Richard Backus

All recent financial 'bubbles' including the current one in real estate have had two (avoidable) causes. One was the result of tax policies instituted under President Reagan, the other was one of the unfortunate consequences of Globalization. The politics of greed, the basis of these actions, has place the entire middle- and working-classes at risk of becoming the 'second nation' warned of by John Edwards in his bid for the presidency. Both policies have lead to unchecked asset inflation worldwide. The ultimate consequence of this worldwide will be societies of rich and poor, with no middle class, similar to most poor countries today. The poor will be outbid in trying to obtain access to any of the activities or privileges currently enjoyed by our elites and a slowly-dwindling middle class. In trying to participate in any public event the average citizen will simply have not the funds.

Over the past decade or so the prices of admission to the most commonplace of events, like sports events, theater tickets, or just local social activities, have already increased to the point of unaffordability by the general public. Activities which used to be of the order of 5 dollars now cost 25 dollars, too much for many middle class families today. This is thanks to President Reagan's tax policies in the 80s allowing the rich to avoid paying even the government's expenses at that time (even though they were the main beneficiaries of government spending.) Changes in estate taxes during this same period have added to this problem. The rich are getting richer and the poor poorer. These same policies unfortunately were adopted by the Brits under Margaret Thatcher and later, to a lesser extent, by most other western European nations. Bush Jr. has further supported and extended these policies, justifying tax giveaways to the rich on the discredited supply side 'theories' of the Ronald Reagan administration.

Globalization, a scheme to 'equalize' worker wage levels worldwide, is in the process of driving western workers' wages down to those of the poorest of countries. The low bidders of the entire world will have the privilege of performing the world's labor as the world's population increases and the efficiencies of automation minimize labors’ part in production. For western workers to compete with Chinese and Indian workers today (whose wages are in the 65 cents to a dollar fifty range) would require hourly wages of 3 or 4 dollar at best (regardless of productivity differences.) So eventually these western workers will either have to be supported by the dole, or end up living in the street if they are unlucky enough to not have a friendly relative with a basement available. It is only a matter of time before this sad event takes place, 20 years at most. What will happen with the children of the current middle class will be a real tragedy. In many poor countries 'death squads' have been frequently employed to solve the problem of those unemployed and aggravating street people.

The recent stock market ‘bubbles’ and current real estate one are the direct consequence of these two policies. The rich worldwide with trillions (9+ trillion dollars in U.S. money markets alone) of financial capital, looking for even minimal returns, have participated worldwide in purchasing whatever real estate they could get their hands on, and along with financial institutions (also foreign as well as local), have purchased the (securitized) mortgages underlying most of this same real estate. Thanks to Globalization, American dollars have provided foreigners the funds to participate in this speculation in U.S. real estate and financial assets. They have driven up prices on what should be a home for a family, turned it into a speculative asset in which the actual inhabitant has little equity (only has to pay the interest on an exorbitant loan) while the real owners are the rich throughout the world and the financial institutions who have underwritten them. Unfortunately this speculation by the world's rich have put the banks into the unpleasant position of being the real risk-takers in this enterprise and are inhibiting them from currently making much-needed new loans. When all said and done, the banker took the risk and is now left holding the bag. Wall Street and the bond-rating agencies are just as guilty if not more so, but the rating-agencies have at least not suffered (except in credibility). The Wall-streeters were unfortunately victims as well, apparently believing their own sales pitches.

What needs urgently to be done is to reverse these two policies and remove the excess capital which is the real culprit in this entire mess. This would require a highly-graduated income tax and heavy estate taxes and an end to the consequences of unbridled globalization. Under a democracy, tax policy should be designed to collect the amount necessary and appropriate for the needs of the entire citizenry. Lightly taxed capital gains should be limited to only that amount of capital necessary for real sustainable capital investment. Any remaining capital gains are simply unnecessary and would result in undesirable speculation and foolish consumerism. They should be highly taxed. Estate taxes should be limited to a reasonable amount for remaining heirs, not supportive of the unborn in perpetuity. The current population should not remain in debt to the no longer living. These measures, which may seem unfair or impracticable to many, are simply a variant of those tax policies adopted during the Second World War and continued until the Reagan economic fiasco. Even while under these highly-graduated estate and income taxes, the U.S. became the richest country in the world.

In order to save western workers from the same exploitative wages and substandard lifestyles currently prevalent in S.E. Asian economies, one of two things need be done. The U.S. Government should either require their foreign trading partners to require employers to provide a worldwide living wage and worker- security laws (something the ILO, the labor-regulating agency of the U.N., should have done long ago), or the U.S. government should unilaterally impose import duties to effect the same. The U.S. government's primary duty under the Constitution is to protect the interests of all its own citizens, not the interest of foreign citizens under WTO rules. To argue over 70 percent duties on imports when there are differences of 900 percent in labor rates is truly amusing if t were not so pathetic. The WTO’s ‘free trade rules’, under these conditions, are truly a joke. No decent employer anywhere in the world should be allowed to pay an exploitative wage to its employees. If a worker does his best, working in good faith, he should be entitled to a living wage sufficient to raise and educate a family. Good governments worldwide should accept this responsibility as their paramount goal.

Without these changes, each year more than $1 trillion (from foreign and U.S. investors) will be added to the mountain of financial asset currently available for investment in the U.S. They will be available to purchase already-overvalued assets causing new 'bubbles' wherever they are invested. Appropriate federal tax policy should limit federal budget deficits, which have been a major cause of this otherwise superfluous capital. 'Fair trade' policies under Globalization should be designed to entirely eliminate those current trade imbalances which have resulted in these destabilizing investments in the U.S. If these policies were implemented, all future speculative crises could be avoided. If not, they will continue to plague the U.S. and world economies, becoming even greater in the future

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Richard Backus, author of this article, is a free-lance journalist specializing in political economy and politics. He resides in Miami Beach , Florida and his personal website is uncensoredops.blogspot.com