The Riot of the Rich

Alan Blinder and Ben Stein don't often agree on economic issues, but this week in their respective columns in the New York Times, they joined in an attack on Wall Street's welfare queens, equity fund managers who make 100 of millions, but pay a lower percentage in taxes then their secretaries. Prof. Blinder is a former deputy chairman of the Federal Reserve Bank and a frequent adviser to Democrats; Mr. Stein is a Conservative economist, actor, and investor. They are united, however, on the issue of tax fairness. Prof. Blinder takes on the hedge fund managers who “earn” excessive salaries, but pay little tax. They are normally compensated on a “2 and 20” scheme: they get 2% of the total funds under management and 20% of the profits. So, for example, a manager of a fund with $2 billion in assets that makes 15% return gets a $40 million management fee plus 20% of the $300 million profit, or another $60 million, for a total income of $100 million. The $60 million is not taxed as ordinary income, but as capital gains which means it is taxed at a rate of 15% for a tax bill of $9 million. But if it were taxed as ordinary income, at 35% plus 2.9% for payroll taxes, the bill would be $22.7 million, or a savings of $13.7 million. Note also that the total $100 million compensation means investors are paying one-third of the profits to a manager. Why would investors accept such an arrangement?

The reason for taxing capital gains at a lower rate is that it is supposed to encourage investment. But as Prof. Blinder points out, it really favors one kind of investment over other kinds. Indeed, the Tax Reform Act of 1986 taxed capital gains at the same rate as income without affecting investment at all. Indeed, the problem in the economy right now is not too little capital, but too much, capital that has difficulty finding profitable investment opportunities; that is why investors are willing to accept such law returns and high fees. Instead of real investment, that is, giving funds to entrepreneurs to expand production, the money goes to stock-market speculation (which provides almost no new funds to business) or to consumer credit (usury).

Ben Stein takes on the private equity funds that rip, strip, and flip companies. Using just a small sliver of their own capital, the managers buy up companies, tear them apart, lay-off workers or outsource them, and sell off the pieces at a profit, profit that is taxed at the capital gains rate. As Ben Stein points out: We are in a war. We are apparently not winning the war. The military is desperately shy of funds, to the point where our fighting men and women are being shortchanged in training and equipment. We also need more money for our soldier's pay, so their families do not live like church mice while their spouses are deployed in Iraq or Afghanistan. In these circumstances, it is fitting and morally right for the richest of the rich to be paying either very low taxes or no taxes at all?...Or, put it like this: do we dare send our men and women to fight for an America in which the very rich are so favored by the government that it amounts almost to an aristocracy?

It is this last point, the rise of an aristocracy, that is most telling. American government (Democratic or Republican) now serves the rich more and more to the detriment of the common good. That is to say, our government long ago ceased to be a real democracy, and has become an oligarchy in which government serves only those with money. And oligarchy, as G. K. Chesterton points out, is not really rule, but a riot—a riot of the rich. But riot is the very definition of disorder. As Ben Stein puts it, Long ago, I had a European history teacher [who said] that one of the causes the French Revolution was the sad truth that the aristocracy was not taxed at all, while the workers and burghers were taxed highly. Is this our future?

When even Ben sounds like a Bolshevik, you know there is a serious problem.

31 comments:

Kevin Monday, July 30, 2007 at 10:53:00 AM CDT  

I like the low capital gains tax because I hope to one day have a lot of capital gains. Anybody who wants to retire some day should want to keep the capital gains tax to a minimum. What we really should be doing is trying to get the regular income tax rates down to the same level.

I agree with your bewilderment over the hedge fund fees. No matter how much money you have, you still put your pants on one leg at a time, and you still are better off with a passively managed index fund than an actively managed bilk-the-investor hedge fund.

John Tuesday, July 31, 2007 at 11:35:00 AM CDT  

Anybody who wants to retire some day should want to keep the capital gains tax to a minimum. What we really should be doing is trying to get the regular income tax rates down to the same level.

Regardless, that's a discussion about overall tax levels. I don't think that Mr. Médaille was looking at that, but at the deeper question of tax equality. Whether or not the government taxes are high or low, the huge disparity between how the wealthy are treated and how the not-so-wealthy (in this country, the downtrodden middle-class) are treated isn't very hard for anybody to notice as unjust. It's finally crossed the liberal/conservative barrier.

It's a clear case of Belloc's point about oligarchical economic systems. The system has been modified so that the rich benefit from the logical outcome of the system's workings. When that happens, the defenders of the system point to the fact that the system is running as proof that the rich must always benefit from any system. It seems from a tax standpoint that the government plays favorites with wealthy people and big business. Most defenders of this would argue that such a policy serves to create an incentive for people to gain wealth and keep it for themselves. But Mr. Médaille is right on target with this point, that it doesn't induce growth, but petty movement.

distributist123 Tuesday, July 31, 2007 at 12:50:00 PM CDT  

The basic problen with most wars is that they benefit the rich at the expense of the poor. This war is no exception. Our men and women are dying to make the oil companies rich while our men and women returning home recieve substandard health care. Belloc said long ago that our modern capatalist sociaety was heading toward oligarchy and the day of oligarchy has arrived in America. It was beginnig to show its face in the early part of the century and is only getting worse.

Kevin Tuesday, July 31, 2007 at 1:35:00 PM CDT  

A low capital gains tax may benefit the rich somewhat, but it benefits the middle class much, much more. A person who is truly rich is not going to have their lifestyle impacted very much by the rate at which their wealth is growing. (Capital gains taxes come from that growth.) But consider the middle class couple that is trying to build a retirement account. A small increase in the capital gains tax could make the amount of money they need to save go up by hundreds upon hundreds of thousands of dollars. In reality this means an increase in the capital gains tax will cause those approaching retirement to have to work several more years, and will cause seniors who are just getting by to have to come out of retirement and seek employment.

Kevin Tuesday, July 31, 2007 at 1:37:00 PM CDT  

What's so oligarchic about our economic system anyway? Last I checked America is representative democracy. Just because most voters disagree with you about what is good for them doesn't mean they're not still in control.

John Médaille Tuesday, July 31, 2007 at 3:50:00 PM CDT  

Kevin says A low capital gains tax may benefit the rich somewhat, but it benefits the middle class much, much more. A person who is truly rich is not going to have their lifestyle impacted very much by the rate at which their wealth is growing.

In this, Kevin seems to have an even lower opinion of the rich than I do. In effect, he credits them with saying, "Yes, I got a $20 million tax break, but it didn't add as much to my quality of life as did the $1,000 break given to the middle class person." I also credit the rich with saying this, and Kevin with actually believing it.

As far as the American oligarchy goes, all I can say is that money talks, and the billions necessary for electioneering speaks loudly indeed. Of course, it may be that the corporations contribute purely out of altruistic motives, and do not want any special treatment whatsover. Hmmm....

Kevin Tuesday, July 31, 2007 at 4:37:00 PM CDT  

John do you take issue with the law of diminishing returns?

Re: oligarchy, would you prefer not to have a national debate about political issues? If not, why should you object to people spending money in the course of taking part in that debate? Furthermore why shouldn't corporations work politically for what they perceive to be their self-interest? Aren't you doing the same by writing this blog? If your complaint is that politicians can be bribed, well their votes in the legislature are not a secret. The voters can still throw them out in the next election if they don't like the way they are doing things. The fact is, if congress knew for sure that a clear majority of Americans wanted something done, and wouldn't vote for anyone who opposed it, they'd be falling all over themselves to make it so! If they don't keep their power, the bribes dry up pretty quick. Your complaint seems to be rooted in the reality that many voters disagree with you.

Kevin Tuesday, July 31, 2007 at 4:41:00 PM CDT  

Sorry, I meant to say, do you take issue with the law of diminishing marginal utility? Slight difference.

John Médaille Tuesday, July 31, 2007 at 9:16:00 PM CDT  

Kevin, I do expect corporations to fund politicians in order to advance their own interests. That's the whole problem: govmint of the rich, by the rich, for the rich. You can talk "democracy" all you like, and point to the formal mechanism of the ballot. But it costs millions to get on the ballot, and billions to be credible once you get there.

Money is power, and as money concentrates, so does power. That's what makes an oligarchy, and what they do with the power makes it a riot of the rich. The mere existence of a ballot does not mean democracy. As Rome transitioned from a Republic to an Empire, they kept all the old forms and offices. Heated elections with elaborate campaigns were held, and great sums of money spent. But it was all nonsense. Real power lay with the wealthy, the emperor, and the army. Some people wonder if we are going the way of Rome. I respond that it is too late to wonder; the answer is clear.

John Wednesday, August 1, 2007 at 8:48:00 AM CDT  

And one has to remember as well, that even if the voters want to throw out a certain politician next election, their choices for replacement are one of two or three candidates, all of which have an agenda and are funded by gigantic businesses. I'm talking about more than just bribery here. It's essentially the removal of the people as a constituency, and leaving corporations as a constituency. Last I checked, democracy was a rule of the people, not of the business. But our governmental system has become hopelessly marred by dog-ears and kickbacks, upper-class donations and upper-class agendas that there remains little enough voters can do to really change to outcome. All they can do is help choose which corporations will be favored over the next four years.

Kevin Wednesday, August 1, 2007 at 9:40:00 AM CDT  

John and John, if 51% of Americans felt exactly as you do about the situation, congress would be enacting distributist reforms tomorrow. How can you deny this? Therefore democracy is safe, QED.

John Médaille Wednesday, August 1, 2007 at 9:52:00 AM CDT  

Kevin, your comment assumes that 51% of the people have a candidate on the ballot who expresses their views. But access to the ballot is limited by both law (which has enshrined the non-constitutional party system) and money. Therefore, there is no reason to assume that your comment is true.

People often complain about low voter-participation in elections. However, the people who do not vote are making a statement: they are saying, The differences between these clowns on the ballot are not worth standing in line for half an hour. And that, too, is a vote.

John Wednesday, August 1, 2007 at 9:53:00 AM CDT  

The problem is candidate electability. The way the system works right now, the entire political arena works to dupe 51% of the people (the majority of whom don't even care enough to vote). I'm not saying that the government can't be changed, but as it stands right now, what Microsoft can do in the government far outweighs what ordinary people can do. It's not the numbers, but the vocalism. It's not the people who like a candidate, it's the media time and campaign funding. Why else are people speculating so much about Obama and Clinton and their campaign funding drives? It's directly related to their ability to be elected. And that's directly related to big business.

Kevin Wednesday, August 1, 2007 at 11:50:00 AM CDT  

You say, "your comment assumes that 51% of the people have a candidate on the ballot who expresses their views."

It assumes nothing of the sort. The people's desire for distributist reform would cause the canidates to appear on the ballot, not to mention causing the incumbents to start enacting the reforms before the next election in order to keep their positions.

Kevin Wednesday, August 1, 2007 at 11:52:00 AM CDT  

Re: "the people who do not vote are making a statement: they are saying, The differences between these clowns on the ballot are not worth standing in line for half an hour. And that, too, is a vote."

No, I think most people that don't vote could barely tell you the canidates' positions on a given topic. They don't care.

Kevin Wednesday, August 1, 2007 at 11:57:00 AM CDT  

Re: "what Microsoft can do in the government far outweighs what ordinary people can do."

One person, yes. But if a majority of people actually cared enough to oppose them, Microsoft could do next to nothing.

John Wednesday, August 1, 2007 at 12:00:00 PM CDT  

In theory, yes. In actuality, no.

People who appear on ballots are determined by how much time they get on TV, and how much the media wants to cover them. There are many reasons for this, one of them the apathy of the political aspect of Americans' lives, another the huge expanse of territory the country covers.

You are correct, though, that if enough people thought that social justice were important, something would be done. But enacting it would look far more like a revolution than a development of the current system. To a great extent, if the system worked the way you say it should, then we would have departed from the way things are going now. Don't assume that just because something is made legal in the U.S., the people must needs have wanted it to be so. Much goes on in the capital that the people have no part in.

All in all, I'm in favor of a little revolution now and then. It's a good thing, right? My point is that it's been far too long since we've had a real one. Yes, the key is making people sit up and take notice, then care enough to get up and do something. But that's not happening now, and the oligarchs are ruling while the masses sleep in a fog of 20-second sound bytes and "Survivor."

Kevin Wednesday, August 1, 2007 at 12:04:00 PM CDT  

Re: "It's not the numbers, but the vocalism. It's not the people who like a candidate, it's the media time and campaign funding. Why else are people speculating so much about Obama and Clinton and their campaign funding drives? It's directly related to their ability to be elected. And that's directly related to big business."

What you are lamenting is that the people allow themselves to be convinced by the marketing and politicking. But the fact remains that they are convinced.

You claimed that the people are being removed from their role as the constituency, and that voters could do little to change the outcome. What is actually going on is that the people are acting as a constituency in a way you don't care for.

Its also a little ironic to be complaining about vocalism on the internet - it has never been cheaper or easier for anyone to get a message out to millions of people. If the people ignore your message, that's not a failure of democracy. That's democracy in action!

John Wednesday, August 1, 2007 at 12:09:00 PM CDT  

And how many people do you think are actually intellectually involved in politics? It's not a matter of being victimized by politicking, it's a matter of rolling over and hitting the snooze button!

Seriously, if you don't think that the absence of a vote is a vote in itself (and I agree with your interpretation of that, to a certain degree), then this is not democracy in action, but sloth in pervasion. It's not people hearing the message and disagreeing with it, it's people just not caring about the message. It's not democracy in action, but an abstention from democracy.

The internet is a way to get ideas out there, but how easy is it to find an idea you've never heard of? The internet isn't as all-encompassing as the television is in people's lives. We log on, see what we want, then log off.

Kevin Wednesday, August 1, 2007 at 12:11:00 PM CDT  

Re: "In theory, yes. In actuality, no... People who appear on ballots are determined by how much time they get on TV, and how much the media wants to cover them."

This is categorically false. Anyone who collects enough signatures for their canidacy will appear on the ballot. The fact that this is made easier by appearing on the media, etc, is neither here nor there.

John Wednesday, August 1, 2007 at 12:21:00 PM CDT  

I apologize. I used the wrong term. I should not have said getting on a ballot, but being considered on a ballot.

It is always the case that if they get on the ballot, and if people are aware of them being on the ballot, and if they are popular, the majority of voters who might actually think about the election (not just those who automatically hit an 'R' or a 'D') balance the candidate against the odds of media coverage and chances of winning. The rest just choose the candidate who has a better hair-do. You still haven't addressed the issue with the system, regardless of getting a few paltry signatures for a ballot spot. Being on the ballot doesn't mean people know who you are. And the people don't care enough about their election to find out.

Unless, that is, you get on Fox News or CBS.

Kevin Wednesday, August 1, 2007 at 4:26:00 PM CDT  

There are two things going on here.

On one hand you are saying that people don't pay attention to politics and often don't vote. I don't dispute that. It is lamentable.

On the other hand, you still haven't backed off your statement that the people are being removed from being the constituency, that there is an oligarchy, that big business has taken power that rightfully belong to the people, etc. I disagree. The people still have the power, however badly or apathetically they wield it. The distributist rhetoric on this point is confused and often outright false. It seems to me that this confusion comes from accepting ideological constructs like "class" without critical consideration.

See my questions here, which have yet to be answered. Class is an illusion that only seems real if you don't examine it too closely.

John Thursday, August 2, 2007 at 10:59:00 AM CDT  

Well, I'll do my best to answer here, though I don't pretend to speak for others. The first thing you need to know is that distributists themselves are divided over what distributism means. It is analogous to the debate about what liberty means, and the two go hand in hand, in my opinion. But "we" don't have a unified rhetoric here. Some of us use class as an argument here, but not all of us. That said, let me laborate as to your questions on the use of that word.

I see no need to have a distinction of class in our rhetoric per se, but it is the traditional (if Marxist, for bad, or Jacobin, for good) way of referring to the disparity between the homeless man on the street and the man who makes millions per year and owns four houses and a private jet.

The number of people in the latter group outnumber those in the former. I don't think anybody will dispute that.

In the United States, there is no "clear" cutoff of any certain "class", as distinction between these economic "classes" is gradual and graded.

I will ask whether the terms "blue collar" and "white collar" mean anything to you. They are, in a way, a statement on what could be called class. People often go from one state to the other, and there are some in between. But when we say class we don't mean it in the terms of class warfare, class struggle, proletariat and bourgeois. It merely means that there is a way of grouping people by economic means, and each tier is loosely called a class.

I hope that clears up the difficulty about confusion in the terminology. I don't know what you mean when you say these distinctions aren't real. I'm pretty sure they are. I'm fairly sure that there are people much better off materially than I am, and people who are also much worse. When looked at from material means, I am in neither "class" (if you will), but that distinction is most likely a real one, and not in my mind alone. The poor man is quite aware that he is not as well off as the rich man, even if the rich man is unaware of the poor man's existence.

The oligarchical aspects of the American governmental morass is not one of theory. In theory, the people still have all the power. But in theory, minimum wage is supposed to raise quality of living. Things aren't always the way they are supposed to be in theory. Looking back over these comments, I can see that I've been speaking in a sort of shorthand. I've been assuming you saw certain things from my standpoint, and I apologize for that. I'll need to go back a little.

The problem lies with people's reliance on the corporate world. Democracy lies upon a foundation of independence. This isn't in the paltry and hackneyed term 'independence' that Americans used when speaking of the British Empire in '76, but true independence of minds. People were expected to think, and clearly. Independence in that sense of the term means dependence on right reason.

Large businesses arose. For good or bad, I am willing to see that the industrial revolution happened, and do not advocate any kind of agrarianism (here is where I part ways with certain distributists). But big businesses have also gained lobbying power in the government. They have won for themselves tax breaks, lower inspection qualifications, and other benefits.

People have become dependent of big businesses to think. The media is run by businesses, and not totally disinterested ones at that. Ordinary Americans are being lulled to sleep, while the big boys stay up late to play. The mere fact that there are "big boys" is debatable, but I think that they're there. And the fact that they are means that there's something gone wrong with the democracy.

It's in big businesses' interests to keep Americans asleep on a cerebral level. Psychologically, Americans are comfortable. I advocate a reawakening. But that reawakening implies a state that is not what it should be in theory. I don't mean a suppression is going on, but deception. Americans are weary enough that they want to go to sleep. In that case, we will not have a democracy, but an oligarchy. And it will be through a common consent, even if it's in absentia. The people's vote hasn't been swept away. There's no need to. The vote is suborned by what you tell Americans, and how they're educated anyhow.

Do you see what I mean? I hope I'm being clear here.

Kevin Thursday, August 2, 2007 at 5:11:00 PM CDT  

"the disparity between the homeless man on the street and the man who makes millions per year and owns four houses and a private jet.

The number of people in the latter group outnumber those in the former. I don't think anybody will dispute that."

Just to be clear, you're saying there are more very rich people than very poor people. I agree with that. (Did you mean the opposite?)

Kevin Thursday, August 2, 2007 at 5:33:00 PM CDT  

Quoting John- "It merely means that there is a way of grouping people by economic means, and each tier is loosely called a class...I hope that clears up the difficulty about confusion in the terminology. I don't know what you mean when you say these distinctions aren't real."

I don't mean that their aren't differences between individuals. I'm saying that these differences reflect their location on a very long, very smooth spectrum of variation on which there is no obvious breaks between groups that could be properly called classes. When the distributist says things like, "One class makes more then it can possible spend, and everyone else is dependent on this class extending credit at usurious rates", nothing could be farther from the truth. Most people are somewhere between these two extremes.

Now obviously that quote was not from you and was not in this post. But the fallacious belief that that kind of class system resembles reality seems to be a theme very much in parallel with your assertion that corporations weild the real political power.

Quoting John: "The oligarchical aspects of the American governmental morass is not one of theory. In theory, the people still have all the power. But in theory, minimum wage is supposed to raise quality of living."

I don't see the connection between these two examples:

In the case of the minimum wage you are talking about a divergence between intention and outcome (based on a faulty economic theory).

In the former case, the issue is a matter of fact: who, in fact, wields political power in America. Now, if I come over to your house and start running in circles and hollering and breaking dishes, an observer would be inclined to say that I am doing whatever I please. Indeed. But it wouldn't be correct for them to say that I wield the political power at your house, because you can kick me out at any time, or demand that I behave in a certain way, with the threat of being kicked out. Similarly the corporation's success in achieving their goals through the mechanisms of representative government doesn't mean that the representative government is a farce.

I understand your misgivings about the level of attention and critical thought people are giving politics today. But I think the way you express yourself is not as careful or precise as it might be. The simple fact is that there is no oligarchy running the nation. It is a gross exaggeration to say that people are "dependent of big businesses to think." Its a meaningless tautology to say "The media is run by businesses." I sympathise with your desire to see people more engaged, when you say, "Psychologically, Americans are comfortable. I advocate a reawakening." But you need to understand that if democracy is to be preserved, they can never lose their right to act just as they are now.

John Friday, August 3, 2007 at 9:24:00 AM CDT  

But you need to understand that if democracy is to be preserved, they can never lose their right to act just as they are now.

If that's so, then if democracy is to be preserved, the people must have the right to throw away real (or, practically speaking, political) democracy.

I won't pretend to misunderstand you. The same reasons I think we can't go back to times before the industrial revolution I also have concerning the French revolution: they were real revolutions, and that included a revolution of concept. Even today, if men chose to live in a feudalistic monarchy, they would choose it. That's a very democratic idea, but their form of government would in no way be a democracy.

As you posit a smooth gradation of people on the economic change (I'm not sure if I agree, but I'm unsure enough to not go into it here), there is something similar on the governmental scale as well. When falling into ruin, democracy may look like many things without strictly ceasing to be a democracy. But there is the disparity between reality and theory, as I said before. Let's take your example of the house owner (one that might produce not a little levity among distributists, as it's one of their favorite harping points):

If you were to come into my house and behave poorly, I would be within my rights to kick you out. Kicking you out would be dependent on my physical prowess (nothing at all spectacular) or my ability to call the police and have them remove you forcibly. So far, it is my right, and duty.

But if I was unaware of your presence, if I was paralyzed from the neck down, I could not really stop you. If I were asleep, it would be very difficult to stop you, barring of course some very noisy misbehavior (for the purposes of analogy, the Sept. 11 tragedy might be considered noisy misbehavior of unwelcome guests).

What if my roommate (paid off by you, who want to play roughly in my domains) had slipped me a sleeping medication in my food or drink? Even better, what if he hypnotized me to sleep, of my own will and accord? I certainly don't will you come over and ruin my things, but I think sleeping is more important than that risk. I have chosen to give up the defense of my home, as you say. It is a democratic choice. But unless there is a revolution against that slumber, it will be the last truly democratic choice I make on my own.

I once heard it said that people get the type of government they deserve. I think we could be a little more clement and say that they probably get the government they can handle. We could be a little liberal, and say that people always get the type of government they want. But whether or not we can safely and completely call it "democracy" isn't always constant.

I am decidedly against the idea that the representative government is a farce. I can't think of a single case where that has been the case without some sort of clear transition away from the representative idea. The question is who is being represented. It seems to me that the corporation is being represented more than the individual. For the sake of argument I am willing to be lenient and say that it is being represented in equal amount as the individual. But the question should arise: who is supposed to be represented in a democracy?

Even aside, certain big corporations now dominate the individual's side of the equation. I don't mean that Wal-Mart is directly influencing politics, or even indirectly, really (if it does, it's far too complex a question for here). But the media itself is founded on corporation schemes. CNN is a corporation. NBC is a corporation. C-SPAN is a corporation. And often these corporations strong-arm certain perspectives among voters. Democratically, you can argue it is done by invitation. Voters don't want to think, so they have the media do most of it for them. But my argument is that when that happens, real democracy is lost. At least until people exercise their right to think again. Just because this is possible doesn't mean we are practicing democracy. If anything its potentiality (as opposed to its actuality) is an argument that we're not there right now.

Kevin Friday, August 3, 2007 at 10:55:00 AM CDT  

I think we're close enough to an agreement now. I still disagree with some of the language you use to express it, but I feel like continuing this would be nit-picking.

An old newspaper man once said, "Democracy is the theory that the people know what they want, and deserve to get it good and hard."

John Connolly Friday, August 3, 2007 at 1:32:00 PM CDT  

Exactly. Thank you for the most stimulating conversation.

Anonymous,  Saturday, August 4, 2007 at 11:25:00 AM CDT  

Why all the talk of capital gains having an effect on retirement savings for the middle class? Most middle class people saving for retirement save in tax free vehicles anyway (IRAs of both types and 401k).

The only flaws with these plans is IRAS only allow you to put a limited amount away every year and neither IRAs or 401ks allow for withdrawal for early retirement.

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