Bill
Gross bashed "Supply Side Economics" in his latest letter.
Bill Gross June 2009
I
suppose I am a "supply side economist," although I stopped paying
dues at the supply side country club a number of years ago. Most people bash
"supply side economics" for purely political reasons. They're
Democrats, and it is considered a Republican thing, so they bash it. If
Republicans somehow made fuzzy kittens part of their policy platform, then
Democrats would be bashing fuzzy kittens (and vice versa). There's no more to
it than that.
However,
Bill Gross has been around long enough to be a little more sophisticated than
that. "Supply side economics" is directly responsible for the bull
market in bonds in the 1980s-present that made Bill Gross rich. He doesn't
seem very thankful. Let's see what he has to say.
The
fact is that supply-side economics was a partial con job from the get-go.
Granted, from the 80% marginal tax rate that existed in the U.S. and the U.K.
into the late 60s and 70s, lower taxes do incentivize productive investment
and entrepreneurial risk-taking. But below 40% or so, it just pads the
pockets of the rich and destabilizes the country’s financial balance
sheet. Bill Clinton’s magical surpluses were really due to ephemeral
taxes on leverage-based capital gains that in turn were due to the secular
decline of inflation and interest rates that at some point had to bottom. We
are reaping the consequences of that long period of overconsumption and
undersavings encouraged by the belief that lower and lower taxes would cure
all.
Interesting.
He says it was a "con job," but then disagrees with himself and
says that reducing tax rates from 80% to more like 40% was a good thing. Ummm
... which is it?
He
then declares, out of thin air, that rates above 40% "disincentivize
productive investment" while rates below 40% "just pad the pockets
of the rich." Now, sometimes the rich do get their pockets padded by the
government. In a biiiig
way. That's what the banker bailouts are all about -- transferring money from
mostly middle-class taxpayers to the super-wealthy. But, I can't really see
how taking less than 40% of someone's income away from them is "padding
their pocket." Rather odd terminology, no?
Second,
while the Bush tax cuts lowered the top income tax rate from 38.6% all the
way to 35% -- whoop de doo -- the fact of the matter is, the marginal rate is
still above 40% for many people when state and local income taxes are
included. And, if Obama has his way and eliminates the upper income limit for
payroll taxes, they would be way above 40% (more like 60% effective). So,
even if we go by Bill Gross' own statement that 40% is about right, then we
should have a tax cut, not a tax hike.
You'd
figure that Bill Gross would know about that, living in a high-tax state like
California. But, I wouldn't be surprised if, like many very wealthy, he
doesn't actually pay those high income tax rates, which mostly fall on the
upper middle class. It seems a lot of these wealthy types are like that. Even
Warren "Grandpa Honest" Buffett talks up his support of an
inheritance tax, but his
money goes into a foundation tax-free.
Actually,
the rate "40%" by itself is rather meaningless. It could be 40% of
all income above $10,000, or 40% of all income above $10,000,000. Big
difference. There have been examples of economies with rather high tax rates,
which can work passably if those rates fall on very high incomes. This was
common in the 1950s, in Japan, Germany and the U.S.
Isn't
it interesting that Gross centers on "40%" as if he actually knows
something about something? I see no evidence that rates below 40% have no
economic effect. If you look at places that adopt rates below 40% -- any of
the flat taxers like Hong Kong, Russia, most of Eastern Europe, Singapore,
etc. etc. -- all the evidence is the other way.
On the
contrary: the 40% level is, I propose, a political
compromise.
I
mentioned some time ago that "free market capitalism" has a
problem: it doesn't work.
March 8, 2009: Capitalism Vs. Socialism
The
19th century, in the U.S. and Britain, was a time when "free market
capitalism" -- low taxes and stable money -- was embraced to an
unprecedented degree. Stupendous economic growth ensued.
But
the results were not satisfying. The rich got a little too rich; most people
were effectively enslaved. This led to over a century (1849-1970) of
experimentation with various ways to ameliorate these problems.
Part
of this solution was things like Social Security, state health care,
corporate pensions, limits on working hours, paid vacation, compulsory
state-funded education, and all the rest.
But,
another part of it was the idea of the "progressive" income tax.
Contrary to popular belief, the "progressive" income tax was never
really about "wealth redistribution." Have you noticed that wealth
is never really redistributed? Social Security is about the closest thing we
have. It is a redistribution from mostly poor and middle-class working people
to poor and middle-class retired people. Medicare is a redistribution from
poor- and middle-class working people to the health care industry, with some
leftovers for retired people. Neither has anything to do with the "progressive"
income tax, and are actually "regressive" using that terminology.
The
Federal income tax (and corporate income tax) is mostly for funding the
military, and the interest on the debt that was issued to fund the military
in the past. It's the Empire Tax. (A little is left over for corporate
subsidy, pork payoffs to political allies, and the National Park System.)
Empires
are funny things. What are they good for? Did the British Empire improve the
life of the average British workingman in any way? Quite the opposite, the
British workingman was disadvantaged by the colonies. The colonies were a
source of endless cheap labor, and also a destination for a river of British
capital, which flowed overseas instead of being invested in Britain. (In
1910, the outflow of British capital was a whopping 9% of GDP!) Remember the
capital/labor ratio:
March 30, 2008: The Capital/Labor Ratio
Obviously,
the British workingman was disadvantaged by the Empire in terms of the
capital/labor ratio. Plus, he died to make it possible. It was not so much
different than the "outsourcing"/cheap
imports/"globalization"/illegal immigrant boom that is eviscerating
the U.S. middle class today.
But
back to our story: the "progressive" income tax was not about
funding the government. For funding the government, maybe a simple sales tax
(and no other taxes) would be the best method. It was not about
redistribution. It was about making it difficult to amass large pools of
capital.
For
whatever reason, politically, a rate of about 40% seems to have been settled
on in most of the developed world. This is where we stand today on the
discussion that has been going on since about the 1840s, on how to resolve
the apparently inherent problems of the capitalist system. I am not saying
that this system is a rational or effective one, or that 40% is an
appropriate rate. That is simply the way things stand for the moment.
That's
one reason why, recently, I have suggested tax cuts more in the spirit of the
Japanese or German tax cuts of the 1950s. They kept the highish rates, but
they radically increased the level of income at which those rates applied.
You can see that there is ridiculous, irrational resistance to the lowering
of the top tax rate from 38.6% to 35%, which is an irrelevant twiddle.
However, I doubt there would be the same resistance to, for example, making
the first $50,000 of income per adult tax-free. Indeed, Obama suggested
exactly this, for retirees, but why not for everyone? If we had the 37.5%
rate apply to more like $2 million of income instead of $350,000, with
comparable moves in other brackets, that would be significant for the vast
majority of people.
As I
was trying to get at earlier, the problems with capitalism ultimately reflect
deficiencies in the average human character. While capitalism
"ideally" might not be a system whereby the strong exert power over
the weak, the fact of the matter is: such is the desire of the
"strong" to exert power over the weak (just look at the
"strong" bankers taking all the taxpayers' lunch money today), that
any system -- feudalism, communism, fascism, imperialism, racism,
colonialism, whatever-ism -- will have a tendency to become such a system.
Capitalism, just as Adam Smith argued, is successful perhaps because it
channels this basic urge into forms that are at least somewhat more
productive than other past systems. In the olden days, people just used to
rampage across the countryside, like the Mongol hordes, or the Roman legions,
or the Wehrmacht.
If
this character deficiency did not exist, maybe we wouldn't need capitalism.
Probably any system could also be used to express a more generous and
cooperative demeanor, and there are examples of noble aristocrats, enlightened
despots, and happy communes. This has always been the exception, however.
* * *
Worse
than the Depression Watch: "Depression Expert"
Barry Eichengreen says: worse.
Eichengreen/ORourke:
tracking the present Depression
* * *
Chrysler
dealerships: It's all politics. See what I mean
about the strong getting stronger? Here we have some Clinton cronies cleaning
up in Chrysler dealerships all around the country, while perfectly good
dealerships -- which exceeded the "pass/fail" metrics that Chrysler
sent out earlier -- are being shuttered. Lefty fascism has a little different
flavor than righty fascism, but it's all the same in the end. The liquidation
of the S&Ls in the early 1990s was a huge fiesta of theft among
government insiders -- especially the Bush family. The amount of theft going
on today is magnitudes larger.
Zero Hedge: Testimony from Chrysler dealers
* * *
Something
for those of you with a bad back: The human body
is not designed to sit in a chair for eight or ten hours a day. Often this
results in chronic lower back pain. I've had it.
You've
probably tried all kinds of things. Maybe you've even gone and bought a very
fancy "ergo" chair like an Aeron chair. They can be quite
expensive, costing $1000 or more.
Didn't
work, did it?
That's
because you just can't sit properly for eight hours straight. Eventually,
you're going to slump against the backrest. This is what is really hard on
your lower back.
I
found a solution quite by accident. I have a cheap Chinese office chair that
I bought for $99 including shipping. Like everyone else, I ended up slumping
against the backrest from time to time. This caused lower back pain.
Eventually,
I slumped against the backrest so much that I actually broke the backrest.
Damn cheap Chinese crap!
So, I
took off the backrest with the thought of maybe fixing it. But, that seemed
like a pain in the butt so I didn't do it right away, and instead ended up
using the chair without the backrest.
Eureka!
With no backrest, you can't slump against the backrest. No more back pain!
It
looks pretty funny. Like a stool on wheels with armrests. But, it works
great.
Nathan
Lewis
Nathan
Lewis was formerly the chief international economist of a leading economic
forecasting firm. He now works in asset management. Lewis has written for the
Financial Times, the Wall Street Journal Asia, the Japan Times, Pravda, and
other publications. He has appeared on financial television in the United
States, Japan, and the Middle East. About the Book: Gold: The Once and Future
Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is available at
bookstores nationwide, from all major online booksellers, and direct from the
publisher at www.wileyfinance.com or 800-225-5945. In Canada, call
800-567-4797.
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