From Hero to Zero

Throughout history, it's never really been any different.

When the going is good, the masses worship at the temple of success.They look up to those who have plenty of cash. They emulate the behavior of the winners and the movers-and-shakers. In fact, they hang on their every word, hoping that the golden touch somehow rubs off on them.

But when the tide turns, so does the social mood. Resentment and anger towards the well-to-do grows fast. People start blaming those who seem to have gained at their expense. They zero in on individuals and families who have cash to spare as they try to fill the gaping holes left in their own finances by faltering growth and fading wealth.

Under the circumstances, it was only going to be a matter of time before the wipeout we've experienced over the past two years provoked increasing hostility towards those seen as the "moneyed elite." According to a report in the Los Angeles Times, "The Belief That the Wealthy Are Worthy Is Waning," that is already the case.

With financial crisis and scandal as backdrop, Americans are questioning whether plutocrats are either indispensable or deserving.

The notion that the poor always will be with us has been ingrained in our culture ever since the sermons of Moses were set down by the anonymous author of Deuteronomy.

The financial crisis of the present day raises a rather different issue, however: What should we do about the rich?

That the point is even open for discussion suggests that a sea change is taking place on the American political scene. For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work.

Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.

That mind-set has all but been eradicated by the damage sustained by the average worker's nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen.

(The price of admission to the top 1% income-earning club last year was roughly $400,000.) That may account for the near-total absence of public outcry over President Obama's proposal to raise tax rates on the wealthiest Americans -- except of course from the wealthiest Americans.

One factor fueling the public fury over the AIG bonuses, so inescapably in the news this week, is the recognition that so many huge fortunes landed in the hands of the undeserving rich. Some of them added little value to the economy but merely moved money around in novel, excessively clever and ultimately destructive ways; others are corporate executives who were ridiculously overpaid whether they succeeded or failed at their jobs.

It won't be long now, moreover, before Americans again wise up to the role of dumb luck in building wealth. By my count, roughly one-quarter of the names on the Forbes list of the 400 richest Americans got there by inheritance (and by no means have all of them enhanced the family fortune with their own toil or brainpower). A few years ago, it was common to think of the rich as a special breed. We may soon come around to George Orwell's view that the only difference between rich and poor is income -- "The average millionaire," as he put it, "is only the average dishwasher dressed in a new suit."

The shift in sentiment should surprise no one. As the management sage Peter Drucker once predicted, "In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history the 'villains' have been the 'heroes' during the preceding boom." Drucker was speaking in 1997, two downturns ago.

This brings us to a couple of questions certain to become more pressing as we stagger through the fiscal and economic hangover from the Roaring Oughty-Oughts: How much does our economy depend on the rich, anyway, and why shouldn't we soak them good?

A bit of history will be useful here. The original case for a progressive income tax -- that is, one levied disproportionately on larger incomes -- was based less on raising revenue for the state than breaking up concentrations of wealth, inherited and otherwise. The nation's Founding Fathers considered these to be undemocratic -- markers of "an aristocratic society, not a free and virtuous republic," as the tax-law expert Dennis Ventry has written.

Recent events validate the Founders' instincts. The craze for financial deregulation in Washington was fomented in part by Wall Street plutocrats brandishing lavish political donations, gifts, offers of employment and other trappings of economic power. Would Wall Street have gotten so far out of control if it had had less power to wield? No one can know for sure, but it's a question worth pondering.

There's also a social value in suppressing income inequality. In a country with only a slightly less ingrained tradition of civility than the United States, the AIG affair would provoke rioting in the streets.

"We live in a country with tranquillity and good feelings toward each other, and that's precious," says Robert Shiller, a Yale University economist and coauthor of "Animal Spirits," a new book about the psychology of economics. In the current crisis, "there's anger and a sense of injustice taking hold, and it's not in the interest of wealthy people -- you don't want people on the poor side of town to be angry with you."

By the way, maintaining the civic institutions, police forces and public infrastructure that enable great fortunes to be made and kept costs money. Wealthy taxpayers should keep that in mind the next time they're inclined to bellyache about not getting anything from government.

As a rationale for progressive taxation, the concept of regulation and redistribution eventually yielded to the quest for revenue. Taxing large incomes was justified because that's where the money is, and, secondarily, a rich person suffers less in giving up a dollar than does a poor one.

The inflection point was the Roosevelt administration. FDR kept talking about the justice of chipping away at "great accumulations of wealth," but he also needed the money. The overall average tax bite on the richest Americans reached its high-water mark of nearly 59% during World War II.

After that, even though marginal rates (the amounts charged on the last dollars) remained as high as 91%, the average tax bite on the rich fell to as little as 25% in the early '60s, largely the result of their skill in exploiting loopholes. Starting with Ronald Reagan, federal income tax policy came to focus mostly on finding the rate that could produce the most revenue while provoking the minimum squawking from the wealthy chickens being plucked.

Those squawks sometimes take the form of a claim that too much taxation saps the economic value of the wealthy -- their capacity to invest, to create jobs, etc. It's proper to note that years of study have unearthed no consistent evidence that taxation causes the rich to alter their investing behavior much, at least not until their tax burden reaches a point vastly higher than what Obama contemplates.

"The real rich -- the top 1% -- work very hard for reasons other than money," Reuven S. Avi-Yonah, a tax historian at the University of Michigan, told me this week. The quest for prestige, political power and self-esteem, the ability to control things and people, are all factors in their behavior.

Thanks to the financial crisis, those goals are regarded with increasing hostility by the political establishment. Certainly the claim of the rich to play an indispensable role in the American economy will be treated with more skepticism than in the recent past, and their ability to preserve their loopholes and other advantages in the tax code will diminish.

Will the economy suffer as a result? The experiment is about to begin.

Comments

[roger]

Sometimes Michael 's acumen of reality is nothing
short of amazing

[jaycey]

The economy won't suffer, it will benefit. It never ceases to amaze me the number of otherwise intelligent people who think that lower wages, less infrastrucure, less higher education, healthcare and income security will return the nation to prosperity. Yeah, right, when we're a low wage, third world nation we'll all be rich again.

Remember, production equals consumption, everywhere and always. If 10% of the population has all the money, consumption must drop, our productive capacity decays, and we are no longer a wealthy nation; we're a poor nation with some very wealthy people in it.

[Lara Braveheart]

Excellent preface and article!!!

Reminds me of an Open Letter I wrote to the 'Rich' about 3 years ago, with similar sentiments:

-------------------

TAKE A F*&%$#G LOOK IN THE MIRROR! MR AND MRS. MCMANSION!

So, ignore my lunatic - ecoterrorist -- rantings, and for those of you to whom they even touch a nerve of reality, -- give the hairs on your neck "Drop of the Guillotine-like" gooseflesh, or make your stomach feel all "disemboweled" queasy -- feel free to laugh nervously and find my lunatic ranting funny, a source for some gossip fodder at your social gathering tonight, when you run out of bourgeois drivel to impress your boring, pretentious 'friends', and resort to...

"Any of you receive that emaill forwarded to you today, from that certifiably insane environmental ecoterrorist Peak Oil lunatic warning us that......

-------------------

Well, I never be gotten me any response from da 'Mirror, Mirror on the Wall, Who is the Fairest of Us All' Oy Vey crowd....

But I did attempt to warn them to attempt them to improve their behaviour and demonstrate that they gave a flying fuck more about their fellow man, or their nation, or their constitutions, than they did about their own ego's.

Was a bit like screaming at the drunk, blind and deaf Titanic Captain there is an iceberg ahead!!

The mega-rich don't care: Remember Rothschild's remarks about when is the right time to buy stock: WHEN THERE IS BLOOD ON THE STREETS, EVEN IF THE BLOOD IS FROM YOUR OWN FAMILY!

These people give a new meaning to the concept of reptilian thinking, and reptilian emotions!

Lara JMCSwan

[weinerdog43]

"Will the economy suffer as a result?"

Good grief, the economy, and the people, are ALREADY suffering. As our economy continues to deteriorate, the plutocrat class will be lucky to get away with jail sentences. People are PISSED.

[Metzenbaum Scissors]

Hey! Look! Rhianna's driver got a ticket for a missing license plate!!!

[Tom U]

The United States today is communist.

Let me explain. What destroyed communism? A centralized-command government can be highly efficient and can make big things happen fast. Witness how USSR got its space effort ahead of the US, and how its military became a superpower. But over time, absolute concentration of power in the central government created absolute corruption. The rest followed.

In the US, as Reagan came to power, he introduced the notion that big government is bad. His intention had some validity at the time - federal government has gone quite big and the welfare state has gone a bit too far. Reagan reversed the trend and US economy took off. But his successors did not re-balance the Reagan ideology. Before you know it, even the good part of government was downsized to become bad. Worst, power was transferred to big corporations, with Wall Street banks receiving absolute power. And absolute power corrupts absolutely.

The United States federal government installed a communist regime in Wall Street banks, and a neo-fascist regime in big biz boardrooms. The federal government simply became a brain-dead corporatist regime. All proceeded to do what they do as such.

How does one remove corporatist, communist and fascist regimes? Simple. Only the people can.