The “Decent Life” Argument
I was having a discussion with a conservative friend recently, and challenged him to write up a budget for a decent life for a responsible, hard-working American:
Living in Shoreline, a relatively inexpensive area north of Seattle.
Divorced, two kids.
Not very smart or capable, but has worked hard their whole adult life.
He has so far demurred to do so. Said:
Ahhhhh. “Decent.” Sadly the scarcity red herring rears its head again.
I replied:
This is why I want you to do a budget. Because I think your baseline minimum — “not starving or freezing in the streets” — is Dickensian, cruel, utopian in a very dystopian way, and wildly unrealistic.
With very good reasons, none of us wants a large portion of our population living on that edge. I think you included.
We’re all worse off at that dystopian baseline.
Is there a scarcity of money in America? If that means “not enough for everyone to live a decent life,” no. (Though of course there’s competition for money. Not the same thing.)
I don’t think you understand what you’re really saying:
If income/wealth were less concentrated, inflation would be rampant because demand would be banging against scarce supply of real resources.
But that’s a fundamental misunderstanding of monetary economics, and of scarcity and resources in a modern economy.
In an 80% service economy where many physical goods are produced on demand (basically a service itself):
• The totally dominant “resource” is human effort/work hours/labor. (You know that your theories are are only true in a full-employment economy, right?)
• More spending causes more production (quantity). Close to 1:1. Think massages, and iPhones. If you don’t buy it, it doesn’t get produced. The primary adjustment mechanism is not via price. (The real market is not like the financial markets that way.) It’s via quantity.
IOW, in a market with huge untapped labor resources (limited “scarcity” of “resources”), the quantity elasticity of labor (“resources”) is high.
More spending (demand) causes more production (supply).
Another way to think about it: as the demand curve shifts up, it pulls the supply curve right. Quantity adjusts (mainly), not price.
Higher GDP (and GDP/capita), not higher inflation.
This is not, of course, an argument for perfect equality (don’t try that straw man). We know that would be a dystopia too. Other (i.e. incentive) effects are at play. Lots of moving parts.
But bottom line: in the high-productivity American services economy as it exists, Say’s law is pretty much 180 degrees wrong.
And we haven’t even bolted on lending/borrowing/debt/credit yet, much less fiat money or central banks.
The fundamental notion of scarcity is not the simplistic real-goods/barter-economy thing you think it is.
The policies you promote would result in a return to a more Dickensian society. Exactly what we see in countries with high inequality and small governments. Not a country you want to live in.
Truly, taking America back.
Show me a realistic budget for a decent life for the responsible, hard-working American I’ve described.
And tell me why — if we can have a country where everyone can have that decent baseline, while huge upsides still exist for smart stivers — we shouldn’t do so.
Since you’re so fond of pooh-poohing “fairness” arguments, a reason beyond “It’s not fair to confiscate my money!”
Cross-posted at Asymptosis.
What’s sad is the federal government has squandered so much money, and added too many anti-growth policies with the pro-growth policies, resulting in an enormous national debt. I suspect, interest on the national debt will rise substantially.
We need much better fiscal policy and economic policies out of Washington. For example, in a recession or depression, remove or reduce hundreds of billions of dollars of the $2 trillion a year of federal regulations, rather than piling on more massive regulations.
Larger tax cuts and a higher minimum wage would result in less entitlement spending (e.g. unemployment insurance, food stamps, earned income tax credit, and other anti-poverty programs). It’s ridiculous to put restrictions on financial institutions when they’re not needed (e.g. after the crisis) and not put restrictions on them when they’re needed (well before a crisis develops). Fiscal policy needs to be more effective in smoothing-out business cycles, like monetary policy.
Living standards, particularly for low income Americans, can rise much faster with appropriate fiscal and economic policies out of Washington politicians.
How about roughly median wage? Back-of-envelope calculations here, from six years ago:
http://angrybearblog.strategydemo.com/2008/03/noni-mausa-who-should-have-children-or.html
Steve, You are pretty much repeating the conversation I have regularly with my right wing friend from the Twin Cities who interestingly enough simply refuses to consider the concept that his taxes are what they are not because of what the poor do not pay, but what the obscenely wealthy do not pay. Of course, he would bring up the national debt issue like Peaktrader because there is a Democrat rather than a Republican in the White House never recognizing that fiscal policy can lead to more employment and therefore more tax revenue and less spending on welfare programs like SNAP. Contrary to Peaktrader I do not see how you can call those things entitlements when all it takes is GOP control of one chamber of Congress and 40 seats in the Senate to make them go away.
PT –
Still beating the anti-tax drum, I see, despite exactly 0 credible evidence to support the viewpoint.
And financial regs are not useless. The finance sector is still running wild, post crash. And we also need to prevent the next crazy ass financial disaster – which is why they existed in the first place.
Steve –
One expression of Say’s Law is that supply creates demand, and I guess that’s what you’re alluding to here. I’ve seen it expressed in other ways, that seem only loosely related to demand –> supply.
I’d like to see a catalog of Say’s Law expressions, how they relate one to another, and an explanation in layman’s terms of why they are wrong under current [or any] conditions, and hopefully that is simple enough to share with the economically illiterate.
Pipe dream?
Cheers!
JzB
Jazzbumpa, I suspect, banks are holding over $2 trillion of excess reserves (and retarding economic growth), because of the hostile environment, by both Democrats and Republicans (since you want to be political) and “too-big-to-fail” no longer exists.
Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever.
I agree with the spirit of your points.
I think your argument works best if you say that we have better communications systems for the management of production and any supply chains forward to the retailer. But even that has limits.
If you doubled the minimum wage in one year, you would get higher inflation. Even in a mostly service based economy, it would take time to hire more experienced service providers. And in the mean time, much of the work would be done on overtime pay. Also as demand increased past supply capabilities there would be an incentive to increase prices thru additional fees or markups. There is very little cost to running off a customer who you can’t really adequately service anyway.
Wages increased very rapidly at the beginning of WWII, thus demand rapidly increased, and sellers were able to rapidly increase prices.
Year ———-1940—–1941—–1942—–1943—–1944—–1945—–1946
Income——–78.4—–96——-123.4—-152.1—-166——171.6—-178.6
% Increase—0.075—-0.224—-0.285—-0.233—-0.091—-0.034—-0.041
Note: Increase is my calculation.
From: I looked at Personal Income Table 2.1 at this website: http://www.bea.gov/
Inflation went very high in 1941 and 1942 before wage & price controls were enacted.
—————1940—–1941—–1942—–1943—–1944—–1945—–1946
CPI———-14.0—–14.7—–16.3—–17.3—–17.6—–18.0—–19.5
% Increase–0.7——9.9——9.0——3.0——2.3——-2.2—–18.1
Note: % Increase is Dec-Dec from the table.
From: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Of course it could be argued that this was at a time when many working age men were being enlisted or drafted into the military thus distorting the economy. And the counter is that leading up to WWII there was a large reserve of unemployed men, Roosevelt’s public works programs could be sharply reduced as the size of the military increased, and women came into the workforce in large numbers. The fact is that once wages increased rapidly, inflation followed.
But if you increased the minimum wage by the same amount, but spread over 6 to ten years then the resulting increased inflation would probably be minimal. Retailers would slowly build up their capacity as demand increased. Any new employees would still be in a weak wage bargaining position.
As to “Since you’re so fond of pooh-poohing “fairness” arguments, a reason beyond “It’s not fair to confiscate my money!””
Conservatives are dishonest, probably even with themselves. Who should pay for the government at all levels? Who has benefitted the most from the systems put in place and managed by the government? Those amassing large amounts of wealth or those barely keeping body and soul together? I don’t believe that anyone making less than 2 times the federal poverty level should be paying any taxes.
If they were honest, they would say that increased taxes interfere with their game to determine the winners in life. (A little sarcasm.)
In the 1700s, England sentenced people to death for small thefts and even that did not put an end to thefts. (Small thefts by our standards were labeled as Grand Larceny.) How much more crime do the conservatives want? We are richest country on the planet and we imprison more than any other country. Is that related to our fanatical rejection of any degree of socialism? It could be argued that a high percentage of the imprisoned are there for drug related crimes and the counter is the question “How much desperation do our current economic policies cause?” (Drugs are an escape for some and employment for others.)
From: http://www.oldbaileyonline.org/browse.jsp?id=t17170501-34-defend186&div=t17170501-34#highlight
Sorry for the length.
Simply put, cutting taxes is not the same as paying people more for their labor when it comes to how an economy works.
Reducing a person’s taxes is not equivalent to paying them more.
Tax cuts can not be paid for via job creation.
You might want to read this (posting 9/2010):
I kept it real simple, but Jerry Critter did an even better number crunching and commented: The same number of jobs are created each year at the beginning. For example, 1 million jobs each year for 10 years.
Annual salary of each job = $49,777
Tax rate = 12.68%
Total accumulative taxes paid after 10 years = $4,000,000,000,000
Results:
Total jobs needed to be created each year =11,522,569 for a total of 115,225,690 over ten years.
(It is the last comment of the thread).
That’s 11, 522, 569 new, additional jobs needed every year for the next 10 years to cover the cost of the Bush tax cuts.
Good luck on that.
Creating jobs through lower taxes also reduces government spending on the unemployed.
Over the past few years, we’ve spent and squandered too much fuel (more government debt) for too little economic growth, because one foot has been on the accelerator and the other foot has been on the brake.
The cart has been before the horse. It’s better to promote economic growth and tax it than prevent economic growth and tax it more.
I stated in Feb ’09:
1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $700 billion for the 140 million workers at the time, including through the earned income tax credit), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.
2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
The recoverless recovery.
From UCLA Anderson forecast last year:
“U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”
Well if the current extremely expansionary monetary policies were combined with a more equal distribution of wealth, there WOULD be more inflation (as measured by CPI) And a less bubble prone financial sector, one were the current price of purchasing the rights to future dividends was less.
And on the national debt…did you ever notice how that is usually quoted on a per-capita or per-household basis? As if we are all obliged to pay it off equally rather than service it through taxes.
One thing that the right wing DOES get right is when they call inflation a tax on everybody. Which is why the rich (and by extension the federal reserve) are SO scared of it. They’ve managed to game the rest of the tax code to pay lower effective rates than the rest of us, so the idea of paying a tax on an equal basis is abhorrent to them.
The federal government added over $5 trillion of debt for this:
http://www.advisorperspectives.com/dshort/charts/indicators/GDP-per-capita-overview.html?Real-GDP-per-capita-since-1960-log.gif
It should be noted, shrinking trade deficits add to GDP growth. So, the “recovery” is actually weaker than reflected in GDP.
“The federal government added over $5 trillion of debt for this”
Yeah and at least it was money spent.
PT –
<iSubstantial tax cuts worked under Kennedy, Reagan, and Bush.
No.
No.
And Hell No.
http://angrybearblog.strategydemo.com/2012/10/gdp-growth-caused-by-tax-cuts-has-never.html
JzB
Jazzbumpa, Reagan achieved a V-shaped recovery, unlike the L-shaped recovery at best Obama achieved, and Bush achieved a mild recession, while trade deficits continued to rise to 6% of GDP, or up to $800 billion a year, which subtract from GDP. U.S. living standards improved sharply under Reagan and Bush.
GDP is a poor measure of living standards, not only because of trade deficits, but also because of the mix of GDP. For example, the U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit), while the U.S. shifted from low-end to high-end manufacturing, and also became much more productive (i.e. producing more output with fewer inputs). The E.U. produced more government, which added to its GDP.
U.S. average annual per capita real GDP growth
1982-2007: 2.30% (height of the Information Revolution)
1946-1981: 2.11% (including rebuilding Europe and Japan)
It should be noted, Bush inherited a structural bear market beginning in 2000, after a spectacular structural bull market from 1982-00.
Also, it should be noted, the U.S. was on the path to a mild recession with the Bush tax cut in early ’08, until Lehman failed in Sep ’08.
We don’t know if Bush could’ve achieved a stronger recovery, than Obama, because he wasn’t President.
Until Glass-Steagall (or something similar) is re-instated then NOTHING will change much as far as this “recession” is concerned. The banks (Wall Street&Rich Folks) will continue to suck up savings (workers wealth) and gamble (piss) it away while THE TAXPAYER (FDIC) uses a valuable and necessary resource (TAXES) to pay it back, choking off ALL hope of using said resource for economic recovery. Much like a patient with a severed artery, if the bleeding is not stopped then the patient will die, much less “recover”.
Thanks “Big Dog” for the REAL Y2K!!!
Peak Trader: TWO failed wars on credit was NEVER going to accomplish ANYTHING except two failed wars and one hell-of-a waste in BLOOD&TREASURE. Ole Wanted Dead Or Alive= failure, always did, always will.
Mike Meyer, everyone was making money from the housing boom, including low income workers and homeowners, directly or indirectly, until the music stopped, and then the banks and the “rich” lost the most.
And, the bottom half don’t pay much income taxes and certainly receive lots of tax credits and other government benefits.
If you compare the two Bush wars to other wars, they were quick and decisive. The U.S. would’ve spent a large part of the military budget anyway just to maintain an idle military (yes, there was lots of double and inflated counting) rather than on the occupations (and, historically, military spending under Bush as a percent of GDP was very low). Bush also had to spend on the “War on Terror,” and Homeland Security. There certainly wasn’t a “peace dividend,” like under Clinton, including after Reagan won the “Cold War.”
The Iraqi war, cited by some as the “bad” war, not only freed Iraqis and the world of the madmen Saddam and his two sons, when Bush sent them to Allah, it was good energy policy, for the U.S. and the world, freeing-up Iraqi oil, before Peak Oil. Iraq has the largest oil reserves in the world, more than Saudi Arabia. Moreover, can you imagine Saddam and his sons with access to trillions of dollars of oil, particularly at these high prices.
Also, I may add, oil is the lifeblood of the U.S. and the global economy. The “World Order” has been that the world price of oil, and many other commodities, is priced in dollars. So, foreigners have to sell goods to the U.S. to acquire dollars to buy oil, i.e. exchange valuable goods for worth less paper.
In exchange, for the U.S. consuming up to $800 billion a year more than producing in the global economy and in the long-run (which funds a large part of the U.S. military, at least indirectly), the U.S. will do the world’s “dirty work” (which most countries won’t or can’t do) with its relatively huge and high-tech military.
Surely YOU jest!!! Even the house flippers weren’t “making money” before the bust. They were getting into debt. One does not “get rich” on credit, one accrues debt. The banks and the rich did not “lose, they were INSURED much like every lender.
Gas cost MORE today, after those invasions, than it ever did before, AND WE are only just beginning to make those PAYMENTS for those wars.
Probably the only ones saying those wars ended badly are The Iraqis, The Afghanis, The Wounded Vets, The Wounded Populations and, of course, The Families of The Dead. Mayhaps YOU might inquire of one of them for a “good or bad” call on the wars. Don’t bother to ask The Dead, they no longer have an opinion on the matter.
That “worthless paper” isn’t exactly worthless. True, its not backed by gold or silver, its STILL an instrument of DEBT and it has OUR name on it.
You’re making too many false assumptions.
Millions of borrowers didn’t pay their debts, and when the crisis began, defaults accelerated. Banks were swamped with bad debts. There’s no insurance when a bank lends money and the borrower doesn’t pay it back. Instead, on a massive scale there’s bankruptcy.
It’s ridiculous to assume gas cost more from the invasions. Gas cost more, because of Peak Oil. Also (indirectly) with destruction of cheap energy, e.g. coal, and with creation of expensive alternative energy from the Obama Administration.
Much fewer Americans died or were wounded in Iraq and Afghanistan than in Vietnam. People die in wars.
There’s a difference between worthless (not worth anything) and worth less ( worth less than before, e.g. through changes in currency exchange rates, interest rates, and inflation).
For example, the Japanese yen appreciated from 360 yen to 100 yen over 30 or 40 years. This means when Japan exchanges a dollar for yen, it receives fewer and fewer yen per dollar.
PULLEEZZEE!!! YOU’RE giving me a rash!
When one purchases a mortgage, part of that purchase price is an INSURANCE policy, just in case, through no fault of one’s own, one misses a few payments and falls into foreclosure, at which time, the INSURANCE pays off the lender. Banks fall into penury because of miss-management of investment funds (or out and out fraud&theft), on this last occasion, by buying BALES of said failing mortgages, which will NEVER be foreclosed on in time to meet said banks financial obligations. Should said bank have enough RESERVES to hold its breath long enough, then said bank PROFITS, mightily indeed. Somehow, it seems, some of today’s modern bank managers fail to see THAT principle.
The price of EVERYTHING is inflated because of wars, gas included.
I participated, in a small way, in The Viet Nam War and so I whole heartedly AGREE, from personal experience that, yes, sadly, people do indeed die in wars.
Now I’m wondering, again, what the meaning of is, is. STILL that doesn’t change the fact that a Federal Reserve Note, no matter the denomination, is an instrument of DEBT. Those foreign nations holding them are holders of OUR debt.