Tuesday, May 22, 2012

An Economy Driven by Distraction

“Orwellian” is an overused word. That is probably because politicians, partisans and pundits continue unabated to take perfectly good words with positive connotations and twist them to mean something else, to suit their own purposes.

In the wake of the recent French and Greek elections and the G8 summit in Chicago, we are hearing even more refrains of “austerity doesn’t work” and “Europe needs growth instead of austerity.” Everyone is in favor of growth, so that is a non-issue. But when politicians like Greece’s Alexis Tsipras, France’s François Hollande and the U.S.’s Barack Obama refer to “growth” policies they are talking about more borrowing and spending—in other words more of the same policies that have to date resulted in precious little growth. And, in most European countries to date, the austerity they are criticizing has largely taken the form of higher taxes and fees—which those same politicians generally favor. It does your head in.

Another way that politicians weasel around hard economic issues is to appeal to people’s feelings rather than using hard numbers. To undermine an opponent or bolster their own support, it is depressingly easy to distract a lot of voters with issues that have emotional resonance but are not particularly key.

A good example of this is all the coverage that bubbled up with the Occupy Wall Street protests—and still appears regularly in certain media—about “income inequality.” Apparently, a lot of people’s sense of fairness dictates that all people’s income should somehow be kept within some kind of range. Economists and commentators on TV and radio can be heard citing income inequality as a serious problem that needs to be addressed.

The attraction in making this an issue is that, if we accept that a wide gap in income levels (as opposed to the overall standard of living) as a problem that needs solving, there is only one logical solution—higher taxes on the wealthy—and that suits politicians right down to the ground. As I have said before, there is nothing particularly wrong with raising taxes on the rich, but in the grand scheme of things it doesn’t actually bring in that much extra money and it certainly doesn’t make the poor any less poor. A government could raise a lot more money by increasing taxes on the middle class because, collectively, there is much more income earned by that group, even though each individual earns much less than someone in the wealthy category. There just aren’t enough people in the one percent and there are too many people in the ninety-nine percent.

But would any of the protestors at any of the various Occupy sites actually care about income inequality if they had jobs and/or were having no problems paying their mortgages or other debts? Some surely would, but most of those in the crowds probably wouldn’t. But maybe your response to that is that the reason people don’t have jobs and cannot pay their mortgages and other debts is because of income inequality. But does anybody really seriously believe that, if you could somehow lower the income of the wealthy, that everyone else’s would go up? Or maybe that’s not the point. Maybe people just want to see the wealthy that little bit less well off simply because it would make them feel better or would feel fairer.

One of the best explanations I have seen of why the income inequality obsession really makes no logical sense was in a column by Holman Jenkins Jr. that appeared last month in The Wall Street Journal (subscription required). As Jenkins points out, there is little logical sense in focusing on the condition of a tiny minority (the super-rich) rather than on improving the conditions of the vast majority.

“If it were learned that the car driven by the average American is 10 times more likely to burst into flames than the car driven by the richest 1%,” he asks, “what should the policy response be? Should it be to mandate that cars driven by the rich burst into flames more often?”

He goes on to highlight the silliness even more by pointing out that the inevitable result of efforts dealing with income inequality is to cause the rich simply to report less income. He quotes CNBC’s John Carney as reasoning that, as an example, the fabulously wealthy Mark Zuckerberg could, if he so chose, avoid all tax by not investing his considerable assets and instead meet his living expenses by borrowing against them. According to Carney, the Facebook founder might even be able to quality for the Earned Income Credit by doing that.

You might not like the rich and you may resent their lifestyle, but you can only raise taxes so much on them before they stop investing, and that’s bad for everybody. (Well, not really bad for the rich because, after all, they are still rich.) In extreme cases, you might see them fleeing the country altogether. I don’t think that’s a huge problem, but it’s not unheard of. Speaking of Facebook founders, it has been in the news lately that Eduardo Saverin renounced his U.S. citizenship to avoid significant capital gains liability as a result of the Facebook IPO. Born in Brazil, Saverin was a naturalized U.S. citizen and since 2009 has been living in Singapore. This action will not have gotten him off entirely scot free by a long shot (the IRS levies an exit tax in these situations), but his accountants have obviously calculated that over the long haul he will still save a bundle on his estimated $2 billion stake in Facebook. Take that, Buffett rule!

Fortunately, we have economic geniuses like U.S. senators Chuck Schumer and Bob Casey who have a solution to this situation: pass a law (cleverly called the Ex-Patriot Act) that would extract a new 30 percent capital gains tax on people in Saverin’s situation (even though they are no longer U.S. citizens or residents) and bar them from ever re-entering the U.S. It’s not clear whether this law would even be constitutional or enforceable. But the senators are clearly not concerned about that.

The entire point of the exercise, after all, is to make people feel better. After all, it is much easier for politicians to talk about the likes of Eduardo Saverin and his billions than to have to answer questions about why the masses of people who haven’t abandoned the United States continue to live with such a bad economy.

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