Economics is a social science, with models based on social behavior that can be unpredictable. Economic theorists forget that, which is why some oppose progressive taxation proposals to impose higher taxes on the wealthiest citizens. The purported economic argument is that taxes on the wealthy reduce the ability of wealth to create economic opportunities.
That argument is incomplete and at several levels is fraudulent.
Wealth has a potential to create economic opportunity. It doesn't necessarily do so, and over the past three decades capitalists building their personal wealth have reduced opportunities within the United States while expanding it in other countries.
The wealthy have gravitated to financial markets that grow personal wealth, disdaining production of goods and services that spur economic growth. Meanwhile the vast majority of citizens see their share of the nation's wealth falling further. That is, the wealthy have grown personal wealth without regard for the overall health of the national economy.
There is a basic reason. The very wealthy need not be concerned about the economic health of the nation. Their wealth places them in a global society unaffected by social turmoil in any region.
It's not just true of the United States. Financial consultant Bain & Company reported last April that millionaires in China are moving their assets into "wealth management products" and away from higher risk investments ("Number of Chinese high net worth individuals nearly doubles . . . ", April 19, 2011, Bain & Co., www.bain.com). Other reports project increased sales of luxury products and show Chinese millionaires shifting their assets out of the country.
Similarly, the European Organization for Economic Cooperation and Development reported that income inequality is increasing across the developed world with the U.S. ranked fourth after Chile, Mexico and Turkey in the width of the gap between wealthy and working class ("Divided we stand: Why inequality keeps rising," Dec. 5, 2011, www.oecd.org).
American venture capitalist Nick Hanauer (Second Avenue Partners) says the wealth gap is "like a huge clot in our nation's economic circulatory system."
"It is unquestionably true that without entrepreneurs and investors, you can't have a dynamic and growing capitalist economy. But it's equally true that without consumers, you can't have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do," he says ("Raise taxes on rich to reward true job creators," Bloomberg News, Nov. 30, 2011, www.bloombergnews.com).
Instead, investors reward corporations that reduce work-force costs with lower wages, layoffs and plant closings while executives get higher wages. Lower incomes for middle-income families reduce discretionary spending by those families - the economic activity that is a key to national economic health.
Hanauer's view aligns with the philosophy of Henry Ford that factory workers needed sufficient income to be able to afford the cars they were making. Shifting wealth away from the majority of the population to the top 5 percent is reducing the ability of the majority to continue to fuel economic growth for the U.S. while countries such as China - where lower labor and regulatory costs promote higher return on investment - are creating new millionaires on the backs of a low-paid work force.
Columbia University economics professor Joseph Stiglitz challenges tax-cut policies as "another costly experiment with ideas that have failed repeatedly," citing among other things the Bush administration's insistence on unaffordable tax cuts ("The ideological crisis of western capitalism," Project Syndicate, July 6, 2011, www.project-syndicate.org).
"Financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth. But austerity undermines growth, worsening the government's fiscal position, or at least yielding less improvement than austerity's advocates promise. On both counts, confidence is undermined, and a downward spiral is set in motion," he says.
* Edwin Tanji is a former city editor of The Maui News. He can be reached at email@example.com. "Haku Mo'olelo," "writing stories," is about stories that are being written or have been written. It appears every Friday.