Reich is right.

[we_are_toast]

The companies that are getting bailed out are not feeling enough pain. Time to let them go bankrupt, and then the government can step in and help them reorganize.

I think before the government steps in the shareholders need to take a hit, and every employee needs to take a hit. Across the board salary cuts. The auto workers make more than the average American and they need to sacrifice if they want the taxpayers to subsidize their jobs.

The Real Difference Between Bankruptcy and Bailout

When a big company that gets into trouble is more valuable living than dead, there used to be a well-established legal process for reorganizing it - called chapter 11 of the bankruptcy code. Under it, creditors took some losses, shareholders even bigger ones, some managers' heads rolled. Companies cleaned up their books and got a fresh start. And taxpayers didn't pay a penny.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.

The Treasury seems to have lost sight of its real client. It's client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

It would be different if Main Street was getting something out of all this. But credit still isn't flowing to small businesses or distressed homeowners, and unemployment is skyrocketing.

There's more at stake for Main Street when it comes to General Motors and other automakers now teetering on the edge of bankruptcy, because two and a half million households depend directly or indirectly on them for their paychecks. But the best way to protect all these people is not to pay off the automakers' creditors, shareholders, and executives, with no strings attached. Recall that when the government bailed out Chrysler in the early 1980s, a third of its employees lost their jobs.

In exchange for government aid, the Big Three's creditors, shareholders, and executives should be required to accept losses as large as they'd endure under chapter 11, and the UAW should agree to some across-the-board wage and benefit cuts. The resulting savings, combined with the bailout, should be enough to allow the Big Three to shift production to more fuel efficient cars while keeping almost all its current workforce employed. Ideally, major parts suppliers would adhere to the same conditions.

Remember: The underlying goal is to help Americans through this crisis and come out of it with a stronger economy.

And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration to help average people get affordable health insurance, send their kids to good schools, and find good jobs -- including jobs rebuilding the nation's crumbling infrastructure and finding alternative sources of energy.

It's not the big guys who need rescuing. It's the small. Right now, the government has its priorities upside down.

http://www.robertreich.blogspot.com/

[grapejelly]

Re: Reich is right.

we have somewhat of a little free market still. This whole "fuel efficient cars" misses the point. These companies, like United Airlines, are ossified after decades of being run for the benefit of labor and management. They need to be allowed to go under.

But most important, taxes on dividends MUST be repealed, taxes on capital gains MUST be repealed, and the disincentives to save and invest must be removed so that we can start investing and saving again.

The bankruptcy process can work so that shareholders and unsecured creditors are wiped out, the court can modify the horrendous obligations that have been imposed for the benefit of retirees and workers, and the newly emergent company can live to fight another day.

[c1ue]

Re: Reich is right.

GJ,

You keep harping on capital gains and dividend taxes to be removed.

But what of the concept of 'economic rent'?

Those with money can always make more - even monopolize profits - by ensuring their capital always reaps more than its share.

Reducing taxes on capital gains and dividends only accentuates this trend.

After all - those with tons of money make most of their income from capital gains and dividends.

Furthermore as Sir Warren pointed out - besides him paying less taxes as a percentage of his income than anyone who works for him, the actual tax burden is even more lopsided when you take into account sales and payroll taxes.

A removal of capital gains and dividend taxes then would change the Sir Warren equation of 15% vs. 28%, to 0% to 28%.

Doesn't seem like a very wise thing to do.

Why not instead advocate a flat tax?

17% across the board, income threshold at say 60K to be 'eligible'?

This way there is no discrimination against capital gains and dividends, but equally no discrimination against anything else. The win for capital gains and dividends is again what it should be: relative growth, not capital monopoly.

[grapejelly]

Re: Reich is right.

GJ,

You keep harping on capital gains and dividend taxes to be removed.

But what of the concept of 'economic rent'?

Those with money can always make more - even monopolize profits - by ensuring their capital always reaps more than its share.

Reducing taxes on capital gains and dividends only accentuates this trend.

After all - those with tons of money make most of their income from capital gains and dividends.

Furthermore as Sir Warren pointed out - besides him paying less taxes as a percentage of his income than anyone who works for him, the actual tax burden is even more lopsided when you take into account sales and payroll taxes.

A removal of capital gains and dividend taxes then would change the Sir Warren equation of 15% vs. 28%, to 0% to 28%.

Doesn't seem like a very wise thing to do.

You need people to invest money in business enterprises, and save money. That is how you get things moving. The people with the money need to deploy that money. That is why you need to do what I am suggesting.

We need to reward thrift and productive investment. The system now actually penalizes thrift through currency depreciation and punitive taxation.

I am against all taxes, but realistically, most income tax is paid by wealthier people. Cut their taxes to zero on productive investment and you will be on your way to solving today's most pressing economic problem.

[Chomsky]

Re: Reich is right.

Cut their taxes to zero on productive investment and you will be on your way to solving today's most pressing economic problem.

"Productive" being the key -- no capital gains exemption for real estate, etc.

[c1ue]

Re: Reich is right.

I am against all taxes, but realistically, most income tax is paid by wealthier people. Cut their taxes to zero on productive investment and you will be on your way to solving today's most pressing economic problem.

GJ,

You might perhaps consider reading more Dr. Michael Hudson.

First of all, while most income taxes are paid by the 'wealthy', the question isn't how much they pay.

It is whether they are paying their fair share.

If the wealthiest 20% own 80% of the capital and are making 80% of the income, but are only paying 70% of the income tax, is that fair? And what about the other taxes? property, sales, etc? Do the rich pay their fair share? Sir Warren in the interview where he talked about his tax level vs. his employee's, also noted that payroll taxes are equal to income taxes as a share of government income. Yet the rich pay virtually none of it.

How much of the roads, defense, and other benefits of government to the wealthy enjoy? Is it less proportional than their representation in the population or more?

You always have to be careful to separate your own selfish desires (paying less personal tax) vs. what is good for everyone, including yourself, in the long term.

As for taxes on productive investment - again how do lower taxes ensure more productive investment?

That sounds suspiciously like 'trickle down' theory or Reaganomics. Or put another way - isn't this exactly what Bush did? And did it help the American economy?

As we are witnessing first hand - lower taxes actually leads to financialization of the economy.

At first 'productivity' goes up in the sense of higher corporate profits, but ultimately it goes down because it is always more 'efficient' to outsource manufacturing and other forms of physical wealth creation in favor of FIRE.

What EJ advocates in order to stimulate innovation is different than what you speak of - it is more a case of directed subsidy towards those innovating. Or in other words, an increase on the benefits in order to take the risk of innovation.

In principle I think this is a good idea, but I am still somewhat unconvinced that subsidies help that much. After all, isn't a successful innovation its own financial reward?

[LargoWinch]

Re: Reich is right.

This is a good summary of the current ridiculous state of affairs.

However, I think the author may be mistaken with the following:

"And what a tragedy it would be if the government spends so much on these bailouts there isn't enough money left for the next administration..."

As we all know, the next administration has been given an even bigger mandate to "save us all"; a kind of New New Deal. Oh and they have a fully functional printing press good enough to buy Brazilian Bonds.

The high inflation tsunami is forming...

[grapejelly]

Re: Reich is right.

I think income tax is grossly unfair to everyone and nobody should have to pay a dime in income tax.

If you are going to tax, then tax consumption.

Eliminating capital gains and dividend taxes would incentivize investment by people who have money to invest.

I don't know what could be more elementary. All we have are our own selfish desires. That is what makes the world go round. Anything else presumes that you know something is greater, and that something may not be what I presume is greater. The way around that is to respect each person's fruit of his or her labors.

You say

As we are witnessing first hand - lower taxes actually leads to financialization of the economy.

Well no. Not at all. What leads to the financialization of the economy is the unlimited extension of credit via fiat currency issued by a central bank. Last time I checked, that is where "money" came from.

GJ,

You might perhaps consider reading more Dr. Michael Hudson.

First of all, while most income taxes are paid by the 'wealthy', the question isn't how much they pay.

It is whether they are paying their fair share.

If the wealthiest 20% own 80% of the capital and are making 80% of the income, but are only paying 70% of the income tax, is that fair? And what about the other taxes? property, sales, etc? Do the rich pay their fair share? Sir Warren in the interview where he talked about his tax level vs. his employee's, also noted that payroll taxes are equal to income taxes as a share of government income. Yet the rich pay virtually none of it.

How much of the roads, defense, and other benefits of government to the wealthy enjoy? Is it less proportional than their representation in the population or more?

You always have to be careful to separate your own selfish desires (paying less personal tax) vs. what is good for everyone, including yourself, in the long term.

As for taxes on productive investment - again how do lower taxes ensure more productive investment?

That sounds suspiciously like 'trickle down' theory or Reaganomics. Or put another way - isn't this exactly what Bush did? And did it help the American economy?

As we are witnessing first hand - lower taxes actually leads to financialization of the economy.

At first 'productivity' goes up in the sense of higher corporate profits, but ultimately it goes down because it is always more 'efficient' to outsource manufacturing and other forms of physical wealth creation in favor of FIRE.

What EJ advocates in order to stimulate innovation is different than what you speak of - it is more a case of directed subsidy towards those innovating. Or in other words, an increase on the benefits in order to take the risk of innovation.

In principle I think this is a good idea, but I am still somewhat unconvinced that subsidies help that much. After all, isn't a successful innovation its own financial reward?

[vinoveri]

Re: Reich is right.

Eliminating capital gains and dividend taxes would incentivize investment by people who have money to invest.

.

Maybe. The point of contension I would suppose though as earlier mentioned is what is productive use of capital. Although potentially lucrative, flipping houses is not productive. Day trading or swing trading stocks is not productive. Speculating in futures is not productive (it may be necessary to a functioning market, but should not be encouraged as a business model per se). So perhaps eliminating capital gains on productive investment, if that can be defined, makes sense. Buying equities in public companies, for most retail investors, is not a productive use of capital - when one has no control or say in the management of the corp - seeding a company or IPO may be.

[grizam303]

Re: Reich is right.

Maybe. The point of contension I would suppose though as earlier mentioned is what is productive use of capital. Although potentially lucrative, flipping houses is not productive. Day trading or swing trading stocks is not productive. Speculating in futures is not productive (it may be necessary to a functioning market, but should not be encouraged as a business model per se). So perhaps eliminating capital gains on productive investment, if that can be defined, makes sense. Buying equities in public companies, for most retail investors, is not a productive use of capital - when one has no control or say in the management of the corp - seeding a company or IPO may be.

What about a high short-term capital gains tax and no long-term capital gains tax? That would be a good place to draw an arbitrary line of what is productive and what is not.

[grapejelly]

Re: Reich is right.

Maybe. The point of contension I would suppose though as earlier mentioned is what is productive use of capital. Although potentially lucrative, flipping houses is not productive. Day trading or swing trading stocks is not productive. Speculating in futures is not productive (it may be necessary to a functioning market, but should not be encouraged as a business model per se). So perhaps eliminating capital gains on productive investment, if that can be defined, makes sense. Buying equities in public companies, for most retail investors, is not a productive use of capital - when one has no control or say in the management of the corp - seeding a company or IPO may be.

Flipping houses is only possible with easy money creation via central banks.

Speculating and trading IS productive because it provides liquidity which is vital to any market functioning efficiently.

Buying equities in public companies is a fine example of productive use of capital. If the money used to buy the equities is money left over after consumption, then this investment represents savings.

[vinoveri]

Re: Reich is right.

Flipping houses is only possible with easy money creation via central banks.

Speculating and trading IS productive because it provides liquidity which is vital to any market functioning efficiently.

Buying equities in public companies is a fine example of productive use of capital. If the money used to buy the equities is money left over after consumption, then this investment represents savings.

Not to quibble too much, here, but one man's productivity is another's rent extraction I would suppose.

I would suppose a good number of folks would view their 401k "savings" investment into equities as not particular "productive" at a time like this - it may be productive if you're a company management though.

Speculating by borrowing fiat yen at 0.5% and leveraging futures contracts, e.g., driving the price of oil to $147 is not a productive use of capital (although free money and leverage sure does provide "liquidity").

[grapejelly]

Re: Reich is right.

Not to quibble too much, here, but one man's productivity is another's rent extraction I would suppose.

I would suppose a good number of folks would view their 401k "savings" investment into equities as not particular "productive" at a time like this - it may be productive if you're a company management though.

Speculating by borrowing fiat yen at 0.5% and leveraging futures contracts, e.g., driving the price of oil to $147 is not a productive use of capital (although free money and leverage sure does provide "liquidity").

not a problem...as long as the central bank isn't creating infinite amounts of cash...

[kelton56]

Re: Reich is right.

So why, exactly, is the Treasury substituting government bailouts for chapter 11? Even if you assume Wall Street's major banks and insurance giant AIG are so important to the national and global economy that they can't be allowed to fail, that doesn't mean they have to be bailed out. They could be reorganized under bankruptcy protection. True, their creditors, shareholders, and executives would take bigger hits than they're taking now that taxpayers are bailing them out. But they're the ones who took the risk. We didn't.

The Treasury seems to have lost sight of its real client. It's client is not the creditors, shareholders, or executives of any of these firms. Its sole client is the American people.

Is it not yet crystal clear: the Treasury has not so much nationalized the nation's financial system, as the nation's financial system has privatized the Treasury...

I, for one, am working on my application to become a bank holding company.

[jtabeb]

Re: Reich is right.

Grape,

Two things

You are right in that PORDUCTIVE investment makes everyone's life better, more things at cheaper prices, What is not to like.

But You are wrong when it comes to rent (rentier income), this takes money/goods/services out of the economy with no benifit to anyone other than the rentier.

That is why the two types of invesment have to be treated seperatly.


If I invest in a company that makes widgets a provides a dividend of 10% are year and employs 10000 workers is that different than investing in a hedge fund that pays a 10% dividend and makes nothing and employes six people? I would say yes, in the first case you are using your capital for productive purposes and Yes, you should keep that.
But in the later case you are just earning money because you have money (no it is not the same as the first case BECAUSE you are providing a productive benifit to society), and that should be taxed to provide and INCENTIVE for people to use their money as outlined in the first case.

Even Ayn Rand points this out.

Capatilizm is supposed to reward strength and productive uses of capital. Our present system rewards WEAKNESS and non-productive uses of capital, you can't have an economy like that (for very long).