Depressions and Depression

Listening to Barack Obama’s televised speech to Congress, I couldn’t help but get the impression that the president must have scored 800 on his verbal SAT. But he must have got scored no more than 200 on the math section. His sentences parse. But his sums do not.

As I sat marveling at Obama’s soaring rhetoric, I was silently adding up the soaring price tags on his promises of something for almost everyone – the 95% of the population who earn less than $250,000 a year. And I came to the rather gloomy conclusion that there is likely to be more than a “dead cat bounce” in income tax rates.

In the bad old days (before Thatcher and Reagan) when I was at Oxford, I was amazed that British income tax rates were over 100% in certain circumstances. I was agog that people could even survive under such punitive rates.

I remember dating some lovely English lass whose father was a Labour Party MP there (the rough equivalent of a Congressman). It made a big impression on me that her father drove over to Oxford to pick up his daughter and the scruffy Yank whom she had invited to their country house for the weekend – in a Rolls Royce.

Of course, I wasn’t shocked that a country squire would drive a Rolls Royce. The shocking part was that he was a Labour MP responsible for imposing the ruinously high tax rates that prevailed in Britain in those days. Until that moment, I had never fully appreciated the fact that socialist politicians are only too keen to drive a Rolls Royce.

Naïve Arithmetic

In our current circumstances, we’ll find plenty of Obama’s cabinet who will be only too pleased to motor around Washington in Cadillacs – products of a General Motors Corporation that has effectively gone bust. (As a footnote, not many auto buffs remember that Rolls Royce closed its manufacturing line in Springfield, Massachusetts, when auto sales collapsed in the Great Depression. I wasn’t thinking about that, however, as I settled into the soft Connelly leather hides covering the seats in that Rolls years ago.)

I probably sat silently for a few minutes chewing on the ragged edges of cognitive dissonance while we motored through the English countryside. In due course, I regained my composure enough to ask a reasonably polite version of the obvious question: How in the world could anyone afford to buy a Rolls Royce when income tax rates jumped to 83% on incomes over £20,000, with an additional 15% surcharge on “un-earned” investment income that brought the top rate to 98%?

On naïve arithmetic, assuming an earner would only keep £2,000 out of  £100,000 earned, it appeared that you would have had to earn £2.5 million just to have enough cash to spend £50,000 on a Rolls.

Of course, I put the question in a more abstract way. I asked “the honorable member” if he was not concerned that mounting such spectacularly high tax rates might lead to unemployment among auto workers. (Rolls Royce had gone bust in 1971 and the British government nationalized it in May of that year.) Since the government owned the company, it presumably had an incentive to keep the market underpinned by encouraging a sufficient number of tycoons.

He answered that there was no reason to worry, as everyone he knew paid for their cars through their companies. Apparently, a car was a deductible expense to a company and not a direct income item to a company director or officer. Therefore, a company executive could enjoy a new Rolls without having to worry about earning £2.5 million to buy one.

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A Recipe for Lower Stock Prices

The point of this recollection is that depressions lead to depressing income tax rates.

Partly, this seems to be because a great many people who were “in the game” trying to become rich (or even marry rich) during the bull phase lose all hope and ambition for wealth. Their deepest desires swing from hitting it big to just keeping a pay check. Instead of the rich being a dynamic set of people that succeed, they are considered a fixed class, the “top two percent of earners,” and a group to whom the average person has no connection.

It is hardly a coincidence that top federal income tax rates in the United States jumped from just 24% in 1929 to 63% in 1934.

This time around, the effect of steeply higher rates on small business and big business alike will be to stifle entrepreneurship, which will likely contribute to the self-fulfilling prophecy. There will be much less upward mobility, as the obstacles to becoming successful in America are to be multiplied. Obama has proposed hiking capital gains taxes by 33%. He also wants to raise dividend taxes by 33%.

That sounds to me like a recipe for lower stock prices for many years to come. If you are hoping that your “201K” will become a 401K again any time soon, you will probably be disappointed.

The Collapse of “Bull Market Dating”

Among the many consequences of the change in the credit cycle and the immediate impoverishment of a large cross-section of former investment bankers, mortgage brokers and real estate developers has been the collapse of “bull market dating.”

As the Washington Post reported earlier this week, the economic downturn is “taking some of the thrill out of dating” because “financial stress is affecting the romantic lives of those who lost sizable disposable incomes.”

Single men and women are adjusting to the downturn by looking for “cheap dates” and ways of interacting that don’t require a bull market budget. And while some guys have stopped trying to impress women with their financial success or drive, some women have responded by withdrawing from dating altogether, because they see no future with a man without money.

A Natalie Huddleston (27) told the paper she has had fewer offers of dates since the market crash.

“I feel bad for the guys who don’t have jobs” she said.

But apparently, not bad enough to date them…

“So if a guy can’t really take you out or doesn’t have the money or the state of mind to take girls out, then it’s not going to go anywhere,” she continued.

Reading Ms. Huddleston’s depressing comments makes me exceedingly grateful that I am married to my beautiful wife. As amazing as it may seem to anyone who doesn’t know us, she really loves me. I don’t have to worry that adverse market movements will make her go anywhere. The stereotype of a young beauty queen married to an older guy is that she must have a lust for the money.

My wife is much better than that. We have a blast together. I have no doubt that if I lost every penny to my name, I could live with her on a shoestring and enjoy great companionship, great sex, and an occasional stimulating argument.

I am lucky enough to be able to say that I am a happy man. It took me a long time to find the right woman. But I am glad I succeeded before the music stopped.

The Paradox of Abundance

During economic depressions dating is not a big sport. Depressions are times for marriage and commitment.

Just as the “Roaring Twenties” idolized riches and glamour (and gave rise to the sort of promiscuous parties recorded by F. Scott Fitzgerald in The Great Gatsby ), so did the recent bull phase of the current credit cycle. That is now over.

I don’t explicitly believe that high tax rates are conducive to strong marriages. But the issue is embroiled in paradox.

The puzzle is that during boom times, individuals who lose their jobs or find themselves swindled out of riches by some character like Bernie Madoff and become emotionally depressed.

In other words, when people are facing desperate economic circumstances they actually become happier. They turn away from materialism to the things that matter. Marriages endure. Health may even improve, in spite of hardship.

This is also the paradox of abundance. The financial crisis we are experiencing allows us to rediscover what is really important in life.

You see, before we can become financially successful, we need to be emotionally grounded. And this requires finding the resources within ourselves to take advantage of this time in history.

It’s a good time to be married, provided you’re not trying to date a Ms. Huddleston.

James Davidson

Editor,

Abundance

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