Category Archives: Economics

Miscellaneous economy stuff

Cynicism

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Fred Barnes writes in The Weekly Standard about the boneheaded economics of “liberal Democrats.  With all due respect to Mr. Barnes, who is a far better writer than I, I beg to differ with his characterization.  Here are the examples he presents of their boneheadedness.

Barbara Lee, a House member from California, is upset about computerized checkout lines at grocery stores. She avoids lines with no flesh-and-blood checker.  “I refuse to do that,” Lee said at a House Appropriations Committee hearing, “I know that’s a job or two or three that’s gone.”

Representative Jesse Jackson Jr. of Illinois is up in arms about the iPad, which he declared on the House floor recently is “now probably responsible for eliminating thousands of jobs.”  Alas, “what becomes of bookstores and librarians and all the jobs associated with paper?” Quite soon, he said, “such jobs will simply not exist.”

House minority leader Nancy Pelosi has her own remedy for the jobs dearth: Extend unemployment benefits.  “It injects demand into the economy,” she insists.  “It creates jobs faster than almost any other initiative you can name.” It has the “double benefit” of putting money in the pockets of the jobless and acting as a “job creator.”

Representative Keith Ellison of Minnesota is the champion of job creation by adding to the regulatory burden of businesses. Sounds counter-productive, right? Not so, Ellison told MSNBC. Companies will have to hire more people to comply with new regs.  “If the government says, look, we have got to reduce our carbon footprint, you will kick into gear a whole number of people that know how to do that or have ideas about that, and that will be a job engine,” Ellison said.

These are all very smart people; they know better, Mr. Barnes notwithstanding.  Rep Lee knows that technology creates more, and better, jobs than its lack.  Otherwise, she’d be pushing legislation to return us to the 19th century when roads were built with shovels and picks, there’d be no electricity to light her reading lamp, and there’d be no telephones or cars to ease her communication or travel.

Rep. Jackson had just been extolling the virtues of the iPad a few months prior to his remarks above.  I don’t think this flip-flop is an indication of any boneheadedness on his part.

Rep Pelosi didn’t get to be the Representative of the 8th District of California for 24 years and Speaker of the House of Representatives for 6 years because she’s a ditz.

Finally, Rep Ellison knows regulations don’t create jobs.  If they did, we’d have full employment, what with the number of government regulations expanding from 2600 pages in the Federal Register in 1936 to over 80,000 pages today.

It’s clear that these Progressives do think we are boneheaded, though.  It’s been their mantra for the last couple of years, for instance, that if only we understood what they were saying to us we would, perforce, agree with them and fall right in line with their government-will-take-care-of-us meme.  But since we don’t agree, they say it must be because we don’t understand; there must be something wrong with their messaging.  They need, they say, to keep adjusting their message until we do understand them.  They just need to keep dumbing down their message until we finally get it.

No, these Congressmen aren’t boneheaded.  Nor is their economics; those words aren’t intended to have any meaning.  This is just part of their messaging, and part of their cynical attitude toward us.  They’re used to having us dependent on themon government for our welfare, and they’re loathe to lose that power.  When they were swept to dominant positions by the 2008 elections, they rolled the dice on their control of our welfare.  They passed “stimulus” spending for the benefit of their unions, then they rammed through Obamacare to drastically increase our dependency on themon government, and then they rammed through Dodd-Frank to hamstring American businesses so as to increase our dependency.  Only three years on, with unemployment ranging between 9% and 10% the entire time, did they finally get around to paying lip service to a “jobs” bill.  But this is, in the event, just an attempt to push class warfare, while looking to continue paying us for (still) not working with yet more “unemployment insurance”—insurance designed to insure that we continue to not work and remain dependent on…government. Oh, and it has further spending for their unions.

After the midterm elections last year, and with the continuing disaster of their policies these last three years, they’re simply worried about losing their power.  This latest round of claims which Mr. Barnes provides just shows the Progressive cynical attitude toward us: they’ll say anything they can think of to pander to us, get our votes, and stay in power.

Fair Share and Economic Mobility

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Much has been made, in the last few years, of an apparent increasing concentration of wealth in the hands of a few, while the poor get poorer.  One result of this has been a demand that the rich should pay more taxes; they should pay “their fair share.”  Another result has been a general objection to the increasing wealth of those who are already wealthy; there should be a general redistribution of their wealth to the poor.

In addition to attempting to define what “their fair share” should be, it’s also useful to explore whether the wealth disparity in the US is really all that bad.

Let’s look first at the question of “fair share.”  I’ve written elsewhere that in 1999, the top 10% of Americans, by income, paid 66% of the total income taxes collected by the Federal government, while the bottom 50% paid 4% of the total; in 2008—after the Bush tax cuts that so favored the rich—the top 10% of Americans’ share had increased to 70% of the total income taxes, while the bottom 50%’s share had decreased to 3% of that total.  With the richest Americans’ share of the tax burden increasing, already, what is their “fair share?”

Further, when we look at actual income vs. taxes, we see this in 2008—again, after those Bush tax cuts “for the rich;” the disparity is even more startling.  The top 1% by income, who earned 20% of the total income in the US, paid nearly 40% of the total taxes paid by Americans.  That bottom 50%, who paid those 3%, actually earned nearly 13% of the nation’s total income.  Again, what is the “fair share” of the rich?  I suggest it’s already been met, and more.

Still, were the concentration of wealth and the associated wealth disparity static, there might be a valid beef, if only from the practical standpoint that such stationarity would contribute to stagnation in our economy, at the cost of continued improvement in well-being for us all.  But when we look at income mobility, we see no such stationarity.

When we look at minimum wage earners, for instance, we find that adults who earned at minimum wage levels over the period 1998 through 2006 did so only relatively briefly.  Then, rather than losing their income altogether, they moved on to better paying jobs.

We can look at this another way, too.  According to the Treasury Department’s “Income Mobility in the US from 1996 to 2005” report, the children of today’s poverty-level family are part of the next generation’s middle class families.  Today’s poor young man is tomorrow’s middle-aged middle class man.  Indeed, “80 percent of taxpayers had incomes in quintiles as high or higher in 2005 than they did in 1996, and 45 percent of taxpayers not in the highest income quintile moved up at least one quintile.” Further, the median incomes of those in the lower quintiles increased more than did the median incomes of the higher quintiles.  Not only are today’s poor a different group of people than yesterday’s, today’s poor are better off in absolute terms than were yesterday’s poor.

The movement runs both ways, as it must: relative movements are a zero-sum game.  Not only is yesterday’s poor man not today’s poor man, because yesterday’s poor man has gotten better off, relatively as well as absolutely, yesterday’s rich man is not today’s rich man: he’s lost ground relatively as well as absolutely.  “Among those with the very highest incomes in 1996—the top 1/100th of 1%—only 25% remained in this group in 2005….  [T]he real median income of these taxpayers declined over this period.”  It’s broader than that, too: 30% of those in the top quintile in income in 1996 had fallen to the next lower quintile by 2005, and nearly 3% had fallen all the way to the bottom quintile.

It seems that demands for the rich to pay “their fair share” are redundant; they already are.  It’s that bottom 50% that seems to be underpaying their “fair share.”  Further, demands for the class warfare of wealth redistribution would seem to be aimed at a moving target.  Our free market economy already is redistributing wealth, as Americans earn their way out of poverty, or lower middle class, or middle class, and enter those better off groups.  Demands to take wealth away from the rich are demands to take property away from those who’ve only just earned it with a lifetime of hard work and sweat.  And they are demands to deny that property to the children of these only newly successful.

The Progressive and the Law

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The law be damned.  Constitution-schmonstitution.

We can’t have our way through democratic procedure, so we’ll just blow up democracy and rule by fiat.  Because We Know Better.

That’s Rep Jesse Jackson, Jr’s (Dem, IL) attitude, as reported in The Daily Caller yesterday.  He was holding forth on the virtues of Obama’s Stimulus Lite, that $500 billion “jobs” bill that failed a cloture vote in the Senate a couple of days ago.  But let’s let the good Representative speak for himself, with my commentary interspersed.

I hope the president continues to exercise extraordinary constitutional means, based on the history of Congresses that have been in rebellion in the past.  He’s looking administratively for ways to advance the causes of the American people, because this Congress is completely dysfunctional.

I’m not aware of any Congresses that have been in rebellion in the past.  I must have slept through that part of my junior high Civics.  But what about that alleged dysfunction?  The “dysfunction” stems from Congressmen actually have the gall to honor their commitment to their constituents to work to hold down government spending (this “jobs” bill wanted to spend $175 billion we don’t have and to continue to pay people for not working, rather than stimulating job growth) and to hold down taxes (the bill wants to “pay for” those $175 billion by adding a surtax of 5.6% on “millionaires,” the Progressives’ more new taxes mantra).  And this elides objections to the Progressives’  class war, which they’re using as justification for the taxes.

President Obama tends to idealize—and rightfully so—Abraham Lincoln, who looked at states in rebellion and he made a judgment that the government of the United States, while the states are in rebellion, still had an obligation to function….  On several occasions now, we’ve seen…the Congress is in rebellion, determined…to wreck or ruin at all costs.

The Progressive is accusing the Congress, for doing its duty with its power of the purse, of committing Treason (the Constitution’s definition (Art III, Sect 3)) by being in open rebellion against the President of the United States—how, exactly?  The Congress isn’t rolling over and giving the President everything he’s demanding is the treasonous, rebellious behavior.

Listen to the video, too; it’s highly instructive.  We have, for instance, this from Rep Jackson:

The President had an opportunity to exercise Section 4 of the 14th Amendment; he chose not to.

This is what the 14th Amendment actually says:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

Notice that there is nothing authorizing the President to create new or to increase existing debt by Executive fiat.

Rep Jackson’s entire performance is a breathtaking, Ezra Klein-esque ignorance of the Constitution (which is understandable; it is, after all, so old).

On the other hand, Rep Jackson insists that the Congress “is in rebellion;” how can any debt that it creates or increases be valid at all?  Hmm….

Rational Expectations and Jobs and Progressives

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Rational Expectations is the economic theory that people act rationally, by and large and in their aggregate, in their decisions in the market place.  That is, even in the face of incomplete information, people generally form logical predictions about their future, and they act in a logical manner within the framework of their predictions.  Of course, information used in those logical predictions includes government’s actions in the market and people’s own view of what those actions will produce, independently of what government officials might aver.  And of course, in the face of incomplete information, mistakes are inevitable, both individually and across the economy.

The Progressives in government, despite the empirical evidence to the contrary from FDR’s failed Keynesian spending and Obama’s Keynesian Stimulus Act in 2009, instead insist that government spending is stimulative in and of itself, and government taxing is irrelevant to Americans: we will make no predictions from government spending, and we’ll simply accept the taxes as part of our environment; we’ll form no rational expectations of the future from these actions.

Against this backdrop, what are we to make of the Obama Jobs Bill just defeated in the Senate?  Here are the essential components of the Obama proposal:

  • $175 billion in new spending,
  • included in this was $44 billion to cover an extension of unemployment insurance even beyond the present 99 weeks of paying people for not working,
  • a further reduction in the employee’s payroll tax, a parallel reduction in the payroll tax of employers whose payrolls are $5 million per year or less, with this payroll tax reduction set to expire in 15 months, and
  • a permanent surtax of 5.6% on millionaires.

In the Progressive fantasy economics world, employers were to rush right out and hire workers, knowing that just having them on the payroll 15 months from now, their payroll tax cost of these new employees will double.  Never mind that it takes that long in a modern economy for an employer to begin to recoup the hiring and training costs of a new employee and for the employee to become productive.

Also in this world, the new employees in their temporary jobs, and existing employees with their temporary increase in take-home pay, will run right out and spend that money on everything they’ve ever wanted, and the stimulus is carried through.

Finally, in this fantasy world, the millionaires will simply not respond to their new tax: they’ll keep right on doing whatever it is they so nefariously do with their ill-gotten gains.

Here’s what rational expectations says Americans will do, and what we already did, for instance, with Stimulus I in 2009 and with the prior temporary payroll tax reduction (and the one time payments from the Economic Recovery Payment program and the Making Work Pay tax credit).  The fourteen people nationwide who actually got jobs out of Stimulus I did increase their spending, but not by much: they used as much of their windfall as they could to cut into their debts, which had increased sharply as they tried to cover necessary expenses while having no income.  We didn’t spend those payroll tax reductions, knowing they were impermanent—knowing, even, how short-lived they were.  We didn’t spend those one-time payments, either.  Instead, we saved them against future needs, trying to rebuild our savings, or we paid down our debt.  Employers didn’t hire, accurately predicting into the future that those temporary reductions would expire and their costs would expand suddenly and sharply.

The 99 weeks of unemployment payments already have led to a level of extended unemployment duration unmatched in decades: nearly 45% of those currently out of work have been in that state for more than 6 months.  As any freshman Econ student understands, when government subsidizes a thing, government gets more of that thing.  And so it would have been with the proposed extension in unemployment insurance beyond those 99 weeks.

And those millionaires with their shiny, new tax?  They were going to do what any rational human being does: adjust their incomes and investments so as to mitigate the effect of that tax: these job producers, these owners of businesses, were going to reduce their exposures—and not hire more workers in the process.  Those would have been permanent adjustments to their permanent new tax.

These rational responses to temporary government actions were such a complete shock to the Progressives since Stimulus I and those one-time “stimulative” payments that they simply denied the responses occurred.  This is why the Obama jobs bill, thankfully defeated in yesterday’s vote, was proposed in the first place, and why it was structured as nothing more than Stimulus I Reduced.

This Progressive move is part and parcel with their attitude toward the intelligence of the workaday American: we’re just too stupid to think for ourselves.  We’re not capable of behaving rationally.  This is also demonstrated by their mantra that our problem, the reason we don’t just blithely follow them over the cliff, is that we’re too stupid to understand their message.  They must keep adjusting how they communicate with us because we just didn’t get it the first time.  Or the second.  Or the umpteenth.  And so, since we’re too dumb to form rational expectations, their interminable Keynesian spending is perfectly sound economics.

Progressives actually argue, with a straight face, that their programs have saved or created millions of jobs.  Here’s one example of how well that’s actually worked, in the Progressives’ precious “green jobs” milieu, and how honestly their accounting has been done.

Finally, no Progressive (or modern Conservative, come to that) has been able to show that the “recovery” currently in “progress” is due to the “stimulus” bill passed in 2009, or due to the stupendous Federal spending and even more stupendous Federal borrowing, generally, or to some combination of these.  They cannot offer any evidence that whatever anemic recovery might be in progress is due, instead, to an ordinary, normal business cycle recovery.  A recovery that has, in fact, been held back by all of that spending and borrowing, just as the nascent economic recovery in 1937 died shortly after birth from the Federal spending and borrowing and free market interference of FDR.

Greed and Envy

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Caution: long post….

Greed is wanting more than we have, not because we need more, but simply because we’re dissatisfied with what we have.

While Dante defined envy as “a desire to deprive other men of theirs,” modern usage stems from another meaning: a painful, even resentful, knowledge that someone else has something that we lack, and we want it, too.

But “Greed is good,” Gordon Gecko said, and he wasn’t far wrong.  More accurately, we should never underestimate the power of greed to do good in the world.  Envy is a part of this, in a way; it’s another aspect of greed: it can give a focus to what it is we want that’s more than what we have: sometimes we want that specific thing that he has, if only because he has it already.  Adam Smith understood this; these are his invisible hand.

To greatly oversimplify things, here’s how that invisible hand works.

A man wants something he doesn’t have; he may not be entirely clear on what it is, but he can describe his shortfall at least to some extent.  Another man offers to develop and then make a widget which he says will generally satisfy the first man’s shortfall.  He’ll then sell it to the first man if he will pay for the labor, materials, and a little extra for a profit.  The two agree on the terms of the transaction, and in short order, one man has a widget he didn’t have before, and the other man has some money he didn’t have before.

Another man sees the first man’s widget and tells the second man he wants one like that.  A conversation occurs, and in short order the third man has a widget, too, and the second man has a bit more money.

Soon a fourth man approaches the second and says that if the second will make a bunch of widgets, the fourth man will buy them all and resell them elsewhere.  Now lots of people have widgets, the widget maker has much more money, and a seller is making money.

A fifth man comes along and says this to all those who’ve bought widgets: “All your widgets look alike.  I have a fine selection of gee-gaws that you each can add to your widget to make it a truly unique possession, which no one else has.”  And others see the gussied up widgets and want—and conclude transactions to obtain—widgets that are just like this man’s, or just like that man’s.

A sixth man says he can improve on the widget: he can make a Widget DeLuxe, or a wodget, either of which is better than even a gussied-up widget.  And so on.

All of those original players—buyers, developers, manufacturers, sellers—are better off for these free exchanges: each has, as a result of the exchanges, something of value to him that he didn’t have before, and he got it at a price he considered worth paying—whether in labor or in money—in order to get that thing.  On top of that, additional jobs were created—additional sellers; manufacturer helpers; after-market developers, manufacturers, and sellers—and these new job holders are all better off than they were before: they have jobs, now, and the wherewithal to buy widgets, if they wish.

In all of this economic growth, in all of this wealth increase, greed and envy played their roles in driving the system.  Every participant acted on his own self-interest, every participant did what he did to satisfy himself alone.  Yet as a result of the interactions of these individual self-interests, these individual greeds and envies, everyone in the system became better off.

It’s true that the wealth distribution was uneven.  In this simple scenario, the original widget maker seems to have the largest gain, and the sellers seem to have the next largest.  But even the meanest widget buyer is better off now than he was before, and he’s better off in a way that would have been impossible without this commerce: he has a widget he couldn’t even contemplate before because it didn’t exist before, and he has options for a better widget or a wodget, as well.

Notice a critical aspect here, though.  This system was a free market, within which participants to an exchange were able to come together and reach their agreements along parameters that were entirely agreeable to them, and to them alone.  No one was forced into an exchange he didn’t want, no one was barred from an exchange in which he wanted to participate, and each one was free to act solely on his own desires.

Greed and envy are two-edged swords, though, and they certainly can overwhelm a free market.  There is a role for government intervention, and it is to protect all of us from the plainly rapacious.  But that intervention must work to preserve free market mechanisms—the very mechanisms that channel our venalities and convert them to accidental strengths for our common good. This kind of government intervention must enforce contracts, and it must ensure transparency so that every participant can readily understand what it is he is getting—or selling—when he enters that market for his own selfish purposes.  But it must leave each participant free to act in his own self-interest.

When the market isn’t free, when the market is centrally controlled—even when the market is nominally free, but government intervenes too much—the capacity of commerce to turn greed and envy to our common betterment is overwhelmed.  When government intervention favors this or that selected group, for instance—one group didn’t get as wealthy as another, let’s say—then our greed and envy are simply channeled away from functional (if accidental) cooperation for the common good toward simple, resentful, isolated greed and envy: “Why do they get special treatment?  Why can’t I, too?”  Members of the other groups—whether government-designated groups or self-styled (now that government has set a precedent of special groups for special treatment)—stop working to gain the wherewithal to buy, they stop working to produce.  These groups insist, instead, that government intervene in their favor, too.  In short order, the market is no longer producing, and wealth and well-being deteriorate.

Thus, government intervention too easily suppresses the essential cooperative nature that is men and women acting in our own self-interest—including our own greed and envy—to arrive at exchanges voluntarily between those of us who want and those of us who have, or can produce, or can create.  Intervention cannot look to control the forces of the free market, to control by government fiat our greed and envy, without destroying that free market.

“If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary,” James Madison wrote.  But we’re not, and they don’t; we must limit government’s market interventions, as we must government’s power generally.  Greed and envy are part of our nature, but only a free market has the capability of channeling those base parts to our collective benefit.