The Rich Uncle Argument
Back at the beginning of the month, I recounted an odd incident from a Kaufman Foundation conference that I’d attended:
I heard someone say that the reason it’s important to cut taxes on rich people is that economic growth comes from people starting new businesses and most new businesses are financed by borrowing money from family—a rich uncle, for example. Therefore, the richer our rich uncles get, the better off the rest of us will be. After all, we can hit them up for loans!
Crazy. I didn’t think this would go anywhere. But today I read my Ed Kilgore:
Up until today, I figured that in the course of a pretty long career in politics and government, I had heard every conceivable conservative argument against progressive taxes, and for high-end tax cuts. But in the midst of a workmanlike article claiming (dubiously) that Americans are upset about government oppressing oppression of small businesses, we get this interesting twist from Carl Schramm and Doug Schoen at RealClearPolitics:
Hikes in marginal tax rates will discourage investment in new ventures. Those who dismiss concerns about “tax hikes on the rich” who can presumably afford to pay more should understand that among those “rich” people are well-to-do older relatives and friends of aspiring entrepreneurs, the first source of investment for most new businesses that would otherwise have trouble securing capital – especially in the midst of a credit crunch.
This suggestion comes immediately for before a rejection of a cap and trade system for carbon emissions, on grounds that it would unduly burden businesses.
As Ed says, the argument is that “we can’t have progressives taxes because somebody’s rich uncle might not have the wherewithal to subsidize somebody’s business start-up.”
I’m not going to dignify this with a response. I’ll just note that Schramm is president and CEO of the Kauffman Foundation and I believe he was in the room when I first heard the “rich uncle” argument, so I may have been present at the creation of this particular talking point. Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs. And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States. The status quo systematically discourages talented, skilled people form leaving jobs at existing firms in order to strike out on their own, and this is one of the things the administration is trying to address in its budget proposals.
52 Responses to “The Rich Uncle Argument”
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March 30th, 2009 at 3:51 pm
Oh come on, dignify it with this one response at least:
That the whole point of this country was supposed to be an end to ancestral priviledge, surely. Mightn’t there be some bright young entrepreneurs out there who don’t happen to have rich uncles? Perhaps taking some of Uncle Scrooges’ hoarded gold bars and offering them as loans to somebody not his nephew might be better for the country?
No, you’re right, these arguments shouldn’t even really have to be made. Yeesh.
http://www.obamalondon.blogspot.com
March 30th, 2009 at 3:58 pm
But if you fail to favor the rich uncle enough, then rich parents will feel guilty and fail to grant their offspring the lifestyles of wealth and superiority to which their class is accustomed. This would be very painful to said offspring.
March 30th, 2009 at 4:00 pm
It’s a pretty standard argument and shows up, I think, in Hayek and Schumpeter, but my memory may be fooling me. It isn’t totally off base, but without quantifying it further using some real evidence it is hard to know what to make of it.
There is also the reverse argument: one of the main reasons for progressive taxes is to separate old people and their kids from their money, since they will pick below average quality projects to invest in due to personal connections. There is substantial evidence that this is true for children of family firm founders.
Finally, well functioning financial markets undercut the force of the claim, as Carl Schramm and Doug Schoen recognize. So yes, this only works if you believe financial markets don’t work well or even passably. So it doesn’t fit well into a free market ideology.
March 30th, 2009 at 4:02 pm
Also, it is necessary to abolish the inheritance tax to ensure that Paris Hilton will become a captain of industry.
March 30th, 2009 at 4:02 pm
We don’t just have extreme inequality in this country. We have a very class-based, hereditary stratification of that wealth. If we just have a lot of inequality, but people rose and fell entirely due to merit, it would still be a problematic system but at least it would be a more just one.
To get back to the point: Most people don’t have a rich relative.
March 30th, 2009 at 4:06 pm
Something similar argues for the legalization of prostitution. If whores weren’t driven underground and losing money to down time in jail eventually a hired fuck would cost less. Those savings could go towards getting your rich uncle a blow job. He’d be happier afterwards and more inclined to give you money for your coke habit. Oh wait, I guess that wouldn’t help the GDP much………..Ok, try this, we have the government subsidize your NAMBLA membership dues. You take those savings and start a summer camp for wayward boys. What, still not helping out here? OK…….try this….
March 30th, 2009 at 4:08 pm
“We don’t just have extreme inequality in this country. We have a very class-based, hereditary stratification of that wealth.”
Income taxes on the wealthy will do very little to solve this problem, but inheritance taxes might do much more. How about it Matt?
March 30th, 2009 at 4:09 pm
I think that RCP is an interesting clearing house for the work done across the net, but the stuff they produce for RCP itself is uniformly lousy.
March 30th, 2009 at 4:10 pm
I’m wondering where I can get some of these “rich uncles”. I’m one of those and when he died, all he left me was alone types. There ain’t no one in my family, extended family, or otherwise to pay for my “entrepreneurial” spark, thank you.
Maybe we shouldn’t tax middle class and poor people because without the tax they’ll be able to save and be able to afford to pay for their own “entrepreneurial” endeavors?
Or maybe we should tax the heck out of rich people and give the money to “entrepreneurs”? That would accomplish the same thing right?
Of course it’s good to know they want a nation of “entrepreneurs” funded not based on merit, but based on familial connections (ie: nepotism). That explains a lot of the hole we’re in now.
Let’s just call a spade a spade. They just don’t want their money taken away. Can’t say I blame them, but that’s what happens when you don’t even throw a bone to those who aren’t as lucky as you.
March 30th, 2009 at 4:10 pm
Life is like a hurricane
At right-wing think tanks!
Iraq war, financial crisis, deficits
The country’s in the tank!
The solution’s no mystery!
Just rewrite history!
Tax cuts! Woo-hoo!
Every problem, the only solution!
Tax cuts!
March 30th, 2009 at 4:15 pm
Chris D = Win
March 30th, 2009 at 4:16 pm
“Can’t say I blame them, but that’s what happens when you don’t even throw a bone to those who aren’t as lucky as you.”
Wonder who’s funding all those charities out there then. Hmm..
March 30th, 2009 at 4:18 pm
But but but…. I thought all of the rich pulled themselves up by their bootstraps.
Won’t it completely blow holes in the bootstrap talking point, if this argument is made?
AAAHhhhhhh… my head hurts.
March 30th, 2009 at 4:37 pm
Actually, the inverse is true here. A higher marginal tax rate spurs investment in small business. The reason is that these businesses tend to fail, and thus cause losses that the rich can write off. In other words, if a rich person chooses between losing their money to taxes, or losing their money to a small business, they’re going to choose the latter, because the investment might pay big dividends in the future.
March 30th, 2009 at 4:55 pm
The clan is with us still, and there is no set of Keynesian money games that will make the clan behave like something other than a clan. If the clan is very good at applying technology, efficiently so goods have more utility, then the only constraint the clan sees in the way of future productivity increases are collective attempts to prevent the efficient application of technology.
March 30th, 2009 at 4:59 pm
Wonder who’s funding all those charities out there then. Hmm..
That’s actually a good point: wingnut welfare cases have rich uncles named Bradley, Scaife, Olin and Regnery. Or, in RCP’s case, Uncle Steve Forbes.
March 30th, 2009 at 5:10 pm
“I’m not going to dignify this with a response.”
Now, that’s a fresh and convincing sentence!
Look, the whole topic of money from family members is vastly underexplored by the American media, in part because so many prominent members did long get a check from Mom and Dad or a rich uncle. It makes a big difference in determining who can, say, move to D.C. and a young age and get a very low paid job in journalism versus who goes into a better paying but less influential line of work.
March 30th, 2009 at 5:25 pm
“And perhaps more directly to the point, the lack of a guarantee of affordable health coverage is a major impediment to entrepreneurship in the United States.”
That must explain our low level of entrepreneurship compared to, say, France or Sweden. Oh wait — we have a much higher level of entrepreneurship than either of those countries.
Matt, we get it that you’re in favor of fully socialized health care, but this shows the downside of trying to shoe-horn your advocacy of it into unrelated posts.
March 30th, 2009 at 5:29 pm
DaveInHackensack, if one is really concerned about entrepreneurship, then, yes, one would have to come down on the side of making universal health care a priority, much moreso than nurturing the financial interests of rich uncles. The concerns of, shall we say, the “entrepreneur special interests” lie on the side of universal health care, so if one is actually serious about addressing their concerns, that’s where you would look.
March 30th, 2009 at 5:34 pm
Just as a matter of idle curiosity, is there any information as to how much money that Bill Gates, Michael Dell, and Steven Jobs received from their rich uncles to start their companies?
March 30th, 2009 at 5:35 pm
Matt, the point about health care at the end was awesome. I never thought about the connection between the lack of health care coverage and entrepreneurship. That’s why I like this blog.
March 30th, 2009 at 5:39 pm
Entrepreneurship is certainly depressed by the fact that health coverage for entrepreneurs must be purchased out of profits, but overall the impact on the economy probably isn’t nearly as great as the impact of the mere fact that health coverage is a marginal cost of production in a country like ours with an employer-based health insurance system.
If I want to hire a full-time worker I have to pay for her health coverage. If the government pays for her health coverage instead, you remove health coverage from the marginal cost of production and you get higher employment.
March 30th, 2009 at 5:42 pm
I know this sounds really good to liberals, but is there any actual evidence that this is the case? Studies of entreprenuership across different countries? Studies of entrenprenuership through time and its correlation to govenrnment investment in healthcare? Interviews with people who would start their own business but for the lack of healthcare? Anything, other than wishful thinking?
March 30th, 2009 at 6:00 pm
Clearly no on this thread has ever tried to start a new business.
Just imagine (unlikely though this may be) that you had a good idea for a new product or service. What could you do? Well, you can and probably will take out a second mortgage your house, and you will probably borrow everything you can from friends and family. But unless you are already rich that won’t take you very far.
So what do you do?
The banks don’t lend to start ups, particularly innovative startups. Well, mybe they’d lend part of the money for, say, a Starbuck’s franchise, if you put up lots of collateral. But remember you’ve already mortgaged your house.
And don’t expect to get money from “venture capitalists”. There is no more rapacious or less venturesome group. Those smug morons on the TV “dragon” reality shows really are exemplars of the breed. They want only to invest in “new” ideas that have been tried several times before, and then only if they can be shown that others have already sunk several millions into the game.
So where do you get those millions?
For a business in startup the only *real* source of capital are people who can write checks for $50k – $100k, betting on a long shots. You sneer at them as “Rich uncles”. Working entrepreneurs call them “angel investors” and with good reason. They are the people who make it all possible.
Extra taxes on those investor’s income is a surgical strike against innovation.
March 30th, 2009 at 6:01 pm
Where would George W Bush be if it were not for a rich father, uncle and uncle to Osama Bin Laden?
No wonder he wanted to cut taxes!
(I apologize for not adding anything to the conversation, but that thought had to get out)
March 30th, 2009 at 6:09 pm
Mr T: Just imagine how little innovation must have been going on during the Eisenhower years, when taxes on the rich were vastly higher.
March 30th, 2009 at 6:22 pm
A meta question this post raises, which I addressed elsewhere last year (“Questioning the Conventional Wisdom of Microfinance and Encouraging Entrepreneurship”), is whether the U.S. government does too much already to encourage entrepreneurship. In that post, I mentioned Scott Shane’s argument that most start-up businesses in America were economically unproductive, created relatively few jobs, and what jobs they did create tended to be lower paying and have fewer benefits than those at larger companies. The reason for this, according to Shane, was that there simply are fewer talented entrepreneurs with high levels of human capital than there are Americans who start small businesses, and that many small businesses are started by unemployed or underemployed individuals who are motivated to do so partly by government incentives (e.g., government small business loans, grants, training and other encouragement) and by the relatively low opportunity costs for them of starting a small business, due to their current employment status.
March 30th, 2009 at 6:32 pm
Re: So where do you get those millions?
You basically don’t. Your “angel investors” are about as common as visitations by divine angels. Most people who start small businesses do so on their own dime, meaning either they have some small inheritance, savings or maybe severance pay from a layoff, or (very commonly nowadays) they use their credit cards and home equity. If they’re among the lucky few (most business startups fail) and start to show some profits, then they can go to the bank or to the venture capitalists to expand. But until the they’re on their own. Even Bill Gates started out working in his garage. The “rich uncle” is a myth.
March 30th, 2009 at 7:02 pm
Even Bill Gates started out working in his garage.
Bill Gates was his own rich uncle. It’s not so much that he dipped into his own trust fund to capitalize his business has much as he had the flexibility to create an initial product he could sell to get his business off the ground. Plus he was able to use Harvard’s facilities in an era before Harvard figured out that they could get a piece of anything created by students on their equipment.
DaveInHackensack, to a degree, the ease with which one can start a small business in the USA seems to be one of its “loss leader” appeals to attract productive immigrants as well as making up for the lack of a social safety net for the unemployed. Yes, maybe we do encourage people to start businesses who shouldn’t, but what else are they supposed to do with their time? It’s not like there’s a plethora of manufacturing jobs available, and no one hires the middle aged unemployed who’ve been downsized from their middle management or engineering jobs.
March 30th, 2009 at 7:05 pm
I have to point out, though, that if you’re looking for an example of a rich uncle who’s eager to invest in his nephews’ startups then Scrooge McDuck is not a good illustration of the genre. Scrooge’s money stays in that bin. His economic interactions with the next generation consist of hiring Donald for difficult and dangerous expeditions at 4c an hour, making it difficult for Donald to build up a stake.
March 30th, 2009 at 7:14 pm
Matt, the point about health care at the end was awesome. I never thought about the connection between the lack of health care coverage and entrepreneurship. That’s why I like this blog.
Yup, especially as evidenced by the recent issue of The Economist that had a special report on the dearth of entrepreneurship in Europe (with national health care!) compared to the still world-leader of entrepreneurship, the U.S. (no national health care).
It’s really awesome to think about checking insights against factual reality.
March 30th, 2009 at 7:16 pm
Taxes are theft, Matthew. Everyone has an inalienable right to hoard every penny they acquire into perpetuity. Or did you fail to follow the comment thread from your “fat cat” post over the weekend?
March 30th, 2009 at 7:25 pm
“Even Bill Gates started out working in his garage.”
Where do you people come up with this shit? I hate beating up on Bill Gates, because he seems like a pretty decent guy for an obscenely rich person.
But, again, his dad was the name partner in the most prominent law firm in Seattle. Bill gates did not grow up anything like middle class. Just stop pretending Bill Gates was the boy next door with a dream. He was a smart guy who had every advantage money can offer a child and later, a budding entrepeneur in America.
And, to his and his father’s lasting credit, they are outspokenly in favor of steep taxes on inherited wealth.
March 30th, 2009 at 7:36 pm
Tyro,
There’s a difference between making it easy to start a business, in the sense of having few government obstacles to starting one, and actively encouraging start-ups, through government-funded loans, grants, etc.
“Yes, maybe we do encourage people to start businesses who shouldn’t, but what else are they supposed to do with their time? It’s not like there’s a plethora of manufacturing jobs available…”
We should enact policies that would encourage more established businesses to set up operations or expand in the U.S., particularly businesses that create high-paying blue collar jobs. Unfortunately, most liberals take the opposite tack. They are against the sorts of policies that would lead to more high-paying blue collar jobs, e.g., allowing more mining and drilling, providing access to low-cost energy, reducing litigation risk, right-to-work laws, etc.
March 30th, 2009 at 7:40 pm
It’s not correct to say either that “rich uncles” or “angel investors” are rare. However, it’s also incorrect to conflate the two, and it’s VERY incorrect to suggest that their behavior is a key factor we should consider when setting tax rates.
There are basically three phases to starting a high-growth business venture – the “rich uncle” phase, the “angel” phase, and the “venture capital” phase.
“Rich uncles” and “angel investors” are unusually unresponsive to changes in tax law because they generally invest at least in part for reasons other than monetary gain.
Thus they seem like an unlikely group to refer to when you’re trying to argue that changes to the tax code will affect entrepreneurship.
I think it’s much more likely that changes in the tax code have a big effect on people’s willingness to start a business with their own money, but the relationship between marginal income tax rates and the rate of self-started business is complex.
In short, this is all very dumb. Let’s move on.
March 30th, 2009 at 7:48 pm
Matt you seriously tgink it’s absurd to say you need saving to have investment
See your former colleague’s post
http://meganmcardle.theatlantic.com/archives/2009/03/the_rich_really_are_different_3.php
March 30th, 2009 at 8:00 pm
Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues …
Hmmm … revenue stays constant at the level of the last few decades, we insist on shooting spending way up, the ensuing crippling budget deficits don’t result from shooting spending way up.
An interesting mind set, that.
Anyhow, on to the main point…
[Why not tax "the rich", they can afford to pay 90% on income over $5 million, or whatever.]
Some people it seems aren’t familiar with one of the most basic principles of public finance found in any textbook on the subject: that the deadweight cost of a tax — the loss it drops on society — increases by the square of the increase in the tax rate. (And tere are a lot more costs than Uncle Joe not ponying up to fund his nephew’s new pizzeria.)
What real-world effect does this textbook technicality have on policy and politics? Well…
The income of “the richest” over $X million, (1, 5, 10, whatever) is overwhelmingly investment income such as cap gains (even if received as compensation through incentive stock options and the like) that is reinvested. So…
1) A high tax on it is itself a direct taking of capital. Gosh.
And usually more surprisingly to lovers of high tax rates for “the rich”…
2) In the entire history of the income tax the highest effective tax rate on capital gains that “the rich” ever actually paid was 23% — and that was during the years after the 1986 Tax Reform when the highest tax bracket of all was only 28%.
In contrast, during the liberals’ much longed for “good old days” of the 91% top tax bracket, back in the 1950s and early 1960s, the effective tax rate on capital gains that “the rich” actually paid was … 14%!
Now, maybe lovers of high tax rates on “the rich” should ask themselves this: Why when the top tax bracket rate was >90%, as we so want to see again, was the rate the rich actually paid only 14% — lower than when the top tax bracket rate was only 28%?
Possibly it is indeed because, as the public finance textbooks explain, the deadweight cost of a tax increases by the square of the increase in the tax rate.
As tax rates rise this puts exponentially increasing pressure on politicians to put ever more loopholes and preferences into the Tax Code to exempt the income of “the rich” from the tax both (1) for the legitimate and necessary purpose of saving the economy from the rapidly rising deadweight loss, and (2) because as the deadweight cost of taxation rises, politicians can profit exponentially more by selling tax breaks to special interests.
A 91% tax bracket, circa 1960, is 3.25x a 28% tax bracket, post-1986. So the deadweight cost of the 91% rate is more than ten times the cost of the 28% rate.
Thus, cutting the top rate from 91% to 28% reduced the deadweight cost of the tax by more than 90%! — which is how tax loopholes and preferences were eliminated en masse then, so the efffective tax rate that “the rich” actually paid rose.
BTW, during the Clinton years after he increased the top tax bracket to 39.6%, the average effective tax rate on capital gains fell to 19% — wow, just like someone familiar with the effect of the deadweight cost of taxes might predict.
So, just how high do you folks want to increase the top tax bracket rate? And how do you expect to actually collect it, given the historical fact that back when the top tax bracket rate really was 91% the richest only paid 14%?
(Which, as it happened, was a lower effective rate than paid by the less-rich upper middle class back then, who couldn’t use all the deductions, investment preferences and special capital gain exemptions provided to the super rich — so the richest paid lower tax rates than the less rich.)
March 30th, 2009 at 8:02 pm
I find it amusing that now we have finally firmly established that drilling for more oil won’t create an appreciable dent in supply or reduce oil prices to any measurable degree that the right has discovered a newfound friendship with the working man and has declared that we need more offshore drilling because it will create more high-paying blue collar jobs.
reducing litigation risk, right-to-work laws,
All of this is available in the southern states, which are not known to be a stronghold of high paying jobs for blue collar workers.
Policies to encourage entrepreneurship in the US are there because the US wants to play “angel investor”, knowing that most fail but that some will do well. And lacking a full-featured safety net, the alternative is to give people another outlet: our economy is basically run on the principle that employees should in no way depend on their employer for a paycheck. But what it gives with one hand, it takes away with the other– insurance is damn expensive. And rates of self-employment in the US are lower than many other european countries (ref). That said, self-employment/small-business-ownership is a feature of somewhat less advanced economies– if a country can’t afford to attract research, technology, and advanced manufacturing jobs, then you might as well open a small shop or find work as an independent contractor.
In the absence of an economy that could guarantee long-term employment, however, I have to wonder what people think that workers should be doing with themselves. They can’t just wait around for corporations to be bribed into hiring people at jobs with decent wages (ie, the southern model).
March 30th, 2009 at 8:10 pm
So many crap arguments so little time to refute them!
1. Start a company, hire people, you can get group medical.
2. Most start up business fail… duh!! That’s the way the process works in capitalism. Most fail… some are successful….a few are spectacularly successful. The ones that are successful produce goods and services that improve our standard of living and employ lots or workers. No start ups equals no successes equals a stagnating economy.
3. Starting a business is all about capital. Higher tax rates have a huge impact on the expected after tax returns on investments in start ups and the availability of capital. If you don’t understand this you are either deliberately obtuse, mentally deficient or have no understanding of human behavior and how businesses work.
March 30th, 2009 at 8:16 pm
Jim said:
Possibly it is indeed because, as the public finance textbooks explain, the deadweight cost of a tax increases by the square of the increase in the tax rate.
I’m very confused as to your logic here. Can you explain the link between deadweight loss and effective tax rates?
March 30th, 2009 at 8:31 pm
Bah. There is only so much wealth out there.
My company operates fine on our budget but we’ve been seeking capital to expand the past year. We think we have a product that is architected to be better than anyone elses in our market, but we need the money to add and refine it. So yeah, I’d like to see some VCs step up to the plate.
The problem is we need this angel investor because theres no way a government is going to be able to give a subsidy that would encourage growth since we need probably 100-200% of our annual income. Self-interested ramblings, I know. And none of us have a rich uncle…
March 30th, 2009 at 8:51 pm
“I find it amusing that now we have finally firmly established that drilling for more oil won’t create an appreciable dent in supply..”
This is false.
“…or reduce oil prices to any measurable degree”
All things equal, increased supply leads to lower prices, although high oil prices aren’t a concern at the moment.
“…that the right has discovered a newfound friendship with the working man and has declared that we need more offshore drilling because it will create more high-paying blue collar jobs.”
I can’t speak for the rest of the right, and you shouldn’t assume that I do. And my concern for the “working man” isn’t “new-found”. Aside from being insufferable, the liberal presumption that only they care about the working man is inconsistent with many of the policies liberals advocate. In fact, I criticized McCain last fall for not focusing on this issue. The right should advocate policies that will facilitate the creation of high-paying blue collar jobs for a number of reasons. Aside from the reason that it’s a good thing on its own merits, people who are able to earn a livelihood through high-paying jobs are less likely to be dependent on transfer payments, and thus more likely to vote for the party that promises less of them.
“All of this is available in the southern states, which are not known to be a stronghold of high paying jobs for blue collar workers.”
These are the 8 states with the lowest unemployment rates in the country. All are right to work states, and most also have high-paying jobs in natural resources industries.
March 30th, 2009 at 9:35 pm
Re: Bill Gates was his own rich uncle.
Yep, and as I noted small businesspeopme do tend to get started on their own dime. Gates obviously had a few more dimes than most, but the point remains.
Re: no one hires the middle aged unemployed who’ve been downsized from their middle management or engineering jobs.
Actually most white collar layoffs have no troule finding comparable jobs (I’m talking in general; nowadays things are a bit difficult there for everyone). Most have skills that are easily transferrable. It’s the blue collar folks who are screwed when their factories close.
Re: tax rates have a huge impact on the expected after tax returns on investments in start ups and the availability of capital.
Which explains why the hugher tax rates of the 90s stifled business startups while our current low tax regime is flush with dynamic new businesses.
Re: Scrooge McDuck is not a good illustration of the genre.
Actually he’s a pretty good stereotype for the normal rich uncle: rich precisely because he holds onto his cash and keeps family and friends at arm’s lenth. I had an uncle and aunt like that. In their heyday they were worth a couple of million, and they were notorious tightwads. When another aunt (sister of the rich aunt) had her car stolen the whole family pitched in to help her buy another one– except for Rich Uncle who begged off claiming he needed his money to buy a new Lexis. And he came to a sad end. His wife some years dead, his own children totally estranged from him, he died in a nursing home, with Alzheimers,
alone except for the staff, wondering where the keys to his Lexis were.
Re: These are the 8 states with the lowest unemployment rates in the country. All are right to work states, and most also have high-paying jobs in natural resources industries.
Yet at the same time there are several right to work states with very high unemployment: South Carolina and Florida to name two. So that’s a red herring. No, the low unemployment appear to be low population density states which escaped the effects of the housing boom and bust.
March 30th, 2009 at 9:45 pm
There is only so much wealth out there.
Likewise, there are only so many companies worth investing in. The last couple of bubbles were a function of too much capital chasing too few valuable investing opportunities.
Start a company, hire people, you can get group medical.
Then once one of your employees gets sick, your rates fly through the roof because your “group” medical covers a risk pool of just a few people. That’s if you get to the point in your business where you can start hiring employees in the first place.
March 30th, 2009 at 11:00 pm
Matt:
Meanwhile, the crippling long-term budget deficits that will result from refusing to raise new revenues are not going to be doing any wonders for entrepreneurs.
So are the crippling long-term budget deficits that will result from refusing to raise new revenues much, much larger than the crippling long-term budget deficits that will result from increasing spending? If not, why are you harping on one and not the other?
March 31st, 2009 at 10:43 am
Isn’t the proof of this already in the pudding? For the past 10 years, the “rich uncles” didn’t get richer by investing in new business. No, that would have been too much work and might take too long to reap rewards. Rather, didn’t McScrooge: 1) invest with Madoff, 2) work with hedge funds and others playing with Credit Default Swaps, 3) buy real estate in booming markets [I think Mr./Mrs. McCain bought 5 or 6 new residences in the last 10 years - all in "bubble" markets], 4) shift their own business ventures to the Cayman Islands to avoid paying taxes and 5) work with UBS to hide other taxable assets?
Seriously, the notion that investing in new business ideas is a good way to make more money? How quaint.
April 5th, 2009 at 10:11 am
I think that Matt needs to re-evaluate his assumptions and his logic. Wealth comes from capital formation and that can only happen if we save excess production for later use rather than consume as Matt seems to believe. In a world where capital is mobile it will go to places where it is treated more kindly and respected, rather than where it is blamed for the problems created by government. That is exactly what we have seen over the past few decades as producers of real goods abandoned politically destructive jurisdictions such as California, New York and Michigan and moved to places where they felt more secure and more appreciated.
The bottom line is that wealth can only be created by saving and investing and that governments do neither. When they expand their activities and their spending governments can only get the money by one of three ways.
1. They can tax it from citizens and businesses.
2. They can borrow it from savers.
3. They can use the printing presses.
While the first method may seem attractive to many members of the lower and middle classes because they believe that taxes transfer wealth from the rich to them, that can’t be further from the truth. While I would not dispute the fact that higher income taxes will hurt the rich, personal income taxes are a small part of the total revenues that are extracted by governments to fund activities. And even though the poor and middle classes may come off without much immediate direct harm when income taxes on the rich go up, they will certainly take a hit when the pro-tax sentiment permits governments to hurt them by raising other taxes, fees, duties etc. Over the longer term they are certainly hurt when businesses determine that the risk of building new factories is not worth it and decide to look to other jurisdictions that are more favourable.
The borrowing approach also hurts the poor and middle classes. By going out into the capital markets governments increase demand and cause productive businesses to pay more to borrow. As interest rates rise faster than they would have there is less investment and fewer jobs for people that need them. But government borrowing activities can also start to put pressure on the currency as sentiment abroad about the likelihood of repayment with money of the same purchasing power begins to become an issue.
The third approach, printing money, is toxic to everyone. It hurts savers by robbing them of purchasing power. It hurts producers by making it hard to plan for the future. It hurts workers by increasing instability and lowering real wages. It hurts consumers who find that they have to pay more for goods and services than they used to.
The bottom line is that real wealth can only come from real production and real savings. And those do not come from governments, which are mainly parasitic and live off the productive classes in society. The Marxist and Keynesian arguments that Matt seems to be pushing do not work and have never worked. In fact, what we have is direct and indisputable evidence that the opposite approach is what will work. We already have seen that the Hoover/FDR big government interventionist approach, which funded public work projects and increased income taxes failed to lead to a recovery. Instead of recovery, those steps led to persistently high unemployment, a lower standard of living and a stagnant economy. Contrast that to the approach taken by Harding, who ignored the advice to intervene and lowered taxes and government spending. By letting the market clear out the bad businesses the depression of 1920-1921 ended very quickly and the rest of the decade saw a great boom that increased the standard of living for most Americans and reduced unemployment levels to very low levels. And while they certainly did not start that way, many ‘uncles’ became quite rich because the government stayed out of the way.
April 5th, 2009 at 10:16 am
eric Says:
Isn’t the proof of this already in the pudding? For the past 10 years, the “rich uncles” didn’t get richer by investing in new business….
For the past 10 years (and much longer) the Federal Reserve and the government created an environment that permitted people to get rich by getting access to cheap credit and gambling without fear of the consequences of failure. A true free market system would not permit either the Fed, which could not exist in a free market, or the government, which would have very limited functions that were focused on protection from force or fraud, to have the power to meddle in the market or to backstop private losses with public tax revenues.
What we have clearly seen is the failure of government and regulations. Yet, many people like you and Matt seem to think that giving governments even more power is the solution.
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