Creating a Quality Economy, Part 2

price_index-copy.gifBy Mark Pash, with Brad Parker –

Capitalism does significantly raise the standard of living but not for all and not enough for many. Therefore, it is up to government to take a more active role in the economy in order to overcome these flaws with as little hindrance as possible. In other words, one of the major missions of a federal government has to be macroeconomic well being.

But, the vigorous policies of government can also promote private solutions to these flaws. Private philanthropic and labor union measures can be encouraged, as can pension programs, profit sharing and equity sharing plans, job training, child care and medical insurance.

For some reason, many do not believe that these flaws exist. All they have to do is look at the economic record prior to the extensive gov’t involvement starting in the mid 1930s: the panics of 1837, 1857, 1873, 1893 and 1907; the Banking Crisis of 1884; the recessions of 1892-6 and 1921; the severe depression from 1873 to 1879 and the Great Depression of the 1930s. The record after this period of the modern industrial age is much less volatile with the average population living substantially better lives because steps were taken by the government to correct the flaws of capitalism.

Although we will be discussing these flaws, and other areas of how to improve our capitalistic system, it might seem to be an overly negative analysis of capitalism. Therefore, I want to impress on you the enormous success of our system, which provides the tax dollars and wealth to fund our government. There is a necessity not to hinder capitalism but to enhance it through effective government policies.

Enhancing Free Marketings – Capitalism

Enhancing the system of capitalism increases the total tax revenue, which helps the government provide the services that are needed. The government should pursue policies that encourage and facilitate business formations, operations and competition. Local and National governments need to reduce or maintain low the barriers to the formation of new businesses – entrepreneurship. The government can also play a key role in entrepreneurship by improving the environment for entry and operations. All government fiscal policies need to encourage and not hinder incentives, initiative, innovation, productivity, investment, research and development. The government always needs to continually simplify tax laws and regulations – red tape to facilitate business growth. It needs to not over-regulate the good but look more for the bad and increase their punishments. Government needs to insure a level playing field in the business environment to insure fair competition.

The government must discourage competition within an industry and geographical area based on the cost of an individual’s labor, as that reduces the quality of customers. It needs to insure labor utilization and flexibility of hiring and firing while protecting employee rights and unemployment benefits. It needs to create portability of benefits, income tax averaging and other features for today’s more mobile labor force. Government fiscal policy can boost productivity by creating more accessible and affordable quality education for all thus creating a more capable labor force.

GLOBALIZATION & TRADE

Globalization is the continual increase and expansion of commerce by individual firms worldwide. As a consequence, this is producing the gradual elimination of national boundaries, where commerce is concerned. However, these firms are basically in competition with each other not with individual countries. Eliminating boundaries has generated both positive and negative effects. The three flaws of capitalism have followed globalization and must be dealt with on an international level.

There are limited international regulatory bodies to oversee these firms except the World Trade Organization, which does not have much power. Obviously, we will need to develop more institutions for this purpose. It will be a major task for future administrations to comprehensively address these issues. So, how can we compete as a nation when our firms and other country’s firms buy, sell and produce all over the world to take advantage of these flaws of capitalism? We cannot! Therefore, the major area of concern for our government is and should be the economic well-being of our people, our customers. The concept of a well-compensated work force, thus creating quality customers, is the major objective of every nation. In order to rebalance global trade and wages, we must have the wages of the international work force progress towards us and not ours being lowered to theirs.

Countries like China are attempting to compete as a country not as independent businesses. The government owns many, if not all of their companies. This is a socialist scheme not capitalism. They compete by making use of flaw number two, outlined above. They are taking advantage of the huge consumer base (middle class) in the United States. The major long run problem with this strategy is that it is not building a large enough adequate consumer base in China. If the U.S. consumers slightly lower their consumption because of lower wages, less credit card and home equity-line debt or a basic recession, China could see a significant recession/depression.

Since the U.S. is still the primary customer, it has the power to use tariff changes, not to protect industries but to protect the middle class purchasing power and more importantly – to force low wage countries to pay an adequate wage so they can become adequate consumers. We do not have to insist on equal wages but reasonable non-slave labor wages that are rising to continue to allow access into our markets. Yes, Labor Unions are an additional method to help accomplish an adequate consumer base goal but tariff changes are needed as well. The concept of Americans having super cheap goods and services, which offsets our wage declines, is absurd. This differential, so we can buy 10 shirts instead of 9, is not economically justified when those workers, who make the shirts, can’t buy any of our production of goods and services. Furthermore, the increase in the labor component of manufacturing in other countries will not significantly raise prices to alter our consumer habits. We should eliminate or reduce all tariffs on countries with adequate wages and environmental practices. We should raise tariffs on all those who do not. Also, we should probably continue with a small general tariff on all goods as a revenue raising structure in addition to taxes.

The excessive trade deficit is deceiving to some degree as well. It does not include monies coming into the United States in terms of education of foreign students, investments in stocks, real estate and government bonds. They receive our paper and we receive their goods and services. What it does mean is that foreign individuals, enterprises and countries will own our assets as we will own theirs. This is true globalization! How do we compete in this environment? The solution is to reduce our dependence on foreign oil and create an increase in the wages of other countries, through tariff increases, so their workers can afford to buy our goods and services.

The “Fair Trade vs. Free Trade” argument is somewhat bogus as almost all industrialized countries have some sort of tariffs. I am for total free trade with the proper tariffs to protect the consumer base-wage differentials, ecological differences and anticompetitive practices (dumping & subsidies) by governments with large pocket books. Our firms can compete with any firm globally – they only need a relatively level playing field.

TAXES

There are many websites, newsletters, books, etc. on tax policy. Following are only the general important concepts and the defense of Progressive tax policy.

The Progressive Income Tax is one of the fairest taxes as it is based solely on the ability to pay. What is important is not how much any individual earns but how much is left over to be an adequate consumer and saver for retirement. This bears repeating: It is not important how much one pays in taxes but how much money is left after paying taxes! Creating quality consumers is essential to tax policy and therefore the Progressive Income Tax is the key to sound government fiscal policy in offsetting flaw number one.

The estate tax is also a very fair tax because the taxpayer is dead and no longer in need of their money. It is levied only on the very, very rich. It is the best tax to offset the first flaw above – the rich getting richer – which reduces the number of consumers and the ability to build wealth. Importantly, there are provisions to help family farms and businesses. And, contrary to some opinions, many of these assets have never been taxed!

Collectibility in tax legislation always has to be considered in specific tax regulations and laws. The capital gains rate at 15% is substantially below the maximum wage rate at 35%. But, the lower the capital gains rate, usually, the more transactions resulting in more total tax revenues. Ease of tax avoidance and evasion is also a consideration.

Tax Deductions and Credits can also be used to offset business risk and encourage social behavior.

Payroll-FICA-Social Security Tax is an income tax. It needs to be included in any income tax debate as more workers pay a higher payroll tax than income tax. It is not as progressive as the income tax because it is a flat tax with a ceiling. A great tax cut for 99% of the workers and many small businesses in the country would be a reduction in the employee based tax rate and elimination of the ceiling. This could be structured to be revenue neutral or a revenue increase to actuarially extend social security.

Lowering or raising income taxes does not necessarily create a boom or bust. There are many other factors involved. Most of these taxes are usually spent, as the government is the customer – offsetting flaw number two. The Clinton Administration raised taxes in the early 1990s and we had the biggest boom in the history of mankind. The income tax rate in the early 1930s, during the Hoover Administration, was 24% on only the wealthy and we had the worst depression in modern industrial history. Of course, no government taxing system can be too confiscatory resulting in overly restricting and reducing the incentives of the free enterprise system.

In other words, a tax rate of 99% is too high and 1% is far too low to overcome the flaws of capitalism. The Clinton years seems to depict an appropriate level of taxation. Personal and corporate tax rules, regulations and preparation should be kept as simple as possible. This does not mean reducing the number of brackets or itemized deductions but mostly the above the line regulations.

Corporate tax rates should be more progressive as they have more of the ability to pay as it is based on profits after salaries and expenses. It should be lowered for smaller and less profitable businesses and increased on more profitable corporations. Of course, the very significant corporate loophole system and offshore havens always needs to be reviewed and corrected, which will allow actual rates to be lower without losing revenue.

One has to be careful with taxes based on sales not profits; sales taxes, consumption taxes, the VAT tax and property taxes. They can over-interfere with commerce and are usually over burdensome for lower income families and businesses.

Should the tax on dividends be so substantially below the taxes on interest and wages? The answer is – no. Dividends should be taxed at the same rate as everything else with exclusion for a small amount of dividends and interest so it will stimulate and help the lower income families save for retirement. In fact, the dividends paid out by corporations should be tax deductible with offsetting increases in taxes to make it revenue neutral. This will encourage corporations to plan more for the long term, which addresses flaw number three. These increased dividend payments will help the Baby Boomer Bubble through retirement without any requirement to sell securities.

There is an argument that individuals end up paying all taxes either directly or through high prices. This is not a completely accurate statement. Although, this is somewhat true because we are all in the system, it is an unrelated argument because what counts is how much a business or individual has left over after taxes. Also, pricing mechanisms include many costs and other factors of which taxes is only one of them. Taxation comes out at various points of the production-sales-profit cycle. The question is at what point does it come out?

MONETARY POLICY

Monetary Policy (the creation of new money) is as economically important as fiscal policy (how much the government taxes and spends). Currently, the monopoly of creating and distributing new money is accomplished by the commercial banking system – i.e. Bank of America, Wells Fargo etc. – by the creation of debt. We thought it was well controlled and regulated by the Federal Reserve – central bank, until the recent sub-prime fueled financial crisis. We have learned that no matter how much regulation there will always be errors in a human system.

Over the last two hundred years, we have seen many monetary crises in every country on the globe. There are many reasons for these failures, such as over-corrections, mismanagement, cronyism, familism, corruption, and political interference. Since human behavior is not perfect, when this single system over lends, usually in the booming sectors, it has substantial problems when those sectors start their decline. Also, having one system with its strict guidelines reduces competition and diversity. “You can only borrow if you already have money – collateral!” This means the single banking system for the distribution of new money is too limited and too under-diversified in its infusion of new money. This stifles growth, competition, the recirculation of money and employment.

These failures can be drastically reduced in two major ways: (1) by having many systems deliver new money reducing the ravages of human error; (2) and by educating the public with full disclosure and transparency regarding monetary and financial functions and products.

The banking system will remain the major source for the monetary system for some time. I am recommending that the Federal Reserve increase the commercial banking system’s reserve requirement by a small percentage. This allows them to distribute some new money through many other new distribution institutions under their control. Some of these new monetary delivery systems should have an equity return not just an interest rate charge – or combination thereof. This reduces the extreme negative effects of high interest rates causing failures – defaults – and the reluctance of private enterprise to invest.

The evolution of our monetary system, which is based on an archaic banking structure, developed several centuries ago, needs modernization. The future evolution of our monetary system is of vital importance. It can fund appropriate programs that have a return relieving the burden on the fiscal side of government.

by Mark Pash, with Brad Parker

Read Creating a Quality Economy, Part 1.

Reprinted with permission from Economics for Democrats.

Brad Parker is an award winning artist, songwriter, producer and musician. He has recorded, toured and produced hits in North America, Europe and Asia. Parker owns Indie label Riozen records and is a co-founder of “muzlink.com”. Brad is a prolific political writer and speaker as well. Parker is very involved with Democratic political organizations including: President, Valley Democrats United, Vice President, Progressive Democrats of Los Angeles, Platform Committee of the California Democratic Party and Delegate, CDP Central Committee from the 42nd Assembly District.

Mark Pash has been in the financial industry over 35 years. He received his BS and Masters in Business Administration from UCLA and USC respectively. He is a Certified Financial Planner from the College of Financial Planning. He served on Senator John Edwards Committee of Economic Advisors.

Articles by Brad Parker:

Published by the LA Progressive on July 31, 2008
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About Brad Parker

Brad Parker is an award winning artist, songwriter, producer and musician. He has recorded, toured and produced hits in North America, Europe and Asia. Parker owns Indie label Riozen records and is a co-founder of "www.muzlink.com". Brad is a prolific political writer and speaker as well. Parker is very involved with Democratic political organizations including: President, Valley Democrats United, Progressive Democrats of Los Angeles and Delegate ~ CDP Central Committee from the 42nd Assembly District. His website is: www.riozen.com. His new book is: Left Turn Only - Dispatches From The Progressive Underground (available on Amazon & Kindle)