Saturday, October 31, 2009

Bush Exploited the Common People to Make the Rich Richer



As the Global Sociology blog notes, "stratification happens when the tax regime favors the transfer of wealth to the top". After years of growing income disparity between the rich and the rest of America, surely the federal government wouldn't exacerbate the problem would it? Well if it was the Bush administration, the answer is "yes".

The tax cuts sponsored by President George W. Bush lapse at the end of next year. Those cuts will have saved individuals, and cost the government, $2.34 trillion, according to The New York Times. Unfortunately, not every individual benefitted equally.

As the table above shows, a full 61.6% of the Bush tax cuts went to the top 20% of wage earners! Only 1.3% went to the bottom 20% of wage earners, and only 7.6% went to the next 20%. If you were in the middle quintile of US wage earners, you received about 11.8%, or about half of your "fair share".

This was income redistribution at its worst. The rich were in power, and their greed knew no limits. No wonder so many Americans have felt for years that their country is in danger of becoming another banana republic, because under Bush it sure looked like this country was dominated by an oligarchy of inherited wealth.

No, the right wing cannot justify the cuts as economic stimulus. Economic progress was stalled for years under Bush, and the majority of Americans are worse off than they were at the start of the decade. As the facts show, the tax cuts were nothing more than a scheme to transfer wealth to the rich, pure and simple.

Not only were benefits distributed unfairly through society, but reduced taxes mean reduced Federal tax revenues. You and I and everyone else in American with an income (if they are lucky enough to have one) is still paying off that deficit with our taxes now.

Fortunately, Bush's unfair tax cuts are lapsing now, but more will be needed to reverse the trend toward greater social stratification in America. Let's hope that America can get back on the path to social justice and economic growth for everybody.

Friday, October 30, 2009

Investing in America's Future



The Problem is Waste


A frequent theme on this site is that today's financial crisis lie is the direct result of a longstanding misallocation of resources into unproductive ends. Current consumption, larger houses, etc. were preferred to savings and investment in the future, even if families and governments buried themselves in debt.


What the President Said

In "American Blew It, Will Obama?", we quoted the President's realistic State of the Union Speech about the incredibly short-sighted policies that led us into this mess:
In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election.
Despite years of waste, maybe we could have muddled through if it hadn't been for the kleptocratic policies promoted by the preceding administration. As the President said:
A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway.


What We Said


Not only did these policies weaken the American middle class, but the diversion of precious resources away from more fundamental investments left the nation less competitive economically. As we pointed out in "Mis-Allocated Resources":

One of the issues brought to the fore by the present financial crisis is the extent to which America's productive capacity has been hollowed out. . . . Houses, shopping malls, internet concept stocks -- all were bubbles that wasted billions of dollars that could have funded productive, forward-looking activities.
In other words, we borrowed against our futures through leveraged speculation rather than investing in basics like R&D, training the workforce, etc.


New Support from the Financial Mainline


It seems that the mainline financial community is coming to agree with this point of view. In his latest monthly commentary, "Midnight Candles", PIMCO's Bill Gross cited some statistics compiled by his organization:


The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades.

Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services.

A long history marred only by negative givebacks during recessions in the early 1990s, 2001–2002, and 2008–2009, produced a persistent increase in asset prices vs. nominal GDP that led to an average overall 50-year appreciation advantage of 1.3% annually.

We, in effect, were hollowing out our productive future at the expense of worthless paper such as subprimes, dotcoms, or in part, blue chip stocks and investment grade/government bonds.

Putting a compounding computer to this 1.3% annual outperformance for 50 years, produces a double, and leads to the conclusion that the return from all assets was 100% (or 15 trillion – one year’s GDP) higher than what it theoretically should have been.

In other words, by leveraging up in stocks and other paper assets, we deleveraged our GDP, and by a huge amount.


The Only Solution

To repair America's decline, we must get at the root cause -- misdirection of resources. We can't continue to emphasize the financial sector of the economy. We must invest in the things that will make us productive, which are human potential, intellectual property, and productive capacity. This is the only path to a future that will benefit all the American people.