One important fact about capitalist economics is rarely discussed.
When investor income does not match the need for new investment capitalism can not work well.
A portion of productive capacity needs to be directed to new investments. The role of the investor is to divert part of economic output away from production of goods and services, the main operation of the economy, and into building up the economy itself.
To be an investor one must have money to invest. Most rich people are not big investors because they choose to spend most of their income on luxury living, but there are a few very rich people who have so much money that they could never spend even a tiny part of it on personal consumption, however lavishly they may live.
However, if the very rich have so much income that investment outlets can't be found for it all, as is often the case, that income has no useful place to go. If that surplus income is withheld from circulation it will slow the economy. If the money goes into speculation in existing assets it will causes asset price inflation, and it will make the money disappear from circulation within the main economy as effectively as if it was under some mattress. Depression may result.
High tax rates for the very rich can put their surplus income back into circulation. Taxing surplus income helped make 20th century capitalism prosperous, but the very rich organized a successful tax revolt. The very rich hated the 90% tax rates, even though it was money they never would have spent. They discovered that taxing surplus income is not necessary to make capitalism work, because government debt will do almost the same thing.
Since the decades-long tax revolt by the rich, instead of taxing surplus income, the government borrows that money. It is hard to borrow much from anyone other than the very rich. Who else has much money to lend? That borrowing creates what we call the national debt. Now that the US government is borrowing the surplus income, investor taxes are low again, and happy investors have a secure and tax free investment outlet for their surplus income in government bonds.
The national debt roughly equals the taxes that the very rich ducked.
Borrowing surplus income in order to get it back into circulation would be a functional solution to excessive investor income, but Obama's heavy reliance on a trickle-down stimulus will make his stimulus program ineffective.
Trickle down economics is another policy tailored to please the very rich. The trickle down ideal is that surplus investor income that the government borrowed should go right back to the rich, as if it wasn't surplus in their hands already.
Most economists support directing the borrowed surplus income to where it will be spent, thus getting it back into circulation. Still, we are immersed in propaganda from the very rich telling us that investors would invest more and create jobs if they got that surplus income back. We can't stimulate the economy by giving more money to people that already have too much. Investors at the top are the only group who are not going to spend additional income, that's why it had to be borrowed from them in the first place. It is still surplus income every time it goes around the borrow/trickle cycle.
Ducking necessary taxes, putting the government into debt, and demanding trickle-down stimulus has ruined the economy. Will investors learn that restored taxes on their surplus income is in their own future self-interest?
Since it seems capitalism is incapable of reform, socialism becoming popular again. Let's hope that either reform or revolution will soon make it possible control surplus income and address the many urgent problems surplus income has created.
Barry Brooks http://home.earthlink.net/~durable/