Thursday, February 12, 2015

Guest Post: Why Redistribution Didn’t Work

Here is the second in a series by Scandacelt, my former junior high and high school teacher from back near the dawn of time. Enjoy!


When Barack Obama ran for president in 2008, one of his major stated purposes was to help the poor and the middle class.  He was more aggressive in his advocacy for class warfare than any presidential candidate we had heard in the past 50 years. 

Now a lot of what Obama said doesn’t appear to have been very sincere.  He talked a lot about being bipartisan but he hasn’t been bipartisan.  You can argue that he took Republican ideas and put them in Obamacare but if so there weren’t enough Republican ideas or he might have gotten a Republican vote or two. 

But on the subject of redistribution, I think Obama was sincere.  It fits his larger left wing agenda.  What he wanted to do was to take from the rich and give to the poor.

To accomplish this end, President Obama (and a Democrat Congress) raises the taxes on the wealthy and on corporations.  He surely thought he had accomplished his goal.

Yet here we are, six years later, and the statistics are amazing.  For those people in the top quintile, earnings are greater than ever.  They are doing great.  Meanwhile, for the median household in America, earnings have fallen by 8%.  Six years of redistribution and all you have for it is less.  The average earnings of the poor and middle class have fallen while the rich got richer.  How did this happen?

The first thing you have to know is that left wing policies almost invariably get hit by unexpected consequences.  You think you are ending a war by withdrawing troops and the next thing you know there is more warfare than ever.  That is what happened with redistribution.

Democrats never seem to learn about taxes.  They think that if you tax something more you will invariably get more revenue.  Over and over and over, the lesson isn’t learned.  Higher rates don’t necessarily mean higher revenue. 

Our founders knew better.  They had a name for two different kinds of tariffs, which is a tax on imports.  The REVENUE tariff had lower rates.  The PROTECTIVE tariff had higher rates.  The purpose of the revenue tariff was to bring money into the government’s treasury.  The purpose of the protective tariff, the one with the higher rates, was to deter imports of particular items and thereby “protect” certain industries.  But the higher rate tariff brought in less revenue because it discouraged behavior that brought in revenue.  Raise the tax high enough on investment and you discourage investment.  Raise the tax on income and people will find ways to get compensated other than by income. 

Just because you raise the tax rates doesn’t mean that people will pay the higher taxes.  Neither wealthy individuals nor corporations simply stand still and take it on the chin financially.  Nothing is more fungible than money and what they do is they transfer it.  Why invest in America when the tax rate is prohibitive when you can invest in Ireland where the tax rate is great?  So they do.  And as a consequence, the money isn’t invested in the United States.

But investment is essential for the creation of new jobs.  The U.S. needs to be creating 300,000 new jobs every month to get ahead.  Somewhere around 250,000 and we are treading water.  At around 200,000 per month, we are losing ground.  When the number of jobs being created gets too low, the laws of supply and demand kick in and people find that they are willing to work for less just to get (or keep) a job and pay the bills.  And suddenly, earnings for median income families have fallen.

Of course, that wasn’t the only thing to hurt earnings.  In 2008, we were right at the door of a complete bank meltdown.  Over a trillion dollars was invested into the banks to keep them solvent. 

The cause of this meltdown was well known and in fact had been predicted.  As far back as 2004, a senator from New Hampshire named John Sununu Jr. was warning that our government policies were encouraging banks to make high risk loans.  He cautioned that if we didn’t reverse this policy, a market correction was inevitable and the housing bubble would burst. 

Sununu proposed legislation to fix this situation.  It was sponsored by a number of Republican senators and was backed by George Bush.  But it was aggressively condemned by several Democrats as one more example of Republicans hating the idea of poor people owning homes.  Between the criticism of Republican nastiness and the fact that a filibuster couldn’t be beaten the Republicans backed off.

Of course, those Democrats didn’t step forward and say “we were wrong” when it all hit the fan.  Liberalism means never having to say you’re sorry.

When the President and the Democrats too power, they immediately went to work and changed the banking rules with Dodd-Frank.  To make sure that we weren’t hit by another bank meltdown, like the one we had just experienced through making bad housing loans, the Congress changed the banking rules so it was much more difficult to get…  small business loans. 

Under the old rules, businesses could use the product assets purchased with loans as collateral for those loans.  Under the new rules, the businesses had to use something else as collateral such as their building.  Instantaneously, it became much more difficult for businesses, particularly small and start-up businesses to get credit.

Let’s just note as an aside that this decision is like a city having problems with houses catching fire so to address it they require that there must be a sprinkler system installed for the yard. 

The significance about the small businesses is this-small and start-up businesses are the major creator of new jobs.  Big corporations tend to settle down and be content with what they have.  They may create jobs but most new job creation comes from start-up companies which are trying to become established.  Kick the props out from under start-up businesses and you harm employment.  Harm employment and you have a glut of labor.  Have a glut of labor and you will see wages fall and with that fall you see household incomes decline.

All of this explains how the middle class and poor became poorer but it doesn’t explain how the rich became richer.  To understand that, you have to know about a few other policy consequences for this president.

When start-up businesses struggle, the big winners are the large, existing corporations.  Their major threat comes from the little guys who figure out a way to do things better.  50 years ago, the largest retailer in America was Sears.  At that time, there was a little upstart company called Walmart.  But Walmart had a better system, a better set of ideas and today, Walmart is 10 times larger than Sears. 

With start-ups set back so badly, big corporations got something of a breather.  Freed from the little guys nipping at their heels, the big corporations got higher revenues, and better profits.  Better profits means bigger dividends and higher stock values. 

The primary owners of stocks are the wealthy.  Increase the value of stocks and you increase the wealth of the wealthy. 

Other factors contributed to the increase in stock values.  Remember how Dodd-Frank made loans more difficult for small businesses.  What they DIDN’T do was prohibit the foolish loans for homes that made the mess in the first place.  Those are still in existence. 

For a wealthy investor who is looking to invest his money, real estate doesn’t look good.  The problem that made the market collapse in 2007 and 2008 is still there and unaddressed.  Investing in real estate is a bad idea until that is corrected.  Since the wealthy have to put their money somewhere, and they don’t want to invest in real estate, somewhere is stocks. 

This is compounded by Federal Reserve policies which have artificially held interest rates low.  Investments in money-bonds, CD’s, etc… have virtually no return. 

So, it is invest in stocks or…  look for something else.  A lot of people have invested in precious metals.  There is so much money pursuing precious metals that people aren’t even wasting their time on silver and going to gold.  The standard 16 to 1 ratio between gold and silver has been completely obliterated.  If you have a million dollars you want to invest in precious metals, you can keep a million dollars’ worth of gold in your wall safe.  You need to have a whole spare room for the silver. 

But back to the main point.  Most of the investment has been in the stock market. 

All of this investing has had a short term healthy return.  And as a consequence, the rich have gotten richer. 

Speaking of silver, is there a silver lining to all this?  Not really, unless what you primarily care about is the ratio between the poor and the rich.  Because of all the investment in the stock market, it is experiencing asset inflation.  At some point within the next few years, it will crash, just like it did in 2008.  Then, EVERYONE will be poorer.  


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