Friday, July 25, 2014

The failures of capitalism

From page B3 | July 16, 2014 |

I love capitalism. I truly believe it is the best system in existence. Whether you want to call it greed or ambition, a capitalistic system drives people to seek success.

As Warren Buffett said, it is this system that makes America the most successful country in the world, not something exceptional in the individuals that make up the country.

Years ago, Buffett also proposed more aggressive taxation of the rich. I have come to agree that this is the right thing to do. I believe for capitalism to thrive, we need for the players in the system to be motivated. Unfortunately, we have reached the point where a few players own too many marbles, and too many have none.

There are several consequences to this situation. In an era in which government assistance is too accessible, and generally results in a better lifestyle than modest income, we are killing the golden goose of capitalism — the ability of the average worker to achieve the American dream. We are encouraging dependency (disability retirements, government aid) because most people are unwilling to kill themselves for basic existence, and this is understandable.

At the same time, there is oodles of money in investments with little return, i.e., U.S. treasuries. The lack of return has caused risk takers to create a stock bubble. If this money were in the hands of middle-class consumers, it would be spent and drive further growth.

So, what are the solutions?

1) Put an effective cap on very high income earners with a steeply progressive income tax starting at $1 million per year.

2) Make capital gains tax progressive, beginning at the $1 million per year level as well, and consider decreasing capital gains for middle-class investors.

3) With that added government revenue from 1) and 2), feed that money in to subsidize people actually working for a living instead of voting for a living.

4) Shrink, do not grow, the government through attrition.

I believe these changes would allow flow and growth in what is basically a constipated economy where money is made and destroyed in a sequence of phony bubbles.

Greg Johnson


Letters to the Editor


Discussion | 20 comments

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  • Mike B.July 16, 2014 - 4:15 am

    What is the point of this letter? What does this have to do with anything topical right now?

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  • Greg JohnsonJuly 16, 2014 - 8:32 am

    Well Mike B, is the fact that 95 percent of the wealth created since the financial crisis has gone to the top one percent topical? Or, the fact that real median income has fallen over about the last 15 years? Or the fact that we had -2.9 GDP "growth" first quarter of '14? The "recovery" is not happening, and we have a huge percentage of chronically government supported people who have a better life than those who are trying to scratch out a living. If you want topical Mike, read the Enquirer!

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  • Rich RifkinJuly 16, 2014 - 9:43 am

    GREG: "The recovery is not happening." ........... I beg to differ. Not only has unemployment come down substantially, from over 10% to about 6%, but our industrial production has never been higher, ever. We are producing more industrial goods now than we did before the economy tanked in 2008. The leader of our industrial growth has been our high-tech sector, which leads the world. Also, in most parts of the country (including our region), the housing market has largely recovered, and nowhere is there a severe over-supply of housing inventory, which is what caused the price collapse of 2008. ............... None of that is to suggest that there are not serious problems in our economy or jobs market. We are getting older, and as a result a smaller share of adults are participating in the employment market. Because the value of a high-tech education is going up (esp. in computer science and engineering and the management of tech industries) much faster than the value in all other areas of our economy, we are seeing an imbalance between the haves and have-nots. Further, our banks are still not lending at a normal rate. They are quite profitable, due to the spread they are getting between their cost of funds and their lending rates. But it is quite unusual how little credit is being offered to home buyers and small businesses. Perhaps most worrisome of all is our massive under-investment in critical infrastructure. We see this in Davis and Yolo County, as our roads are in poor shape and getting worse. ................ Yet compared with most of the world and with what was going on in the U.S. in the previous 10 years (including the bubble years before the collapse), the macroeconomic indicators are all quite good right now and headed in the right direction. And no matter how much Greg Johnson says the opposite, he has no real facts to back up his contention that our economy is on the verge of disaster.

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  • Greg JohnsonJuly 16, 2014 - 10:23 am

    Rich, how did I know this would catch your attention? It's true that industrial production, and energy are bright spots. However, in spite of extreme monetary policy, growth stinks. Real estate is not great (I own a lot) except in pockets of wealth. The U-3 is pretty meaningless, and participation is bad, even among younger groups. I heard recently that more 50's and 60's folks are holding on to their jobs, so I believe we have not really felt much impact of the huge demographic problem which will slam the wealthy countries. I agree STEM is the way to go and that's where I'm going to direct my kids. I talked to a recent UCD grad with an econ degree and he told me he's applying for jobs for 9 bucks an hour and can't find one. Half the country thinks we're still in recession. When the people are convinced we're in recovery, I will be too! ..........................However, since you grabbed on to one sentence in my response and went to town, I would be interested in what you think of the content of the letter as I do respect your opinion.

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  • ZabaJuly 16, 2014 - 9:40 pm

    I beg to differ as well. ..... Just one tiny flaw that POTUS hussein has encouraged: it; lots of news stories...... "91 million Americans aren't looking for jobs....... The unemployment rate isn't always the best measure of the job market, because it only includes people who have actively searched for work within the last four weeks. Many Americans just aren't looking for jobs.....In fact, about 91 million adult Americans don't work, and aren't looking for jobs. They make up 37% of the population -- the highest level on record since 1978".......Rich, will you ask them how they see the economy?... Are we all excited by hussein obama's 'fundamental change' to America?.... I love capitalism and America. ....Some of our purported leaders, not so much.

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  • Greg JohnsonJuly 16, 2014 - 10:26 pm

    ....In fact, about 91 million adult Americans don't work, and aren't looking for jobs. .................Therein lies a huge part of the problem and one of the biggest reasons for my argument that we have to make working for a living more attractive than voting for a living. On its current course, the country is going to cave in.

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  • Rich RifkinJuly 17, 2014 - 9:35 am

    "In fact, about 91 million adult Americans don't work, and aren't looking for jobs." .............. There are several factors at play, here. One, of course, is that while the economy has added millions of jobs over the last 5 years, it has not yet added enough to pick up all the slack. Two, due to inefficiencies in our education system (and really the failings of individuals making bad choices) we have a lot of people who are poorly trained to work in the high-tech sector of our economy, where a science and math education is necessary, yet jobs are plentiful and being filled by immigrants. Three, many people who are very low-skilled and over 50 have been choosing (often fraudulently) to go on disability, which takes them out of the job market. But by far the most important factor is four, the percentage of our population age 65 and over is at an all time high and growing, and as a result, we have a far lower employment participation rates today than we had 15 years ago. Keep in mind that this aging factor really began in ernest around 2000, and since then the percentage of our employed adult population has been shrinking. Even in the bubble years from 2004-2008, when unemployment was low, more and more Americans were not working due to aging out of the job market.

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  • ZabaJuly 17, 2014 - 10:33 am

    "The leader of our industrial growth has been our high-tech sector, which leads the world"....followed by Israel......In the meantime, today's news as a possible sign of the times: Microsoft Layoffs to Cut Up to 18,000 Jobs......If we had a POTUS supporting American Exceptionalism and America overall, the economy would be lots better.....How's that Hope and Change working out? Lousily.

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  • AnonymousJuly 16, 2014 - 9:28 am

    The problem with putting a steep tax on higher income earners is that they will leave the country and live elsewhere. How does that help?

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  • Greg JohnsonJuly 16, 2014 - 10:28 am

    Anonymous, I can understand that concern. However, I imagine the majority of these people are US employees. Why do rich tech execs pay Palo Alto real estate prices and California tax rates? Why does Warren Buffett live in Omaha? There are many things that keep people where they are. Even rich retirees riding capital gains would think hard before moving to a different country where they had no friends or family, and probably didn't speak the language.

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  • Rich RifkinJuly 16, 2014 - 11:24 am

    Regarding your letter: I am not in favor of a higher income tax rate on the highest earners. I would get rid of all of the deductions and credits which almost always mostly benefit the rich. This is especially true with mortgage interest deductions. Something like 95% of the benefit goes to the top 0.5% of income earners. (I don't have a source for that. I read it a few years back in the WSJ.) ............... As to the tax rates themselves, I think our system would work better with just two rates, say 15% for income up to $200,000 and 30% for income $200,000 and above, and I would treat capital gains the same as earned income. I would have (for a married family of four) a base deduction of $50,000. ............ I would have a single corporate income tax rate of 25% for corporations, which would make the U.S. globally competitive. ............. Two taxes I would increase: 1. Effluent taxes, especially one on carbon (and on carbon imports); and 2. Fuels taxes, using the money to re-build our crumbling national infrastructure. ............... As to "shrinking government," it all comes down to Medicare, Medicaid, Interest on Debt and National Defense. That's where ALL the money goes. Take your pick which ones you think you can cut through "attrition," as you favor.

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  • ALJuly 16, 2014 - 2:53 pm

    I'm not sure that only the .5% of income earners benefit from the mortgage interest deduction since it has a cap of $1,000,000 and 80% of their (.5%ers) itemized deductions would phase out. That deduction helps middle income homeowners the most!

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  • Rich RifkinJuly 16, 2014 - 3:17 pm

    AL, you have to start with the fact that only about 30% of all taxpayers itemize deductions. The reason for this is because, even for most home owners with mortgages, the standard deduction is higher than they could take off their taxable income by deducting the interest they pay on their mortgages. Then, consider a person with an $20 million mortgage and another who owes $50,000 on his home. The former pays $1 million in interest and deducts all of that from his, say, $2 million income. The latter deducts $2,500 from his $75,000 income. You tell me how that kind of a weighted system does not heavily benefit the rich? And it is this way with all sorts of tax credits and deductions. They are designed to benefit the rich. Much, much better would be to have a lower top rate and get rid of all of their deductions. ............. Another thing to keep in mind about the mortgage tax deduction: While it makes purchasing a home on credit more affordable, that in and of itself moves the demand curve for housing to the right. In other words, it is self-defeating, at least for middle and upper middle income home buyers. More people can buy, so the price goes up; and the higher price means fewer people can buy. It's a bad system.

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  • ALJuly 18, 2014 - 8:26 am

    Rich, In your example the person with the $2,000,000 mortgage would only get a $200,000 mortgage deduction, 10% of the mortgage interest they paid.

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  • Greg JohnsonJuly 16, 2014 - 6:29 pm

    Thanks for your response Rich. I agree with eliminating deductions and simplifying the tax code. With respect to the federal budget, Alan Simpson said the federal government is rife with waste. I don't think you can call him unreasonable as he was one of the heads of the only bipartisan groups who could ever agree on anything recently. I also believe in means testing for Social Security. It's not an ideological stance (after all, the rich pay the most into it), it's just a practical one to help avert this debt/death spiral we're in. My opinions from this letter are also based in what I think could work. I have no ill will toward the ultra-wealthy if they made their money honestly, quite the contrary.

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  • Rich RifkinJuly 16, 2014 - 9:29 pm

    "Alan Simpson said the federal government is rife with waste." ............. No doubt that is true. It's quite obvious with defense spending, the way powerful members of Congress will keep appropriations going for multi-billion dollar defense systems that the Joint Chiefs don't want, all to line the pockets of the people who fund those members of Congress. (Google: "How To Waste $100 Billion: Weapons That Didn't Work Out") Our Medicaid and Medicare spending, likewise, are rife with rip-offs, especially with doctors billing for services they don't provide. May of them making a living just ordering bogus prescription drugs. (Google: "Fanny pack mixup unravels massive Medicare fraud scheme in Key Biscayne.") I am less sure that for interest payments on the debt the same can be said. ................ I doubt, though, given the corruption of our campaign finance system, which is designed to make private campaign donors richer with public spending, that much will ever be done with the rife waste.

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  • sfJuly 16, 2014 - 12:18 pm

    Greg: I usually don't agree with much of your opinion, but I think your take on the economy is right on. I just fininshed Piketty's book, which gives some interesting statistics on income inequality. Unfortunately, he doesn't give much in the way of solutions. I think your suggestions would be a good place to start.

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  • Curt MillerJuly 16, 2014 - 5:20 pm

    Piketty's vilification of capitalism is odious. He contends that disparities in income and wealth are spiraling out of control — setting the haves against the have-nots. Without “confiscatory” taxes to create a new social/economic equilibrium, he warns, today’s democracies may ultimately collapse — taking capitalism and the capitalists down with them, leaving us under the thumb of the almighty State. His little formula, r>g, is supposed to be one of the great takeaways from the book, but it points up one of the problems: presenting far too static a picture of how people behave in a competitive marketplace. Businesses come and go. In comes a Walmart or Target and out goes a Sears or Kmart. Also, individuals with the highest incomes are not the same people from one year to the next. It is an ever-changing cast of characters. The Tax Foundation has a chart that shows IRS data on people reporting a million dollars or more in income over a nine-year period. Fully half of these people made a one-time-only appearance. Only 15 percent of them reported at least a million in income two of the nine years and only eight percent made it in three of the nine. Today's perverse government policies of credit expansion, gunning the money supply, and messing with minimum wages don't benefit ANY economic group but threaten to bring the whole economy down, thus impoverishing everyone.

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  • Greg JohnsonJuly 16, 2014 - 10:22 pm

    That's good Rich. I guess we agree on all those points as well. So you're previous contention was very inaccurate. I am not claiming the problem will be solved, only pointing out that there is a problem and there are POTENTIAL solutions. That is a start. I wish Obama and/or the republicans would have embraced Simpson-Bowles.

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  • Greg JohnsonJuly 17, 2014 - 11:34 am

    But by far the most important factor is four, the percentage of our population age 65 and over is at an all time high and growing...............The Chicago Fed estimates this to account for about 25 percent of the decrease. It is debatable. However, since labor participation in the 65-74 range has nearly doubled in the past 20 plus years while it has severely fallen for young folks, the boomer effect should be somewhat mitigated. Also, I read that the 65 plus age group increased by 3.3 million between 2000 and 2010. Considering the huge number of unemployed and the fact that more of these people than ever are still working, I would question your conclusion.

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