26 September 2008

The Middle Class, Free Markets, and The Financial Crisis

This letter from Mark Goodman arrived today in my email. Having a home business, particularly a network marketing business, is a perfect of example of a free market economy working the way it's supposed to.

Dear Friends,

The fundamental principle of Barack Obama's economic policies is that sustainable, long-term economic growth requires a robust middle class and properly functioning free markets.

How is the Middle Class Doing?

We have just completed the first economic expansion on record during which middle class incomes actually declined. At the same time, energy and health care costs have soared. This middle class squeeze is occurring as globalization causes a massive transfer of manufacturing jobs to China and service and technology jobs to India and elsewhere.

IRS data shows that we are in a 30-year trend of increasing income inequality while wealth is becoming increasingly concentrated in the top 1% of households, which now own more than the bottom 90%.

The Bush tax policies have exacerbated this growing inequality by cutting taxes for the wealthiest Americans whose incomes have grown faster than any other group while their average tax rate has declined more than any other group.

Obama will correct this distorting effect of the tax code by allowing the Bush cuts to expire and providing tax relief to 95% of households. Taxes will be lower or the same for everyone making less than $250,000 per year. The tax code will revert to its 1990's rates for everyone else.

Capital gains and dividend tax rates will remain the same for people making less than $250,000, and will increase only modestly to 20% for the top 2% of earners.

Middle class relief will also come in the form of a series of tax credits—for tuition, mortgage interest, fuel efficient vehicles, etc.

Since small business are the source of 80% of new jobs in our economy, Obama proposes eliminating capital gains taxes for entrepreneurs and investors in start-ups and small businesses.

He will also reform or eliminate corporate tax loopholes, breaks, and havens in order to eliminate perverse incentives that lead corporations to move jobs overseas or maintain an office in the Cayman Islands.

But it is not enough to reform the tax code. Our economy faces enormous challenges in three key areas—energy, infrastructure, and education—and the thrust of Obama's economic plan is to address each of these areas with an ambitious plan for public and private investment. These challenges can become opportunities for enormous wealth creation and job growth.

In stark contrast to the current Republican administration and Senator McCain's economic proposals, Obama is committed to fiscal discipline. Investments will be paid for with an aggressive approach to wasteful spending and a framework of accountability and efficiency for programs worthy of being funded by the taxpayer.

The $10 billion per month expenditure in Iraq (while the Iraqi government sits on a $79 billion surplus) will come to an end with the responsible conclusion of the Iraq war.

As Justice Brandeis said, sunlight is the best disinfectant. The recently passed Coburn-Obama Bill (The Federal Funding and Accountability Act) will allow anyone to search $1 trillion in government spending. Obama also proposes that citizens be able to read on-line any bill pending the signature of the President; that meetings between lobbyists and government agencies be broadcast on-line; and that it be made public which corporations receive how much in benefits from tax bills.

How is the Free Market Doing?

A market that is subject to manipulation, that incurs excessive risk, that lacks accountability for that risk, and that lacks the transparency necessary for its proper functioning is not free. It is the role of the government through fiscal and monetary policy to ensure stable macroeconomic conditions, and through its regulatory framework to ensure stable financial conditions.

In 2006, Senator Obama introduced legislation to prevent fraud and abuse in mortgage transactions.

In 2007, he formally warned Secretary Paulson and Fed Chairman Bernanke about rising foreclosure rates and proposed a home ownership summit with all the stakeholders in order to avert a crisis.

In a speech at the NASDAQ in the fall of 2007, Obama warned that public trust in the capital markets must be restored and that pain on Main Street may trickle up to Wall Street.

In March, in a speech following the collapse of Bear Stearns, Obama traced the sub-prime crisis to lax oversight and called for a new regulatory framework adequate to new market realities.

But here we are. With respect to the proposed $700 billion bail-out (which, by the way, is only the beginning), Obama is insisting that there be no blank check and proposes the following stipulations:

  1. A bi-partisan, independent Board to ensure oversight and accountability for the money that is spent.
  2. That the taxpayer be treated like an investor and participate in the up-side
  3. That the foreclosure problem be addressed in a separate bill
  4. That Wall Street CEO's not receive bail-out money in the form of bonuses

Going forward, financial firms that can be bailed out by the government should be subject to government oversight. Capital and liquidity requirements should be strengthened. The regulatory agencies should be streamlined to address the post Glass-Steegel reality. And there must be a process to identify systemic risk to the financial system with regular reporting to the President and Congress.

Free markets facilitate prosperity. A robust middle class drives long-term economic growth. It's time for a President who understands these basic principles.

Mark Goodman

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