US elections: The rich can't be trusted with money

By Larry Beinhart

October 16, 2016

The American presidential campaign is about sleazy sex. About name-calling. About fact checking. Tabulating who told the most lies. About demographics: white, educated, under-educated, women, suburban women, blacks, Latinos. It's a horse race! Who's leading, who's falling behind!

What about issues? Are there any actual issues?

Yes, there are.

One of the most important is that perennial: taxes. Cut them or raise them. Who is going to pay more or pay less? The two candidates have actually taken the perennial party positions.

Hillary Clinton is for raising taxes on the rich (moderately) and cutting them for the middle class (infinitesimally).

Donald Trump is for cutting them. Especially for the wealthy. And, it's worth noting, especially for himself and his family. He wants to cut the inheritance tax down to zero. That wraps the lobbyist for the policy, the politician who wants to implement it, and its beneficiary, neatly into a single person.

'Fairness'

Trump claims that when rich people have more money, they will invest fervently, producing huge, amazing results, especially creating jobs. Dogs chase balls. Cats leap at dangling strings. Something profoundly similar happens when Republicans hear the words "tax cuts".

Clinton wants to raise taxes on the rich. The reason she gives, and what Democrats in general cite, is "fairness".

To hell with "fairness". What's really important is that the rich can't be trusted with money.

The more they have, the more they screw up. Not just for themselves, personally, like rich TV families do - spending it on ostentatious toys, drugs, disastrous infidelities, and lawyers to get them out of trouble after they commit crimes.

Oh, no. They're not content with that. They like to take down entire economies. Ruin it for everyone. For you.

Take a look at the history of income inequality in the US for 101 years, 1913-1914.

Income inequality rises abruptly, in spikes. There's a big one in the 1920s and a small one in 1936. Over the next 45 years it declines very significantly, and then flattens out. It's not until the early 1980's that it shoots up again. After that, the spikes come one after another in the late 1990s, a big one around 2003, and one more that begins in 2009.

For a healthy economy, tax the rich. If you cut their taxes, they go crazy. They create bubbles. The bubbles burst. The rest of us get drenched.

These did not happen because a bunch of really amazing, incredible entrepreneurs suddenly arrived on the scene and made huge profits. Or because there was an upsurge in productivity. The start or the end of war. More trade. New technology.

Except for 1936, all others have one and the same primary cause: Tax cuts for the rich.

Coming out of World War I, the top marginal tax rate was 70 percent. In the 1920s it was cut in three quick steps down to 24 percent. Yes, there was a boom. It turned into a bubble. Then the Crash of 1929. With massive bank failures. The Great Depression.

The downward slide bottomed out and reversed direction after US President Herbert Hoover raised taxes. The economy rose rapidly with another tax hike under Roosevelt.

Then came 1936. As hysterical as people are today over balanced budgets, they were more so then. It seemed as is the recovery was safely under way. So Roosevelt cut spending. That took money from the masses but had little effect on the well-off, lowering the bottom while leaving the top.

The economy immediately went into a stall. Then it headed right back down.

Income inequality

Roosevelt quickly reversed himself. The government resumed spending. Income inequality decreased. The economy resumed its upward path.

With World War II, the top rate went to 90 percent, plus or minus a couple of points. It stayed there until 1964 and 1965, when it was cut down to 70 percent. It stayed there until the early 1980s. Inequality declined, then flattened out.

Then came Ronald Reagan. He cut the top rate down to 28 percent.

Whoop-de-do! It was morning in America, again!

Until Black Monday, October 19, 1987. It was a worldwide crash. In New York, the Dow Jones Industrial Average fell 22.6 percent, the largest one-day decline in history. By then the Savings & Loan Crisis was also under way. Sixteen hundred banks failed. The bail-out cost $160bn. Back then, it seemed like a lot. Then came a recession.

By then there were massive government deficits. In response, Reagan's successor, George H W Bush, raised taxes. It lost him re-election. But unnoticed, it marked the point where the recession stopped and the economy began to recover.

Bill Clinton won. He raised taxes. The economy grew even stronger. It was virtually the only time since Reagan that the benefits of economic growth spread to more than just the very top.

In Clinton's second term, a Republican Congress pushed him to cut the capital gains tax from 28 percent down to 20 percent. That marks the moment when the Dot.com Boom became the Dot.Com Bubble that became the Crash of 2000. It was followed by the recession in George W Bush's first term.

This Bush responded with new tax cuts for the rich. Twice.

Economists will tell you there was a recovery. In their technical sense, that's true.

But there was an inexplicable mystery, it was a "jobless recovery". That had never been seen before.

It only makes sense if we imagine two separate economies. There was one for the rich. They got to enjoy a boom. The rest of the country was mired in a persistent recession.

Failed banks

Like the other booms created by tax cuts for the rich, this quickly turned into a bubble. It climaxed with the Crash of 2008. This time, the failed banks were much bigger than they'd been in the S&L Crisis. There was bailout. Officially, it was $900bn. Without any announcement or notice, $27 trillion - yes, that's trillion - was put into circulation to keep the financial industry alive and thriving.

It was followed by the Great Recession.

If we look back at this type of recession, the kind that follows income inequality-bubble-crash, the historical truth is that they reverse direction after taxes are raised on the rich. No one has ever said they were raising taxes in order to bring an economy back to life and become more vibrant. It's always because less business means less tax revenue, causing deficits, and the tax hikes are directed at those.

With that in mind, Bush's "jobless" recovery makes perfect sense. By cutting taxes, he was creating a new bubble. By failing to raise taxes, there was no real recovery. The gross numbers of the former masked the latter.

Something very similar happened after the Crash of 2008. The Bush Tax Cuts had been written so that they could not be repealed. They could only run out, which they did in 2010. Obama tried to keep the middle-class tax cuts but eliminate the ones at the top. The Senate blocked him. He made a deal to extend the Bush Tax Cuts for another two years.

Lo and behold! Between those two points, virtually all the money went to the top 1 percent. The recovery for everyone else was anaemic, at best. From the Crash of 2008, and on through "recovery", until 2012, median income continued to decline. It was only after taxes were raised on the rich that median income began to climb. That is to say that the rest of society finally participated in the renewed economic growth.

For a healthy economy, tax the rich.

If you cut their taxes, they go crazy. They create bubbles. The bubbles burst. The rest of us get drenched. Everybody else has to pay for their uncontrollable excesses. It may sound illogical, counter-intuitive, not what they teach in economics school, but it is the historical truth. It's the facts. The rich can't be trusted with money.