Wake Up Congress…This is Important
January 24, 2011 No CommentsBy: John Foshee
College of Arts and Science
Class of 2011
“The disposition to admire, and almost to worship, the rich and the powerful and…neglect persons of poor and mean condition…is the great and most universal cause of the corruption of our moral sentiments.”- Adam Smith
It may seem odd that the most influential economist of modern times and someone considered by many to be the father of western capitalism would disapprove of 21st century American culture. After all, the country is in a state of depressed economic condition derived from the greed of those chasing an enormous amount of wealth. The super-rich achieve almost celebrity status while the common man suffers ignominious accusations of laziness and stupidity when in most cases systemic measures hinder their progress. Never has a principle been so self-evident than in the current United States, where income inequality has grown to levels not seen in more than 80 years. George Bush described the situation as that of the “haves and have-mores.”
According to the Economist, “there was not a single year between 1952 and 1986 in which the richest 1% of American households earned more than a tenth of national income. Yet after rising steadily since the mid-1980s…in 2007 the income share of the richest percentile reached a staggering 18.3%.” Coincidentally (or perhaps not) in 1929 the top 1% of America’s wage earners earned 18.4% of America’s total income. The similarities in the periods leading up to the Great Depression and the recession of the late 2000’s suggest that rampant income inequality not only isn’t fair but in fact is an unhealthy economic condition.
Even more disturbing is the utter lack of new and creative policy proposals floating through Congress aimed at reducing this chasm in the fortunes of United States citizens. Lawmakers, Republican and Democrat, continue to recycle old policy that has shown to be either ineffective or implemented incorrectly. For example, Republicans continue to advocate extending overly generous tax cuts to the top 10% of wage earners. They argue that anyone who has taken economics agrees with the principle that reducing taxes for the wealthy will allow them to spend more and thus help stimulate the economy naturally. Well they are half right, but anyone with an economics degree is also familiar with the law of diminishing returns. Regardless of how low tax rates dip, those people with investable assets of $50+ million are not going to spend demonstrably more if there tax rate is at 40% instead of 45%. At some point, one is satisfied with their lifestyle and begins hoarding their wealth instead of reinvesting it in new business or purchasing new goods. Regardless of political affiliation, this gross accumulation of wealth for certain individuals does nothing to benefit the economy and overall has a negative effect on public welfare. The entrepreneurial will continue to be entrepreneurial with or without the Bush tax cuts. They should be allowed to expire for the super wealthy (but not the middle class) and would help reduce the deficit without depressing the economy.
Instead of cutting taxes even more, Republicans would be better served by reforming the tax code. The United States tax code is several million words long and changes daily. The Economist says, “Exemptions, credits and loopholes worth $1 trillion a year riddle the system and distort behavior.” Additionally, compliance with these inordinately complicated statutes costs Americans over $200 billion dollars a year. The tax base could be expanded and tax revenue increased while still lowering rates if these loopholes are closed. Some exemptions, like those on retirement savings, should be kept but the largest loopholes favor the rich, making the tax system less progressive, and encourage rampant tax avoidance. Reforming the tax code would go a long way in correcting the income inequality problem and reducing the deficit.
Democrats also have a worrying lack of vision. They have pushed a massive stimulus through Congress that has increased the deficit, but is merely a band-aid on a very sore wound. The United States income inequality gap problem for the bottom is reasonably well understood. New technology allows the automation of blue collar jobs and globalization moves much of what is left to poorer countries with less rigorous labor standards. From this perspective, using the stimulus to fund a temporary road construction project is less practical than using that increased spending on education. In today’s America, whether as a fund manager, consultant, or in any industry, an educated and skilled workforce is requisite for success. Employers needing skilled labor report a difficulty filling positions because a lack of qualified applicants, despite the millions of Americans who desperately need jobs. Investment to make sure everyone has a good education will do far more good for the American way of life and the future of the American economy than temporary projects.
Additionally, forcing banks to hold more capital and actually pay for their implicit government safety net would be a much more practical solution than just a blanket tax hike and would rein in the behavior of those who many have attributed the results of recession to. Many of the top 0.1% of American wage earners are in the financial services industry and this income bracket earned 8% of America’s wealth at the end of 2008 according to economists Emmanuel Saez and Thomas Piketty. They earn roughly 80 times more than the bottom 90% of Americans. Many would say that this patently unfair, these people do not contribute 80 times more to the welfare of the state as a whole nor do they work 80 times as hard as everyone else. However, this belief is largely a question of politics and not economics. What is not a question of politics is that cutting into the enormous bonuses of bond salesmen and hedge fund managers would have the dual effect of forcing them to practice more responsible lending and money managing practices and also help reduce the enormous inequality gap.
To the men and women of Congress: indiscriminately raising taxes or increasing spending are short-sighted goals that do little to fix the rotten roots of our problems. Powerful teachers unions that prevent the poor from receiving quality education and the “too big to fail” system that encouraged bankers to recklessly allocate money while leaving ordinary Americans with the tab are deep, entrenched problems that require serious action. They contribute to widening income inequality, declining measures of social mobility, and slower growth. The government needs to keep its focus on pushing up the bottom and the middle rather than dragging down the top. Spending needs to be focused on the bottom and subsidies that favor specific industries or insiders need to be abolished. Not only do these reforms need to be implemented, but they need to be implemented right now. Cutting entitlement programs and investing in education are measures that need to be phased in gradually and whose returns will not be seen immediately. However, the problems of the United States are immediate and there is not a second to waste. Closing tax loopholes will help alleviate the deficit in the short term and Congress can take the steps necessary to correct medium to long-term problems.
The point of these reforms is not to affect mass redistribution of wealth and they will not narrow all income disparities. The United States system at its heart is meritocratic and skill and intellect would still be rewarded in a freer world. However, these reforms would attack the most egregious, unfair kinds of income inequality and allow more people to move upwards in the social ladder. If the United States Congress wants to stabilize the financial markets and return to a strong, growing economy then fixing the income inequality problem should be at the top of their list.
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