Bleeding Heart or Ulterior Motives?

Nationally, the incomes of the top fifth of Americans went up 9.1% over the last decade, while incomes among the bottom fifth fell by 2.5% and the middle fifth increased by 1.3%.

Is this a problem? Bleeding heart liberals think so. They act like they care about poor people and feel just fine about taking money out of other peoples’ pockets to hand it out to the slackers we will always have among us. This approach is okay for socialist Europe but not for the US, as we have built our nation on equal opportunity rather than equal outcome. Wealth redistribution is not good for our country or for our economy.

So why does the richest man in the world, one who considers fiscal, monetary and trade policies to be of primary importance, support Barack Obama for President? Because Warren Buffett is a pragmatist. In fact, many Republicans who support Obama’s economic plan to McCain’s do so because, like Buffett, they realize that if this trajectory continues unabated, we will end up with a country with more crime, worse health, and less social harmony and civic participation. That equates to less opportunity for all, rich and poor.

When Ronald Reagan was elected, tax rates on top incomes were so high – almost 60% combined federal, payroll and capital gains – there was little incentive for business leaders to invest in expansion or new companies. By the end of his second term, Reagan had cut this combined rate to 35%; Clinton raised it to 40%; the second Bush lowered it to 34%. The intended outcome is greater job and income growth, which should translate into higher educational levels, lower crime and a better society overall. This works when business investment creates jobs at home, but as we all know and as the straight-talking John McCain will tell you, new technologies and low-cost overseas labor have made many blue-collar jobs obsolete in the US and, as McCain says, those jobs are never coming back. In the last week alone, we’ve seen that Dell’s selling its factories, HP’s laying off 26,000 people, and who knows what will happen to the 24,000 or so working at the now-bankrupt Lehman Brothers.

So how to approach this new economy so the benefits will trickle down to the majority of Americans? Would a tax increase on the rich to just over Clinton-era levels stifle this new economy? This was the fear in the 90’s, but it never materialized. Incomes grew, as did the economy, and we erased the federal budget deficit. In 2001, when these rates were reversed, economic growth slowed and the deficit returned.

That government spending could ever be a good thing has been out of favor since Reagan, and for good reason. But with the implosion of Wall Street over the weekend, with our infrastructure crumbling and with schools cutting out programs and even school days (given their slashed budgets in the face of the mortgage meltdown), there are some worthy uses for our tax dollars that don’t include bailing out investment banks or rebuilding Iraq. They include spending on infrastructure, accelerated research into alternative energy - including nuclear - and education and training – areas where a fully free market fails us and where small investments today can turn into big dividends tomorrow.