the thousands, on their own soil, for no reason other than that our political leaders had gotten us involved in a “foreign entanglement” that we should never have been involved in.

I knew it was our leaders who were ultimately responsible for the attacks, for it was they who had “taken sides” in our name. It was they who had made the American people targets of attacks by people who saw us as their enemies.

And it made all the sense in the world for the Nine Eleven terrorists to perceive us as their enemies, for our leaders had done everything in their might to help Israeli colonists to get away with seizing land that had belonged to an indigenous people that outnumbered them many times over.

To quote an article I’ve written on this subject:

It was good old Harry S. Truman who first got us involved in the Arab-Israeli dispute and it was his decision in 1948 that put us on the side of the Israelis. At the time, the American people were feeling a lot of sympathy for the Jewish people after the horrors of the Holocaust were revealed, so it was easy for them to consent to a plan to ‘give them a homeland’ where they would be free of persecution.

Unfortunately, everyone in the press conveniently ignored the fact that the land the U.N. decided to give to the Jews happened to belong to someone else. To understand how the Palestinians (and some Jews ) see the creation of the state of Israel, imagine a similar thing happening here, in America. What if the Indians who lived in New Jersey 300 years ago fled by boat to Europe instead of becoming assimilated into the developing American culture?

What if, over the years, those Indians educated themselves and kept their sense of ‘nationhood’ alive and maintained a dream of some day returning to their homeland? What if they started emigrating back to New Jersey in big numbers maybe 60 years ago and made it clear that they intended to get their land back? What if the majority of European nations supported their cause and sent them military hardware and financial support? How do you think the modern inhabitants of New Jersey would feel about the claim that the land really belonged to the Indians because they had once lived there 300 years ago?

I’m pretty sure I know how most property owners in New Jersey would respond. Outraged? You bet. Militant? You can count on it, especially if the seizure took place at gunpoint, as it did in Israel in 1948. The truth is that it is impossible for the United States to justify its support for Israel while declaring loudly to the world that it is outrageous and immoral for one country to invade and annex another. It’s theft at gunpoint, any way you look at it. This is why the Palestinians and their Muslim sympathizers are so crazy angry at the United States, because they see the incredible hypocrisy of our political leaders and are outraged that we do not see the injustice and sympathize with their plight.

Yes, it’s true. Our sympathy for the Jews—-a good thing—-is what ultimately led us to make an incredibly stupid decision to approve an illegal and immoral act. Maybe we weren’t guilty of malevolence, but we are nevertheless paying the price now for the moral/intellectual lapse we had back then. Since Nine Eleven, we have been spending hundreds of billions of dollars on Homeland Security and on the Iraq & Afghanistan wars and we will be spending trillions more in the future if we cannot get ourselves on the right side of history. Does this mean that we are supposed to start hating the Israeli Jews now? Of course not. But no longer can we play favorites.

I am aware that ordinary Americans have been manipulated by the patriotic rhetoric of America’s Leadership Class to never question them when they are telling us who the Good Guys are and who the Bad Guys are in the disputes that we hear are occurring on the other side of the ocean, between rival states/tribes.

Well, I have an important news bulletin for all of my most gullible fellow Americans…sometimes the greatest threat to a people is not some foreign tribe, but is actually their own leaders, most especially those leaders who speak so passionately about their love of their country.

Case in point: Adolph Hitler, a patriot’s patriot, a social conservative who hated communists and championed all the traditional values that had made the German people great. He turned out to be the greatest enemy the German people ever had.

In the first two installments of Stupid Rich People (see below), I focused on different aspects of their sometimes incredible stupidity. In today’s installment, I focus on their really stupid ideas re: INFLATION.

It’s not as though rich people don’t understand anything about inflation.

They know that there is an officially measured inflation rate, and that if you subtract that percentage from the percentage of increase that your financial investments supposedly earned over a given period, the result can be very, very small, and very disappointing.

This disappointment is apparently so great that it has caused the vast majority of rich people to perceive inflation as some kind of horrifying threat that must be ruthlessly dealt with, or it will “destroy everything.”

Ironically, in their zeal to crush the life out of inflation, they have actually deprived themselves of real gains in their standard-of-living that would have been possible if only they had not developed their really perverse ideas on inflation .

The most important thing about inflation that rich people do not understand is that different groups of people in an economy can and do experience different rates of inflation.

Yes, it’s true that the government’s measurement of inflation does not reflect this fact; it is only a measurement of the “average” percentage increase in prices that has occurred over a period, and it only measures the price increases that affect a certain segment of the population.

If government statisticians understood that different income groups experienced different rates of inflation, they could measure those different rates by monitoring different “market baskets” of purchases that reflect the buying habits of people in different income brackets.

In the case of rich people, that market basket would have to include the price of mansions, yachts, rare art objects, property in upper-class zip codes, real estate in general, and most especially the changing price of the various [financial] assets that they like to buy.

The resulting spectrum of inflation rates that would apply to different income groups would tell us much more about how the cost-of-living is changing (with respect to the members of different income groups) than any “average” index could.

Without this statistical effort, rich people are left with an average number that dramatically understates the true rate of inflation that they have been afflicted by.

Whenever the Republicans cut the tax rates of rich people, it always produces a dramatic increase in the rate of inflation that rich people experience. Their disposable incomes do increase dramatically, but so do the prices of everything that rich people buy.

If we had an accurate measurement of the true inflation rate that rich people experienced in the years following the Bush tax cuts, they would discover that their disposable income gains were completely wiped out by the dramatic increase that occurred in the cost-of-living-rich.

There is a principle involved here.

When all rich people are given the same increase in disposable dollars—-which is what a reduction in federal income tax rates does—-then none of them ends up better off, for it does nothing more than create an inflation event.

It is a stupid thing to do.

If rich people had any good sense on this topic, they would understand that the only way it is possible for a member of the upper-class to experience a real gain in purchasing power is if his/her disposable income alone were to increase compared to all other rich people.

Your gains need to be exceptional if you want to see your “bidding position” improve within the hierarchy of all disposable incomes.

When all rich people receive the same big chunk of money, then you end up with the same number of people richer than you and the same number of people poorer than you. In terms of purchasing power, they gain nothing.

Rich people are right to concern themselves with the subject of whether or not certain government actions will provide them with real gains, or only illusory gains.

Unfortunately, they have been listening to a lot of these stupid inflation hawks, who—-like Republicans, generally—-claim that they are looking out for the interests of the wealthy.

Being stupid, themselves, they don’t even realize that the agendas they propose are guaranteed to deprive the wealthy of real gains in their standard-of-living, gains that would have been possible, if only they had not been so stupid.

More on that topic in Stupid Rich People (Part 4)...

Yes, rich people—-or rather, rich Republicans—-are really quite stupid.

One would think that rich people—-of all people—-would have an advanced understanding of how markets work, but alas, they do not. If rich people understood how markets work, they wouldn’t get themselves all worked up about the idea of paying higher taxes. They’d just pay them and be happy about it.

And they would not have wasted all the billions of $$ they have thrown at the Republican Party over the decades just to get their tax obligations reduced.

If rich people understood markets, they would realize that it really doesn’t matter how steeply progressive the income tax rate ends up being, for they would still have all the after-tax income they would require in order to obtain the scarcest goods/services/experiences that our economy is able to produce and bring to market, even if the top marginal rate were set at 99%.

If rich people understood markets, they would realize that if the government were to start taxing all income (including capital gains) at very steep rates, the prices of all the luxury goods/services/experiences produced in this country would simply drop to a level that they could afford. The same quantities of luxury goodies would be available for purchase as before, only they’d be available at much lower prices.

At any point in time, no matter what tax rate they are paying, the rich enjoy a claim upon the scarcest goods/services/experiences that the economy is able to produce. They get to own/experience those luxuries for one simple reason: they have more disposable dollars to throw at those markets than everybody else, so they are able to outbid all the other participants in the economy for them.

If all rich people are given more dollars to spend, like through a big tax cut, it does not magically cause the number of luxuries available in the economy to increase. If sellers of luxuries start to see more customers for the limited quantity of items they have to sell (perhaps customers who were priced out of the market before they got their big tax cut), they are going to raise the prices they charge to get the most dollars they can. They always seek to charge the highest prices they can, whatever the market will bear.

During the Great Depression of the 1930’s, rich people felt much poorer than they did during the Roaring Twenties. Many of them had lost a lot of paper wealth and the top marginal tax rate on income had increased from 24% in 1929 (12.5% on cap. gains) to 63% and then 78% during the 1930’s. But you know what? None of the beach front property or the mansions or yachts disappeared.

The economy didn’t stop producing luxuries for the upper class; they still had the highest disposable incomes in the land. All the things that rich people used to spend their “excess” cash on was still available at lower prices. In real terms, the wealthy as a class lost nothing in terms of lost purchasing power as a consequence of being forced to pay a greater percentage of the government’s bills.

And yet they complained and they continue to complain today. Every dollar they have “invested” in the Republican Party over the past few decades has been wasted, i.e., spent for no actual gain. If today’s rich Americans had never received any of the tax cuts The Republicans have given them since Reagan, but had started paying higher rates instead, they would have still have the same purchasing power that they have today.

Increasing the disposable incomes of all rich people [in away that preserves their rankings withing the hierarchy of all disposable incomes] does nothing to improve the purchasing power of rich people, but it does set off an inflation event within those markets that serve the rich, and that includes of course the asset markets. And that brings up another of the ways in which rich Republicans are really, really stupid.

Stay tuned for Stupid Rich People (Part 3)

Rich people are so stupid.

Of course, there are exceptions, but the unfortunate truth is that a significant majority of rich people are really, really stupid when it comes to their political judgments and their understanding of the economy they dominate.

As a teacher, I realize that it may not be their fault that they are so stupid, but you know something? Innocently stupid is still stupid and that’s what rich people are.

The only question that really matters is whether or not they will continue to act stupid and do stupid after it has been explained to them why they have been so stupid. After all, a lot of stupid people do a lot of stupid things merely out of habit, don’t they?

One really stupid thing that many rich people are guilty of is listening to—-and giving financial support to—-Republican politicians.

Sure, The Republicans are always making legislative proposals that would seem to benefit many, if not all rich people, and so it kind of makes sense that rich people would identify with the Republican Party, but unfortunately for them, Republican politicians are among the stupidest of all people in our culture.

Republican politicians see their situation in the simplest of terms: in order to succeed in politics, it is absolutely essential that they get their hands on a lot of money to spend on their campaigns. And so The Republican Politician targets the individuals who have the most money to spend on politics, the filthy rich.

In their enthusiasm to earn the financial support of the rich, they come up with all sorts of initiatives, like tax cuts, that will put lots and lots of dollars in the pockets of rich people. It is a very simple calculus, the kind of calculus you would expect from people with simple minds.

If these stupid people had a more sophisticated understanding of how the economy functions, they would understand that there is a big difference between financial wealth and real wealth.

To better understand the distinction, simply imagine what it would be like if everyone were to somehow become extremely rich in dollars one day and then we all decided to retire and live off of our accumulated ‘wealth.’ (Yes, this is the ultimate goal that The Republicans say we should all strive for.)

What we would soon discover is that we would actually possess no real wealth at all, because no one would be producing anything of value that we could buy.

The only reason why money has any value to us is because it gives us a claim on the productive efforts of others. How wealthy you actually are depends more on what others are doing than it does on your personal accumulations of paper notes.

The Real Economy is the productive behavior of people; it is the actual goods & services that people are producing and trading and consuming.

When economists speak of the “Wealth of Nations” (at least those economists who are not stupid Republicans), they are not talking about the amount of currency that is in circulation; they are talking about the productive capacity/output that various nations enjoy.

The only economic question that should ever matter to us, as a society, is how might we act to increase our production of real wealth? Unfortunately, stupid Republican politicians and the stupid rich people who give them financial support do not understand this.

They focus all of their efforts instead on increasing the financial “wealth” of all rich people, efforts that actually do nothing to improve the amount of real wealth the rich are able to enjoy. Indeed, they frequently serve only to make rich people poorer, in real terms.

(To be continued…)