Why is Too Much Speculation Bad?

The largest pieces of the Bush tax cuts were cuts on speculation: specifically, Long Term Capital Gains, Dividends, and Carried Interest.  These are all mechanisms by which speculators make profits.  These profits contribute very little to the economy as a whole, but they make a few people very rich.  Until the "Fiscal Cliff" settlement last month, they were all taxed at 15%--less than half the marginal rate for rich people.  This is a very powerful incentive for figuring out ways to make your money in these areas.

Of itself, this might be harmless, but because it occurs in competition with the rest of the economy, a lot of investment chooses to be done in these low-tax areas, which has the effect of driving investment out of areas that can create more jobs.  We need some speculative investment:  it creates a back end for IPOs and commodity production, but if we over-incentivise speculation, it actually reduces investment in the very thing we're trying to stimulate: manufacturing, engineering, services, etc.   Productive business. This further increases competition for the few remaining speculators, which makes it harder and harder for small investors to compete.

It gets worse:  the board members of the productive businesses make most of their income by being shareholders, so they have a huge incentive to increase the short term profitability, and thus their share price, at the expense of the employees, the product quality, and the long term viability of the business.  Not all do this, but since their personal competition is largely with people who make their income by speculating, a lot do.  So they cut long term expenses--pensions, health care, employee training, etc.  Now the other businesses, the ones whose board were behaving responsibly, are at a disadvantage, so they have little choice but to cut benefits too.

We need speculation.  But too much of it is worse than too little.  With too much, we have wrecked the greatest engine for economic growth the world has ever seen.  It may not be too late.  But eventually it will be.