The Republican Party line is that there is too much government and too many regulations from big brother government and that a healthy economy depends upon more investments by the very rich. Taxing the rich further will discourage them from making more investments and thus hurt economic growth.
Let us examine these claims to see if there is any truth to them. The economic meltdown of 2008 was caused by highly risky and faulty bank practices that could have been averted had certain bank regulations not been repealed during the Bush administrations. So more regulations rather than less could have averted the second worst depression in American history from which we are still struggling to recover. As for taxes causing the rich not to invest, soon after Obama succeeded in raising the tax rates for the rich, the stock market started to rally and the Dow Jones has broken several record highs being around 14,455 recently surpassing its highest benchmark of 14,164 in 2007 prior to the crash of 2008 after which it reached 6,443 at its lowest in 2009. It has more than doubled in just 6 years. The middle class is still struggling high unemployment, little gains in salaries, and major losses in benefits so the money in the stock market isn’t coming from them but from the wealthy. Where is the correlation between investments and higher taxes for the rich as claimed by the Republican Party? Just the opposite seems to be true. As a matter of fact rich investors will continue to invest regardless of taxes. Their net gains are still more if they pay 20% long term capital gains and qualified dividends for $2 million (more money invested) as opposed to $1 million (less money invested). Long term capital gains and qualified dividends were increased from 15% to 20% for the rich at the beginning of this year. The math is actually very simple. All a smart investor cares about is how much he nets, not how much taxes he pays. Even if long term capital gains and qualified dividends taxes went up to 40% they would still invest. What else can they do with their money if they want it to grow?
Now for the claim that investments by the rich stimulate economic growth: Since the stock market has reach record levels, has anyone felt significant recovery in the economy or significant increases in jobs? The recovery is slow and jobs are increasing at about the same rate as last year and not keeping pace with the stock market. The salaries and bonus of the very rich have reached record highs but this is not reflected in economic growth or even growth of the companies they manage. Not much has changed in employment, salaries, and benefits for the middle class. I’m sure most readers of this article can attest to this. So there is no correlation between investments by the rich and jobs and economic growth for everyone else. How about direct investment in companies? Why don’t investors invest in new companies and technologies to stimulate economic growth and jobs? The truth of the matter is that smart business men invest in what makes sense and where there is a market. They are not stupid. They are rich because they are shrewd and know that without lucrative markets there will be little profits.
So what is this market? It’s lots of little guys who want to spend money on the latest fads or gadgets and every day goods. These are the hundreds of millions of middle class citizens who don’t have enough to invest so they spend their money on the everyday things that most people buy. Unlike the wealth who invest most of their wealth and spend little, the middle class spends the majority of their income and sometimes more by borrowing on their credit cards. The middle class accounts for the vast majority of goods and services purchased in this country. They are the ones that truly create the demand for manufactured goods and other services that keeps this economy vibrant. They buy most of the houses and cars and computers and cell phone and groceries and gas and all the other goods and services one spends money on day in and day out. So what happens when millions of these little middle class guys are out of work or barley surviving working at MacDonald instead of at a high tech company? They tighten their belts and spend far less. Some go into bankruptcies or foreclosures and join the ranks of the poor further reducing the size of the middle class. What does this do for the demand on goods and services? The demand goes down. So what happens to companies that hire people to manufacture goods and provide services? They lay off workers because there is no demand for what they provide. Then what happens to the rich investors? They stop investing in companies that are no longer profitable. This all amounts to a depressed economy. Sound familiar?
It isn’t so much the rich who invest more that stimulates economic growth and higher employment. It is the demand for more goods and services that stimulates economic growth. Placing more money in the hands of the tens of millions of middle class workers will result in more spending on goods and services further increasing demand. That is the real key to economic growth. Henry Ford knew best a hundred years ago. Pay and treat your workers well and they can afford to spend more on a car. He was right and still is. Instead of giving executives higher salaries and huge bonuses give employees higher salaries and better benefits so that they will have more money to spend. As they spend more they will automatically create more demand, jobs, and profits. More job and better pay for the everyday person leads to more spending and a much healthier economy. Banks need to loosen up on lending money, not qualifying requirements, so that more of the middle class will have money to spend. Lower taxes for the middle class will also allow them to have more money to spend.
So the secret of a healthy economy is a large middle class with lots of cash to spend. They will contribute far more tax revenues because of lower unemployment and everyone comes out a winner. Giving the rich more money, higher salaries, larger bonuses, and lower tax rates only makes them invest more and pay less taxes instead of contributing to the purchasing of more goods and services. They already have far more than they know how to spend. It makes them far richer but does little for the economy. A vibrant middle class makes everyone happy and feeling rich. If the rich would share some of their wealth with blue and white collar workers rather than horde it all to themselves they will realize that in the end they will also come out ahead. The way things are going these days the rich are getting richer as the middle class shrinks into poverty. Wages no longer keep up with inflation. Eventually we will be back to a two class system like in the feudal days. Is this what democratic capitalism is all about?
How do you feel about economic growth and my conclusions?