Thursday, March 13, 2008

The Financial Security Objection

My friend R is a conservative. The other day, we discussed the regressive tax strategies advocated by Republicans. R did not dispute my objections to such schemes, but instead settled on an honest and simple statement of his motivations.

R's concern was about his family's ability to accumulate wealth. He noted that during the Great Depression, wealthy Americans were adversely affected by the economic conditions, but unlike working class folk, the wealthy were not devastated. In contrast, working families were devastated. So my friend espouses a strategy in which he will accumulate a lot of wealth, and by preventing the government from taking his money, he will then be in a relatively good position should another Great Depression occur.

I don't know whether or not this is the typical belief held by conservatives, but I'm sure my friend is not alone. We are all driven by some combinations of fears and hopes about economic outcomes. R's fear is that taxation will leave him without any hope of surviving an economic collapse.

Needless to say, I have some issues with this kind of strategy.

During the Great Depression, there were shanty towns where people lived in crates and old pipes and anything else they could find. However, as far as I can tell, only a small minority of the population fell victim to this outcome. If it were the demise of the average Joe, the majority of Americans would have lived in Hoovervilles, and that doesn't seem to have been the case. Instead, most Americans endured significant hardships (unemployment went as high as 25%), but most were not rendered homeless. Only the few super-wealthy folk survived unscathed.

So, first, if we had to define the boundaries of the economic classes during the Great Depression, we probably would say that there was a minority of truly destitute persons, a large majority of persons with lower standard of living, and a teeny, tiny sliver of super wealthy folk. This means that all one has to do to avoid being in the destitute minority is to be in the 25th percentile or better. My friend R already does this handily. However, R is not rich. He's not a billionaire (unless he's not telling me something!), and so he's not going to be unaffected by a Great Depression. In other words, while more wealth is always better, it's unlikely that having the upper tax brackets pay 5-10% more in tax is really going to save R much grief should a depression occur.

Second, no Democrats are proposing taxing the wealthy at much more than the rates we had under Bill Clinton. At those tax rates, not only do wealthy people survive, they thrive. The wealthy Republicans who whined about taxes under Clinton are just plain greedy. They were getting incredibly rich, but somehow it wasn't enough for them.

Third, the strategy my friend is advocating is pessimistic. Rather than go for a strategy that is likely to make the nation solvent and better able to prevent a depression, my friend wants to apply a strategy that will make a depression far more likely to occur. Indeed, some analysts have said that the disparity in wealth between the haves and the have-nots was a primary cause of the Great Depression. The wealth gap today is getting far greater (far worse) because of years of Republican rule. I cannot imagine how the expectation value of R's wealth improves by his paying a few percent lower taxes at the expense of national solvency.

So I think R's strategy is wrong for me, wrong for the nation, and wrong for R himself. It is better for R to prevent a depression through sensible policy than it is to encourage a depression in the hopes that the depression-encouraging strategy will leave R with a little more padding when the depression comes.

In other words, I'm all for selfish strategies, but I think that selfish long-sighted economic strategies are better than selfish short-sighted ones.

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