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.
