On October 18, 2013, James Freeman writes on The Wall Street Journal opinion page:
Stan Druckenmiller makes an unlikely class warrior. He’s a member of the 1 percent—make that the 0.001 percent—one of the most successful money managers of all time, and 60 years old to boot. But lately he has been touring college campuses promoting a message of income redistribution you don’t hear out of Washington. It’s how federal entitlements like Medicare and Social Security are letting Mr. Druckenmiller’s generation rip off all those doting Barack Obama voters in Generation X, Y and Z.
Mr. Druckenmiller describes the reaction of students: “The biggest question I got was, ‘How do we start a movement?’ And my answer was ‘I’m a 60-year-old washed-up money manager. I don’t know how to start a movement. That’s your job. But we did it in Vietnam without Twitter and without Facebook and without any social media. That’s your job.’ But the enthusiasm—they get it.”
Even at Berkeley, he says, “they got it. There is tremendous energy in the room and of course they understand it. I’d say it’s a combination of appalled but motivated. That’s the response I’ve been getting, and it’s been overwhelming.”
This was not the Wall Street consensus. He also said that a “technical default,” in which the government is a week or two late in making payments on its debt, would be “horrible” but not “the end of the world” if it produced reforms that put U.S. finances on a sounder footing.
Then as now, he argues that major reform to protect future generations would be worth a short period of market turbulence.“If there’s something really big on the other side in terms of entitlement reform, it’s worth using the debt limit. And God forbid even if you go a day or two over it in terms of interest payments,” he says, the country would be better off “if and only if you got big, big progress on a long-term problem.”“I did not think it would be nutty to tie entitlements to the debt ceiling because there’s a massive long-term problem. And this president, despite what he says, has shown time and time again that he needs a gun at his head to negotiate in good faith. All this talk about, ‘I won’t negotiate with a gun at my head.’ OK, you’ve been president for five years.”His voice rising now, Mr. Druckenmiller pounds his fist on the conference table. “Show me, President Obama, when the period was when you initiated budget discussions without a gun at your head.”
Which brings him back to his thieving generation. For three decades until 2010, Mr. Druckenmiller ran the hedge fund he founded, Duquesne Capital. Now retired from managing other people’s money, he looks after his own assets, which Forbes magazine recently estimated at $2.9 billion. And he wonders why in five years the massively indebted U.S. government will begin sending him a Social Security check for $3,500 each month. Because he earned it?
“I didn’t earn it,” he responds, while pointing to a bar chart that is part of his college presentation. Drawing on research by Boston University economist Laurence Kotlikoff, it shows the generational wealth transfer that benefits oldsters at the expense of the young.
While many seniors believe they are simply drawing out the “savings” they were forced to deposit into Social Security and Medicare, they are actually drawing out much more, especially relative to later generations. That’s because politicians have voted to award the seniors ever more generous benefits. As a result, while today’s 65-year-olds will receive on average net lifetime benefits of $327,400, children born now will suffer net lifetime losses of $420,600 as they struggle to pay the bills of aging Americans.
One of the great ironies of the Obama presidency is that it has been a disaster for the young people who form the core of his political coalition. High unemployment is paired with exploding debt that they will have to finance whenever they eventually find jobs.
Are the kids finally figuring out that the Obama economy is a lousy deal for them? “No, I don’t sense that,” says Mr. Druckenmiller, who is a registered independent. “But one of my points is neither party should own your vote. And once they know they own your vote, you’re not going to get any action on this particular issue.”
When the former money manager visited Stanford University, the audience included older folks as well as students. Some of the oldsters questioned why many of his dire forecasts assume that federal tax collections will stay at their traditional 18.5% of GDP. They asked why taxes should not rise to fulfill the promises already made.
Mr. Druckenmiller’s response: “Oh, so you’ve paid 18.5% for your 40 years and now you want the next generation of workers to pay 30% to finance your largess?” He added that if 18.5% was “so immoral, why don’t you give back some of your ill-gotten gains of the last 40 years?”
He has a similar argument for those on the left who say entitlements can be fixed with an eventual increase in payroll taxes. “Oh, I see,” he says. “So I get to pay a 12% payroll tax now until I’m 65 and then I don’t pay. But the next generation—instead of me paying 15% or having my benefits slightly reduced—they’re going to pay 17% in 2033. That’s why we’re waiting—so we can shift even more to the future than to now?”
He also rejects the “rat through the python theory,” which holds that the fiscal disaster will only be temporary while the baby-boom generation moves through the benefit pipeline and then entitlement costs will become bearable. By then, he says, “you have so much debt on the books that it’s too late.”
Unfortunately for taxpayers, “the debt accumulates while the rat’s going through the python,” so by the 2040s the debt itself and its gargantuan interest payments become bigger problems than entitlements. He points to a chart that shows how America’s debt-to-GDP ratio, the amount of debt compared with national income, explodes in about 20 years. That’s where Greece was when it hit the skids, he says, pointing to about 2030.
Breaking again with many Wall Streeters but consistent with his theme, Mr. Druckenmiller wants to raise taxes now on capital gains and dividends, bringing both up to ordinary income rates. He says the current tax code represents “another intergenerational transfer, because 60-year-olds are worth five times what 30-year-olds are.”
And 65-year-olds are “much wealthier than the working-age population. So the guy who’s out there working—the plumber, the stockbroker, whatever he is—he’s paying the 40 percent rate and the coupon clippers who are not working anymore are paying a 20 percent rate.”
Ah, but what about the destructive double taxation on corporate income? The Druckenmiller plan is to raise tax rates on investors while at the same time cutting the corporate tax rate to zero.
“Who owns corporations? Shareholders. But who makes the decisions at corporations? The guys running the companies. So if you tax the shareholder at ordinary income [rates] but you tax the economic actors at zero,” he explains, “you get the actual economic actors incented to hire people, to do capital spending. It’s not the coupon clippers that are making those decisions. It’s the people at the operating level.”
As an added bonus, wiping out the corporate tax eliminates myriad opportunities for crony capitalism and corporate welfare. “How do the lobbying groups and the special interests work in Washington? Through the tax code. There’s no more building plants in Puerto Rico or Ireland and double-leasebacks and all this stuff. If you take corporate tax rates to zero, that’s gone. But in terms of the fairness argument, you are taxing the shareholder. So you eliminate double taxation. To me it could be very, very good for growth, which is a huge part of the solution to the debt problem long-term. You can’t do it without growth.”
“I would go for something simple that is very, very tough for the other side to argue, for example, means-testing Social Security and Medicare,” which would adjust benefits by income. He notes again his impending eligibility for a monthly government check.
“I don’t need it. I don’t want it. I could also make the argument that every health expert will tell you that wealthy people live 4.5 years longer than the middle class or the poor. So I’m going to get paid 4.5 years more than the middle class or the poor,” he says.
“I think a much more effective strategy would be for them to publicly shine a light on something so obvious as means-testing and take their case to the American people rather than go through the actual debt limit.”
If Mr. Obama rejects the idea, “then we will really know where he is on entitlement reform.” For this reason, Mr. Druckenmiller views means-testing as “really the perfect start—and it should only be a start—to find out who’s telling the truth here and who’s not.”
What is interesting to me is that the closest Stan Druckenmiller gets to the distinction between the vast majority of Americans dependent on wages and government welfare support and the wealthy ownership class is his use of the terminology of “coupon clippers”––meaning those who are the OWNERS of corporate stock representing productive capital assets.
The 400 wealthiest Americans and the other 1 to 10 percent richest Americans are rich because they own wealth-creating, income-generating productive capital assets. The disenfranchised poor and working and middle class are propertyless in terms of owning productive capital assets.
Because productive capital is increasingly the source of the world’s economic growth, shouldn’t we be asking the question why is not productive capital the source of added property ownership incomes for all? Why are we not addressing how the system facilitates greed capitalism and envy while concentrating productive capital ownership among the 1 to 10 percent of the population?
Still there is perhaps promise for Druckenmiller to understand the change that is necessary to reform the system to provide equal opportunity for EVERY American to acquire wealth-creating, income-generating productive capital assets on the basis that the investments will pay for themselves––and on the same terms that the wealthy ownership class now utilizes. They are able to use the investment’s earnings to pay off the capital credit loans used to finance their investments, without having to use their own money or deny themselves consumption.
My colleague at the Center for Economic and Social Justice (www.cesj.org) Norman Kurland comments:
Your interview with Stanley Druckenmiller “How Washington Really Redistributes Income” (Wall Street Journal, October 19-20) offers one of the most realistic descriptions of what’s wrong with Washington politics today. What’s needed is a systemic solution — not just a third way but a genuinely “Just Third Way.
Druchenmiller might be open to an approach that President Reagan as early as 1974 called an Industrial Homestead Act” based on the macroeconomic systems theory of Louis O. Kelso in his 1958 book with the philosopher Mortimer J.Adler, The Capitalist Manifesto. A comprehensive national economic agenda now called “The Capital Homestead Act” — would (1) stimulate non-inflationary market-based growth, (2) create millions of new private jobs without government subsidies, (3) begin to reduce income redistribution spending, (4) radically simplify the Federal income tax system in ways that automatically eliminate future budget deficits, (5) switch to general revenues for funding “entitlement” promises, (6) equalize access to future capital ownership opportunities for every citizen as a fundamental human right (as is now available for over 12 million American private sector workers through Kelsonian-invented Employee Stock Ownership Plans (ESOPs), (7) encourage local commercial banks and capital credit insurance companies, supported by the Federal Reserve, to enable every man, woman and child to borrow through a “Capital Homestead Account (CHA)” or IRA asset-backed and insured capital credit to purchase new or transferred equity shares from viable commercial, industrial and agricultural enterprises repayable (as with ESOPs) with tax-deductible future profits of companies issuing CHA shares, and (8) return the Federal Reserve to its original policy under Section 13(2) of the Federal Reserve Act favoring asset-backed money over government debt-backed money policies, which was a major contributing factor to the threat to the U.S. dollar as the world reserve currency.
A summary of the proposed Capital Homestead Act can be read at http://www.cesj.org/homestead/
summary-cha.htm. If both Ronald Reagan and Hubert Humphrey could agree that our national economic policy should encourage equal ownership opportunities as a twin pillar to full employment, my hunch is that open-minded members of the top 0.01 percent of the wealthiest Americans like Stanley Druchenmiller will also support the Just Third Way. It will revive the original economic morality of the American economy as a just free market and private property-based model spreading economic empowerment from government to the people, uniquely without redistributing property rights from current owners.
http://online.wsj.com/news/articles/SB10001424052702303680404579141790296396688
