Seeking Alpha
Momentum, short-term horizon, macro
Profile| Send Message|
( followers)  

I have written extensively here on the need for income redistribution in favor of the middle and lower classes to correct for the maldistribution that has been created by Congress and the rest of government in favor of wealthy special interests using highly paid lobbyists at the expense of those income classes.

The truth is, the wealthy largely got their wealth or increased it markedly from or by means of government action, usually in the form of favorable legislation, regulations or unbid contracts. The situation is truly troubling.

Income distribution as recently as 6 months ago had 21% of income going to the bottom 59%, 79% going to the top 41% and 6% of all income going to the top 1/10 of 1%.

This is way out of whack historically and damages the economy seriously by reducing aggregate demand because the middle and lower classes have a higher average propensity to consume goods and services than the wealthy who spend a larger percentage of their income on financial instruments. The result is permanently inflated financial markets and permanently depressed consumer goods and services markets.

But redistribution alone won't do the job.

America's small businesses must be helped to become more productive and profitable. Most of our GDP and employment is generated by small businesses. A big part of the problem here are the laws and regulations special interests have obtained from Congress and government over the years. They often hurt small business and help the wealthy and large businesses.

An example should suffice. Many large corporations pay nothing or next to nothing in federal taxes. Few smaller businesses are able to do that. Global corporations cheery pick the countries for their various activities to take best advantage, including of taxation. That problem needs to be repaired with a vengeance.

Also, government contracting strong favors bigger businesses, often where that is not really necessary. Many government contracts are let without even competitive bidding, using instead a political buddy system. Indeed, companies are thrown together overnight to take advantage of buddies in government who grant contracts. It is a travesty.

I suggest we need a commission or standing group on small business to address and bring public attention to all laws, regulations and contracts at all levels of government which relatively handicap or comprise the efforts of small businesses or impose burdens on them that they are ill-equipped, because of their size, to handle. The commission should as well press for needed corrective legislation and regulation. This is important. As America's small businesses do better, income will become better distributed, although help is needed to correct for the ill-gotten gains from government of the wealthy as well.

Further, small businesses that serve the national interest in direct way should be given temporary subsidies to assist them in getting started or through bad times. The Small Business Administration should be expanded. Chambers of commerce should be given grants to direct new, small businesses to endeavors likely to be profitable. A mentoring program could also be of help here, again sponsored by chambers of commerce or like standing organizations. More thought is needed here. These items simply come to mind quickly.

Income redistribution via the tax system to correct the imbalances created by Congress and the rest of governments will significantly increase aggregate demand and restrain the inflation of U.S. financial markets, but an increase in small business output is also necessary to serve that increased demand. For that reason, the problem needs to be attacked from both the supply and demand side. During this recession, we have lost many small businesses and that is a problem that, like the rest of the problems I identify here, no one in government wants to discuss, much less think about seriously. Business as usual is the rule. "What problem" is the implicit attitude.

Interestingly enough, contained within the dual program I suggest is an implicit solution to much of the nation's unemployment problem. Redistribution of income would increase aggregate demand significantly. Small businesses properly and temporarily assisted could do much to supply that demand. The result should be a noteworthy drop in unemployment within a reasonably short time. Without corrective redistribution and a major program like I suggest for small business, we cannot expect too good a recovery. We will remain pegged to a new "lower normal" level of GDP growth in my view.

Until we can develop a public consensus around these points, getting Congress to do anything - especially something it might well perceive as being contrary to its own interests -- could be very difficult. Two major misconceptions attend developing that consensus.

The first is the notion that the rich have "earned" all that they got. This is largely nonsense. The wealthy have largely gotten so mostly by receiving advantages from government in one form or another. As Warren Buffett makes clear, if the wealthy had income taken from them, they would not stop working, but would work all the harder trying to get more income. The wealthy, better than any group, know how to feed well at the government trough and they do, big time, along with getting the advantages of government regulations and legislation better than most others. For example, Warren Buffett bought options to directly acquire Goldman Sachs (NYSE:GS) preferred stock, wanting to see first whether Goldman Sachs got bailed out on its CDSs with AIG and how the TARP funds would be fully handled. He is feeding at the public trough, too, and a less deserving individual for government help is hard to imagine.

Secondly, there is the perception that those unemployed or underemployed, along with their businesses, are lazy and incompetent and that is why they are in the fix they are in. This too simply is not so. It is true they are NOT so politically well connected. But that only makes my point that political connections go far toward determining income and opportunity in America, given the way government operates, rather than just hard work that is useful in the context of the market place alone. How good your and your friends' lobbyists are should not determine your income and the income distribution.

The difficulty is virtually no one is thinking along these lines. That, in substantial part, is because too few have considered how we have gotten ourselves in to this situation and too few, especially who are doing well, really care.

Unfortunately, that includes most of those in Congress.

Disclosure: None relevant

Source: Income Redistribution Is Necessary (But It's Not Enough)