Economists, politicians, bureaucrats, journalists,
executives and ordinary folk express many views on the subject of economic
stimulus. We all speak from our own peculiar
perspectives. The result is a wide
variety of opinions. One that is particularly
misguided is championed by about 1% of us, the “Selfish Rich,” and the
politicians they own. They tell us that
they are the investment class and that they need favorable tax treatment to encourage
them to invest. They say that stimulates
the economy.
But private investment is made by entrepreneurs, some individuals,
some corporations. Some are wealthy, most
are not. They are a diverse group, but their
investment decisions are primarily influenced by one thing: their perception of
demand. And demand is influenced by
consumption - consumer spending and private
or public investment.
The long period of sluggish job growth in which we now find
ourselves is largely due to the fact that entrepreneurs see that demand is
stagnant. This accounts for hoarding of
cash in corporate coffers and the slowness with which our economy has recovered
following the sharp downturn of 2007 and 2008.
And we can do something about it.
Government is good at spending, whether consumption or investment. And it taxes us, and tax policy influences
private spending by leaving us with more or less money. Consumer spending, which accounts for much of
economic demand, is largely driven by middle class folks, of whom there are
many, rather than the Selfish Rich, of which there are few.
The immense importance of the middle class in creating demand
is ignored by those proposing low taxes for the Selfish Rich. We are ill advised to embrace their argument
about who stimulates demand. It is not
the Selfish Rich, whether by consuming or by investing. They buy yachts while others buy sedans, but
they buy only so many yachts. And how do
taxes affect their investment decisions? When we had 90% marginal income tax rates
during the 1950s, I knew a wealthy man who complained bitterly about the rates
at which his income was taxed. He did
not, however, give up his profession just because he could keep only 10 cents
for every marginal dollar he earned. He
kept on working. So much for high tax
rates discouraging the wealthy from working hard. And when looking for investors for a new
business, a wealthy retired businessman told me that his days of making entrepreneurial
investments were behind him. He had
already “made his.” His priority was
preserving capital. Even if inflation
were to be higher than the interest rates on government bonds, he left his
money with Uncle Sam. So much for low tax
rates encouraging the wealthy to invest.
Beware the Koch Brothers and their like, and beware the
politicians who have been bought by them. They tell us that reducing taxes for
the rich will make prosperity trickle down on everyone. That is not the case, and we have long known it
to be a LIE. In 1979 eleven Republican
presidential candidates appeared at a debate in the Civic Center in Des
Moines. They were all asked to explain
how they could cut taxes, increase defense spending and fight inflation. One got it right. Congressman John Anderson of Illinois said it
was done with “smoke and mirrors.” The
other ten proposed one version or another of what Ronald Reagan most famously expounded. George HW Bush called Reagan’s plan “Voodoo
Economics.” It later became known as
“Supply Side Economics.” It has been
repeatedly discredited. It does not
work. It sounds inviting, but promised
budget cuts are killed by NIMBY attacks and prove impractical when, at
implementation time, politicians find that the bath water is full of babies!
Don’t believe the Selfish Rich claim that tax cuts,
particularly tax cuts for them, will stimulate the economy. It is simply not true. They keep saying it is true because they are
Selfish. That’s not good for anyone.