10/25/08

How our economy is more like a poker game than a restaurant
By: Ara


Recently, while I was cleaning a hairball out of the P-trap under my bathroom sink (I couldn't afford to call Joe the Plumber -- his agent wanted too much money) I found this link to a simple story entitled A Dinner for 10 Men: A Parable of Tax Cuts.

It opens like this:





"I'm opposed to those tax cuts," the retired college instructor declared, "because they benefit the rich. The rich get much more money back than ordinary taxpayers like you and me and that's not fair." "But the rich pay more in the first place," the businessman argued, "so it stands to reason that they'd get more money back."

Actually, they don't "pay more." Warren Buffet has famously pointed out that his secretary pays a higher tax rate than he does -- and he thinks that's wrong and has called for the system to be changed to make it right by her.

No matter. The parable goes on to prove the "professor" wrong and the businessman "right" by creating an analogy so idiotically simplistic that it makes my head hurt just thinking about how to summarize it. Instead, I'll simply include the closing paragraphs. You can reverse engineer the story from there if you want:
The nine men surrounded the tenth and beat him up. The next night he didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!

And that, boys, girls, and college instructors, is how America's tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table any more.

How do I put this in a respectful way? F#@k you and the horse you rode in on.

This is the sort of after-dinner story-fantasy I'm sure Ronald Reagan enthralled his corporate audiences with back in the early 60s before he became governor of California. It was stupid then and it's stupid now. Unfortunately, we had to live through this fantasy for more than 30 years to see how stupid -- and destructive -- it truly was.

I like a different analogy, one that is more down-to-earth, simpler to follow and much more concise. It's part of the 1951 memoir of Marriner Eccles, the chairman of the Federal Reserve circa 1934-48. In describing the causes of the Depression, he says this:
...[A]s in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

There you have it -- a brilliant flash of insight from 1951. True then, true today. In other words, giving more and more tax breaks to the wealthiest among us, relying on a free market to "trickle-down" wealth to the rest of us, does not work.

So how did we get here, in this horrible place? How did this happen? Well, I'd say that it is a feature (not a bug) of the unregulated free market system. The tendency is for capital to cut its expenses ruthlessly -- on things like labor. As a result, wages (the real engine of the economy) go stagnant and the middle class borrows more and more just to stay ahead. After a while, the amount of debt far outweighs the amount of real assets that the middle class holds. Then credit dries up -- and the bubble pops. Everyone loses.

Cutting taxes again won't solve the problem. What solves the problem is building an economy where people have jobs that produce real, tangible benefits -- infrastructure improvements, energy independence, higher education and universal health care.

That's why I voted for Barack Obama: because he gets it.

2 Comments:

Mark W Adams said...

Perfect!

My mind boggled over the idea that the Ponzie scheme built on those credit default swaps linked to the US housing market represented more than the entire GDP of the whole planet if they were cashed in at face value.

Astounding, but the borrowing to play poker analogy makes perfect sense of it all. Thank you Phil Graham.

Put it this way. The mere existence of a government benefits the wealthy more. Without laws to protect their property, enforce contracts, provide an infrastructure for commerce, and prevent trade mark, copyright and patent encroachment -- they wouldn't have the opportunity to build their wealth.

They get to keep their wealth because the government guarantees they persons and property will remain safe from the rabble, that the police can be counted on to protect their mansions and banks from the mob.

They enjoy a disproportionate benefit from the existence of a functional government. They should pay their fair share, Especially since they are much more able to pay.

DCup said...

Great post!

I've had an idiotic free market, anti-tax troll commandeering my comments with his nonsense. This is a breath of fresh air after all his crap.