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Rex Nutting
Aug. 4, 2010, 12:01 a.m. EDT · Recommend (12) · Post:
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G-20 to world: Spend more, save more
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How much time will Wall Street give AOL?
By Rex Nutting, MarketWatch
Editor's note: An intermittent columnist on these pages for some time, Rex Nutting begins a regular weekly stint at MarketWatch with today's entry. His column will appear every Wednesday, and eventually will be expanded to twice weekly.
WASHINGTON (MarketWatch) -- The rich have broken their side of the bargain.
Here's how it's supposed to work: The super-rich accumulate vast fortunes and spend some of it conspicuously (thank you, Chelsea) while the rest of us emulate them, envy them and gossip about them. In return, all they have to do is keep the rest of us gainfully employed by investing their savings wisely.
Reuters The estimated $3 million wedding of former first daughter Chelsea Clinton to Marc Mezvinsky is one example of conspicuous consumption by the rich.
The richer they are, the better off we are, the theory goes.
That's the essence of trickle-down economics. It's the premise behind the trillions in tax cuts over the past nine years that have left the federal budget in a huge hole.
It's time to recognize that the policy of tax cuts has failed us. They blew a titanic hole in the budget. What's more, they didn't deliver the growth that was advertised. Although the very richest Americans got even richer, the rest of us were left behind, contrary to what was promised by the politicians.
From the time of the Reagan tax cuts in the early 1980s to the eve of the recession in 2007, the average inflation-adjusted income of the top 1% doubled to $1.8 million, while the incomes of the bottom 40% rose just 7% to $20,000.
The top 1% of families -- those who are worth more than $8 million -- saw their wealth double. They owned half of the nation's wealth in 2007. In the meantime, the bottom 40% have lost wealth since the 1980s and now own no more than the roof over their heads.
Since the recession, the gap between the rich and the rest of us has only gotten wider.
The middle class is disappearing, and with it our consumer-led economy. America may be returning to the economy of 1750, when spending by the rich was the only thing that kept shopkeepers and manufacturers in business. The problem is, the rich just don't spend enough to keep us all employed.
Lowering the top marginal income tax rate and reducing the tax on capital gains and dividends was supposed to usher in a new era of investment, a rising tide of prosperity that was going to lift all boats.
Instead, we got a massive misallocation of capital. Instead of building the things that would help the economy grow, we got millions of unwanted houses. Instead of new high-paying jobs, we borrowed against our homes and ran up our credit-card debts to finance a lifestyle we couldn't afford.
The economy we created was badly unbalanced, and it's going to take years to restructure it. We're about 12 million jobs short of where we should be. How many celebrity weddings does it take to create 12 million jobs?
The pool of people who are at home today is larger than ever. But Jeff Zaslow explains why many people at home are now saying they've had enough.
The tax cuts aren't the main cause of our problems, but they didn't prevent the worst from occurring either.
The idea that cutting the taxes of the wealthy would lead to prosperity was based on a naïve view of what motivates people. Money matters, but other things matter more. Talent, pride, ambition. Is LeBron James 20 times the player Bill Russell was? Is Thomas Kinkade a better painter than Vincent Van Gogh?
Some of those tax cuts are scheduled to expire at the end of the year, and they should expire if we are serious about reducing the government's debt.
Yes, families earning more than $250,000 would pay a little more to the government. Taxes on capital gains and dividends would edge higher. The estate tax would be restored for the wealthiest families. Hedge-fund managers would pay their fair share. But tax rates wouldn't go through the roof; they'd be the same as they were in the late 1990s, when the economy did OK.
With the economy still struggling to pull out of a nasty recession, everyone knows it's not the best time to raise taxes; the economy needs all the buying power it can get. The net impact on the economy could be positive, however, if the extra revenue gained from letting the tax cuts expire were spent on investments in public goods like roads, education and research.
The Republicans insist that any further fiscal stimulus be paid for. If anyone should shoulder the burden of getting the economy going again, it ought to be the people who've had the good fortune to escape the recession without a smudge or a bruise.
Rex Nutting is MarketWatch's international commentary editor.
Wall Street growing impatient with AOL Inc. yet?
10:37 a.m. Today10:37 a.m. Aug. 4, 2010 | Comments: 2
- cluffjay | 12:07 a.m. Today12:07 a.m. Aug. 4, 2010
"Commentary: Stocks tend to do better when Congress is not in session http://bit.ly/9wksJl" 11:14 a.m. EDT, Aug. 4, 2010 from MarketWatch
"Itching to vacation? Air deals are rampant but act fast http://bit.ly/9bADda" 10:39 a.m. EDT, Aug. 4, 2010 from MarketWatch
"ISM's U.S. services-sector gauge strengthens in July; stocks react positively http://on.mktw.net/cqmjri" 9:06 a.m. EDT, Aug. 4, 2010 from MarketWatch
"U.S. stocks cling to modest gains in opening half-hour; Dow industrials up 27 points http://on.mktw.net/bc4M4t" 9:00 a.m. EDT, Aug. 4, 2010 from MarketWatch
"Coming up: ISM nonmanufacturing index for July http://on.mktw.net/db6U96" 8:38 a.m. EDT, Aug. 4, 2010 from MarketWatch
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