Despite being very libertarian, and very much of the opinion that giving money to a government that spends money more irresponsibly than a drunken sailor is sending good money after bad, I do recognize that the accumulation of wealth at the top is not a good thing.  One might argue that such an accumulation is a result of the phenomenal talent of a few at making and building wealth.  While there is no “pie”, or other limit on wealth in the long term, wealth alone does not beget wealth, you have to put it to work.  Money sitting in a bank, or in real estate that isn’t doing anything, isn’t really working.  That said, this highlights part of the reason wealth isn’t being put to work:
The risk of the venture is relatively low, but that which exists is of the nature that Harriet through her superior talent and experience could offset more than Ozzie. Indeed, in Harriet’s hands, the opportunity would be better managed and a better product would emerge. Both for their own reasons seek to borrow money in order to acquire the opportunity, Ozzie because he prefers to and Harriet because she has to. Who would the bank finance on the most favorable terms?
The answer is easy.
Ozzie.
Even though Ozzie does not actually want to deploy his own wealth, he can pledge a small slice of it as collateral. Even though in Ozzie’s hands the opportunity is at greater innate risk than it would be in Harriet’s hands, the bank can eliminate that risk for itself entirely by securing it with other collateral from Ozzie. Consequently, its position guaranteed, the bank is willing to provide money to Ozzie at a low interest rate. Harriet has no collateral to pledge, and though hers is the superior talent, the bank would take on more risk by loaning to her than to Ozzie, for its loan would depend exclusively on the success of the venture, and not on other collateral. The bank will loan to Harriet only at a higher interest rate, if at all. While both propose to borrow the money, Ozzie can outbid the talented Harriet using cheaper money. ( Remember, though, it is not Ozzie’s money any more than it would have been Harriet’s money.)
So at first glance, Harriet is out entirely, unable to match Ozzie’s bid for the opportunity. She does have an option though. If Harriet wants to participate in the opportunity, she can bring Ozzie to the table as a guarantor or even go to work for Ozzie. Ozzie still comes out ahead, though, because the acquisition of the opportunity now depends on Ozzie who is able, in turn, to demand greater reward for it than Harriet. The greater reward for Harriet’s talent therefore accrues to Ozzie.
In the long run, the more talented person should be able to gain wealth once the venture is joined, but the barrier to entry is obvious; Harriet has to convince Ozzie to back her because the bank refuses to accept the risk (risk-adverse banks, or maybe I should say banks that were willingly risk-blind and are now risk-adverse, are a big part of the reason our economy is in the tank). Â If only the wealthy are allowed to play the game, for whatever reason, the barrier to entry for the small guy is pretty high. Â Also, if there is a very small slice of people controlling the vast majority of wealth, it is just not possible for them to put it to work, a person can only make so many investment decisions in a day. Â The founding fathers were right to be concerned about wealth concentrations if for no other reason than such wealth stagnates.
I like to think of the economy as a power plant sitting on an island with a coal mine (the wealth). Â A power plant can only burn coal at a set rate (a fixed max & min), and will only produce up to a max amount of power. Â It can waste power by not running as efficiently as possible, and a certain amount of waste is a given even during the most efficient operation. Â The power plant can stockpile the coal it digs up all it wants, but absent the construction of additional boilers, it can not create more power, and the island can only support so many boilers and coal bins. Â At some point, that extra coal needs to find another power plant to burn in. Â Luckily, there are as many islands as there are people in the world. Â The more the coal gets moved around, the more power is available to do work (like mine more coal). Â It’s not the best analogy, but I think it gets the point across.
Now, I do loathe linking Daily Kos, and would prefer to not give them a link back, but this has a salient point or two. Â First, regarding tax rates for the wealthy:
Here is a secret about rich people: Â we wouldn’t have noticed a 3.5% tax increase. Â That is not only because there isn’t a material difference between having $1 million and $965,000, which is obvious, but also because most of us don’t actually know how much money we are going to make in a given year. Â Most income at that level is the result of profits rather than salary, whether it comes in the form of bonuses, stock options, partnership distributions, dividends or capital gains. Â Profits are unpredictable and they tend to vary wildly. Â At my own firm, the general rule of thumb is that if we are within 5% of our budget for the year, everyone is happy and no one complains. Â A variation of 3.5% is merely a random blip.
Not an invalid point. Â Here is the important bit, though:
…rebranding the wealthy as “job creators.” Â While true in a very basic sense, it obscures the fact that jobs are a cost that is voluntarily incurred only as a result of demand. Â Hiring has no correlation at all to profits or to income -Â none. Â Let me keep more of my money without increasing customer demand and I will do just that – keep it. Â Perhaps I will spend a little more of it, though probably not, but even if I do it won’t help the economy very much. Â Here is another secret of the well-to-do: Â we don’t really buy much more stuff than everyone else. Â It may be more expensive stuff, sure, but I don’t buy cars, or appliances, or furniture, or anything else more frequently than the average consumer. Â The things I do spend more money on are services such as travel, entertainment, restaurants and landscaping, none of which generate well-paying middle class jobs.
The whole crux of the argument for not raising taxes on the wealthy is that they won’t be able to create jobs if the government takes all their money, except for the fact that absent demand, they aren’t using their money to create jobs. Â They are unwilling to take the risks necessary to rebuild our economy. Â Some of that risk-aversion is understandable, what with the cost uncertainty of ObamaCare and the like, but that is beside the point. Â If the wealthy want to continue building wealth in the long term, they need to be a lot more willing to risk some of it.
Again, I am unconvinced that merely raising taxes is the best idea. Â Without a massive increase, it won’t raise that much money for the government (and I don’t want to give them anymore than they already have; Warren Buffet was right, make a constitutional amendment that anytime the federal government is in the hole by more than 3% GDP, no member of the legislature is eligible for re-election until it’s fixed) and I don’t think it’ll do anything except chase wealth out of the country.
What we need to do is give the wealthy & banks a powerful incentive to take on risk and small business investment. Â We don’t want to do that by repeating past mistakes, such as socializing risk. Â I don’t think lowering taxes will do it, since they are pretty low as it is (historically). Â Maybe we should raise taxes, but also raise the amounts that people can deduct for investment. Â I know that if I could lower my tax burden by buying stock, or some other investment vehicle (maybe I can, I’m not sure), I would. Â If I had money, and my choice was give my money to the government, give it to charity, or risk/invest it in a job growth venture, I’d at the very least keep it away from the drunken sailor.
Although I’m not sure if every investment vehicle should count. Â CDOs and other investment products seem to have created few jobs and a lot of problems (I think Chris is right, too much money chasing too few growth opportunities grew crap like CDOs and shorting). Â Of course, Chris’s identifying of the problem also supports my position that a single person can only chase a fixed number of opportunities to grow wealth. Â Once that person has more wealth than available growth opportunities, they start to chase other bets, including some that don’t create jobs or real (physical) economic growth.
Aside : caps on charitable giving deductions are just stupid (I think Obama backed off of that one), If I make $5M and I want to give $4M to charity, I should only be taxed on the $1M left. Â Some wealthy people might not care if their money goes to government or charity, but I bet enough do to make it worth not having any caps (does giving money to your Alma Mater count as charitable?). Â Still, charity doesn’t often create many jobs.
So how do we de-concentrate wealth & get it working again without outright stealing it?
ETA: This made me laugh (and I think it’s a great idea, why should Wall Street catch all the heat)
Anybody with the drive and talent to create a successful business will be able to get the capital he needs to do it with. He will be able to demonstrate his worth working for other people, or bootstrap the thing. The barrier to entry for success is that you have to succeed. Can’t succeed? No success. That barrier to entry is where it belongs.
But you and the Kos Kids would rather bury that entrepreneur in a cubicle in the bowels of MegaCorp, and give all the capital to politically connected rich people. That is the reality of what you want. I know you like to think you have good intentions, but there is only one possible result of any scheme other than “investor bets his own money on his own judgement”.
I’ve known some successful people who started with nothing, no connections, no education, nothing. The only way to stop them is to shoot them. Then they’d get rich selling flaming sulphur in Hell. Funny thing is, the guy who started with the least is a rabid lefty. Wants to cut the ladder off right under himself. Insecurity, I guess.
Wow, a, do you even read what I write? Really, where did you get the idea that I don’t want the little guy to make it? Please, tell me where I was not clear.
I’m certainly NOT advocated burying the entrepreneur, I’m advocating freeing up more resources for the entrepreneur so he can do his/her own thing and build more wealth. Sure, everyone knows a rags to riches story. Hell, I came from next to nothing & now make more money than I ever thought I would when I joined the Navy at 18. But the rags to riches story is the anomaly these days, not the norm, because it is very hard to get a business off the ground enough that it has a chance to be successful..
Our government (local & federal) has, in collusion with established business, raised the barrier to entry high enough that in order to get any kind of high tech venture (short of software, although the patent trolls are doing the barrier work there) off the ground these days, you either need a huge infusion of capital to pay for the lawyers and pay off the governments, or you need to be willing to sacrifice almost everything in order to be able to devote the resources to overcoming those barriers on the slow slug through the quagmire.
I don’t understand how you can say, “Money sitting in a bank, or in real estate that isn’t doing anything, isn’t really working.” In free market economies (ones that do not have the Fed holding interest rates artificially low) money in a bank is not only earning interest, but interest rates (particularly higher rates) encourage saving. Banks take those savings and loan them out to businesses who use the money to hire employees and buy capital goods for their start-up or make improvements to their existing business. Money in real estate earns the investor rent, which he can then spend or save. If he spends that money, it immediately goes into the economy. If he saves the money, then it goes back to work via loans. Unless the wealthy are literally burying money in their backyard, it’s always working for them through spending, investments, or interest payments on savings, and this helps drive the economic engine.
Venture capital ever since Obama took office. Capital gains tax increases and regulations have been threatened for three years now. Dodd-Frank excluded small ventures but put big roadblocks up for those trying to grow a business.
http://blogs.wsj.com/venturecapital/2009/06/17/the-daily-start-up-obama-calls-for-vc-to-be-regulated/
My argument against taxing the “rich” has little to do with whether or not they will miss the money. They are:
1. There aren’t enough truly wealthy people to make a noticiable difference in the federal budget – we have a spending problem.
2. When they realize #1, they will come for my low-six-figure pay in expensive North NJ. I will notice it,
3. Most importantly – Any additional revenue will go towards … GOVERNMENT! I want far less government, not more.
Bill Whittle absolutely destroys the idea that we can tax our way out of our problems:
http://billwhittle.net/?p=562
CAShane – except banks aren’t loaning it out, except to extremely low risk parties, like Ozzie up there, so it’s literally just sitting there. My point is that banks/larger businesses/etc are hoarding cash, something that numerous reports from numerous sources have noted.
I understand partially why they are hoarding (hedging against uncertainty), but if it’s being hoarded, it isn’t doing any work.
Bram – I don’t disagree, nor do I think taxes in & of themselves is a fix. The problem, as I’ve said repeatedly, is wealth that is controlled by fewer & fewer parties is bottlenecked, especially with the government roadblocks politicians have erected (at the behest of, or the approval of, established businesses).
So short of dropping a 747 onto the capital building while congress is in session, how do we remove those roadblocks and encourage the flow of money to those who can put it to work?
Less regulation, streamline the tax code, stop attacking businesses – in other words make things predictable. Then leave the economy alone! Don’t touch it, don’t bail out, just talk about abortion or something.
My company is sitting on cash and we hate it. If there were opportunities for growth and profit, we would hire and invest in them.
M.R.S.,
What is the incentive for the banks to loan out that money when the government through the power of the Fed has stifled the free market? I alluded to the artificially low interest rate in my first comment because this is where the bottleneck starts. Interest rates determined by the market rather than the Fed would increase public savings and consequently increase bank lending, which will help produce a stronger economy. The problem does not lie with the wealthy and hoarding, it lies with policies of an administration that is economically illiterate that drives businesses to make decisions that are in their best interest, which unfortunately is not in the best interest of those higher-risk Harriets seeking loans. The hedging against uncertainty you mention is a much harder problem to deal with but ultimately it’s understandable. The answer is not to make the banks stop hedging, it’s to remove the reason they are hedging.
Hey! HEY! That was Scott posting that video, not me!
FWIW, I’m with Lyle on that one — I prefer sensual, slow gyrations, like in this video, rather than the frenetic stuff that seems to turn Scott on. ;p
http://www.softgreenglow.com/wp/?p=6928
Bram, CAShane:
OK, so how do we do that realistically, get the money flowing. I.E. what hope do we have, given the utter trainwreck our two party system is, to get a realistic fix in place?
David: Ok, so it was Scott. That being said, don’t be threadjacking this here intellectual discussion to talk about your sexual proclivities! 😉
How’s ’bout the banks get their money from the fed at zero interest and “lend” it to the government at 2 or 3% interest. As long as that little scheme is allowed to go on, why the heck would they bother lending it to a venture that might lose them money
Mad Rocket Scientist:
“We” (the government) don’t do anything except create a business-friendly environment. Motivated entrepreneurs will take care of the rest. Economic growth correlates perfectly with economic freedom.
Harding / Coolidge understood this. Reagan did too. FDR and Obama never grasped the concept of a free-market.
“what hope do we have, given the utter trainwreck our two party system is, to get a realistic fix in place?”
I don’t think there is much hope for a reasonable fix. Our government is to money like an alcoholic is to liquor. The only way we can get them sober is for them to first hit rock bottom and we’re nowhere near that yet. I think it’s too late to vote ourselves out of the mess we’re in. Half the country is already on the dole and there’s no way you can convince them to vote themselves less of your money.
There is a dearth of lendable funds today because we are experiencing a credit contraction as the overleveraged bubble deflates. Added to that is “Regime Uncertainty” thanks to our spastic and economically inept administration. These are both short term issues. Add to them the more long term habit of poor savings rates exacerbated by government suppressed interest rates and the resultant inflationary pressures, and you get exactly the rut we’re in right now. It can be temporary if we do as CAshane and Bram say and get the government out of the business of banking and interest rates. Stop inflating, and allow interest rates to float, eliminate government imposed barriers to entry, as well as tax rates which punish the most productive citizens, and we’ll see the market moving again.
By the way, most people didn’t create their wealth by hoarding. They got to the top through risky entrepreneurial activity. If the wealthy are truly sitting on it right now, it is because of an abnormal condition being imposed on the market. Most of us recognize the government as being at fault. When “old money” becomes stagnant, it generally dissipates.