Tag Archives: plutocrats

Six Talking Points about Fiscal Cliffs and Austerity Bombs

Senate Majority Leader Harry Reid (D-NV) has a message for the middle class this morning:

“Nevadans and Americans across the country agree that we can strengthen the middle class by adopting a balanced fiscal policy that requires millionaires and billionaires to pay a little more. In July, the Senate passed a bill to cut taxes for the 98% of Americans and 97% of small businesses making less than $250,000. House Republicans should stop trying to protect the wealthiest Americans from contributing their fair share and pass this bill immediately. Middle class Americans will have more opportunities to succeed when we level the playing field and make tax policy fairer.”  Senator Harry Reid (D-NV) 11/19/12″  (emphasis added)

In order to effectively expound on this message it is necessary to plant oneself firmly in the Reality Based World, and to dismiss some common misconceptions being promoted by the plutocrats and their GOP allies.

#1.  When the GOP says “your taxes will be raised” they are not talking to 98% of the American public who earn less than $250,000 in adjusted gross income annually.  The Obama Administration’s proposal is to allow the Bush Tax cuts to expire on earnings above $250,000; and to KEEP the Bush era tax rates in place for those individuals earning less than $250,000 in adjusted gross income annually.

#2. When the GOP says taxes will increase on small businesses, they are including those 3% of “small businesses” which are lobby shops, major law firms, large hedge funds, etc.  They are NOT speaking of the 97% of American small businesses which are small partnerships, single proprietorships, or small corporations which constitute the backbone of the American economy.

#3. Social Security and Medicare are called “entitlements” because they are earned benefits, which individuals have paid for and therefore are entitlements. These programs are not the problem, they are simply the target of choice from the Republican leadership which wants to cut Social Security and privatize Medicare.   These programs have NO place in budget negotiations concerning the reduction of the federal debt.

#4.  The legislation to which Senator Reid refers is S. 3412.  The terms of which can be generally summarized as:

“The Senate bill (S. 3412), passed on July 25, 2012, would extend current tax rates for lower- and middle-income persons, would increase tax rates on higher-income persons, would extend for one year (through 2013) certain tax provisions that expire at the end of 2012, and would patch the alternative minimum tax for one year only (2012).” [source]

#5.  “Harry and Louise” style ads from the Edison Electrical Institute (DefendTheDividend) notwithstanding,  S. 3412 and the Obama Administration proposals are  NOT an attack on retirement savings.  Remember the threshold levels:  “Individuals with incomes above these threshold levels, would have some of their itemized deductions and personal exemptions limited by phase-outs, would have a 20% rate on dividends and long-term gains, and would face tax rates of 33%, 36% and 39.6%”  [source]  The current rate for investors is 15%.

Who would  be affected by the Obama Administration’s tax proposals on capital gains?  Information from the Tax Policy Center is helpful.

Things to note — there are NO changes for those individuals in the bottom four income quintiles.  Only those individuals who are in the TOP income brackets (the top quintile, especially those in the top 1% or the top 0.1%) would be affected by the proposed changes in tax treatment of dividends.

#6.  There is NO correlation between low tax rates and economic growth. The non-partisan Congressional Research Service came to this conclusion after studying data from the last 65 years.

“The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced—lower top tax rates may be associated with greater income disparities.”  [CRS pdf]

In short, the only economic feature impacted by a reduction in tax rates is income inequality.   Nothing says “Support The Plutocrats and Financialists” better than saying we can’t raise taxes on the top 2% without cutting earned benefit programs like Social Security and Medicare.

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Filed under Economy, income tax, national debt, Politics, Reid, tax revenue, Taxation

Limits: Stimulus, Austerity, and the Discussion We Should Be Having

There are functional limits to just about everything.  Unfortunately, when political discourse devolves into a polarized face off between two advocates who cannot or will not acknowledge the kernels of accuracy in bifurcated world views then it’s hard to get anything useful out of the discussion.  Compromise doesn’t mean you adjust to fit my agenda, nor that I must adjust to yours.

Consider the Stimulus vs. Austerity economic prescriptions currently on offer.

The readily apparent limitation on stimulative measures such as infrastructure spending and social safety net (or economic automatic stabilizers) support is that at some point the bill comes due, especially if these activities and supports are based on lending.

The equally apparent limitation on austerity and cutting back the social safety net or automatic stabilizers is that at some point deleveraging becomes deflationary and depressive in an economic sense.  Too much “austerity” and demand declines, and declining demand puts the brakes on economic growth.

Consider also the long and short term repercussions of the application of stimulative and austerity driven proposals.

In the long term, advocates of austerity prescriptions and stimulus injections have to cope with a fact of modern economic life — what can be shipped will be shipped.  Beneath layers of rhetoric is the hard sad fact that a corporation which can avail itself of a labor force willing to accept $0.99 per hour with no benefits will avail itself of that labor force.  Further, a corporation which can utilize a labor force willing to accept low wages, while the housing and quotidian needs are subsidized by the public sector, or are booked as an expense, will probably do so.

Also in the long term, advocates of stimulative measures need to acknowledge that physical infrastructure projects have short term durations, and will not necessarily create “sustainable” jobs.  Nor, will those contracts necessarily yield enough jobs to create a viable platform for future job creation.

How do we define success?

One of the problems with each of these views, untempered by any acceptance of the globalization of labor and the impact of robotic technologies, and equally untempered by the obvious fact that demand is an equal side of the free market equation, is that both have very different desired outcomes.

Austerity advocates tend to think in international terms, and see a global economy in which nations measure their success or failure in financial terms.  The nations are adequately capitalized, have limited liabilities, and offer treasury securities which are solid and reliable.   However, when this is  extrapolated to the ideal, the market for treasury notes would be little better than money in the mattress — because none would have greater risk (and hence greater yields or returns) than any other.   Currently, a U.S. treasury note for 30 years pays 2.83%.   [Treas]  By contrast Irish benchmark bonds maturing in 2025 are paying 5.4%.  [NTMA]   In other words, the bond market would like more stability — but not so much that we approach the ideal in which T-notes from any nation are such a sure thing that there’s nothing to be gained by investing in one or another.

Austerity advocates are thus caught in a bit of a bind.  Too much financial “success” and bond rates drop, too little national borrowing and there is less fodder for the bond markets.   What the austerity flock appear to want is a level of national  indebtedness necessary to retain competitive edges in the bond markets, BUT not so much that there is an “unacceptable level of risk” the borrower might default or even that the bankers might take a significant “hair cut.”

Stimulus advocates tend to see the financial picture from their own shores.   As a stimulus advocate myself, I tend to gauge the success of our economy on measures other than financial — an increasing level of aggregate demand, increasing levels of household wealth, increasing manufacturing output, and increasing exports.  While the austerity advocates appear to have an international outlook, but rather narrow definitions of success, the stimulus proponents have broader definitions of economic success but more nationally based perspectives.

Who’s Winning?

Income inequality or distributive impacts are too often discussed in horse race terms.  If the marginal tax rate for those in the top 0.1% are cut by 20% then the ultra-affluent are the obvious winners; but, if the marginal tax rate is raised for that group while we retain the child tax credits and lower the margin for middle income Americans do the ultra-affluent really win anything?  The horses are out of the gate.

In purely financial terms, who’s winning now?

Notice the steep drop between the average family income for the top 0.01% and the top 1%.  Then notice that the average family income for the remaining 90% of Americans is $29,840.

How did the top 0.01% create such a gap? A wealth management specialist, whom I’ve cited previously explains:

“Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Now, why such a gap between the 0.01% and the top 0.1%?

Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%. In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.” [Domhoff]

The “winners” in purely financial terms, are the financialists. “Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.” [Domhoff]  We should remind ourselves that the definition provided by Domhoff’s article includes the top half of the top half of all American income earners, which includes both columns at the left hand side of the graph.

It stands to reason that if the top 0.01% comes from banking or financial services sectors their perspective will be one of Austerity.   The graph illustrates the current wealth distribution but it doesn’t indicate the trends.

The Federal Reserve graph above illustrates the widening gap between the top income earners in the U.S. and those in the lower income brackets since 1967.  So, not only do we have wealth accumulating to the very tip top of the pyramid now, the trend has  been ongoing for the last 45 years.

The Stimulus Argument

One assertion which needs a bit more analysis concerns the tendency to make quick judgments about the nature of the trends.   Capitalism requires the accumulation of wealth such that investments can be channeled from areas of surplus to areas of need.  Arguments about who does the transfer are the hallmark of various forms of political ideologies.   As we can see from the discussion above, especially the observations of Mr. Domhoff, not all government activity which causes the transference of wealth are necessarily socialistic.

If our tax policy, our investment policies, and/or our banking and financial policies favor those who can borrow for almost nothing, can keep production and profits in foreign accounts, can avail themselves of tax havens, and can influence legislation favorable to those elements — then what we have, in essence, is  government intervention which favors the redistribution of wealth to the top 0.01%.   However, the moment anyone objects to this arrangement the financialists immediately cry that this is Communism, or some other form of nefarious -ism, and our Free Enterprise System is Under Attack.

The Core of Capitalism

We all got the message in high school General Business or Economics that capitalism means an economy in which the means of production, distribution, and exchange, are privately or corporately held.   And, that the exchange (or transfer) of wealth is privately distributed.  Also during that first week the teacher explained that finance involves the act of providing funds for business activities, for making purchases necessary for business and commerce, and for investing.    What we ought NOT do is to confuse the two terms.

Nor should we narrow the definition of finance so strictly that it comes to mean only those activities which facilitate the accumulation of wealth.  Finance in a capitalist system means funneling wealth from areas of surplus to areas of need — from the investors or bankers to the contractor who needs a loan to get materials needed for the next job, the car dealer who wants to add inventory, the manufacturer who wants to expand the factory, the restaurant owner who wants to open a new cafe, the garage owner who wants to buy new and more modern engine diagnostic equipment.

Yes, there is a “need” to channel some funds into wealth accumulation — or what good would retirement planning be?  There is nothing intrinsically wrong with some people working very hard in the financial sector to increase the wealth of their investors.  There is something wrong with an investment sector which focuses almost exclusively on increasing investor wealth to the detriment of the real economy.

One more time, let’s return to Tom Armistead’s definition of financialism and its effects:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments. Financial instruments – loans, mortgages, stocks, bonds, etc. – are in their original form firmly linked to economic reality: the mortgage finances home ownership; the stock certificate represents ownership of a company that owns physical assets, the bond secures debt incurred to build a factory.

So far so good — the financial instruments are linked to the real economy.  But, remember Armistead’s continuation:

However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own, a weird shadow dimension, a hall of mirrors, a distorted alternate reality that intersects and reacts with the real economy in unpredictable and destructive ways. George Soros described this phenomenon as “reflexivity.” Derivatives have a lot to do with it. Leverage and the abuse of easy credit are contributing causes. The shadow banking system is a symptom.

Here’s where the problem begins.  The distorted hall of mirrors in an alternative reality is destructive of the real economy, the one in which those mortgages, car loans, student loans, commercial loans, and business loans are made.   Wall Street stops being a channel by which investment moves, at a profit, from areas of surplus to areas of need and starts being a Casino.

When securitization becomes an end in itself, for the construction of yet more artificial derivatives, and not necessarily for the reduction of risk; when the shadow banking system sucks wealth from the real banks and the real economy — capitalism and finance are in trouble.  The result? Increased volatility, faster cycles of boom and bust, and economic instability.

Let’s ask if the discussion we should be having is NOT one about capitalism vs. “wealth redistribution,” but one in which we talk of capitalism and the incentives to invest in activities which increase real economic growth, not merely the accumulation of wealth for those at the very top of the income period.

If the 0.01% intend to anchor their wealth on something substantial like loans, mortgages, equities, and bonds (from the real economy), or are they content to accumulate wealth in the shadow banking realms and hope the remaining 99.99% don’t fold under the volatile economic  pressures and their declining share of total national wealth?

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Filed under Economy, income inequality

Wynn Joins the P.I.T.Y Party

Poor Steve Wynn — the Nevada gambling mogul isn’t getting the respect he deserves! To hear him tell it:

“I’ll be damned if I want him (President Obama) to lecture me about small business and jobs,” he told Ralston. “I’m a job creator. Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”

“I can’t stand the idea of being demagogued, that is being put down, by a president who hasn’t created any jobs and doesn’t even understand how the economy works,” he added.”  [LVSun]

Stephen Colbert had some well chosen words for this attitude, and offered a solution — the formation of the Protecting Industry Titans and Yachtsmen, or the P.I.T.Y. Party.  Evidently, Mr. Wynn is seeking membership.

The moguls like Wynn  certainly are getting touchy these days.   Mr. Wynn is sounding ever so much like hedge fund manager Leon Cooperman, from Freeland’s article, and Colbert’s satire:

Cooperman argued that Obama has needlessly antagonized the rich by making comments that are hostile to economic success. The prose, rife with compound metaphors and righteous indignation, is a good reflection of Cooperman’s table talk. “The divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them,” Cooperman wrote. “It is a gulf that is at once counterproductive and freighted with dangerous historical precedents.”  [New Yorker]

Excuse me for a moment — as a member of the 53% who did pay federal income tax in 2011, but whose vehicles must do without their own elevators, I have to ask: When did getting your itty-bitty feelings hurt preclude you from making sound business decisions in your own interest?

First, what happened in the recent recovery which might have exacerbated the sense that the 0.1% were raking in far more than might be expected for any small element in the overall economy?

Chrystia Freeland captured the trends in two paragraphs back in 2011:

“Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

But the financial crisis and its long, dismal aftermath have changed all that. A multibillion-dollar bailout and Wall Street’s swift, subsequent reinstatement of gargantuan bonuses have inspired a narrative of parasitic bankers and other elites rigging the game for their own benefit. And this, in turn, has led to wider—and not unreasonable—fears that we are living in not merely a plutonomy, but a plutocracy, in which the rich display outsize political influence, narrowly self-interested motives, and a casual indifference to anyone outside their own rarefied economic bubble.”  [Atlantic]

BUT, don’t mention any of this or they’ll get their feelings hurt?

Note that both Cooperman and Wynn perceive themselves as members of the focus group formulated Job Creators category.  If one remains hermetically sealed in one’s “rarefied economic bubble,” then this might be understandable.

Thus within the confined realm of their “narrowly self-interested motives,” excluding the needs of any around them, Wynn and Cooperman are free to indulge in the level of self pity necessary to excuse their opposition to paying a mite more in taxes to support the interests of any others. Or, that other 99%.

Secondly, “it’s all about me,” isn’t necessarily a good philosophical foundation for business practices.  Note the arrogance of Wynn’s articulation, “Guys like me are job creators and we don’t like having a bull’s-eye put on our backs.”    Mr. Wynn should know better.  What happened to his business in the wake of the Housing Bubble collapse?

Visitor volume, reported as 54,267,549 for Nevada in 2008 dropped to 49,731,901 in 2009.  It dropped to 49,684,782 in 2010 as the Recession deepened.  [NVRA]  Airport travel, convention attendance, visitor volume, all those statistics Nevadans watch carefully were down.  People de-leveraging from household debt, and especially those who lost jobs, don’t answer Nevada’s siren songs.  Those people are included in a group commonly called CUSTOMERS.

If too many customers are too financially strapped to play with our fancy lights and whistles money grabbing machines or to play at our flashy green tables then Mr. Wynn’s operations decline — back to the bad old days of the Bingo Parlor in Maryland?

Who doesn’t understand how the economy works?

If those who consider themselves the Elite excavate their own custom designed bunkers in which only their economic needs really count, and bombard the political system with their avaricious ideology, then it won’t be too long until the customers they require to sustain their operations evaporate.

Income inequality trends were in place prior to the Recession, as illustrated by this graphic from the Congressional Budget Office:

Income increased by 275% for those in the highest quintile, by 65% for the next highest group, by just under 40% for the next 60% of the income earners, and 18% for those in the bottom quintile. [CBO]


Notice that since 1982 the percentage of wealth accumulating to the top 1% of American income earners has increased, and increased rather dramatically since 2002.

Now it’s time to ask the obvious question:  If wealth accumulation trends continue, and it appears that they have during the recovery period —

“In 2010, average real income per family grew by 2.3% (Table 1) but the gains were very uneven. Top 1% incomes grew by 11.6% while bottom 99% incomes grew only by 0.2%. Hence, the top 1% captured 93% of the income gains in the first year of recovery. Such an uneven recovery can help explain the recent public demonstrations against inequality. It is likely that this uneven recovery has continued in 2011 as the stock market has continued to recover. National Accounts statistics show that corporate profits and dividends distributed have grown strongly in 2011 while wage and salary accruals have only grown only modestly.”  [Saez pdf] (emphasis added)

— then how do the ultra-rich intend to keep their businesses profitable?  Especially in Mr. Wynn’s case, the casinos being essentially entertainment retailing?

One of the time honored ways to determine if a business is in trouble is to see if it is gaining a larger share in a declining market.   Obviously, if a declining number of people have the financial capacity to spend their discretionary income on entertainment, then this doesn’t bode well for entertainment establishments.   Pursuing economic and taxation policies which precipitate further contraction in wealth accumulation among a majority of the population isn’t conducive to creating an expanding market for anyone’s products.  The President appears to have grasp this point, Mr. Wynn and Mr. Adelson perhaps not so much.

Job Creators

Moguls do not create jobs.  Moguls, and other businesses owners, hire people.   If they have a lick of sense they do not hire anyone they don’t need.  Another time honored rule of personnel management says:  If you don’t need Cousin Harry don’t hire him.  Nothing will drive any business into the ground faster than an inflated payroll — especially when it threatens to morph into the  family tree.

For the umpteenth millionth time — staffing levels should only be increased when the current employees cannot make or provide the goods and services demanded by the customers, with an acceptable level of customer service.

Demand is what creates jobs.  For all the self-congratulatory posturing of the economic elite, if no one is buying the vehicles, purchasing the furniture, or spending a night with the slot machines — there will be less demand and with less demand comes the natural restrictions on hiring.  The old Supply Side Hoax was never more than an artificial justification for greed.  It certainly isn’t the way to keep an economy growing.  The President understands this, some of the touchy moguls not so much.

Perhaps someone would like to procure one of Mr. Colbert’s Million Dollar Certificates, suitable for framing, telling Mr. Wynn that at least one person likes him?

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Filed under Adelson, campaign funds, Economy, income inequality, income tax, Obama, Republicans, Steve Wynn, Taxation