Why Economic Dogma Threatens Our Future Prosperity

By Rob Weigand

As we all know, there are many problems facing the economy and financial markets right now. One of the longest-lived and most pernicious problems is one of the least discussed — or even recognized. For example, this problem is responsible for many Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control (and California is on the brink of bankruptcy). This problem fueled the market’s overvaluation in the 1990s, culminating in the infamous tech bubble. It lent a significant tailwind to the crazy lending standards and housing bubble that propped up the bull-market-that-wasn’t from 2003-2007, and the problem is still with us today, preventing us from clearly evaluating conditions in the economy and financial markets — particularly how we arrived at our current state of affairs.

Behavioral psychologists bestow two technical terms on this problem — cognitive dissonance and cognitive consonance — but they are two sides of the same coin, or in this case, two sides of the same problem. To understand these terms is to understand one of the major roadblocks preventing us from moving forward decisively as an economy and as a nation.

People are probably more familiar with the term cognitive dissonance — the tendency to ignore, or underweight, information that contradicts our current opinion or set of beliefs. Cognitive consonance is the “flip side” of dissonance — we also have a tendency to overweight information that reinforces our opinions and beliefs. And, with our consciousness severely crippled by these two flaws, we bravely venture forth into the world as consumers and investors, fated never to live up to John Stuart Mill’s vision of homo economicus (”economic man,” the hyper-rational decision-maker in which most microeconomists still believe). Unlike Socrates, however, most of us don’t even know what we don’t know. The tendency to prefer dogma to facts is, in my opinion, one of the main factors that threatens our future prosperity. We can’t embrace a way forward until we fully appreciate the deep hole capitalism has dug for itself.

The Market’s Emotional Roller Coaster. I gave a talk on the economy recently, and my last slide was borrowed from Liz Ann Sonders at Charles Schwab Market Research (reproduced below). It’s entitled “The Market’s Emotional Roller Coaster,” and it depicts 12 stages of emotion that investors go through in a full bear-to-bull-market cycle.

Someone asked where I thought we were in the emotional cycle. Without hesitation I answered “We never finished the capitulation phase back in March, so we’ve been stuck at that point for months,” and everyone groaned — they wanted me to say we were almost through with the despair phase so they could justify not having to experience any further pain, and instead soothe their psyches with false hope for a big bull market in late 2009 or early 2010 — the bull that will bail out their 401(k)s and allow them to resume their borrow-and-spend consumerism.

But I don’t think we’re anywhere close to that point yet (and I’m in good company — more on this below). The market lows of March 2009 represented a brief moment of realism, as equity valuations were accurately discounting the torrent of bad economic news we’ve had from just about every indicator — real estate values, consumer spending, employment, corporate profits, etc. But we couldn’t “bear” Dow 6,400 or S&P 666 (yes, that was the March low), so our collective consciousness created a better narrative — a market rally that sparked 3 months of drivel about “green shoots.”

This is as good a place as any in this little tale I’m telling for you, the reader, to wake up to the reality of our current situation. The average 1-year trailing P/E on the S&P 500 has remained in the low to mid teens during this bear market (see the graph below). The last recession and bear market that approached this one in severity, during the 1970s-1980s, resulted in a market P/E ratio of less than 8. The current recession is far more severe than that one, yet equity valuations remain far above their levels from 1981-82.

If estimates of Q2 corporate earnings are reasonably accurate, the current level of the Dow and S&P imply a trailing P/E ratio of approximately 40. Without a dramatic rebound in earnings in the next couple of quarters — and how likely is that? — the implication is that stock prices could fall another 50-60% before equities are priced to deliver their “normal” long-term annual returns of about 7% (real). And even from much lower levels, earning 7% per year from stocks would require that GDP and corporate profits resume growing at their rates from previous decades — something few respected forecasters believe is possible (elaborated on below).

To understand why equity values discounted economic events more realistically in previous bear markets we need to ask “what’s changed since the 1970s?” The answer is “us.” Or, more precisely, the media we consume and the way many of us use it to fuel our dogmatic fantasies. We use our media subscriptions, the internet and television to indulge in cognitive dissonance and consonance to the point that many of us have talked ourselves onto a precipice of dogma. For those of you balanced on this precarious ledge, I’m going to try to talk you down. Why do I care if you jump or fall, someone might ask? Because, like it or not, we’re all in this together. If the dogma-addicted don’t get themselves into rehab they’re going to pull us over with them.

What are some of the dangerously dogmatic opinions I’m referring to? Well, here are a few. Have you not figured out by now that Ronald Reagan is the engineer of our crushing federal debt? You might have to read that one again — Ronald Reagan is the inventor of borrow-and-spend government. He was a Keynesian, but instead of tax-and-spend, he preferred to borrow-and-spend; it’s basically the same recipe. The data are in, folks — $14 trillion of debt and counting — the fictional Arthur Laffer “tax-cuts-pay-for-themselves” narrative has been proven false beyond a shadow of a doubt. California tried its own version of this with Proposition 13 and they are on the brink of bankruptcy.

It’s not unthinkable that our federal government could be in similar straights soon. If a household cannot escape this basic common sense, then neither can a business or a government — you have to pay your bills as they come due. You either raise taxes or cut spending, but you have to live with a balanced budget every year. But once Reagan’s minions got us believing that a different alchemy existed, hundreds of politicians have reinforced that dogma in their hollow campaign promises to the point where about a hundred million Americans now accept something false as true. And these believers find it too painful to look at the simple, factual history of the situation — that’s cognitive dissonance. They instead prefer indulging in even more Laffer and Grover Norquist — cognitive consonance. Many would rather “feel” right than have to pass through a phase of recognizing previous opinions as wrong to ultimately arrive at opinions and views that are more accurate.

Here’s another one — are you all riled up over “news” stories about the shocking involvement of government in business? Especially those Karl Rove psycho-torials in The Wall Street Journal? Well, here’s another little fact you need to digest. Government gets involved in business because business asks them to. That’s right — pop your eyes back in your head and read it again — it’s another undeniable truth. Businesses in the U.S. spend billions every year begging politicians to intervene on their behalf. It goes by the politely sanitized term of “lobbying” — but we all know it’s a legalized form of bribery. Moreover, the worst-performing industries that wreak the most havoc on the lives of citizens spend the most. That’s right. It’s well-known that banking and finance spent at least $4 billion (officially) in the past decade lobbying politicians. Banking and finance — the industry that’s been in a crisis every 10 or 20 years since the 1800s.

In second place is — you guessed it — the health care industry. This is the industry that charges Americans more for prescriptions than the citizens of all other countries. It’s also the industry that makes us pay almost twice per capita for health care compared to Canadian and French citizens. It’s the industry that’s engineered a massive propaganda campaign to convince Americans that it would be too expensive for everyone to have health insurance and access to health care. Too expensive? How hard-bitten of a nation have we become when we elevate an economic issue (health care profits) over a human rights issue (access to affordable health care)? If we took a fraction of those lobbying fees and used them to hire consultants from Canada and France, not only would we have more affordable health care with better outcomes (Americans are unhealthy!), our housekeepers, landscapers, restaurant waitpersons and the person who cooked our dinner the last time we ate out could afford to take their kids to the doctor. Approximately 1 million Americans declare bankruptcy each year because of medical bills — and many of them have insurance.

So what type of cognitive dissonance are we engaging in regarding the economy? The carefully-scripted narrative that’s broadcast every day on Fox Business and CNBC must be recognized for what it is. Under the guise of “objectivity,” every negative opinion is immediately balanced by a guest suggesting that he sees “green shoots,” and the next great bull market is right around the corner. The market will come back because it’s always come back. We have forgotten the useful cliche, “Consider the source.” The programming on these business channels first and foremost serves their advertiser base — the financial services industry. The industry that wants to gather assets, at minimum, and even better, get you to trade as much as possible, while it continues spending a significant fraction of its considerable profits to buy the political influence that ensures that they’re free to do it again and again, regardless of the havoc they wreak on our economy and way of life. Thus programs with names like “Fast Money” and actors like Jim Cramer, who 5 days a week stars in a sitcom where an escapee from a lunatic asylum sneaks into a television station, raids the wardrobe department, dresses up as if its Halloween, and speaks in tongues.

In a world too full of mis- and dis-information, may I instead suggest that you let yourself be guided by the opinions of long-term thinkers with successful track records. They do exist. People like Warren Buffett (who warned us that “derivatives are weapons of financial destruction” many years ago), Jeremy Grantham, Bill Gross, and Mohamed El-Erian, all of whom are on the record regarding “green shoots” — they never existed. Bryan Marsal – whose firm is overseeing the unwinding of Lehman Brothers, which is about as close to the smart money as anyone gets — told CNBC on July 6 that he doesn’t see spending coming back — ever. In the past weeks and months, every one of these individuals has tried to guide our view of the future of capitalism to more realistic expectations.

The rampant consumerism and the leverage that propped up the economy for the past decade was not sustainable — game over. Corporate profits, when they begin growing again, will grow more slowly from their 2009 lows. Like Japan, we’re going to get older and save more. And that’s the good news. The United States may have recently passed into what I believe to be the ultimate indignity — we now have to manage the value of the U.S. dollar to please the Chinese, so that we can entice them to keep buying more of our nearly worthless debt. And the Chinese keep buying it — at least for now — but in ever-shorter maturities, which provides them with the option of not rolling over their holdings when these shorter-term T-notes come due over shorter horizons.

Much of the recent steepening of the yield curve is due to financial, not economic events — when the Chinese buy shorter-maturity debt and shun longer-maturity debt, the yields on short-term debt stay low while the yields on long-term debt rise, and voila, we have a steeper yield curve. Not one that’s forecasting a recovery, however — one that sadly depicts how, like any profligate debtor, the U.S. is now forced to manage its financial affairs to please the whims of its foreign lenders rather than benefit its citizens.

The first step towards breaking free from this sad reality is to recognize it. The U.S. cannot make a shred of progress until we realistically assess what we’ve become as a nation, and how we got here. Tax cuts aren’t going to save us, nor is denying our neighbors and fellow citizens access to health care. That’s more dangerous dogma that will just dig us in deeper. When we embrace the same values that we claim to admire in the Great Depression/WW II generation — thrift, economy, modesty, charity, generosity and a strong work ethic — we’ll have taken at least one authentic step on the long path to being a great nation of great people again.

Comments

[TKA:]

I'm not going to take the time to break this all down so let me just point out one critical factor glaringly conspicuous in its absence. Mr. Wiegand states, "...Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control (and California is on the brink of bankruptcy)". So, if this is true, government spending only played a minor role? Talk about cognitive dissonance...

Jul 10 10:28 AM

[Pat Shuff:]

First nuke the university system to eradicate the source. It is the only way to be sure.

Jul 10 10:39 AM

[CautiousInv...:]

"One of the longest-lived and most pernicious problems is one of the least discussed — or even recognized. For example, this problem is responsible for many Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control (and California is on the brink of bankruptcy). This problem fueled the market’s overvaluation in the 1990s, culminating in the infamous tech bubble. It lent a significant tailwind to the crazy lending standards and housing bubble that propped up the bull-market-that-wasn’t from 2003-2007, and the problem is still with us today, preventing us from clearly evaluating conditions in the economy and financial markets — particularly how we arrived at our current state of affairs

The data are in, folks — $14 trillion of debt and counting — the fictional Arthur Laffer “tax-cuts-pay-for-them... narrative has been proven false beyond a shadow of a doubt. California tried its own version of this with Proposition 13 and they are on the brink of bankruptcy.

It’s not unthinkable that our federal government could be in similar straights soon. If a household cannot escape this basic common sense, then neither can a business or a government — you have to pay your bills as they come due. You either raise taxes or cut spending, but you have to live with a balanced budget every year. But once Reagan’s minions got us believing that a different alchemy existed, hundreds of politicians have reinforced that dogma in their hollow campaign promises to the point where about a hundred million Americans now accept something false as true."
______________________...

This author is somewhat paradoxical, capable of attributing all of our fiscal ills, the tech bubble and the housing bubble to Reagan, which is utter rubbish, while also making informed observations about today's market and the likley future.

Like cognition, budgets have two sides: the income side and the spending side. Had we been genuinely concerned about federal, state and local deficits we would have contained spending, something politicians are loathe to do. By nature, politicians are predisposed to spend in the mistaken belief that they can allocate resources better than either the market or the source of income.

After we cut through the psycho babble, the author makes a couple of interesting observations about big business, healthcare and lobbyists. He fails to connect the dots, though, and does not state the obvious: were government less involved in micro managing various industries through complex rules, regulations and tax exemptions we would have, miracles of all miracles, fewer lobbyists. Intrusion of the government in business is a welcome mat for lobbyists.

I also happen to agree with his outlook for the future and his assessment that we are constantly fed a diet of economic pablum by mainstream media because of inherent conflicts of interest owing to ownership and sponsorship issues. The most egregious example of this is CNBC which is owned by General Electric. Not only has GE received $billions of TARP funds but it also stands to benefit from development of infrastructure and alternative energy.

Jul 10 11:05 AM

[Pat C:]

We have the author: "Businesses in the U.S. spend billions every year begging politicians to intervene on their behalf. It goes by the politely sanitized term of “lobbying” — but we all know it’s a legalized form of bribery." (Very well written article - thank you)
And then we have Causeinv..."He fails to connect the dots, though, and does not state the obvious: were government less involved in micro managing various industries through complex rules, regulations and tax exemptions we would have, miracles of all miracles, fewer lobbyists." (Good response too)

The "chicken or the egg", either way we keep coming back to it and it is a source of much pain.

Can we all agree on this?

Jul 10 12:13 PM

[Socialism c...:]

"For example, this problem is responsible for many Americans' longstanding (and misguided) obsession with cutting taxes, which is the primary reason the federal debt has been allowed to explode out of control..."

Um...NO!!! Author is a Big Government ideologue, apparently! I quit reading after this patently false line. It has never been more clear that the problem is out of control SPENDING, not inadequate taxation!! The real problem causing ballooning federal debt is SOCIALIST ENTITLEMENT GOVERNMENT, and the seemingly unending growth of such into every facet of our lives and business!! It has resulted in a large non-productive class, and high penalties for the most productive. And yes, Mr. Wiegand, we DO have an obsession with cutting taxes in the U.S. -- because this nation was founded on a few basic principles, among them the notion of personal property rights! Our Founders thought confiscatory taxation to be anathema to Liberty. Alas that you and your ilk have strayed so far from their philosophy yet still believe yourselves free.

Jul 10 12:56 PM

[Jeff Nielson:]

What a SUPERB essay! I've bookmarked this - to refer to it myself in the future.

For those criticizing the author's tax "heresy", it's important to focus. It's not the poor and middle-class who have been "under-taxed", it's the filthy-rich. 1% of the U.S. population holds more than 35% of ALL wealth - and 55% of ALL stock. And their grip on America's wealth grows stronger every year.

Meanwhile 80% of the U.S. population holds only 15% of total wealth (about 25% less than in other industrialized nations).

Unless Americans believe that 80% of their population are a bunch of losers who DESERVE to get poorer and poorer every year, then the numbers are unequivocal. The very wealthy have been grossly UNDER-TAXED every year - and as a result, they are the ONLY people who have been benefiting from Ronald Reagan's "trickle-down" economics of giving the wealthy a free-ride (at the expense of everyone else).

Jul 10 01:15 PM

[Graham and ...:]

Most people on this site are in the top 1%. Admire your guts (and Weigand's).


On Jul 10 01:15 PM Jeff Nielson wrote:

> What a SUPERB essay! I've bookmarked this - to refer to it myself
> in the future.
>
> For those criticizing the author's tax "heresy", it's important to
> focus. It's not the poor and middle-class who have been "under-taxed",
> it's the filthy-rich. 1% of the U.S. population holds more than 35%
> of ALL wealth - and 55% of ALL stock. And their grip on America's
> wealth grows stronger every year.
>
> Meanwhile 80% of the U.S. population holds only 15% of total wealth
> (about 25% less than in other industrialized nations).
>
> Unless Americans believe that 80% of their population are a bunch
> of losers who DESERVE to get poorer and poorer every year, then the
> numbers are unequivocal. The very wealthy have been grossly UNDER-TAXED
> every year - and as a result, they are the ONLY people who have been
> benefiting from Ronald Reagan's "trickle-down" economics of giving
> the wealthy a free-ride (at the expense of everyone else).

Jul 10 01:19 PM

[Robert A. W...:]

Thanks for yours, and everyone's comments. The references to Reagan's brilliant misdirection regarding his borrow-and-spend policies are mainly used to illustrate how we are wired to under- and over-weight data that contradicts and reinforces our current beliefs, respectively. You act this out perfectly in your reply, which focuses on one of the articles rhetorical points, and not its main idea. You overweighted my "heresy" -- you perceived my article was pro-government and anti-Reagan because I thoughtfully illustrated that what Reagan did and what he said were often 180 degrees apart. Just like lobbyists from banking and finance and health care, just like CNBC, which serves its advertisers and not its viewers, etc. That's the main point of the article. Synthesize the views of Buffet, Grantham, El-Erian and Gross -- they know what they're talking about. We face a rough future, and the sooner we wake up to that fact and start working -- and talking -- like we're all on the same side, the sooner we can move forward. That's what the article is about.


On Jul 10 12:56 PM Socialism cannot compete! wrote:

> "For example, this problem is responsible for many Americans' longstanding
> (and misguided) obsession with cutting taxes, which is the primary
> reason the federal debt has been allowed to explode out of control..."
>
>
> Um...NO!!! Author is a Big Government ideologue, apparently! I quit
> reading after this patently false line. It has never been more clear
> that the problem is out of control SPENDING, not inadequate taxation!!
> The real problem causing ballooning federal debt is SOCIALIST ENTITLEMENT
> GOVERNMENT, and the seemingly unending growth of such into every
> facet of our lives and business!! It has resulted in a large non-productive
> class, and high penalties for the most productive. And yes, Mr. Wiegand,
> we DO have an obsession with cutting taxes in the U.S. -- because
> this nation was founded on a few basic principles, among them the
> notion of personal property rights! Our Founders thought confiscatory
> taxation to be anathema to Liberty. Alas that you and your ilk have
> strayed so far from their philosophy yet still believe yourselves
> free.

Jul 10 01:56 PM

[Robert A. W...:]

Elevate your level of reading up to my level of writing -- Reagan is not blamed for the tech bubble, loose lending standards, etc., it's our tendency to inaccurately weight information ("it's the greatest bull market of all time!") that reinforces what we want to believe -- what we wish to be true -- that's cited as the cause of the bubbles.


On Jul 10 11:05 AM CautiousInvestor wrote:

> "One of the longest-lived and most pernicious problems is one of
> the least discussed — or even recognized. For example, this problem
> is responsible for many Americans' longstanding (and misguided) obsession
> with cutting taxes, which is the primary reason the federal debt
> has been allowed to explode out of control (and California is on
> the brink of bankruptcy). This problem fueled the market’s overvaluation
> in the 1990s, culminating in the infamous tech bubble. It lent a
> significant tailwind to the crazy lending standards and housing bubble
> that propped up the bull-market-that-wasn’t from 2003-2007, and the
> problem is still with us today, preventing us from clearly evaluating
> conditions in the economy and financial markets — particularly how
> we arrived at our current state of affairs
>
> The data are in, folks — $14 trillion of debt and counting — the
> fictional Arthur Laffer “tax-cuts-pay-for-them... narrative has been
> proven false beyond a shadow of a doubt. California tried its own
> version of this with Proposition 13 and they are on the brink of
> bankruptcy.
>
> It’s not unthinkable that our federal government could be in similar
> straights soon. If a household cannot escape this basic common sense,
> then neither can a business or a government — you have to pay your
> bills as they come due. You either raise taxes or cut spending, but
> you have to live with a balanced budget every year. But once Reagan’s
> minions got us believing that a different alchemy existed, hundreds
> of politicians have reinforced that dogma in their hollow campaign
> promises to the point where about a hundred million Americans now
> accept something false as true."
> ______________________...
>
> This author is somewhat paradoxical, capable of attributing all of
> our fiscal ills, the tech bubble and the housing bubble to Reagan,
> which is utter rubbish, while also making informed observations about
> today's market and the likley future.
>
> Like cognition, budgets have two sides: the income side and the spending
> side. Had we been genuinely concerned about federal, state and local
> deficits we would have contained spending, something politicians
> are loathe to do. By nature, politicians are predisposed to spend
> in the mistaken belief that they can allocate resources better than
> either the market or the source of income.
>
> After we cut through the psycho babble, the author makes a couple
> of interesting observations about big business, healthcare and lobbyists.
> He fails to connect the dots, though, and does not state the obvious:
> were government less involved in micro managing various industries
> through complex rules, regulations and tax exemptions we would have,
> miracles of all miracles, fewer lobbyists. Intrusion of the government
> in business is a welcome mat for lobbyists.
>
> I also happen to agree with his outlook for the future and his assessment
> that we are constantly fed a diet of economic pablum by mainstream
> media because of inherent conflicts of interest owing to ownership
> and sponsorship issues. The most egregious example of this is CNBC
> which is owned by General Electric. Not only has GE received $billions
> of TARP funds but it also stands to benefit from development of infrastructure
> and alternative energy.
>

Jul 10 02:00 PM

[whidbey:]

I think you have missed the point completely. The level of spending, not tax cuts, is the issue here. Tax cuts is a means of dis saving for individuals as a nation, but it attractives because our spending habits drive us to distortions and delusions about our needs to live happily an well. Taxes and RR are merely symptoms, not the disease itself.

We as a nation expect that government has means and methods ordinary people can not possess, and can provide vastly more than tax revenues we want to pay . It is federal debt powers that are ruining us. The lack of moral character in Congress helps.


We elect those who will spend to fulfill our wants, and needs. This is the fundamental dilemma of a republican form of government: the few can tax the many into oblivion. We need a hard currency Congress can not deface, spending limits for Congress that start with debt service first and current operations later, and a life style suitable to our productivity. You also got there.

The capitulation you are looking for is coming, but you will not like it even in Topeka.

Jul 10 02:17 PM

[JWhitling:]

Thanks for this moment of clarity! Especially this phrase ..

"Are you all riled up over “news” stories about the shocking involvement of government in business? Especially those Karl Rove psycho-torials in The Wall Street Journal? Well, here’s another little fact you need to digest. Government gets involved in business because business asks them to. That’s right — pop your eyes back in your head and read it again — it’s another undeniable truth. "

It like much of the rest of this article is spot on and worthy of deep remembrance. Thanks much and thanks to the editorial board for bringing this to the surface where I could find it.

Jul 10 02:28 PM

[Robert A. W...:]

I remain flattered that so many high-performance members of the SA community have commented on my article. I respectfully suggest that it's you who are missing the point. The example of tax cuts, the get-government-out-of-... fervor, and the national health care is too expensive argument are merely used as illustrations of cognitive dissonance and consonance. Like many other commenters, you have also taken the bait, overweighted one of your trigger topics (in this case taxes), and read the rest of the article as if it were blaming tax cuts for ills besides our crushing deficits. That's not what I wrote, read it again -- maybe with a blood-pressure cuff on when you get to the stuff you have dissonance towards. The point is that in swallowing the tax-cuts-pay-for-thems... B.S., and that we could have a bull market starting from a trailing P/E of 30 (in 2003), and that leverage could increase to the point that we allowed it in 2007, we were all mis-weighting information -- a serious cognitive flaw that we should be more on the alert for in the current environment. Which is why the Buffet-Gross-Grantham-... assessments are not receiving the weight they deserve right now. Ask yourself: if earnings fall 35% and grow slowly from their new lows, what level on the Dow and S&P imply 7% real returns over the long run going forward? The answer is scary . . .


On Jul 10 02:17 PM whidbey wrote:

> I think you have missed the point completely. The level of spending,
> not tax cuts, is the issue here. Tax cuts is a means of dis saving
> for individuals as a nation, but it attractives because our spending
> habits drive us to distortions and delusions about our needs to live
> happily an well. Taxes and RR are merely symptoms, not the disease
> itself.
>
> We as a nation expect that government has means and methods ordinary
> people can not possess, and can provide vastly more than tax revenues
> we want to pay . It is federal debt powers that are ruining us. The
> lack of moral character in Congress helps.
>
>
> We elect those who will spend to fulfill our wants, and needs. This
> is the fundamental dilemma of a republican form of government: the
> few can tax the many into oblivion. We need a hard currency Congress
> can not deface, spending limits for Congress that start with debt
> service first and current operations later, and a life style suitable
> to our productivity. You also got there.
>
> The capitulation you are looking for is coming, but you will not
> like it even in Topeka.

Jul 10 02:32 PM

[Leftfield:]

Looks to me that until the government and oligopoly own absolutely everything and stamp out even these discussions and elections, we still have a chance and a responsibility.
Voters are to blame for this ultimately. Reagan's deal with the Democrats was supposed to include spending cuts that never materialized. Really, the whole country has played "kick the can" for so long without values that we are at this pathetic pass where big government and Wall St., as crony winners at this game, seem set to own us completely.
A household cannot turn to another party (the taxpayers) generally like government to grab even more for there, can we agree on this, monumental, profligate waste. Similarly, the government will run out of even that option, although Jeff Nielson is absolutely right that the superrich need to be taxed far more.
We are running out of time as those people have no principles other than that they are rich and thus, better than you and I. Bankster bailouts prove this. Vote early and often to exorcise us of the incumbents.

Jul 10 02:33 PM

[Robert A. W...:]

I like it, thanks for participating.


On Jul 10 02:33 PM Leftfield wrote:

> Looks to me that until the government and oligopoly own absolutely
> everything and stamp out even these discussions and elections, we
> still have a chance and a responsibility.
> Voters are to blame for this ultimately. Reagan's deal with the Democrats
> was supposed to include spending cuts that never materialized. Really,
> the whole country has played "kick the can" for so long without values
> that we are at this pathetic pass where big government and Wall St.,
> as crony winners at this game, seem set to own us completely. <br/>A
> household cannot turn to another party (the taxpayers) generally
> like government to grab even more for there, can we agree on this,
> monumental, profligate waste. Similarly, the government will run
> out of even that option, although Jeff Nielson is absolutely right
> that the superrich need to be taxed far more.
> We are running out of time as those people have no principles other
> than that they are rich and thus, better than you and I. Bankster
> bailouts prove this. Vote early and often to exorcise us of the incumbents.

Jul 10 02:34 PM

[rosey99:]

Ballsy play to criticize Saint Ronald here on SA, though the bulk of the comments reflect our collective, and deep, denial.

For those of you who still don't get it: It was grossly irresponsible to cut taxes, mostly for the very wealthy, while increasing spending. Accepting the tax cuts without requisite spending cuts was immoral. Combined with trickle-down - or voodoo - economics it was grossly immoral.

The intellectual gymnastics one has to go through to rationalize tax-cut and spend behavior is frightening to behold. It speaks volumes about who we are, and the thinness of our moral fabric. This mess is now so huge, I don't know that those of us tasked with cleaning it up will be able to do it in a single generation. The budgetary wars to come will not allow for college deferments, though running off to Canada may remain an option. We're all gonna get drafted, and that pisses me off.

Jul 10 02:41 PM

[Robert A. W...:]

I appreciate your participation, but as with other commenters, I must point out that I'm just using the Reagan tax-cuts-pay-for-thems... dogma to illustrate how we'll latch onto something we know really can't be true, but we want to believe it so bad we start using this mis-processed information as a basis for further (irrational) thinking. If I were ever going to write a proper column criticizing Reagan, I'd have to include how David Stockman was villified for pointing out that Reagan was gutting Social Security (with the help of Greenspan) to make the budget deficits look smaller than they really were, and that the real motive behind that move was to please the Forbes/Goldwater crowd, who's always hated entitlement spending. After all, they've got theirs, what do they care about the "average people" who clean their houses, cut their lawns, and cook and serve their dinners in restaurants? You know -- our neighbors and fellow citizens.


On Jul 10 02:41 PM rosey99 wrote:

> Ballsy play to criticize Saint Ronald here on SA, though the bulk
> of the comments reflect our collective, and deep, denial.
>
> For those of you who still don't get it: It was grossly irresponsible
> to cut taxes, mostly for the very wealthy, while increasing spending.
> Accepting the tax cuts without requisite spending cuts was immoral.
> Combined with trickle-down - or voodoo - economics it was grossly
> immoral.
>
> The intellectual gymnastics one has to go through to rationalize
> tax-cut and spend behavior is frightening to behold. It speaks volumes
> about who we are, and the thinness of our moral fabric. This mess
> is now so huge, I don't know that those of us tasked with cleaning
> it up will be able to do it in a single generation. The budgetary
> wars to come will not allow for college deferments, though running
> off to Canada may remain an option. We're all gonna get drafted,
> and that pisses me off.

Jul 10 02:50 PM

[Adam855:]

I think it's admirable of the author to quickly respond to some of the reactions expressed, mainly to point out that some of the examples which elicited strong reactions were off track from the main point.

The point of cognitive dissonance is a great one, since there is a positive side to it as well. Since there is a seller and a buyer in every financial transaction, often the best opportunities happen when you're on the winning side of the cognitive dissonance. This is why contrarian thinking can be so profitable, especially at the extreme ends of the "emotional roller coaster" (beginning and ends of bulls/bears), which is when public emotion is most out of whack with actual reality.

This also illustrates why keeping emotions in check and keeping an open mind by reading opinions that don't agree with your current view is critical to investing.

Jul 10 04:31 PM

[baldskits:]

Dear Cautious: Please read the article again! The author did not say St. Ronnie was responsible for the banks and mortgage failure. He started the borrow and spend strategy which reached its apogee in Cheney's statement " deficits don't matter". He started us on the path to destruction with borrowing, de-regulating, etc.


On Jul 10 11:05 AM CautiousInvestor wrote:

> "One of the longest-lived and most pernicious problems is one of
> the least discussed — or even recognized. For example, this problem
> is responsible for many Americans' longstanding (and misguided) obsession
> with cutting taxes, which is the primary reason the federal debt
> has been allowed to explode out of control (and California is on
> the brink of bankruptcy). This problem fueled the market’s overvaluation
> in the 1990s, culminating in the infamous tech bubble. It lent a
> significant tailwind to the crazy lending standards and housing bubble
> that propped up the bull-market-that-wasn’t from 2003-2007, and the
> problem is still with us today, preventing us from clearly evaluating
> conditions in the economy and financial markets — particularly how
> we arrived at our current state of affairs
>
> The data are in, folks — $14 trillion of debt and counting — the
> fictional Arthur Laffer “tax-cuts-pay-for-them... narrative has been
> proven false beyond a shadow of a doubt. California tried its own
> version of this with Proposition 13 and they are on the brink of
> bankruptcy.
>
> It’s not unthinkable that our federal government could be in similar
> straights soon. If a household cannot escape this basic common sense,
> then neither can a business or a government — you have to pay your
> bills as they come due. You either raise taxes or cut spending, but
> you have to live with a balanced budget every year. But once Reagan’s
> minions got us believing that a different alchemy existed, hundreds
> of politicians have reinforced that dogma in their hollow campaign
> promises to the point where about a hundred million Americans now
> accept something false as true."
> ______________________...
>
> This author is somewhat paradoxical, capable of attributing all of
> our fiscal ills, the tech bubble and the housing bubble to Reagan,
> which is utter rubbish, while also making informed observations about
> today's market and the likley future.
>
> Like cognition, budgets have two sides: the income side and the spending
> side. Had we been genuinely concerned about federal, state and local
> deficits we would have contained spending, something politicians
> are loathe to do. By nature, politicians are predisposed to spend
> in the mistaken belief that they can allocate resources better than
> either the market or the source of income.
>
> After we cut through the psycho babble, the author makes a couple
> of interesting observations about big business, healthcare and lobbyists.
> He fails to connect the dots, though, and does not state the obvious:
> were government less involved in micro managing various industries
> through complex rules, regulations and tax exemptions we would have,
> miracles of all miracles, fewer lobbyists. Intrusion of the government
> in business is a welcome mat for lobbyists.
>
> I also happen to agree with his outlook for the future and his assessment
> that we are constantly fed a diet of economic pablum by mainstream
> media because of inherent conflicts of interest owing to ownership
> and sponsorship issues. The most egregious example of this is CNBC
> which is owned by General Electric. Not only has GE received $billions
> of TARP funds but it also stands to benefit from development of infrastructure
> and alternative energy.
>

Jul 10 04:32 PM

[ERCaptain:]

A little humility in the approach would make this article more digestible. I suspect I would like Professor Weigand in real life, but this article was too much.

I guess if we disagree with any of his points we are suffering from cognitive dissonance. Brilliant! Thus the article and professor are beyond critique.

Where do we begin? Macro assumptions? His read on market sentiment? Health care? His assertion that CNBS and Fox have "carefully-scripted narrative" (there must be a plethora co-conspiratorial analysts coming on those shows)?

The professor puts himself in opposition to the recently released paper of the San Francisco reserve regarding the value of tax cuts.

As long as we are going after Keynesian, why not go back to Roosevelt? "Ronald Reagan is the inventor of borrow-and-spend government." Really? I thought Roosevelt gave us a primer.
I have found it interesting that there has been very little recent main stream criticism of Obama's modern application of keynesian economics, while Reagan took a beating a la "Voodoo Economics".

One would imagine that Professor Weigand would have more followers after this insightful post. Imagine a professor still taking an opportunity to poke at Reagan. Isn't it innovative thought? (Like Rob I am being rhetorical!) I am not sure I would want to pay the good professor for credit hours sprinkled with that level of insight.

Jul 10 05:24 PM

[Robert A. W...:]

Thanks for your thoughts, ERCaptain, I appreciate your skepticism, and offer proof by counterexample. Here's what 3 credit hours buys you in my Applied Portfolio Management program: www.washburn/edu/sobu/apm. On the "Stock Reports" tab, bear in mind that those stock research reports are written by novice 22-year old undergraduates. Read one or two as time allows and get back to me on the level of quality you see. Make particular note of their spreadsheet modeling and valuation skills. Good news -- I've still got a few spots available in the Fall 2009 class. And I agree that we'd like each other in person. But I'm not going to give up on getting you to like me in writing, either.

Regarding Reagan, the point is that in his role as the Great Communicator, he pioneered the use of outrageous dogma (ketchup is a vegetable, tax cuts pay for themselves) that many have now seized upon and bombard us with constantly. Regarding Roosevelt, he put the Kenyesian strategy into play appropriately -- to spark an economy out of depression. Reagan, Bush Sr., Clinton and Bush Jr. all had the chance to make it right by paying down the deficits, or dramatically cutting spending, during times of prosperity. They can always veto those budgets, you know. But, as one of the astute commenters above observed, "we've played kick the can with values for so long now" that we just accept our daily dose of dogma as if it's our just punishment. Breaking this cycle begins with demanding a more engaging, dignified dialogue.

On Jul 10 05:24 PM ERCaptain wrote:

> A little humility in the approach would make this article more digestible.
> I suspect I would like Professor Weigand in real life, but this article
> was too much.
>
> I guess if we disagree with any of his points we are suffering from
> cognitive dissonance. Brilliant! Thus the article and professor
> are beyond critique.
>
> Where do we begin? Macro assumptions? His read on market sentiment?
> Health care? His assertion that CNBS and Fox have "carefully-scripted
> narrative" (there must be a plethora co-conspiratorial analysts coming
> on those shows)?
>
> The professor puts himself in opposition to the recently released
> paper of the San Francisco reserve regarding the value of tax cuts.
>
>
> As long as we are going after Keynesian, why not go back to Roosevelt?
> "Ronald Reagan is the inventor of borrow-and-spend government."
> Really? I thought Roosevelt gave us a primer.
> I have found it interesting that there has been very little recent
> main stream criticism of Obama's modern application of keynesian
> economics, while Reagan took a beating a la "Voodoo Economics".
>
>
> One would imagine that Professor Weigand would have more followers
> after this insightful post. Imagine a professor still taking an
> opportunity to poke at Reagan. Isn't it innovative thought? (Like
> Rob I am being rhetorical!) I am not sure I would want to pay the
> good professor for credit hours sprinkled with that level of insight.

Jul 10 05:51 PM

[Alphameister:]

I don't know exactly what the curve looks like, but it is intuitively obvious to me that at some parts of the curve, tax cuts pay for themselves (going from 90% to 60%, for example), while at other points they do not (going from 20% to zero being quite obvious). I, too, felt the arrogance of the article was quite off-putting, maybe because, like some of the above commenters, I saw no shortage of dogma and cognitive dissonance of a different stripe. Reagan was at least right that big government is the problem, not the solution. And it is clear that Weigand is on board the entitlement society which holds that my health problem entitles me to steal the fruits of your labor (but only indirectly through the arm of government; can't have muggers leaving out the middle man). I'll pass on your class until your arrogance is matched by insight.

Jul 10 07:25 PM

[stopwhining:]

Herein lies the ultimate question. Is a person entitled to keep what he/she earns since gains are ultimately a product of superior efforts, or is success equally a product of luck, timing, and surroundings? If the former, then taxes should be low and spending reduced along with it, if the latter, then everyone should get over themselves and chip in for the greater good.

We all like to believe we rise or fall on our steam, but based on those I've met in this world, I would only ascribe 50% of any given outcome (on average) to the underlying persona.

Bring back the estate tax, raise taxes on the wealthy, lower gov't spending across the board, nationalize healthcare, and provide economic incentives to help make the U.S. energy independent. These are the keys to our long term success, but I have no confidence that they will be undertaken.

Jul 10 07:52 PM

[THofler:]

The author clearly doesn't have a good understanding of reasonable P/E ratios in this environment. As Doug Kass (SeaBreeze Partners) said when he called the bottom on March 5, "you don't invest for the future in a severe recession by looking at trough earnings." We're in the trough. We won't be here for a very long time.

Of course, you can make the point that "this time it is different,... really!" I know things are scary, especially with a new socialist government, but the U.S economy will recover.

Second point: Pros like Ben Graham or Robert Shiller don't take trailing 12 month earnings very seriously. They look at earnings averaged over the last 3 years or as long as 10 years.

Third point: Everyone gets exercised (congnitive dissonance!) over the the current P/E ratio of the S&P 500. If you read some recent postings at the S&P web site, they evaluate those earnings in exactly the same way they would for a single corporation with 500 divisions. This is complete nonsense. The SPY or IVV is a portfolio of 500 companies, NOT a single corp. with 500 divs.

The gigantic losses of AIG included in the S&P500 has had a huge downdraft on those aggregate earnings, & the stock should be valued near zero. But that does NOT have a huge effect on a well diversified portfolio.

This article is a bunch of misleading data tarted up with a lot of babble & liberal cognitive consonance.

Jul 10 09:14 PM

[Henry Buttal:]

I found my opinion of this article very much following your charming graph on the reactionary aspects of investing... enthusiasm when I saw the recommendation from SA editors, exhiliration when I saw the title on the page, euphoria when I read your first intriguing line in bold letters - well, you know the rest.

I think there might be value in the opinion, but the overblown rhetoric and length obscure the value, and causes me to suggest you should measure twice, cut once in the next article.

Jul 10 09:38 PM

[awake09:]

Just to demonstrate my "tolerance" bonafides, I continue to read your anti-rich diatribes. Personally, I am not looking forward to the US turning into South Canada.

In the interest of disclosure, I make $70,000 a year. And none of it comes from sales to the socialist north.


On Jul 10 01:15 PM Jeff Nielson wrote:

> What a SUPERB essay! I've bookmarked this - to refer to it myself
> in the future.
>
> For those criticizing the author's tax "heresy", it's important to
> focus. It's not the poor and middle-class who have been "under-taxed",
> it's the filthy-rich. 1% of the U.S. population holds more than 35%
> of ALL wealth - and 55% of ALL stock. And their grip on America's
> wealth grows stronger every year.
>
> Meanwhile 80% of the U.S. population holds only 15% of total wealth
> (about 25% less than in other industrialized nations).
>
> Unless Americans believe that 80% of their population are a bunch
> of losers who DESERVE to get poorer and poorer every year, then the
> numbers are unequivocal. The very wealthy have been grossly UNDER-TAXED
> every year - and as a result, they are the ONLY people who have been
> benefiting from Ronald Reagan's "trickle-down" economics of giving
> the wealthy a free-ride (at the expense of everyone else).

Jul 10 09:55 PM

[Hot Richard:]

Spending = the problem.

Jeesh...

Jul 10 11:04 PM

[Dan in mpls:]

Granted, a lot of great points were made in the article but there can be zero doubt that the author is a Democrat <G>. The 14 trillion dollar debt was created by government spending. Every single one of those dollars had to be authorized by a Congress that knew how much money was comming in. I would have been far less congnitively dissonant if he'd have ripped on at least one Democrat.

Jul 10 11:35 PM

[Anandakos:]

Jeff,

"Unless Americans believe that 80% of their population are a bunch of losers who DESERVE to get poorer and poorer every year..."

Well I think that most of the posters here DO believe that. In my heart of hearts I hope they hear Marley's chains clanking before it's too late.

On Jul 10 01:15 PM Jeff Nielson wrote:

> What a SUPERB essay! I've bookmarked this - to refer to it myself
> in the future.
>
> For those criticizing the author's tax "heresy", it's important to
> focus. It's not the poor and middle-class who have been "under-taxed",
> it's the filthy-rich. 1% of the U.S. population holds more than 35%
> of ALL wealth - and 55% of ALL stock. And their grip on America's
> wealth grows stronger every year.
>
> Meanwhile 80% of the U.S. population holds only 15% of total wealth
> (about 25% less than in other industrialized nations).
>
> Unless Americans believe that 80% of their population are a bunch
> of losers who DESERVE to get poorer and poorer every year, then the
> numbers are unequivocal. The very wealthy have been grossly UNDER-TAXED
> every year - and as a result, they are the ONLY people who have been
> benefiting from Ronald Reagan's "trickle-down" economics of giving
> the wealthy a free-ride (at the expense of everyone else).

Jul 11 12:15 AM

[Anandakos:]

StopWhining,

Right on. We do need to lower stupid spending -- Empire and agri-business subsidies can play hell with the fiscal balance sheet. But we also need to steepen the tax curve, in particular by getting rid of personal deductions and replacing them across the board with refundable credits.

Deductions benefit high bracket payers much more than do credits, because they lop off the "last dollar" on AGI which is taxed the highest. Credits, especially if refundable, benefit everyone equally; a $3,000 tuition credit provides the same value to a poor person as it does to a rich one. One could even say they yield a greater value since the three thousand are a higher proportion of the poor person's total pool of dollars, allowing for proportionately greater freeing of discretionary dollars. This is especially true when they are refundable.

Since high income people typically have so many ways in which to transform their income into "capital gains" taxed at a very much lower rate, the reduction in the value of tax exclusions by substituting credits for deductions seems eminently reasonable and justified to me.

Overall I agree with your assessment of the relative value of inherent ability and circumstance in determining income. How can it not be obvious that a child born at the same time and with the same intellectual skills as Bill Gates in North Korea he would not now be the rich person he is. Obviously that's an extreme example, but the same would probably be true had he been born black in Tuskegee, Alabama.

I have no doubt that in that case he would have been a successful black entrepreneur, but he would not have founded Micro$oft. That required access to Seattle Prep's nearly unique in its day computer lab.

On Jul 10 07:52 PM stopwhining wrote:

> Herein lies the ultimate question. Is a person entitled to keep
> what he/she earns since gains are ultimately a product of superior
> efforts, or is success equally a product of luck, timing, and surroundings?
> If the former, then taxes should be low and spending reduced along
> with it, if the latter, then everyone should get over themselves
> and chip in for the greater good.
>
> We all like to believe we rise or fall on our steam, but based on
> those I've met in this world, I would only ascribe 50% of any given
> outcome (on average) to the underlying persona.
>
> Bring back the estate tax, raise taxes on the wealthy, lower gov't
> spending across the board, nationalize healthcare, and provide economic
> incentives to help make the U.S. energy independent. These are
> the keys to our long term success, but I have no confidence that
> they will be undertaken.

Jul 11 12:32 AM

[Anandakos:]

Rosey,

Not just drafted, inducted for the duration..... There will be no cease fire or peace accord in this economic disaster. The US is Napoleon's army in Russia; we didn't take Moscow, it's FRICKING cold, the food's gone, and it's 1500 klicks back to gay Paree.

The saddest thing about all this is the degree to which the flim-flam artists on Wall Street have snookered so many otherwise intelligent people in Congress into carrying their water in this grand Shell Game.

I'm not excluding either party from that assessment; you have to be pretty darn smart to get into Congress these days. I even include Michelle Bachmann; she's not dumb, just ill-educated.

I may take a nolo contendere on James Inhofe, though; the bell curve pretty much works on any group greater than 35. Even though the median is probably about 120 in the Senate, there have to be 1.4% (one or two people in this case) who are two normal distributions on the dumb side. One of those would definitely be Inhofe.

On Jul 10 02:41 PM rosey99 wrote:

> Ballsy play to criticize Saint Ronald here on SA, though the bulk
> of the comments reflect our collective, and deep, denial.
>
> For those of you who still don't get it: It was grossly irresponsible
> to cut taxes, mostly for the very wealthy, while increasing spending.
> Accepting the tax cuts without requisite spending cuts was immoral.
> Combined with trickle-down - or voodoo - economics it was grossly
> immoral.
>
> The intellectual gymnastics one has to go through to rationalize
> tax-cut and spend behavior is frightening to behold. It speaks volumes
> about who we are, and the thinness of our moral fabric. This mess
> is now so huge, I don't know that those of us tasked with cleaning
> it up will be able to do it in a single generation. The budgetary
> wars to come will not allow for college deferments, though running
> off to Canada may remain an option. We're all gonna get drafted,
> and that pisses me off.

Jul 11 12:48 AM

[Robert A. W...:]

Regarding my insight into market P/E ratios:
www.iijournals.com/doi...

www.iijournals.com/doi...

On Jul 10 09:14 PM THofler wrote:

> The author clearly doesn't have a good understanding of reasonable
> P/E ratios in this environment. As Doug Kass (SeaBreeze Partners)
> said when he called the bottom on March 5, "you don't invest for
> the future in a severe recession by looking at trough earnings."
> We're in the trough. We won't be here for a very long time.
>
> Of course, you can make the point that "this time it is different,...
> really!" I know things are scary, especially with a new socialist
> government, but the U.S economy will recover.
>
> Second point: Pros like Ben Graham or Robert Shiller don't take
> trailing 12 month earnings very seriously. They look at earnings
> averaged over the last 3 years or as long as 10 years.
>
> Third point: Everyone gets exercised (congnitive dissonance!) over
> the the current P/E ratio of the S&amp;P 500. If you read some recent
> postings at the S&amp;P web site, they evaluate those earnings in
> exactly the same way they would for a single corporation with 500
> divisions. This is complete nonsense. The SPY or IVV is a portfolio
> of 500 companies, NOT a single corp. with 500 divs.
>
> The gigantic losses of AIG included in the S&amp;P500 has had a huge
> downdraft on those aggregate earnings, &amp; the stock should be
> valued near zero. But that does NOT have a huge effect on a well
> diversified portfolio.
>
> This article is a bunch of misleading data tarted up with a lot of
> babble &amp; liberal cognitive consonance.

Jul 11 07:14 AM

[Liqal:]

"Government gets involved in business because business asks them to. That’s right — pop your eyes back in your head and read it again — it’s another undeniable truth. Businesses in the U.S. spend billions every year begging politicians to intervene on their behalf"


Every now and then someone hits it right out of the park.
Excellent !

Jul 11 07:16 AM

[sunnsea:]

Roosevelt raised taxes on the rich to 90% to help pay for WWII.


On Jul 10 05:24 PM ERCaptain wrote:

> A little humility in the approach would make this article more digestible.
> I suspect I would like Professor Weigand in real life, but this article
> was too much.
>
> I guess if we disagree with any of his points we are suffering from
> cognitive dissonance. Brilliant! Thus the article and professor are
> beyond critique.
>
> Where do we begin? Macro assumptions? His read on market sentiment?
> Health care? His assertion that CNBS and Fox have "carefully-scripted
> narrative" (there must be a plethora co-conspiratorial analysts coming
> on those shows)?
>
> The professor puts himself in opposition to the recently released
> paper of the San Francisco reserve regarding the value of tax cuts.
>
>
> As long as we are going after Keynesian, why not go back to Roosevelt?
> "Ronald Reagan is the inventor of borrow-and-spend government." Really?
> I thought Roosevelt gave us a primer.
> I have found it interesting that there has been very little recent
> main stream criticism of Obama's modern application of keynesian
> economics, while Reagan took a beating a la "Voodoo Economics".
>
>
> One would imagine that Professor Weigand would have more followers
> after this insightful post. Imagine a professor still taking an opportunity
> to poke at Reagan. Isn't it innovative thought? (Like Rob I am being
> rhetorical!) I am not sure I would want to pay the good professor
> for credit hours sprinkled with that level of insight.

Jul 11 08:19 AM

[User 75350:]

Great article. Thanks!

Jul 11 08:58 AM

[Robert A. W...:]

And stock returns and corporate profitability were strong for decades afterwards!


On Jul 11 08:19 AM Sunnsea wrote:

> Roosevelt raised taxes on the rich to 90% to help pay for WWII.<br/>

Jul 11 09:08 AM

[Ferdinand E...:]

Gorgeous comment about Ronald Reagan. As a matter of fact the 'Reagan Revolution' that all the Republican gentlemen who wanted to be president talked about was Reagan's plunging the US into debt with the crazy borrowing of his government.

Jul 11 09:35 AM

[nukldrager:]

Great article, and comments!
Not sure what a world full of hyper rational decision makers would look like though. Seems like more cognitive dissonance there.
But... fast money, fast food... what can we expect? It's still a Barnum and Bailey world.

Jul 11 09:37 AM

[woollyB:]

Are we talking about the same Buffett who wrote, last October, the New York Times op-ed piece titled "Buy American. I am." telling us that it was time to go long on stocks? I suppose it's possible that he has "realistic expectations" now, as the author suggests, but I wouldn't say he's been at the forefront of correct thinking.

Jul 11 09:46 AM

[jdl51:]

Every bit of that $14 trillion debt was authorized by Congress and signed into law by the past three republican presidents. And the administration with the worst borrow and spend record? GWB and the republican congress from 2001 to 2007. They've spent more of the taxpayers' money on the most wasteful projects since the LBJ days that conservatives blame so much for the welfare state. When a supposedly pro free market party suddenly says it's wrong to bargain with drug companies on price, there's something terribly wrong. The Bush administration more than doubled our national debt during its tenure, yet the republicans still want to lay claim to fiscal responsibility. His last proposed budget had a $1.2 trillion deficit not including Iraq and Afghanistan among other things in the "off budget" basket. The situation isn't going to change overnight, regardless of the suddenly fiscally responsible republicans' calls for an immediate balanced budget now that a democrat is in the WH. Their solution is to cut the few social programs for the poor and ignoring the huge corporate welfare spending bill, and they don't address the fact that without cutting military spending and social security, there is nothing that would make up for the huge deficits they've run up without raising taxes. The Reagan "deficits don't matter" party is over and it's time to pay the piper.


On Jul 10 11:35 PM Dan in mpls wrote:

> Granted, a lot of great points were made in the article but there
> can be zero doubt that the author is a Democrat <G>. The 14 trillion
> dollar debt was created by government spending. Every single one
> of those dollars had to be authorized by a Congress that knew how
> much money was comming in. I would have been far less congnitively
> dissonant if he'd have ripped on at least one Democrat.

Jul 11 09:51 AM

[ronslim:]

In order to castrate the competition or force the the use of their product are the main reasons bsn beg for intervention. That's why we had a constitution. Yes I said had.


On Jul 11 07:16 AM Liqal wrote:

> "Government gets involved in business because business asks them
> to. That’s right — pop your eyes back in your head and read it again
> — it’s another undeniable truth. Businesses in the U.S. spend billions
> every year begging politicians to intervene on their behalf"
>
>
> Every now and then someone hits it right out of the park.
> Excellent !

Jul 11 09:55 AM

[Nyetnichevo:]

CNBC I agree is fully compromised. GE has a debt problem akin to the US Federal deficit. Some of the most egregious problems stem from a myriad of issues: excessive compensation at the corporate and govt. levels, business using the power of lobby to corrupt the political system in their favor, a health care system that is broken and getting worse, and most importantly, the disenfranchisement of the American worker. What we really need is a good old fashioned Boston Tea Party to throw out the bums in big business and government who never seem to represent the people they lie to while getting themselves elected, then spend their days getting wealthy off our backs. What the people want/need and deserve are freedom from tyranny, the right to work and have a safe home, health care that is affordable, and a government and business that serves us and not exclusively themselves. I am also in favor of public hangings for lousy scoundrels like Madoff, the Enron crowd, Angelo Mazzillo, and all the other cretinous villians who destroyed their own companies from within. These are the folks who have destroyed capitalism and they were fully aided and abetted by the powers in Washington who are also responsible for creating a massive debt bomb in waiting that will sink our great country. Of course, this theory was put forth by Machiavelli who told us quite clearly that absolute power breeds absolute corruption. Wall St. and DC are both blinded by their own greed and power. Another bad sign of the of the times is the daily presence of the Federal Reserve on TV . Since when was that ever relevant? Their mere presence indicates to me that they are lying and covering up for massive shortfalls. Created by the misguided policies of Sir Alan Greenspan, the maestro of the American collapse. And let's not forget all the good folks at Goldman Sachs, Hank Paulson who went before the world to beg Congress for hundreds of billions of dollars to refinance the same criminal banking industry that made the mess the mess to begin with.

Jul 11 10:04 AM

[Tedspick:]

Lets see now, who was in the White House during the infamous "Guns and Butter" time when we had the "Great Society" as well as that lovely war in Vietnam? And didn't Johnson come BEFORE the infamous Reagan? How was all that paid for? Did the democratic congress balance the budget then?

Another question centers on the measured increase in government revenues that accompanied historic tax cuts. Nobody in their right mind thinks that we can cut taxes and at the same time indulge in massive spending increases (Reagan purchased an end to the cold war doing that) - how about cutting taxes AND holding the line on spending at the same time? Thats when you get the best of both worlds.

Jul 11 10:12 AM

[Canadian In...:]

Wow! Talk about cognitive disonance!


On Jul 10 12:56 PM Socialism cannot compete! wrote:

> "For example, this problem is responsible for many Americans' longstanding
> (and misguided) obsession with cutting taxes, which is the primary
> reason the federal debt has been allowed to explode out of control..."
>
>
> Um...NO!!! Author is a Big Government ideologue, apparently! I quit
> reading after this patently false line. It has never been more clear
> that the problem is out of control SPENDING, not inadequate taxation!!
> The real problem causing ballooning federal debt is SOCIALIST ENTITLEMENT
> GOVERNMENT, and the seemingly unending growth of such into every
> facet of our lives and business!! It has resulted in a large non-productive
> class, and high penalties for the most productive. And yes, Mr. Wiegand,
> we DO have an obsession with cutting taxes in the U.S. -- because
> this nation was founded on a few basic principles, among them the
> notion of personal property rights! Our Founders thought confiscatory
> taxation to be anathema to Liberty. Alas that you and your ilk have
> strayed so far from their philosophy yet still believe yourselves
> free.

Jul 11 11:02 AM

[dcb:]

good article:
I think the tax issue is mainly because government uses the revenue it gets to dole out favors to special interests and note serve the better good. If you believe this (which I think the evidence suggests) better for me to keep my money. this additionally touches on aspects in your article and how special interests spend and lobby for more favors.

the fault of goverment was spending money they do not have. I do not know how to get over this additction. those in elected office know you stand a better chance of getting elected giving things away than than not. They continue to buy eletions with an ever smaller pie, the public is at the bottom of this pie, with special interests at the top.

You could have an affordable private system, but every time the issue comes around industry guts the power to make it affordable. As a physician my standard of living goes down, while profits go up for these people. I would think you want to spend the money on taking care of people, not in increasing corporate profits. since they have the lobby money that is what happens.

Jul 11 11:11 AM

[derryl:]

Mr. Weigand's central observation is clearly true: ideological bias skews our perceptions of reality and the economic opinions that arise from those skewed perceptions.

I liked RR but it is a simple fact that he took the US from being the world's largest creditor nation to its largest debtor. The arithmetic of debt is simple: if you spend more than you earn you get into debt. The only way out of debt is to spend less than you earn so you can pay off your debt. Debt is consumption of your future brought into your present. Repayment of debt is reducing your present consumption to pay off your past excesses.

Everybody is happy consuming their future via debt. Nobody is happy reducing their present standard of living to repay debt. As California shows, voters refuse to accept government programs to repay public debt. Voters refuse to acknowledge the arithmetic of debt. The state is fiscally bankrupt but voters will not accept any tax increases or spending cuts to correct the deficits.

If this isn't cognitive dissonance I don't know what is. Voodoo economics has been adopted en masse and has morphed into magic fiscal arithmetic where it is all gain and no pain.

Trickle down economics was supported by reporting national income in aggregate (GDP growth) without subtracting the increasing public and private debt and without showing how all the income growth was concentrated in corporate profits and financial returns while hundreds of millions of workers suffered stagnant or declining incomes. This was papered over for 2 decades by expanding household debt, but increasing debt is fiscally unsustainable for households and countries alike. The financial and corporate profits likewise were not sustainable because the hundreds of millions of consumers whose borrowing and buying fueled the profits could not continue spending more than they earn.

Unless you think we can return to mass borrowing to restore spending more than we earn, then Mr. Weigand's conclusion is correct that stocks are 'objectively' overvalued based on forward PE estimates in our environment of debt paydowns. On the other hand there are trillions of dollars in the hands of the not presently indebted beneficiaries of voodoo economics and this investable money is seeking a rate of return, anywhere.

30:1 PE may be the new normal in this environment. A 'correction' is not inevitable. I am not shilling for the stock market. Just making an observation.

Jul 11 11:25 AM

[Joyful Alte...:]

The top tax bracket under Eisenhower was 90%, too. It tends to cut down those $10,000,000 CEO paychecks because there's no point to them.

Jul 11 11:38 AM

[shootpar2001:]

What a crock of S**T.
No mention that 'the wealthy' pay all the taxes!!!!!!!!
.......and you do not have to make the 'magical' $250,000 to
pay more than your fair share. Where is this 'magical' revenue source going to come from?
You see... all that lost wealth you are complaining about came from this same group that you want to tax some more. They have tax loss' for years to come; thus rate increases are not going to solve the overspending problem anytime soon (years).
Now that the 'magical' stimulus is not working, and the Blame Bush
strategy is wearing thin; let's blame someone else.
In review; get a fricking clue.........!!!!!!!!!



On Jul 10 01:15 PM Jeff Nielson wrote:

> What a SUPERB essay! I've bookmarked this - to refer to it myself
> in the future.
>
> For those criticizing the author's tax "heresy", it's important to
> focus. It's not the poor and middle-class who have been "under-taxed",
> it's the filthy-rich. 1% of the U.S. population holds more than 35%
> of ALL wealth - and 55% of ALL stock. And their grip on America's
> wealth grows stronger every year.
>
> Meanwhile 80% of the U.S. population holds only 15% of total wealth
> (about 25% less than in other industrialized nations).
>
> Unless Americans believe that 80% of their population are a bunch
> of losers who DESERVE to get poorer and poorer every year, then the
> numbers are unequivocal. The very wealthy have been grossly UNDER-TAXED
> every year - and as a result, they are the ONLY people who have been
> benefiting from Ronald Reagan's "trickle-down" economics of giving
> the wealthy a free-ride (at the expense of everyone else).

Jul 11 11:41 AM

[Duude:]

Wow! Talk about a disconnect! What's threatening our future isn't tax cuts, its too much government. We build social programs to help people. But the medicine we designed does anything but help. A case in point, I offer up this input from Star Parker.

Back on Uncle Sam's plantation
Star Parker - Syndicated Columnist - 2/9/2009 8:00:00 AM

Six years ago I wrote a book called Uncle Sam's Plantation . I wrote the book to tell my own story of what I saw living inside the welfare state and my own transformation out of it.
I said in that book that indeed there are two Americas -- a poor America on socialism and a wealthy America on capitalism.

I talked about government programs like Temporary Assistance for Needy Families (TANF), Job Opportunities and Basic Skills Training (JOBS), Emergency Assistance to Needy Families with Children (EANF), Section 8 Housing, and Food Stamps.


A vast sea of perhaps well-intentioned government programs, all initially set into motion in the 1960s, that were going to lift the nation's poor out of poverty.

A benevolent Uncle Sam welcomed mostly poor black Americans onto the government plantation. Those who accepted the invitation switched mindsets from "How do I take care of myself?" to "What do I have to do to stay on the plantation?"

Instead of solving economic problems, government welfare socialism created monstrous moral and spiritual problems -- the kind of problems that are inevitable when individuals turn responsibility for their lives over to others.

The legacy of American socialism is our blighted inner cities, dysfunctional inner city schools, and broken black families.

Through God's grace, I found my way out. It was then that I understood what freedom meant and how great this country is.

I had the privilege of working on welfare reform in 1996, passed by a Republican Congress and signed 50 percent.

I thought we were on the road to moving socialism out of our poor black communities and replacing it with wealth-producing American capitalism.

But, incredibly, we are going in the opposite direction.

Instead of poor America on socialism becoming more like rich American on capitalism, rich America on capitalism is becoming like poor America on socialism.

Uncle Sam has welcomed our banks onto the plantation and they have said, "Thank you, Suh."

Now, instead of thinking about what creative things need to be done to serve customers . .. . they are thinking about what they have to tell Massah in order to get their cash.

There is some kind of irony that this is all happening under our first black president on the 200th anniversary of the birthday of Abraham Lincoln.

Worse, socialism seems to be the element of our new young president. And maybe even more troubling, our corporate executives seem happy to move onto the plantation.

In an op-ed on the opinion page of the Washington Post, Mr. Obama is clear that the goal of his trillion dollar spending plan is much more than short term economic stimulus.

"This plan is more than a prescription for short-term spending -- it's a strategy for America 's long-term growth and opportunity in areas such as renewable energy, healthcare, and education."

Perhaps more incredibly, Obama seems to think that government taking over an economy is a new idea. Or that massive growth in government can take place "with unprecedented transparency and accountability."

Yes, sir, we heard it from Jimmy Carter when he created the Department of Energy, the Synfuels Corporation, and the Department of Education.

Or how about the Economic Opportunity Act of 1964 -- The War on Poverty -- which President Johnson said "...does not merely expand old programs or improve what is already being done. It charts a new course. It strikes at the causes, not just the consequences of poverty."

Trillions of dollars later, black poverty is the same. But black families are not, with triple the incidence of single-parent homes and out-of-wedlock births.

It's not complicated. Americans can accept Barack Obama's invitation to move onto the plantation. Or they can choose personal responsibility and freedom.

Does anyone really need to think about what the choice should be?

Jul 11 11:53 AM

[shootpar2001:]

also remember that Johnson raided social security to fund Vietnam and you see how terrible this guy really was. By a wide margin the worst president we ever had. The liberals ate it up..... why....he blinded them with 'so-called' civil rights movement. What a crock of SH*T, if true civil rights were instituted; why is the cry for reparations still being heard?


On Jul 11 10:12 AM Tedspick wrote:

> Lets see now, who was in the White House during the infamous "Guns
> and Butter" time when we had the "Great Society" as well as that
> lovely war in Vietnam? And didn't Johnson come BEFORE the infamous
> Reagan? How was all that paid for? Did the democratic congress balance
> the budget then?
>
> Another question centers on the measured increase in government revenues
> that accompanied historic tax cuts. Nobody in their right mind thinks
> that we can cut taxes and at the same time indulge in massive spending
> increases (Reagan purchased an end to the cold war doing that) -
> how about cutting taxes AND holding the line on spending at the same
> time? Thats when you get the best of both worlds.

Jul 11 11:56 AM

[Jimbo:]

Down here in Florida we have a saying, which may also be popular in other states,:"No person or their property is safe as long as the legislature is in session". Let us perform a thought experiment in honor of Mr. Weigand, Congress suddenly decides to follow an annual balanced budget and raises taxes, any taxes, to meet that goal. What does Mr. Weigand think that would do to the economy? I have read quite a few comments that Ronald Reagan caused the killer debt but my only recollection of Reagan was that he wanted to:"Starve the beast", meaning he wanted to shut off funds for what he believed were boondoggles.Unfortunat... he did not have control of both houses of Congress consistently and Republicans, as well as Democrats are chronically infected with the appropriator disease. I would support Mr. Weigand's tax ideas but only if we had a serious balanced budget requirement. Vice President Biden insists it is patriotic to pay taxes, but too many appointees in the current administration seem to be quite unpatriotic. Alexis D'Tocqueville pointed out this tax/appropriate weakness in the democracy experiment in Democracy in America about 1830.

Jul 11 11:56 AM

[The Greates...:]

I too have stated that the Reaganomic trickle down effect compiled with the less government is good simple amounted to business being de-regulated and allowed to close factories here and open overseas for pennies on the dollar for labor. Great for the bottom-line of the corporations, not good for the over all effect on America. The great job exodus through out the 1980’s where the changes seemed small then are now having a huge effect today. We simply became a importing country instead of a exporting country, on goods and jobs. Now coupled with the too big to fail atmosphere, the large impact of the lasting effects of the crude oil bubble driving up virtually the cost of everything from food to manufacturing.
The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today.
Interesting article.
BTW you can not spend your way out of debt, it just will not work.

Jul 11 12:23 PM

[Dorlan H. F...:]

This is one of the most rational arguments I have read. I agree with a lot of what you have to say. I don't give much credence to technical analysis. As far as I am concern technical analysis is a road map which shows from whence you came but not how to get anywhere in the future.

I am convinced that what drives markets are irrational people who are driven by greed and fear.

Adhering to dogmas has been and will be the downfall of any political system. It was the rigid constraints of socialism that caused it to fail. The rigid constraints of right wing capitalism will cause it to fail also. The development of mankind and nations is a dynamic process where the only constant is change. The secret of the success of Capitalist/Democratic countries is the system which allowed for change. And has Joseph Schumpter observed Capitalism allowed for a process of creative destruction. In other words under capitalism nothing stays the same always. And this applies to fiscal and monetary policies. Any dogma which only trumpet the cutting of taxes is bound to fail!

These right wing capitalist who put themselves out as leaders are really followers of people, who dont even know what is good for them. These leaders are enablers of individual destructive desires.

People more often than not do not know what is good for them. How many of us are happy when it rains or snows? We call that bad weather! But it is this bad weather which provides water which is the source for life. Without a constant dose of "bad weather" we would all be dead.It is the same emotion which cause people to call the source of life bad that influence peoples tax and investment policies.


I

Jul 11 12:31 PM

[Swashbuckler:]

Let's lay today's problems on Reagan. If you can't do anything else, you can always teach. If you can't teach anything else, you can always teach school.

Jul 11 12:44 PM

[TAS:]

This is worse than the dregs posing as intellectuals on the Huffington Post.

Sorry, you can't fool all the people all the time. November, 2010, can't come fast enough.

Jul 11 01:23 PM

[ebworthen:]

You're right about the 50-60% drop coming soon and the mess we've created.

Unfortunately, you are smoking the hookah of politics.

We do this because we are gibbering monkeys, not becuase monkey liberal or monkey conservative is holding the coconuts at any one time.

No government formulae, conservative or liberal, will fix this.

The only thing that will fix it is death, and a lot of it.

Normal human cycle, unfortunately.

Jul 11 01:52 PM

[FloridaBoy2:]

Uh, Warren Buffet has said that he feels he should pay more in taxes and that the code is not fair. You need to do a little homework.....including the history of lobbying.

Spending? I suppose the money spent on the Iraq fiasco is socialist
entitlement? That is a huge part of the deficit that is ignored by the pundits.


On Jul 10 12:56 PM Socialism cannot compete! wrote:

> "For example, this problem is responsible for many Americans' longstanding
> (and misguided) obsession with cutting taxes, which is the primary
> reason the federal debt has been allowed to explode out of control..."
>
>
> Um...NO!!! Author is a Big Government ideologue, apparently! I quit
> reading after this patently false line. It has never been more clear
> that the problem is out of control SPENDING, not inadequate taxation!!
> The real problem causing ballooning federal debt is SOCIALIST ENTITLEMENT
> GOVERNMENT, and the seemingly unending growth of such into every
> facet of our lives and business!! It has resulted in a large non-productive
> class, and high penalties for the most productive. And yes, Mr. Wiegand,
> we DO have an obsession with cutting taxes in the U.S. -- because
> this nation was founded on a few basic principles, among them the
> notion of personal property rights! Our Founders thought confiscatory
> taxation to be anathema to Liberty. Alas that you and your ilk have
> strayed so far from their philosophy yet still believe yourselves
> free.

Jul 11 02:15 PM

[lance.cahill:]

Prof. Wiegand,

Great article.

However, a few quibbles.

I think you're making an awful caricature of Arthur Laffer's idea.

The Laffer Curve illustrates the deadweight loss from taxation insofar as deadweight loss is a function of the elasticity of the supply curve. Laffer has stated as much that the shape of the Laffer curve was not meant to be precise, but rather a useful teaching tool for his students to get the concept of the elasticity of the supply curve, with implications for government revenue with resulting changes in taxation policy.

It reflects poorly on your overall point (that biases are blinding individuals to the rough times ahead) if your own biases--it appears here, your distaste for supply-side economics--blind you to what the Laffer curve was, as opposed to the caricature believed by both Democrats and Republicans.

Despite Laffer's critics (a prominent Keynesian one time "disproved" the curve using a traditional Keynesian model), a multitude of countries (not just the US and the UK!) cut marginal income tax rates with much success, whether you count that success as increasing taxes as a share of GDP or income reported by those in the top 1%.

For example, after the 81' tax cuts, the percentage of total income tax paid by the top .5% rose from 14% (in 1981) to 18% (in 1984-85).

In my opinion, the most important contribution of Ronald Reagan's efforts to cut marginal income tax rates in order to spur long-term growth was a shift in the terms of the debate. It raised new questions regarding static versus dynamic econometric models measuring changes in tax receipts due to behavioral changes (not merely portfolio changes, such as the desire to hold tax-exempt bonds) that might effect income reporting and supply-side changes.

Is health-care too much of an untouchable topic that we cannot consider traditional notions of scarcity when discussing it? You may say it is a moral peril to bring scarcity into those discussions, but without that backstop, such visions may soon turn into a mortal peril.

As to the substance of your post, it seems you combine two variables ("expert" opinion and high P/E ratios) to come to the conclusion we are slouching toward Tokyo circa the 1990s. But, the former is hardly indicative that we are headed towards a catastrophe, as opposed to the "shoots" are more yellow-ish green than forest green.

Do high P/E ratios really need earnings to rebound immediately? Most equities, save for a few, have horrible earnings, as this recession as existed predominantly upon corporations balance-sheets in regards to earnings. I could see your point if we did not have an output gap of -6.1%, but this may merely be a sign of the times.

Have the commentators you've enlisted as comrades-in-arms said the same regarding P/E ratios?

Jul 11 03:42 PM

[CLH:]

What complete garbage this article is. We owe th govt. all of our wealth? We have a party and president who believe this.

Jul 11 03:55 PM

[Robert A. W...:]

"We owe the government all of our wealth . . . " I don't believe those words, or any combination of words that could be construed to have that meaning, appear anywhere in the article. But, thank you for illustrating an extreme form of cognitive consonance. Your mind read what I wrote and overwrote it with what you think.

On Jul 11 03:55 PM CLH wrote:

> What complete garbage this article is. We owe th govt. all of our
> wealth? We have a party and president who believe this.

Jul 11 03:57 PM

[UK farmer:]

An interesting article..In America you have an aristocracy, a few people holding all the power, which is not much of a democracy to the rest of us.
There is a book called "The Third Wave" by Alvin Toffler, which may ease the way forward, and is a more interesting book than The Downwave by Robert Beckman, that predicted this crisis, aping as it does the last 300 years of mans' finance.
We certainly have to change the way we organise our affairs, and the conundrum is -can it be done without (your) bloodshed.?
Your surviving genes need you all to use your undoubted collective intellects in SA to support a program for a sustainable future, in this time of denial.
Just a macro view from one who knows little

Jul 11 05:19 PM

[Robert A. W...:]

Thanks, UK Farmer. Agree completely re: sustainability. Here's a decent collection of resources I keep on my main website if you want to explore further. I highly recommend the first book, "Plan C." It lays out the impending end of fossil fuel capitalism in clear terms.
www.washburn.edu/facul...


On Jul 11 05:19 PM UK farmer wrote:

> An interesting article..In America you have an aristocracy, a few
> people holding all the power, which is not much of a democracy to
> the rest of us.
> There is a book called "The Third Wave" by Alvin Toffler, which may
> ease the way forward, and is a more interesting book than The Downwave
> by Robert Beckman, that predicted this crisis, aping as it does the
> last 300 years of mans' finance.
> We certainly have to change the way we organise our affairs, and
> the conundrum is -can it be done without (your) bloodshed.?
> Your surviving genes need you all to use your undoubted collective
> intellects in SA to support a program for a sustainable future, in
> this time of denial.
> Just a macro view from one who knows little

Jul 11 05:48 PM

[Sklein1033:]

I think there is strong evidence that the tax cuts do, in fact, pay for themselves. Let's look at numbers.

According to tax policy facts, total federal tax receipts in 1980 were 517 billion. This of course was before the Reagan tax cuts. At the end or Reagan's term in 1989, total federal tax receipts were 991.2 billion. Therefore, federal tax receipts almost doubled during the Reagan administration.

Also, there Reagan tax cuts were not just for wealthy as millions of American families had their taxes cut.

So, when you look at the facts, it appears that there was nothing immoral about Reagan tax and they did pay for themselves.

Now let's look at the Bush tax cuts.

According to the tax policy center, total government receipts in 2002 were 1.853 trillion. The Bush tax cuts were initiated in May 2002. Total government revenue at the end of Bush's term was 2.524 trillion, a total increase of $671.00 billion. So, based the facts, it appears again that the Bush tax custs paid for themselves.

The tax policy facts can be viewed at www.taxpolicycenter.or...


On Jul 11 03:57 PM Washburn University Market Commentary wrote:

> "We owe the government all of our wealth . . . " I don't believe
> those words, or any combination of words that could be construed
> to have that meaning, appear anywhere in the article. But, thank
> you for illustrating an extreme form of cognitive consonance. Your
> mind read what I wrote and overwrote it with what you think.
>
> On Jul 11 03:55 PM CLH wrote:

Jul 11 06:02 PM

[User 367041:]

Really? Cause =/= effect? Perhaps so, probably not... or perhaps this was a Freudian slip. It was my understanding that FDR's policies really did little to help, quite possibly worsened and prolonged, and many were deemed unconstitutional. It is my further understanding that our recovery from the Depression was the direct result of WWII being fought "over there" as opposed to "here" -- affording us the luxury of having an intact infrastructure in place to "rebuild the world", setting up a positive trade balance for decades... coupled with the fact that we were Europe's most significant lender, benefiting from the financing of the war as well. I'm not an economist, though.


On Jul 11 09:08 AM Washburn University Market Commentary wrote:

> And stock returns and corporate profitability were strong for decades
> afterwards!

Jul 11 06:07 PM

[Northstar10000:]

Only an idiot could possibly believe that we are taxing too little.
For every dollar you give the gov they will spend a dollar twenty. Spending always out paces the revenue. Since spending has never gone down and taxes have always gone up we should be in utopia by now according to the idiot from the university cocoon.

Jul 11 06:14 PM

[Dr A J:]

Very simply stated,the author may be well educated,well intentioned but is just totally wrong

Jul 11 06:52 PM

[jai hanuman:]

the wise old man said "You can't handle the truth".

And that is why we get fraudsters like Clinton, Greenspan, Summers, Rubin, and Bernanke. Because they tell us not the truth that is good for us and that we don't want to hear - but those sweet nothings that make us fuzzy and warm and lower our guard.

By speculating on real estate, countries do not become great. Great countries are destroyed that way.

By "cleaning up the after effects of bubbles" (as the Maestros said), the taxpayer becomes the chump and the fraudsters become rich.

Jul 11 08:39 PM

[jai hanuman:]

more than the level of the taxes, it matters how efficiently they are spent.

hint: 6 figure pensions (tax free in NY state) to state employees before they are 55.

Some poor fellow is paying for those.

Public sector wages and pensions(especially at the State and local level) are out of control. The same profession can pay 5 - 6 times more as a state employee compared to the private sector. And _very_ generous lifelong pensions (pensions are unheard of in private sector now - 401ks are a joke).

That is a clear indication that democracy did not work as well as was claimed in the report card.

On Jul 11 06:14 PM Northstar10000 wrote:

> Only an idiot could possibly believe that we are taxing too little.
>
> For every dollar you give the gov they will spend a dollar twenty.
> Spending always out paces the revenue. Since spending has never gone
> down and taxes have always gone up we should be in utopia by now
> according to the idiot from the university cocoon.

Jul 11 08:50 PM

[dilettantedude:]

Great article, thanks! There are those so deeply ignorant of recent economic history and innocent of simple compassion - the greed-off-the-leash crowd - who keep trying to justify keeping more and more of their money while the poor don't have decent health care outside the emergency room, and justify it with extreme right wing ideologies. Such people cannot have any credibility until they explain one single period in American history - the late 1940s through the 1960s.

We had marginal federal tax rates then between 80% - 94%. They were 70% until Reagan, and we had a low, stable national debt. After Reagan cut taxes the national debt exploded. Not a debatable point except among the ignorant.

Yet we had the greatest rise in living standards in American history. We had the largest expansion of the middle class in human history. We had the greatest period of entrepreneurial capital and business formation in human history. We had the most fertile period of technological innovation in human history. On top of that, we built the institutional and physical infrastructure that we've been allowing to run down ever since Reagan, because we can't afford to keep it up.

The greed-mongers who think that if we pay higher taxes it will cause the decline of American business are simple, ignoramuses. They should just admit that they'd rather spend their money on SUVs and granite kitchen countertops than provide health care for the poor, and stop pretending to be human beings.

Jul 11 08:54 PM

[Voice of co...:]

Remove political lobbying and restore morals, ethics and character to senior managements, the economy would suddenly improve and likely remain.

However, the chance of either happening are slim and none and slim just walked out the door.

Jul 11 09:09 PM

[perceptions...:]

"If estimates of Q2 corporate earnings are reasonably accurate, the current level of the Dow and S&P imply a trailing P/E ratio of approximately 40. Without a dramatic rebound in earnings in the next couple of quarters — and how likely is that? — the implication is that stock prices could fall another 50-60% before equities are priced to deliver their “normal” long-term annual returns of about 7% (real). "

Wanted "dead or alive", a hollywood ending, for the GFC.

Unfortunately, this is not a movie and the real economy is in the process of finding a new level.

The major concern that I have, is that events re-inforce themselves and as the situation deteriorates, earning get worse, which makes the situation deteriorate further, etc and the 50-60% fall in equities becomes something much worse.

Jul 11 09:38 PM

[Sklein1033:]

Top marginal tax rates in the 1950s and 1960s were meaningless because very few people had the income subject to those rates. For those taxpayers with high incomes there were numerous tax shelters and other tricks to get around the system. That's what prompted congress to pass the alternative minimum tax in the late 1960s

During the Reagan years total government receipts nearly doubled from 517 billion in 1980 to 991 billion in 1990. The reduction in marginal tax rates could not have caused to increase in national debt because total tax receipts increase substantially during the Reagan years. Rather, it was the inexorable increase in spending over and above the increase in tax revenue that cause the increase in the national debt during the Reagan years.

Jul 11 10:00 PM

[Ned Williams:]

Lost in this discussion is the fact that revenues are relatively fixed as a percentage of GDP [Hauser's Law]. The Laffer curve shows us that at the point of maximum revenue collection, increasing tax rates are balanced by an equal destruction of the tax base. Therefore the optimum long term strategy is to have a tax rate below the optimum rate, in order for the tax base/economy to grow at a reasonable rate.

Under both Reagan and W, tax revenues increased with lowered rates, yet under Clinton an increase in the tax rate also raised revenues, indicating that we're probably close to the Laffer maximum at current rates. [Note that several high tax states have pushed the combined tax rate above the Laffer maximum and are suffering revenue declines.]

While revenues are relatively fixed, spending has no limit [we certainly have seen that recently]. If we're going to target spending relative to expected tax revenues what should be the limit?

Over the long term, increases in National Debt are not a problem, as long as the economy is growing faster than the debt, in nominal terms. For example, a 3% increase is debt over a period when the economy grew at 5% [including the inflation that has the effect of lowering the "real" value of the debt], is a decrease in debt relative to GDP and the ability of the economy to pay the interest on that debt, since revenues are tied to GDP growth.

In order to achieve this target, legislators must not only constrain themselves [fat chance], but spending patterns must reflect the fact that the economy goes through business cycles. If there is any attempt to have counter-cyclical spending at the same time that revenues are falling [now], targets will be blown out of the water.

I am in no way condoning excessive deficit spending. I also believe that spending relative to GDP could be cut way back or made more productive. If that could happen, a slight amount of deficit spending may allow for decreasing tax rates, in order to stimulate current and future GDP growth.

For a complete description of how this could be done, look for my upcoming book, "Fixing Everything".

Jul 11 10:52 PM

[Boxed Merlot:]

..."The Market’s Emotional Roller Coaster.
I gave a talk on the economy recently, and my last slide was borrowed from Liz Ann Sonders at Charles Schwab Market Research (reproduced below). It’s entitled “The Market’s Emotional Roller Coaster,” and it depicts 12 stages of emotion that investors go through in a full bear-to-bull-market cycle.

...Optimism, enthusiasm, exhilaration, euphoria, unease, denial, pessimism, panic, capitulation, despair, hope, relief, returning to optimism...

Someone asked where I thought we were in the emotional cycle..."


OK, I’ll play along. Now that the bull has capitulated, or tapped out so to speak, what’s to prevent the owners of the show from bringing in a fresh bull to fight the exhausted bear chained and pegged in the ring? I realize the up and down oscillation in your model is based on the historical techniques of these animals fighting styles*, but the emotions attributed to the model belie a cognitive dissonance in favor of the bull. As an example, if I was someone with skin in the game on say, gold for example, (I bet on the bear), my emotions are opposite the ones shown. What’s more, I’m going to be pretty upset for the crowd to approve bringing in another bull just to finish the bear off without settling out the bets from the first bout. To me, that’s the difference this time around. The rules of engagement have changed causing the stakes to be much more perilous. (*Illustration taken from a history of Mokelumne Hill, Ca)

Jul 12 01:07 AM

[Boxed Merlot:]

By the way, any relation to Bob Weigand, (business news at 25 and 55) KCBS radio, SF?

Jul 12 01:20 AM

[Freedom Fan:]

I agree. The biggest threat to our economy is that people have selfishly kept too much of their own earnings from government.

Government is always much more efficient and much wiser than the private sector in spending money, because the private sector is concerned about taking risks and making icky profits, while government is concerned about everyone's welfare and happy children.

So what we need are bigger and more powerful public sector unions with larger pensions and more middle management. We need card-check legislation to force all workers to join unions.

Yes, California is now bankrupt because prop 13 kept the politicians from taking more taxes and requiring a 2/3 majority to raise more taxes. True California has the second highest income tax in the country, some of the highest sales taxes, and high business taxes, but its property taxes are only average. This is wrong because our public servants need more money so that they can continue to enjoy the sensible, lavish lifestyles to which they have become accustomed. This will keep our public servant bureaucrats happy and more productive so they can retire at age 50 with 100% salaries and full medical care. If only we could hire more unionized bureaucrats who work 40-hour weeks while charging 10 hours of overtime, then California will return to fiscal health.

If only the government would tax me more, I know I would immediately become more productive and prosperous.

I'm sure that government bureaucrats will spend my money and my grandchildrens' money much better than we ordinary citizens ever could. So please, please raise my taxes.

This is an excellent article and you are obviously a genius.

Jul 12 02:17 AM

[drpaul1139:]

This is a brilliant article!

It was obvious written out compassion and with comprehensive data to back up the compassion. Please permit a less than politically correct person to weigh in on this dead horse with an observations and a simple solution to credit, debt, and interest.

What Mr. Weigand is saying (and many of the brilliant comments) are that most Americans are economically stupid and we get the government that we have. I was not a fan of President Clinton but if I am not mistaken he left the country with $3 plus trillion in surpluses and the Republican administrations gave us trillions of dollars in debt, and now a new democratic president is giving us trillions of more dollars of debt?

And now we have a $14 trillion national debt, which is about 100% of gross domestic product and on average $90,322 for 155 million labor units? And as Jeff Nielson is pointing out for us which we all had better be aware of if we indeed want an immediate solution, and an immediate solution is possible when we are clear on the numbers.

“1% of the U.S. population holds more than 35% of ALL wealth - and 55% of ALL stock. And their grip on America's wealth grows stronger every year.

Meanwhile 80% of the U.S. population holds only 15% of total wealth (about 25% less than in other industrialized nations).” Jeff Nielson

Thanks Rob Weigand for the Article, thanks Jeff Nielson for these numbers…

To make a third contributions with solution numbers, what I will attempt to do here is get us out of this mess with some new economic thought so that all of the Americans without economic and political sophistication, and I doubt that they will ever gained these two will just shop and be happy and all is well.

The problem is not only the perceptions of reality but also no reality at all by all of us when it comes to the so-called capitalistic model.

Lets build this capitalistic 101 model from the ground up and we can solve this economic mess that we find ourselves in quickly and together. Presupposing one fundamental, undeviating, and permanent understanding about capital, indeed a mastery washing the mental slate clean of credit, debt, and interest which are the hindrance to both 100% employment and non debt driven consumption.

Capital should be the primary tool of a capitalist economic model. But we need to understand what capital is. Capital means to capitalize or the bringing in of cash value from the future for present use. The vehicle for bringing in capital from the future for present use is the public corporation by its ability to issue unlimited upside and unlimited downside ‘risk-reward’ shares where the earnings of the public corporation determines the up and down sides.

The earnings for the corporation starts from the labor units demand for products and services, spending called consumption, which is the revenue of the public corporations and then the earnings as a percentage of revenue driving share prices causing the equity to rise in value.

Equity is the differences between the revenue of the public corporation and the total value of the corporation called capitalization, notice that the concepts of credit, debt, and interest are nowhere in our descriptions of capital which is the foundation of capitalism?

Please! Lets be clear here. Look at that last sentence and see the connections between capital and equity the two pillars of capitalism.

Therefore any country with a stock market is practicing capitalism to the degree of the number of public traded companies, and the total value of its stock market exceed the countries gross domestic product.

What class of economics does credit, debt, and interest belong to? Creditism? It is this creditism that permits the 1% of the populations to control.

The perceptions that credit belongs in the lexicon of capitalism and that credit is free is a drug worst than ‘crack cocaine’. So the question is how do we end credit, and its three negatives of debt, interest, and unemployment?

As we see massive unemployment is triggered primary by the labor units inability to pay the interest on free credit. A critical number of unemployed brings the whole economy down traced solely to free credit, debt, and interest, which are the real cause of boom-bust-economic cycles, not the perceptions of something else. The total interest will never match free the credit, credit is a slave to interest.

Now mathematically when we ask what is the opposite of free credit then the answer is equity, free equity.

Permit me to explain.

The assumption is that a person will have a job to pay the debt with interest. But a job for most people will never keep up with the cumulative effect of interest. So a job is tied to the negative concept of credit.

If a job is tied to the negative concept of credit, then purchases are tied to the positive concept of equity for public companies. As of this moment 99.99% of the economist have no ideal of the power of positive equity for public companies so we MUST take this equity matter into our own hands!

Why do I say this, how do we do this?

By this secret multiple value creation formula of x=(a*b)/c where X is stock price, A is revenue, B is earnings as a percentage of revenue, and C is a rate of return with 1 share outstanding ALWAYS creates more value for a public company than a non public company solely by the ability of a public companies to issue shares when X-A-B can be predicted.

Who creates the earnings for a public company causing the stock price to be multiples of revenue? The consumers.

Ok if the consumers are the ones who create the earnings for a public company where 1% currently own 55% of the equity then what percentage of the earnings and stock price of a public company can be attributed to the consumers?

When we can answer this question then we can replace free negative credit with free positive equity and we will have a new instant economic paradigm.

What we know now, from careful investigation of the multiple value creation variables for public companies, is that when 46% to 69% of the equity of new public corporations are given free to a precise number of customers simultaneous to the product or service purchases then the prices of the free shares are ALWAYS greater by 3, 5, 11, 20, and over 40 times the price of the product or services by x=(a*b)/c.

The determination of the precise number of customers prior to a new public company’s registration process and the giving of the free shares after the cash purchases-consumption of the new public companies products and services causes A revenue, B earnings, and X stock prices to be precise predictions.

The free giving of the 46% to 69% of the shares of a new public company is the sharing of the percentage of the multiple equity value created and attributed directly to the consumer’s purchases providing the stability of share prices for the remaining non-customer investors who pays cash directly for their shares.

This free sharing in exchange for cash purchases by the 46% to 69% customer-owners of new public corporations is called Product Equity Value©.
www.productequityvalue...

It is the free Product Equity Value© contained in each product or service that causes the global economy to become a willing, renewable, and stable one of equity driven demand consumption replacing unstable credit-debt-interest driven demand consumption.

This means that an average American spending just one third, or $12,000 with new public companies giving Product Equity Value© will have $138,000 in liquid savings an average PEV© ratio of 11.5 to 1.

Product Equity Value© will add a minimum of $21.39 trillion to a US stock market already valued at $19 trillion.

Hey folks! We are not taking about a perception or some far off event! We are talking about something that is in motion now and will be a reality for at least 14 million American in 2009-2010! Help make Product Equity Value© a reality and not a perception!

Learn all you can about it!

Paul Katchings
Business Engineer-Inventor
www.productequityvalue...

Jul 12 02:38 AM

[the real wu...:]

So much wasted intellect on this topic. Civics I lesson: congress passes legislation which appropriates money and instructs the exec. branch, the prsident and his minions, how to spend it. Presidents spend the money appropriated by congress, defend the borders, fight the wars and provide for the country's interests in the world. Neither Reagan nor Clinton nor Bush I&II are responsible for taxes and spending. Its all congress. Trust me. Congress rules the budget, the exec. branch provides the funds thru the Treasury. And, Civics 2 lesson, a politician's first job is re-election, each congressperson bribing the voters with popular spending.

Jul 12 03:27 AM

[Responsibility:]

When we talk about over spending by the Government, should we consider ability/dogma to "tax" more and more as also part of the problem, regardless of whether the super-rich should be taxed more or not?

Should we also talk about the over spending by the general consumption driven society?

The tax code (fairness) is one thing but over spending, and particularly wasting, is another thing.

Who should be responsible for Americans, on average, consuming (e.g. housing, recreation, auto, medical) more of everything than many other people while investing (e.g. saving) less than many other people?

The dogma of goodness of generocity (spend more to boost economy and to boost self indulgence) and democracy (everyone should live in large house, drive big car, and afford high cost services) should be balanced by the facts of reality, those of productive (not just serving each other's indulgence) work, global competitiion (not just competing with each other inside), and long term strategic goals (not just short term financial results by any means).

Capitalism or socialism can work or fail, depending on how the details are being addressed.

Work to balance the budget is needed by individuals as well as the government.

One interesting thought: since there are so much blames on the super rich getting richer and on corporations making more profits, are these happening because many people are over consuming and over paying? Are we forgetting that consumers can at least choose to consume less and to shop for lowest prices or to do them by ourselves?

Jul 12 07:53 AM

[markfl:]

Actually the founding fathers could never make up their mind about much of anything, which is why it took several years to ratify the constitution. George Washington and is pal Al Hamilton were all about taxes. That's what caused the Whiskey Rebellion--a tax designed to pay off the national war debt. Hamilton was all about big government, including the first national bank of the United States.

Andy Jackson followed in the tradition of Jeffersonian Democrats to become the only Prez ever to pay off the national debt.
"Following Jefferson, Jackson supported an 'agricultural republic' and felt the Bank improved the fortunes of an 'elite circle' of commercial and industrial entrepreneurs at the expense of farmers and laborers. After a titanic struggle, Jackson succeeded in destroying the Bank by vetoing its 1832 re-charter by Congress and by withdrawing U.S. funds in 1833." We had terrible recessions in the 1830's.

U.S. Grant (Republican) presided over the worst US depression ever in 1873. After the Panic of 1907 under Teddy Roosevelt (Republican) and the collapse of the Knickerbocker Trust (where we begged JP Morgan to bailout the economy), big government Dem. Woody Wilson signed the Federal Reserve Act.

I don't want to confuse you with the facts, but the world is not as you imagine it was. In case you thought Woody was a socialist, I can tell you the Bolshevik red scare resulted in federal laws stricter than the Patriot Act ever thought about being. Just consult The Google. Its all there.

On Jul 10 12:56 PM Socialism cannot compete! wrote:

> "For example, this problem is responsible for many Americans' longstanding
> (and misguided) obsession with cutting taxes, which is the primary
> reason the federal debt has been allowed to explode out of control..."
>
>
> Um...NO!!! Author is a Big Government ideologue, apparently! I
> quit reading after this patently false line. It has never been more
> clear that the problem is out of control SPENDING, not inadequate
> taxation!! The real problem causing ballooning federal debt is SOCIALIST
> ENTITLEMENT GOVERNMENT, and the seemingly unending growth of such
> into every facet of our lives and business!! It has resulted in
> a large non-productive class, and high penalties for the most productive.
> And yes, Mr. Wiegand, we DO have an obsession with cutting taxes
> in the U.S. -- because this nation was founded on a few basic principles,
> among them the notion of personal property rights! Our Founders
> thought confiscatory taxation to be anathema to Liberty. Alas that
> you and your ilk have strayed so far from their philosophy yet still
> believe yourselves free.

Jul 12 08:36 AM

[FloridaBoy2:]

Rob,

Good common sense article, thanks. Good comments too. It is time to bring the country back to 'the middle'. I hope we can do it.

Jul 12 08:38 AM

[Brad Denny:]

Professor Weigand's assessment has touched many nerves, perhaps because it gets very close to the heart of the issue. But, the closest he gets, in my judgment, is not in the original piece, but in the response concerning "sustainability."

My inadequate acquaintance with economics reminds me that Adam Smith advanced the theory that the "Wealth of Nations" would be maximized if each person was allowed to pursue his or her private interests free of most constraints. Private enterprise has been the foundation of capitalism ever since and has been a major force in the achievement of rising living standards for a large part of the developed world.

But the world that Adam Smith knew has long since vanished. We are now in possession of a whole variety of "weapons of mass destruction" including fossil fuel based climate change, nuclear waste and weapons, international terrorism and global economic meltdown. Since this entire discussion is taking place on the internet, perhaps I need to add the enormous enabling and disabling potential of the dissemination of rumor, fact, fiction, information and disinformation worldwide.

Lets simplify the whole discussion by turning to the concept of
"sustainability" as the cornerstone of value assessment. Short run gains are no longer positive if they creat long term losses that cannot be reversed. If we burn up so many fossil fuels in the next 50 years that the ability of the planet to support life is reduced by
50% and our grandchildren and great grandchildren will lead lives of desparation, are we justified in pursuing our own interests by burning those fuels?

No. Case closed. It is time to alter Adam Smith. Sustainability rather than short term private profit must become the measure of value in the new economics. Private enterprise is great. But toward what end? We cannot do short term good by doing long term evil.

Jul 12 09:59 AM

[MaxRoul:]

you see


On Jul 10 10:28 AM TKA wrote:
you missed the part about "borrow and spend' cognitive dissonance back at ya
> I'm not going to take the time to break this all down so let me just
> point out one critical factor glaringly conspicuous in its absence.
> Mr. Wiegand states, "...Americans' longstanding (and misguided) obsession
> with cutting taxes, which is the primary reason the federal debt
> has been allowed to explode out of control (and California is on
> the brink of bankruptcy)". So, if this is true, government spending
> only played a minor role? Talk about cognitive dissonance...

Jul 12 07:15 PM

[Boxed Merlot:]

On Jul 12 02:38 AM drpaul1139 wrote:

Help make Product Equity Value© a reality and not a perception!
>
> Learn all you can about it!
>
> Paul Katchings
> Business Engineer-Inventor

Has Amway© morphed again?

Not that this is a bad thing, but in addition to a receipt for my purchase, should I now expect a 1099 at the end of this and every year to come too?

So now, there's nothing I can do that's not part of my "business"? This is sounding more and more like Congress, where all I have to do all day (and night), is spend. I won't even have to both about re-election.
Where do I sign up?

Jul 13 11:35 AM

[MSimon:]

Nationalize health care to lower costs? Wonderful.

I'd like to pay lower prices for everything. Nationalize the whole economy.

On Jul 10 07:52 PM stopwhining wrote:

> Herein lies the ultimate question. Is a person entitled to keep
> what he/she earns since gains are ultimately a product of superior
> efforts, or is success equally a product of luck, timing, and surroundings?
> If the former, then taxes should be low and spending reduced along
> with it, if the latter, then everyone should get over themselves
> and chip in for the greater good.
>
> We all like to believe we rise or fall on our steam, but based on
> those I've met in this world, I would only ascribe 50% of any given
> outcome (on average) to the underlying persona.
>
> Bring back the estate tax, raise taxes on the wealthy, lower gov't
> spending across the board, nationalize healthcare, and provide economic
> incentives to help make the U.S. energy independent. These are
> the keys to our long term success, but I have no confidence that
> they will be undertaken.

Jul 16 11:04 AM