Economist Robert Samuelson at his best. He addresses the question of income inequality in his column. An excerpt:

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap though still vast between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn’t better off. By and large, the poor aren’t poor because the rich are rich. They’re usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck. The presumption implicit in the criticism of growing economic inequality is that society’s income is a given and, if the rich have less, others will have more. Up to a point, that’s true. The government already redistributes much income, often for the good. During the boom years, companies might have been less lavish with top executives and slightly more generous to other workers or shareholders. Some new fortunes stem from self-dealing and financial razzle-dazzle, not the creation of real economic value. It’s just desserts that some of this wealth has evaporated. But the redistributionist argument is at best a half-truth. The larger truth is that much of the income of the rich and well-to-do comes from what they do. If they stop doing it, then the income and wealth vanish. No one gets it. It can’t be redistributed because it doesn’t exist. Everyone’s poorer.

I think those last few sentences would surprise most voters. It’s not a surprise to those who want to redistribute wealth. To them, potentially having additional monies to redistribute is worth the gamble of damaging economic growth with higher tax rates. Poor economic growth is hard to ascribe to any one member of Congress, as such, the political costs are too dispersed to have an impact on your average demagogue.

In fairness, if you’re a liberal democrat, not voting for higher tax rates may constitute an act of super-human discipline. It’s like asking Shawn Kemp to remain celibate AFTER his vasectomy. [Speaking of stamping out pandering, I almost explained the Kemp joke–the fight continues, the dream shall never die!]

Also in the column, Samuelson notes how McCain’s attacks on greed ‘buttressed the moral case for redistribution.’ I agree, McCain spoke as though he had personally detected an uptick in one of the seven deadly sins. Keeping the Jeopardy category of ‘seven’ alive, that was kind of Dopey of him.

Poor voters, the guy who was supposed to give the other side of the income inequality argument ending up sucker-punching his client. Perhaps we should have seen it coming though. Since McCain was limited by his acceptance of public financing, in effect we got the candidate version of a public defender.

All articles referenced are copied in full at end of post.



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Poor Aren’t Poor Because Rich Are Rich

November 04, 2008

By Robert Samuelson

For years, we’ve debated rising economic inequality. On one side, liberals denounce it as unjust. Redistribute wealth to the poor and middle class, they say. On the other, conservatives minimize its importance. What matters most is overall economic growth, they retort.

Well, the conjunction of the presidential campaign and the financial crisis is giving the debate a curious twist. Liberals have triumphed politically; soaking the rich has become more acceptable. But conservatives may have won the intellectual argument; making the rich poorer doesn’t make everyone else richer.

If Barack Obama and John McCain agreed on anything, it was this: Greed is bad. They competed in denunciations of reckless investment bankers and avaricious CEOs.

Obama proposed raising taxes on higher incomes (couples above $250,000); though McCain didn’t, he suggested that much recent wealth accumulation was ill-gotten. Unintentionally, perhaps, he buttressed the moral case for more redistribution. Let’s tap the gold mine of the rich.

Unfortunately, the mine has less gold. All the financial turmoil has left the wealthy, however defined, much less wealthy. Stock ownership is highly concentrated. In 2001, the richest 1% owned 34% of stocks and mutual funds, estimates economist Edward N. Wolff of New York University. Let’s see. Since the market’s high in October 2007, stocks are down (through Oct. 31) 38%, or $7.5 trillion, reports Wilshire Associates.

That will mean lower capital gains taxes, because capital gains profits on the sale of stocks and other assets will plunge. In recent years, capital gains taxes have been running at $100 billion or more. That amount could drop sharply, even if the top rate on capital gains were raised from 15% to its pre-2003 level 20%.

Thousands of well-paid investment bankers, traders, portfolio managers and security analysts are losing their jobs. Though Wall Street bonuses will continue, their total is likely to decrease. Gains in executive compensation may be similarly squeezed. Profits are down; the political climate is hostile.

In 2005, the richest 1% of Americans had 18% of total income and paid 28% of all federal taxes, says the Congressional Budget Office. Their income won’t grow much. Even if higher tax rates increase government revenues, the effect will be less than before.

Judged only by economic inequality, the financial crisis is a godsend. It will probably narrow the gap though still vast between the rich and everybody else. But what good will that do? Economic inequality also declined in the Great Depression. The country wasn’t better off.

By and large, the poor aren’t poor because the rich are rich. They’re usually poor for their own reasons: family breakdown, low skills, destructive personal habits and plain bad luck.

The presumption implicit in the criticism of growing economic inequality is that society’s income is a given and, if the rich have less, others will have more. Up to a point, that’s true. The government already redistributes much income, often for the good.

During the boom years, companies might have been less lavish with top executives and slightly more generous to other workers or shareholders. Some new fortunes stem from self-dealing and financial razzle-dazzle, not the creation of real economic value. It’s just desserts that some of this wealth has evaporated.

But the redistributionist argument is at best a half-truth. The larger truth is that much of the income of the rich and well-to-do comes from what they do. If they stop doing it, then the income and wealth vanish. No one gets it. It can’t be redistributed because it doesn’t exist. Everyone’s poorer.

This isn’t just theory. Last week, Gov. David Paterson of New York pleaded with Congress to provide emergency aid to states. Heavily dependent on Wall Street for taxes, he testified, New York faces a $12.5 billion budget deficit next year and expects joblessness to rise by 160,000.

Wall Street bonuses will drop by 43% and cap gains income by 35%, he estimated. People in New York would be better off if the securities industry were still booming, even if there were more economic inequality.

Americans legitimately resent Wall Street types who profited from dubious investment strategies that aggravated today’s crisis. And government properly redistributes income to reduce hardship and poverty.

But that’s different from attempting to deduce and engineer some optimal distribution of income. Government can’t do that and shouldn’t try.

Scapegoating and punishing all of the rich won’t do us any good if the resulting taxes dull investment and risk-taking, discouraging economic growth that benefits everyone.

Page Printed from: http://www.realclearmarkets.com/articles/2008/11/poor_arent_poor_because_rich_a.html at November 09, 2008 – 10:59:52 PM CST

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