Class Warfare Helps No One

Rhetoric that spawns class warfare may feel cathartic, but it doesn’t help anyone. I’m concerned that it makes the less fortunate more resentful, and also causes those most capable of creating jobs to pull back. So I was surprised at the tone of a recent Star Ledger editorial that suggested that “filthy rich” people deserve to be maligned by the President and others. In contrast, Mayor Bloomberg, a dedicated public servant, had this to say about about President Obama’s rhetoric:

“I feel very strongly we should not be — success should not be frowned on, and I have lots of friends, wealthy people, made a lot of money, were big Obama supporters, gave him money, raised money for him, who are not happy now. They all say the same thing: ‘I knew I was going to have to pay more taxes. Somebody’s got to do it, and I’ve got the money,’ ” he said. ” ‘But I didn’t expect to be vilified.”

It doesn’t help to oversimplify the two intertwined economic challenges of our time – preventing a European style debt crisis here, and addressing structural unemployment issues. The fear of the former contributes to the jobs problem as executives worry about fiscal headwinds beyond their control causing the economy to slow.

Job creation is a complex issue. As the Ledger’s management well knows, you don’t hire more people unless you are confident that more customers will buy your product. The Ledger isn’t exactly leading by example here. Newspaper sales are down, so Ledger management has cut its workforce. Should other companies with similar concerns be held to a higher standard than that to which the Ledger holds itself?

As the Ledger management understands so well, confidence matters in decisions on whether to hire. Confidence is a function of psychology. FDR pumped us up and told us not to fear. JFK said he’d get this country moving again, passed an investment tax credit, and challenged us to go to the moon. Reagan spoke of morning in America. We don’t hear such upbeat rhetoric or positive challenge from the top today.

One acquaintance of mine, who employs thousands, told me that the biggest difference between President Clinton and President Obama is that Clinton liked successful people and Obama does not. That is interesting perspective from a major employer. It is natural to retreat a bit when you are vilified. That is particularly true when one is concerned that vilification may have financial consequences – just ask Boeing.

The smarter journalistic perspective is from New York Times columnistTom Friedman. He wrote years ago that wage differentials would create enormous pressure to move certain jobs elsewhere. Think about it. Do people go to Walmart looking for “Made in the USA” or are they looking for a cheap price? It is hard to blame Wall Street or the rich for such behavior among consumers. One CEO has noted that he could hire 20 Vietnamese factory workers for the same cost as one such worker in the US. Those workers seek upward mobility too. Moreover, almost one-third of U.S. manufacturing companies say they are suffering from some level of skills shortages.

It isn’t just the rich who are looking to make a buck or save a buck. During the go-go years, there were plenty of people who were flipping real estate and trying to make some fast money. They were playing the same game as some on Wall Street, just with less capital. Irresponsible financial behavior was widespread on a lot of streets, not just Wall Street.

Certainly there were unsophisticated victims of misleading information from mortgage lenders, and the Dodd-Frank disclosure reforms were long overdue. But the banks were not the only bad actors in bringing about the housing bubble. Many politicians were pushing banks to make loans where adequate credit quality did not exist, and their political cronies made tens of millions as executives at the government mortgage agencies FNMA and Freddie Mac.

The important thing isn’t looking for villains; it is getting the economy and our federal budget back on the right track. Look, I think that higher taxes have to be part of the equation. It was terribly wrong to start a war with Iraq while cutting taxes. We spent $3 trillion and and deferred the cost to the next administration or next generation. Congress can’t even do the easy stuff, such as reforming the law to tax billionaire hedge fund operators at ordinary income rates for money they make when they are not even risking their own capital. That income is much more like salary than capital gains, but Congress gives a huge tax break that even most Wall Street people oppose!

Historically, federal taxes have consumed about 18 to 20 percent of GDP. That has been generally true regardless of top tax brackets. Higher rates have historically been coupled with more deductions or loopholes. With federal taxes consuming between 14 and 15 percent of GDP today, it seems clear that part of any grand compromise has to be some increase in taxes.

However, we are kidding ourselves if we believe that our federal deficit problem comes anywhere close to being cured simply by taxing the rich. Projections on federal spending indicate that federal spending will consume about 30 percent of GDP by about 2030.

The math is pretty simple. The federal income tax raises about $1 trillion. Of that, nearly $400 billion comes from the top 1% of taxpayers. The federal deficit is about $1.5 trillion. So even if we double taxes on the top 1%, we’d still have an annual deficit of over $1 trillion. More significantly, that hole will continue to widen dramatically in the years ahead. While there is a strong case for higher taxes on the rich based on economic justice, it is imperative to understand that simple math says that this will not solve our budget problem.

So the answers have to be more political realism and courage in Washington on spending cuts, some acceptance of tax increases, and more creative approaches to job creation. I outlined some of these job creation ideas in my last blog, including a plan that would produce both tax revenue and incentive to bring cash into the US for spending on corporate and public infrastructure.

Let’s be serious: if domestic jobs are going to be created, the money is going to come from those who have it to invest. As a small business owner, I very much want to hire more people and grow my business. But if I’m going to pay somebody a salary, it helps to have confidence that my revenues will grow by at least the amount of the new salary and benefits. I can’t imagine that the Ledger and larger businesses think much differently.

People have a natural tendency to invest when they believe that can get a reasonable return for taking a risk with their money. They have a natural tendency not to invest when they fear that they will be punished through negative returns, substantially higher taxes, or public castigation. Public officials, the press, and business leaders should all be working to foster a positive climate. A rising tide lifts all boats. Class warfare just makes the tide go out.

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