Sunday, November 28, 2010

David Stockman on Increasing Taxes For the Rich

Economist David Stockman has gone on-record saying that trickle down economics does not spur growth. Stockman worked in the Reagan administration. Stockman said Reagan knew tax cuts and increased spending would cause a federal deficit. Reagan wanted to create the deficit to justify killing New Deal programs. Stockman told Fareed Zakaria the Republican Party took the wrong lesson from the Reagan years.

And then when Dick Cheney, who should have known better, in the 2001 debate, I think it was, about the Bush - first Bush tax cut, it was totally not need. He said, well, Reagan proved that deficits don't matter. Reagan proved nothing of the kind, and, yet, that became the mantra and it just led the Republican Party away from its traditional sound money, you know, fiscal restraint principles that were really the heart of the Republican Party and its job in our system.

Stockman said the Republican Party is unwilling to go off-message about cutting taxes. Stockman advocates tax increases for the rich and cuts in federal spending.

ZAKARIA: That simply that the hole is too large that you could - you can indulge in the fantasy that you just do one or the other, but part of what you want to do is you really feel very comfortable raising the taxes - raising taxes substantially on the rich because you feel that there has been a real divergence in the fate of - of Americans over the last 25 years.

STOCKMAN: Yes, because this wasn't a real solid, sustainable, productivity, technology-based prosperity. Much of this was a debt- fuelled money - easy money bubble. In fact, it was a serial bubble. First, the dot-com and then the housing and consumer credit and the ATM machine and everybody buying, you know - borrowing from their house in order to buy things they couldn't afford.

So all of this ended up, strangely enough, shifting wealth and income to the very top strata of our society in a way that we've never seen in history. Because it wasn't real, sustainable, mainstream economic growth and prosperity. One number that I think is shocking is that in 1985 the top five percent of households had $8 trillion of net worth. By the peak of this bubble in 2007 they had $40 trillion.

ZAKARIA: So from $8 to $40 trillion.

STOCKMAN: Eight to 40. Five fold in 25 years.

ZAKARIA: And the economy didn't -

STOCKMAN: A $30 trillion gain.

ZAKARIA: Right. And the economy didn't grow five fold.

STOCKMAN: The economy didn't grow five fold, and it was because of the bubble valuations of assets, stocks and bonds and real estate and all of the other speculative classes.

I'm saying that it is now so distorted that to get the economy back to health, we're going to have to reset some basic parameters of our economy, and one of them in this environment would be a higher tax burden on the upper income than a conservative, like myself, would ordinarily advocate.

But right now, this isn't about growth. This isn't about Morning in America in 1980. This is about solvency. This is about cleaning up the mess the morning after from a 30-year binge that wasn't sustainable as we've learned.

Stockman is one of many economic minds worried that America's economy is fueled more on trading paper than actually inventing new things. Florida gubernatorial candidate Jeff Greene became a billionaire buying credit default swaps that would pay out if the mortgage market crashed. Greene made money placing a wise bet. Not because he was the next Henry Ford or Thomas Edison.

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