Capital Commerce

One smart Capitol Hill observer E-mails me: "In my view, the Democrats will have a working majority even if they fall a few votes short of 60. One of the close races is Maine, but Republican Senator Susan Collins appears to be pulling away. If she wins, Democrats will often be able to get her vote and that of her Republican colleague Olympia Snowe on most domestic issues." 

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Here's a bit more on that plan floating around Democratic/liberal circles to eliminate the tax advantages of 401(k) and other retirement plans, via an interview with the author of one plan, Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research in New York. 

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Is America headed for a "lost decade" of meager growth like Japan suffered during its banking and real estate meltdown in the 1990s? That's the big debate right now on Wall Street. Yet, in Washington, the common wisdom holds that America is already waist deep into a lost decade, one marked by stagnating wages, growing income inequality, and deteriorating economic fundamentals. That has been the liberal narrative of the Bush years, and now some conservatives have begun to buy into the critique. "Even before the Wall Street crisis, the American economy had underperformed from the point of view of the average worker," former Bush speechwriter and pundit David Frum wroterecently.

At best, this narrative is historical fiction. Take the bit about wage stagnation. Indeed, the real average hourly wage for workers, as calculated by the Labor Department, is just 1.2 percent more than it was at the end of 2000. Yet many economists, including those at the Federal Reserve, think the government is overestimating inflation by nearly a full percentage point. If true, then workers have actually seen wages rise by about 10 percent since 2000. And you don't even have to tweak the inflation data if you combine wages, salaries, and benefits, as does economic analyst Ed Yardeni. Doing that, he finds that workers are 11 percent to the better since January 2001.

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I posted yesterday about a loopy idea floating around Capitol Hill to shift people out of their 401(k) plans into a government plan. It would be like Social Security: the Sequel. It would also be a $100 billion-a-year tax increase that would hit people making as low as $75,000, according to the plan's author, a prof at the New School of Social Research. My guy Ed Morrissey over at Michelle Malkins's Hot Air site makes a great follow-up point:

I'd suggest that Pethokoukis vastly underestimates the effect this change will have on the stock market. The advent of private tax-deferred retirement accounts created a huge investor class in the U.S. By some estimations, more than 70% of American adults have money in the stock market in long-term investments for their eventual retirement. That's a revolutionary change in the relationship between labor and ownership, one that capitalism succeeded in creating where Marx and his followers only fantasized.

What happens when the tax deferral on this investment ends? Most people won't want to take the risks of the market without it, certainly not on the scale they do today (about $5 trillion in capital) and likely not after the Fannie Mae/Freddie Mac collapse. They'll start moving to savings accounts or gold and removing their money from the markets. The flight of capital will eliminate the necessary engine for recovery, but that's a minor point. The price of stock will utterly collapse as everyone looks to liquidate their holdings, crashing Wall Street and throwing tens of millions out of work as publicly-held companies disintegrate.

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