By John Lumbard.

It’s springtime, and investor doubts and fears are in full bloom.  Profit margins are too high, unemployment is too high, the Fed is printing too much money, China’s growth is slowing, Europe is never, ever going to get out of its funk, and we don’t have high speed rail!

The real concern, deep down, is that we don’t deserve another good year in the stock market.  Last year we had too much fun.

Too much fun?  That’s news to me . . . Home construction is up, and the unemployment rate is falling.  GDP has recovered from a bad case of frostbite, and should grow nicely in the second half of the year.  Yes, it’ll stop growing if the Fed stops printing huge amounts of money every week, but they’re winding the printing presses down at a very gradual rate.  Inflation is not raging out of control, interest rates are so low that they make stocks look cheap, and corporate earnings keep growing, steadily.  If the Fed prints too much money for too long the most likely result will be . . . a bubble in the stock market.

When we say that, the first thing that goes through the minds of listeners is “the bubble is going to burst!”  Whoa . . . easy there, Bucko;  the bubble hasn’t even inflated yet.

And then there’s the fear that if you make money in the stock market people will hate you.  There’s been a furor about the incomes of the wealthy;  maybe, instead of getting mad at the top 1%—they’re only 1% of the population!—we should put that energy into improving the lives of the bottom 1%.  And creating good jobs for the bottom 20%.

What’s really going on here is a growing sense of failure, both in job creation and in the War on Poverty.  Nobody’s talking about the bottom 1%, because it’s much bigger than that—and it’s harder for children to break out and rise into the middle class.  When they do there’s still plenty of reward;  if a young couple started at the bottom of the economic ladder in 1979 and worked their way up to anywhere in the middle, their incomes are 40% greater than those of their parents who did the same thing (240% greater, if you include inflation).  If you think honestly about the cars, homes, food, telephones, and computers of 1979 you’ll quickly realize that these statistics make sense.

The problem is that the children of today’s poor have a bigger mountain to climb.  The CDC says that today 40.7% of all births—more than forty percent of all births—are to unmarried women, up from about 16% in 1979.  Harvard economist Raj Chetty says that those who grow up in single-parent households—particularly if they are part of a community of single-parent households—are much more likely to suffer depression, anxiety, behavioral and social problems, and problems with drugs and alcohol.  They are more likely to drop out of school, and less likely to go to college.

The National Poverty Center says that 31% of households headed by single women live below the poverty line.   Twenty-two percent of all children live in poverty . . . Government has done nothing to reverse these trends, and the media (sex sells, as does promiscuity) are making them worse.  Then we compound the problem with bad schools . .

If we want to give the bottom 22% a reason to break the cycle of poverty, we need to do better for the working poor.  Life is hard for those in this most-deserving segment of society—they even give more to charity, as a percentage of income, than those in the middle class—but they receive little of the torrent of government cash that flows everywhere else.  And government cash can only do so much;  the real answer is to persuade entrepreneurs to increase hiring.

No, we’re not talking about tax breaks for companies that hire workers, or “programs” of any kind.  Let’s just take away some of the headaches and burdens that government has created, and make the prospect of hiring an employee a little less scary.  The Brookings Institution says that the number of businesses in America is now shrinking.  Every year.

It’s hard to imagine any economic harm that would result from over-taxing movie stars, but the road to hell and high unemployment is paved with legislation that causes inventors and entrepreneurs to become just a little bit less eager.  If politicians—in a belief that this can help them get re-elected—persuade Americans that the rich are bad people, fewer Americans will want to become rich.  Let’s not forget that it’s the hunger of entrepreneurs that drives employment and better living standards.  They travel a hard road of feast and famine, from big years with huge taxes to years that wipe out the retirement savings of those who are lucky enough to escape bankruptcy.

In fact, there’s so much feast and famine that most of the 1% have to be considered temporary residents.  During their lifetimes 12% of Americans spend at least a year in the top 1%, according to Professors Hirschl and Rank, in the NY Times. And a majority of Americans will have incomes that rank in the top 10% at some point in their lifetimes.


 The OECD says that our tax system is already far more progressive than that of any European nation, because we don’t have a value-added tax that falls heavily on the middle and lower classes, and because our gasoline taxes are very low.  If we listen to Thomas Piketty and raise the top tax rate—federal and state—above 50% we’re going to find that some entrepreneurs retire early and move to Switzerland or Bermuda;  while the young dreamers—think Steve Jobs, Bill Gates, and Robert Noyce—put their energy into learning to surf.   The pace of innovation will slow, and unemployment will rise.


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