You posed an article by Robert Frank of the Wall St. Journal on my wall so I felt compelled to read it and respond thoroughly. Upon finishing my first read of the article, my mind was reeling attempting to harmonize its clever craftsmanship and highly disingenuous message; the WSJ is certainly getting its money’s worth with Mr. Frank.

Upon further contemplation, I was left with a lot of thoughts, which I’ll share below, after briefly recapping the author’s position.

Author’s Position

The article is motivated by the following correlation: those States most reliant on income tax revenue from their wealthiest citizens now face the largest deficits. Mr. Frank frames this subject by noting that this is emerging during a time of greatly increased public spending. He then notes that “as the incomes of the wealthy have grown, they have become less stable.” Mr. Frank acknowledges that there is a consensus that these top salaries are too tightly linked to the market. Nonetheless, this situation has left governments increasingly dependent upon their top earners for revenue.

This story is told through the personal story of Brad Williams, a former economic forecaster for the State of California. Mr. Williams retired from the State in 2007 and now runs his own consultancy. We learn that Mr. Williams had long been aware of this excess reliance on top earners. While working for the State, he advocated the following fixes: 1) flattening income tax rates, 2) allowing the wealthy to defer payments on windfall profits, and 3) establishing a “rainy day” fund. His proposals, however, were not adopted. Mr. Williams, however, felt vindicated by the recommendations of a bipartisan commission assembled by former Governor Schwarzenegger in 2009. The commission’s proposal to fix the State’s over reliance on income taxes from the wealthy was to decrease those taxes while increasing the general sales tax. As California remains beholden to its wealthiest, and by implication, to the market, Mr. Williams laments of having “no real pleasure in being right.”

My Thoughts

As I alluded earlier, the author of this article, Robert Frank, has spun this tale well. However, its unquestioned reliance on certain tacit assumptions, along with a gross disregard of other highly relevant factors, make it a staggeringly disingenuous work of art.

To his credit, Mr. Frank notes how the top tax bracket has fallen from 90% during WWII to 35% today. But instead of analyzing this massive decrease, he instead highlights how today, those earning over $379,000 are taxed twice that of those whose salaries are under $69,000. This “twice as high” tax rate is presented as a great injustice while the broader 55% decrease is included as mere background. Mr. Frank fails to examine how these massive tax reductions for the wealthy helped create the very conditions which underlie the current crisis.

Throughout the article, the increased accumulation of wealth is treated as inevitability. Furthermore, the article dismisses, as asides, other factors that have lead to the current crisis, namely decreased corporate taxes. As anyone following the saga of General Electric is aware, large corporations, while thriving, are paying far less in taxes than before. These profits are instead going into CEO and senior executive pay. Since these outsize compensation packages are directly tied to the stock market, they foment instability. Thus, public officials, instead of leading, are left studying Wall St. to “more accurately predict state revenues.”

In essence, this story is about how US public policy regarding taxation has empowered the super-wealthy to leverage their wealth so spectacularly as to ensnare all of us in their vagaries. The US economy has been split in two, leaving government constantly one step behind, trying to fix what has already transpired while the next movement is afoot.

The proposals that the author endorses, those espoused by Mr. Williams, are cruel and cynical. To escape the current volatility, it is suggested that income taxes be lowered and sales taxes increased. Such a proposal would further impoverish the state, enrich the already wealthy, and burden the poor and middle class.

Mr. Frank fails to examine other, more progressive policies, that could help address the current volatility in state revenues. Higher income taxes for the very wealthy might well temper current excesses in market-based speculation. And decreasing income polarization would itself engender more stable revenue collection models, thus allowing states to better plan for and wisely craft their spending priorities.

Instead, we’re one again pitched tired old proposals which do little more than privatize profit while socializing losses. We’re told that states will benefit if the super-rich are allowed to spread out their income tax payments on windfall profits over multiple years. In the same breath, we’re encouraged to create a “rainy day” fund, the type which could ostensibly be funded by such windfall tax revenues. Mr. Frank’s vision would leave us poorer now and surely impoverished later.

Conclusion?

Sorry, but if that’s the best that “conservative” America has to offer, then maybe we should start dragging the term “conservative” through the mud, like “social welfare” (aka Socialism) has been. As Bob Herbert has opined in his swan song at the New York Times, America has lost its way. Our extreme economic inequality now holds the majority of us hostage, and our elected officials appear to be indifferent, impotent or in-cahoots. Our system no longer serves us. Rainy day funds are not the answer to an America, Inc., which has become “too big to fail.”

So, Jim, those are my thoughts. This article is well crafted but wrongheaded. I respectfully disagree.

Best,
-WD

“The people who are not around the Capitol square are with us,” said Rep. Robin Vos, a Republican from Rochester and co-chair of the Legislature’s budget committee. “They may have a bunch around the square, but we’ve got the rest on our side.”

Isn’t that what Mubarak’s people said in the earlier days of the uprising in Egypt?

Comments such as these should put all progressives in Wisconsin who are not out there protesting on notice. Don’t let them get away with this. Go protest if you can, or write these Republican politicians to let them know that while you may not be there, you are not “on their side.”

Which side are you on?

When the Government assured the world in 2008 that it would use TARP to prevent the failure of any major financial institution, and then demonstrated its resolve by standing behind Citigroup, it did more than reassure troubled markets – it encouraged high-risk behavior by insulating the risk takers from the consequences of failure. Unless and until institutions like Citigroup are either broken up so that they are no longer a threat to the financial system, or a structure is put in place to assure that they will be left to suffer the full consequences of their own folly, the prospect of more bailouts will potentially fuel more bad behavior with potentially disastrous results.

Notwithstanding the passage of the Dodd-Frank Act, which does give FDIC new resolution authority for financial companies deemed systemically significant, the market still gives the largest financial institutions an advantage over their smaller counterparts. They are able to raise funds more cheaply, and enjoy enhanced credit ratings based on the assumption that the Government remains as a backstop. Specifically, creditors who believe that the Government will not allow such institutions to fail may under price their extensions of credit, giving those institutions access to capital at a price that does not fully account for the risk created by their behavior. Cheaper credit is effectively a subsidy, which translates into greater profits, giving the largest financial institutions an unearned advantage over their smaller competitors. And because of the prospect of another Government bailout, executives at such institutions might be motivated to take greater risks than they otherwise would, shooting for a big payoff but with reason to hope that if things went wrong they might still be able to keep their jobs.

I think that Citi’s moral hazard = America’s moral hazard. More thoughts on our current state of affairs soon.

It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.

Are you a cold and timid soul, Mr. President?

For shame.

Take a look at the numbers. Not only is it 5,000 ft. from the surface of the ocean to the ocean floor, but it is an additional 18,000 ft. down to the oil reserves. We are drilling down nearly 25,000 ft. for this stuff!

Perhaps this disaster will be a wakeup call that such exploration is simply too dangerous. While the devastation here will be great, it’s some comfort to see that Cape Wind has finally been approved for Nantucket Sound. Contrast the clean energy we’ll get from that development with the dirty, nasty oil that has now been unleashed on the Gulf Coast ecosystem. Drill Baby Drill never seemed so idiotic.