Labor & the Economy: November 2008 Archives

I want to caution about the use of the word "they" in current policy debates. This use of "they" leads to a kind of understanding in our brains that might just be short-circuiting our ability to make rational decisions. How we understand a problem has huge implications for how we decide to solve those problems.

Let me use the current debate over providing a loan to the auto companies as an example of what I mean. Some people say that "they" - the auto companies - did bad things. "They" opposed higher CAFE standards. "They" pushed SUVs because SUV sales led to higher profits in the short term. "They" made cars that were not as good as Japanese cars. Therefore "they" deserve what they get.

But who is the "they" here? What happens to your thinking about policy solutions if you instead understand that SOME executives of these companies were able to get their hands on the resources of the company, and did things that increased their own personal fortunes, even as their actions harmed the long-term profitability of the companies? In fact THOSE particular executives might have already fled with the loot they got for themselves, leaving the car companies behind.

Do you see what I mean? In that first use of "they," where you think of a company as some kind of a sentient being, a monolithic entity that makes decisions, you are led toward one kind of solution. Namely to let "them" fail and let "them" deal with the consequences of "their" decisions. The companies "deserve" to fail because "they" did certain things.

"Let them fail" ignores the millions of jobs at stake, the communities that those incomes support will be seriously affected, and that the country's manufacturing infrastructure will be further degraded if the auto companies fail.

But if you think about it the other way, where certain individual bad actors were able to make personal fortunes off of their access to company resources and their control of company decision-making (and lobbying), we are led to very, very different conclusions about how to fix the mess we and our economy are in. In this mindframe the solution that presents itself involves dealing with the bad actors, and setting up rules that keep future bad actors from being able to cause companies to harm themselves and the country in their pursuit of personal gain.

I came across the article, Why the Economy Grows Like Crazy Amid High Taxes, by Larry Beinhart, and it says some things that the people of California should hear.

Beinhart make some very good points. first, he points out that if you look at the periods of higher taxes, you see that these are the very periods when the economy does much better. He writes,

Examples include World War II and the Truman-Eisenhower years, when it was around 90 percent, and the Clinton years, when it was high relative to the preceding and following administrations.

He also points out that big tax cuts are often followed by bubbles and crashes, like the big crashes of 1929, 1987 and 2008.

Beinhart says that one reason for this is that low taxes encourage businesses to distribute profits rather than reinvest them in their companies. When taxes are low the owners have incentive to grab all the cash they can out of the company.  But when taxes are high every dollar they take out of the company is immediately reduced.  If the money stays and is reinvested in the company the company's value grows and can later be taken as capital gains.  As a former business owner I understand how this works. 

Beinhart writes,

With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest.

The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.

This creates a bias toward long-term planning.

If a business is planning for the long term, it wants a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits.

So low taxes cause companies to only think a few months ahead and sacrifice their long-term good for short-term gain, instead of planning to be in business year after year.  Also, low taxes encourage a fast-buck climate in which takeovers and disruption rule.  Beinhart writes that when the Reagan tax cut era took over,

It was no longer enough for a business to be a reasonably good business, making steady, reliable profits.

Indeed, that became a very bad condition for a business to be in. It made it a target for takeovers by people who were willing to milk them of their profits.

There is a lot more over at the article, so go read the rest.

This holds important lessons for Californians.  Along with Beinhart's observations, there are other reasons to think that low taxes harm the economy.  For one, it is the nature of our economic system that a few people can come into possession of huge shares of the wealth.  This dries up the economy because regular people don't have enough of a share of the wealth to allow them to spend much on consumer goods, etc.  We are seeing this happening today.  On top of that we are seeing the government forced by tax shortfalls to lay people off just at the time we need more people to be able to buy houses, cars, etc.  Taxes provide jobs and redistribute the wealth in multiple ways, so that regular people CAN buy houses, etc.

But in California we have rules that don't let us raise taxes, even though we can see that we need the income so that the state can keep teachers, firefighters, roadworkers, etc. employed!  We as citizens actually tolerate rules that keep us from asking corporations and wealthy people from pitching in to help fix the economy!  It is time for us to start looking at how to fix these rules that hobble us during times of economic emergency.