Sturdyblog had a post a couple of days ago: The Crazy Idea Of A Fairer Society. I found it interesting but fatally flawed, more wishful thinking in my opinion. I will say that he writes well, has a couple of decent arguments and may be worth your time to read. But let us assume we wanted a fairer society, one in which the disparity between rich and poor is less pronounced. Mr. S would prefer wealth redistribution or tax the rich and give to the poor. That is the essence of his point although he may prefer to describe it differently. Now I do agree that there is too much of a difference between rich and poor and that there are way too many poor. It is not that I resent others having wealth or even a lot of it. What I see is that concentrations of wealth creates far more economic problems that the rich become the tail wagging the economic dog. Just to be fair we might point out that the economic balance has inched even closer to government and that is a far more dangerous. Government has a tendency to do far less with a great deal more, particularly when it is borrowed taxpayer money. I say borrower taxpayer money for deficit spending will be repaid with taxes taken from the public in one form or another long after the money is spent. All the more reason not to turn to government to solve income inequality.
The major problem with income redistribution is that it penalizes an economy for all the wrong reasons. Assuming poor individuals and those who’s income is far less then their needs want jobs or better paying jobs, then taxing the rich will not create the new jobs necessary to solve the problem. Our thinking must be to change the rules of the game so that we prevent too much accumulation of wealth, so that we prevent unwieldy concentrations of wealth. The question becomes what rules do we change, why, and how should they be changed. Many individuals see capitalism as some anthropomorphic creature from the Black Lagoon, waiting to devour the poor but honest working man. Funny, that was the way Marx saw it. The Spirit of communism was that anthropomorphic savior and hero of the working class. Capitalism is an economic system that relies a free market to distribute scarce resources. Goods and services that are sold in this free market rely on price discovery so that we approach a balance of supply and demand. Capitalism also relies on savings or the reduction in consumption so that a portion of wage or profit can be saved and invested in the production of goods and services. That is, capital relies on seed corn to produce the crop what will be consumed less the seed corn needed for the next planting. If more corn is desired next year then there must be the appropriate reduction of consumption that will allow a surplus the following year. In a sense, consumption, or economic growth is curtailed for more growth the following year. Now this is a bit simplistic. But it is the basis for economic activity under a capitalist economy. Note that I said economy, for capitalism doesn’t really have a political ideology attached to it as does socialism and communism. As we see with the country of Singapore, one can be a dictatorship and still have a capitalist economy.
So what has gone wrong in the western economies? The first has been the reduction of moral hazard or risk. the rise of the modern corporation came from eliminating moral hazard, or risk. Corporations offer limited liability from unforeseen liabilities. One is legally liable only to the extent of the loss of ones capital investment. If the corporation you have invested your capital in with the purchase of stock causes billions of dollars in civil and even criminal damages, the most you can be held liable for is you capital, those shares of stock. If such a company is liquidated for only a billion and the outstanding judgment is ten billion, guess what? that is all the plaintiffs get. You aren’t on the hook for the other nine billion. Go read about PDM, Pittsburgh-Des Moines Steel. When it closed due to poor earnings and laid off all its workers, those who were already receiving pensions found those pensions being cut. The EPA declared the former foundry site an environmental waste superfund site. all the assets of the company, including pensions, both currently being paid and those that would accrue were subject to government seizure. At last word, the retirees were getting only twenty five percent of their promised pensions. Those who weren’t pension eligible got nothing. The problem with PDM was that union wages could not compete with Japanese steal making wages. Japan has little iron ore to speak of, little coal, all its steel making resources, including energy through coal powered plants rely on imports. A general tariff on Japanese steel would have prolonged the life of PDM, but the union would have eventually killed it.
But more than that, we have the problems of the banking industry. At one time we kept consumer banks separate from the commercial or investment banks. that is no longer true and where investment banking was subject to a higher moral risk than consumer banks, now the two are almost indistinguishable. Our Federal Reserve Banks, which is only a quasi government entity entirely owned by the banks has preceded to push fractional lending to the point that every banks can engage in almost unlimited credit creation. The fact that FASB, the Financial Accounting Standards Board was forced by the Fed to change its rules for valuation of assets only stoke the fire even higher. One may now mark underperforming assets, meaning mortgages, municipal bonds, and the like, to unicorn rather that to market value, that value reflected by why someone would actually pay for a bad loan. So we need to separate consumer banking from commercial banking from investment banking. We also need to limit banks to the creation of one dollar of credit for every dollar of capital. Capital, in this regard means paid in capital in the form of bank stock shares. When it comes to consumer savings, a stricter standard must be put into place. Now the funny this is, the deferential between rick and poor is due more to excessive credit creation. It is insane that we consider one man’s debt as another man’s asset. Let that sink in for a minute. If I own a business, I can borrow against my accounts receivable according to the history of payment by my customers. Bad history, the less money I can borrow against what is owed me. My accounts payable is an asset that is strictly limited to its payment history. My debtors credit becomes my credit, a rather perverse way of thinking.
Thus I would propose that banks must have charters and that those charters be very limited. the excessive creation of credit is a very dangerous thing and should not be left to the hands of the bankers. We must have checks on this process. Second, it is time to eliminate the idea of the corporation. The supreme Court has declared that corporations are real persons, just like you and me, and entitled to give money to any number of candidates regardless of the amount. The hell they are. Time to kill them. They have grown far too large and concentrate too much economic and financial power to be or any good use. Back to partnerships and sole proprietorships. Rather than reduce risk, let us increase it to a proper level. Think of all the government agencies we could eliminate and the money we could save. Well, how would they get financing? Personal bonds and loans. If we really need some form of corporation then the personal limited partnership would do just fine. Any thing that would be given a corporate charter must return ten or more percent of its profits to its shareholders. In fact, more than that percentage. Make them just like REITs, and return as much as eighty percent of the profits. Actively limit their growth by combination, buyouts, and so forth. Most industries can support at least five or more producers of goods and services. The idea that somehow we can get economic growth through economies of scale is a farce. The other thing we would need to to is to penalize any multinational corporation doing business with America. The multinational corporation robs us of employment for its own gain. We only benefit though lower general prices at the expense of higher unemployment. Consider that even though we may pay slightly higher prices for our goods and services, we pay a great deal for welfare and so much of that expense has been deferred to the future collection of taxes. This means that we “bust” the unions. That is, the current legislation greatly favors unions. It has an asymmetric advantage over the businesses it is suppose to bargain with. Unions are a restraint of trade. Public unions should be made illegal for they are a conflict of interest for the common good. You think your pay is too low, get some education and a better job. No one owes you a living. This allows business, particularly small businesses to lower wages and thus lower costs and thus lower prices. Unions are an inflation upon the land, period. You see, once we allowed the formation of corporations with, at times, unlimited resources, unions became necessary. Eliminate unions as well as corporations and we put the proper perspective bank into business. It is hard to become a large size when one is a partnership. we place limitations of the size of our businesses and and keep the large multinational firms out of our economy. In this case, small is beautiful.
It is time to scale back government, it has simply grown too large and consumes far too much of our scarce resources. Government’s function is to provide a formal semblance order in society and a measure of protection for its citizens from outside forces. There is no reason for a federal education office that takes control out of the hands of the local community and places it in the hands of unelected bureaucrats who remain unaccountable to the public. Our Army Corp of Engineers is a fiefdom all its own and has extended its reach much too far into local and state affairs. The same applies to the EPA, their overreach is far too broad and the impact they exert is all too often harmful. There are many federal departments that no longer serve the public and do little for the nation. Our court systems have become a morass of self interest, time for reform. First, all members of the bar will no longer be permitted to take any case for a percentage of the judgment. It will be fixed fee according to a schedule set by state law and federal law. The court fees and attorney fees have become reasons why justice in this country is now bought and sold to the highest bidders. Second, all attorneys will have pro bono cases assigned each month, which they must faithfully discharge their duties or face felony charges. The practice of law is the practice of justice, not personal enrichment. Another professional area of greatest concern is that of health care. It is time to stop the madness of what has become a monopoly practice that extorts the public without any justification. Apply the anti trust, anti competition, the restraint of trade, and all the other laws that the health care industry has managed, bribed, or otherwise influenced Congress to exclude in their case. The costs are absurd. What is worst is that what is done in the name of not for profit health care facilities has become an enrichment scheme for those who run them.
We also need to put an end to the professional “charity business” like the Clinton Foundation. If you want to be a charity then you must spend ninety five percent of your donations on the charity you support. And that ninety five percent must be spent directly, not conveyed into the hands of your friend in the form of high wages. The second part of that is that you, as the chairman or board member will serve at the pay of one dollar a year. Any speeches you make that are paid into the charity by others will become taxable income for you. It is time to stop the thieving from the public in the name of charity. Charity has become a business and it is time to make it a charity once again. But look at all the good these foundations do. They have become make work projects to enrich the NFP crowd of managers, advisors, and workers while contributing very little to the intended recipients. No one ever got rich working for the Peace Corps, but one can be well paid working for the Clinton Foundation. And what has been the average payout of the funds that charity takes in, maybe ten or fifteen percent in a good year? If one is serious about income inequality, then end this farce.
Time to go back to the original intent of the founding fathers and let the state legislatures choose their senators. Let them recall the people they choose if they do not represent the state’s interest. This was one of the separation of power that was built into the constitution. We have reached a point where the state governments are almost superfluous because the federal government has expanded its power too far. We really need to clean up our laws and our governments. We’ve had an attorney general who was far more concerned perceived racism than he was with the criminality of the financial sector in this country. I noticed he went back to work for that same criminal element he had come from. So, if you work for a corporation, a banking concern, you never see public office. You will automatically be disqualified from holding any appointment in government. Second, as an ex public office holder you are forbidden to work for any business you once oversaw. We have to stop the revolving door between high level public office and high level private business employment. As for lobbyists, I have no problem when people want to present a case for some interest. But the lobbyists will be strictly supervised. They can only spend money on their salaries, their office supplies, their airline travel, their office space, etc. And each year they will be audited. We should not tolerate the buying of legislation by any interest group. Second, only private individuals can give to any campaign of any politician. Political parties will be considered for profit and taxed on their donated income and the GAO will perform yearly audits to insure compliance. If we have to put that in the constitution to take the matter out of the hands of the supreme courts, both federal and local, then let’s do it.
And it is time to demilitarized the police force. First, they are not to be used to collect fines, court costs, and other civil penalties. We want people to keep the peace when possible and to investigate crime. So, rather than continue the “I’m the law and you’re not” attitude, we take away their bullet proof vest, their military foot ware, their military style rank on their uniforms. We put them into civilian clothes because they are civilians and not military personnel. Now, to help them do their jobs we break up the ghettos. Because we will same some tax money eliminating government waste, we can redirect a few funds for cleaning up the low income and no income areas using local unemployed labor. You were in prison, no problem, you got a job digging ditches or removing trash and debris. We also decriminalize drugs. We have lost the war on drugs. In order to reduce income inequality one has to better the environment for the poor. To simply redistribute income does very little. People need some measure of control over their environment and city hall just doesn’t make it. So, breakup the big city government, no reason to have it. Economies of scale have never worked well in New York city and the masses only keep electing idiots like DeBlasio and Rohm. Chicago is dead broke, bankrupt and that idiot only knows to raise taxes because the public unions want higher wages. Is that the blind leading the blind?
Now I could go on an easy twenty thousand more words on what we might do to reduce income inequality. But it all comes down to changing the rules, not income redistribution. One must consider the impact on economic activity done by income redistribution. It really is unproductive and very disruptive to the health of an economy. But find ways to eliminate barriers to entry in the various areas of business and more people will become productive. That is the point of reducing the inequality, isn’t it. Stop the extreme amassing of wealth. Why? Because it leads to the chase of higher yields regardless of the risk. Large amounts of money moving around dislocate other larges sums of money. Capital needs to used productively, not gambled away with ever more credit inflation. It has been the inflation caused by excessive creation of credit that has brought us to the brink of global depression. And by the way, depression doesn’t happen all at once, it’s a bumpy ride to the bottom over time. If no man needs nor can accurately control five billion dollars in his personal fortune, then why make rules that let him accumulate so much? That is insanity. No, limit wealth accumulation by changing the rule and use taxation sparingly, for taxation is the power to destroy.