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Alternative Minimum

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The following post is by Dealbreaker reader and commenter Infinite Guest.

For a long time, I used to go to work early. I worked downtown, alone on a nearly silent floor, and around dawn most mornings I took a coffee break or an early lunch, looking out the south windows on the streets coming fitfully to life and the glint of gold leaf as the rising sun stuck the Statue of Liberty far below. During the next few hours the building and the district would fill up, noisy, arrogant and anxious, thousands of similar but distinct agendas executed upon with ferocious intensity only superficially restrained by the sober business suits and starched shirts we all used to wear back then; but dawn belonged to me and Liberty, and as much as I dreaded taking a car to work in the cold dark to suffer over minuscule discrepancies, the identification of which furnishes my living, I looked forward to seeing her every morning. I could step away from whatever crisis was ongoing in London, hands off the keyboard, eyes off the screens, and feel free, if only for a few moments, and enjoy my freedom.

Liberty means different things to different people. To our Founding Fathers, to a great degree, it meant “No taxation without representation.” That is, that we citizens ourselves, through our representatives in government, have the right to direct our government’s collection of revenues according to our wishes, as being a necessary curb on their arbitrary exercise of power; and this was by no means a new idea, but on the contrary a condition and a state of affairs the English themselves took for granted, a kind of “freedom from” in the sense that they were not slaves of the king and a kind of “freedom to” in the sense that, through the strange and tortuous swamp that is the political process, they acted in their own self-interest, or anyhow their group interest, to influence the shape of things to come. Liberty, to many if not most Americans today, is closely tied to social mobility in the ideal of the self-made man and the rugged individual of the Frontier, the person who is not bound by any ties to the past, or to other people and other cultures overseas, but is free to carve out his own destiny and make his own fortune according to his abiity and ambition. And even if I draw them that way, these two ideas of liberty are not at opposite ends of the spectrum. They coexist rather well in most cases, even in the same person at the same time. I myself believe that the rugged individual and the self-made man, to the extent that there are such things, since in fact we all come from somewhere and we all rely from time to time on the help of other people, are exactly the people we as a society want to encourage and attract, and ought to support, through our tax policy. Hard-working, independent people with ideas and ambition are the people for whom the concept of liberty arose in the first place. The rest of us don’t make much use of our freedoms, might not need them, could even be better off without them. The freedoms that a society has and the freedom of the individual, even though they are not a dichotomy, not slices of the same pie, are also not identical, nor parallel axes. And it happens that given a large enough space, any two axes which are not parallel will from time to time cross each other.

The Statue of Liberty is among the most famous monuments ever constructed. It follows that the statue means many different things to many different people. All art is necessarily ambiguous, of course, but in the broader sense of human understanding generally, we could say that the observer, the thing observed and the particular context they both inhabit are all contingencies to any sort of meaning, and the Statue of Liberty is an excellent example of that sort of thing. Today, as I reimagine my memory of those mornings, I don’t recall associating her with Class Struggle, but her design, dedication and purpose, that is, the intentions of the people who commissioned her and constructed her, run very much along those lines. She is partly a monument to the French Revolution, partly to the abolition of slavery, and largely to the liberation of the European peasantry under the pressure of nearly open immigration to the United States. Even today it would not be an exaggeration to say that the great strength of the United States lies in her power to coerce the other nations of the world to adopt her institutions and practices, nor to say that the great wealth of the United States – a fantastically wealthy country! – lies not so much in the wealth that is privately held or controlled, but rather in that public wealth we hold in common: our culture of innovation, our open exchange of ideas, our vast natural resources and the means we have to exploit them, our pragmatism, our public education system, such as it is, our strong defense of both property and liberty, our shared respect for the value of hard work and our regard for the safety and welfare of the people who perform it, and even our orderly and predictable, if perhaps bloated and intrusive, public sector. The greatness of this country is the fact that in contrast to her antecedents and even some of her contemporaries, America is generally on the right side of the Class Struggle, on the side of the great majority of mankind who through most of our history have suffered unfairly and unnecessarily and from whose toil and collaboration we all benefit together as against the privileged minority whose appropriation of public goods for their private enjoyment by any means has been and continues to be an obstacle to the advancement of human society. Which brings me to Bill Gross.

I’m not young enough to believe that economics is a science, nor that a nation’s economic policy is anything but politics, and I’m not smart enough to believe that it should be. Fairness is fundamental to economic policy, and fairness is a funny thing, like liberty. It defies easy definition. Too many economic actors have too many conflicting priorities, not all of which cohere to any sort of rational expectation of human behavior. If a set cannot be ordered along a single axis, then political solutions are probably the best we can do. Now, the means for arriving at a political solution, the legitimacy of the institutions responsible for implementing it, the people who influence it and the shape it takes are all rich fields for debate, but here we are, at our current level of ignorance, with what technological substructure is available to us, making economic decisions profound and otherwise in what must be a relatively fair and efficient way by some standard, else we would all go about arriving at superior bilateral (or multilateral) agreements on the side, which in fact we do, all the time. And here we are in a world dominated by American ideas and practices supposedly drifting away from an equitable distribution of wealth and income, the latter of which feeds the former in the case of the underclass, and vice versa for the very fortunate few, so that even social mobility, the American Dream itself, is no longer possible for the majority of people who are supposed to be somehow actually running things. Well. No surprise to see the muzzles of a few stalking horses peeking through the brush, and before you know it we have ourselves the Buffett Rule. The problem, we are told, is that rich people don’t pay enough taxes. Raise the top marginal rates on income or harmonize the rates on capital gains or close a few loopholes, whatever, just make sure that rich people pay more taxes. Problem solved, if only the Republicans would get on board. It’s a fairly Manichaean view. That’s politics.

I believe the long term is a sort of central limit to innumerable and highly variable accumulated short terms, which is to say that the future doesn’t have much to do with the present, but you can hedge, and I would like to see our political institutions taking the long-term view, especially since nobody else does, but file that in my huge pile of unrealistic desires somewhere between getting a decent martini outside Manhattan and having a threesome with Marion Cotillard and Kate Upton. Nevertheless. We all read PIMCO’s November Investment Outlook, and in particular, this boldfaced bit:

If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing “capital” at lower rates than “labor” should now end.

There’s no shortage of food for commentary there but a few things jump out at me. The obvious bit is that this privileged 1% represents three million people, most of whom work for a living, and that they are concentrated in areas like New York City where the overall economy is relatively healthier and more robust, poverty rates are lower, tax rates are more progressive, and higher, education, healthcare, public transportation and other social services are better, more comprehensive and more widely available, but wealth and income are actually less equally distributed than elsewhere in the country. His overall ideas, that labor is the source of value and that economic rent should be taxed away, shouldn’t be controversial, and although I suspect he’s (somehow) talking his book even in this letter, my hat is off to him for committing the sentiment to paper so clearly and publicly. The rest of it is a little murkier, and I don’t mean to single out Bill Gross even though here I am singling out Bill Gross, for no other reason than that he’s the one who wrote the letter. Then Bill Gross, too, means many different things to many different people. He doesn’t mean much to me. He’s not my friend, my role model or my customer. He’s a highly successful money manager with a very big megaphone, which he used this month explicitly as the mouthpiece of a class of people.

Most of my income comes from employment. You could assert that a large share of my income is derived from economic rent, and I would not particularly argue, but then, the system works in my case: a greater portion of my income goes to various tax authorities than to food, housing, childcare, healthcare, insurance and education combined. Our family would not be impacted by any of the proposed Buffett Rules, except in the beggar-thy-neighbor sense that the people who are would therefore have something in common with us, and to the extent that any change in the tax code gives me something new and tedious to work on for a little while, so, naturally, you might expect me to be in favor of it. All things considered, to a first approximation, the Buffet Rule is good for me. Then, too, hate is a strong word, and it’s a mistake to generalize, but without naming names I wouldn’t really mind seeing one or two very rich people pay their fair share, so to speak. I don’t share Bill Gross’s view, or perhaps his class’s view, that the Buffet Rule does that. I think it’s much more likely that the Buffett Rule would create inflation. Furthermore, I think it’s generally accepted that raising tax rates on interest income and capital gains, ceteris paribus, directly depresses growth. Maybe the rates are “too low” and they “should be” higher. Fine. If, as a society, we choose to turn slightly away from investment for the time being in favor of minimally higher Federal tax revenues that I suppose will eventually find their way into consumption, who am I to argue? But let’s not pretend that investors don’t care about the tax rate their paying when in reality it’s practically the one thing they do care about, otherwise there wouldn’t be any such thing as PIMCO and Bill Gross would still be counting cards at Binion’s.

The real meat of the November Investment Outlook, elided by the media, is Mr. Gross’s complaint that corporate profits and financial wealth are disconnected from growth in the real economy via financial engineering and bad tax policy, and consequently, productive assets are underinvested and working people fail to realize gains in income. I would be surprised at how long this divergence has persisted except that, having worked for large companies, it seems to me that they could generally stand to be more aggressive, not less, in their efforts on that front. There’s still a lot of fat at many large companies, which, like cream, rises to the top. Once that’s gone we can talk about profits reflecting growth in the real economy. As we move toward a leaderless society over the Utopian long term we can dream that the trend will head toward greater competence among the few leaders who necessarily remain to preside not over the hierarchy of people but instead the administration of things. In the meantime, how do higher tax rates on investments to anything to address his underlying concerns? They don’t. At best, they would be semiotic, simply a means for the government to propose, and the wealthy to agree, that savings is not superior to consumption in the preferred scheme of economic activity. For some set of people who are socially aligned with the herd, signals like that might be sufficient to redirect them toward more productive activities. Maybe the very wealthy belong to that set. I don’t think so. I think the rich are different than you and me. They’re rich, for one thing.

What happened here is that Mr. Gross took a look at some very real problems and some proposed government solutions and matched one to the other without weighing any alternatives not currently on the table. If you’re going to appear to surrender something valuable without actually surrendering anything very valuable, it’s a good strategy. If you’re going to address the problems that concern you, and if those problems amount to, “Maybe it’s wrong that I have so much when everyone else has so little, and I keep getting richer while they don’t,” then you really ought to try a little harder, and necessarily, it will cost you.

What, then?

Even in politics, under the right extraordinary circumstances, once in a while it’s possible to confront matters directly. In his State of the Union Address earlier this year, the President called on Congress to raise the national minimum wage. It seems like a long time ago and I haven’t heard anything since, but there’s something that would directly and meaningfully address income inequality. For starters, why don’t we go ahead and do that? He asked rhetorically. And as to the inadequate use of assets, well, although a tax on returns doesn’t really address that problem, a tax on asset values does. Directly.

Yes, I know: France. That’s just like you to try telling me that because a thing works or doesn’t work in France it will or won’t work in the United States. The most recent round of asset taxes hasn’t worked quite so well as intended in France. Fat has-been movie stars are fleeing to Russia in droves, yes, I read the papers occasionally and I understand your objections but the United States of America is not France and it never has been (except for a few territories that were at one point but haven’t been lately). Some form of wealth tax is particularly suited to the United States, which unlike France has worldwide tax jurisdiction, and which is Constitutionally required to distribute the revenues from any direct tax back to the states in proportion to their population, making it both difficult to circumvent and at least potentially fair, from the standpoint of wealth redistribution, in a way that the cosmically perverse black hole of other Federal expenditures – debt service, foreign wars, agricultural subsidies and the like – is demonstrably not. If you knew an asset was costing you money to keep, you’d be under real pressure to get some use out of it. Again, I don’t believe economics is a science, but I confess, I do believe in incentives. I believe that the larger problems, the structural problems and demographic problems slowly draining the vigor out of our national economy would be ameliorated by some of the likely indirect consequences of a wealth tax, for instance, that under the current regime there is no compelling tax incentive to produce goods onshore, recirculating workers’ income in the national economy instead of shipping it off to China and India, but, if assets were taxed, there would be. If assets were sufficiently taxed, there would be so much production here in America that we wouldn’t have enough workers to fill the available jobs. We’d have no choice but to return to that era of open borders that inspired the Statue of Liberty Enlightening the World.

You can take this with you to your next cocktail party, that champions of the Buffett Rule are picking the wrong fight with the wrong people for the wrong reasons with the wrong weapons. It’s newsworthy when billionaires support higher taxes on returns. It makes them seem almost human. But until they support measures that would actually improve life for the least among us, like taxing assets and raising the minimum wage, they remain so many Scrooge McDucks.