Tuesday, October 28, 2008

How Much Will You Pay to Rent a Nation?

Throughout the almost three decades of conservative power, I was hopeful that we'd learned a few things that were approaching the level of acknowledged facts:
  • Foreign trade is universally beneficial, even when it destroys industries in your own country.

  • Providing able-bodied adults access to perpetual government support (welfare) creates a permanent under-class and contributes more to human misery than being mean in the short term and forcing people to fend for themselves after a while.

  • Confronting implacable enemies early works better attempting to placate the implacable until they're ready to attack you.

  • Rich people pay the amount of tax that they think government is worth, rather than the amount that government thinks they should pay, leaving the middle class to make up the difference.
This may be the sum total of wisdom accrued from the conservative revolution. And I agree with Roger Kimball when he points out that Obama doesn't seem to be enthusiastic about any of the four:
What I find depressing about this–as, indeed, about the whole Obama juggernaut–is the extent to which it represents a return of bad ideas that have already been tried time and again, have failed and made people poorer and less stalwart, and yet seem poised to make a sorry comeback once again.
All of these principles are important and all can contribute significantly to the ultimate success of society. But it seems to me that the ultimate denial of reality comes when we forget that governments don't operate with the "consent of the governed" so much as they operate with the consent of those willing to pay for it.

When you have 80% of the revenue being collected from 5% of the population, those 5% wield huge power. Fortunately, the rich are pretty much like everybody else: most of them are good, hard-working, patriotic, well-meaning individuals who look out for their own interests first but acknowledge that looking out for the interests of their society is in their long-term best interest as well.

But, unlike the other 95%, the rich tend to be well-educated and financially sophisticated. They are very good at understanding the value they receive from government and are able to price that value. The rich will pay for government but they'll only pay for what they think it's worth. Beyond that level, they will defer recognizing income, export wealth to tax havens, or pay armies of accountants whatever it's worth to hold on to their money and keep it out of the hands of the government.

We have a few data points from the last fifty years. We know that the rich are unwilling to pay 90% of their income for government. They're not happy paying 50%. They're quite happy paying somewhere between 15% and 35% (depending on how much of their income comes from capital gains) and they were only slightly less happy paying between 28% and 40%.

So Obama may get away with resetting rates back to the Clinton-era tax structure, especially in a time where the rich understand that the national debt is dangerously high. But what will happen if he spends as he's promised to spend? What will happen if the rich see the national debt getting worse? In other words, what will happen when they see that they're not getting good value for their money?

There are only two things that the rich can do to rectify the situation. They can either try to seize power or they can vote with their feet and leave. Seizing power means that they become politically active and channel huge amounts of money to candidates that will fix things. This is, of course, something that the other 95% of the population will try very hard to oppose, possibly successfully. After all, the other 95% benefit from government for a long time before it collapses. Campaign finance laws and the internet militate against such a seizure, because they make populism a more potent force. But the wealthy still have inordinate clout; I wouldn't count them out in a good old fashioned class war.

And we should hope that they win. Because it's when the rich decide that the government can't be salvaged that things get really bad. The rich can live wherever they want to. They can move their money wherever they need to. When taxes move from being a necessary evil to a case of throwing good money after bad, the rich stop paying taxes--or at least they go pay taxes somewhere where their investment gets a good value. Once that happens, the next domino to fall will be a loss of faith in US currency and then it's all over.

I think Obama understands this. I hope Obama understands this. Because we're closer to the tipping point on the national debt than ever before. The events of the last six weeks should be a warning to him and the legislature. It's not only financial markets that run on confidence and trust. Politics do, too. The rich are betting big that Obama can produce a competently run government for just a little bit more money. If they decide that he can't, I'm not sure they're going to be patient enough to give it another try.

Having now finished my little discourse in plutocracy, I'm off to vote for Obama. I sure do hope he's as smart as he thinks he is. There doesn't appear to be another alternative.

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