Ray Dalio Is Kinda, Sorta, Really Wrong, Part 3

Ray Dalio Is Kinda, Sorta, Really Wrong, Part 3

Two weeks ago I started a mini-series in the form of an open letter responding to a series of essays by Ray Dalio, the founder of Bridgewater Associates. I wrote here and here that he was kinda, sorta wrong in Why and How Capitalism Needs to Be Reformed, Parts 1 and 2 but really, really wrong in It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’ and ‘Modern Monetary Theory,’ in which he basically endorsed MMT. Today I continue my response.

If reader feedback is any indication, you are also passionate about this conversation. Last week’s letter generated many long, thoughtful reader comments. Clearly, it is not just Ray and I who are worried about the country’s future direction. I find that encouraging. A national conversation is precisely what we need in these serious times.

As noted, Ray has done us all a service by pointing out some rarely mentioned elephants in the room (some tinged with pink). We discuss various parts but seldom the entire creature. By that, I mean the rapidly growing potential for “progressive” control of both Congress and the White House. This stems from differences between haves and have-nots, between the protected and unprotected, combined with a desire to have government solve our society’s perceived ills.

So let’s pick up where we left off last week.

Dear Ray

In Part 1 of this letter I mostly agreed with you about the significant wealth and income disparities in the US today. And then in looking for your hope of a bipartisan commission that can deal with the problems, I simply pointed out that such commissions have rarely worked in the past and would be even more unworkable given today’s partisan, ideological divide.

Now I want to review two of your suggested solutions. Since this is an open letter and others will be reading it, let me quote directly from that section:

1. Leadership from the top. I have a principle that you will not effect change unless you affect the people who have their hands on the levers of power so that they move them to change things the way you want them to change. So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for reengineering the system so that it works better.

4. Redistribution of resources that will improve both the well-beings and the productivities of the vast majority of people. As an economic engineer, naturally I think about how money might be obtained from taxes, borrowing, businesses, and philanthropy, and how it would flow to affect prices and economies. For example, I think about how a change in personal tax rates might occur and how changes in them relative to corporate tax rates would affect how money would flow, and how changes in tax rates in one location relative to another location would drive flows and outcomes in them. I also think a lot about how the money raised will be spent—e.g., how much will be spent on programs that will improve both social and economic outcomes, and how much will be redistributive. Such decisions would of course be up to the people on the bipartisan commission and the leadership to decide and are way too complicated an engineering exercise for me to opine on here. I can, however, give my big picture inclinations. Above all else, I’d want to achieve good double bottom line results. To do that I’d:

b. Raise money in ways that both improve conditions and improve the economy’s productivity by taking into consideration the all-in costs for the society (e.g., I’d tax pollution and various causes of bad health that have sizable economic costs for the society).

c. Raise more from the top via taxes that would be engineered to not have disruptive effects on productivity and that would be earmarked to help those in the middle and the bottom primarily in ways that also improve the economy’s overall level of productivity, so that the spending on these programs is largely paid for by the cost savings and income improvements that they create. Having said that, I also believe that the society has to establish minimum standards of healthcare and education that are provided to those who are unable to take care of themselves.

A National Emergency?

Let me highlight in particular one sentence from the above with my own bolded emphasis.

So there need to be powerful forces from the top of the country that proclaim the income/wealth/opportunity gap to be a national emergency and take on the responsibility for reengineering the system so that it works better.

First, let’s ignore the fact that many would not agree that the income and wealth gaps rise to the level of “national emergency.” Let’s for the moment assume the levers of power you mention would pass to a majority who would in fact see it that way and want to do something about it.

Using suppositions and hypotheticals, this is not all that far-fetched. It is entirely possible next year’s elections will deliver a Democratic Congress and White House that would consider these gaps a national emergency. A recession in early 2020 would raise those odds. And if not in 2020 then by 2024 it might even be more plausible.

That said, let’s look at what your proposals to raise taxes and redistribute income might actually look like.

First, the on-budget national deficit for this year will be in the $1 trillion range and when you add in the off-budget deficits total debt could easily rise by $1.3 trillion or more. That’s just in 2019 and it won’t get much better in 2020.

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Total US government debt is now $22.4 trillion. We could easily see the national debt at $25 trillion before the next inauguration. That doesn’t include the $3 trillion+ state and local governments owe, nor some $100 trillion of unfunded federal liabilities or $6.7 trillion of unfunded state and local government pensions (data from The US Debt Clock.)

Even a garden-variety recession will blow those deficit numbers out of the water. If revenue falls and expenses rise as they did in the last two recessions, a $2-trillion deficit is more than likely. The national debt would almost certainly reach $30 trillion within a few years.

Interest on the national debt is budgeted at $389 billion for fiscal 2019. Assuming similar interest rates in the future, that cost will rise to almost $550 billion on a $30-trillion national debt—almost as much as the defense budget.

Essentially, we would need to raise taxes by $1 trillion along with some considerable budget cutting just to balance the budget before we get into any redistribution of income. But let’s set aside that for the moment and talk about raising taxes enough to fund the income redistribution programs you would like to see.

In your words, you want to increase taxes “from the top” and earmark those increases to help those in the bottom and middle, somehow “engineering” those taxes to have no effect on productivity. Let’s look at some real-world numbers of what the top income earners pay in taxes, courtesy of the Tax Foundation.

Source: Tax Foundation

Some 68% of all income tax revenue comes from the top 10% of income earners. That’s fair enough, I suppose. Interestingly, the top 1/10 of 1% of income tax payers pay more than the bottom 50% combined.  

Source: Bloomberg

Here’s a chart from that same Bloomberg article that breaks it down by the different percentiles and the percentage of total income taxes they paid. The top 1% paid a greater share of individual income taxes (37.3%) than the bottom 90% combined (30.5%).

Source: Bloomberg

Now, let’s go back to the Tax Foundation data. This is part of a larger and more detailed analysis at the website.

Source: Tax Foundation

Note the top 10% of income tax payers paid approximately $1 trillion in income taxes. When you say that you want to “raise more from the top via taxes” let’s see what that means. Giving $3,000 to each of the 70 million tax filers in the bottom half would require $210 billion. You would also need the government to have the systems and people to do this which would require at least another $20 billion or so, and that may be giving a lot of credit to government efficiency.

So, getting an additional $230 billion from the top 10% of income earners would mean giving that group a roughly 23% across-the-board tax increase. That’s before we do anything about the national deficit.

Note also, to do this you wouldn’t be taxing only millionaires and the rich. To get in the top 10% of income payers you merely need to be making ~$140,000 a year. The cut-off for the top 5% is approximately $200,000.

So, let’s say we ask only the top 5% of income earners to fund this new spending. To get that same $230 billion you would need to raise their taxes by approximately 30%, give or take.

Want to do it just from the top 1%? You would need to raise their tax rates by 50%. Again, that is before we even begin to reduce the deficit.

And when you say that you want to engineer these taxes not to affect productivity, I am scratching my head trying to figure out precisely how to do that. The marginal tax rate for incomes over $500,000 is 37%. So if you wanted to get that $230 billion from the wealthiest taxpayers, their top marginal tax rate would rise to approximately 56%. Add state income tax and the rates could easily get to 60% or more in some states.

And do we really want to raise taxes either during or just after recession? Seriously? Not exactly a prescription to boost the economy and productivity.

Adding a little more complexity, there is a difference between the top 10% of earners and the top 10% of taxpayers. To be a top-10% earner, you merely have to make $118,000. In October of 2018, the Economic Policy Institute published a study showing that the top 1% reached the highest wages ever in 2017. But when you read all those stories about the 1%—or even the top 5% or 10%—how much money do you need to pull in to be in one of those groups?

Source: Investopedia

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We already have a system where somewhere between 40–47% of taxpayers literally pay no income tax. (They do, of course, pay Social Security and Medicare taxes on their wage incomes.) How much more progressivity do we need in order to be “fair,” whatever that is?

It is one thing to simply state that you want to engineer taxes in order to redistribute income to the lower half and doing that while not hurting productivity. But it is another thing entirely to lay out exactly how much money is needed to be able to make the system more equitable.

Is $3,000 per family enough? Do you need twice that much? Where does the money come from and how much would taxes have to be raised? It is one thing to say that we should tax pollution (if it would help bring down pollution, I might even find myself in favor of that—pollution has a social cost) but it is another thing to say what constitutes pollution and how much. Automobile emissions? Do you raise taxes on the bottom 50% for their cars? It gets complicated real quick.

Louisiana Sen. Russell Long (Senate finance committee chair from 1966 to 1981) is credited with saying, “Most people have the same philosophy about taxes. Don’t tax you, don’t tax me, tax that fellow behind the tree.” If the top 10% are the “fellow behind the tree” then you must raise their taxes substantially in order to collect any meaningful amount of money. Or else move down the scale and raise taxes on many more people.

The real emergency? Trillion-dollar deficits that will grow to $2-trillion deficits during the next recession. You could literally double taxes for the top 10% and barely balance the budget today, before any recession. That is how far out of balance our system has gotten.

And all this is before we have paid for climate change or free college or any of the progressive left’s other proposals, along with income redistribution. And to be fair, Republicans are no longer concerned about multi-trillion-dollar deficits, either. They just have different spending priorities.

You want bipartisanship, Ray? It seems to me that deficit spending pretty much gets everyone’s support. Not exactly the kind of bipartisan cooperation that I find helpful.

A Little Coordination, Please

Finally, you call for coordinated monetary and fiscal policies. Quoting:

5. Coordination of monetary and fiscal policies. Because money is clogged at the top and because the capacity of central banks to ease enough to reverse the next economic downturn is limited, fiscal policy will have to be more coordinated with monetary policy, which can happen while maintaining the Federal Reserve’s independence. If done well, this will both stimulate economic growth and reduce the effects that quantitative easing has on increasing the wealth gap by shifting money and credit into the hands of those who have a higher propensity to spend from those who have a higher propensity to save and from those who need it less to those who need it more.

Here and elsewhere, you acknowledge that quantitative easing did in fact make the income and wealth gap worse. So you call for fiscal policy to do the income redistribution that you feel necessary.

When I read Parts 1 and 2, I came to this section and left a little bit mystified. If you didn’t want to use quantitative easing, and the realities of our national debt and growing deficits being what they are, how much would taxes have to be raised?

And then you answered that question when you wrote It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’ and ‘Modern Monetary Theory’. And it is at this point that you went from being kinda, sorta wrong to being really, really, really wrong.

[To be continued…]

Next week we will look at various scenarios for the future (going out about 10 years), what their various outcomes and costs might be, and how we can deal with the massive debt and deficits, not to mention new spending programs. I am actually going to propose my own solution that I think will put us back on track.

Unfortunately, paraphrasing Winston Churchill, the US will likely try everything else before we finally do the right thing.

Boston, New York, and Puerto Rico

I am enjoying the beautiful weather here in Puerto Rico. Later this month I’ll be visiting Boston and New York, then on July 4 I fly back to Puerto Rico working on what will likely be Part 5 of this series. It may or may not be the final part. I’ll just see how far I get.

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Shane has developed an interesting new hobby. One of our guest bedrooms has an open outdoor alcove. There was really nothing in it but weeds when we moved in. She has cleared it out and made a nice little garden. The interesting thing is that she planted something that to me looks like a weed but monarch butterfly caterpillars evidently consider those weeds to be ambrosia. So now Shane is growing cocoons and raising monarch butterflies. It is really pretty cool to watch them emerge from the cocoon. And theoretically, they’ll migrate back next year, since they supposedly return where they were born to start the process all over again. We’ll see how that theory works next year. But right now, it’s just a lot of fun.

And with that I will hit the send button. I feel like there’s more to be said on taxes. I know that Elizabeth Warren is talking about a wealth tax. I’m not quite certain how that would work on illiquid assets. It would certainly raise a lot of money but imagine the chaos.

On that cheerful thought, let me wish you a great week!

Your thinking about taxes in the future analyst,

John Mauldin Thoughts from the Frontline
John Mauldin

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June 24, 2019, 12:04 p.m.

Dear John,

Thank you for debunking Ray Dalio’s writings.  What I find fascinating and concerning is that such an “educated” economist would even write such things. 

* How in the world is income redistribution going to work in the long term?  Yes it gives a short term boost to the receiver of $$, but simply leaves them in the same unproductive state of employment.  What possible economic theory states that taking $ from one group and giving to another could lead to economic prosperity?  There is no gain in production nor productivity.  This is simply kicking the can down the road.

* Trump has it right that the solution is jobs, jobs, jobs.  Any government social economic policy that does not encourage job creation (and hence overall increase in GDP/production, is a failure from the start.  Job creation then leads to wage growth - the end goal.

* Anyone even considering bipartisan solutions in this current political climate has his head in the sand.  Democrats won’t even acknowledge our true nation emergency of the southern boarder.  Today’s democrats only want to destroy Trump, that is it—country be dammed.

* The obvious solutions are not even discussed;  Cost of illegal immigration and effects on deficit;  Increase GDP through better trade;  Lack of skill in workers preventing them from increasing their income;  Government waste of billions of dollars;  Capital cronyism giving large and other companies unfair advantage in laws and taxes.

* The only solution is to change the mindset of those in government.  The only way to do that is to term-limit congress, so that government becomes more a means rather than the end goal.  Unfortunately, I don’t see congress voting themselves out of a job…  so we will have this problem indefinitely ...  sad but true ...

June 24, 2019, 1:11 a.m.

For some reason my last comment was rejected. I would be interested to know why.

basically, I was saying that taxes are not the solution, reforming the remuneration for employees is needed to share the profits with the employees at the coal face rather than give it all to those at the top. The following article says it all much better than I can.


Stephen Teigland
June 23, 2019, 7:44 p.m.

You say:

We already have a system where somewhere between 40–47% of taxpayers literally pay no income tax. (They do, of course, pay Social Security and Medicare taxes on their wage incomes.) How much more progressivity do we need in order to be “fair,” whatever that is?

Suppose payroll taxes were included in this analysis rather than trivialized.  Based on US Treasury estimates individual income taxes for FY-2019 are expected to be about $1.7 trillion while payroll taxes are expected at $1.24 trillion

So payroll taxes amount to more than 42% of individual taxes paid while income taxes amount to less than 58%.  Payroll taxes are not progressive, rather they are regressive since there is a ceiling on the income subject to the tax. So if payroll taxes are included in this analysis you get a much less progressive picture and you do not have half the population paying no taxes.  Adding sales taxes would further reduce the progressivity of our tax scheme.

June 23, 2019, 5:34 p.m.

First of all I would like to thank you for writing such thought-provoking and insightful letters each week.  They have done a lot to educate me and I am grateful.  I have one question.  There is always a lot of information about how much tax each decile pays in taxes and they usually give the minimum required and average to find oneself within each decile.  Unfortunately, it may just be that I don’t know where to look but I am interested in finding out how much in total dollars each decile earns.  I think the two figure together would give a much better picture of fairness and clear what can be some pretty muddied waters.  For example, the top 1% may pay 37.3% of all income taxes but it would be very helpful to find out how much of the total income reported by the entire country was earned by this group.  I agree with you that MMT will likely create a monster we may never be able to recover from, but in order to figure out the best way out of our present awful situation, I think this extra information could be very helpful.

Thanks again for your hard work.  You have helped someone who never had a single business or economics class in his life at least begin to get a rudimentary grasp of the subjects.

Robert Watkins
June 23, 2019, 11:26 a.m.

I once again, I admit I am no economist, my limited knowledge comes from much reading including John’s and Ray’s letters. I’ve also gained some incite from working 50 years in the private sector, and watching the lifestyle of many of those we call the “have nots.”  Sure, misfortune can be seen among any and all walks of life but there is typically a reason for what many liberal progressives call misfortune. My life long experience has revealed that decision are by far the largest determiner of ones outcome of life in the US. We need only mention a few who started dirt poor but have been blessed, Pres. Obama and Ben Carson are two who come to mind. It’s blatantly obvious the determining factor: GOOD DECISIONS!  While their friends took the easy route,  quitting school, having babies, and relegating themselves to poverty, Obama, Carson and many others made the decision to take the difficult route to prosperity. 

Not that I can compare my outcome to theirs, but I too have followed a somewhat extremely difficult route of working extremely hard to get to where I am today. Before I toot my horn too loudly, I must admit that other than decisions, the largest common denominator Is the fact that we were blessed to be born in America. Rather than begrudging those who have more in the US, we should thank God we weren’t born in a country where the impoverished make the poor in America look like kings and queens!

John Perreault
June 23, 2019, 11:18 a.m.

I am curious why neither of you have pointed out that Capitalism is based on money spent.  Whenever a dollar is spent by any level of the economic population that is a vote for the particular good or service or more importantly in the coming year for a particular politician or party.  We are in the current situation because that is what the dollars voted for.  Until and unless the dollar vote changes there is no workable solution.

Al Scott
June 23, 2019, 9:35 a.m.

So, I began by writing down some questions:
Is the money at the top improving productivity?
Is the money at the top improving money velocity?
How much of the money at the top is sequestered: i.e., off-shore accounts, art, gold, etc.?
And then, How much (money) is enough?

I was trying to keep my thoughts in the framework of fiscal implications and mv=pq but then drifted to social implications and “The Fourth Turning”.

Taxes were brought up this week so, to put them in a historical context, I looked for a broader date range thinking there might be an answer:


That was an eye opener…40% top rate today is a big number but, when put in the context of WWII, it loses some weight. Everyone was pitching in in the 1940’s, even the lowest tax rates. And then, of course, the drop of highest rate taxes in the 1970’s and 80’s and beyond to today gets us to a growing pile of money at the top (the “protected”) while more and more people at the bottom (the “unprotected”) are having a difficult time putting $400 together to cover a personal emergency. Maybe today not everyone is “pitching in”. Or, said a different way, an unprotected family feels as though they are pitching in (under duress) when they pay for their $400 doctor visit but they never see or hear about the protected doctor returning the favor.

So, is more “hoarding” the problem….less “pitching in”? Is that what will bring us to the Fourth Turning (social revolution), or more barking from the “progressive left” (socialism), or “more coordination of monetary and fiscal policies” (big government)? Sure seems like that is the direction: i.e., as the top asks “How much progressivity do we need in order to be ‘fair’?”, the bottom is asking “How much (money) is enough?” That is a crucible for destruction.

If the top cannot “pitch in” and come up with a solution it can put to work/be responsible for (maybe The Giving Pledge, $20 hourly wage, health care, college endowments that allow “free” learning, extended vacations, etc.), then government will be forced to take action. The protected might be their own worst enemy.

Richard Salvagni
June 23, 2019, 8:50 a.m.

!st let us look at the fairness and responsibility of paying taxes , I am 70 yrs. old I live outside the US (Africa) earn 50 K /yr pension and unearned income and I pay 8% of my total income in US income taxes .
Next look at the richest man in the world Bezos company, Amazon pays no income taxes and how many major corps. in the US pay no taxes??? what so ever and add to the billions in corporate welfare out there while likely 20%+ of our employable population is sitting home (shadow stats ).
Add 5-10 %yearly inflation again shadow stats a homeless situation that is out of hand in almost every major city. Zimbabwe type inflation in housing and other speculative assets crypto currencies , tech (unicorn stocks) etc.
The correction is coming and needed but regretfully it will hurt those most that are already staggering, while the banks and the zombie cos. will still survive .
The worst president in US history a liar ,cheat and a thief , the great divider who follows 2 of the worst presidents ever Baby Bush and bought and sold Obama!!!!
The dollar will likely drop 20% in the next 18mos. as the orange idiot pushes the fed and the economy falters and interest rates drop back to zero depression is coming ,deflation is on its way .
I can see no way out of major debt default some time in the very near future!!

L M C Clark
June 23, 2019, 8:41 a.m.

I am very a capitalist and skeptical optimist but this column requires a comment.

An issue neglected in this analysis implication is if taxpayers were to pay only an equivalent tax percentage to income percentage, the country is unlikely sustain itself, larger deficits than current.  As a practical matter, the bottom half would vote it out.  Though it is appealing to the right to reduce “entitlements” for spending to match revenue (whatever warped tax code), this is unworkable too. 

Of note, percentage “share” of income taxes is not effective tax rate (check the arithmetic, top 1% in 2016 27% of “adjusted”).  These data also do not include corporate entities that add wealth principally to the top.

In a throw down line Mr. Mauldin thinks Mr. Dalio assumes no harm to productivity, implies the converse.  This signals a weak understanding of productivity drivers (Brookings report, Scientific American articles).

Last, cutting taxes without re-engineering the code to eliminate loopholes in a good time with large deficit spending was a bad idea.  And tax cuts have never “paid for themselves” despite the myth.

It appears Mr. Mauldin is a disbeliever in climate change … “paid for climate change … or any of the progressive left’s other proposals”.  This is a bit amazing given observations and data however, science and data deniers are becoming more numerous, education or disinterest in learning.

June 22, 2019, 11:22 p.m.


Increasing taxes, while it will help and I think is justified after the last round of idiotic tax reductions, especially the ones that favoured certain very well off groups, is not the solution.

The problem is that income has not kept up with inflation or with company profits. If workers below the top 5% were receiving adequate pay, they would not need compensation to top up their income.

The old logic was that companies would pay their employees adequately and that there are no requirements to go full socialist and force them to pay reasonable wages.

This has not been the case for at least the last 40 years. Take the bonuses from the top end of town and distribute them evenly to those who actually provide the productivity and deserve the bonuses.

The problem appears to be that those who control the distribution of company profits, both as wages and bonuses are no longer providing fair compensation to those who deserve it. Instead they claim a disproportionate percentage for themselves.

In reality, US white and blue collar wages are at 3rd world levels compared to other developed countries and compared to executive compensation.

If any company will not provide adequate compensation to its workers, tax the **** out of them and pass it on to the workers. It is not socialism, it is a fundamental principle of capitalism that companies provide proper recompense for labor provided. Currently they do not.

No executives contribution is worth 100 or 200 times the compensation of the other in the company. But that is what many receive and they have control over who gets what!

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