I am inspired by Big Swede, a frequent commenter here and elsewhere who has his own brand – the somewhat-non-sequitur. The man has his own charm, and I’ve come to appreciate it. He did, in his own fashion, make a sort-of-dead-on comment over at Missoulapolis – here’s the original quotation he is responding to – Carole links to Haaretz:
First of all, even with their very long-term view, CalPERS and funds like it couldn’t achieve returns greater than 9% a year, as they did over the last 25 years. Long-term government bonds trading at a yield of 3% create too much of a burden on returns, which translate into excessively high expectations of the portfolio’s stocks component…
Secondly, dropping yields on government bonds over time requires savers and public employers to increase their provision into savings, at the expense of consumption. That is the price of very low interest rates. In some cases, it can wind up depressing private and public consumption instead of stimulating them. We seem to have reached that point.
To which Swede responds:
Consider this vicious cycle.
People out of work, less money to spend.
Leads to
Sales and income tax declines.
Leads to
State govt. running deficits.
Leads to
State govt. raising taxes.
Leads to
Business leaving state or country.
Leads to
People out of work, less money to spend……..and on and on and on……
It does indeed seem like a downward spiral. The theory behind the stimulus package is that government has to step in and halt the spiral by injecting fresh cash into the system, creating demand. The stimulus package, however, was besotted with tax cuts directed at the upper middle class, so its impact will be muted somewhat. There will probably be another stimulus package in our future. In the meantime, Republicans are like a broken pull-string doll … tax cuts … tax cuts … tax cuts …
The word that comes to mind is “chaos”, at least apparent chaos as we move back towards order. But how much pain must we endure? I don’t know if the stimulus package will work. I sort of doubt it. I look at Obama’s $1.75 trillion deficit, and shudder. China is our good buddy, but are they that good? If not, do we merely create the money? If we do that, do we spiral into inflation? Hyperinflation?
History repeats, somewhat. Asset inflation and easy money and low taxes and paper chases preceded the Great Depression. We supposedly know more now, and have a Federal Reserve wise to its own mishandling of the banking system back then. Nobody wants chaos or depression or inflation, except perhaps some mentally challenged Republicans who want Obama to fail.
But I wonder if it is all beyond our reach, if we have to crash, bottom out, and again come to know what our forebears learned from the first Depression: We need financial regulation and high marginal tax rates to keep this marvelous engine from overheating.
Piece of Mindful 
dropping yields on government bonds over time requires savers and public employers to increase their provision into savings, at the expense of consumption.
Let us be mindful of why yields drop on savings, why our investments don’t do as well. Maybe our workforce, including the overpriced CEOs you like to bash, is not as productive as before. One problem with high yields is that it encourages people to drop out of the workforce, either retire early or do lesser jobs. This dropout reduces the productivity of the workforce. Perchance that is part of the problem we are seeing.
Government stimulus can be helpful in as far as it boosts productivity. I don’t see much productivity boosting items in the latest round.
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You’re not the first I’ve heard who defend CEO compensation as a day’s pay for a day’s work. They are merely in a position of high leverage. No one is worth what they make.
There is the matter of arbitrage, where CEO’s save money by replacing American jobs with cheaper foreigners. Then you could say they have earned their pay, from a stockholder standpoint.
Anyway, I’ve not seen anything on productivity lately, but it was on the rise all throughout the last eight years. Wages did not keep up.
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I like your term, “fresh cash”, which means to me, fresh off the printing presses. That being said I’d like to kick the can down the road on the productivity issue.
Seems to me, Obama’s foray into economics has definately poked a stick into the monsters eye. That monster of course is the wealth producers, not the wealth redistributers. How can the producers enact their revenge? Productivity.
As a dual wage earning family my wife and I are well below the 250K threshold. But under similar circumstances, our jobs, investments, properties located in the east, or west would put us over. The solution, simple, cut back. In fact many now are talking going “John Gault”.
Going “John Gault” would mean as a professional cutting back hours, hitting the links, fly fishing the Madison, in an all out effort to reduce family income to $249,999.
Now I’ve heard you say all wealth is created from the bottom up. What a more perfect way to prove your theory.
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Being a “serial linker”, I couldn’t resist.
Reason to revolt.
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Workers, using equipment and tools and ideas (creators are also workers) make products. The wealth created flows upward, as each worker is paid less than he produces. (Were this not the case, there would be no business in the black, as they’d all be paying out more than they make.) It’s elementary.
Investors harvest wealth, leverage it, reallocate it, reinvest it in plant and equipment, and are an essential part of the process. But they do not create wealth. They facilitate creation, however, and are necessary.
Chasing paper is not a wealth producing activity.
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I just got your 250K statement. If you are so foolish as to stop working when you reach 250K, you will hear a chorus of Accounting 101 students yelling at you “You’re never better off making less or spending more”! And frankly, I doubt you’d do it.
And I think his name was Galt. Or Reardon. Or Rourk. They were all comic book figures, inventions of a woman with an active imagination and a philosoophy at odds with the real world.
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You’re not the first I’ve heard who defend CEO compensation
I was not defending. I was agreeing with you in an off-hand manner. If we have a bunch of overpaid CEOs that would be part of the problem of reduced returns.
The wealth created flows upward, as each worker is paid less than he produces.
I would say your accounting here is too simple minded. The team on the floor may actually build the car, but their value added includes returns to management and capital.
Investors harvest wealth… But they do not create wealth. They facilitate creation
You are a little too hanged up on “creation”. Try thinking in terms of “adding value”.
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I would say your accounting here is too simple minded. The team on the floor may actually build the car, but their value added includes returns to management and capital.
Management is part of labor. You’re being too narrow. I’m separating the act of making an investment as a wealth-creating activity. It’s the essence of your philosophy. You over-value it. Dramatically. Good management is a valuable skill. Investors perform a useful and necessary function, but they do not create wealth. They re-channel it, they redirect it into new ventures, and free free up people to work and create new things. It’s a valuable service they perform, but you guys give them all of the credit when they deserve very little. That’s because they can afford to hire economists to advance their cause, and they fund think tanks, like Heritage, that suck up to them.
That’s trickle down. It’s bogus.
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You’re right about Galt not Gault. Been awhile since I read the book.
And I’ll agree that any beginning accounting student would balk at turning down extra income, no matter how high its taxed. Especially after seeing job prospects after graduation vanishing into thin air.
Think of it as a protest, symbolic gesture. Or better yet, an avoidance of being labeled as “rich”.
Because I see a day when that label disqualifies you for medicare, SS, mortgage and charitable contribution deductions.
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How old were you when you read the book? (I’m doing a survey.)
Exactly how large a tax increase are we talking about here?
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Early 20’s? It was an optional read at the small college I attended.
We’re not talking a large increase, but when you turn up the knob too quick, the frog jumps out.
I just heard that Max is bemoaning the Adm. new proposal that any farm/ranch grossing more than 500K is ineligible for farm subsidies. I’m seeing a trend, success measured in portions of 1M.
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It is suggested that people not read Atlas until they are in their 30’s, and less impressionable.
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you will hear a chorus of Accounting 101 students yelling at you “You’re never better off making less or spending more”!
Why not? You have to consider the opportunity costs: the cost of the next best foregone alternative. You have to consider the value of leisure time. And sometimes the spinner rims are worth more to us than the cash in hand.
You over-value it. (investment activity) Dramatically.
The market values investments. Modern finance has dramatically dropped the cost of accessing investment money and increased its availability. Funding for 747 fleets and pawn shops is more competitive now than ever.
They re-channel it (wealth), they redirect it into new ventures, and free free up people to work and create new things.
This is managing money and deserving of compensation. I’ll agree that there is some overcompensation going on. I generally vote in favor of market transparency vs edict from the mandarins in DC. But the fee structure on investment management has troubled me for some time. I compare it to paying firemen based on the value of the buildings they save. Most firemen are honest, but you will tend to get more and bigger fires. Our debt securitization problem is a form of arson.
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It is suggested that people not read Atlas until they are in their 30’s, and less impressionable.
Are you telling us you read it too late?
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You make good points, of course. The accounting axiom is really a tax axiom – a reply to people who ask you if it is worth this or that expense to save a few tax dollars. And Swede is really arguing Laffer again – that we have reached the point where additional taxation will yield diminishing returns. He is at odds with history.
And your points about investors and access to capital are sound as well, and we are in agreement that such pursuits are overvalued. I say that we are awash in capital, and that such activities deserve no special notice in the tax code. But since investors have accumulated great wealth, and our political system is based on private bribes given to public officials, they have had overbearing influence on the tax code, and had their own activities set aside for special reduced rates of taxation.
The value of leisure time means a lot to me, by the way, which is why I do too much of this.
And finally, I was spared Atlas as a youth – my oldest brother was a Randian (Randolph?), as were tens of thousands during his time. Her philosophy takes hold at a young age and stunts the intellecutal growth of people. My brother is still trapped in right wing economics, never having experienced, even for a second, the notion that the other side might know a thing or two. That’s Rand.
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