A common plank in the Democratic Party’s agenda is that of wealth redistribution. They never call it that in public but that is essentially what it is. The idea, simply put, is that a small minority of the population should not posses a majority of the nation’s wealth. Proponents of this policy often cite the widening gap between rich and poor and the vast differences in their standards of living. I'm going to take a few minutes here and look at this argument from a historical perspective and attempt to find its roots.
A good portion of this argument has its roots back in the time of the Great Depression. A time when vast fortunes were being made by investing on margins. If there ever was a time when the rich got richer (and the poor got richer) this was the time. With exchanges all over the USA (Chicago and Boston with New York seen as the big one) many people were jumping into the stock market and buying stocks to be a part of the boom. This was a time when a stock may jump 20 points in one day, there was no where to go but up! This lasted a long while and many people began putting their stocks up as collateral for bigger loans to speculate on the market with. Even the rich banker types were falling into this system of grand dreams. Some economists even declared that the market was safe and not akin to gambling because the prices on stocks ALWAYS went up!
This was destined not to last. There were a few bumpy days in late 1929. Before the great Wall Street Crash of 1929 there were a few organized efforts to slow the market down but none proved effective enough. Some thought the Federal Reserve should increase it rates to curb speculation but speculators were already borrowing at rates much higher than what the Federal Reserve was lending at. As such, any action by the Federal Reserve would likely have no impact on speculators but would have an impact on small business men and farmers.
Due to the great wealth building power of the Stock Market in the 20's there were many companies that decided to invest their profits into the stock market! This is similar to the current stories you read of farmers in China who put away their hoe and shovel and pick up a computer to farm for gold in on-line MMORPG games.
There were also many inside traders at the time. People would form groups and one person would begin buying a stock at an inflated price to make the market think the stock was going somewhere. Once the market took hold of this notion the other investors in the group would sell off their stock in that company for a quick profit. There were a lot of back room deals going on in the 1920's and many fortunes were made in this way. Fortunes were also lost in a similar way when investment companies began selling securities and then decided to buy back their own securities because they were doing so well!
In fact, many economic historians now see the market crash not as the starting point of the Great Depression but a casualty of it. Earlier in 1929 the economy was begining to go into a downturn. Why it took so long for the market to catch up with reality is a question for the economists, but it did.
Why am I going into the Stock Market and the Crash of 1929? The thing about the Stock Market prior to the crash is that is was being driven by the minority of wealthy people in the USA. When stocks were selling at $300 per share and weekly rent was $5 most people could not afford to be part of the 5,000,000+ shares being traded every day on the exchange. Even though it is popular to state that everyone was in the market at the time less than 1% of the US population was actively involved in the market. Those who were most actively involved in the market were the super-rich of the time. Those hurt the most were also the super-rich.
What happens when someone loses half of their money? Well, it depends on how much half is. If you only have ten dollars and lose five you don't feel that big of a sting. If you have 10M and lose 5M well... That hurts a bit more!
With the destruction of so much money and the collapse of the market many investors had no desire to invest. The fact that the market did not just crash in one day but kept crashing for weeks also helped put fear in the hearts of investors. See, after the crash some people thought, "Look, it's a market correction I better buy while the prices are low," but, these market corrections kept on happening every day! So, in effect, the person who bought the stock the next day for $50 ended up selling it the day after for $40 and on and on until the stock reached a price in the single digits.
Government involvement soon created the SEC, which Wall Street bitterly fought against, and it also passed a number of laws dealing with trading of stocks. One such law had to do with short selling.
The short selling law was likely inspired by a certain bank president who was selling his own banks stock short! He defended his position saying that by being able to trade his own bank's stock this somehow made him more concerned with the banks performance. I would buy that line if he wasn't selling the stock short! Short selling is based on the idea that a certain stock will decline in value. How much faith can you have in your bank if you are shorting its securities?
At the end of the day, the great investors who drove the market were now a bit gun shy. Vast fortunes had been lost and businesses that had grown up around those super-rich were in trouble. Who will buy the next million dollar yacht if no one has a million dollars? Thus was born the New Deal.
The New Deal was an attempt by President Roosevelt to fix the Great Depression and get the nation back on track. Some economists believe that the New Deal actually lengthened the Great Depression. In fact, after the Supreme Court began throwing out many of the laws passed as part of the New Deal the President threatened to pack the court by adding judges to the bench (enough to give him a majority) this resulted in the Court throwing in the towel and giving up their role as protectors of the Constitution. It was this same court, in Wickard v. Filburn that ruled on the legality of the Commerce Clause. If you do not know what the commerce Clause is it is the one piece of legislation that was passed during the New Deal that effectively broke the government by allowing it to do anything it wanted.
Another key element that is often cited as a prolonger of the Great Depression is the Smoot-Hawley Tariff Act. This act was intended to force Americans to buy American made products by raising the price on imported goods. The act went too far and was short-sighted in that trade is a two-way street. If foreign countries can not afford to sell their products in America then they will probably not be able to afford to buy American products in their own country! Later even raw materials were taxed which caused American manufacturing costs to rise. These isolationists’ policies were clearly misguided. Let it also be known that this act was passed by the Hoover administration and was not a part of the New Deal
One of the central goals behind the New Deal was to show that Capitalism (the Stock Market) had failed and it was now up to the government (socialism) to take care of the people. With an unemployment rate of 25% much of the population was all too eager to see government step in. The greatest program set in motion by President Roosevelt was the Social Security Program. Of this program President Roosevelt said the following: "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program." How right he was, Social Security has become the "third rail" of politics.
Even with all of the New Deal policies that Great Depression lasted until the beginning of World War Two. It wasn't the socialist policies of Roosevelt that pulled us out of the Great Depression, it was war. War and its demand on manufacturing broke us out of the Great Depression. Even though taxes were high many Americans were putting in longer hours to earn more money to make up for the lean years of the Great Depression. Businesses were eager to land valuable government contracts and all attempts at a balanced budget were thrown out the window to fund the war. It may be more accurate to say that the beginning of World War Two masked the Great Depression more than ended it though the war itself did end the Great Depression in the long run.
Now we face a dilemma. The New Deal failed to get the country out of its economic funk yet, increased government spending in regards to the war effort did. So, is government the answer? If you ask a liberal they will tell you that the government is better at taking care of problems than private enterprise is. That is an over simplification as there are some areas where government is the answer and some areas where they are not the answer.
Let's look again at the rich minority vs. equality of wealth. Liberals would like you to believe that if we were all equal in regards to wealth things would be better. Though this idea does have some merit it is also misguided in that liberals believe in bring the rich down rather then bring the poor up.
Why do I say that? I say that because it is true. The liberal view on wealth redistribution is all about taxing the rich more. They can't very well give a tax cut to the poor as those people no longer pay taxes! Besides, look at the Soviet Union. In that country socialism was used as the great equalizer. Everyone was made equal in that no one had anything! The only hard work that was rewarded in the Soviet Union was the hard work of defecting to a western country. Do you really want to live in that sort of country?
"But, the rich don't need all that money!" Hmmm... How can you say that? I will concede to you that most people do not need a salary in the millions of dollars but, if by their actions they help their company realize a profit in the billions of dollars shouldn't they get a compensation plan that rewards increased performance?
"But, but, that guy from the oil company, why should he get so much money?" Ah, the oil company. An industry that sees a 10% profit gets called on the carpet for making an 'obscene' amount of profit. Are you aware that banks typically make 18%+ of profit every year? The only reason the oil industry looks like they are abusing the market and gaining obscene profits is because they are so big. How is a $10B profit on $100B in revenue worse than an 18M profit on $100M in revenue? It's not! If anything the oil stockholders should be asking the executives why they are stuck with only a 10% profit when the banks are getting 18%+!
"If the wealth was redistributed evenly than we could all afford better things." That argument sounds good on the surface but ignores something very important, venture capital. How many of today's startups get venture capital funding? Can you imagine the next Google going to a bank and asking for a few million dollars in funding based on an untested business model? We need that rich minority to invest in the future. It is far easier to ask a person with $100M in the bank for $1M than it is to ask 100K people for $10 each. If we got rid of the super-rich who would finance new companies? Who would buy the yachts? Who would pay a painter $250K for a piece of canvas with a couple of buckets of paint thrown on it?
"Well, the rich should still pay more in taxes." Here in lies a fatal flaw in the argument. The taxes in question are often income taxes. Income taxes, by definition, only apply to income, the accumulation of wealth. By increasing taxes on income you only further the divide between rich and poor by making it harder to become rich. There is no tax on accumulated wealth, and there should not be! The only thing close to a tax on wealth would be property taxes. How do you avoid property taxes on your wealth? Why you invest that wealth! What happens when you invest that wealth? Well, you create jobs as the people and businesses you invest in will use your money to get their business off the ground. At the end of the day you will either lose your money, gain a profit on your money, or see the value remain fixed.
"See! The rich get richer and the poor get poorer! You have just admitted it!" Not really, for every great new company there are probably ten that fail (if not more). The Market Crash of 1929 showed us that even the super-rich can become paupers if they invest their money incorrectly. For every company that makes it adds to the employment numbers of the country.
Is Capitalism perfect? Heck no, it has its flaws and it can be exploited if you have enough money. By that same token, if you use large amounts of money to exploit Capitalism there is also an increased chance you will lose that money too.
If you have the drive and determination to become rich you do not want to see wealth redistribution. If you lack those qualities than you do want to see it. Robin Hood may make for enjoyable reading but it is hardly a way to run an economy! If you continue to steal from the haves they will eventually decide that enough is enough and they will move to a place where you can no longer steal from them.
- Danny McGuire
Even when the market is down some investors are able to make money. How do they do it? With "Short Selling."
