No, Populism Will Not Bankrupt Itself
In Slate today, Matt Yglesias argues that anti-Wall Street populism is counterproductive, because it will cut Wall Street's profits, leaving less tax revenue for the populist government, thereby hurting the populist cause. It's worth pointing out briefly that this is incorrect.
Yglesias's argument is fairly simple. He says that populist firebrands like Bill de Blasio are just fine on the local level, because they can spout popular anti-Wall Street rhetoric and reap big tax revenue from Wall Street, but they can't actually hurt Wall Street's ability to make profits. But on a national level, he says, enactment of populist policies could hurt Wall Street's profits, which would leave the progressive government officials with less tax revenue, which would, counterproductively, hurt their ability to enact their progressive programs. Here's his key argument:
Suppose that President [Elizabeth] Warren rides to town with a raft of new legislation and tough regulators and a set of U.S. Attorneys firmly dedicated to prosecuting financial wrongdoing with the utmost rigor. Well if it works, the pre-tax income of Wall Street types is going to plummet. And while that might well be good for the country and the middle class broadly, it would cause the tax base in New York and California and other politically blue high-inequality jurisdictions to fall. Rather than hiking rates on the rich to pay for new programs and more generous wages, these places would find themselves either needing to tax the middle class (a much tougher sell politically) or else shift into a neoliberal efficiency-seeking mode. By contrast the Tim Geithner philosophy—regulate Wall Street but don't seek to transform it or displace the sector from its leading role in America's political economy—is a great match for the politics of progressive taxation to finance public sector social democracy.
Which is to say that the alliance between labor unions and bank bashing is a very effective and powerful one as long as it doesn't actually win.
Yglesias misses a couple of important points here.
1. Perhaps the biggest reason of all to seek to cut down on Wall Street's profits is the fact that those profits themselves are often little more than a tax on other people's money, funneled into Wall Street's pockets. Above a nominal amount, Wall Street's profits are essentially a skim. Banks and other financial institutions take percentages of enormous deals, without adding a matching value to the economy. Shrinking the financial sector's portion of the overall economic pie is good because it leaves that money in the pockets of companies, entrepreneurs, investors, and taxpayers who might end up doing something far more economically and (more important) socially productive with it than, say, dreaming up new forms of derivatives and other "creative" financial products that ultimately serve only to perpetuate and enlarge the Wall Street skim.
Bankers are not the only people in this world who know how to make money.
2. In a theoretical world in which a president actually enacted meaningful reform which reduced the financial sector's share of earnings, the resulting business climate would be far more fair and far more accommodating to entrepreneurs and small business. In such a theoretical world, bumping taxes on the upper middle classes would not be such a terrifying thought.
3. Progressive taxation should be viewed as a tool to achieve a more economically just and fair and equal economy and society. Trying to preserve a less fair economy in order to better maintain progressive taxation is ass backwards.
In other words, it is foolish to argue that we need to preserve a bad situation (the finance sector taking far too much money for itself, the top 1% of earners holding far too much of society's wealth) just so we can keep open a back door method of ameliorating that very thing (raising taxes on Wall Street and the rich). Shrinking the power and prominence of Wall Street is its own reward for society.