In the later morning of March 6, 2009 CNBC commentator Lawrence Kudlow went off—again—on his favorite rant. President Obama is driving down the stock market and harming the economy by taxing capital. Capital formation will be harmed, Kudlow averred, as if the President’s actions would prevent this manna from heaven saving us from ourselves. You can hear the same rubbish on Fox, of course. It would be a good thing if CNBC, which purports to provide informed comment about economic and financial matters, did not proselytize the same crap.
Why is this wrong, you may ask? Surely we need capital and healthy capital markets? Of course we do, but not at the expense of a healthy economy. The current crisis has been created by governments favoring capital over labor or, in other words, the rich over the worker. The threat of deflation that terrifies financial markets is the result of excess productive capacity. As corporations reduce production to a level that more closely matches demand, they lay-off or fire workers. As a result, workers spend less, demand falls, and production must be resized down.
There is nothing new in this. Karl Marx argued that allowing capital total power over labor would result in excess capital accumulation and a collapse of demand. Driving down the pay of workers reduces their ability to purchase the goods that all the shiny new factories can produce. Capitalists reduce production or reduce worker pay to sustain their profits and demand falls further.
John Maynard Keynes had a solution: when consumer demand falls, the government can step in to create demand in its place. During the fat years, as Joseph told the king of Egypt, the government should run a fiscal surplus that it can then spend when the next recession arrives, as it always does. Of course, we entered this recession after seven years of Bush deficits that resulted from tax cuts that primarily benefitted capital. The same Republicans who acceded to those deficits now complain about Obama and the Democrats spending too much on propping up banks and stimulating the economy. They are now opposed to deficits when they logically are most necessary. In an effort to reduce that deficit President Obama has proposed raising taxes on capital. Will that reduce capital formation? Possibly, but with the current excess global productive capacity that is not a problem. When demand again outstrips production, inflation may ensue capital spending can again be encouraged, if the free market cannot, unaided, find the capital it needs. That’s tomorrow’s problem. On balance, capping the deficit is more important than aiding capital or tackling a potential problem because it will comfort financial markets.
Kudlow rant was based on several unstated assumptions: that lower taxes are always good and that higher taxes are a disincentive to effort and investment. Does Peter the Plumber read in the newspaper that income taxes are going up and say: “Okay, then, I’ll work fewer hours”? If he wants the same net pay at the end of the week, he will have to work more hours. Does the investor see that capital gains tax rates are increasing and refuse to invest his or her wealth? Investors have no choice but to invest; they are primarily concerned only with the risk of losing their investment and return they expect. If tax rates increase on investments held more than a year—to truly encourage capital formation, the rate of capital gains tax should reduce as the term of the investment lengthens, perhaps 20% for one year, 15% for two years, 10% for three years, and so on—some projects they otherwise would have invested in will look less attractive. They’ll find somewhere else to earn their return. Taxes in the United States are not at the levels that discourage economic activity but they may distort it a little.
During the Kudlow rant this morning , Steve Leesman tried to talk some sense but, as usual Kudlow and Melissa Francis, his co-anchor on “The Call” shouted him down. Why do right wingers shout so much? Bill O’Reilly, Rush Limbaugh and Hannity also talk over their guests, asking a question and shouting over the answer. Is it because they know only a few things and shouting makes them sound more true? Or is because they want to prevent the intrusion of any data, any real information. When belief is all, facts are dangerous.