Clinton, Obama Put Middle Class On The Wrong Path To Prosperity
By RAFAEL RESENDES AND JOHN TAMNY | Posted Thursday, March 06, 2008 4:20 PM PT
Democratic front-runners Hillary Clinton and Barack Obama have made restoring the economic prospects of middle-class Americans the centerpiece of their respective presidential campaigns.
Clinton decries "stagnating wages and a growing sense that too many middle-class families are just one pink slip away from financial devastation," while Obama laments the 2003 tax cuts that offered the rich tax relief "160 times greater than that received by middle-income Americans."
To fix this seeming inequality, both would let the aforementioned cuts with regard to income and capital gains lapse in 2010, and both would seek further redress through greater penalties on investment success and high incomes.
Such class rhetoric is probably not a bad short-term political strategy considering the ratio of middle-class Americans to rich Americans, but would these policies actually address the economic needs of average earners? We think not.
Conspicuously absent in their lofty rhetoric is acknowledgment of the relation between capital and wages that drives economic growth and creates jobs. They also fail to understand how risk and capital combine to drive innovation and increase living standards across economic classes.
Middle Class Boost
Sure enough, there are no wages at all without capital, and when taxes rise on earnings, there's a reduction in the amount of capital available for wages. As for investment, capital merely flows to where it is treated best.
The above truths have apparently eluded the Clinton and Obama camps, despite the desire of the former to achieve "shared prosperity" and the latter's aspirations to actualize the ethereal concept that is "change."
Real change from Washington would reveal itself through a basic admission on the part of politicians that income inequality is a useless way of measuring an economy's success. Overall quality of life is a far more important measure, not to mention that financial success of the income and investment variety consistently leads to prosperity that is shared by all.
That is so because it is the rich who have capital. And when the rich are able to keep more of what they earn, they have three basic choices when it comes to what they can do with their nontaxed income. They can consume it, save it, or, best of all, invest their financial surplus. All three accrue to the economic health of the middle class.
When they spend their earnings on a combination of life's necessities and frivolities, the consumption is a form of economic "stimulus" that doesn't require the money to make a round trip through Washington.
The consumption should be seen as a purer form of non-Washington stimulus that in no way enervates its beneficiaries, and that in no way reduces the incentives for rich and poor alike to work and produce in the way that high marginal tax rates do.
The rich can also hoard their funds in savings accounts. Keynesian theory tells us that this is a bad thing, but in truth, money saved hardly lies dormant. Instead, banks lend out savings to job-creating entrepreneurs and businesses, along with individuals who might already have a better use for the money than does the saver.
Best of all, the rich can invest their money. This is ultimately the most critical driver behind increased societal shared prosperity, as it leads to innovation — which is what ultimately improves a society's life quality.
For example, this year's Super Bowl was visually more appealing to football fans today vs. 10 years ago due to improvements in computer technology fans could only dream of 10 years ago. Today's "economy" car is more reliable, safer and easier to drive than luxury models of the 1970s due to new materials and manufacturing processes. Medical procedures and medicines exist today for health problems that killed or significantly reduced life quality in the 1990s.
Today's middle-class American enjoys goods and services that the wealthiest Americans could not 10 years ago. This results from the rich investing their money in an attempt to create more wealth, which not only leads to immediate jobs but also adds to discovered knowledge that in turn spurs innovation never before imagined.
It is this process of investment and innovation that truly leads to shared prosperity. Importantly, taxes on investment success greatly affect the willingness of those with means to invest.
Consider two countries: A, where individuals invest their capital and keep the gains from those investments; and B, a world where individuals invest their capital but the government keeps 50% of those gains.
Every dollar of return an investor earns from an investment placed in A requires two dollars from a similar investment placed in B for an investor to achieve a similar personal gain. Does anyone doubt that investors from country A will be more willing to pursue investment opportunities relative to investors from country B?
Is Inequality Relevant?
For our often uncertain politicians, let's quickly illustrate why. Let's say investors are offered a project that generates an 8% return. Because of the risk involved with this project, investors require a 6% return for providing their capital.
In country A, investors gladly invest and create new jobs and add to the knowledge in the economy to eventually create new technologies. In country B, investors refuse to invest, as they will only make 4% on their investment since the government will take half of their returns. This country misses out on the additional jobs and knowledge this project brings to all citizens, regardless of the current economic structure.
The path to shared prosperity is not measured by income inequality, but rather by the life all citizens live relative to their alternatives. Over the past 55 years, the world has witnessed how societies that embrace individual wealth creation and accumulation provide living standards far greater than those promoting income equality.
The middle class should not be fooled by the rhetoric emanating from Clinton and Obama. When they talk about raising taxes on the rich, what they're really saying is that they will lower the wages and living standards of the middle class through reduced capital formation.
"Shared prosperity," rather than something that can be provided by the federal government, is something that will only reveal itself when the taxes levied on the prosperous are reduced.
Resendes is president of Applied Finance Group. Tamny is editor of RealClearMarkets and a senior economist at H.C. Wainwright Economics. |
