By Carl S. Milsted, Jr.
Last month the U.S. Department of Aristocracy announced authorization for a total of 9 trillion dollars for the purpose of maintaining a respectable differentiation between rich and poor. Aristocracy Secretary Thurston J. Wilkinson, IV stated in his announcement, “With this budget allocation we shall endeavor to maintain a sense of class in our nation in order to have a respectable presence on the world stage. Without this critical allocation our nation would be at serious risk of repeating the embarrassments of the Jacksonian Era.”
When questioned by Edna Eubank of the Berkeley Unamerican on why we need a Department of Aristocracy while at the same time we spend hundreds of billions of dollars trying to improve the lot of the poor, Wilkinson responded, “All of the noble programs you hold so dear are dependent upon my department. With excessive economic mobility, these programs would lose funding as voters succumb to a fit of Horatio Algerism. Millions of bureaucrats would be laid off. Millions of highly educated people would be reduced to making less money than plumbers or auto mechanics. Imagine the humiliation!”
OK. OK. I made this up. There is no Department of Aristocracy.
But there might as well be one. And the 9 trillion dollar figure is not fictitious; it is the new amount for the U.S. debt ceiling. 9 trillion dollars are scheduled to be slurped out of the capital markets by the federal government. That’s roughly enough money to finance 30 new GMs! (I used debt plus market cap to arrive at this figure.) Imagine what would happen to the price of labor if there were 30 more GM-sized corporations bidding for workers. Or, that money could have gone to finance homes, small businesses or solar collectors.
Centuries ago, Adam Smith pointed out that risk-adjusted profits track interest rates. If profits are less than interest rates, investment stops. If profits exceed interest rates, new businesses are financed which drives up labor costs and/or drives down consumer prices.
Populists used to take this fact to heart and supported many schemes to push interest rates downward. Unfortunately, most of these schemes involved inflation or price controls, and were thus quite destructive.
Adam Smith pointed out that real interest rates, and thus profits, naturally fall in a market economy as capital accumulates. In Smith’s day, the government used tariffs and monopoly patents to allow favored industrialists to make excessive profits. Today, we have high budget deficits (which consume excess savings), Social Security (which discourages savings by the working classes), overregulation of the capital markets (which gives existing big corporations an unfair advantage) and government sponsored pure research (which creates new investment opportunities).
The modern day wealth subsidies come not from an explicit desire to help the rich, but from attempts to stimulate the economy during the Great Depression. John Maynard Keynes prescribed a set of anti-savings measures in order to stimulate the economy. The Left took his ideas to heart since they provided an excuse for welfare programs – the poor tend to spend what they get, so taking from the rich and giving to the poor leads to increased spending.
What the Left failed to realize is that the rest of Keynes’ agenda consists of subsidies for the rich! If the government consumes savings, the demand for capital goes up. If you discourage workers from saving via payroll taxes and a promise of retirement income, then the supply of capital goes down. The end result is a greater return on investment for those who have money to invest.
If you want a more egalitarian society, you want to have a savings rate that is so high that high return investment opportunities are hard to find, where the rich need to work or take risks in order to make more than a couple of percent return on their holdings.
It appears that some on the Left are learning this. Bill Clinton deserves credit as a deficit hawk, and today it’s the Republicans who are claiming that deficits don’t matter. Unfortunately, there are still plenty of people on the Left who have yet to learn this lesson; they are still calling for yet more expensive social programs, which would result in higher deficits.
Message to Democrats: if you want to boost wages, lower profit rates, and win the votes of freedom lovers, you need to do two things. First, work towards paying down the national debt. Second, replace the Social Security payroll tax with a consumption tax. The wealth gap will narrow, and we won’t need so many social programs.
Carl Milsted is a senior editor for The Free Liberal.