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How to create sustainable economic recovery

tax burden of the beleaguered rich

It should be coming clear that economic recovery has evaded us. If you’re not seeing that just yet, your illusion of recovery will dissolve quickly this fall, just as I’ve said it would. Nothing the Federal Reserve has done has created recovery because it was never possible that such simplistic stimulus — made to appear significant only by its gargantuan size — would correct the enormous faults in our economic system.

We are failing economically due to a hugely flawed system, not do to a lack of money.

It is not fair to criticize unless you can offer alternatives that will actually create true and sustainable economic recovery that works for all citizens. The problem we are facing is in ourselves. People do not want the kinds of reform that sustainable economics require, even though these reforms can happen in entirely capitalistic ways. There is nothing socialist about the cures I’m going to present.

They require, however, the kind of heavy lifting and major political change that we are extremely unlikely to ever see. I present them only because I think it’s important to show that there is another way to live, not because I hold out a lot of hope for such a sea change in politics.

 

Some basic principles for sustainable economic recovery

 

Sustainable economic recovery principle number one: Reduce your personal debt. Reduce your nation’s debt. Debt offsets wealth; it is not a foundation for wealth. Stop thinking you can build a healthy economy by endlessly piling up mountains of debt.

Sustainable economic recovery principle number two: This one is based on principle number one. Pay in taxes today for what you spend today. You don’t get to spend other people’s money. Stop thinking you have a right to do so just so you can feel you are part of a society that helps the poor. If you want to help the poor as a Democrat, outstanding; but do it only by taxing yourself right now for every penny your programs cost so that you feel the full weight of your own generosity right away on your own shoulders. If you’re a Republican and want to have a huge military, pay for every bullet now out of your own pocket, not out of your children’s pockets. Whatever your programs are, don’t ever make your children pay for them!

Sustainable economic recovery principle number three: Money bubbles up to the rich much faster than it trickles down to the poor. Trickle-down economics is a major part of what got us to where we are through thirty years of creating bigger bubbles as a means of recovering from the previous bubble. It’s time to go back to demand-side economics (reality economics), rather than supply-side economics (“voodoo economics” as George Bush the First called it when he still had an economic brain). You want to see the economy expand, then focus tax breaks on the middle class. Those people immediately create demand for products the rich are only too happy to manufacture. The fact is that tax breaks stimulate the economy wherever they are give, but they do so much more equitably and quickly if given to the poor and middle classes.

Capital-gains tax breaks, which were the key to trickle-down economics — work solely for the wealthy. People should not pay lower taxes for doing less work or non-productive work, such as being a hedge-fund manager or a stock investor. Capital gains should be taxed at the same rate as all income.

Reducing the capital gains tax did not create more investment in equipment so much as it created higher stock prices and higher prices for the football teams that the wealthy buy. It mostly became a huge investment loops that really contributed very little to the economy. Higher stock prices do not translate into more spending on capital equipment. Higher demand always translates into more spending on equipment because demand is money waiting to be made by those willing to invest. So, put any tax breaks you want to create where they will expand demand, not where they expand supply capacity. The rich will find money to expand their capacity to supply. True economics abhors a vacuum. Demand will not long go unmet. Rather, it becomes a case where short-term loans make sense in order to ramp up supply to meet the demand that is already waiting. That is how debt is meant to be used — as a tool, not as a foundation.

Creating a higher income-tax bracket for the wealthy while keeping capital gains taxes lower than the top income-tax bracket is a smoke-mirrors game. The wealthy make most of their money off of capital gains, so they wind up paying a smaller percentage of their total income in taxes than the middle class. The higher income tax bracket that doesn’t apply to capital gains simply makes it look like they’re being asked to pay a higher portion of their income. They readily approve such measures because they know paychecks are not how they make their money anyway.

Sustainable economic recovery principle number four: This will sound odd after what I’ve said about paying for what you spend by taxing what it takes now and about not tasking the rich, but stop taxing corporations. In spite of what Mitt Romney says, corporations are not people. Taxing corporations only takes money out of businesses right where that money has the most likelihood of being used to expand the economy.

Instead, tax profits at the point where they go to individuals. Tax people. Businesses are your economic engine. Taxing the business just takes fuel out of your engine. Why would you do that. Tax the profits at the point where they are captured by people. That creates an incentive to keep the money invested in business expansion, rather than in expansion of shareholder wealth. Those profits that go to shareholders are the fish that actually landed in the net. Tax the catch, not the net.

Sustainable economic recovery principle number five: Put responsibility directly on the shoulders of CEOs. People who make elaborate amounts of money by being a CEO as well as other top-tier executives should have all of their own money at risk if they lead their company into bankruptcy. In other words, if you lead your company into bankruptcy, your own finances should be directly attainable to help pay off the businesses debts.

If CEOs cannot handle that, who cares? They are not even a fraction as necessary as they believe they are. Fact is, many famous CEOs have made enormously stupid decisions where less famous people would have done much better.

Look at what Netflix did when it lost millions of customers by deciding to charge them separately for DVDs and for streamed videos, charging the same amount for each that they did for the combined package. They quickly had to apologize and backtrad.

Look at what Bank of America did when it went one step too greedy and decided to start charging customers for using their debit cards in their own bank machines as if the customer has no right to access their own money without paying to do so. They quickly had to backtrack.

Look at how many of the most famous CEOs on the planet took massive banks and led them into massive bankruptcy.

Look at how smart the CEOs of major retailers like Sears and J.C. Penny have been in failing to use their massive strength to reposition for today’s buyers. They’ve stumbled blindly through bizarre ideas that lost their remaining regular customers while gaining them scarcely any younger customers.

How smart was the CEO of Hewlett Packard in the decision to stop making personal computers and printers because it took too much work to remain competitive. They were one of the biggest suppliers of such products in the world. Why would they give put that ground because it took constant reinvention to remain relevant?

Throughout the Great Recession CEOs have proven how abundantly stupid they can really be by bankrupting giants of industry that were worth hundreds of billions only to have their mistakes bailed out by people far less wealthy than they are.

If you’re a CEO and don’t have the courage for to be held liable for your decisions, get out. What do I care that you cannot stomach the risk? Leave. You’re not fit for the job. You don’t have the courage to truly lead if you will not shoulder the risk of your own decisions.

Sole proprietors put all of there money at risk all the time. If CEOs cannot do the same, they don’t deserve to make more money than the sole proprietors of small businesses who put all their money at risk, often mortgaging their houses to finance their business.

The principle that needs to be added to corporate law is that the captain goes down with the ship. A responsible leader pays a high cost if he or she fails. That’s supposedly why they deserve the big money. Corporations only exist because laws were created that made them possible. Corporate law can be rewritten to assure a proper risk-reward basis for paying CEOs the big money they make.

Sustainable economic recovery principle number six:  Businesses do not break laws, people do. So, put the people who run the business in jail if laws were broken. Fines against the business are not enough because they don’t cost the people who make those decisions anything. They cost the shareholders, and that may indirectly come back against the CEO and other executives, but indirect is simply not good enough.

Sustainable economics (i.e., economic recovery that lasts) requires accountability. Genuine risk-reward equations help assure that people do not take unreasonable risks for ill-gotten gains. If you want to make the big bucks, you also should have to shoulder the big risks you take in the decisions you make.

Sustainable economic recovery principle number seven: End all short-term stock and bond buying and selling as well as other practices that exist primarily for speculation. Put a little time into the equation so that people have to hold when they buy. 99% of the rapid day trading is speculation that makes Wall Street the glorified casino that it is, rather than a marketplace for seriously buying ownership in a business or financing a business. The commodities market needs similar major reform to end the casino. We should not be gambling with our entire economic foundation.

You won’t see such changes without a huge battle, of course, because those who play in the casino love it and own all the influence in Washington. Nevertheless, their gaming with shares as chips is destructive to the economy because businesses that employ real people rest on bets over what other people are going to do with their money that often have nothing to do with how the business is doing.

The explosion of day trades and flurry of speculation is not investment in business. It is simply gambling with businesses as chips. Wall Street needs massive overhaul, and having to hold for awhile after you buy would take a lot of hot air out of the casino balloon. It would move things in the direction of buying because you believe in the value of the company — the Warren Buffet approach — not because you think tomorrows news is going to make people go crazy.

Sustainable economic recovery principle number eight: If you’re rich, know there is a simple mathematical fact that you ignore as a class at your own peril. It is that point of equilibrium beyond which greed becomes the source of its own demise. As the rich reduce their labor costs more and more to increase their profits, they also reduce the power of the working class to buy their products. There is a tipping point where stinginess with labor means the rich have no one left who can afford their products, and their profits began to fall off. You can choke your own wealth by choking the flow of money. Hoarding wealth eventually assures the end of wealth for all.

It takes money to make money, and that means making sure a significant flow goes to the workers who ultimately create the demand for your products. Even if you produce heavy equipment that your workers never buy, that equipment is used by businesses from whom your laborers do buy. Trap wealth at the top, and even the wealthy will become less wealthy in the long term.

A well-off middle class was the bedrock of a healthy and vibrant economy in the US, and we’ve gone far down the path of losing that, thanks largely to trickle-down economics. The erosion of something as vast as the middle class takes a long time, but thirty years shows a lot of damage done, and we are, I think going over the tipping point right now where even the wealthy cannot make money because they have fewer people who can afford their products.

Sustainable economics tries to create a playing field that assures a more balanced distribution of wealth because the economic engine runs in its peak power curve when everyone is well paid for their contribution.

To some, that sounds immediately socialist, but I’m not suggesting we regulate the pay of CEOs, I’m suggesting we hugely load them with the very real capitalist responsibility for their executive decisions if they’re going to justify that pay. Then they’ll be a lot wiser about what they do. There is nothing non-capitalist about making sure that those who experience the lion’s share of rewards are the ones who shoulder the lion’s share of the risk.

There is nothing non-capitalist about putting the focus of stimulus all on the demand side, instead of the supply side. That, in fact, used to be a bedrock of capitalism — the idea that you stimulate business by stimulating demand. The vast (but now diminishing) middle class is best suited for stimulating demand. So, if you’re going to create tax breaks, create them where they expand demand.

 

You can see now why sustainable recovery has not happened. Nothing has been done to create fundamental changes in how the business world operates because greed rules Washington; but greed contains the seeds of its own destruction, and the greedy are about to find out what that means to their own wealth in the currently unfolding crash.

 

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