Lois & Clark Forums Forums General Discussion Fun with Polls Poll: Which US presidential candidate do you like best?

Read this yesterday in the NYTimes and found it interesting - it's not particularly partisan, just informative and relates to the title of the thread.

NYTimes: Obama in the Senate

c.

This is a post I'll title: The Federal Reserve, the Falling Dollar, and the Effects of Fiscal and Monetary Policy.

To start off with, I'll address people's accusations of mismanagement of the economy by the Bush Administration. I'll surprise you to say that in part, I agree with the assessment. I would give the administration a solid C on its handling of the economy. While the administration started off strong with its across-the-board tax cuts, it has since done very little to bolster the economy since. The beginning gets an A. The middle gets a C+ and near the end a D. You'll see why I don't blame the administration for everything further down this post despite the poor grade I give them.

The tax cuts essentially saved a drowning economy in 2001. After the dot com bust in early 2000, the economy was teetering on the edge of recession. The bust was primarily a technology bust. Anyone remember what the high was in the NASDAQ stock index? It was 5048.62 just before the bottom fell out. One year later, the index stood at around 2400 a loss of over 50% of its value in a single year. That loss of trillions of dollars in value from its high is one of the most devastating blows this economy has faced in its history, rivaling the crash of 1929. For those unfamiliar with the NASDAQ index, it is the main representative of the health of the high tech industry since most, if not all, of the high tech companies are represented in this index. The crash of 1929 began the Great Depression where unemployment went to 25%. The only thing that saved the American economy was World War II. The fact that we did not fall into a recession is a reflection of the resiliency of today's economy.

The NASDAQ has never recovered in all that time. Today, the index is even lower than that value at 2212.49 as last traded. The Dow Jones Industrial Average, OTOH, has more than recovered from its losses in 2000 and is significantly higher even after losing a thousand points recently. This dichotomy illustrates just how illusionary the prosperity of the 1990's was as "irrational exuberance" reigned in the high-tech field as shown in the ridiculous levels the NASDAQ reached. The 1990's prosperity was essentially a time bomb waiting to go off, and it did in 2000. Bill Clinton rode the prosperity of the dot com boom and didn't have to lift a finger to get a powerful economy. With so many millionaires making money from dot com companies that didn't have any earnings, money was plentiful for investment and jobs growth. When it did go bust as was inevitable, Clinton did nothing, handing a failing economy to Bush. I give Clinton a D for his handling of the economy overall with a slight upgrade to a temporary B for his capital gains tax cut in 1997 and a solid F for his handling of the economy when the stock market went bust.

Investors spooked off by their losses in the stock market began moving their assets into real estate. And that began the rise of the real estate boom. That move laid the groundwork for much of today's problems in the sub-prime mortgage mess we have. Real estate values boomed during the early 2000's. I remember in San Diego when housing values were going up as much a $50,000 a week where the selling price for a home was typically tens of thousands more than the asking price. A home that cost $200,000 the year before was selling at $800,000. Is it terribly surprising that real estate could take such a fall after such a drastic rise? But that's only part of the picture.

With Republicans in charge of both the presidency and the Congress, there was an opportunity to rein in spending and wasteful government programs. In both cases, the GOP failed and spent money like drunken sailors. It makes you think divided government isn't such a bad thing. When the White House and the Congress are controlled by opposite parties, neither tends to get what it wants. When both are controlled by the same party, watch out! These "fiscal conservatives" running Washington were anything but. Only when things were getting out of control and another election approached did Republicans start to get somewhat serious about domestic spending. It wasn't enough. Some blame Iraq for the drubbing the GOP took in 2006. I think it played a very tiny role. There were actually two factors at work then. First it's the common 6-year itch. Considering the GOP avoided any losses at all in the midterms of 2002 made it more likely 2006 would be bad for them. Second, the rank and file of the GOP were tired of the spending and angry over the lack of action on the illegal immigration issue. The Mark Foley October Surprise (you can set your 2-year clock to this every time an election approaches because you know the Democrats have a dirty trick up their sleeves) caused a lot of damage among religious conservatives. So the GOP was tossed out of control of Congress. It's still interesting to note that GOP losses in 2006 were still lower than what is normal in the sixth year of a president's tenure.

Overall, I agree with Pam with her low assessment of Republican control of the purse strings.

Fred Barnes wrote an interesting book called "Rebel-in-Chief." In it, he talked about the term "compassionate conservative" and what it means. He postulated that W was never a classical conservative or a Reagan conservative. The term, compassionate conservative, meant that rather than limiting government, he would use government to forward conservative goals. An example Paul gave was the faith-based initiative where money was given to faith-based charities the same as it's given to other charities, provided the money is used for helping the poor rather than to promote religion. The use of government funds for that purpose is not what a Reagan conservative would advocate. No Child Left Behind is another example. Conservatives (I'll use that generically to cover Reagan and classic types) believe education is not a federal issue and is best left to the states and localities, a concept known as federalism. Bush is no believer in federalism. Rather he wanted to use large government programs to promote conservative educational initiatives. Unfortunately in that regard, he gave up on accountability in order to pass it through a Democratic Senate. The rank and file GOP didn't care much for the big spending this compassionate conservatism required.

What would have given the GOP good grades in the midterm or near the end of the Bush term would have been a follow through on a tax cut every year along with controlled spending. In particular a capital gains tax cut would do wonders for the economy, something that even Bill Clinton acknowledged when he signed a capital gains tax cut a few years back. Did you know European capital gains rates are lower than in the US, the average being around 5%? Even the Europeans can get something right once in a while when it comes to taxes.

Was this all responsible for the current slowdown in the economy? Partly, but there are a lot of factors at work, the least being fiscal policy. The economy is a very complex thing where it's not easy to assign responsibility to any one area. People would be surprised at how little a president and Congress can influence the economy. Presidents get all the credit and all the blame but in reality much of the economy is out of the control of fiscal policy. Fiscal policy has two purposes. It can get in the way of a growing economy and ground it to a halt. Or it can get out of the way of the economy to let it flourish. But fiscal policy usually takes a backseat to monetary policy. While fiscal policy can have a significant influence over the economy, monetary policy is the trump card.

The Fall of the US Dollar

Much has been said about the fall of the US dollar, losing 17% in value to the Euro in just the last year. Speculation as to why it has fallen has mostly been complete bunk. So why did the US dollar fall so precipitously? The elephant in the room that nobody ever talks about is China. The US has a trade deficit with China of $256 billion in just the last year out of the total trade deficit of $711 billion. It is the trade deficit that is the primary culprit in the loss of value for the greenback. It was exacerbated quite a bit by the artificially low Chinese yuan. Unlike the US dollar, the Chinese yuan is not free floating, i.e. the value is not subject to supply and demand for its value and is controlled by the government. Consistently it has been roughly 8 yuan to the dollar. But that makes for an extremely weak yuan relating to the dollar. Many economists put a free floating rate of closer to 6 yuan to the dollar, which would do wonders for our trade deficit. Despite much diplomatic pressure from countries all over the world, and the Central Banks all recognize the dangers of such a weak yuan, China has resisted strengthening its currency by any significant amount. That artificially low yuan led to massive sell-offs in the US dollar causing much of the fall in its value. Guess where the largest foreign deposits of US dollars reside? The two largest are Japan at over a trillion US dollars and China at over $800 billion. China has a lot of control in the value of the dollar and has done everything it can to maintain the artificial value of the yuan to maintain its trade surplus. That's one of the reasons why almost everything in the US is made in China. The weak yuan makes it very cheap to make things there.

In the rest of the world, this puts enormous downward pressure on the dollar where supply and demand make a difference. Europe's entire trade with China is only slightly more than the US trade deficit with China so the Euro is relatively unaffected by Chinese trade. The artificial pressure, of course, leads to the depreciation of the dollar as it relates to the Euro and related currencies.

The irony of the situation is that a trade deficit is actually a sign of strength in an economy but the contradiction of it is that persistently high trade deficits will eventually sap an economy as money flows out of the country. Why is it a sign of strength? It means that Americans have money and can spend it.

The trade deficit, however, is not the only reason why the value of the dollar has fallen. That leads us to monetary policy.

Monetary policy and the Federal Reserve
The most powerful man in America is not President Bush. The most powerful man in America for the last sixty years has not been the president. The most powerful man in America right now is Ben Bernanke, Chairman of the Federal Reserve Board, the entity tasked with setting America's monetary policy. Before him, the most powerful man in the world was Alan Greenspan and before him, Paul Volcker.

Just what is monetary policy? Basically monetary policy is the control of the supply of money in an economy. It is the Federal Reserve which determines how many dollars are in the US economy and determines how much to put into it and how much to take out.

Every country has its equivalent. In Europe, it's the European Central Bank based in Germany and the Bank of England which sets the monetary policy for those nations.

Monetary policy has more effect on the dollar than anything a president can or cannot do. Why? The Fed has control of the money supply and full control over short term interest rates. It's not really a very difficult concept. When the Federal Reserve wants to change the money supply, it uses a mechanism known as the open market operation, essentially the buying and selling of US securities. When the Fed wants to increase the money supply, it buys outstanding Treasuries and deposits "money" into the banks that sell them. This money is completely created out of thin air with nothing behind it. Because there is no backing, the money supply goes up. When the Federal Reserve wants to shrink the money supply, it sells US Treasuries taking money from the banks and giving them Treasuries in exchange. That money is now no longer available to the economy. This control over the supply makes a huge difference in the value of the dollar.

Much is made in the press over Fed control of the federal funds rate (rate charged for overnight loans between member banks), the discount rate (money charged by the Fed to member banks in short-term loans), or the Prime Rate (a completely artificial rate that banks use to base private loans). The real power is in the open market operations. The changes in discount rate or federal funds rate are merely a signal to the financial community what the Fed intends to do in its open market operations.

The Fed is a completely separate entity that is self-maintained. The profits it makes from interest on the Treasuries held in its portfolio more than helps it self-finance. In fact, less than 1% of the funds earned by those securities is used by the Fed. The remaining 99% is given back to the US Treasury at the end of its fiscal year. Congress and the president also have no control over the Fed since it's an independent entity. It can do whatever it wants without any limitation from the rest of the government. This is what makes it the most powerful entity in the world.

The Fed is tasked with a delicate balancing act. It must maintain economic growth at the same time as it must keep the reins on inflation. In the 1970's a loose monetary policy led to skyrocketing inflation. Poor fiscal policy led to high unemployment AND stagflation. In the 1980's an overly tight monetary policy led to one of the deepest recessions in the modern era between 1980 and 1983. But it successfully wrung inflation out of the economy at the cost of millions of jobs and a recession. Some of that credit went to Ronald Reagan who refused to budge on fiscal policy even knowing his party would take a drubbing in the 1982 midterm elections. Most of that credit actually should have gone to Paul Volcker, then Chairman of the Fed. But as I said, presidents get all the credit or all the blame. Reagan rode a booming economy into a landslide victory in 1984.

Today's balancing act is still between growth and inflation. With the rise in oil prices, it's a matter of time before the risk of inflation rears its ugly head. The Fed must choose between allowing inflation to rise or clamping down to the degree that it risks recession. While the economy was faltering around 2000, the Fed loosened up the money supply while lowering interest rates. It was at that time that the dollar began its fall. The increased trade deficit combined with low interest rates were not conducive to a strong dollar.

At the same time, the European Central Bank has a completely different charter. It's main task is to keep inflation at bay no matter the cost. It is not overly concerned with growth while the Federal Reserve tries to maintain a balance between the two. This conflicting set of priorities has two effects. First, it tends to strangle European economies with high interest rates and high unemployment. Impressive economic growth in Europe is 2% while 2% in America is treated as a growth recession. Second it contributes to weakening the US dollar versus the Euro because of the discrepancies between interest rates between the Eurozone and the US. With US interest rates reaching historic lows and the European Central Bank stubbornly maintaining high interest rates, money fled from the US into European bonds. While the Euro strengthens, economic growth for the Eurozone has been forecast at an anemic 1.8% for the year, roughly the same as the current growth rate in the US economy.

This competition gives the Fed a more difficult job. While the European Bank has only one goal, making the job much easier for them, the Fed has two. Does it allow the dollar to fall or does it strengthen the dollar by raising interest rates but risking recession at home? With the triple pounding of the US economy due to the dot com bust, the September 11 attacks, and the impact of Hurricane Katrina on the economy, the Fed has gone more towards increasing the money supply at uncomfortable levels and maintaining historically low interest rates. That has come at a cost. With no entity policing the value of the dollar, simple supply and demand meant that the US dollar had to fall. It was inevitable. The only way to preserve the US dollar would be for the Fed to induce a deep recession, a cost it was not willing to pay.

Fast forward to today. In the last few years, the Fed has felt comfortable enough to raise interest rates for about a year and a half in an effort to slow the fall of the dollar. But for every action, there is a reaction. With rising interest rates, people began to default on their loans taken out during the real estate boom. A few years ago, sub-prime (less than Prime Rate) loans were plentiful. Now with these indexed rates rising, people couldn't afford to pay their mortgages taken out on real estate they couldn't really afford at normal interest rates. This defaulting has led to the current sub-prime mortgage crisis. Banks can no longer afford to loan money because of the defaults and this lack of lending power has developed into a severe credit crunch. As credit is the lifeblood of business, businesses are feeling the pinch and are cutting back on their investments. A prolonged cutback on investment can only lead to higher unemployment.

So once again the Fed is in a dilemma. Does it allow the credit crunch to take the economy into recession or does it make an attempt to stop it? Watching the stock market fall a thousand points as a result of the sub-prime mortgage crisis, the Fed has reacted as predicted. It has begun the process of lowering interest rates and loosening the reins on the money supply again. Predictably the dollar began to fall faster with the discrepancy between interest rates in Europe and the United States approaching 2%. With higher interest rates available abroad, money heads in that direction.

Will the Fed's balancing act be able to prevent recession, especially since the rest of the government is throwing essentially a band-aid at it with the worthless rebate checks it will soon send out (another reason I give Bush a D at this point. Cut the capital gains rate!!!!!!)?

BTW, those who blame the president for the sub-prime mortgage crisis and the falling dollar really aren't aware of the relative powerlessness the president actually has in this area. It is wholly the domain of the Federal Reserve. The power of this entity can make or break any presidency since the president takes all the credit or blame for its actions. Fiscal policy really has little impact in this area and that's all the Congress and the president can control.

WHH holds the record as the shortest lived presidency with something around 30 days. He died of pneumonia after one of the longest inaugural addresses in history on a cold, wet day without an overcoat [speech was in the neighborhood of 2 hours long - over 8000 words]. However, it was over 3 weeks before he actually took sick - as we all know the best cure for the common cold is rest, which had very little of because of the busy presidential schedule. It turned to pneumonia and he died.

His grandson, Benjamin, defeated Grover Cleveland, who defeated him 4 years later.

My point with the Roosevelts was simply that they were related. TR was still extremely popular when FDR was elected and probably played something of a role in his election [though at that point, a Daffy Duck probably could have run against Hoover and won]. The fact that Eleanor was TR's favorite niece didn't hurt either.

There are 4 sets of related presidents - Adams, Harrison, Roosevelt and Bush. [There are two Johnsons, but no relation.]

Something I find interesting... many - and probably most - Americans had no idea that FDR was in a wheelchair. I believe there is only one surviving picture of him seated in it.



Without fail, the media waited until he was already standing [which he could do with the help of braces or other support] or seated in another chair before taking pictures.

Carol

I knew that he was in a wheelchair. He had polio in his youth, didn't he?

The fact that he was in a wheelchair is just one more thing that I find admirable about that man - that in spite of his disability, he was able to be such a truly great President. He must have been in pain sometimes, because I think that people who have had polio often develop pains and aches as they grow older. And yet he was able to give so much to other people, to his country.

Of course, it helped that the media were so courteous and respectful. Then again, why should they necessarily write about FDR's disability? It didn't lessen him as a man, and certainly not as a President.

Ann

Sadly, even in this day and age, some people still equate physical handicaps with mental deficiencies. It's not true, but some people still feel that way, unfortunately.

And yes, it was due to polio.

And today's media - it seems - would have had a field day with it. I agree that it shouldn't matter, but today it would. For good or bad, I'm not sure, but it would. Today's media, generally, it seems [those Daily Planet reporters not withstanding ] are anything but courteous like those who covered FDR were when it came to his disability. However, I've run into more than a few 'old timers' who had no idea until much later that he was in a wheelchair.

Just a for instance... Whether you like W or not, the man is a decent athlete, but everyone falls off the bike once in a while. I remember a huge deal being made out of it and he had the facial injuries to go with it [nothing major - a few scratches, no stitches or anything like that].

The wheelchair shouldn't have been a big deal, but color of skin or gender doesn't have much to do with your ability to be a good president either, but it seems like that's all that's discussed about Obama/Clinton most of the time. It's a novelty and a physical disability would likely be treated the same way. Regardless of it's affect on his ability to govern, it would be in the forefront of the media.

And as for why Clinton/Clinton gets more attention than the Bush/Bush thing did... Personally, I think there's a big difference between being the spouse of a president [and didn't they make a comment at one point about '2 for the price of 1' or something? I have a vague recollection of that] and the child of one - especially a child who was 'out of the house' long before the parent became president. Chelsea might be a slightly different matter or even Barbara/Jenna someday should they choose to go into politics, but W had moved out and married etc, decades before Dad was in the White House. Just my .02 why the Clinton relationship is different than the Bush one.

Carol

Roger, I just want to compare what I remember of the reactions in Europe and Sweden to Reagan with what you seem to remember:

No. And not in the same way. Yes, some people were rather horrified at his extremely right-wing policies. I particularly remember reading about how middle-class people in America were sometimes just a paycheck away from becoming homeless and being reduced to living in their cars, because if they lost their job and their income there was absolutely no safety net that would break their fall.

But for all of that - and in spite of the fact that, yes, contemptuous things were being said about Reagan being an actor who really didn't know or understand much about politics at all. But you know what? Reagan's charm penetrated much of that. Reagan was never utterly dismissed, never written off as a hopeless ....(fill in a suitable noun yourselves). His sheer personality defied the most contemptuous charges levelled against him. Besides, what did Reagan ever do that is comparable with the Iraq war? He did nothing of the sort. Remember that Bush became extremely impopular abroad only after it became clear that he was going to attack Iraq.

Reagan was portrayed as politically naïve, because he was an actor and not a politician (that is what people in Europe said anyway). But I can't recall that he was ever portrayed as stupid.

He was called that, yes.

No! People were scared of his Star Wars program, yes. But they weren't nearly, nearly as scared as they were of Bush Jr's warmongering. Hey, we could tell the difference. Reagan's Star Wars program was primarily defensive, even though it could be seen as provocative, and even if people feared that it might start a new arms race. But for all of that, it was just that - a new weapons system, primarily used for defence. It was not as if Reagan declared war on the Soviet Union.

Besides, there were huge demonstrations in Europe against Bush in February, 2003. And don't I know it, because I took part in one of them. It was huge. The main speaker said to us: "People, I have never been so afraid in my life. Because we have gathered here in Malmö, and others have gathered in Copenhagen, and London, and Paris, and Madrid, and Rome, and in all those other great cities in the world, and we are all speaking to Bush, imploring him not to attack. And yet he probably will. Because he doesn't listen to anyone. He doesn't listen to the world. He is defying us, all of us all over the world, because he will have his war. And nothing can stop him." I remember the chill that went through me as I heard those words.

So were there great European demonstrations against Reagan? If there were, I haven't got the slightest recollection of them. Did I take part in any of them? Not on your life!

If there were any demonstrations in Sweden, I don't remember them at all. On the other hand, I don't blame the West Germans for protesting. Why should they have to have missiles deployed on their own soil just because the US wanted them there?

I don't remember that joke or that uproar at all.

Yes, I remember that we were scared of "Star Wars".

You know, that wouldn't surprise me. I remember that Gorbachev was very, very admired in Europe. And why? Well, because we could tell that he was loosening up the Communist system of the Soviet Union, slowly dismantling the system from within. We thought that that was a tremendously brave thing to do. After all, we could remember previous Soviet leaders who seemed to want to loosen up Communism a little, and soon afterwards these leaders were mysteriously deposed. For a long time, we Europeans were really scared of the Soviet Union. And here Gorbachev comes along, slowly inching his big mighty Soviet Union closer to Western democracy and ideals. I have to admit it, we rather loved him for it.

We didn't love Gorbachev for being a Communist thug, but for moving the Soviet Union away from Communist thuggishness.

I don't remember that at all! The newpapers I read, and the TV and radio channels I listened to, absolutely didn't mock Reagan because of his Alzheimer. Absolutely not!

I remember, instead, that I was once again so impressed with Reagan's strength of character and his dignity and courage. He actually announced the facts of his disease to the American people and to the whole world. If I remember correctly, he said something like "I am now approaching the twilight of my life". I was impressed and moved like heck by the sheer, stark beauty of it.

So I need to insist that Europe's, and probably the world's, distrust of George W. Bush is a phenomena all of its own, quite distinct and different from the kind of distrust that has met other Republican US Presidents. I do agree with you that a European distrust of Republican Presidents is there, and most Europeans tend to prefer a Democratic US President over a Republican one. W, however, has struck most Europeans as a man who plays a whole new kind of ball game, different from anything we have seen before.

Ann

Okay, found something that's not *really* connected but, you know, it's about Sweden and taxes, so... I hereby present: The effect of tax incentives on Swedish musical groups\' funny outfits.

Some of the linked articles are in Swedish (if they're translating wrong, Ann, please let us know), but the summary's in English.

PJ

Pam, I have to admit that I'm not really interested in the effect of tax incentives on Swedish musical groups' funny outfits. Maybe I'll read it later.



This is ABBA, who in the mid- and late seventies were hugely popular in much of the world, though they never made in in the United States. Maybe the poor guys found the Swedish taxes so forbidding that they could only afford to drape themselves in aluminum foil. That's the Swedish flag in the background, by the way.

Roger, I want to thank you for your post on the Federal Reserve, the falling dollar, and the effect of fiscal and monetary policy. I found it most illuminating. I understand what you mean when you say that Ben Bernanke, Chairman of the Federal Reserve Board, has more influence than President Bush on the U.S. economy, because you describe a situation that is quite similar to the one we have in Sweden. Here we have Riksbanken, the National Bank, which makes its decisions about the Swedish interest rates independently of what the government might wish. Ben Bernanke similarly "rules" over the interest rates in the U.S., which gives him a huge influence.

But here in Sweden, it is the government - or rather the Parliament, but usually the party that forms the government also controls the Parliament - that makes all decisions about tax cuts or tax hikes. We had a right-wing government in Sweden in the late eighties. That government lowered Swedish taxes, because lowering taxes is what right-wing governments do. But it didn't reduce spending as its tax revenue fell. The consequence was that Sweden soon had a huge budget deficit, which caused great economic problems in Sweden for the next decade. In some ways, Sweden has never fully recovered.

So when I hear that President Bush slashed taxes and hugely increased spending at the same time, Roger, you will have to excuse me for thinking that Bush's federal "buying spree" at a time when he had made sure that the "tax revenue flow" into his federal coffers had been reduced, must have had something to do with the fact that America suddenly found itself in debt.

But there is a huge difference between an American budget deficit and a Swedish budget deficit. The difference is that the US currency is the dollar, which is also effectively "the world currency". You can use the dollar to pay your way everywhere. But if you want to buy something and you want to pay for it with, say, the national currency of Romania, will people want to sell things to you? In return for your Romanian money? Remember that if they accept Romanian money from you, then they themselves will have to try to use that money to buy goods from others. And they will have to hope that others are interested in their Romanian money. But if no one wants that money, then that money is useless. And those who foolishly sold their goods in return for the useless money have effectively given their valuable goods away for nothing.

For all practical purposes, if you have a small national currency, you simply can't use it to buy anything from abroad. You have to use your own currency to buy dollars, or possibly euros, and then you use the dollars to buy the stuff from abroad. But if your country's economy isn't in good shape, you will have to spend huge amounts of your own currency to buy the dollars you may want.

For people in Romania, and for people in Sweden, their money is only as good as the strength and the dependability of their economy. If we in Sweden get our country into serious debt, then we are in serious trouble. Our Swedish krona is likely to fall like a stone. To rescue the falling krona, we have to fix our economic problems.

In the United States, however, if the country gets itself into debt, so that it doesn't have as many dollars as it needs to, then there is a very simple solution to the problem. Print more dollars. The United States can glut the world market with dollars and people will still accept your greenbacks as valuable money that can be traded in for goods. You literally have an inexhaustible gold mine in your printing press for dollars.

Of course, if the United States just spends and spends, and keeps importing more than it exports, and gets itself deeper into debt, the dollar will eventually take a beating. That is what has happened now. Of course you can blame your troubles on the Chinese and their undervalued yuan. Or you can partly blame OPEC for their inflated oil prices. But what I see when I look at what has happened in America is a President who cut tax revenue and increased spending at the same time, and expected to get away with it by printing more dollars. And I also see the money from the tax cuts ending up in the pockets of the richest Americans, while the median American has had his or her income lowered.

Ann

EDIT: I forgot... Romania is a member of the EU now, and their currency is the Euro. And the Euro is a much, much more solid currency than any previous Romanian money ever was.

I'm beginning to see comments about McCain which are ageist by some in the American media. Given this, I think were FDR covered by the contemporary American media, they would have been all over his disability and looked for those pictures.

c.

Ah, that finicky median family income, which by the way is up. Median family income was right around $50,000 in 2000. It is now around $58,000 and it's gone up each of the last 7 years.

You make a false assumption about revenue. Revenue dipped in 2001 due to the near recession but came back strongly as the tax cuts kicked in (usually a 6-12 month lag between tax cut enactment and effects as people adjust their behavior) and accelerated even faster after another tax cut in 2003 with 2004 being a banner year for tax receipts as the economy grew over 4%. I'd like to see a European nation reach 4% growth annually.

You're dead on about spending, though, and this president has been no better than any other at controlling it. Freezing spending to the rate of inflation for just one year would come close to eliminating the deficit, which at its high was $414 billion and was $162 billion last year. The fear is that tax receipts will start to fall again with a possible recession looming and no tax cut in 4 years. It's time for another real tax cut to jump start this economy. Even a Keynesian would agree with me.

BTW, the president has no say over "printing" money. Increasing the money supply is completely in the hands of the Federal Reserve.

I, too, remember the American economy was up in many ways between 2002 and, I guess, 2006. Maybe even 2007. And because the economy was up, I'm sure you are right that tax revenue was up during those years.

I remember, too, that the New York Times regularly pointed out during those years that while the American economy was growing, the United States sunk deeper and deeper in debt. The NYT also repeatedly said that if another country had mismanaged its economy so badly, it would have been mercilessly punished by the rest of the world, and it would have sunk into a bad recession. But, according to NYT, the rest of the world - not least China, the prime creditor of the United States - was so dependent on a well-functioning U.S. economy that it refrained from calling in the U.S. debt. I remember that NYT often pointed out that only the United States, because of its unique position in the world economy as the issuer of the world currency, the dollar, was allowed to get away with what no other nation would be allowed to do.

It is at least possible that the position of the dollar will be challenged in the future. It could be that other currencies, such as the yuan or the euro, could become currencies that can be used in most parts of the world, so that it will no longer be necessary for anyone who wants to buy something from abroad to have dollars to be able to pay for it. It could be that the importance of the dollar might be decreasing. If that happens, it will become more difficult for the United States to put itself in serious debt and not suffer the normal consequences of it.

You are right that a 4% growth of an economy as big as the one of the United States is staggering by European standards.

But the inflation is up because of the falling dollar, and freezing spending to the rate of a growing inflation does not sound like an easy thing to me. Particularly not as long as the United States keeps having to meet the costs of more than 150,000 troops in Iraq.

But here is where you have to take inflation into account. I don't doubt for a moment that the median American family makes more dollars now that it did in 1999 or 2000. But if the value of the dollar has fallen since 1999 - and it really has - the "real" income of the median family could still be lower today than it was in 1999.

If indeed the median income in the United States is down, while the average income is up, that can only mean that the rich are getting richer while the majority of the Americans are getting poorer. Let me try to explain what I mean.

Imagine nine people. One of them makes $9.000.000 annually. The others make, respectively, $1000, $700, $300, $100, $80, $60, $30 and $10 annually. (I know, totally unrealistic figures. Bear with me. This is a thought experiment.)

The total income of these nine people will be $9.000.000 + $1000 + $700 + $300 + $100 + $80 + $60 + $30 + $10, which is $9.000.2310. The average income of these nine people will be $9.000.2310 divided by nine, which is appoximately $1.000.0257. In other words, the average income of these nine persons will be a little more than one million dollars! Not bad!

But the median income of these nine people is the income of the "middle guy". You line them all up from the richest to the poorest. In this case, where you have nine people, the median guy is the one at fifth place. This person has four people ahead of him, who make more money than he does, and he has four people behind him, who make less money than he does. So how much does "number five" make, then?

In this case, "number five" makes $100. That is not a lot at all. So while the average income in this thought experiment was a little more than $1.000.000, the median income was $100.

If indeed the median income is down in America, then the robust growth of the American economy has not benefitted the majority of Americans at all. (Okay, there is a possibility that a largish chunk of the population was absolutely dirt poor before, and they have gotten a raise, at the same time as the richest Americans have gotten a raise. Then a majority of the American people have benefitted, even if the median American hasn't. But I have not heard of such an inflation-adjusted raise for such a large number of the poorest Americans.)

Ann

Roger, you talked about a 4% growth of the American economy. Let's assume that the (very imaginary) people that I talked about in my last post each gets a 4% raise, too. How much extra money will each of them make because of the raise?

The nine million dollar guy will earn an extra 4% of his income. 4% of 9.000.000 is 360.000. This guy will earn an extra $360.000 if he gets a 4% raise! His raise alone will be more than a hundred times what the other eight people earned together, because their total income was $2310. Admittedly, that was before they got a raise. So how much will their raise benefit them?

The richest of the people lagging behind the millionaire made $1000 a year. Give him a 4% raise and he will earn another $40. I'm sure he will appreciate his extra forty dollars, but will they make a huge difference to him? I don't think so.

The median guy, Mr "Number Five", will get an extra $4, because his income was $100. What can he do with his four dollars? Buy a packet of cigarettes? Let's hope he doesn't smoke.

The poorest guy, who earned $10, will get an extra forty cents. Wow.

Let's imagine that these nine people each have to pay an income tax of 10%. That means that the richest guy will have to pay $900.000 in tax. (We will ignore the 4% raise I talked about earlier.) The one thousand dollar man will have to pay a hundred dollars. The others will have to pay, respectively, $70, $30, $10, $8, $6, $3 and $1. (Imagine earning ten dollars annually and they'll take one dollar away from you in tax. You'll get to keep $9.)

Now let's cut taxes so that everyone just has to pay 5% tax. Wow! Such a tax cut will get the richest guy an income hike of $450.000. The others will get to keep an extra $50, $35, $15, $5, $4, $3, $1.5 and 50 cents, respectively.

My point is that if you are poor, either a raise that is a percentage of your income, or a tax cut that is a percentage of your tax, will give you peanuts in real money. Peanuts.

Anyway, if the government gives my nine hypothetical persons a tax cut from 10 to 5%, the government will initially lose money. Before any dynamic effects of the tax cuts have come into effect, the government will lose 450.000 + 50 + 35 + 15 + 5 + 4 + 3 + 1.5 + .5 dollars. All in all, the tax cuts would mean that the government would have its tax revenue from these nine people lowered by $450,114.

I once read a suggestion that the government should stimulate the economy not by slashing taxes, but by giving every American citizen an extra sum of money. Just handing it out to everybody, giving the same amount to everybody.

Imagine that the government would just give these nine people an extra $5000. Just give it to them. How much would it cost the government? Giving $5000 to nine people would cost the government $45.000. Only about a tenth of the amount it would lose from giving these nine people the tax cuts I described.

But what would an extra $5000 mean to the eight poor people here, those who earned between $1000 and $10? Oh wow! It would mean so much! There would be so many little things that I'm sure that they desperately needed, that they would now suddenly be able to get for themselves.

What would an extra $5000 mean to the nine million dollar man? Exactly. It would mean pretty much nothing.

But I wonder what would be the best thing to do for the economy, or for the general welfare of the American people.

Ann

Why not, instead, teach those who are making the least amount of money better skills to increase their earning power so they are making more than $1, $3, $6, or $8?

Personally, I've never been really comfortable with government handouts. It doesn't seem to fix anything.

Tara

The flaw in the reasoning is that you make the assumption that nobody ever changes and that 5% is 5%. Give an employer an extra $450,000 and what does he do with it? Does he pocket it? Does he reinvest it? Does he spend it? No matter what he does with it, it's creating economic activity. And if he's an employer, even better because people spend money to make money when it comes to investment. And that money spent after getting that $450,000 could be used to hire 10-20 more people. Rich people do not like idle money. They put it to use. That's why they're rich in the first place. The best definition of a rich person I've ever heard is from the Cosby Show. Bill Cosby said that "you're not rich when you work for your money. You're rich when your money works for you." Exactly right. Give a rich person an opportunity to make money and he'll seize it.

One thing I could never understand is the propensity of the left to always assume static responses. It's clear that people will change their behavior under different circumstances. Yet nobody on the left ever takes that into account. That's the whole thing behind supply-side economics. Behavior is changed depending on the circumstance. Give an employer a higher ROI and out come those investment dollars and more jobs. It's not like $450,000 goes into a black hole and is never seen again. It's put back into the economy to make more money. And when it's investment, you get the power of the multiplier effect that does more than just hand $5 to a poor person. It gives ten, twenty people new jobs that they've never had before. Then they'll become part of the tax base and will contribute even more.

What can be more compassionate than enabling an economy to produce more and better jobs? Direct government handouts aren't going to do it. That's a recipe for keeping poor people poor. You have to give employers the incentive to hire more people. You do that by making it more profitable for them to invest.

I've always had this theory that psychologists make the best economists. Not the money managers or the accountants, but the psychologists. Economics is called the study of money but in reality it's the study of human behavior. The whole supply-side theory is based on what people will do when government gets out of their way, economically. Under a static model, you cut tax rates by 5%, you rake in 5% less in tax revenue. Under a dynamic model where human behavior changes, that 5% can ADD revenue, growing by leaps and bounds as people get hired, pay more taxes, make more money and hire even more. This is what the multiplier effect really is. It's a behavior change that ends up benefitting the economy more as a whole than as a sum of its parts.

The absolute worst kind of tax cut is a demand-side tax cut, what politicians refer to as a "targeted tax cut." Employers get nothing. No jobs are created. People lower on the economic ladder get their $5. Tax revenue probably will go down because no significant economic activity is stimulated. What then? Explain how that makes anybody more than marginally better off. Give an employer a tax break and you can point to the ten people who were previously unemployed who are now contributing.

I don't know anything about those tax cuts by the Swedish right wing politicians, but since your right wing is further left than our left wing, I wouldn't be at all surprised if those tax cuts that lost your treasury so much money were of those inefficient "targeted tax cuts" variety that generate little to no economic activity.

Even stock analysts are psychologists masquerading as financial experts. There are two types of financial analysts. There are fundamentalists and there are technicians. Fundamentalists look at the numbers a corporation generates and decides whether that company is worth investing in. Technicians couldn't care less what company they're looking at. What they look at are the little squiggles on charts that show stock movement in the past. By studying the little squiggles, they can accurately predict to a certain degree how a stock will do in the future. That field of study is known as technical analysis. Fundamentals can tell you a good company to invest in but a technician can tell you when to buy and sell stocks from that good company. A really good technician can make money on any stock, as long as it's publicly sold and has good liquidity (lots of shares sold daily).

Those little squiggles are basically patterns of behavior. People behave differently under different circumstances and those circumstances can be interpreted by the movement of a stock over time. You can make out patterns like pennants, moving averages, Bollinger Bands, teacups, inverted W's, etc. Some predict that events over decades can accurately predict a stock's movement. Those are the Elliot Wave technicians.

One of the most successful investors of all time lives in San Diego. His name is Larry Williams and I've had occasion to chat with him a bit. He invests purely in commodities futures. He studies those little squiggles all day long and places his orders based on those squiggles. He makes millions a year doing just that. All he does is buy and sell futures contracts and never actually takes delivery of any actual commodity. All that's done just by studying people's behavior. I should also say he writes books on investing, too.

I wonder why the left, in the face of so much evidence that people do change behavior based upon the circumstance, simply can't seem to get themselves to believe in it and act accordingly? Instead it's always his 5% is bigger than his 5%.

Y'know, my in-laws are from Canada. When I first met them, they were pretty reliably liberal. But in the mid-nineties (I forget which year) they had moved from a large house in Nashville to a larger house in New Jersey, and that was the year that President Clinton hit people with a retroactive tax-hike. My mother-in-law was totally disgusted. She figured that if she'd spent that money, she'd have employed lots of local people fixing up and furnishing her house, and helped out the local economy. How was it supposed to be better for that money to get sent to Washington and then distributed... wherever? Especially after all the money the gov't would spend on collecting & processing it. Sort of an epiphany for her.

Sept 11th moved her a little more to the right. Two years ago, we even sort-of agreed on some things. One evening, over Christmas, we were talking in the living room, and she mentioned that my father-in-law was doing a sinus-cleaning procedure that involved squirting water up his nose. I snarked that she'd better not tell John McCain; he'd say it was torture. She laughed. My liberal brother-in-law was shocked. "Now I *know*," he said, "that you're not making fun of John McCain." We glanced at each other, grinned, and said, yeah, we were. Ah, good times...

PJ

I realize that I should probably leave this thread alone by now, but I have been thinking about a few things that you've said, Roger, and I'd like to add a few things on my own.

If I have understood you correctly, you say that rich people are the key to the well-being of a country. Rich people are, I think you have said, the ones who invest, who employ others, and who generally keep a country going. And the richer they are, the more they can invest and employ, and the better off their country will be. Therefore, it should be in everybody's interest that the rich keep getting richer, even if the median citizens, let alone the poor ones, keep lagging farther and farther behind. (Although I think you claim that siphoning off money and sending it selectively to the rich will eventually benefit the median and poor citizens, too.)

I have more or less scoffed at this idea. However, after giving the matter some more thought, I think I have realized something – namely, if a country has virtually no rich people at all, chances are that all of the country will be just dirt poor. Where will the surplus come from that is absolutely necessary if you want to invest money and create things that can generate further growth? For example, one of the countries today that is generally in trouble is Chad. Are there a lot of millionaires in Chad? Are there people who are willing and able to build factories and to run modern effective farms in Chad?

You are right, Roger. It does take a surplus to invest and to build things that aren't absolutely necessary to just survive for today. If no one has that kind of surplus, everyone will just have to concentrate on merely surviving.





That said, however. Can we really assume that rich people are always going to use their surplus wisely and in such a way that it benefits others? If you give a billionaire a huge tax break, what prevents him from taking all his extra money and putting it in a bank in Switzerland? Or what prevents him from investing it all in a factory in China?



Perhaps he will buy himself another luxury yacht... who knows if it was made in America?

It seems to me that the American ideal of cutting taxes for the rich is built on the assumption that rich people are particularly good, wise and altruistic. Therefore it is best to just entrust all that extra money to the rich and have faith in their ability to put their money to the best possible use. But this is something I can't do.

My impression is that there are very few countries in the world which suffer from a real shortage of filthy rich people. Surely you find the super-rich or the so-much-richer-than-you kind of people pretty much everywhere, except possibly in Chad. And yet there is poverty and corruption and all sorts of societal ills in so many of these countries, in spite of their billionaires.

Yes, I know. So many of these countries are not democracies. They are fractured along ethnic and religious divides, and people belonging to different clans, and so on. Clearly rich people in such countries will not try to benefit their societies as a whole, but instead they will try to favour their own clan, or their own ethnic or religious group. That sort of thing will not happen in a country like the United States, or at least, it will happen to a much lesser extent.

But for all of that, what will happen when the richest Americans always get the biggest tax breaks and the biggest raises, so that they increasingly move into another reality than other Americans? And what, in the long run, will it do to ordinary Americans to see the rich ones lose contact with the ground and soar higher and higher into a lofty realm far above ordinary people? Into a lofty realm, where ordinary people's troubles and worries don't exist, and can therefore conveniently be forgotten altogether?


The rich are taking off.

I once heard that a Professor of psychology or something like that had conducted a survey, where he asked a lot of people the following question. Which would they prefer, having their salary doubled but becoming relatively poorer all the same, because everyone else had their salary quadrupled? Or having their salary halved, but becoming richer all the same, because everyone else had their salary reduced to a fourth of what it was? What was most important, becoming richer in absolute terms or becoming richer in relative terms? A large majority answered that what they would have liked best would be to become richer than other people, and what they feared most was becoming poorer than other people. If this psychological need to keep up with other people in economic terms holds true for Americans, too, then an American society where the rich leave the rest of the population in the dust may be headed for trouble. Particularly if the median and poor citizens are not only left far, far behind, but especially if their incomes also go down in actual terms.

I think that a country which consistently keeps giving more and more of its resources to the rich will become a society which slowly but steadily moves away from the idea that all human beings are the same, and have equal values. Here in Sweden, everyone was acknowledged to have the same value in 1921, when every adult Swede, man or woman, got the same right to take part in the Swedish elections and cast their votes. Before 1921, women had not been allowed to vote. And in the very early twentieth century, rich men in Sweden actually had more votes than poor men. One rich man could have, I think, possibly dozens of votes. The richer he was, the more votes he got, quite literally. But if a man didn't have a job at all and no income, he also didn't have the right to vote at all. In 1899, when Sweden still had this income-based voting system, a well-known Swedish poet, Werner von Heidenstam (who was a rich man, too), wrote a poem where he protested against this system. The most famous lines from that poem go like this, in a rough English translation: It's a shame, it's a stain on the banner of Sweden, that citizenship is money.

(How did all of Europe become so stratified, with a rich upper class separated from the rest of the population? How did the rich Europeans get so rich? Well, many of them belonged to the nobility. The nobility were the people who, way back in the Middle Ages, had been given a special tax exemption, so that they didn't have to pay any taxes at all. Therefore they and their descendants became filthy rich, too. It was the poor people who had to pay the taxes that were necessary to keep society going. Ehh... does this sound familiar in any way?)



European nobility.

It was this kind of stratified society, with a privileged upper class of nobility and nouveau riches and an oppressed underclass of poor people, that drove so many Swedes and other Europeans to leave their home countries in the nineteenth century and move to the United States. But isn't this kind of stratified society making a comeback in America? Aren't the privileged upper classes back with a vengeance in the United States?

Is it, well, always fair that rich people in the United States are rich? Do they all deserve their money because they are gifted, driven, talented and smart? Have they all worked hard for their money? Or is it possible that quite a few of them are rich because they have been given money by their rich parents or spouses?

Let's consider a rich Swede, Björn Borg, and his son, Robin Borg. Björn Borg, born in 1956, had an extremely average childhood. His father owned a small neighbourhood grocery store, exactly the kind of grocery store that he would have been forced to close down by now if he had tried to hang on to it, because these days people prefer to go to shopping malls or supermarkets instead. Björn's mother was a housewife who helped out a bit in the store. Björn himself was a very average student in school, absolutely nothing special. He did excel at sports, though.

When Björn was nine, his father, Rune Borg, was a moderately good ping-pong player.



And one day Rune Borg won a ping-pong tournament, where the first prize was a tennis racket. He took the racket home and showed it to his son, who got interested. “Can I have if, daddy?” “Yes, sure.” And so Björn took the racket and some tennis balls and got outside and started pounding tennis balls at his parents' garage door, much to his neighbours' annoyance. He kept doing this, day after day, week after week, until he had learnt to control the ball. His PE teacher found out that Björn was good at tennis, and made sure that the kid became a member of a tennis club. That wouldn't have cost the family much at all. In Sweden, sports for kids are sponsored and subsidized by the government.

Björn soon proved to be amazingly talented. This YouTube video shows Björn at age fourteen, in 1970. He has just reached the final of a relatively big Swedish national tennis tournament, where he was beaten by a 25-year-old, and he is being interviewed by Swedish television for the first time. He is saying that he is tired, that the other guy was stronger, that he plays tennis nine hours a week and that he hopes to play Davis Cup in the future.

Interview with Björn Borg, fourteen

At fifteen, Borg became a high school drop-out. He believed that his time would be better spent practicing tennis than attending school, and accompanied by his coach, Lennart Bergelin, he travelled all over Europe by bus, taking part in all tournaments that would have him.



Björn eventually went on to win the Wimbledon tournament five times:



Because Borg was such a good tennis player, but also because he really became an international star, he became rich beyond his parents wildest dreams. They themselves became rich, too, only because of their son.

Björn has two sons himself. The older one, a chubby young man in his early twenties, is named Robin. (Well, Robin is mostly thought of as a boy's name in Sweden.) Robin Borg is a tennis player too. But, well…



This is Robin Borg, son of Björn Borg. I think it's fairly obvious from the picture alone that Robin Borg is never going to be a tennis star. It seems likely that Robin will never have any sort of splendid career of his own. And you know what? He doesn't need to. He is still going to be richer than most of us will ever be. Because he has a rich daddy.

It doesn't bother me at all that Björn Borg's parents and sons are going to be rich just because their son and father is able to give so much money to them. I don't see that Rune, Margareta, Robin and Leo Borg's wealth is going to hurt society in any way. However, if some positions in society are going to be given exclusively to rich and privileged persons who often owe their positions to their parents, then that may indeed be a real problem. And since we are talking about politicians in this thread, how about George W. Bush? To what extent does he owe his position as the President of the United States to his father?

It is of course impossible to know what kind of life and career George W. Bush would have had if his parents had been extremely ordinary, but let's try to imagine it anyway. If Bush's parents had been absolutely ordinary, they would only have been able to send him to a very ordinary, not-too-impressive college. I guess it is even possible that they would not have been able to send him to college at all. Let's assume, however, that they were able to send him to some sort of college, but let's also assume that a degree from that college wouldn't automatically open all sorts of doors for him.

Let's assume, too, that Bush had been forced to have a part-time job to meet the costs of his college studies. Maybe the demands of his job would have made him tired, so that he couldn't concentrate as much as he needed to on his studies. If he needed special tutoring, his parents wouldn't have been able to pay for it.

You remember, too, that Bush was a young man while the Vietnam War was going on. I guess you know that Bush never went to Vietnam. Who knows, maybe that had something to do with his father being able to pull some strings. Suppose he had had a very ordinary father instead, a father who couldn't do anything to keep his son out of Vietnam. Suppose Bush had been made to go to Vietnam.



If Bush's fate in Vietnam had been average, then he would have returned home alive and physically unhurt. However, there is a real possibility that he might have been killed or disabled.

It is even more likely that Bush might have suffered from Post-Traumatic Stress Syndrome if he had been forced to serve in Vietnam. We do know about Bush that he has a propensity for addiction, since he came close to becoming an alcoholic. Maybe if his life had been harder for him, because he had to work while he studied or because he had to go to Vietnam, he might have been ever more likely to find comfort in the bottle. Maybe he would even have become a drug addict, particularly if he got traumatized inVietnam.

I guess that Bush would at least not have run a smaller risk of becoming an addict if his parents had been ordinary. Since we know that he drank too much in the rich and privileged life that his parents gave him, let's assume that he would have drunk too much if his parents had been ordinary, too.

I have no idea how Bush got over his near-addiction, except that he got religion. It is certainly possible that he would have found God if his parents had been ordinary Joes, too. So let's assume that this version of Bush got religion and stopped drinking, too. However, I assume that if our present-day rich George W. Bush needed professional help to get over his addiction, his parents would have been eminently able to pay for any help he needed. They wouldn't have been able to do that if their incomes had been average. Also, they wouldn't have known people who knew people so well that they would necessarily know what clinic or therapist would be best for their son.

Now consider George W. Bush, born to average parents. He went to a nothing-special college, had to hold a part-time job while he studied and graduated without distinction. He was sent to Vietnam and returned feeling jittery and shaken. He started drinking and was a drunk for a while. He then found God, and with the help of his congregation he was able to become sober. He would have had few connections, little money and a name that only his acquaintances recognized. Okay, and from this position he tried to become the President of the United States. Would he have succeeded?

Let's return for a moment to Björn and Robin Borg. I'm pretty certain that Robin Borg has a tennis scholarship somewhere in the United States. Would he have received such a scholarship if he had been an ordinary chubby guy from Sweden with a bit of tennis talent? You know the answer.

I once read a comparison between George H.W. Bush and George W. Bush in Time or Newsweek. The article said that whatever George W. Bush had tried his hand at, his father had done better before him. Is it possible that George W. Bush simply doesn't have the skills and ability that his father had? Could it be that he just isn't as qualified for his job as his father was? Is it possible that he is the President of the United States for two reasons, because he has a charming, TV-friendly personality and because he inherited everything else he needed to become elected – only he didn't inherit the skills?

A left-wing politician in Sweden recently said that all American Presidential candidates are right-wing, and the reason for that is that all American Presidential candidates are rich people. They are rich because you simply can't launch yourself as a Presidential candidate in the United States unless you have a lot of money to fuel your personal rocket:



And because the Presidential candidates themselves are rich, they are going to understand the concerns and needs of rich people better than they understand the concerns and needs of poor people. Admittedly, this doesn't always hold true. There have been many rich people who have devoted their lives to helping the poor and disadvantaged.

But the problem in the United States is not only that the Presidential candidates themselves are invariably rich. A further problem is that they are dependent on huge donations to finance their presidential campaigns. Who will give them those donations? Who will be able to give them so much money? Other rich people. So in America, rich people become presidential candidates and they have to appeal to other rich people to get the money they need to campaign. How do you get rich people to give you so much money? Not by telling them that you are going to increase their taxes and funnel more of society's money into helping the poor.

I think that because politics in America is so incredibly dominated by rich people, it has become almost a truism that it is good for society to do what is good for rich people. Because this is what rich people want to hear and this is what they will pay others for saying. Why is it so good to cut taxes for the rich? Maybe because it can be mathematically proved that this is going to be uniquely beneficial for society. But on the other hand, maybe this is what rich people want to hear, and because of their great influence in the American society they are able to pay others to repeat this message over and over again until it becomes a truism – cut taxes, cut taxes, cut taxes.

In 1974, when I studied sociology at the University of Lund, all the other people taking this course were Communists. I had all those interminably long arguments with them. They argued that Capitalism is evil and that it ruthlessly funnels money from the poor and gives it to the rich, creating a society reminiscent of slavery. I actually agreed with some of their points, but not with their conclusions. They insisted that it was necessary to overthrow the democratic system and give all power to the Communists, who would be in charge of making society fair and equal. This is the counter-argument that I repeated back at them, over and over:

“How do you know that those Communist people will not abuse the enormous power you want to give them? How do you know that they will use this power wisely and altruistically? How do you know that they will not hang on to their power just because it gives them so many advantages? How do you know that they will not make life worse for other people just so that they will be able to hang on to their own privileges?”

For those of you who think that the best way to make society better is to make rich people even richer, I have a similar question for you. How do you know that the rich ones will use their enormous wealth wisely and altruistically? How do you know that they will not be chiefly concerned with hanging on to and increasing their own privileges, maybe even to the detriment of others?

Ann

I've been lurking in this thread and am choosing to stay out of the debate, but I just wanted to say that I am really impressed with your last post, Ann. You made some very valid points that got me thinking.

This entire thread has given me food for thought.

I wouldn't generally post in this type of thread, but I need to point out something re the rich/poor debate.

My natural tendency is to be a socialist since I believe in equality. It's hard to climb a ladder you don't even know exists. So, my first instinct is always to say, yes, let's distribute wealth. I know a lot rich, selfish people. I don't think they have the foggiest clue how to help their fellow man, even if they have the desire to do so.

Unfortunately, having worked with the federal government far too often, I don't really trust them to spend the money any more than I trust a random wealthy person to spend the money.

IMO, all the systems are seriously screwed up. The socialist system depends on a bureaucratic nightmare wherein wealth is distributed on the basis of flow charts and computer programs, none of which can accurately represent reality. The money supposedly taken for the general welfare ends up being spent on needless renovation or endless studies that conclude nothing.

The capitalist system depends on the charity of the wealthy to care for those who cannot care of themselves. This is clearly problematic because of the simple fact that most humans are self-interested to the point of narcissism. If you're lucky, the wealthy person was raised with a conscience and cares about others. But even then, it's a matter of getting the 'ear' of the wealthy person in order to have your cause be heard. And, the wealthy can become swept up in their charity balls and other events that are more social activities than actual fundraisers.

Basically, I think we should all just agree that the systems we have are flawed. They were invented by flawed human beings and are therefore bound to have issues. I have friends in both camps (and a few Marxists and anarchists just to mix it up) and what I hate most about it is that they can't seem to be civil to each other. They're so sure their POV is right, they demonize the opposition instead of learning from them. I disagree with this entire mentality.

This is why I could not vote in this poll. Every single politician I know lies. It's their job. Even the ones I actually like as people aren't necessarily people I would want as friends. They wouldn't get to run for president if they were an honest grocery store clerk. Nobody wants to hear the hard truth or that someone doesn't have an answer. We want to be promised things, to believe that a utopia is possible. As long as we, the people, continue to expect marketing from our politicians to get votes, we are never going to elect anyone worthy of the office. It's pretty easy to stand on the outside and say what should be done, but by the time a politician runs for presidency, he has sold and compromised pretty much everything just to be able to get along with people. That's the sad truth. No matter how much Obama claims to be the fresh new voice, he's not. He got where he was by trading in the backrooms just like Clinton, just like McCain. They all do. Especially the successful ones.

This is why I now call myself a "nothing." I have no political views anymore. None. I only vote because I feel it's my civic duty. It's not a great place to be, let me tell you.

I now close this depressing rant. I also take this moment to encourage anyone with children to consider moving to a deserted island. Possibly on another planet.

(I'll be responding to things throughout your post, but that seemed to be the money 'graph. So to speak )

The answer is, we assume that the rich will be selfish (it's a basic Christian doctrine that all people are sinners). They will seek their own good, and they'll want to get richer. The trick is to set up society in such a way that getting them richer also makes other people richer, which is where capitalism comes in. Lots of people, all acting in their own self-interest, all benefit. The humble boy becomes a tennis star and hires, I dunno, a publicist, an accountant or two, massage therapists. His travel to tennis tournaments means he spends money on transportation (maybe a travel agent?). He buys nicer clothes, bigger TVs, cars and video game systems for all his kids. This all benefits the tennis star -- but it also benefits massage therapists, airlines, and auto workers. That's the theory, anyway.

You're right, wealth alone doesn't do it. For the above theory to work, it's crucial to have a stable society, rule of law, equality under the law, and property rights.

Have you heard of the Prisoner's Dilemma? Imagine two petty crooks robbed a bank together, were both picked up by the police, and interrogated separately. There's not much physical evidence. If they both stick to a narrative of innocence, they might both get away with it. If only one of them puts the blame on the other, that one gets immunity, but the other goes to jail for a long time. If both of them blame the other, everybody loses and they both go to jail, but not for as long. Cooperating is the best strategy *if* the other guy can be trusted to cooperate. If he's got a history of ratting you out, though, you'll be better off if you blame him.

So that's where rule of law comes in -- if, say, two people sign a contract and they're both honest, they both benefit. If there's cheating on one side, the honest one loses. If the laws of society have penalties for cheating, less cheating will occur. If there are no penalties, or the penalties aren't enforced, then it actually becomes illogical *not* to cheat.

tangent
(There are other factors like religious beliefs that play in here, but I'm ignoring them for now) (actually, no, that might fit -- some religions teach that sooner or later, cheating *will* be punished, and that increases the odds that those believers will stay honest)
/tangent

I notice, Ann, that relative wealth seems to be a theme.
I cut you off there because I don't want to take it as given that the results do hold true for Americans. Where was this survey conducted? Americans like to be richer, yes, but they don't usually want to make everyone else poorer. There's a phenomenon called "keeping up with the Joneses" which is about competitive consumerism. If the Jones family buys a new car, the Smith family wants one, too. Jones gets a new power saw, Smith gets a bigger one. The Murphys trump that with a remodeled kitchen. Etc. Nobody in this game is running around trying to destroy the neighbor's stuff. That wouldn't be the same thing at all. (They're probably all in debt up to their eyeballs, but that's another story.)

Money in a bank in Switzerland means more money that can be loaned to other people. That benefits entrepreneurs who go on to hire people, etc. Factories in China are a great source of cheap goods, which increases the spending power of Joe Average.

So what if it wasn't? Think globally! Perhaps there's an up and coming boat builder in Chad who could really use the hard currency.

In the mid-nineties, Bill Clinton & the boys hiked up a tax on luxury yachts. The principal result was that boat builders went broke.

You responded to Roger:
And the phrase "siphoning off money" struck me. First, you seem to be dealing with a zero-sum mindset here. If one guy gets a bigger piece of the pie, it's because someone else had part of their slice taken away. Except that isn't true. The entire pie can and does grow, which benefits everyone. Second, how does letting someone keep more of their own income constitute "siphoning off"? That seems to assume that the government owns the money in the first place, which I would strenuously disagree with.

Lower and middle income people really don't pay that much in taxes, btw. You can't just look at rates, you have to factor in deductions and exemptions. Speaking for the decidedly non-wealthy Jernigan household, over the last few years, our net personal taxes have run about 4-5% of our income, even though some of our income is in the 28% bracket. If the tax cuts are allowed to expire, we'll have to pay more.

The other general point I want to make is that membership in "the rich" is anything but static. People get rich, people go broke. Sometimes they go on to get rich again. A large percentage of "the rich" have not inherited money, they earned it. You compared it to nobility, but I don't think that works. Nobility is the ultimate old-boys club; if your ancestors didn't suck up to the right monarchs, you've very little chance of ever getting in. There's no such barrier to getting rich.

I'd write more (perhaps I'll get to W tomorrow) but I'm hours past my bedtime...

PJ