Wednesday, December 12, 2012

Wall Street Develops Stockholm Syndrome

Barely able to contain its delight today, the New York Times reported that major executives, particularly Wall Street executives, had come around to the "need" for higher taxes.

I seriously doubt a single one of them actually thinks raising taxes is a good idea. But they fear the fiscal cliff more than tax hikes, and they suspect Obama might be more than willing to let us all go over that cliff if the Republicans don't yell "uncle" on rates. Also, if you run a big business these days, particularly in the financial sector, big government is your not-so-silent partner. It works like a protection racquet: don't pay/acquiesce, and you get hurt. Pay up, and your new friend will protect you from unseemly things like competition. Regulation after regulation are raising the bar for entry so high that few newcomers will bother trying anymore. It's true in banking, it's true in conventional money management, and it's true in hedge funds.

Most of these execs know there's a difference between tax rates and tax revenues. They know that raising rates won't bring in anywhere near what the government projects and might even bring in less. They might also know that the rich actually paid a higher percentage of the tax burden after the Bush tax cuts, not before. If they're really on their game, they might even beware of Hauser's Law, which demonstrates that the government only brings in about 19% of GDP in tax revenue no matter where you set rates.

But they must keep their new partner happy, particularly as the latest cudgel, Dodd-Frank, begins to get implemented next year. And they are walking on eggshells - their task master in the White House is not pleased with his Wall Street subjects who largely abandoned him this past election. Examples will be made!

These executives won't actually personally suffer with the higher rates. Once you're worth a certain amount, it doesn't really matter much, so on a purely rational, self-interested basis, their collective kowtow is almost understandable. What they lose in after-tax income will be made up for by what they gain in regulatory advantages and general market stability, or so they think.

They will find themselves wrong. They are helping set up a terrible deal with tax hikes today and budget cuts tomorrow, which, if history is any guide, will never materialize. Debt will overwhelm us, as will market instability.

I wonder how much time will have to pass before we all look back and say, "What the hell could we have been thinking."