Fair taxes - An income disparity hypothetical

The media chatter about the gap between the wealthiest 1% and the rest of us continues unabated, particularly since the CBO confirmed how much the gap has grown in the last 30 years or so.  We hear some folks talking about taxing the rich, other folks talking about class warfare, but very little real problem solving.  No one I have heard is asking how the gap between the very rich and the rest of us over the last twenty years has affected our economy.

From the little bit of evidence I have seen it appears that in developing economies big income gaps can help generate faster growth, but in developed economy's big income gaps retard growth.

This makes sense to me.  In a developing economy people have a lot more needs than they do money.  So the consumer market is small but bursting with potential to grow rapidly.  Allowing those with an entrepreneurial bent to gather wealth provides capital to pick up the good ideas and run with them.  We are seeing this happening across the parts of the world we have traditionally thought of as undeveloped nations.

But in a developed economy we have more money than needs.  I heard a statistic the other day to the effect that studies show that most people in the United States, once they have about $70,000 a year in household income, don't really want to work longer hours to try to make more money.  I assume $70,000 reflects the point where people have what they need plus some extra, so lets assume $70,000 is the US threshold for a comfortable life.  It is the point where you spend nearly all of your income, but there isn't much you need that you can't afford.  Unlike a developing economy where they need everything, in the developed economy many of us have all we need.

Since economies are mind bogglingly complex, I find a simple hypothetical can help me grasp fundemental relationships quickly.  Here is a little hypothetical about income distribution that popped into my head.

Operating on the assumption the $70,000 figure quoted above is the point where people in the US have their primary wants and needs filled, suppose the net income available to Podunk, a town of 10 people, is $700,000.  If all 10 Podunkians get $70,000 of that income (i.e. no disparity in income) the the full $700,000 of income available to the society is circulating around supporting the economy of Podunk as people spend their income.

But suppose Joe finds a way to take home $200,000 of the $700,000 income in Podunk.  The other 9 persons take home the remaining $500,000 ($55,555 per person, down about $14,500).  Even if Joe has more extravagant wants and needs and spends twice as much, $140,000, as anyone else in Podunk , that still leaves Joe with $60,000 in extra income.  So he looks for somewhere to invest it.  But Podunk now has $60,000 less money in the economy, and the other 9 Podunkians are now $14,500 poorer, so Joe can't start a new business, because there are no Podunk consumers with the money to buy new products.  So what does Joe do?  He probably just pays more to buy up local property.  He inflates the value of some asset local asset without adding any real value.

This sounds really familiar to me.  Stock prices have been inflating and deflating precipitously, but overall for the last 15 years stock prices have spent most of the time at higher valuations than the historical average would suggest were prudent.  Gold prices are inflated, house prices are inflated. In short, we have lots of investment capital scrambling around to make some money, and big corporations sitting on huge piles of money, but few people willing to start new businesses, or expand existing businesses in the US because US consumers don't have the money to support new ventures.  The consumer market in the United States has been shriveled by the wealthiest people taking a bigger and bigger slice of the pie.  We disguised this result for years (and drove the world economy) by consumers taking on a bigger and bigger debt load, but that bubble has also popped.

The chattering political class is all abuzz about job creation, and how can we get people back to work.  I suspect the US is going to be in the economic doldrums until more of the income this country generates starts making it into the hands of the regular folk that spend most of what they earn, and less income goes to the people who have everything they could possibly need or want - except more.

The deficit - a pertinent fact

Lots of apocalyptic buzz these days about our national budget deficit.  I am one who believes Washington has been pretty irresponsible at times over the years, and we should work toward reducing our budget deficit, but the hyperbole on the political front sometimes begs for a reality check:

Normally we judge how serious our debt situation is comparing how much income our country generates in a year  (gdp) against how much debt we have.   It is sort of like your personal finances.  If you owe $50 and only make $20 a month you have a much bigger problem than if you owe $50 and make $100 a month.

31 countries in this world have more debt than we do as a percentage of gdp.  Of course that includes the high profile debtors such as Greece, Italy and Portugal, but it also includes countries we think of as economically solid and responsible, like Germany, Israel and Canada.

Source:  San Francisco Chronicle Insight section for Sunday, October 16, 2011

Thoughts on Immigration Laws

Immigration laws are an odd sort of law.

Being an illegal Immigrant is not a crime in the same sense as murder, robbery or other acts that are intentionally directed at harming someone else.  Immigrants (generally) come here to work, because they can't support their families or feel it is too dangerous in their home country.  The are generally motivated by values we respect.  

The main purpose of immigration laws are to protect our selfish economic interests.  They are basically about the fact we've got a good deal and we don't want the rest of the world muscling in.  

Immigration hawks lately argue illegal immigrants are acting illegally so they won't consider amending the law until everyone is obeying it.  Their view seems to be "its the law so it must be obeyed, and we can't talk about changing the unfair, impractical of just plain dumb parts of the law until everyone is obeying the law".

Every time I hear an immigration hawk say something like that I hear echos of the Syrian Government shooting its peacefully demonstrating people because they are breaking the law.  Or Ghadaffi, or Hosni Mubarek.  

I don't think Jesus would find violation of immigration laws a very compelling sin.  That's not to say we don't have a right to enforce immigration laws, or that some restrictions on immigration aren't prudent.  But much of the overheated rhetoric about immigration is misplaced.

Our economy, whether we like it or not, depends on cheap labor from Mexico and Central America to work for low pages in low end, low paying jobs that Americans won't do.  Would you or any of your kids be willing to spend 8 to 10 hours a day bending over in a strawberry field for something close to minimum wage day after day, month after month? Anybody you know be willing to do that?

Immigration hawks in the last couple decades have substituted emotion for analysis.  Instead of recognizing immigration laws as laws about economics they have treated them the same as laws against murder, rape and robbery - drumming up emotional outrage (because that is what gets votes) then making it tougher and tougher for people to come to this country.  Politicians and media personalities build huge ratings on this emotion based opinion bending.  It is very successful politically but does not prepare you to actually govern, because once you play the emotion card in your own head, it is very hard to get past it.

A couple decades ago we had a program that allowed people to come North to work in the fields, then go home.  We eliminated that program and at the same time made it tougher and tougher to immigrate legally.  People have kept coming (now illegally) because there were jobs here and there were no jobs in their homelands, and they have been helped out by employers who needed them.  Perversely tougher laws probably resulted in vastly more immigrants in this country  because, as academic studies have shown, most illegal immigrants would prefer to go back home where their roots are (and their earnings make them relatively much wealthier) when their work ends.  But crossing our borders has become so difficult and dangerous people who once came to work and then went home to their families between growing seasons, now stay and look for any kind of semiskilled labor job so they don't have to go back and forth across the border.  Or they bring their families up here.

It seems to me Immigration hawks have not approached immigration law in a constructive manner because they get a lot more mileage out of it as an emotional issue to get people fired up to vote for them.  Unfortunately when they get enough votes to get elected they often do something stupid, like the immigration laws recently passed in Georgia and Alabama that seriously damaged their states agricultural economy, before they realized maybe they made a mistake.  Good government figures those things out ahead of time, but good government doesn't come from fired up emotions.

Republicans and defense spending

Republican Presidential candidates continue talking like cuts in defense spending are off the table, and, astoundingly, not ruling out increases in defense spending.

The relationship Republicans have with defense spending is a lot like the relationship a hypochondriac has with a Doctor.  They always feel threatened and think they need more, no matter how irrational the fear.

I wish someone would ask them some questions like:

Republican President Dwight D. Eisenhower (a professional soldier who knew a little about defense) said, as he was leaving office, that we should beware the military-industrial complex.  What did he mean?

How do you explain the fact the average American taxpayer pays nearly $2000 a year in taxes to support Defense spending while the average European (and almost everyone else in the world) pays under $500 a year?  What extra margin of safety are we buying with the additional $1500 per person per year?

What are we protecting by maintaining bases thousands of miles away from our shores?  How does having those bases help protect us from attack?

Responding to some current Republican economic arguments

I start this blog by with a preface - Democrats are far from perfect.   But these days Republicans are the problem.


I used to be Republican.  I wish they could really be an advocate for fiscally responsible government to counter the tendency of politicians to hand out government money to get elected.  But Republicans talk the talk but seldom walk the walk and the current crop of Republicans is living in a fantasy world where the answer to every problem is tax cuts.  Republicans discovered cutting taxes plays really well with voters - just like handing out candy plays well to kids.   The candy strategy has become an obsession.  

Fact: the Federal Governments income right now is the lowest it has been (in real dollars) since the 1950's - even though we have had two wars going on for nearly a decade.  The Republican approach to economics is sort of like quitting your job just as your kids are starting college.

Republicans try to paint Democrats as the reason we have a big deficit, saying Obama hasn't submitted a balanced budget in three years.  Here is my problem with this statement - it is factually correct but way out of context.  Its like accusing a fireman that has been trying to pull you out of a burning building of messing up your hair.  It ignores the fact Obama walked in the door facing the worst economic crisis since the great Depression.  If we had tried to balance our budget immediately we would probably be in a depression right now.  I would be real surprised if you could find even one reputable Republican economist (outside a partisan think tank) who would disagree with that assessment.  Not to mention a Congress full of Republicans many of whom seem to care more about defeating Obama than in making government work.

Some facts - the budget was balanced in 2001 when Mr Bush walked in the door and Republicans took control of both houses of Congress.  Republicans continued to control both houses of Congress and the Presidency until 2007 by which time the economy was already starting to melt-down and the deficit had already exploded.  That events of that six year period, coupled with the bailout to stop the free fall in financial markets, are the source of our current financial morass.  Mr Bush was the only President in history to cut taxes while a war was going on.   Mr Bush never vetoed a single spending bill of any kind, because they were filled with the kinds of handouts and freebies Republicans prefer. 

Republican commentators are fond of saying that the Democrats are paying for current spending with our children's money.  Here is an easily documented fact - lots of charts and graphs on the internet - since WW II the budget deficit has increased twice as much during Republican administrations as it has during Democratic administrations.  The biggest deficit explosions in the last thirty years happened during the Reagan/Bush administrations and the Bush Jr. administration.   The fact is Democrats have spent much of the last 30 years trying to patch up fiscal messes made by Republicans.

The current deadlock in Congress is remarkably similar to what was going on in Congress in 1990 to 1993.  Republicans had set the agenda during the Reagan years when they controlled the Senate and Mr Reagan was President.  They enacted big tax cuts without making cuts in spending and the deficit immediately began to shoot up.  In 1987 Democrats regained control of both the House and the Senate.  Republicans whose policy's had caused the big jump in the deficit suddenly became deficit hawks, lambasting Democrats as the cause of the deficit.  A budget deal was struck in 1990 that brought us to a balanced budget by late in the decade.  But by that time Republicans were already at more tax cuts and the cuts in regulation that triggered the financial collapse in 2008.  By 2001 Republicans had gained control of the House, Senate and Presidency (for the first time since 1921 to 1933).  They cut taxes and started handing out government money left and right, once again exploding the deficit.  Then they get out of power and suddenly they are deficit hawks again.  Only this time there policies are idiotic as well as hypocritical.  In 1990 the economy was basically pretty strong, although we did go into a recession.  Now we are flirting with a replay of the great depression.  Government spending is what has kept us afloat.  And they think now is the time to deflate the life raft.

Republicans credibility with me is gone.

Is there a correlation between income disparity and growth?

The news is full of data these days about how over the last thirty years the gap between the wealthiest Americans and the working folk in America has exploded.   The rich have gotten way richer, while the middle class has seen no growth in real income.

No one outside of the partisans on each side of the political spectrum seem quite sure how to treat this fact.  The partisans on the right talk about class warfare, and that the rich got that way because they earned it.  The partisans on the left say we are all in this together, that this simple fact in itself justifies....something...no one seems quite sure.  Higher taxes on rich people maybe?

I find some data from a couple different fields raising a question I believe should be the focus of consideration of the increased disparity in income across our society.

First, I know that psychological studies have found that generally what makes rich people happy is not how much they have, it is how much they have relative to other people.  It is an ego boost, a way of proving they are special.  It is not, I suspect, that the super rich are competing with the middle class, they are competing with one another, with other people that judge self worth in monetary terms.  I am not being judgmental here - I draw no conclusions about whether building your self image around how much money you make is good or bad.  We all need to have ways to make ourselves feel special.  I am just noting this is what psychology suggests is what motivates people to keep accumulating wealth far beyond what they need to live comfortably and securely.

Second, one of the historical facts frequently cited to prove that we have in fact developed into a much more stratified society economically is that the gap between the middle class and the wealthy has not been this large since the 1930's.

This intrigues me because our current situation tracks so closely to the situation in the 1930's.   In the decade leading up to the 1930's Republican ideology that focuses on turning individual initiative loose from the constraints of government was very popular, Republicans controlled both houses of Congress and the Presidency from 1922 to 1932.  During that period we went through an enormous, largely unregulated boom that caused the gap between the wealthy and the middle class.  In 1929 the stock market crashed and we began sinking into the great depression that, among other things, aggravated the income gap.  The country turned more toward the Democrats view that a society that used government to control individual excesses in 1933.  For the next half a century we went through a prolonged period of growth that spread benefits across the income spectrum.  The gap between the wealthy and the middle class was a fraction of what it is today.  In 1980 Ronald Reagan invigorated the Republican ideological counterattack  and the gap between the rich and the middle class began to grow again during his administration.  Public sentiment seemed to swing toward Republicans and they gradually began regaining control of the nations agenda, culminating with the election of George W. Bush in 2000 along with Republican majorities in both houses of Congress.  For 6 years Republicans controlled both houses of Congress and the Presidency, and pursued policy's reflecting their ideological belief that individuals needed to be released from the constraints imposed by government.  The current economic collapse was beginning as the Republicans lost their total control over government, and the current gap between the incomes of the rich and the middle class seems to be entirely a product of the policies pushed by Republicans to free individuals from the constraints of government.

So here is where all this leads me?  It leads me to wonder if there any research out there correlating economic growth with the degree of income disparity in the countries population.

Do Country's that have relatively small disparities in income between the wealthy and the middle class grow faster or slower than countries that have a large disparity in income between rich and middle class?

Is there an optimum level of disparity where growth is maximized?

Would the wealthy care if it became apparent the country could grow faster and be stronger, if they shared more of the wealth with the middle class?   This is a particularly compelling question now that the wealthiest folks are now global.  The really wealthy in the US didn't seem to have a problem with shipping jobs to other countries and closing down their operations in this country.  Of course one can argue they were compelled by the markets.  But in terms of their personal wealth, will they see trying to help their country remain a dominant economic power as a distraction from their effort to climb the global wealth ladder?

I'm betting, given the fact this income disparity issue has been an issue for awhile, that if there isn't any data out there yet, there will be soon.  If anyone runs into it please share it.

Postscript:  there evidently is some data - as explained in an email from my cousins:

In his book, “The Darwin Economy,” Robert H. Frank of Cornell University cites a study showing that among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.

Globalization - the long term picture

Historically economy's have usually been local, and locals have fought to keep competition from outside the local area even as they sometimes are seeking to sell their goods and services to others outside their area.  Economists believe that knocking down all those local barriers will make everyone better off.

Globalization is the buzz word we use for the process of knocking down local barriers to commerce.  Globalization is one of those things that is great in economic theory but presents horrendously thorny problems when we try to find ways to get there.

The basic conundrum is as long as big parts of the worlds workers are climbing out of abject poverty, they are happy with a life style workers in developed economies find unacceptable.  But the process pursued in the last 150 years that has brought workers in less mature economies up out of poverty  has involved developed world companies moving jobs to less developed countries.  Sometimes this is driven only by the desire to make more profits, but often it is forced by realities of the market place.  If a company doesn't do it some one else will and the companies products will then be overpriced.

The result has been progress toward globalization has waxed and waned.   There is lots of enthusiasm for awhile, but eventually the process causes job losses and economic slowdowns which kill enthusiasm, particularly in democratic states, for globalization.

There is lots of irony involved in the Globalization process.   American consumers have made Wal-Mart one of the worlds most successful retailers because of its low prices, but Wal-Mart - and other similar companies - have dropped prices by producing their goods outside the United States and gradually undermined the economic viability of many of the industries that employed those same consumers.

So the fundamental problem can be posed - how can you deal with the job losses in developed countries that are inherent in the process without condeming the undeveloped world to decades of further poverty.   How do you replace the jobs in western countries that are migrating to less developed economy's?

Supporters of globalization (mainly either rich folks not threatened with job loss or idealistic economists) often argue that the free market can replace those lost jobs with the proper incentives.  I'm dubious - I think the free market can dream up some new products or services that can provide jobs for workers in developed countries, but I suspect that won't happen nearly as fast as job losses will occur.  Our world is already full of products and services many of us wouldn't buy, finding really new products that appeal to masses of people is really hard.

One possible way to alleviate the gap between job losses and creation of new private sector jobs is to use Government jobs.  Hire people, particularly young people and older folks, to do the things that contribute to a richer life but that the private sector can't do effectively (or profitably).  All my life I have marveled at the beautiful and functional infrastructure built by the WPA during the great depression.  It seems to me that offers a path to offset the negatives of globalization.

However the Civil Service laws that have built up over the last century create a problem with using Government.  If the primary purpose of the government program is to create jobs, direct government hiring is handicapped by the protections the law gives to Government workers.  Government jobs seeking to stimulate the economy should be focused on giving people a lifeline and experience.  They should pay less than the private sector, and provide fewer long term benefits, so people will be motivated to move out of the government job and into the private sector as soon as possible.