Tag Archives: political economy

Consumption and Inequality

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Some on the left worry about income inequality as though that matters.  It is, though, equality of opportunity that provides everyone the path to increasing prosperity.  Even though we begin life with an equal endowment of inalienable rights—including the right to seek our own happiness as John Adams described it—it is the implementation of those rights, equality of opportunity, that lets us capitalize on and so to maximize, our unequal endowments of ability, temperament, luck.

One way to assess the increasing prosperity of all is to look at consumption.  Hassett and Mathur do this in their paper, “A New Measure of Consumption Inequality,” a copy of which can be found here.

Some numbers will illustrate.  First, a snapshot of the general situation:

Per cent of Total US Consumption

 

Year 2000

Year 2010

Bottom Fifth of Households by Pretax Income

8.9%

8.3%

Middle Fifth

17.3%

17.1%

Top Fifth

37.3%

38.6%

That’s remarkably stable.

Now, the trend in consumption:

Increase in US Consumption from 2000 to 2010

Bottom Fifth

14%

Middle Fifth

6%

Top Fifth

14.3%

Despite the recessions of the early 2000s and since 2008, household consumption actually has increased, and the bottom fifth by pretax income increased their consumption by quite a bit, despite the claimed unfairness of income inequality.

Now, some illustrative items of consumption, focusing on the bottom fifth of American households:

Per cent of Households with the Indicated Item

 

Year 2001

Year 2009

Computer

19.8%

47.7%

Dishwasher

17.6%

30.8%

Microwave

74.9%

92.4%

Washing Machine

57.2%

62.4%

Air-Conditioning Equipment

65.8%

83.5%

6 Rooms (Other than bath) in the House

21.9%

30.0%

 

Odd, that—overall relative share, by those unequal income groups, of consumption of items like these has remained quite stable across over time.  Moreover, despite that income inequality (which has grown, as it typically does, during recessions, does not act as a limiting factor in consumption capacity.  Apparently unequal incomes don’t matter that much to well-being.  Household quality of life for is improving for all groups.

Of course, this does not mean that the lower income groups don’t need help—they often do, especially during economic dislocations; their resource margins are much thinner.  But that help is most effective as temporary hands up, not in the form of permanent wealth redistribution programs.  The latter simply address a non-existent problem.

Economics

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We’re well aware of the role of economics in our daily affairs and in the aggregated domestic affairs of our country.  The quality of our economy directly relates to our and to our nation’s prosperity.  But what is the role of economics in our foreign and defense policies?  Our economy is no less critical there.

General George Marshall once said

The only way human beings can win a war is to prevent it.

A successful economy plays a role in this prevention through a number of pathways.

The role of economics in foreign policy

Included among the paths is the ability to aid our allies, our friends, and those who wish to leave their current orbit and if not align with us, at least to begin to chart their own independent course.  A strong economy makes this possible.  The surplus from that can fund support for those nations struggling to get free of their current restraints—both their own and those from foreign domination.  Our strong economy, through the trade relationships our businesses create, can aid other economies as they struggle through their own recessions—and their resulting stronger economies can, through those same trade relationships, then aid our own in similar circumstance.

Another path is through the capacity to support the economic development (and through that, the social and political development) of less fortunate nations, both those in the developing world and those whose development has been stunted by being trapped under foreign domination—the follow-on condition of those nations just broken free.  Our economic strength here is especially useful in guiding the political and social development of these nations as well as their economic evolution.  By aiding these nations to develop as democracies with free market economies, we not only help them to find their own strength and prosperity, we deny the nations of tyranny the resources they need for their aggression, and we push those tyrannies back from our own shores.  This also is facilitated by our very success at home, which demonstrates the superiority of our economic methods.  As above, this is possible only from our own economic surplus.

A third path is to work with nations that are committed to the principles of free enterprise, and of freedom generally (which collection will overlap greatly, but are not coincident with, the group comprising our friends and allies), to strengthen all of us economically and politically and thereby to build, further, a bulwark against those tyrannies, who otherwise would become tempted to test us in battle, and perhaps win.

A fourth path is as a magnet for immigrants who want to come here share in our success—economically, to be sure—that’s the proximate magnet—but also our success politically and culturally.  These immigrants are a prime source constant renewal for us, in energy and in problem-solving.

The role of economics in defense policy

A strong economy creates the ability to fund, conduct R&D for, and equip our national defense system.  Without a successful national defense system, we very quickly will have no economy to defend, no nation to defend.

A strong economy enables the next step—the ability to fund the actual use of our national defense system, which usage is by its nature destructive of that system and which destruction must be replaced during the conflicts and after them.  Yes, we will be tested in battle, even though the means of testing will evolve, as the events of 11 Sep 2001 and after have demonstrated.

A strong economy gives us the wherewithal to preposition equipment and supplies near flash points.  These are, to be sure, targets, but they’re useful in the power projection phase of conflicts, and they can be useful in delivering quick reaction forces to the flash location(s) when they start to ignite.

A strong economy creates the ability to help other nations develop their own defense capacity: arms support, arms development support, and so on.  Such defense arrangements also can support economic success in the recipient nations: a common constituent of arms sales agreements is the assembly of purchased weapons in the buying nation’s factories, which represents employment for the citizens of those nations.

Related to the above, a strong economy facilitates reciprocal R&D agreements with our allies and friends.  This leads to greater commonality of key supply items, which simplifies the logistic problems inherent in coalition war.

A strong economy facilitates our maintaining a force with the technology and the numbers to enable us to hold open the world’s sea lanes.  This, by itself, creates a virtuous circle: free and easy transport of trade goods over the world’s waterways facilitates free trade, which leads to greater prosperity and stronger economies for all concerned, which leads to increased free trade and an easier time maintaining and improving those forces guarding the sea lanes.

Notice, too, that all of this adds up to a forward defense of our nation so as to minimize the likelihood that the initial, critical blows of a conflict land in our homeland.

In the end, the very success of our economy—our evident prosperity and freedom—serves as an empirical example of the rightness of our way of life.  It becomes a magnet drawing other nations to our methods, or at least to try them, it draws other nations to send their sons and daughters to our universities, where they not only will learn the academics of our institutions (whether economics, or science, or engineering, or philosophy, or…), but simply by being here through much of their formative years, these students also will learn the American way of life through immersion in it.

Moreover, our free market, capitalist economy, founded on individual liberty, individual responsibility, and individual ownership of property—our bodies and our real and our intellectual property—is what gives us the moral strength and the prosperity to constantly grow, to steadfastly maintain our freedom, to aid others, whether our neighbors or those wanting out from under.

Pick One

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David Wessel, writing in a recent Wall Street Journal, reports that

Chief executives of more than 80 big-name US corporations…in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Then Wessel himself makes this remark [emphasis added]:

The declaration differs sharply from those of several other business groups, which urge Washington to deal with the deficit and avoid across-the-board spending cuts and tax increases set for year-end—but avoid any stance on the politically charged issue of raising taxes.

This is an all too common conflation of two separate questions, but it’s amazing to see it coming from a Pulitzer Prize-winning economics journalist.

Of course raising tax revenue is different from raising taxes: the latter is merely one way to achieve the former.  But Wessel compounds his confusion by repeating it:

The CEOs who signed the manifesto deem tax increases inevitable no matter which party succeeds at the polls in November. “There is no possible way; you can do the arithmetic a million different ways” to avoid raising taxes, said Mark Bertolini, CEO of Aetna.

Notice that: Wessel directly contradicts the CEOs in their statement, which he quoted above.  And then he carefully provides his confused “paraphrase” of raising taxes outside another direct quote.  Yet Wessel then notes the following:

The executives didn’t endorse Mr. Obama’s proposal to raise the marginal income-tax rates for the top 2% of taxpayers or any other proposal.  Rather, they called for an overhaul of the tax code that, among things, would eliminate or reduce deductions, credits and loopholes (known as “broadening the base”), and one that also would bring the Treasury more revenue than the existing code does.

It’s no wonder Americans are having trouble sorting through the question of tax reform when the so-called experts can’t even trouble themselves to keep matters straight in their own writings.

Romney’s Tax Plan and Obama’s Tax Plan

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It’s interesting, at this juncture just after the third debate—on foreign policy—to look at the proposals the two Presidential candidates have for personal taxes and personal tax reform (yes, yesterday’s debate and tax policy have little to do with each other, but never mind about that).

The Wall Street Journal provided a description of Republican Presidential Candidate Mitt Romney’s proposal.  Against a backdrop of an across the board rate cut of 20% (along with a reduction in the top business tax rate from the current 35% to 25%), Romney is proposing a cap on the total value of the deductions and credits an individual or family might take.

During the first Presidential debate, Romney proposed

What are the various ways we could bring down deductions, for instance?  One way, for instance, would be to have a single number.  Make up a number—$25,000, $50,000.  Anybody can have deductions up to that amount.  And then that number disappears for high-income people.

He repeated the concept in early October, suggesting a $17,000 cap with higher income people perhaps having a lower cap.

In the second debate, Romney again put forward his concept.

I’ll pick a number—$25,000 of deductions and credits, and you can decide which ones to use.  Your home mortgage interest deduction, charity, child tax credit, and so forth, you can use those as part of filling that bucket, if you will, of deductions.

Of course Progressives and the NLMSM want yet more specificity, and Romney declines to provide it.  In the first place, it doesn’t get much more specific than a cap—no particular deductions or credits are on the table for elimination, so there’s nothing about which to be specific there.  In the second place, Romney acknowledges that there are, also, other

ways to reduce deductions that in any case would have to be negotiated with Congress.

This is quite a different approach to Obama’s concept of negotiation.

Why a cap, rather than eliminating outright several of these market distorting deductions and/or credits?  Each taxpayer would pick and choose the deductions and credits that are of value to him in his particular circumstance, in a particular year.  Thus, these deductions and credits would compete with each other for inclusion.  What a concept: competition and individual choice.  And we’d be accumulating empirical data about which deductions and credits really do have value for us taxpayers.  But those are anathema to Progressives, whose raison d’être would disappear the moment their dependents don’t need them anymore.

Moreover, this competition, coupled with the generally lower tax rates, would reduce the degree of market distortion that each deduction causes.

The cap also preserves, for now, the degree of progressivity in our tax code that in itself is market distorting, yet is politically necessary to get any reform be passed in today’s DC environment.  See the table below.

Notice how, under the current system, the average total of deductions and credits rises with income.  The Progressives’ evil rich would bear the brunt of the effect a deduction cap.  And middle income Americans wouldn’t feel the cap at all.

Set in apposition to Romney’s proposal is Democratic Presidential Candidate Barack Obama’s tax plan.  We’ve seen his idea at the link above: raise taxes on those Americans whom he despises.  And for what purpose?  Not to pay down our national debt or even to reduce the Federal budget deficit.  No, Obama intends to use his tax increase to transfer funds to his favored Americans—union, and so-called green energy, cronies who will then fund his political power.  And he’ll use the monies to fund the rapidly increasing spending for which he called in the last two budget proposals he sent to Congress.

Hmm….

Econ 101

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Milton Friedman had some thoughts on basic economics.

The most important single central fact about a free market is that no exchange takes place unless both parties benefit.

There is all the difference in the world…between two kinds of assistance through government that seem superficially similar: first, 90 percent of us agreeing to impose taxes on ourselves in order to help the bottom 10 percent, and second, 80 percent voting to impose taxes on the top 10 percent to help the bottom 10 percent….  The first may be wise or unwise, an effective or ineffective way to help the disadvantaged—but it is consistent with belief in both equality of opportunity and liberty.  The second seeks equality of outcome and is entirely antithetical to liberty.

Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own.  So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.

And [emphasis added]

The economic miracle that has been the United States was not produced by socialized enterprises, by government-union-industry cartels or by centralized economic planning.  It was produced by private enterprises in a profit-and-loss system.  And losses were at least as important in weeding out failures, as profits in fostering successes.  Let government succor failures, and we shall be headed for stagnation and decline.

Stated Differently™, bailing out losing firms assures us of mediocre economic growth.  Winston Churchill also had a thought on this matter.

When losses are made, under the present system these losses are borne by the individuals who sustained them and took the risk and judged things wrongly, whereas under State management all losses are quartered upon the taxpayers and the community as a whole.  The elimination of the profit motive and of self-interest as a practical guide in the myriad transactions of daily life will restrict, paralyze and destroy British ingenuity, thrift, contrivance and good housekeeping at every stage in our life and production, and will reduce all our industries from a profit-making to a loss-making process.

 

™Judge Andrew Napolitano

 

h/t Power Line