Thursday, December 01, 2011

What to do about the "1%"

Remember, the 1% is political poetry.  There is nothing inherently wrong with making more than some arbitrarily chosen number of dollars.  There will always be a 1%.

The problem with our system is that too much of our national wealth is being invested by the financial markets: Wall Street.  Wall Street only knows how to do one thing: invest capital in order to produce the maximum short term profit.  It very efficiently moves money around to put money in the hands of enterprises which will make the most money right now.

What if Goldman Sachs announced a mutual fund that would invest in the creation of mass transit.  It would promise to spend whatever money it took to build a first class mass transit system.  It would not get any profits for decades if ever.  I don't know about you; I'm not putting my 401k in that fund.

The history of socialism and capitalism has shown that you cannot replace financial markets with government planners and still get efficient capital utilization.

So what do you do the financial markets?

1.  Regulate them, so they are transparent and fair.
2.  You tax the incomes of the people who operate them.  So much money flows through Wall Street that even microscopic fees generate huge personal incomes.
3.  You impose a transaction tax on the market -- every other kind of business is taxed in some way -- the financial markets should be too.
4.  Through taxation, you reduce the amount of money which is invested through the financial markets.  Government spending is another form of investment and can be used to invest in the things that capital markets cannot: projects and enterprises that produce public goods which are not profitable.  Public goods raise the living standards of everyone.  Transportation and communication infrastructure, medical research, even weapons production, while not immediately profitable to the government, create businesses and jobs for profitable companies.

Basically, to improve the standard of living of everyone, we need to (1) reduce military spending, (2) increase taxes on the wealthy (3) invest through the government in the creation of public goods and (4) regulate financial markets so that they are transparent and fair.

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