What Happened to the American Dream?

The problem with Mitt Romney's taxes isn't Mitt Romney. He shouldn't be considered a bad person because he works to make a profit, is successful, and pays the legal tax rate on his earnings.

The problem is that if elected, he is not likely to change that particular tax rate structure and improve America's economy.

American capitalism was once based on what was known globally as "the American Dream". It was based on the founding fathers' meritocratic ideals: incentives were built into the system such that people would want to work hard; then society would reap the benefits of the hard work of its citizens.

Those meritocratic incentives had two pillars to them: equal opportunity at the starting gate, and then a competitive environment that would reward merit (a combination of talent and hard work). The human instinct for the pursuit of happiness would take care of the rest.

Equal opportunity means all citizens should have access to the basic tools needed to compete, things like freedom, protection from violence, an education.

Then, a competitive environment with rewards is needed. Soviet communism didn't work because without rewards people don't have a reason to work, to bring forth new ideas, to build. The measure of whether a society has a functional reward system is social mobility; the more people are changing their level of wealth (for better or for worse), the more the society has incentives in place that reward merit. Societies with high levels of social mobility tend to also have high levels of economic growth, such as China today.

Back to Mitt Romney's 15% tax rate. Studies are showing that social mobility has slipped in America. It is harder than it used to be to improve one's status. The 1% are hoarding the wealth, hanging onto it and making it grow for them by lobbying, powerfully, to pay lower tax rates than the middle class (with notable exceptions like Warren Buffett). The rich-poor gap is increasing. The education divide is increasing. Equal opportunity has gotten lost, and the reward system (falsified lately by easy credit, leading to broken dreams) is distorted and dysfunctional.

Tax rates really need to be fair, and need to be structured precisely around a study of how progressive they can be to provide both equal opportunity and rewards for hard work. The American Dream needs to be brought back, and then the economy will work again too.

Italy's Formula

The European debt crisis rages, with the waters (temporarily?) calmed due to a successful strategy by the European Central Bank, with other banks, to keep liquidity flowing and bond issues subscribed.  The governments of Greece, Ireland, Spain, Portugal, and above all Italy (too big to fail?) need to bring debt and deficits down to sustainable levels.  That comes through austerity measures: after decades of loose spending, costs must be reigned in and bills paid. Yet austerity compromises economic growth, the most important ingredient for sustaining interest payments and paying back debt. Noone really has answers as to how European governments can stimulate growth at the same time as administering austerity. The solution is good management. Business schools abound with case studies on how companies on the verge of bankruptcy have been turned around and made successful, in the face of seemingly impossible challenges. Italy's new management has just put forward a bill designed to remove various systems and structures inhibiting growth, unleashing the hidden potential in the economy. The government claims, citing independent studies, that such unleashing of potential could boost annual GDP by more than 10%. The tricky part will be convincing interest groups (taxi drivers, lawyers, pharmacists and so on) to let go of acquired, beloved protectionist mechanisms, to not go on strike, to not take to the streets, to yes roll up their sleeves and get down to work for the good of the nation. The beauty of the government's bill lies in the detail. Lawyers will be required, for the first time, to issue an estimate of their fees in advance. Local governments have been commanded to remove any rules that "condition, impede, or delay the launch of new businesses or the entry of new economic players", by the end of this calendar year. There are many other parts to the package, mainly liberalizing the economy but also pumping money into infrastructure projects that will create jobs and move the economy. Little things like lawyers offering estimates can go a long way. Healthy competition will be created. Consumers will get in the habit of shopping around more. Lawyers will have an incentive not only to charge less, but to offer better quality services. Hard work and talent will mean getting ahead. Young people will have an incentive to work hard, because in a free market hard work pays off (in Italy you tend to have to "know someone" to get ahead; talent doesn't necessarily get you anywhere). The government's bill also takes a stab at improving Italy's judicial system by carving out a section of the courts, to be specifically devoted to company disputes. It aims to get such disputes settled quickly and effectively. There is a great story about how in the land of random justice and never-ending trials, the court in Turin decided to introduce an efficient "first in, first out" policy to push cases through quickly. This had huge repercussions: companies started paying their suppliers because they knew if they didn't they'd be forced to in court. Once laws became enforceable, people started abiding by them. The rule of law is the most basic foundation for a functioning economy. (This, by the way, is the best way to combat the mafia, or corruption: introduce a functioning, clear, effective judicial system.) In the end, freedom to express potential in a fair, meritocratic system should be the key to the conundrum of how we can have austerity and stimulate growth at the same time.

Where are the Ideas?

Where are we in history? We've rolled out Republican ideals, toyed with Libertarianism,  breezed through Marxism, tussled with Anarcho-Sindacalism, accepted the victory of Capitalism. Today formerly Communist and Socialist economies are marching forward with their own varieties of Capitalism, about to beat the West at its own game and sweep the broken pieces under the rug. But economic systems - the ways humans choose to organize themselves in community - never stop evolving. So what is the next wave? Clearly in the West it isn't about the struggle of the Worker anymore. It is, more likely, about the widening of the rich-poor gap, the 1 percent versus the 99 percent. Our finance-weighted capitalism, if left to its own devices, uncurbed, widens that gap. Possible future scenarios range from a magical, never-ending supply side growth trend with happy trickle-down effects that appease the poorest even as the gap is widening, to a day of reckoning when all the debt is called in and dominoeing defaults freeze credit, liquidity, and life as we know it. Or we could see growing frustration, revolution, an Occupy movement engulfing everything. Or globalization accelerating to a gallop and newer parts of the world sucking financial wealth like a vacuum far away to distant lands. In the US the debate is very much focused on large government versus small government. It is somewhat misguided, in the same way purely theoretical ideologies like Marxism or Libertarianism have been misguided: human nature always comes into it and ruins everything. Thus a society with big government will inevitably become unwieldy and corrupt, while too little government provokes injustice and fails to address societal issues that cannot be addressed at the level of the individual. Any group forming a community must have rules, as well as the tools to make sure those rules are respected. Beyond that, there is a crucial role for government: it should pursue the long-term benefits of the society as a whole, benefits such as clean air, education, or infrastructure. Society as a whole can wear different hats. It can be the Consumer. In a country where the Consumer is king, the government might decide that legislation should aim to make a wide choice of products available with prices competing downward. But in certain cases this can have dangerous consequences, such as the lack of a single standard for cellphones across America, or the electricity blackouts in California. It could mean risking product safety, or allowing for abusive child labour. Another hat is the Taxpayer. The government can decide the Taxpayer is king and needs his taxes cut no matter what. Or the government can focus on Constituencies. Lobbies. Interest Groups. One versus the others in a vicious power game involving votes and money. Or society can wear the hat of Future Generations. This would be the wisest way for a government to approach society (though practically impossible within our current political systems). It would mean cleaning up air pollution to save on future health costs. It would mean investing in technological innovation. It would mean lots of training programs and support for entrepreneurial initiative. And it would mean spending money wisely, working together, creating value for all.