Class Warfare

by Wayne Spencer - October 4, 2008

When I was much younger my favorite board game was Monopoly*. Later, after studying economics I realized that the game of Monopoly was a simplified example of pure economics played out.

As anyone knows who has played the game, the game ends when all but one of the players goes bankrupt. It makes a great game but do we want to run an economy that way? This week we have seen the results of just such a game.

Due to the lack of meaningful taxation for the wealthiest among us together with government expenditures which favor the wealthy, cuts in needed government expenditures at the lower end of the economy and a trade policy which defies any known rules of macroeconomics we have all the ingredients for the perfect economic storm.

The answer to this perfect storm has been to give more money to the wealthiest so that some of our money will be returned to us somehow. It's called trickle down economics. Believe me there is no such thing in the world of economics. It is just plain class warfare.

Let's consider the Monopoly game for a moment. Like the real economy, profits are generated from the participants. By luck or by skill some players begin doing better than others. Eventually all of the money, houses, hotels and utilities end up in the hands of one or temporally two players. But eventually there is only one winner. That's pretty much how an economy in the third world works and why we see such severe differences in wealth in those countries.

Modern industrial nations have learned that in order to keep an economy vibrant that it must provide a system for redistributing the wealth to the lower end of the economy. This is accomplished by a progressive tax policy whereby the tax rates increase according to the increase in income and government programs such as transportation, sewers, healthcare, pensions, unemployment insurance and tax credits.

Back to the Monopoly game. In the game of Monopoly there is no taxation on wealth and no means to redistribute wealth save for the pay out of $200 when you pass "go." Now suppose that we made some simple changes to the game. Set up an income tax system whereby the players would pay a high tax on all income higher than a certain set ceiling amount and that money would be "redistributed" to the players earning less than a certain floor amount. From a game standpoint this would eventually make a dull game. But from a real life "game" this would make a much more secure life for all but the super rich.

The super wealthy decry redistribution of wealth from the higher income levels to the lower income levels calling it class warfare. But when government policy does just the opposite and accelerates the redistribution of incomes from the low income levels to the higher income levels we hear it called fiscally responsible or trickle down economics.

In the past decades we have seen many examples of income redistribution from the lower to the higher wealth demographic. Our agricultural subsidy program established to help the small farmer has turned into a giant give away program for extremely wealthy farmers and giant agribusiness. The military industrial complex has been steadily receiving more and more income from the federal government. At one time when manufacturing was labor intensive this military spending was looked upon as a make work project. Now, it is a method of providing trillions of taxpayer dollars for the benefit of the owners of military related industries. The amount of money going to companies like Haliburtin, General Electric, Boeing, and many more is obscene. At the same time our armed service men and women who risk their lives are living on food stamps.

The Iraq invasion and occupation has provided a huge pipeline of money to the wealthiest corporations.

Another pipeline of money of over $80 billion was paid out to companies to help in the clean up and rebuilding of New Orleans. Where did the money go? No one seems to know and worse no one seems to care. The big business in the area seems to have made out very well while the poor are still suffering. To add insult to injury, government funds were paid to contractors to raze the existing public housing which survived the storm. This national disgrace is well known in the rest of the would while it is seldom mentioned here at home.

Our once progressive tax system has become less progressive. The highest tax bracket is now 35%. When the Democratic candidates talk about raising it back to 38% the wealthy media owners scream like they were being robbed. Yet, in the "good old days" of the 1950's, the highest tax bracket was 90%.

The capital gains tax which mostly wealthier taxpayers pay has dropped to 15%. This lower tax rate is based upon the premise that these "investors" are taking a risk. Somehow a worker who may be in a job in which his life is at risk doesn't count. After this week when the taxpayers bailed out these "investors" to the tune of $700 billion we probably need to reevaluate the amount of risk that these investors are taking. I think that there are arguments to be made that all income should be taxed on the same basis: wages, dividends, interest, profits and inheritance. If inheritance were taxed as ordinary income there would be no need for the inheritance tax.

This week's bailout proved two things:

In all of the discussion of the economy this past week, we heard little from macroeconomists in the mainstream media. It is not that they were not speaking out but that they were not heard. Seems that the mainstream media did not want their voices heard for obvious reasons, since they were nearly unanimous in their opposition to the bailout. Maybe we need the freedom to be heard as well as the freedom of speech.

The ones that we did hear from were the financial experts. Some of these experts may be microeconomists but most seemed to be in the realm of financial advisors or financial management people. I believe these are the people who created most of the problems with the financial industry at the present time. Why do we think that the people who got us into this mess are the ones who can solve it?

Congress has passed the bailout package. Who are the players who will be implementing and overseeing this macroeconomic event.

First there is Secretary of the Treasury, Henry Paulson, Jr. Mr. Paulson has a Maters Degree in Business. He will be working with Ben Bernanke who should be regarded as the brains of the outfit.

Federal Reserve Chairman, Dr. Bernanke is not only an economist but is regarded as an economic scholar. He has among his many credentials a B.A. in Economics from Harvard and a PhD in Economics from MIT and has written a number of economic textbooks. He brings what is possibly one of the best economic brains in the country to the table. It is unfortunate for him that he has the job of trying to clean up the mess that he inherited from his predecessor. We can only hope that Dr. Bernanke will be running the show.

The bailout bill does mention the Federal Reserve Board of Governors. Specifically under Section 101 Purchases of Troubled Assets it states this: (b) CONSULTATION.—In exercising the authority under this section, the Secretary shall consult with the Board, the Corporation, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, and the Secretary of Housing and Urban Development. Where the Board is the Federal Reserve Board of Governors and the Corporation is the FDIC.

The Comptroller of the Currency is John C. Dugan. Mr. Dugan received his B.A. Degree in English Literature from the University of Michigan and a Law Degree from Harvard Law School. Before his appointment as Comptroller, Mr. Dugan was a partner at the law firm of Covington & Burling. He was also a member of the American Bar Association's committee on banking law, the Federal Bar Association's section of financial institutions and the economy, and the District of Columbia Bar Association's section of corporations, finance, and securities laws.

The Director of the Office of Thrift Supervision is John M. Reich. A current member of the Board of Directors of FDIC, Mr Reich was Senator Connie Mack's (R-FL) Chief of Staff. Mr. Reich holds a B.S. degree from Southern Illinois University and M.B.A. from the University of South Florida. He is also a graduate of Louisiana State University's School of Banking of the South.

The Secretary of Housing and Urban Development (HUD) is Steven Preston. Mr. Preston received a B.A. Degree in Political Science from Northwestern University and his Masters Degree in Business Administration from the University of Chicago. He has a long career in both government and business.

Oversight is to be provided as follows: (b) MEMBERSHIP.—The Financial Stability Oversight Board shall be comprised of— (1) the Chairman of the Board of Governors of the Federal Reserve System; (2) the Secretary; (3) the Director of the Federal Housing Finance Agency; (4) the Chairman of the Securities Exchange Commission; and (5) the Secretary of Housing and Urban Deve1opment. (c) CHAIRPERSON.—The chairperson of the financial Stability Oversight Board shall be elected by the members of the Board from among the members other than the Secretary.

The Federal Housing Finance Agency was created by an Act of Congress July 30, 2008 for the purpose of helping to stop foreclosures by providing (FHA) mortgages. The administration delayed implementing this agency until September 4, 2008. It is the agency given the responsibility for running Freddie Mac and Fannie Mae which were recently taken over by the government. The Director is James B. Lockhart III. Director Lockhart has a Masters of Business Administration from Yale University. Mr. Lockhart has financial experience and has been in various government agencies under the present administration.

The Chairman of the S.E.C. is Christopher Cox. Mr. Cox has a Law Degree and an M.B.A. both from Harvard University. He is a former member of Congress.

From what I can tell, the principals and the oversight people responsible for the operation of this bailout are predominately from the financial business community. Not only do I see the lack of economists as a problem for the bailout but I also see this shortcoming in the government agencies from which they come. Certainly, all of these agencies represented are crucial to the proper functioning of our government where the economy is concerned. A business degree is a poor background for running an economy. Being a carpenter does not make one an expert on forests.

What do you think?

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The game of Monopoly is a registered trademak of Parkers Brothers, Inc.

Bios are from Wikipedia and government agencies.

Copyright © 2008 by Wayne Spencer - This article may be freely distributed with this copyright notice attached.