Wednesday, October 07, 2009

Quote of the day

Krugman snarks:

Back when socialists like Eisenhower ran the country, and taxes on the rich were much higher, there was less temptation to run big risks with other peoples’ money in search of giant bonuses.

Heh. This actually ties in to a couple of posts that Brian has done over at Why Now:

  1. The American rich are not contributing to the American economy. They're using their wealth for useless unproductive things like investing in Bernie Madoff, not in creating products and services. It is the Indians and Chinese who are creating products and services now -- and taking the profits.
  2. Rent-seeking behavior on the part of our elites is destroying our economy. Enterprises that should be profitable are drowning in debt and having to declare bankruptcy because leveraged buy-outs have so burdened them with debt that it is impossible to continue operations. But the people who profited from these leveraged buy-outs are sitting pretty with all the "fees" they collected to do all of this destruction.
Neither of these would be happening if that "socialist" Eisenhower's policies were still in effect. The rich then had to invest in something productive and *leave it there long enough to do some good*, because otherwise their wealth would simply get taxed away. There was not any incentive to "churn" -- to buy and sell and extract money from the transactions -- because the capital gains taxes would have eaten them alive. Rather, the incentive was to invest in companies for the long term, and support policies for companies that would lead to long-term growth and stability, so that when they did need money because their income had declined they would hopefully be in a lower tax bracket that would make it reasonable to then sell some of their share of the companies they owned in order to get living money.

It was a totally different system, one that was capable of designing and building products that took five years to create and another five years to get them into large numbers of homes. That system has completely fallen apart because of the short-term rent seeking encouraged by low marginal tax rates at the top income brackets, instead the incentive now is to get in quick with borrowed money, sell off assets for profits and extract those profits as fees, then sell the decrepit corpse to new owners who have no real alternative but to declare bankruptcy, the invariable result of which is either the corporation is dissolved or so greatly reduced in size that only a tiny fraction of the work force remains. This sort of rent-seeking behavior is only possible because we no longer tax the wealthy at 90% of their income. If we did, they would have no incentive to do it -- 90% of your profit from a short-term flip going to taxes means you aren't going to invest short-term. Instead, you're going to go long-term, and wait to take your profit until you really need it because your income has declined... and long-term is exactly what we're missing from the U.S. economy today, and is why our foreign competition is whipping our butts.

-- Badtux the Economics Penguin


  1. Now that was the kind of world I was born into . It seemed just and fair , unlike today .
    I see how it started , Big business wanted to control policy for profit . When did it start . Regun for sure but it had to be before then , Ronnie was just another tool .
    To be fair , Ike warned us about what was to be . Too bad the country didn't listen .
    And they call us anti-American for seeing them as villans !

  2. Yup, I want that world back too. This was obvious to me as early as the mid nineties, that we were in a rentier society. Ah well, crash out first.

  3. Tax rates started to drop during the Kennedy administration. It really took off with Reagan. The disaster has been manifest - huge deficits, declining GDP growth, and - most importantly - the gross redistribution of wealth from the have-nots to the havs. Living stndards for the lowest quintile (or so) has declined by about 2% per year since the 80s. The Richest 400 families were further enriched by about a billion and a half each, during Shrub II. What's the wealth ratio? Top 1% ownes more than the bottom - what is it - 50, 60, 90%

    This is what causes depressions and revolutions. We are a rich country, so our dregs of society have not yet reached the level of desperation that kicks off blood in the streets. I hope the depression cleans things out so the revolution can be avoided.

    JzB the pessimistic trombonist

  4. Absolutely! You can't let the rich have too much money to play with. They don't know how to handle it properly without hurting everyone else.

    They are like children, with no thought about the destruction they cause as they play around. It's better to force them to do something constructive with it, since they are so immature. They have to be presented with just a few options, all of them ones that will benefit everyone.


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