Low rates = slow death.

In the United States since 1990, we have had a tax policy built on every false premise of human nature. It all boils down to one salient fact: What will our policies do to provide the necessary incentives for American entrepreneurs to create and expand businesses?

The recent disaster enacted

Economic growth is created only by people who produce things. The only incentive to create a business which creates real jobs is to have a measurable reward. A 55 percent tax bracket (New York City self-employed's top bracket) provides no risk for reward incentive. Worse than that, all the class envy, while despicable at best, merely tells those who succeed for psychic reasons that the leader of the raw deal will not honor, but rather deny, even their intangible success.

This isn't complicated for direct marketers to understand. No matter how easy it was to enter into business or how successful your testing was, if your results would provide no back-end return, you wouldn't commit your resources. On a macro level, Clinton has told everyone who'd take a loan for new investment that they can't have a return to justify the risk. Unlike the lie of the 1980s that all the money was merely being reshuffled, that is the reality in the 1990s. The few loans people are taking out are to refinance old loans, not for investing in the future. Low interest rates with high tax rates is the real voodoo economics.

This isn't complicated for the general public either. If any of you saw the movie "White Fang," you remember the endless stream of men climbing the mountain to the Klondike gold fields. If they got to the top and had seen Clinton ready to confiscate any real gain as well as insult their efforts as "privilege," they'd have gone home--period. No gold would be mined. Everyone loses. Interest rates were triple of what they are now when Reagan arrived, but he promised you a gain for effort. It is the ability to take home a gain, not low interest rates, which spurs a person to take any form of risk.

In short, lowering interest rates while increasing tax and regulatory burdens is a prescription for economic decline and social chaos. It is a triumph of ideology over economics. Why not try something revolutionary? Rather than encourage debt for stimulus, let people actually keep more of the money they earn. This would be a triumph of economics over ideology.

Who Creates Jobs In The United States?

Ignore for a minute the flat-out lie about only the rich paying more. Does any serious adult believe that the money the "rich" save, invest and spend doesn't go to job formation? If anyone in quotaville D.C. was hired on an effective economic track record, they'd have a working knowledge of the velocity of money. Money in private hands has a 6 or 8 to 1 faster turnover rate when compared to that confiscated by government. The Bush recession, which will be the Clinton depression, is largely one due to the lack of this velocity stimulus. Maybe the rich don't notice a change in their living standards, but others, who depend on them, most definitely did and will (it is almost a cliche to discuss the lost, blue collar boat building jobs due to the "soak the rich" excise tax).

The real lie in all the sell of the budget "plan" was that we're not talking about idle rich in some class warfare hypothesis. We're talking about a marginal rate increase of 30+ percent, which will largely be paid by sole proprietors, partnerships and subchapter S corporations. Here, corporate profits are paid at the individual rates of the owners. According to Dun & Bradstreet, 80 percent of new jobs in 1993 will be created by businesses with 100 or fewer employees. What this means is that almost a million of these higher "individual" taxes will actually be imposed on small businesses and family farms throughout America. Even a proprietor making $20,000 annually will lose deductions (clubs, business news) resulting in higher-income and self-employment taxes. The whole plan is built on lies and sold to you by liars.

The top 1 percent is a particularly insidious distortion because it ignores the key marginal impact on the next dollar to invest and expand. An employer that sees its tax rate go from 34 percent to 35 percent must boost earnings by 17.8 percent just to maintain its dividend. All employers will ask: "How am I going to expand and create jobs if I don't/can't make any money?" This disincentive guarantees a continuing jobless "recovery."

To put it simply, these people are working from January through July just to pay taxes. Clinton forcing on them the largest increase in marginal tax rates in half a century (prior to socialized medicine taxes) compels any rational person not to buck the system. Finally, guaranteeing free medical care to the world (United States, illegal immigrants, whomever) is a further disincentive for anyone to hold a job, much less create them.

Why should any business buy more equipment to make more products when their customers (the "rich") are buying less because more of their money is being confiscated by taxes? They have to lay off employees or at least not create any new jobs. The disincentive mess snowballs. The laid off workers don't pay taxes so total revenue declines.

The benefits of wealth are not confined to the individual who possesses it. All of society is served by the enhancement of labor's productivity, which depends critically on capital formation. The adverse effect of taxes on the productive and their capital formation are costs imposed on society as a whole.

This mean-spirited attack on return has ended any development of new industries/technologies to get us out of our mess. The 1980s telecommunication, software, et al. revolutions can't carry the 1990s. The innovators of the 1980s are now derived as "greedy, rich, privileged," etc. by the current pseudo-governance.

The mean-spirited attack on small employers is found in a lot of the small print the media deliberately ignored. In 1988, even Congress realized the IRS penalties were an improper revenue raising tool due to costs, paperwork and harassment. Clinton demanded and got this changed so that the IRS can return to its penalty incentive harassment, hoping small businesses and lesser educated taxpayers will pay blackmail rather than endure the red tape nightmare and days from work needed to assert their rights.

Arkansas' apparatchiks are also illogical. They're not going to collect a dime from the "rich." They constantly accuse employers of being greedy but then bizarrely assume that such greedy people won't take evasive action (or nonaction) to avoid losing their money to the black hole of D.C.

The National Center for Policy Analysis estimates that this budget will destroy our opportunity to create nearly 1.3 million jobs over the next five years, slash $2,500 per average household from gross domestic product by 1998 and lower capital formation in our country by an astounding $1.76 trillion through 1998. As The Wall Street Journal stated July 20, "No amount of class warfare rhetoric from the Treasury can turn this witch's brew of taxes and mandates into anything but poison for the economy."

New Democrats Are Old Republicans

Today, Conservatives are the party of the entrepreneurial class. They are the heirs of the party of Lincoln through Coolidge which created the United States as the world's only economic and cultural superpower. Republicans (Bush, Brady, Darman types) merely are the party of old wealth. Their goal is to lower interest rates to benefit old money bondholders. Their economic mess was personified by a political lie ("No new taxes") which translated into an economic lie (i.e., deficit cut of 1990).

Democratic leaders today have forgotten their party's populist roots. The party that sought to protect the granges, workers, immigrants et al. will now crucify us on a cross not of gold but of bonds.

Clinton's personal lie was "change." His economic mess is Bush/Brady/Darman II. It has the same phoney argument and the same bracket and gas tax hikes. He will soak those trying to be rich so that the retired rich can clip their coupons and reap the windfall of declining interest rates. New Democrats are simply spineless liars like Rep. Marjorie Margolies Megvinsky who lie in their election, lie to the hometown media the night before and then vote the way the D.C. bosses tell her to. Hers was not a judgment call but a lie, and hopefully she'll join the Senate's leading liar DeConcini in retirement.

We'll reap the whirlwind. Low rates with high taxes failed in 1990. It will fail worse in 1994. Bush cut rates 24 times. No one cared because you don't risk your capital taking a matching loan when there is no reward--just confiscation. Better to buy bonds and watch the underclass pit themselves against the striving class in a Hegalian man against everyman class warfare.

No one will gain under Clinton except the rich bondholders and the rich trial lawyers. It is truly an economic program administered by an evil eye.

Real Interest Rates Are A Mirage Anyway

Another distortion of the interest rate nonrecovery is that such rates could not be an incentive as they once were because of the distortions under the tax code. Primarily, this is because most interest stimulus payments can no longer be deductible. When deductions on interest were eliminated, the real cost of borrowing became prohibitive for many--both financially and psychologically.

If it takes 14 percent compounded to obtain a car loan, the real cost of this loan was 7 percent to 8 percent in 1980, 10 percent in 1985 and 14 percent today. If one believes the demand side needs to be stimulated, one does what the former tax code did--subsidize demand.

Instead, we dramatically raised the cost of borrowing for cars, major appliances, boats, consumer debts, student loans, etc., etc. We also increased the psychological impediment. When you could deduct, you were never sure about the real price so you played the tax code for a lower price. Now there is no uncertainty--what you see is what you get. You don't get prosperity or job

growth.

Where Are All The Unemployed?

Every few weeks we see fictitious numbers such as 7 percent unemployed so that we can pretend we're in the 19th month or whatever of our "recovery." The only recovery we had in the 1990s was that of the Democrat Party, which recovered when Bush self-destructed as a result of his tax hike (a.k.a. deficit reduction).

Probably 10 percent of our people are unemployed and another 20 percent underemployed. Both groups are growing. As described in a recent Wall Street Journal, "...they search for jobs or find part-time work and call themselves 'consultants.' Most of them remain hidden and quietly desperate, burdensome to their families and ashamed of their plight."(2) It is a moral disgrace that we continue to declare our growing volume of human tragedy as invisible.

The Bureau of Labor Statistics said 106,000 jobs were created in January 1993. Why were there 2,191,000 less people working? It gets worse each month.

Bob Herbert writing in The New York Times tried to set the record straight in a column, "The Real Jobless Rate." He stated:

"The federal government will release its latest unemployment figures on Friday. But behind the official statistics is a truer picture--a scarier picture--of the nation's employment crisis...

...Thomas J. Plewes, associate commissioner at the Bureau of Labor Statistics, explained that three 'tests' must be passed before someone is officially considered unemployed: The person must be out of work, must be available for work and must have actively sought a job at some point in the last four weeks. There were 8.9 million people in this category in June, the latest month for which figures were available. In addition, according to Mr. Plewes, the government is aware of 1.2 million discouraged workers. Having thrown in the towel, they are not counted among the officially unemployed. There are also 6.3 million partially employed people--part-timers who would like to be full-timers. 'That,' said Mr. Plewes, 'is a very large number at this stage of a recovery.' Another 'very large' group comprises individuals working in jobs for which they are overqualified. This is a category that cannot be accurately measured. 'It's very, very subjective,' said Mr. Plewes."

So we don't count as unemployed "discouraged nonworkers" or account for the part-timers as "part employed." After any battle, a unit is degraded to reflect its real combat strength. We shouldn't count these 6.3 million people as fully employed--but we do. Our statistics are as accurate as Clinton's campaign promises and about as valid an indicator of the future.

In January 1993, 500,000 job seekers actually dropped out of the labor force. They simply gave up looking. This drop in the available work force accounted for the unemployment rate's drop to 7.1 percent. There weren't more people working--or more jobs available. There were just fewer people saying they were available to work.

The truth is payroll employment is lower now than when the recovery "began" 23 months ago. In September(3), Challenger, Gray & Christmas, a firm that counsels out-of-work executives, reported that more than 400,000 layoffs had been announced nationwide since January 1. That represents 20 percent more layoffs in the first eight months of this year than in the first nine months of 1991, "at the height of the recession," the firm said.

This is not surprising when IBM alone has fired 11 times the population of Microsoft or an amount of people equivalent to the employee base of Pittsburgh.(4)

Further, our phoney unemployment figure excludes those who have never had full-time jobs. Therefore, through the magic of federal data, those who can't get jobs are employed, not unemployed.

Finally, "jobs" are no longer reflective of the traditional 40-hour week, but inflated to reflect bodies working but not necessarily the same hours and certainly for not a comparable wage/benefit trade-off. More than 60 percent of the new jobs created in 1993 were temporary/part-time dead-end, nonbenefits-paying jobs.

It is no exaggeration to say that if all the unemployed would cease looking, we'd be able to say we have no unemployment.

They're Not Unemployed--Just An Underclass

Another way we can pretend we have high employment is to call unemployed people "the underclass." Here, government "assistance" has clearly replaced faith. Faith is the spring of action. Where people believe nothing, they will do nothing--or worse, react nihilistically. No amount of gun control or capital punishment debates will alter the nihilistic trajectory of our growing underclass.

Generations of inner-city residents have never known gainful employment. Many of those who do work, put in time for local bureaucracies--pretend work that's not much different from the dead-end jobs found in a communist society. None of the work done here advances society's wealth-creating potential.

In the public schools the children are forced to attend perpetuate the problem by creating permanent "structural economic challenges"--a polite way of saying that the underclass lack adequate training and social skills so that even should jobs become available, these people couldn't do them anyway. The jobs our underclass once did were forced to Mexico, where the regulatory burdens, family leaves, etc., don't make them cost-ineffective.

Clinton added incentives to broaden the underclass by instituting the largest burdens imposed by the marriage penalty to date. This will create more "clients" for more government programs, driving taxes up.

We have become a hard-bitten country digging for its soul and coming up morally empty.

Read The Wall Street Journal Tuesday's B Section

If you're not yet convinced that a low rate, high marginal tax policy isn't a suicide pact, consider looking at Tuesday's Wall Street Journal B section. In the 1980s, this was a must-read, as it contained a score or more pages of the upward mobility in the United States. It was so popular it spun off its own subsidiary paper, Business and Employment Weekly.

Now you pick up this section. Maybe three to four pages of resume services, outplacement, blind-ads and overseas spots. You don't need a Ph.D. to see that your horizons are limited by our perverse assault on incentives.

All the demagoguery in the world can't change the contrasting realities of the 1980s from the 1990s than the real job help wanted pages.

The Crumbling Castle

Another fallacy of the interest rate cuts is that they'll stimulate consumer confidence. The reverse is true.

You go to refinance. You realize how heavy the downward drift in real estate has been. Much, if not all, of your equity has vanished. Your home may still be your castle, but all home prices will trend downward, particularly in the high-tax frostbelt areas. As their nest egg shrinks, there is a psychological component--people feel poorer. They spend less. The demand side is further depressed.

The homeowner investment appreciation myth was ended by basic demographics. The baby boom has bought. The baby dearth is not there to buy.(5) That's all you need to know about the direction of home prices in the 1990s.

There Are No Cuts Either

The continued decline might have a saving grace if we were going to emerge with a low deficit. The deficit will go up first because there were no cuts and second because of the welfare payments our perverse job-killing policies are spreading.

First, no net cuts. There was a one-year retroactive tax hike--period. The cuts (except military and USPS) are in the "out years." This fabrication was bought by gullible Americans who believe Congress enacted a five-year budget. This would be unconstitutional. Very Slick.

You will pay more in postal rates. This hike will be called a cut. Take that "cut" to your CFO and operations people. This is cost-shifting not cost-cutting. The only cuts here will be the lost jobs in mail order--maybe yours.

Your parents' Social Security tax increase is called a cut, not a tax hike. Your free speech rights against government were cut, too. This administration is hostile to any input, whether in its eliminating lobbying deductions, shutting Republicans out of the budget debate or trying to impose a Fairness Doctrine to suppress dissident radio voices.

In the real world, total spending next year under this budget goes up by $54 billion. And by 1998, the last year of this budget, spending actually goes up faster than taxes! The national debt will rise $1.1 trillion over the next five years even if Clinton's members are valid (they're not). All the budget was about was transferring control over resources and economic decisions from the people who earned it to the chatter class and chirooniks so they can control your life. Not a dime will be cut from the deficit.

The structural deficit will be much greater because the birth dearth will no longer mask the nonfunding of social scrutiny (i.e., a system of largely unfunded benefit promises |debt~ backed up by government IOUs rather than by real capital).

Finally, the tax hike is a breach of faith with the 1986 Tax Reform Act which exchanged lower tax rates for a broadened tax base and less tax incentives. Clinton has individual rates 40 percent above 1986. No one can invest long term in a nation which breaches its word to its citizenry and offers such proven disincentives to match its breath.

The Markets, Not Clinton, Will Rule

Our current class warfare economy is not a strategy for growth, but for hate and resentment to grow the government. All the government growth advocates never speak of anything of value they produce, but only of how to manipulate the money and power (whose existence they take for granted) into their own hands.

An accidental byproduct of no one's taking out investment loans is lower interest rates. Such an indicator is a sign of alarm, not a positive policy.

Clinton successfully lied to 43 percent of the electorate and dragooned a pathetic majority of Congress to enact the mess we call an economic plan of a "New Democrat." It is change surely--change from the 1980s growth.

He and the 218 House Democrats also violated the House and common sense to force this malfeasance on the nation. The House requires that all spending bills be printed and distributed three days before a vote. This was waived. No one read the bill or even tried prior to their vote. "End of grid-lock" means end of constitutional checks and balances, House rules, etc. The good news is that this deliberate subterfuge or Slick in general can no longer control our domestic economy the way Carter did.

Markets, not politics, rule the world. Markets expose lies. This deflationary design for decline will be designated the disaster it is--by the marketplace.

Conclusion

Higher taxes have never improved the economy or reduced the deficit. Never. Period.(6) Cut tax rates and your economy swells and flowers like a desert plant after a rainstorm. Lower interest rates raise tax rates and you only get an economic desert.

Investment, not government spending, is what drives an economy. Free market investment produces a Hong Kong. Government "investment" produces the urban hellhole of Washington, D.C.--the largest source of government largess in the United States.

Lowering interest rates to tease people into taking loans isn't going to work. Any such policy is off to a flying flop. The market understands the fallacy and is reacting correctly.

The chatter class may argue we have a jobless recovery. Jobless, yes--recovery, no.

Footnotes

1 Read "Business Means 'Employers' And It Should Say So," Direct Marketing, June 1993, p. 39.

2 Horowitz, Tony, "Jobless Make Managers Proliferate in Suburbs, Causing Subtle Malaise," The Wall Street Journal, 9/20/93, p. 1.

3 The Wall Street Journal, "Labor Letter," 9/21/93, p. 1.

4 Caroll, Paul, "Big Blues: The Unmaking of IBM," Crown 1993.

5 This "dearth" here and in Europe will mask the underlying weakness of our economy and its failure to create jobs. If this economy were trying to absorb the baby boom and women entry of the 1980s, even the government's statistics couldn't be masked.

6 Al Hunt deceptively tried to argue the contra by claiming the United States' loss of markets, market share and the growth of its underclass was a gain. He then falsely compares other nations' tax rates (all including medical care) to the United States' which doesn't. For a real adventure in disinformation, see Hunt, Al, "Americans Ardor for the Tax Issue Cools," The Wall Street Journal 9/23/93, p. A17.

Robert J. Posch Jr. is vice president of legal affairs for Doubleday Book & Music Clubs, Inc. He has a JD/MBA and is the author of two books published by McGraw-Hill and three by Prentice Hall, including his latest book, "The Complete Guide To Marketing And The Law." He can be reached at 401 Franklin Ave., Garden City, NY 11530--516/873-4628.