Cliff Asness: "Nobody, Left Or Right, Really Thinks The Math Works, No Matter What They Say In Public"

Tyler Durden's picture

Originally posted at The American,

We Are the 98 Percent

The only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now, we are avoiding honest debate on this fact.

The central issue of our time is the debate over the size and scope of government. Two unpleasant but undeniable mathematical truths limit the feasible policy choices. The recent sound and fury of the fiscal cliff follies in the end signified nothing because the resolution was in fact just a denial of both truths.

The first truth is that the current tax rates cannot support the promises made to middle-class Americans. The most unaffordable items in fiscal projections are Social Security for everyone and government-sponsored health care for the middle class. You cannot preserve these even with Draconian slashing of military, infrastructure, welfare, education, and other expenditures.

The second truth is that you cannot pay for the Life of Julia, or any vision of a cradle-to-grave welfare state, without massive and increasingly regressive middle-class taxes. The poor don't have the money to pay for a European-style welfare state, and the rich, rich as they are, don't have anywhere near enough.

Not only that, it's easy to tax middle-class assets and transactions — things like payrolls, sales, and real estate — but soaking the rich means taxing investments. Investments are complicated and can be restructured to minimize taxes. Also, investments are the lifeblood of economic growth. Raising significantly more taxes from the rich also requires higher marginal tax rates — and their rates are already quite high. High marginal rates distort the economy and yield less revenue than anticipated because they increase the rewards for legal and illegal tax avoidance.

That's not to say it's impossible to get more money from the rich, but it's tricky and past attempts have typically been less effective than forecast and often counterproductive. Moreover, even under the most optimistic assumptions, taxes on the rich — or taxes on businesses, financial transactions, or anything else aimed at the rich (and often hitting others) — will still not cover a large fraction of the costs of a European-style welfare state. Ask the Europeans — they’ve tried it all and failed.

To be in our political center today, you have to deny both these truths and pretend that if we sharpen our pencils and make a bunch of wildly optimistic assumptions, we can close a few tax loopholes, cut some waste from spending, and maybe nudge upper-income tax rates up a little, and continue merrily on the same big-and-growing-bigger government path without unfortunate consequences. This is a “balanced approach,” as it ignores both mathematical truths equally, but the denial of clear reality means this approach is doomed to fail.

Surprisingly, many progressive pundits are moving away from their traditional complaint that America’s tax code is too regressive, favoring the rich. They are starting to tell us, albeit only after an election mainly contested on these issues, the truth: to fund the European-style social welfare state which they advocate, we must tax everyone more.

For example, Ezra Klein, blogging for the Washington Post on December 7th, writes, “The need for tax receipts to grow underscores the necessity of finding an efficient way to collect them. Experts say that should include tax reform and new tax sources that take the pressure off the income tax, such as a value added tax or a carbon tax.”

Klein is mild compared to Eduardo Porter, who writes in the New York Times on November 27th, “Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world” and “Taxes on American households do more to redistribute resources and reduce inequality than the tax codes of most other rich nations.” Mr. Porter, it is shocking to see you argue in the New York Times that the United States is a progressive paragon!  Those in the Occupy Wall Street movement must be surprised to learn that you, one of their standard-bearers, think the United States already does considerably more redistribution than Western Europe!

These pundits know the math. To achieve anything like the European-style entitlement state they advocate, we need to tax everyone a lot more, not just the 1 percent. Despite all the drum circles protesting the inequitable distribution of resources, the wealthy just don’t have enough. The middle class and even the poor must step up to carry more of the burden if this is our desired endgame.

In his November 27th op-ed, Porter also writes “The experience of many other developed countries suggests that paying for a government that could help the poor and the middle class cope in our brave new globalized world will require more money from the middle class itself,” and “Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending.”

In a similar vein, Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities and a former economist for Vice President Biden, writes, "It's perfectly reasonable for the White House to begin collecting more revenue from folks who have done by far the best in pretax terms." But wait a moment for it — he then adds, "But ultimately we can't raise the revenue we need only on the top 2 percent."

Note the use of “2 percent,” a number the president himself has begun using more often. It is a small but telling evolution from decrying the “1 percent.” One wonders if the Occupy Wall Street protestors have corrected their signs to read “We are the 98 percent”? Are those in the 98th percentile already saying “They came for the 1 percent and I said nothing…”? According to the more honest progressive pundits above, it will not be long until the 50th percentile is saying it too.

If we take the logic of a Porter or Klein or Bernstein seriously — and we should — their prescription for taxes is nearly the opposite of the president’s public stance. Let’s say what Porter and others are saying but in plain English (or, failing that, let’s just underline a lot).

If we are to redistribute like Europe, we must tax like Europe. The middle class must pay more taxes and they must pay a larger share of the tax burden. The president, in contrast, is vowing to raise taxes on only the rich. One wonders if President Obama would have won the election if he had warned voters that “to pay for Obamacare, stimulus spending, increased regulatory oversight, and the rest of the big government wish list I believe important, we need to raise the level and share of taxes paid by the middle class”? One also wonders why more progressive pundits were not as clear about their goals and the necessities pre-election as they are starting to be now.

The choice the country faces is simple. We can have big government and the Life of Julia (at least for a while, but that is another essay), with everyone paying through the nose and the middle-class share of taxes rising not falling, or we can return to the American tradition of limited government, with everyone paying a smaller burden to the state, with relatively limited services for, and relatively light taxes on, the middle class. What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us. Nobody, Left or Right, really thinks that math works, no matter what they may say in public.

So what happens if we continue down the current path, with perhaps some small amount of revenue raised from some additional taxes on the rich? Remember, the only way to finance a big European-style state is to have it paid for by massive taxation of everyone, mostly the middle class. Right now we are avoiding honest debate on this fact, perhaps because those desirous of this change know the middle class would rebel if it saw the future bill it will have to pay. Instead, large government benefits are being continued and increased, and still new ones introduced, with little accurate discussion of who will ultimately pay.

What happens historically when benefits are bestowed without a bill also coming due is that we get hooked on them. Then, even when they become disasters not worth their cost, people are terrified to change them, as giving something up is indeed quite frightening.

Of course, as a byproduct of this growth in the state, many of us believe we also suffer a terrific erosion of liberty, free-enterprise, and individual responsibility and initiative.

Finally, after we become fully addicted to the latest increase in big government, the bill will ultimately be presented to everyone including, and in all likelihood over-emphasizing, the middle class and the poor. The people who were promised they would be untouched will see the largest proportional hikes. That’s exactly what has happened in Europe. We have seen this movie before, but this time we don’t need subtitles.

In other words, if we told everyone the ultimate destination right now, the country would likely reject it. But if built up in this piecemeal manner with benefits up front and the bill presented later, it can become reality.

The way to boil the frog of freedom is slowly.

We may, with open eyes, choose the reassuring security of big government with a far larger safety and subsidy net and far higher taxes for all — by no means just the “rich” but in fact more so on the middle class — and likely the sclerotic growth and dependency of Europe. Or we may choose the opposite. But we deserve an honest debate about this critical issue. A debate missing from the last election.

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francis_sawyer's picture

I vote for free shit from the treasury to be paid for by everyone else while I sit on my ass... But you'll also have to offer me some incentives to swing my vote...

trav777's picture

nevermind that a good portion of the "rich" work insane hours while the NOBLE middle class is out binge drinking and blowing off reporting for work. The people who complain about how they never get ahead are like the people who complain about how they can just never lose weight.  Even black car drivers in AFRICA of all places get this...

TruthInSunshine's picture

2 + 2 = 5 (aka the "old" arithmetic is the enemy of the state & is terroristy).


Joint Obamney/Krugman/Military-WallStreet-Pharma/HealthInsurance-Banking Complex statement on our "economic" cure:

"We all know that the current level of [massive & debt accretive] governmental spending [and an incredibly bloated public sector along with a mammary gland-dependent bank-defense-healthindustry-WallStreet complex that is suffocating the private sector] is not the problem, nor is the problem that which the [dreadfully inefficient] governmental spending is used to [fail to] accomplish or [unnecessarily] purchase, but that our low level of taxation is the source of our ailment. If we raised marginal tax rates on the relatively few net-net taxpayers who remain amongst us to 90%, we'd raise enough additional revenue to reduce the increase in the national debt by 1% to 3% over the next 20 years."

francis_sawyer's picture

Well that settles it... Pelosi & Feinstein need to get out a law BANNING all tankers & bridges...

midtowng's picture

Social Darwinism lives on in today's GOP, 100 years after it was declared dead.

Tango in the Blight's picture

If you're rich and work insane hours you are either a penny pinching scrooge or an idiot. Your money should be able to buy labor that can lighten your workload. If it can't you're not rich.

mkhs's picture

So why are the blue and green car drivers so less perceptive?

DoChenRollingBearing's picture

Nailed it francis_sawyer.  Everyone one with half a brain or more knows this, but they vote these guys in anyway...

Fake Jim Quinn's picture

He forgot the option the US has used for years: print, borrow, and kick the can down the road while the elite and the politically powerful groups suck at the government teat. Screw the is their problem

nope-1004's picture

"It disturbs me that our country is going broke.  Stop spending foolishly ......  just don't stop sending me my unemployment / pension check."


hannah's picture

"The only way to finance a big European-style state is to have it paid for by..."....the us tax payer with federal reserve fiat. europe hasnt 'paid' for anything since before WW2.

Ying-Yang's picture

Nah.... just have the Treasury coin the trillion dollars coins.

Kitler's picture

100% platinum and illegal to touch or assay by law under penalty of death.

The one with "Trust Me" embossed on it.

TruthInSunshine's picture

The trillion FRN platinum coin should be engraved with Paul Krugman's likeness on one side, and Alfred E. Newman's likeness on the other side.

Kitler's picture

In that case it should be embossed as follows:

"What, Me Worthless?"

Popo's picture

Hell, if that whole trillion-dollar coin thing actually worked, then why not print a few extra and we'll all be rich. 

TruthInSunshine's picture

I "coined" the concept for & name of the following fiat:


Krugmanrand: A gold colored powder-coated round, composed of 3% tungsten and 97% compressed sawdust, bearing the slogan "In Diocletian We Trust" and "To Infinity & Beyond!" on one side, alongside "CTRL+P," and having the other side enscribed with "What, Me Worry?" alongside an engraved likeness of one Ben S. Bernanke (Shakey McShakester).

asteroids's picture

Amerika doesn't have a tax problem It has a spending problem It has had this problem for decades and refuses to deal with it. Eventually, the math catches up and someone must pay. Will it be the US citizen, Europe, China, I really don't know... I only know the end will come quick and it'll be awful.

Acet's picture

Yupes. All this bullshit about America not having enough money for European style social security is baloney.

It's very simple: stop spending so much money on the military and aim for a true defensive military rather than the wanabe imperial army that's only every used to prop-up a certain theological middle-eastern country that shall remain nameless and kill brown people so as to convince them to "open their markets" to certain well connected American companies.

As an upside, the end of the Industrial Military Complex would wipe out a lot of the "rich", 100% of which would be the corrupt, parasitical ones who make their money sucking from the tit of the state.

Next in line would be a cleanup of the Financial system. Lots of savings to be made in there and more parasitical "rich" taken to the cleaners (a process which would be accelerated by actually enforcing Securities Laws, which would result on the worse of the worse landing in jail and loosing everything through fines). As an added benefit, it would do wonders to reduce capital misallocation, deflating asset bubble and redirecting capital from gambling to real investement (today's rich don't invest in the sense of putting money into growing business opportunities, rather they gamble in the Markets - but with the unfair advantage of inside trading - and they pump up asset bubbles).

I'm sure we can come up with a lot more places to save money and stop the flow of wealth to the parasitical rich (I do believe procurement in the US Government is a joke).

At the end of all this government spending would be down, corruption would be much decreased (due to a lack of corruptors) and the remaining rich would me much more likelly to be the entrepreneurial types that bring true wealth to a country (and which at the moment are mostly being shafted by sleazy types with political connections).

Of course, this will never happen!


LetThemEatRand's picture

"The second truth is that you cannot pay for the Life of Julia, or any vision of a cradle-to-grave welfare state, without massive and increasingly regressive middle-class taxes."

First, few are actually asking for that.  Most people just want to have some form of safety net.

Second, there are 400 individuals who have more total wealth than half the nation combined.  Much of that wealth was stolen, including by the creation of a massive police/military state funded by debt that was turned into cold hard cash for the top few.   The wealth of those few individuals measures in the tens of trillions.   If some of that wealth were taken back by properly recognizing the property rights of those from whom it was stolen, there would be abundant $$ to pay for reasonable social services.   Agree or disagree with that, but don't claim that massive and increasingly regressive middle-class taxes are necessary.  They are necessary only if you ignore where all the money went.

trav777's picture

Stolen?  Stolen from WHOM?  Who HAD IT that it was taken from them?

People don't want a safety net, you ignoramus, they want something for NOTHING.

I'd like to see what the saintly middle class EVER did to have had all that wealth that was supposedly stolen from them.

This the problem with all of you motherfking marxists, you conceptualize every inequality as some form of oppression.

dick cheneys ghost's picture

12 yr long, trillion dollars wars dont count, do they?

Cathartes Aura's picture

especially when the VP of the "nation" was part of the revolving door corporate culture, CEO of Haliburton in his "off" years.

gov't embeds, that's where folks could start, though of course, it's much easier to hate the bennie-cardites.

Salon's picture

That much dynastic wealth is enough to influence and control our government. Most of it would have disappeared if we had let the banks fail. A healthy cleansing which allows a fresh start.

If people would stop at the 400 and go no further, then I say lets take half their wealth. It should have bern destroyed in the correction anyway.

secret_sam's picture

If you buy into the notion that taxation is theft, then *many* fortunes of our "great American industrialists" were stolen from the rest of the citizenry by a government that needed things like weapons and public infrastructure.

AT&T?  GE?  Ford?  Standard Oil?  Amtrak?

All paid for by plunder of the taxpayers and used as an excuse to redistribute wealth from the majority to the wealthy owners of those businesses.

Go Tribe's picture

I might pay more taxes for Julia if she were really hot. But I'd want a new phone, so I could text her. And some of those SNAP cards as my swag for the lady.

CH1's picture

Most people just want to have some form of safety net.

What a load of crap. They want free shit. I spent way too many years working with these people.

Safety Net is how you sell the game to chumps.

NotApplicable's picture

Anybody who wants a safety net may reconsider once they notice that its cords are the thing choking them.

Of course, that anyone is dumb enough to ask criminals for assistance in the first place...

Salon's picture

Yup. There are people who are doomed to shitty jobs for the rest of their life.

Genteel, idyllic poverty with food clothing shelter and healthcare paid for is a dream for them. They can always work a few hours a week for beer money or deal some drugs quietly on the side. Just enough to support their party habit.

I would do the same thing in their position

docj's picture

First, few are actually asking for that.  Most people just want to have some form of safety net.

Bull. Shit.

"The Life of Julia" was the official campaign manifesto of the Democrat nominee for re-election to the office of President of the United Fracking States. You think he would have gone out there unless there weren't voting sheeple, numbering in the 10's of millions, already bleating for this? Seriously?

We in the US of A like us some Scandi-style social welfare state - we just don't like paying for it. So that'll be the problem for citizens yet to be born to figure out because Montel is on.

odatruf's picture

Come on, LTER. Do you consider yourself a serious person or a bomb thrower?

If it is the former, then please tell us who among the 400 you mention gained their wealth via theft?  Looking at the Forbes 400 list (, I don't see bankster CEOs or other kleptocrats on there. Please isolate who you mean, rather than assert that "much" of it comes from that kind of rent seeking. I am sure there is some on there, but "much" is a bit, well, much.

And, while their wealth could be taken, ask yourself by what right it would be done?  Simply because it would bring it abundant $$?

And why can't one claim that massive middle class tax cuts are needed?  Isn't it that cohort that runs up the bills? Isn't it that cohort that demands benefit well beyond what they pay in?  Simply put, we can not contiue to allow the average person to get more than $300,000 in Medicare services in their post 65 life when they put in about $165,000 in present value funding.

I'll be the first in line with you to claw back ill gotten rent seeking. That goes for bankers, executives who used influence peddlers rather then the open bidding process to secure government contracts and anyone else who didn't get there by building a better mouse trap or offer a better service than someone else. While we are at it, I hope you'll join me in putting paid to those who handed out the goodies to connected friends while there were supposed to be working for us.

So what's it to be, LTER?  Will you respond?

Snakeeyes's picture

Proud to say that Cliff Asness took my mortgage-backed securities course at University of Chicago!

SgtSchultz's picture

Unless I am wrong, the use of baseline budgeting will see to it that the budget never will have year-over-year spending declines and will grow until self implosion.

q99x2's picture

Fact is: Either grind your life away or join me at college. By getting involved in some extra-curricular activities you can stretch a PhD out to retirement age. That reminds me, time for my 10 mile jog along the sunny California coast.

NotApplicable's picture

Well, unless you die the day after graduation, you're still quite fucked.

viahj's picture

which will win out, the MIC or the social welfare programs?  Europe had their choice made for them after WWII.  now, who will make that choice for the US?

seek's picture

No brainer -- the MIC. They get cash they can give back to the pols -- social welfare programs don't send money upstream, and they only thing the have to offer is votes, a quick code update by Diebold fixes that issue.

centerline's picture

Is this stupid article day on ZH?  Wow.

NotApplicable's picture

My thoughts too. I only clicked on the article to see who wrote this tripe. But wouldn't you know it, it's written under a psuedonym by some divide and conquer intelligence asset.


Ghordius's picture

And yet, note the novelty of someone advocating both spending less AND taxing more

I agree on the point that there is no frank discussion, and lots of partisan propaganda

youngman's picture

We just did vote for fee shit .....Obama won....the takers we just have to wait unitl the rest of the world discards us....throws us out of the party like the kid who always shows up drunk to the party...they will stop taking us seriously...I think they have already quit buying our paper..we have lost a lot of credibility....and we are losing more every day..

Winston Churchill's picture


If the FedRes wasn't backstopping the PD's the auctions of UST's would

be no bid right now.As LoP points out,next go the supply lines.

Joe Davola's picture


If the Fed didn't need to keep rates at 0 to avoid serious implosion (as we saw in the recent article on the effect of 1% change in rates)

seniors wouldn't be burning through whatever retirment savings they have

needing to keep jobs that 19-25 year olds should have

otherwise they need assistance (and legalized drugs)

so the revolution doesn't start

NotApplicable's picture

"We just did vote for fee shit..."

Did you ever consider not voting for free shit?

I mean, just think of how hard it would be for them to steal all of the shit to give away if people merely stopped condoning it.

cranky-old-geezer's picture



TARP began the final stage looting of America.  Since then trillions of dollars have been "printed" and given to mega banks and the govt, which has escalated its looting to heights undreamed of even 10 years ago.  Deficits are looting, plain and simple.  An illegal tax.

This wide open final stage printing and looting will destroy the US dollar before much longer.  At some point USD will be rejected by the rest of the developed world, lose reserve currency status, and tumble fast after that.

Wall Street megabanks with trillions of bailout dollars sitting in Fed reserve accounts know a dollar collapse is coming, so they're quietly putting those reserves into things that will survive a dollar collapse, mainly the stock market, why stocks keep rising. 

They're doing the same thing PM "stackers" are doing, swapping dollars for tangible assets that will retain their value thru a currency collapse.

Hohum's picture

What's this thing called "growth?"  As measured by GDP/total credit market debt it died in about 1970.  And it ain't coming back, whether tax rate is 0% or 100%.

trav777's picture

that's the year US oil production entered irreversible decline