Pity the poor billionaire

Pity the poor billionaire.

Okay,  I say this with sarcasm. By that, I mean, I am speaking with a touch of ridicule. The billionaire, after all, is neither poor, nor in need of pity. Billionaires are blessed in that. they are rich and they live in a country that celebrates their right to enjoy and to spend money.

We still need to give a little thought to the fact that, lately, billionaires have come under intense criticism. It is as if they are responsible for the recent poor showing of the world economy. They are blamed for the disparity in the haves and have nots. That criticism seems unfair.

The world economy is as robust as it is because of and not in spite of  billionaires. Imagine a country without billionaires. There are many to choose from. Niger, Haiti, Zimbabwe, Chad, Somalia, Yemen, are a few that come to mind, and they aren't doing so well. No, billionaires live in countries like America, Great Britain, France, Switzerland, Germany, Japan, and even China. And those economies are doing fairly well. And when they aren't, it is because the national governments who run those economies fail to balance spending and revenues.

A second criticism of billionaires is that they don't pay their fair share of taxes. According to the Citizens for Tax Justice,  "the top 1 percent of earners account for 20.3 percent of total personal income in the United States and pay 21.5 percent of all federal and state taxes. The middle 20 percent of households earn 11.6 percent of US income and pay 10.3 percent of taxes. The lowest 20 percent account for just 3.5 percent of income, and pay 2 percent of all taxes." Of course, there is Warren Buffet lamenting the fact that his secretary pays a higher percentage of her income in taxes than he does. And, there is Mitt Romney who paid only 15% of  his income in taxes. Romney points out that he also gives three million dollars in charitable donations to his church.

The tax system is screwed up. On that, everyone agrees. Now the President and the Democratic majority in the Senate want to raise 100 billion dollars in new revenue and put that burden on the backs of the billionaires who have suffered the least since the economic meltdown.

That seems like throwing the baby out with the bath water. By that I mean that wealth is created by those billionaires that are going to be punished. If we love our economy, and our babies, then we shouldn't be treating them with such contempt.

To give the President credit, he has had to walk a fine line between appeasing democratic liberals who believe in sharing the wealth evenly, and conservatives who want to truly find a way of reviving a moribund economy and putting people back to work. The President recognizes that the US economy depends on business and billionaires who will invest their capital in growing the economy and putting displaced workers back to work. To do so the Government will have to make the United States a healthy place in which to invest. Over taxation and over regulation drives business off shore. Fair taxation and proper regulation results in infr5a structure spending that drives the economy and keeps a fair playing field for everyone in which to compete.

Franklin Roosevelt is often cited for his economic strategy during the Great Depression. He taxed the rich, took over the banks and fired bank managers when he could. He passed regulation after regulation that tied the hands of capitalists. In the process, a third of the economy was out of work. And the depression lasted from 1929 until the end of the Second World War in 1945, when the American economy and American capitalism triumphed over fascist Germany and imperialistic Japan. From 1945 until 1989, the political and economic battle was between Soviet socialism and Western free enterprise. We know who won that battle. Then, came Communist China's turn. After flirting with political disaster in Tiananmen Square, the communist in charge traded political control for economic freedom. The result has become the fastest growing economy in the world.

Where does this leave the billionaire? I think it means that he or she must recognize that with wealth comes responsibility. Fairness has to be the catch word, and at least, at that, the President has it right.
The billionaire has to shoulder a fair share of the tax burden and, perhaps, even a greater part of the obligation to get the economy back up and running. Democrats by and large get it. Both Franklin Roosevelt and John F. Kennedy were from the wealthier strata of the American economy. And while Roosevelt heartily believed in taking from the rich and giving to the poor, Kennedy charted the opposite course, and in a time of falling revenues signed into law a tax cut for the wealthy that stimulated the economy. An early example of the school of trickle-down economics, whereby lower taxation yields greater wealth and fresh innovation.

There are billionaires out there deserving of praise. Bill Gates and Warren Buffet have given away tens of billions of dollars for charitable purposes. But don't forget that it was capital and capitalism that made possible the wealth formation that allowed for the giving.

I say pity the poor man who can't find a job because an American business moved overseas. I say pity the poor man who finds that regulation prevents the drilling of oil or the construction of a pipe line.

The Origin of the Financial Crisis

"The financial crisis that has been wreaking havoc in markets in the U.S. and across the world since August 2007 had its origins in an asset price bubble that interacted with new kinds of financial innovations that masked risk; with companies that failed to follow their own risk management procedures; and with regulators and supervisors that failed to restrain excessive risk taking."

From The Origins of the Financial Crisis
Martin Neil Baily, Robert E. Litan, and Matthew S. Johnson,
Brookings Institure, 2008

In hindsight it is always easy to understand a crisis. In the case of the financial crisis of 2008, the rise in housing prices exceeded the owners ability to repay the mortgages.

But there is also a  more fundamental cause to this crisis. It is is innate human tendency to believe in anything that exalts our own sense of worth or self. Humanity wants to believe in esoteric ideals of kindness, value, goodness, and progress. These ideals are embedded in our religious concepts, our family values, and our political system. Trust in our fellow human beings is an essential part of the social organization. Without these ideals political and economic systems fail and mankind degenerates into a paranoid state of fear.

Thus, it is not surprising that in 2008 a crisis developed in global financial markets. Individuals and the market suspended their rational minds in the hopes that economic prosperity, ushered in by Ronald Reagan's presidency and the fall of Soviet Communism, would continue indefinitely. This crisis is not a singular historical event. As economists and historians remind us, a recent parallel was the Great Depression of the early part of the 20th Century. But, that economic disaster was by no means the only historical incident in which the irrational exuberance of investors exceeded the value of goods they purchased. There have been several economic crises since the stock market crash of October 1929. Likewise, the historical evidence is that markets operate in cycles of boom and bust as investors leap into a market boom in order to take advantage of profits only to find that their speculative judgments are just that, speculation and not rational judgments.

Companies fail to follow management procedures because of the opportunity for profit. There is no disincentive for managers to avoid excessive risk taking other than the potential for corporate bankruptcy. But such a risk is born not by the manager, but by the corporation. And all too often, a corporate manager has previously feathered his own nest before the death knell of economic doom sounds for the company.

Regulators and supervisors also fail to restrain excessive risk taking. Either they are too often beholden to the managers, or themselves part of a system that rewards short term advantage over long term survival. Congressional over site plays an important part in regulating economic behavior. After all, Congress establishes the rules by which corporations play. The history of Congressional action from 2000 on reveals that Congress not only ignored the signs of instability in the market, but itself played an instrumental role in fostering loans to individuals who had no business borrowing, and to banks and corporations who lent money to such individuals. Fannie Mae and Freddie Mack failed because Congressional leaders permitted bad practices.

Is financial crisis inevitable? Perhaps it is because we are all driven to succeed, and we all have a disincentive to question our own judgments when events suggest that success is just around the corner. But perhaps we can lessen the risk of failure by creating better oversight of risk management, by increasing the risk to the decision makers, by separating regulator from corporate management, and by increasing the turnover in supervision so that new eyes and new ideas review the conduct of others. A little sunshine goes a long way to brighten the day.