PHILOSOPHICAL ECONOMICS

This is the third part of a collection of pieces on money and debt.  Be sure to read the first part, The Meaning of Money, and the second part, Money: Power, Security, and Status.

The best way to understand the costs–or risks–of continually financing large portions of public expenditures with newly-created, i.e., “printed” money, is by removing “money” from the equation altogether, and tracking the concept instead.  In this piece, we will analyze a fictional economy that conducts the same print-and-spend activity without there being an actual printing press, or any referential money of any kind.  We will explore what such an economy looks like, and how it functions.

Suppose, then, that we live in an economy in which there is no money, just people with time and labor to trade among each other.  Though each person in this economy has unique, specialized abilities, we will assume that, with a few exceptions, these abilities add the same value, and that the time and labor of every healthy adult in the economy is therefore worth a similar amount, in real terms.  This assumption is not true in a real economy, but we are positing it in our hypothetical economy to simplify.

You are sick.  I am a doctor, so I give you treatment–it takes an hour of my time.  In exchange, you provide me with a steak that you grilled up–it took an hour of your time.  Alternatively, if Jim is sick, I provide him with the treatment, and he gives me the steak that you provided him in exchange for his having cleaned your house–which took an hour of his time.  An incredibly inefficient system, no doubt, but one that effectively conveys the tangibles that are traded through money in a real economy.

Because there is no money, individuals in our barter system have to use promises to coordinate reciprocation across different time periods.  During the time that I am treating your sickness, you will not be able to grill a steak for me.  All that you will be able to do is promise to grill one for me later, when I tell you that I’m hungry.  So you make that promise to me, and I treat your sickness.  Later, I tell you that I’m ready for the steak, and you prepare it.

There is an interesting analogy between promises used in this barter system, and money and debt used in a monetary system.  Money would be analogous to the promise: “I will grill a steak for you, at any time, on your request.”  You can “spend” that promise, i.e., demand redemption on it, any time you want.  You don’t have to wait for anything.  Debt, in contrast, is analogous to the promise: “I will grill a steak for you, on your request… but not until some period of time has passed.”  You cannot “spend” the promise, i.e., demand redemption on it, until the term expires.

Obviously, when a person promises a good or service later in exchange for a good or service now, the provider of the good or service needs to make sure that the promise can be fulfilled.  Otherwise, a “default” will turn his contribution into charity–time and labor given away for free–which he is obviously not interested in.

Now, suppose that we have a bum who is ill.  He needs help, but he is too weak and mentally deranged to reciprocate help.  Granted, if he is left on the street as a spectacle, he will get public sympathy–those that see him suffering won’t like what they see, and will want to help him, even if for free.  But they aren’t necessarily capable of helping him, and even if they were, the help would represent too much charity, too much uncompensated sacrifice, to ask of a small group of people simply because nature happened to thrust them into his world.     

Because we feel a natural empathy for the bum, we band together as a society, as a collective, and make a deal with the doctor.  If he provides services for the bum, out of his time and labor, we will collectively reciprocate.  We will each give him a small piece of our time and labor, to do something that he needs done.  Right now, he is working on building a house and wants help–so we will increase the total number of hours we work each day, with the balance going to help him on that project.

We can think of this action as a kind of crude, bartered version of redistribution through taxation–a charitable obligation that is collectively fulfilled and enforced.  We part with a portion of what we have–our time and labor–and give it to those that need it, through the doctor, who we collectively compensate.

Now, we might ask, in this barter system, what would public borrowing, as opposed to taxation, look like?  It would look like this: instead of offering our time and labor to the doctor now, we would promise, as a group, to provide him with some amount of our time and labor on a date he specifies in the future–to build the house, or to do whatever else he happens to want.

The promise we make, and its mirror image, the claim that the doctor receives on us, could be executable on demand, in which case it would be analogous to newly “printed” money in a monetary system.  Alternatively, it could be executable only after some period of time, in which case it would be analogous to debt in a monetary system.

Now, suppose that we decide that we want to live in a society where doctors perform a lot of compensated public charity–charity for the poor, the sick, the disabled, the elderly, everyone in need.  But, as a collective, we don’t want to have to part with our time and labor, to compensate the doctors for their efforts.  Can we escape the burden?

The answer is yes, with an important caveat.  If the doctors want to have claims on our time and labor not for the purpose of actually exercising them, but for the intangible value–the power, security and status–that having those claims brings, then we can make promises endlessly.  The doctors will be performing uncompensated charity, free labor, without even knowing it.  They will be doing work for others that will never be reciprocated.  Or rather, the reciprocation will take the form of the comfortable thoughts, feelings, and states of mind that come with knowing that one has power, security, and status.  Because no actual redemptions need to be made, there is an infinite supply of the promises that can be given.

Unfortunately, we cannot be sure that the doctors won’t ever want to exercise the claims or demand redemptions on the promises.  Maybe they won’t want to exericse them now, but that doesn’t mean that they will never want to exercise them, or that the promises won’t slowly leak out of their hands, into the hands of those who will want to exercise them.

Suppose, then, that in the future, the doctors decide that they want to exercise them.  They identify a need, and tell us to do work to satisfy it.  We will either have the free time and labor to do that work, and, equally importantly, be willing to provide it, or we won’t.  If we will have the free time and labor, then we will provide it, and this will be our act of reciprocation, of “paying” for the services that were never intended to be provided for free.  If we won’t, for example, because we’ve made the same commitments to other people, who also want to exercise claims on our time and labor, or because we’ve made commitments to our own leisure–and aren’t willing to do the work right now–then we will need to utilize interest.

We have these claims on our time and labor that we’ve created and given away.  More of them are being executed than we have room to support, and so we need to find someone with a claim who is willing to refrain from exercising it.  The way that we do that is the same way that an airline finds people to get off of an overbooked flight,

“Unfortunately, this flight is overbooked, and we are actively looking for people to take the next flight.  Please, if you are willing to give up your seat, we will give you a free future flight to any city in the country.”

This is the same thing that happens with interest: we offer to give claimants more future claims if they agree, for some period of time, to not execute the claims they currently have, claims that we don’t have the present ability to make good on.

Notice that in a monetary system, this problem can be resolved through inflation.  We stand back and let all of the people to whom we’ve made promises exercise their claims, spend their money, or deploy it into non-money investments.  The economy doesn’t have the capacity to fulfill all of these claims, receive all of this spending, support all of this investment, so prices rise.  Whoever holds money during the rise–and someone must, because not everyone can win the bid–becomes the sucker who loses out, whose claims are automatically reduced by an adjustment of the monetary index itself.

But notice that this can’t happen in a barter system, because there is no money!  The collective is trapped, there is no self-created currency that it can inflate to escape from its prior commitments.  Thus, if the claimants want to exercise their claims, even though the spare capacity to meet those claims does not exist, the collective must either explicitly default on the claims, or offer to pay sufficient interest to motivate claimants to postpone their exercise.  The collective has to become American Airlines, and promise future flights to whoever agrees to get off of the currently overloaded plane.

Now, when we, the collective, use interest to postpone the exercise of claims that want to be exercised, we don’t really escape from the burden they entail.  We still have to give our time and labor to those to whom it is owed.  The interest simply allows us to push the obligations off.  Unfortunately, the interest also grows the obligations.

If our productive capacity is growing faster than the interest payments that we will have to offer–now and in the future–to keep the overflowing commitments that we have made from being exercised, or even better, if the services that we wish to fund through those promises will directly increase our productive capacity, our ability to redeem promises, it makes sense to use interest to delay the reciprocation.  But if we are funding unproductive charity, then using promises and interest to postpone the reciprocation would not be the right choice, especially in a barter system where we cannot use inflation as a way of extracting work from people (i.e., the holders of money who lose parts of their wealth to it).

Let’s conclude with some monetary insights from this barter example.  The problem is this.  When we fund government expenditures–such as healthcare–with newly created money, the person that we pay with the money–the doctor–is doing for work for someone else–the patient.  But no one–not the patient, and not the collective, i.e., the taxpayer–is doing any work for the doctor in reciprocation.  It seems, then, that the doctor is doing work for free.  But, if you ask the doctor, he will insist that he is not doing work for free.  He is running a business, not a charity.  So what gives?

Trivially, over a given segment of time, an economy will only have the capacity–the labor base, the real resources–to absorb some finite quantity of claims placed upon it, some  specific amount of money spent.  When new money is created and paid to people for the work they do, there are three possibilities.

(1) The economy’s capacity might grow commensurately with the creation of the new money, allowing the new money to be spent without inflation (assuming all else is held constant).

(2) A sufficient number of people might want the money not to spend or invest it, but to have it, to hold it–for its psychological value.  In that case, their saving of the money will cause it disappear from the economy.  There will be no inflation.

(3) The money might be spent in a situation where the economy does not have the capacity to absorb the spending, in which case there will be inflation.

Now, many fiscal expansionists appeal to (2) as a reason why US policymakers should undertake a large money-financed spending effort right now.  They point out that the economy is in a slump.  People want to have money just to have it–they don’t want to spend it, and they don’t want to invest it.  Therefore, new money can be created in excess of the economy’s capacity to absorb the spending of it.  No inflation will occur because it won’t be spent.  A genuine free lunch is available, and policymakers are stupidly declining it.

The problem of course is that the economy is cyclic.  It’s not enough to say that the newly created money will not be spent or invested now.  To be a free lunch, the money needs to never be spent or invested.  In fairness, it may never be.  According to many, the US and the western world face significant future stagnation as populations age.  Presumably, this will create significant demand for idle monetary savings.  But such a gloomy outlook is hardly guaranteed–it is certainly possible that the cycle of animal spirits, which leads people to prefer to spend and invest their money, rather than hold it cautiously and idly, will return again some day.  If the economy has not grown enough to absorb the plethora of new claims that will come out of the woodwork and be placed upon it at that time, then either interest will have to be paid to keep those claims on the sidelines, or there will be an inflation problem.

What if the cycle is not dead, and does return?  Again, interest will have to be paid to the holders of money to keep them holding it–because there is not enough room for everyone to be spending or investing it, given the amount that has been created.  Put differently, the central bank will have to raise interest rates to discourage people from spending or investing their money (and also from borrowing the idle money of others).  Given the huge stock of money and debt that will have been built up by then, the cost of those interest payments will be quite expensive.  Unless it is financed with even more money printing (which will obviously be inflationary), it will require a large tax increase.  Note that this tax increase is just the “pushing out”–in one big move–of the tax increases that did not occur now to fund the needed stimulatory expenditures.  So unless we can be sure that circumstances will arise that will cause the excess of printed money to never ever be put to use, the free lunch is not really free.

The problem with a big tax increase later, forced by ballooning interest obligations, is that it shocks the economy.  It’s always better for growth, and for prosperity, to change things in an economy gradually, rather than all at once, in an emergency.  This is why, even though the level of expected future savings demand makes room for deficit spending right now without a risk of inflation in the future, the Democratic platform of reducing some of the deficit via tax increases on the wealthy–those who, for various reasons, are amassing large amounts of excess money that they are not spending or investing in labor, the taxation of which will not hurt the economy–makes economic sense, and is better for the economy’s long-term health.  If or when the cycle does turn, the money collected now will represent money that will not need to be paid interest to, and that will not need to be taxed to pay for.

Note that the reduction in wealth inequality that would come from a progressive tax increase of this sort is just an added benefit.  If my having a lot of money brings me security and status in my social universe, that shouldn’t be a problem for you.  Why should you care?  But things are different when we talk about the other intangible that money offers–power.  There are very good reasons why you might not want me to accumulate extreme amounts of power.  Therefore, there are very good reasons why you might not want me to accumulate extreme amounts of money.  That money is power over the economy, over it’s resources, over it’s people, and ultimately, over you, because you, like everyone else, are a slave to it.

This piece is the second part of a collection of pieces on debt and money.  Be sure to read the first part, The Meaning of Money.

Once money is in the hands of the individuals in an economy that exchange it–individuals with minds, who are constantly thinking, feeling, judging, comparing, evaluating, remembering–it takes on a psychological meaning.  That meaning is what makes it possible, within certain limits, for new units of money to be printed, without any liability attached, and used to compensate individuals for the time and labor they provide to those who cannot repay the favor.

Suppose that the United States were to change its currency to the Grumpel.  One evening, bank accounts are shifted over–every Dollar becomes 43,297.65 Grumpel.  All debt liabilities to others, and all tax liabilities to the government, must now accept settlement in this new currency–which looks different, feels different, and sounds different when spoken.  If you were to go to the store to make purchases in Grumpel, how would you know what was expensive, what was cheap, and what was reasonably priced?  Because you have no psychological history with the currency, you would have to continually make conversions in your mind–to the currency that you do know, Dollars.  When you see something selling for 7,144,112.25 Grumpel, you would calculate, and realize, ah, that’s $165.  For a pair of Levi’s jeans?  No way.

Because we have lived in an environment of stable prices, with gradual, virtually unnoticeable inflation every year, dollars have an independent, objective meaning to us.  They are real things in our minds, with their own independent worth–on a par with the worth of the types of things they have always been able to buy.  Consequently, they are able to offer intangible value to whoever holds them, value that is not contingent on their actual use in making purchases.  Earning $100,000,000 and sticking it in the bank can feel great–even when you don’t have anything you want to spend it on, and never will.

When you have large amounts of money, you have power.  Even though there is nothing extra that you want others to produce for you right now, over and above what they are already producing, having money means that if, in the future, you identify something that you do want produced for you, you will have the ability to secure it for yourself.  Simply knowing that you have this ability will bring you satisfaction and comfort–sometimes more satisfaction and comfort than its actual use.

When you have large amounts of money, you have security.  If something bad unexpectedly happens to you, the money that you’ve set aside will allow you to continue your current lifestyle.  Simply knowing that your current lifestyle is secure–protected from capricious threats and dangers–allows you to relax and more easily enjoy it.  For this reason, you continue to add to your savings, you continue to work and generate income, even though you don’t plan to currently use it, and might never use it.  If you don’t ever put the money to use, no problem at all.  You can leave it for your family, your children, to provide for their security.

When you have large amounts of money, you have status.  Money is one of the chief ways that society measures status.  Imagine that you are at a dinner party with interesting people that you haven’t met.  Someone asks you, what you do for a living?  Answer #1: “I’m a boys special education teacher at the local middle school.” Answer #2: “I’m an investment banker, I work at Goldman.”  In terms of improving the plight of real human beings, the special education teacher might add more value to the world than the banker.  But who will receive more fawning?  The answer is obvious.  Like it or not, money has immense meaning as a status indicator, and a significant portion of society uses it to measure who’s who.

The satisfaction of almost every success in life has a large social component.  The gratification is not only in the success itself, but in the fact that it is seen and acknowledged by peers–or better, celebrated by them.  Money is one of the main ways in which this social component is accounted and displayed.  It lets people keep score–assess how they fare relative to their peers, those against whom they measure themselves, and with whom they expect to maintain par.  Nothing breeds more strife in the workplace, for example, than for a person to find out that she makes significantly less than her coworkers.  The money differential takes on the meaning of an insult–“we don’t value what you do as much as we value what they do.”  And it doesn’t matter how much she makes.  As long as there is a meaningful difference relative to those that she views as her equals, she will be hurt, angered.   

Now, to the economic question.  Suppose that we have an economy of producers and moochers.  The producers have excess capacity, the ability to produce X more things than they are currently producing.  The moochers want those X things, but they don’t have the ability to reciprocate.  To the extent that the producers want more money, not to spend, but to hold as a source of power, security, and status, then new units of money can theoretically be created in perpetuity to accomplish the transfer, without inflation.  Once spent, the new units will accrue into the hands of the producers, where they will disappear from the system.  The moochers will then have what they want–stuff–as will the producers, who will have money and its associated intangibles.  Everyone will have what they want, and will be happy.

In this process, the structure of a well-defined, psychologically-entrenched monetary system will have been exploited to create bona-fide charity: producers doing work for moochers without any need for reciprocation.  Note that this phenomenon is not limited to monetary interactions–it happens in many other areas of life.  As an example, consider a biochemistry professor that works obsessively in a lab to find cures for fatal diseases.  He doesn’t do it for the money, he does it for the intellectual achievement itself–the psychological satisfaction that he experiences in mastering his craft, making discoveries that no one else has ever made, solving problems that will change the world, creating value that will be acknowledged, respected, and jovially envied by everyone in his peer group, and by future generations.  Instead of being compensated for his work in the currency of money, promises of reciprocation that he has no need for, he is compensated in the currency of meaning, challenge, excitement, victory, congratulation, admiration, respect, each of which is far more satisfying than the consumption of the stuff that somebody else can make.

Because so much of the value of money lies in the intangibles that it offers to its holder, rather than in its use as a claim to consume, there is room to print new units of it even when the economy does not have the productive capacity to support the expenditure of those units.  In the US economy, there is ~$11.5T of M2 money, 70% of it locked in savings accounts, a record relative to GDP.  There is ~$3T of base money, net money that is not mirrored or offset as an asset by a corresponding private sector liability, a record relative to peacetime GDP.  If, by the flip of a psychological switch, even a fraction of that money were taken out of savings accounts and used to make claims on things in the here and now, or conversely, if the velocity at which each unit is exchanged were to return to its level of say, 15 yrs ago, the economy would not be able to support the use, and a significant inflation would result.  But because the money sits comfortably (for now, at least) in the hands of those who seek it for its intangible value, who want to have it to have it rather than to exchange it for increased consumption, there is no inflation.

Fortunately, or unfortunately, the individuals most likely to accrue new money that is printed into the economy are individuals who add the most value through their labor, or who own, through corporations, the factors of production, and who can profitably collect rents on the use of those factors.  For perspective, in the US, almost all of the saving that has occurred to mirror the government’s borrowing in the current recession has been conducted by the top quintile of earners, who, not coincidentally, own ~90% of all corporate assets.  Naturally, these individuals tend to be much closer to saturation in their consumption than their counterparts on the other side of the tracks, and to be pursuing the money for the power, security, and status that it provides.  Ironically, it is this entrenched wealth inequality, rightly lamented by so many, that keeps the money from moving around, from being put to aggressive use, and from causing inflation.  To the extent that the individuals who accrue it remain tight and efficient in allocating and distributing it, to the extent that they hold it rather than spend it, and thereby minimize its unnecessary leakage into the hands of those who would spend it rather than hold it, no inflationary harm is done.

If not immediate inflation, then what is the cost of financing large portions of public expenditures with new (net) money creation (or with debt, promises to pay later, which will be financed from such)?  In the next piece, we will explore the answer.

In discussions on fiscal policy, it is common to hear participants describe the economy with the word “we.”  Consider the following quote, from a prominent advocate of Modern Monetary Theory (MMT), offered in defense of increased fiscal deficits:

“There is no economic reason for a grand bargain.  We are living way below our means.  We are told we are living beyond our means.  We are living way below our means.  The red line is our potential GDP.  The blue line is where we are.  The difference is the output and income that we sacrifice every day we fail to bring this economy to full employment.  We have tons of spare capacity.  Factories are not operating anywhere near historically high capacity utilization rates.  There is all kinds of extra capacity to produce.  We have millions of people who want to contribute.  And we have useful things for them to do.”

The author speaks of the economy as if it were a single, unified entity, seeking out its own interests.  But if this is what an economy is–a self-contained person of sorts–then what is the need for money?  Since “we” are the ones for whom “we” are doing work, it would seem sufficient for us to just do the work, and leave the situation at that.  Instead, we print up pieces of paper, put them in our pockets, take them out to pay ourselves for the work that we do, and then put them back in as we receive them again.  A pointless round trip from the perspective of “we.”

The sophistry in this way of speaking should be obvious.  In an economy, there is no unit “we.”  There are only individuals–separate and self-motivated.  These individuals each feel their own pleasures and pains, and act on behalf of their own desires and aversions.  Rarely are they willing to do meaningful work for others, endure meaningful sacrifices, for free.  If you wish to test this claim out in practice, then do the following: dress up like a bum, go into a nice New York restaurant, and ask a couple that is having dinner there to pony up another $50 so that “we” can enjoy a nice meal.  When the couple tensely turns away, remind them how hungry “we” are tonight.  “We” want food, and “we” have the means to put it on the table.  What a waste that “we” would instead starve ourselves (austerity!).  See what the couple says to you.   

The fact that people are only willing to do work that they themselves benefit from is the very reason that money is necessary.  Money allows individuals to efficiently trade their work, and to track obligations to reciprocate to each other.  It identifies how much of the overall pie each person has produced, and how much of it each person has a right to consume.

Suppose that I am a doctor, and you are a lawyer.  There is work that you want me to do for you.  But, at the moment, there is nothing that I want you to do for me.  Must you therefore go without my services?  No.  I may not want any legal help right now, but there is surely work that I want done that others can do–for example, someone to cook me dinner.  Some of those other people want the legal help that you can provide.  So I give you my medical services, you give me the money that you earn from providing those people with legal services, and I use that money to go to a restaurant.  We are each made whole, having efficiently exchanged our contributions among each other, over different times and places.

The problem is that not everybody has the ability to contribute, create things that people need and want, and attract for themselves the resources necessary to live in a dignified way.  A world in which such people are left to suffer abjectly insults the moral sense.  At the same time, if given a choice, very few of us would be inclined to help such people–give up meaningful chunks of our time and labor–for nothing in return.  So the population chooses a political system that takes a slice of every person’s income–which represents a piece of every person’s time and labor–and gives it away.  If you are sick or injured, and I am a doctor, I will do work for you, even though you cannot afford to compensate me, or improve my circumstances.  This is not a problem; others will do work to compensate me on your behalf, through the taxes they pay into my coffers.  Those taxes are a loss for them, but it’s OK.  The loss is tolerable because it is not that large, because the cause is noble, and because there is a hidden benefit for everyone: an insurance against the many evils and misfortunes that life presents.  For all that we know, any of us might one day end up in the unenviable situations that we currently give support to–we would be glad that the support is there.

There is a growing movement in economics to topple this naive understanding of fiscal policy, replace it with something more “modern.”  Members of this movement argue that the services of the doctor don’t need to be paid for by anyone.  The patient doesn’t need to pay, nor does the community, through taxes.  Instead, the government can run the printing press, and give the newly created money to the doctor for his services.  Everyone will benefit from the approach, especially taxpayers, who will be relieved of the burden of having to part with a portion of their income in order to pay for an activity that they do not want to pay for.

When we hear the suggestion–or implication, or hint–that such an approach is possible, that an economy can systematically finance large portions of its expenditures with money created from nothing, or with debt promises to pay money in the future (that are eventually fulfilled through the creation of new money, rather than through tax collection), we get nervous.  The scheme sounds fishy, sketchy, ponzi, something likely to come with undisclosed costs attached, and also hidden windfalls for those who advocate it.

There is no question that the approach comes with hidden costs.  But, because of the way money works, because of the meaning that it takes on in the minds of the individuals who exchange it, a meaning that transcends its actual use as a claim on the time, labor, and assets of others, there is space to exploit the approach before the costs become truly problematic.  In the posts that follow, I will carefully expound.

John Hussman recently tweeted an interesting chart showing a Sornette-type bubble developing on the S&P 500:

Well done, but I don’t think investors should be anticipating a crash any time soon. Historically, major asset bubble crashes have always been preceded by rising short-term interest rates.

Consider the 1929 Dow Bubble Crash:

The 1989 Nikkei Bubble Crash:

The 2000 Nasdaq Bubble Crash:

The 2006-2007 Real Estate Bubble Crash:

Short-term rates were also rising prior to the 1987 crash, but that wasn’t a genuine bubble. On non-cyclical metrics (q, Shiller PE, Market Cap/GDP, etc.), the current market (which most would not consider a bubble) is more expensive than the 1987 market, and has been for the majority of the rally.

Whatever your bull-bear persuasion, it should be obvious that the Fed is not going to raise short-term interest rates any time soon.  We need to get done with QEternity first, and that’s probably at least a year or two away, given the stance of fiscal policy.  Even after QEternity is over, the economy would need to start growing robustly (a sustained pace greater than 3%), or inflating, for the Fed to raise rates meaningfully off of zero.  Given where the U.S. and the rest of the western world are demographically and in terms of private sector debt levels, and also the way in which technology continues to reduce the relative value-added of a marginal human laborer, such growth/inflation is hardly a given.  So I don’t think it makes sense to expect a replay of 2000 or 2007–at least not in the near term.

A significant correction, on the order of say 10%, seems possible, from current levels or from a higher level.  The two most likely catalysts seem to be: (1) inflammation in the Eurozone leading to renewed fears of dissolution and contagion, and (2) the effects of tight US fiscal policy showing up in the data and stoking fears of profit deterioration or a new recession.  But experience suggests that such a correction, if it happens, should be bought, so long as the Fed remains ultra-easy (which they will, absent a major regime change).

I was waiting patiently at the traffic light.  After a few minutes, it turned green.  Instead of driving forward, the person in front of me, who was in no rush, decided to be a “Good Samaritan” and let all the cars from the gas station next to us enter the street in front of him.

As he was letting the last car in, the light turned yellow.  He managed to hit the gas and rush through it, but by the time I got there, it was already red.

This event pissed me off royally–though not as much as it might have, say, in 1995, when there were no smart phones to play with while waiting at red lights.  Regardless, the story offers a valuable lesson on how progressives should frame the issue of taxation of the wealthy.  Let me explain.

Why Was I Pissed?

I’ve been a “Good Samaritan” before.  I’ve given other people a break and signaled for them to enter in front of me at crowded intersections.  Why, then, in this case, did it anger me so much to have to wait for other people, and ultimately miss the light?

The answer is that I got no credit for it.  The sacrifice was forcibly extracted from me without even a “nod” or a “thank you.”  Someone else coerced me to give to others, and yet that person took all the credit for the giving.  He got to be the “Good Samaritan”, the “nice guy” that lends a hand–even though I had to bear all the cost.

In general, people don’t like to be handled in this way.  They are willing to help, willing to make sacrifices for others, but they want to be given credit for it.  They don’t respond well when sacrifices are arrogantly and confidently extracted from them as if owed.

What is it about Democrat Taxation Rhetoric that Angers the Wealthy?  

The answer: The exact same thing that angered me at the light–being forced to make a sacrifice for others, and give away hard-earned money, without receiving any credit, not even the slightest “thank you.”  Even more irritating than this is making the sacrifice, and then seeing the career bureaucrats that forced the sacrifice proclaim themselves the real heros as they take credit.  Or even more irritating than that–being subsequently scolded in public by those bureaucrats for having earned a lot of money.

Now, don’t get me wrong, the rich in the United States enjoy more prosperity than any other group of human beings on this planet has ever enjoyed.  In truth, they don’t “deserve” their prosperity any more than a disabled person “deserves” a disability.  The scientific data is unequivocally clear that all aspects of human behavior are neurobiologically determined, ultimately shaped in all relevant respects by environmental and genetic factors.  Success is about luck, including the luck of having been raised in a certain environment, with a certain set of genetic gifts, that together produce traits and talents conducive to wealth creation.

Still, the fact that wealth is a matter of luck and never “deserved” in the ultimate moral sense is no reason for Democrats to embrace rhetoric on taxation that triggers negative emotions in the wealthy.  The majority of the population may be envious of their circumstances, but the wealthy are valuable members of society.  Their presence in the economy adds to everyone’s well being–especially when their wealth is earned through innovation.  If a sacrifice is needed from them to help the greater good, it should be extracted with gratitude and respect.  Nothing is gained for anyone by extracting it in a way that leaves them angry and frustrated.

What President Obama Should Not Do

President Obama–who I think will go down in history as an excellent president–often tries to dissipate tension associated with this issue by describing himself as wealthy.  He intentionally frames the tax “question” as a question of whether people like him should be asked to pay more.

Ironically, this approach adds to the irritation.  Nothing could possibly anger the wealthy more than to have President Obama speak for them.  They don’t view him as a legitimate creator of wealth.  In their eyes, he earned his wealth as a career politician–pandering to the “moocher” class.  Right or wrong, that is their view.  When he claims to be one of them, he rubs it in.

What President Obama Should Do

Any time President Obama–or any leader that wants to bring the country together for the greater good–speaks about the need to raise taxes on the wealthy, he should make a point to mention the value that the wealthy add to our economy.  He should literally say “We appreciate what you do, what you contribute.  Your creativity, your tenacity, your entrepreneurial spirit makes all of our lives better, and we thank you for that.”  And then follow up with, “We just need to ask you to pay a little more in taxes right now, because the less well-off are suffering, and can’t afford to.”

Consider the sacrifices that members of the military make.  They risk their lives in horrifyingly stressful situations.  In some cases, they come home permanently mutilated or dead.  How does the government compensate them?  $30K a year with benefits, a free college education, and lifetime healthcare for any injuries incurred.  Obviously not adequate compensation, especially for those that end up entering live combat.  But despite the poor compensation, people still join the military, they still volunteer to make that sacred, time-honored sacrifice.  At least part of the reason they do so is that society does an excellent job of showing them respect and gratitude, reciprocating their contributions in word and deed.  In America, military service means something.

Now, I certainly am not suggesting that we should treat the wealthy like we treat veterans. I am simply trying to illustrate the point that people are vastly more inclined to make sacrifices when society gives them credit for it.  Society gets an excellent deal from its service members, and it wouldn’t get that deal if it were to ignore them, or frequently bad mouth them.

A Proposal

One excellent way to show gratitude and respect for the sacrifices of taxpayers would be to have the treasury addend tax returns every year with a letter, signed by the treasury secretary, congratulating the taxpayer on a successful year of work, and thanking him or her, by name, for his or her contribution to the greater societal good.

The letter could go farther and give specific concrete examples of how tax funds are being used to help real people in real situations.  For example, the letter might have an article about a student who was able to go to college because of a Pell Grant.  Or a child in poverty that was able to get healthcare because of Medicaid.  And so on.  Putting a face on programs like these helps people to recognize that they are doing something valuable when they pay taxes, something noble and commendable, something that society appreciates.  Given that the gesture is effectively free of charge, there is no reason, other than spite and envy, for society not to make it.

Finally, for the highest earners, the treasury might actually offer them a message of congratulations–maybe even with a specific mention of rank, as in, “You were the 33rd highest earner out of all the individuals in your city.  Congratulations on your achievement, and we wish you continued success next year.”  In truth, making a lot of money, and paying a lot of taxes, is an achievement worthy of mention, and there is no reason why the government shouldn’t acknowledge it.  The advantage of acknowledging it is that people like the feeling of being recognized, they like to know that they rank high among their peers, and therefore with the knowledge of that reward out there, they might not be as inclined to hide their income from the government.  Again, “congratulations” is a gesture that is free of charge to the government.  There is no reason for the government not to make it.