Wednesday, March 16, 2011

The Economics of Michael Moore

Michael Moore has been pushing the idea that we are not broke so we do not need to make government cuts on any level. His proofs are scatter-shot. He points to the cash reserves that businesses are accumulating and that fact that profits are up. He also points out that the 400 richest Americans are worth more than the bottom 50% combined. "The problem is that we are letting the rich keep too much of their money," he says. Let's take a closer look.

Corporate cash reserves are an interesting place to begin because they are easily misunderstood. Right now they are something over $2 trillion. That sounds like they are hoarding huge amounts of cash that other wise could be stimulating the economy. However, the way that cash reserves are calculated is misleading. Let's say that you have $2,000 in your pocket right now and call that your cash reserve. But, your rent is due and you have to make a car payment. Suddenly that cash reserve doesn't look so big. Corporate cash reserves work the same. Their cash on hand has to cover their payroll and other expenses. In addition, they are required by law to keep certain levels of cash on hand to meet emergencies. Subtract all of that and the corporate cash reserves drop by 75%. That still leaves them higher than normal but not high enough to provide a real stimulus.

What about the rich? If they control so much of the nation's wealth then we should take it away from them, right? Again, this is a lot more complicated.

First, why does the bottom half control so little wealth? Part of this is demographics. People under 30 tend to owe more than they own. When I was in my 20s we rented an apartment. We had two cars and some money in the bank and never missed a payment but, between car loans and student loans, we probably owed more than we were worth. We are a lot better off now. Not counting inheritance, we still have savings and a lot of equity in our house.

This is typical. Younger workers have not had time to accumulate much wealth and have a lot of debt. Even Bill Gates had a year or so when he had to live in his Microsoft office because he couldn't afford an apartment. People in the lower half may never reach the top 400 but most of them will cross into the top third at some point in their lives.

But let's assume that the top 400 have accumulated far too much wealth and we should take it away from them. Their total net worth is still less than the current deficit by around $200 billion and we still have next year's deficit to worry about and they year after that.

It gets trickier. Let's look at Bill Gates. He is currently worth around $56 billion. What if we decided that most of it was undeserved and seized $55 billion? What we would get is a pile of investments, mainly Microsoft stock. The government cannot spend stock so it would have to sell it off but it would not get anywhere $55 billion for it. That $55 billion is based on the current price but a massive sell-off would affect the price. When you dump that much stock it causes the price to drop and once it starts going down, it plunges rapidly. That's what caused housing prices to drop so much - too many people had to sell at any price.

Besides, who is going to buy Bill Gate's Microsoft stock if we also seize most of the assets of the other top 399? They will be selling their investments, also. The international markets would collapse.

Michael Moore insists that we do not need to cut government, we just need to soak the rich but $1.6 trillion is a lot of money. The rich don't have that much pocket change and trying to saddle them with the bill will end up hurting the rest of us. It might be indirect but it will happen. An example was the luxury tax levied on expensive yachts under George H. W. Bush. At the time this looked like a pittance on rich people's toys but most expensive boats are bought by the upper-middle class who take out a mortgage to do it. The tax doubled the required down payment and made these boast too expensive for most people. The boat-building industry saw an 80% drop in sales and the tax ended up reducing tax revenue by more than it raised. Eventually it was repealed.

Let's take one more look at Bill Gates and Moore's assertion that we are letting the rich keep too much of their own money. Gates founded Microsoft in the 1970s. Originally it consisted of three people and one product - a BASIC interpreter. After making a deal with IBM to provide an operating system, the company really took off. Most of Gates' wealth came from his stock in Microsoft. If we let him keep too much of his wealth then how would that have worked? Would we have required him to sell off portions of his holdings whenever they reached some limit? How would that have affected Microsoft? Would it have still grown?

None of that matters in the world of Michael Moore. He sees the world with a Marxist lens that says that wealth is bad and the rich are undeserving. I have no idea how he reconciles that with his own personal worth of $50 million. Would he still make movies if we capped his income at $100,000 per movie?

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