The Revolution Comes to Wall Street

The Revolution may have moved from Tahrir Square to Wall Street, but it’s worth keeping an eye on events in Egypt.

It’s not just the sectarian violence that erupted yesterday, killing more than two dozen people. Spengler reports today that Egypt is running out of money, running out of credit and running out of food. Even aside from the violence the situation is dire indeed.

How’s that social justice working out for Egypt?

Some have been saying that Occupy Wall Street was inspired by the Arab Spring. Others think that it’s a leftist version of the Tea Party. Still others feel that it bears a closer resemblance to last spring’s battle of Madison, Wisconsin.

I don’t think we really get very much insight into the matter by interviewing the alienated, dyspeptic youths who are the bulk of the movement’s foot soldiers.

Young people are full of the righteous emotions. Their minds are running on empty.

They are simply pawns in a game that they do not understand.

Whether young people know it or not, their protest is designed to divert responsibility for the current state of the economy away from Barack Obama and his liberal policies. It is part of a larger election strategy.

Since disaffected young people made up an important element in the Obama electoral coalition, it makes good sense that they would rather blame Wall Street for the state of the economy than admit that they voted for it.

Yet, the demonstrations do aim at a real problem. No one can doubt that there is too much income inequality in America. The rich are very, very rich, even obscenely rich, while the rest of the country is falling toward the lower middle class.

Why then is there so much income inequality and what we should do about it.

If the outsized profits and bonuses on Wall Street are the great symbol of inequality, let’s notice that these same Wall Street bankers are far more likely to be liberal Democrats than to be Tea Party Republicans. And let’s emphasize that they live in one of the most liberal cities in America, a city where people pay extortionately high taxes.

If higher taxes were the solution to income inequality New York would be the Promised Land.

It doesn’t correlate to what ideology would lead us to expect, but, since it’s real, there must be a reason.

Allow me to speculate.

First, the very, very rich do not pay taxes. Taxes do not cause them to change their life style or spending habits. If you have a billion dollars, a few million here or there makes no difference to you.

Since the very, very rich do not pay taxes, they are often among the first to propose higher tax rates. It’s part of their campaign to keep the pitchforks out of Omaha.

When Obama says that he wants to tax millionaires and billionaires, he is referring to people who make over $200,000. In my neighborhood such people are not very, very rich.

You cannot really gather too much revenue by taxing the very, very rich. There are not enough of them and there is not enough money. So the tax-the-rich crowd wants to tax the upper middle class, the people whose lifestyle and spending habits will be negatively impacted by higher taxes.

Members of this group will either cut back expenditures or leave the city. If they have children they will not only be paying high taxes to live in New York, but they often have to pay the price of private school. 

To live well comfortably in New York you need to have a lot of money.

So, you have a city like New York that is increasingly being hollowed out by high tax rates. New York is increasingly becoming a city of the rich and the rest.

Under the circumstances, how long do you think it will be before the rich decide to decamp? Even if the crime rate remains stable, there comes a point where even billionaires will have had enough of the abuse inflicted by high tax rates.

They might even become demoralized by the crowds of protester outside their offices telling them where to go.

We do know that when states levy surcharges on millionaires the millionaires tend to pick up and leave. Maryland and Oregon passed millionaire surcharges and discovered that so many rich people left their states that they received less tax revenue than before.

Higher taxes do not necessarily produce higher revenues.

If people can move, so can businesses. The financial services community does not have to stay in New York. It can move elsewhere.

Many hedge funds have moved to Connecticut. Financial services can move anywhere they want, to Singapore, Dubai, or Dallas.

Even if the top bankers make fortunes, it does not help very much if the rest of the staff is treading water. A business that cannot pay enough to provide a decent standard of living for its employees will naturally start looking to move.

Last week Mayor Bloomberg sounded the alarm. He knows, better than most, that Wall Street money is keeping the city afloat.

If 40,000 people pay half of New York City’s taxes, a migration of even a quarter of them will cripple the city government.

More taxes might very well immiserate New York City beyond the wildest dreams of Paul Krugman.

Finally, let’s offer a few remarks about the students who are camped out across America, protesting against whatever.

At the least, we can say that they are putting their college educations to good use.

The pride of America’s educational system did not acquire the skills needed to do the jobs that are available. They did not learn a work ethic that would have served to propel them into the workforce. And they did not learn that markets have a say in determining their value.

Not at all. Today’s younger generation learned how to complain. They learned how to take offense and how to be aggrieved. They have come to believe that they deserve rewards, regardless of whether they have earned them or not.

And, on top of it all, four years in an American institution of higher education has taught them how to PARTY. According to the London Daily Mail they are putting that side of their educational experience to good use.