| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Despite the huge increase in wealth at the upper end of the economic spectrum since the mid-1970sEconomies were slower to decline. Even after wealth discrepancies began widening, there was time before economies would falter. The rich continued to prosper for a century. But the economic condition of the masses deteriorated, leading to widespread malnutrition and starvation. This in turn led to violence and unrest: regicide (Edward II), protracted wars (The Hundred Years War), and rebellions (in England, the Peasants’ Rebellion; in rural France, the Jacquerie and the Tuchins). It culminated in the devastation and social disintegration caused by the Black Death. The bubonic plague deeply scarred all levels of society, the rich as well as the poor. Ironically, the succession of pandemics in the fourteenth and early fifteenth centuries was responsible for an improvement in the status of workers and a more even income distribution. These plagues decimated the working classes, with their poorer diet and sanitation, even more than the better to do. With workers in scant supply, their real wages improved. In the late fourteenth century wages began to rise, while rents and interest rates fell. Graphs in H.O. Meredith’s Economic History of England show that the real wages of the fifteenth century were not surpassed for 400 years. Similarly, “...a study of the purchasing power of builders’ wages by Phelps Brown and Hopkins shows that the prosperity such workers enjoyed between 1400 and 1500 as a result of the redistribution of economic power by the Black Plague was not achieved again until 1870.” (Douthwaite, The Growth Illusion, p. 47.) The development of an incipient middle class, with moderating income inequality between the rich nobles and the workers, set the stage for the Renaissance. This marked a widespread resurgence of art, literature and music, the beginnings of modern science, a modest revival of individualism, and the birth of modern Europe. These developments benefited from a stable and peaceful society. It may seem surprising, but this was not a particularly wealthy period. Trade and industrial production remained well below their peaks of the previous century. Historians have even talked about the depression of the Renaissance. But the Renaissance was a period of relative equality of wealth. A new cycle of increasing income inequality began in the early sixteenth century. Imports of gold and silver from the New World contributed to an accelerating inflation that affected primarily the lower and middle classes. Due to rising costs of firewood and rents, real wages fell 50%. As in the thirteenth and fourteenth centuries, this led to escalating violence: increased crime, pogroms, regicide (Charles I) and assassination (the French Henry IV), civil unrest (The Fronde, Huguenot rebellions, Germany’s Peasants’ War), and protracted wars (The Thirty Years’ War, The Italian Wars, the wars of the Reformation). In the Thirty Years’ War (1618-1648), Germany lost nearly one-third its population. The first half of the seventeenth century saw the first protracted decline in European population since the Black Death. The rich grew richer, while increasing numbers of the poor were driven very near the edge of starvation... Food riots broke out in many parts of Europe…The great dearth fell cruelly upon the poor, while the rich remained secure in their plenty… The effect of scarcity was to…contribute to growing social instability. Famine, pestilence, and economic depression were accompanied by war. During the entire century from 1551 to 1650, peace prevailed throughout the continent only in a single year (1610) — a record unmatched since the fourteenth century. These conflicts were remarkable not only for their frequency but also their ferocity…. During the early seventeenth century, the armies of Europe reached their largest size since the Roman era…. The result was an age of revolutions in virtually all European states. (Fischer, The Great Wave, p. 92-7.) The second half of the seventeenth century began a new respite for labor that was to last nearly 100 years. Between 1670 and 1730 the fraction of wealth owned by the richest 1% of households in England decreased from 49% to 39%. Similar trends, beginning soon after the midpoint of the century, appeared throughout Europe. Once again this led to an increase in social and political stability, a decline in crime, a revival of commerce, and a flourishing of culture. The late seventeenth century well into the eighteenth was a period of exceptional creativity in areas ranging from science to music, philosophy to economics, architecture to finance. The Enlightenment provided justification for the rights of all people, not just the ruling classes. It laid the philosophical foundations for and saw the birth of modern democracy. Yet a new cycle of widening economic disparity began in the 1730s. Between 1770 and 1812, the nominal per capita income in England fell 25% while prices doubled. In most of Europe the nobility was able to use its political influence to procure exemptions from increasingly onerous taxation, which impacted the middle class. (Things are similar today. Prior to the Kennedy tax cuts, when we had a strong economy, the average family’s effective tax rate was just over 10%, while the average millionaire paid more than 80% of his income in taxes. Since then the rich have been able to reduce their tax rate by two thirds while the average family has seen its tax rate more than double. Presently the average family pays as high an effective tax rate as the richest families. Could there be a causal connection between a tax burden that falls on the middle class, increasing economic disparity, and a weakening economy?) The pattern was similar to that which had occurred in the great waves of the thirteenth and sixteenth centuries. Instabilities of many sorts developed. One of the most dangerous was the growth of inequality. This trend appeared in both Europe and America, where wealth became more concentrated in a few hands during the period from 1750 to 1790. (Fischer, The Great Wave, p. 135.) Armed bands roamed the English countryside. The Cossack Pugachev led a bloody rebellion in Russia. There were revolts in Geneva, Belgium, Holland, Poland, Ireland, and the American colonies. Assassins claimed the lives of the Swedish King Gustavus III, the Russian Czar Paul I, and the English Prime Minister Spencer Perceval. A succession of disastrous harvests in the early 1780s increased the desperation of the poor and amplified the violence, leading to the most important series of convulsions, the French Revolution. This had repercussions throughout Europe for decades. The disparity between rich and poor peaked in the early nineteenth century. While the Napoleonic Wars were ravaging continental Europe, half of England was on poor relief. This was followed by yet another round of sustained increases in real wages, aided by government intervention (motivated, in part, by fear of revolution). Greater economic equality again gave rise to a more stable society, the Victorian era in England and the prolonged peace on the Continent that had been negotiated at the Congress of Vienna. Despite the intentions of Metternich and Castlereagh and despite the failure of popular revolutions, the Congress of Vienna ushered in a period of persistent, if gradual, growth in civil liberties and democratic institutions. We are now well into the most recent cycle of increasing economic disparity, which began tentatively during the Civil War, re-ignited with increased momentum during the First World War, and powered to new records in the last few decades. Our present wealth disparity — as measured by the GINI ratio, a standard measure of economic disparity — is the largest in our history (Fischer, The Great Wave, p. 222f.) and is continuing to increase. Our richest 1% now own more than 40% of our wealth, surpassing the previous record of 36% set in 1929. As reported in 1999 by The New York Times: “The gap between rich and poor has grown into an economic chasm so wide that this year the richest 2.7 million Americans, top 1 percent, will have as many after-tax dollars to spend as the bottom 100 million.” The wealth disparity cycle has been repeated often enough to generate a clear pattern. Over the past millennium a broad dispersion of wealth has been accompanied by benign periods of peace, stability and progress. Inversely, an increasingly narrow concentration of wealth has led to decline that ultimately affected all levels of society. The critical factor was not the total amount of wealth, but rather the degree to which the wealth was spread. This pattern may explain the retarded development of Eastern Europe and Russia. In Western Europe the struggles between monarchy and nobility and the conflicts between church and state often resulted in a balance of power, neither side able to impose its will on the other. Peasants benefited from this balance. At times they were able to obtain royal or ecclesiastic guarantees of their rights. By contrast, in Eastern Europe monarchs were unable (or disinclined) to resist attacks on peasant rights by the nobility, attacks that led to the creation of a hereditary serfdom. In Russia, the tsar overpowered the nobility and the serf became property of the state. The extreme disparity between the haves and have-nots stifled progress for all. This raises a question for a world economy. The cumulative wealth of the poorest 50% of the world’s population is less than that of a handful of the richest individuals. Would sufficient economic inequalities within the world as a whole play the same role that inequalities have played within national economies? The growing marginalization of people and countries in an apparently affluent world could provide ample grist for violence and terrorism, leading to the destabilization of even the wealthiest societies. While there has always been severe poverty, not only have economic differences grown during the course of the twentieth century, but it is now easier to be aware how badly off one is in contrast to others. With nearly a billion people chronically undernourished and with tens of millions dying each year from starvation and malnutrition-related diseases in a world that advertises conspicuous consumption, righteous indignation could catalyze violence. It is easier and cheaper to ignite such violence and incite terrorism than to prevent it. (And chemical and biological weapons are disturbingly cheap, as is human life for the desperate with deep faith in their own righteousness.) “If government does not protect the assets of the poor, it surrenders this function to the terrorists, who can then use it to win the allegiance of the excluded.” (Soto, The Other Path, p. xxiv.) Despite the devastating effects historically associated with too great a concentration of wealth and despite the present potential for excessive wealth disparity to wreak havoc, the tendency for wealth to concentrate is not surprising. In a struggle for additional wealth, the rich have an advantage that can rarely be overcome. Because it is natural for wealth to concentrate, problems generated by its concentration are not likely to resolve themselves. Nor are free market mechanisms likely to resolve them. The evidence provided by wealth dispersion cycles is troubling, for in recent decades powerful forces have increased economic inequality. Technological innovations have displaced blue-collar workers. Outsourcing to low wage countries has impoverished employees who lack proprietary skills. Downsizing, one reason corporate earnings have grown faster than revenues in recent years, has bolstered profits at the expense of the middle class. Since 1980, General Electric cut its domestic work force 40% while tripling revenue. General Electric is a representative example. In the last two decades of the millennium the 500 largest U.S. corporations saw assets and profits triple while cutting 5 million jobs. Only one of ten workers laid off by downsizing subsequently found a job paying more than 80% of his previous salary. We have compounded matters by adopting our least progressive tax code since the 1930s and by cutting government programs designed to benefit the middle class. Due to the confluence of these economic and political forces, the top quintile of Americans has grown richer while the bottom four quintiles have become poorer. Between 1977 and 1989 the top 1% saw their incomes double. In contrast to enormous gains made at the top of the economic ladder, workers in private industry suffered a decline in average real weekly earnings. Despite the huge increase in wealth at the upper end of the economic spectrum since the mid-1970s, the real after-tax income of our bottom 60 percent has declined, their real wealth has declined more sharply, and our poverty rate has risen. It took less than two decades to double from levels of the early 1970s. We gave back gains made in the Truman-Johnson days, and despite modest improvement in the latter half of the 1990s, one-fifth of our children are buried below the poverty level. The U.S. has a higher poverty rate than other industrialized countries, and our ratio of income of the richest quintile to the poorest quintile is far above the average of the other industrialized countries. “Over 50 million people living in the United States in the mid-1990s had an income the same as the world average and lower than a large proportion of the population of states such as Sri Lanka, Morocco and Egypt.” (Ponting, The Twentieth Century, p. 155.) This is partly responsible for our crime rate, with the highest level of incarceration of any industrialized state. In such circumstances it would be prudent, as well as decent, to adopt policies to narrow the gap between the rich and the rest. A highly progressive tax code tends to enlarge the middle class while slowing the increase in affluence of the wealthy. When our top marginal tax rate was 91%, outrageous to free market sensibilities, our middle class grew and prospered, as did the country as a whole, even the rich. As our highest tax rates have been reduced, primarily on the grounds that a lower tax rate would provide incentive to be more productive, not only has our productivity lagged, but the disparity between our rich and the rest has grown. This pattern occurred before. In the 1920s, government repeatedly reduced the progressivity of our tax code, also in the name of free enterprise. In four steps it cut the top tax bracket from 77% to 25%. Then, as now, the rich grew richer while the bottom four quintiles grew poorer. Despite the roaring stock market of the 1920s and the increased affluence of our wealthy bankers at the expense of the middle class, that era did little to establish a sound economy or a healthy society. The history of the 1920s holds lessons that may be relevant if we wish to avoid a repetition. When natural economic forces threaten the middle class, widening the gap between the rich and the rest to dangerous levels, it may be appropriate to adopt a more progressive tax policy to protect middle America. Such a policy might counter the tendency, caused in part by natural economic forces, for income disparity to increase. Of course, this is sacrilege. Anyone who can read lips knows taxes are bad and more taxes are worse. Wrong! There is more than just the failure of the Kennedy and Reagan tax cuts. Historically, the necessary perversity of taxation is not at all evident. Holland, the most prosperous country in the seventeenth and early eighteenth centuries, had the highest taxes. “Observers all agree that no other state, in the seventeenth or eighteenth century, laboured under such a weight of taxation.” (Braudel, The Perspective of the World, p. 200.) At the end of the eighteenth century, when England was becoming the dominant world economic power, its average tax rate was double that of France. Even in the U.S., the Kennedy tax cuts marked a major decline in long-term economic growth and productivity. The 1978 capital gains tax rate cut saw a transition from strong economic growth to a recession. The 1981 capital gains rate cut also marked an economic slowdown. Inversely, the 1976 and 1986 Tax Reform Acts, which increased taxes at the top, saw the economy accelerate. Are we missing something? That is not the only point. If we are not going to eliminate taxes altogether, any change in tax policy changes relative after-tax incomes. The more progressive the tax policy, the more it equalizes incomes. The more regressive the system (sales taxes, for which the median rate has doubled in the past 25 years; social security taxes, which have increased even more sharply), the more it increases income differences. A truly progressive tax system could mitigate the effects of natural economic forces and increase the dispersion of wealth. But what about the conventional wisdom that lowering the top tax rates encourages our most productive people to work harder because they keep more of what they earn? What about the argument that increasing the tax bite on our wealthiest citizens decreases the capital they have to save and invest, causing a reduction in investment, lower productivity, slower economic growth, and a lower standard of living for all? What about the claim that greater economic disparity benefits everyone by generating an incentive to work harder? The conventional wisdom sounds nice, but just the opposite may be true. Higher tax rates may increase the incentive to work harder because we would have to work harder just to maintain our after-tax income. Lester Thurow’s The Zero Sum Economy maintains that people will work harder in the political sphere to preserve what they already have than to gain something new. Perhaps this is also true in the economic sphere. Independently, increasing the after-tax income of those likely to spend, rather than save, increases the demand for goods. This demand generates investment opportunities, which in turn stimulate savings. The fact that investment opportunities providing a good return on investment are more important than the amount of capital that is theoretically available to invest may explain the positive correlation between a more progressive tax structure and faster economic growth. Finally, contrary to the “incentive” argument of economic radicals of the right (including Stakhanov, Stalin’s supply-side economist), history suggests excessive wealth disparity is bad for economies. Even now our trading partners have smaller disparities in wealth and income but their growth exceeds ours. This is not intended to oppose tax simplification, though much of the complexity of our tax code has come from rich and powerful interests “purchasing” their own tax breaks. The bad will generated by, as well as the costs of, tax collection are separate issues. Still, there are ways of simplifying the tax code that provide a progressive system. Consider a national sales tax coupled with a steeply graduated rebate, refunding much to middle and lower income families, but little or none to upper income families. Point-of-sale tax collection could be less painful and also reduce tax avoidance. It would dovetail with advice provided three centuries ago by Colbert, the finance minister of Louis XIV. Likening collecting taxes to plucking a goose, he described its aim as getting the most feathers for the least hissing. In addition, if we aim to use tax policy to increase savings, point-of-sale collection would be effective. Because sales taxes do not tax funds that are saved and invested, this mode of taxation would encourage investment. Paying the sales tax refunds as lump sums would further encourage savings and investment. Independently, it is reasonable to increase inheritance taxes on the wealthiest. The argument that fairness requires that individuals be allowed to keep all they earn from their hard work and talent is already questionable. Earnings capacity depends on the educational, financial and cultural infrastructure of society. Without that infrastructure, the talent and hard work might not be worth so much. Contrast Michael Jordan’s earnings to Bill Russell’s, Leon Russell’s to Wolfgang Amadeus Mozart’s, Bill Gates’ to Alexander Graham Bell’s. The argument that we are solely entitled to the fruits of our labor and talent is even more tenuous if we include the hard work and talent required to be born into extreme wealth. Furthermore, a large inheritance has the same drawbacks as welfare. It has been argued, often with more validity than candor, that welfare is debilitating to its recipients. But isn’t it just as debilitating to receive a large entitlement check from a trust department as a small entitlement check from the government? Even in the case of raw talent, which we may regard as our own, to be used for personal gain, is it through some virtue of ours that we have obtained such talent? Gandhi suggested we regard our talent as a trusteeship to be used for the benefit of others as well as ourselves. It is understandable that the wealthy should wish to retain their wealth and pass it on to their children. But it is also understandable that society should exercise its right to limit the amount of wealth to be retained or passed on. Taxation does not violate the right to private property; to the contrary. If government did not have the ability to collect revenue, it could not fund police forces and court systems. If it could not fund police forces and court systems, no one could enjoy a right to private property — for anyone could seize the property and its “owner” would have no recourse. If government is to collect revenue, it is reasonable and moral that legislators consider the impact of different forms of revenue collection on society as a whole. It is natural that the rich would oppose anything that threatens to disproportionately reduce their wealth, that they would argue that a steeply graduated income tax or inheritance tax is unfair, or even that any inheritance tax is unfair because it is taxing money that has already been subject to income tax. But such arguments are hardly convincing. They apply equally to the much larger category of sales tax. But sales tax is regressive; so it generates no complaints about double taxation. An alternative approach, following the tack of Reagan’s economic advisors, might claim that a less progressive or more regressive tax code stimulates investment and economic growth and is better for all of society. The problem with this claim is that there is so much evidence against it — from the correlation of a more progressive tax code with faster economic growth to a millennium of evidence that excessive economic inequality is a menace to the security and standard of living of all. Note, too, that the notion of inheritance runs counter to the spirit of free market capitalism. That spirit insists on a level playing field where the spoils go to the most productive. Such a system, according to classical economic theory, maximizes the incentive to be productive and so leads to the most efficient economy. But such a system is incompatible with inheritance, which tilts the playing field by rewarding the descendants of the rich, even if they are not productive. (Isn’t it interesting that we espouse the laissez faire orthodoxy of flat playing fields, which serves the rich at the expense of the rest, and that where we deviate from pure orthodoxy, it is also to serve the rich at the expense of the rest?) In light of this evidence, why would anyone wish to preclude an effectively progressive tax code? Devotees of laissez faire may be unaware of the historical precedents. Even more important may be their depth of faith in the principle of government non-interference. This faith, no matter how pure and well intentioned, has been a source of misdirected policies. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |