Topic: Commentary
There are just so many examples of economic stupidity in the news these days that its hard to know where to start. For one thing, a recent poll supposedly shows a majority of "economists" claiming that a president John McCain would be better for the stock market than a president Barack Obama. Supposedly, the primary factor that these geniuses made this decision on was that McCain pledges not to raise the capital gains tax, while Obama pledges to raise it by 5% to 8%.
A small increase in capital gains taxes isn't going to do anything to harm the stock market. What causes stock prices to go down is uncertainty, lack of faith in the system, lack of security, lack of transparency, and of course a bad economy.
We can't say for sure what impact either McCain or Obama will have on those factors, but one thing that is for sure is that John McCain is already basically pledging to do things that will undermine those factors, especially the issue of uncertainty.
Right now the continuously weakening American dollar is causing uncertainty. Right now the high levels of American privately held debt and public debt is causing more uncertainty and of course also contributing to the weakening dollar. Thus, right now balancing the budget is one of the most important things that the next president can do that would have a positive impact on stock prices and thus far it looks like Barack Obama is the candidate most likely to reduce the deficit the most. In truth neither candidate is going far enough towards balancing the budget.
The reality is that we need major tax increases in this country, probably across the board, not just on the wealthy, but certainly mostly on the wealthy. And, with those tax increases, if they are used to balance the budget, what we would see is an increase in investor confidence and thus improvements in the stock market.
Not only that, though, we also need more regulation of industry and of course we need major improvements in the health care system and more health care security in America. All of those things are things that Obama is more likely to bring to the table, and thus again he is the one more likely to be better for the stock market.
The Republicans have essentially decimated this country's economy over the past 30 years. It may not have seemed like it at the time, but essentially every aspect of Republican financial policy was gutting the economic backbone of America and driving us towards this current crisis, and this crisis will get worse before and if it gets better.
How anyone can have any faith in John McCain's economic policy proposals I have no idea. Basically everything that he says on the subject is just a repetition of the same tired old talking points that have let us to this current crisis. John McCain's economic agenda is, at its core, just more Reaganomics, the same Reaganomics that we have been following for 30 years leading us down this road, including the time under Clinton. Its the same policies of tax cuts, deficit spending, deregulation, privatization, and giving "the market" free reign.
Over just the past 10 years we have seen a series of major crisisies that have been brought about due to deregulation. In almost every case the industries that lobbied against regulations, processes, and systems of oversight were negatively impacted by the lack of those very same regulations.
Examples include the lack of improved fuel economy standards leading to the current problems faced by American automakers, the deregulation of the banking and lending sectors leading to the current credit and housing crisisies, the lack of oversight of the airline industry that led to the recent grounding of hundreds of planes due to safety problems, the lack of a food source tracking system which led to the recent salmonella problems, the lack of food safety inspections which led to recent problems with tainted beef in America and have harmed the image of American meats around the world, the lack of corporate accounting oversight which led to the accounting scandals made famous by Enron, and the list can go on.
In essentially all of these cases industry lobbied against oversight, and in the short term a few people benefited financially, but in the long run the lack of oversight hurt the industries and the American economy as a whole and certainly undermined the values of stocks. To claim that McCain's hands-off proposals (though he does acknowledge "some" need for minor regulatory increases) would "be better for the stock market" is absurd.
The fact is that proper regulations help industry and they bring security and trust to the economy. In so doing everyone benefits, but by definition the industries and share holders benefit the most, and thus it is appropriate that taxes be increased on capital gains to pay for the oversight.
John McCain likes to tout a common claim that the majority of American's own stocks, and that thus an increase on capital gains would impact most Americans. This is only somewhat true but greatly misportrays the reality. The reality is that as of 2005 56% of Americans owned some form of equity investment, however the majority of Americans own those investment inside retirement plans and thus receive no income from them. In addition, even though 56% of Americans own equity investments, most only own a very small amount.
The top 10% owns 84% of the value in the stock market. The bottom 90% own a mere 16% of the value. Yes, 56% of Americans may own some stock, at least one share, but nevertheless almost all of the capital in American is owned by the top 10%, or really the top 1%.
As of 1999 the top 1% owned almost 40% of the wealth in America. Since the 1980s the share of income from capital gains going to the top 1% of American has been increasing. Today 57.5% of capital gains income goes to the richest 1% of Americans. The graph below shows share of capital income received by the top 1% and bottom 80% of Americans from 1979 to 2003.
source: http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
Both the fairness and the appropriateness of increasing the capital gains tax in some fashion is really beyond question. I personally favor a simplification of the tax code to eliminate the distinctions between different types of income so that capital gains would become taxed in the same way as earned income. This would completely alleviate the argument that lower income stock holders would be negatively impacted and it would also stop penalizing lower income persons for owning stocks and stop making unearned income a means of paying lower taxes for the wealthy. It would also serve to effect a shift in capital ownership in America by proving forces that would result in a more equitable distribution of capital ownership. Barack Obama's plan to increase capital gains taxes by 5% to 8% is better than McCain's plan to do nothing, but its still an imperfect solution, though Obama has also mentioned the possibility of creating a capital gains tax exemption for seniors for a certain amount of income, which is also not a bad idea.
The British publication The Guardian pointed out the obvious fact, which is that the American press is giving John McCain a free ride by continuing to call his economic policies "pro-growth", when in fact all of the economic data proves that his economic policies undermine growth. The facts that prove this are the record of George W. Bush, under which we have seen the worst economic record since the Great Depression. What John McCain proposes basically is not just more of the same policies of Bush, but actually a deepening of the policies of Bush.
President Bush has the worst record on job growth of any president since Herbert Hoover. The typical worker has seen her wages decline over the eight years of the Bush presidency, and she has seen none of the benefits of the period's productivity growth. In addition, tens of millions of homeowners are seeing the bulk of their wealth disappear in the housing crash.
This is the record senator John McCain has embraced by making Bush's tax cuts the centrepiece of his economic agenda. Choosing an economic policy that has been a proven failure is a bold and risky strategy in a presidential campaign, but McCain is betting that the media will be so incompetent that they will not notice. He may be right.
As another example of economic stupidity, Market Watch also recently ran an article on the top 10 most overpaid jobs in America. Ignoring their actual rankings, key fundamental concepts are missing from the article. First of all, even though they state that these positions are "overpaid" they continue to use the word "earn" to talk about their income, for example "They've been long overpaid. Stock-fund managers can easily earn $500,000 to $1 million a year including bonuses -- even though only 3 in 10 beat the market in the last 10 years. Now we discover an untold number enriched themselves and favored clients with illegally timed trades of fund shares."
Well, quite clearly they aren't "earning" this income, which is the whole point. If they are "overpaid" then that means that they are receiving income that they didn't earn.
But here is the big picture that the article fails to grasp. If these positions are overpaid, and all of these positions are positions where incomes go into the hundreds of thousands to hundreds of millions of dollars, then clearly what we see here is an acknowledgement that many of today's highest income receivers are overpaid in the first place. But if these people are overpaid then where is that "overpayment" coming from? You don't get something from nothing. If some people are overpaid then by definition it means that other people have to be underpaid. You can't overpay one person without underpaying someone else.
If the people at the top are being overpaid then it means that the people at the bottom have to be getting underpaid, which is really quite obvious when you consider that median wages have been stagnant in America for the past decade even while productivity and the education of the workforce have risen.
The fact that many of the highest paid people in America are getting overpaid isn't simply some magic lottery for them that benefits them while doing no harm to anyone else, no this is a product if direct theft from the average American worker. Redistribution of wealth has been accelerating in America over the past 30 years and that is a redistribution of wealth from the working poor and middle class to the wealthy.
The fact is that it goes way beyond these "overpaid" positions outlined in the Market Watch article, the fact is that the incomes of the wealthy in America, all of the wealthy are a function of the mechanics of capital not of the contributions of the individuals.
What makes the incomes of the super rich possible, even people like Bill Gates, Warren Buffet, and Michael Dell who have taken actions to create wealth and produce results, is not just their own contributions, but also the work of millions of other people and the system of capital that enables them to reap the benefits of other people's work.
Bill Gates could not become Bill Gates by himself, his wealth is only made possible by the collective work of not only employees of Microsoft but of public and private contributions throughout the global economy.
The incomes of all executives are drawn from the value produced by the other employees. Executives create very little value directly. Their pays comes from the collective value produced by all of the employees. Furthermore, of course, all returns on investment are the product of the value created by the workers of the companies. The mechanics of capital are what make these returns, this redistribution of wealth from the workers to the capital owners and managers, possible.
What we have seen in the American economy over the past 30 years is that the mechanics of capital has increasingly been transferring value from workers to capital owners and managers. The dramatic rise in incomes of corporate executives and the growing gap between the rich and the average in America is not a product of rich people working harder or doing more, it is not a product of the average person becoming lazy or doing less, it is not a product of only 1% of Americans being well educated or intelligent, it is purely a product of the "mechanics of capital", of the financial and legal structure that grants ownership of rights to value that is produced by workers to the owners of the material and legal tools of production.
Growing economic disparity in America is not a product of growing productive disparity, it is purely a product of growing legal disparity and growing legal unfairness, whereby increasing portions of the value that workers produce is taken from them and transferred to capital owners in the form of "unearned income" and "overpayment".
This is the central economic fact that continues to go un-discussed in this country and that certainly anyone advocating the economic agenda of John McCain either fails to understand or fully understands and desires to see continue. The problem for those who desire to see this situation continue is that it cannot continue, and this is why no matter what your views are, the fact is that the economic policies of John McCain are going to be worse for the stock market, because at a certain point the system is no longer able to support itself and fundamentally that point seems to currently be upon us. The completely unjustifiable transfer of value from workers to capital owners simply cannot be sustained at this level any longer even if one wanted to do so. Either capital ownership has to be greatly equalized, which is what I would favor, or there is going to have to be a major and fundamental correction in wages, or else the system will either completely stagnate or the American economy is going to have to become an economy that caters to foreign consumers while American workers fall farther and farther behind.
Updated: Thursday, July 31, 2008 12:26 AM EDT
