Readers shouldn’t be surprised to hear that I’m largely in agreement with Peter Ferrara’s “Obama’s Accelerating Downward Spiral for America,” but he happens to voice one bit of center-right common wisdom with which I have growing disagreement:
There is no secret or magic as to how to turn around these declining incomes. Increased investment in business expansion and start ups increases demand for labor, which drives up wages. That investment buys new tools and capital equipment for workers, making them more productive, which provides the cash flow to increase wages.
Increasing investment results from reducing the tax rates on investment, which enables investors to keep a higher percentage of what they produce, increasing incentives for investment.
First, it seems to me to take far too static and classist a view of categories. You’ve got investors, business leaders, and laborers. If we encourage the first to give money to the second, they’ll buy the time of the third, as another investment, like machinery. But we should encourage laborers to aspire to be business leaders, and many would take such steps if they were left to buy tools and capital equipment that increase their own value and expand their ability to compete with their former bosses. Thus can the market drive up productivity, consumer choice, and competition.
Second, one wonders why we can’t start with driving up real wages, by way of cutting taxes on income. If workers can take home more money, they can demand less pay, leaving the employer additional resources to invest in hard assets. The money enters the productive economy in either direction.
Third, a look at my favorite chart (last posted here) is a reminder that the direct connection between the investment economy and the productive economy has been pretty loose since the mid-’90s. Moreover, if the federal government is to begin taking money out of the economy in order to pay off its debt, as it must, it makes little sense to reduce taxes on investment. For lenders who are subject to our tax law, the government could pay off more debt to the extent that it’s able to collect back some of its payments.
Generally, I have to question the assumption that investors need the incentive of discounts in order to make investments. Yes, yes, the more you tax something, the less you get, as the saying goes, but investors who don’t invest have no income.
Perhaps they’ll invest overseas if the tax rate is much more attractive, but if a healthier economy in the United States makes investments here more profitable, then that’s where the investors will turn. The fact that investment is more mobile than labor isn’t quite the threat that it has become in the political imagination. If people want to work here, and if they want to do business here, then investors’ preferences don’t have to be decisive.
Of course, I should qualify all of the above by reasserting my preference for less government spending and lower taxes across the board. One of the problems with the whole investor-entrepreneur-worker schematic is that it divides the opposing force that the private sector should mount to the government. The finance sector is only too happy to lie with the political dogs if it means an economic advantage, just as labor has done via unions and as big business does at every opportunity.
If income is income is income, then we can all unite in arguing (and voting) to keep more of it.