Ponderings of an arm-chair economist...

[salin]

I believe that our country should refocus on building our economic base, which is healthiest when prosperity is more evenly distributed (ala the fruits of ones work) rather than concentrated in the hands of a dwindling few.

I believe that companies will have longer prosperity when they focus on future revenues rather than short term small gains on the stock market.

I believe that the country is stronger when we are both hooked into the global economy but are not dependent upon it - that is, we need to be economically self-sufficient. We need to be able to produce the goods that we consume.

Wasn't one of the longest economic expansions in our country's history was just after wwII when there was heavy investment in higher education, in our manufacturing sector, in R&D (both corporate and federal), where there were ample decent paying jobs that did not require two income earners just to barely stay above the poverty level?

I believe that there are many economic lessons to be learned from that expansion that are being intentionally ignored, because the income growth at the top grew at a slower rate (it grew, but less quickly than today.) I believe that many of our current economic policies are not driven by an interest in the overall health of economy, nor in the overall economic security of the country nor its citizens, but instead by a desire to extract greater and greater amounts of dollars from a shrinking economy - with wanton disregard for the damage being wrought to the country, to its citizens, and to its citizens children and grand children and great grand children.

I believe that one of the strengths of that expansion was a level of consumerism that was based on growing disposable income - and thus sustainable - creating a demand for more goods, rather than based on a level of consumerism that is based on increasing debt.

Sadly I believe without a quick and serious change in our nation's economic policies we will be at increasing risk for repeating the economic crisis/collapse that was seen during the Great Depression. Today the threat is less the market exposure (debts called in for playing the market on the margin) but for the massive amounts of debt carried by most americans - and a slowdown in wages combined with inflation of necessary goods and services that will make that debt impossible to service.

It is time to start asking our friends, neighbors, family members and everyone we come into contact: Is attaining the American Dream in jeopardy? Do we still believe in the "American Way of Life?" And most importantly: Are those leading us in Washington working to expand or to shrink the American Dream? Remember to vote for long term economic prosperity - not corporate get rich quick schemes in 2006.

[Warpy]

1. What you believe is correct but it is exactly the opposite

of what's being taught in every business school and school of economics in the country, both controlled by the rich and the corporate.

The students are taught that the money pump flows backwards and that they will be judged on short term (quarterly) gain alone, and that taking the long view will get them fired. That last part is correct.

Every time the rich and the corporate have stripmined the rest of us for their unspeakable wealth, the country has gone into a depression as soon as a tipping point has been reached and the consumer market dries up. We're very close to that now, and when it has happened in the past, it's happened very quickly.

Good luck to us all, and may we find a way (amend the constitution, pass laws banning wealth concentration, whatever) to avoid this cycle in the future, when the rich get greedy and the rest of us get screwed.

[salin]

2. Econometrics has ruined the field of economics

it has reduced much of economics into mathmatical equations based on acquisitions.

That said, there are many economists who are not simply pumping the Milton Friedman view. They may not be in business schools - but they are in the places that train economic policy folks. Heck word is that bushco has been trying to replace Snow for a while but can't get anyone to play (accept a nomination) - as the policies being pursued are so damaging to the country that few are willing to become shills for those itching to dismantle our economy and replace it with a corporate/monoplistic plutocracy.

I would bet that a lot of students are reading and discussing the writings of James Galbriath (son of John Kenneth Galbraith), and the popular press writings (as in not text type writing, but columns) of Krugman.

One question I have had for awhile - why aren't we outsourcing CEOs - there are certainly a lot of folks working in lower paid positions in other countries whose companies are doing quite well - why not cherry pick those folks - pay a whole lot less and get a whole lot better CEO. As if that would ever happen.

[Warpy]

7. We don't outsource CEOs because of where we get them

and we get them from the children of the wealthy who have shown some initiative and some aptitude for work instead of leisure. It would be inconceivable for the wealthy to cut their own children off and away from the opportunity for embezzlement that upper corporate management has provided them.

[dcfirefighter]

3. Finance, Insurance, & Real Estate

Aren't really productive enterprises, but they are the big money earners, and they attract investment, both in money and in careers - many of our best and brightest apply themselves here, rather than in engineering, medicine, etc.

I count as productive those things that are produced, and answer a human need: Clean Water, Clean Food, Clothing, Buildings, Transportation of people and goods, Communications, Medicine, Knowledge, Entertainment, Arts, etc.

In many cases our economic system in general, and our tax system in particular, favor FIRE over productivity; ownership of natural wealth over production of Capital; ownership of license over (self) ownership of labor.

Two general and associated principles could save us:
First, the principle of self-ownership: we each own ourselves, our labor, and by extension, the products of our labor. There is no ethical basis for taxing or restricting the sale or trade of our labor or it's products.
Second, the principle of Commonwealth: the natural world is a gift to all humanity - while it is necessary to allocate 'ownership' of portions of it, it is just as necessary to share the financial benefits of such ownership. 'Owners' of natural resources must fairly compensate those that they exclude, whether they exclude them by fence, extraction, or pollution.

These two principles eliminate friction on productivity; assure that wages are as high as possible; allocate natural resources to highest and best use (generally leaving exurban undeveloped lands undeveloped); capture the value of public investment in safety, parks, education, transit, and the like; Provide for a non-redistributionist means for social security; and encourage peaceful and prosperous sharing of resources and commercial trade.

EDITED TO ADD: practically, these principles mean a shift in taxation from labor and income to wealth. Wealth taxes are more effective at discouraging wealth concentration than income taxes are - this should be self evident. However, any wealth tax must be careful to exclude those forms of wealth that are based on someone's productivity - man-made products and capital should not be taxed. This leaves, generally, those forms of wealth based on License: very generally, the aforementioned FIRE - though some of that segment IS productive, plus such licenses as extraction rights, broadcast rights, and patents.

[salin]

5. Great summary per what is favored by the current tax system.

Indeed the continuation of the economic expansion under Eisenhower is often considered successful because it tipped the scales towards productivity over (paper) investment. A revolt from the top (those who made a ton of investment money - but were taxed at a high rate on that money) was building since that time until it came to fruition during the Reagan years - but the rhetoric used to sell the reversal in the tax system made it sound like the rewards would equally benefit those on the lower economic rungs.

Am less familiar with the principle of Commonwealth - very interesting... and very counterintuitive in this "sell all natural resources at bargain basement sales to the corporate bidders - and put the costs of the deals upon the govt" era.

The one thing about the escalation of this unhealthy economic era - is that it does set the stage for some serious changes in the future - we live in an interesting era, and one which I believe will see a big shift in priorities over the next couple of decades.

[BlueEyedSon]

4. How to wrest all that sequestered capital from the ruing elite to

redistribute it?

Good luck!

[salin]

6. heh

suggesting instead a redistribution of the means of accumulating wealth (as in the now - rather than going after already accumulated $s) - back to how it was in the post WWII era - one that emphasized the importance of demand side economics - and a belief that disposable income (that beyond basic needs) for a broader number of folks = a healthy economy for all. No robin hood here - just suggesting we ought to compare our economic policies to a) pre depression era/crash vs b) long expansion era and consider which was historically in the best interest of prosperity for the country.

[BlueEyedSon]

8. Without creating massive inflation we have to get that sedentary currency

back in motion

[dcfirefighter]

10. There isn't any sedentary currency

or at least none to speak of. No rich guy nor group of rich guys is sitting on a pile of currency (currency specifically referring to printed money).

More importantly, no one is sitting on money - electronic or otherwise. Very nearly all the money in circulation is reinvested. What needs to happen, is to make sure that that money is invested productively - into real & necessary jobs; training; education; factories; buildings; railroads; power plants; intellectual capital; production lines; ports; pure research; housing; transit; waterworks; communication networks; schools; and agricultural capital. Unfortunately, more and more of that money (effort) is being invested in real estate (which is a market failure/greater fool/ponzi scheme) and manipulating government and government-granted privilege.

[BlueEyedSon]

11. sorry, yes, it is in the form of other assets. Assets that just sit there

(many throwing off interest/dividends) and the value of which is not flowing through the day-to-day economy.

Not to mention it may be in a swiss bank, or foreign stock market

[dcfirefighter]

13. That's not currency. It's important to be precise.

I more or less agree with you. In my other posts, I point out that some assets arent productive - they simply allow the 'owner' to charge for their use (or earn extra-ordinary income from their ownership). However, certain assets are productive, and the dividends that accrue to their ownership are the very reason they exist: Why on earth would I invest in a new production line if I didn't think it would earn money? If I (or someone like me) didn't invest in the lathe, it wouldn't exist. This is important - Capital requires the investment to exist -- it is desireabe to encourage the formation of Capital, as men and women are employed in it's creation. What is not desireable, is to allow rentiers to enjoy income from Land and License - two things that they did not create, and would exist just fine without them. Paying more for real estate doesn't encourage more production. Paying more for 5-axis milling machines does (encourage more production of 5-axis milling machines).

[BlueEyedSon]

15. Ok , you're smart about this stuff. Can you justify buying stocks as

"productive ownership"? After the shares are on the market, when I buy them, the cash goes to the seller not to the company for operating expenses, expansion, R&D, etc.

Only the IPO brings cash into the company......

[dcfirefighter]

17. Look a few steps back, though

I understand where you're coming from - I had to sit and think of this for a while myself...

IPO: stock sells 1,000,000 shares for $10 each. Company gets $10M to operate with.
Later sale, IPO invester sells 1000 shares for $12 each, makes $2000 on the deal, company gets nothing.

How is that second sale beneficial to the company (and it's employees?)

Simple. How much would you spend on the IPO if you knew that any gains made from the future sale of your stock was taxed at 100%? You'd spend nothing. It wouldn't be worth it to buy the IPO in the first place. Same goes for taxing dividends. If buying a stock doesn't confer any financial advantage to the buyer, why buy it in the first (IPO) place?

Perhaps, with a relatively high capital gains tax on stock trades, companies would be encouraged to pay relatively high dividends - however, this would really hurt certain types of companies - particularly 'Long View' companies that have relatively little current-year cash flow.

In my ideal world, purchasers of stock wouldn't pay taxes on any part of the transaction, however, corporations (and people) would pay 'taxes' on their use of the commonwealth: land, air, sea, mineral, etc.

[dcfirefighter]

9. Very progressive income taxes typically hit rentiers the hardest

And serve as a useful, though inexact, proxy for taxing the privilege associeted with the ownership of natural wealth and license.

As a counterpoint, the post-war era's economics also benefitted from a preponderance of (domestic productive) capital, years of pent-up unmet consumer demand, and a near total destruction of foreign productive capital (e.g. European factories were bombed - Asian factories didn't really exist yet).

Years later, we paid (and continue to pay) for the rebuilding of European & Japanese factories - for example, their Foundries are all post-war vintage, many of ours are pre-war.

[Odin2005]

12. I think Globalization is causing capitalism to self distruct.

Regulated capitalism and the Welfare State was a creation of US liberals and Europeans social democrats who supported the socialist values of equality but were against a planned economy (there are socialists who are not anti-market, I am one of them, but market socialism wasn't in vogue at the time because the far-left was still naively fawning over the Soviet economic planning even as Stalin was starving and butchering people). This worked because it was a pre-globalized world so companies had no choice but to do what governments told them to do. This social democratic synthesis was very successful and pretty much silenced the anti-capitalist Left throughout Western Europe and North America and drove orthodox Marxists crazy since, according to Marxist dogma, that should of never happened. Now, corporations can get around regulations they don't like by moving to countries without these regulations, encouraging a run to the bottom, encouraged still further by neo-liberal economists who statrted crusading against the welfare state and government regulations. As the manufactuing base is hollowed out, damaging the middle class, we can expect a return to the class warfare that the liberals and social democrats had kept in check.

[dcfirefighter]

16. Race to the Bottom, Race to the Top

The free-market capitalism popular by modern Republicans does encourage a race to the bottom - but so does european democratic socialism.

It is only by force, by strong authoritarian government, that european democratic socialism avoids a race to the bottom. Jobs are leaving European countries for cheaper labor, just as they are in the US: it's just that many more of European jobs are subsidized by taxing the incomes of other productive people - which is a pretty way of having a command economy. Unfortunately it only works as long as the governments in question can juggle the wants of the electorate against the productivity of the market. Eventually, those who have the means to pay will take their toys elsewhere. There is a negative feedback loop for European Democratic Socialist Governments: the more they spend on social goods, the more taxes on productivity they must make, and the less likely for increases in productivity.

In order to have a 'Race to the top', the value of public (social) goods has to be recaptured. Things such as eduction, transportation networks, public safety, rule of law, and the like, increase the productivity of a country. Many governments make an attempt at recapturing these investments through income taxes. Unfortunately, such taxes give reason for people & companies to hide, offshore, or otherwise reduce their income. People may move to other states, or even other countries to avoid an income tax. Corporate income taxes generally get passed on to the consumer in the form of higher prices - which means that the consumer, in effect, pays these taxes through reduced purchasing power. In free markets, where goods produced all over the world must compete, goods from a country with low corporate taxation will have a competitive advantage to those from high corporate taxation. All this goes to show why income taxes are disadvantageous.

One alternative, is to tax things that cannot be hidden, cannot be off-shored, and cannot be reduced by their owner. In the case of the hypothetical good government, many of the advantages given by the good government accrue directly to land prices - dampening the benefit to people. IOW, given good government, part of the benefit of higher wages and productivity will be spent on paying more for real estate (or oil, or use of the atmosphere, or a few other non-man-made things). Fortunately, taxing these things, unlike taxing incomes or especially wages, does not hinder their production. If the benefit of public investment is recaptured through such taxes, a positive feedback loop is created, and any such government would be encouraged to 'race to the top'. Furthermore, in absence of taxes on jobs, a 'natural' level of full or near-full employment (unlike European social democracies), with concomitant high wages and good working conditions, would prevail. Such a country would be encouraged to trade freely with other countries, even so far as to benefit from other countries' subsidization of their products. (Another countries sugar subsidy benefits our sugar consumers and candy producers more than it hurts our sugar industry)

[Ksec]

14. good post , I believe we give stockholders WAY TOO MUCH POWER

If all thats important is the stockholder, only the stockholder wins. Everyone and everything else is second to giving that stockholder a few bucks. They will fire employees to enrich a stockholder, they outsource to please the stockholder, they cut corners and endanger workers to give that stockholder his dividends. Everything is about the stockholder.

[dcfirefighter]

18. And how do we give it to them....

We let them hold all the cards: the company needs the stockholder, while employees are a dime a dozen, and even cheaper overseas.

Several steps to freedom:
1) Restructure banking such that 'new' money is created by the public Treasury rather than by private banks, so that companies and people aren't all chasing scarce dollars to pay interest to the same banks that created the money in the first place.
2) Eliminate all drag from employment: wage taxes, income taxes against wages, property taxes against the products of wage-earners, taxes against the sales of the products of wages-earners, and taxes against income earned by the products of wage-earners. Currently these suffer rates of around 15%, 25%+, 1%+, 5%, and 20%. Each 1% of tax reduces employment by some percent, depending on the elasticity of demand. Even if demand for is relatively elastic, removing these taxes would mean an increase in labor demand of many percent - far more than the official 4.7% - such an increase in demand for labor would drive a sharp increase in wages, benefits, and working conditions, as employers would have to compete for employees.
3) All those employees with higher wages and new jobs would increase demand for goods & services, which would increase the price of goods & services. The price increase would spur further production of those goods and services that can be produced, damping the price increase.
4) Eventually, the US would 'run out of labor' as nearly everyone is employed: immigration pressure would increase, and demand for foreign products would increase. As foreign countries experience an economic boom, selling to us, their standard of living icnreases, as does their cost of labor (wages).
5) The increased realizable demand by US (&foreign) wage earners would drive the price of NON-produceable goods & licenses up. To stymie speculation - 'bubbles' - and to pay for the wage tax cuts, these goods & licenses should be taxed heavily - very nearly to their annual rental value.
6) Any surplus revenue should be shared as a demogrant, if only to pay for real estate and other non-reproduceable goods. (there's no real way to keep them from getting expensive - there is no way to increase the production of them. We can only use them more 'wisely', by making them dearer. We measure how 'dear' things are by how much they cost. We can, however, choose to pay the public rather than some individual rentier)