Wage Reform part 3 – “It’s stupid, the economy.”
Alright, in Wage reform: Part 1- The Difference between you and Bill Gates. I attempted to show the depth in the disparity between you and Bill Gates. I hope there was an understanding that money represents time, opportunity, and buying power. You have to spend hours of hard work to have the opportunity to buy a tank of gas, while Bill has to spend only seconds, if not less to have the same opportunity. In post two, Wage reform: Part 2 – "Basically" you and Bill Gates are the same, I hopefully conveyed the fact that we all have basic requirements to survive in our society. These requirements are different as a part of an industrialized economy then they would be if we were still driven by agriculture. It was also an introduction to the idea that a minimum percentage as a way to shrink the disparity between the top and the bottom income earners. I also touched upon a few of the advantages of having an economy with a tighter disparity ratio. And there are so many more. That is where this post hopes to pick up.
Recently when I tried to briefly explained the idea of Minimum percentage to somebody they asked, " are you going to try to take money away from the rich people and give it to the poor?" The quick answer to that question is a trap. His intent is to get me to say that the rich are more deserving and the poor are lazy, stupid, and undeserving. He even threw in something about minorities. Taxes forcefully take from the rich and give it to the poor. The answer to this question will hopefully be clear at the end.
Another common misconception about the minimum wage is, "I don’t make minimum wage, why should I care about it." If you hold that sediment, before you can understand more complex features of the economy, you must understand this simple one. As the floor raises so will your wage expectations. Lets say tomorrow they raised the minimum wage to just a nickel below whatever it is that you are making. Your boss isn’t going to raise your wage, at least right away, to compensate you. So if you have a bachelor’s degree in engineering, work your ass off in a factory, are a fruit picker, or you're a schoolteacher, that following morning after minimum wage increase, as you get your breakfast sandwich, the person asking, "would you like to make that a combo?" is making only a nickel less then you are per hour. All of your hard work, and all of your sacrifice, and all of those things that make you feel that your deserve more then the pimply faced whopper flopper on the other side of the drive through speaker are meaningless. It will make you ask and then eventually demand that you are paid more. After all with gas prices what they are, you are actually making less then that kid. The extra nickel isn’t even worth the hassle of your job. Eventually the cost of living goes up, you get the adjustment, and everybody is right back to where they were at before. The whole cycle starts all over again. You make more but everything cost more, you still work the same amount of time to buy the same amount of things. So it turns out that the minimum wage does matter to you. Ask your parents and your grand parents what a "good wage" used to be? You may make more physical cash then your parents did, however your "buying power" is the same, maybe less. A recent report showed that men in their thirties earn less, with inflation adjustments, then their fathers did. http://abcnews.go.com/Business/LifeStages/story?id=3213731
The drawing at the top of this post is a representation of how an economic system works. Hopefully it is a clear demonstration of how some changes in the system can have profound effect, and how other changes have little effect on the productivity of the system. The fact that the less endowed are closer to the system "work" and "production" end is not an accident. Cash deposited into system at the end nearest the wheel has little time for pause before it is put back into the system. While as the cash deposited into the system at the end closest to the pump is held up and may take a long time before it is ever returned. The openings to the "Cash Flow River" are about the same in size. The opening represent the combination of basic needs, extended needs, and luxuries. In reality the opening on the 70/10 is probably a bit smaller. This situation can threatened to clog and slow the whole system, slowing the wheel and drying the pool of products from which the goods and services pumps cash back into the system.
The reason The lager pool keeps growing larger can basically be blamed upon the economic theory known as "the law of diminishing returns". An easy way to think of this is as follows. I already outlined the concept of basic and extended basic needs in the second post. We all require the same amount of these needs. "Luxuries" add cash also. You would like a big screen TV. You might even buy one. A big screen TV is a luxury in and of itself because you could get by with a 12" black and white. In reality you might like 2 or even 3 big screens. The problem is that you can’t afford to buy more then the nice one you have got. You want it, and there is a snot nosed big box store sales man who wants to sell it to you. The only thing missing is the cash. Your are not a definitive victim of the law mentioned. Enter Bill Gates. He decides he wants a big screen TV. He likes it. He decides to buy 8 more for his mansion. Each one he really doesn't get the same satisfaction as the previous one. After 8 he can think of no reason to buy anymore. There is no more potential for cash flow for big screen TVs. The desire to buy a big screen TV has "diminished". From the moment that a person reaches that top percentile range, they have a limited amount of expenditures before they slow down to a spending to a pace much slower then the amount they earn. After they have bought their giant houses, vacation homes, electronic gadgets, children, and water crafts. At that point cash starts to back us in the system.
To understand how a minimum percentage works there is an important concept that needs digested. An economy isn’t healthy just because it has a lot of wealth in it. "Pooled wealth" is not a sign of a productive society. A healthy economy is one with wealth flowing through it. Observe what would happen if the wealth flowed only into the "70/10" pool and no increase to the contributory occurred. The flow would slow to a trickle and work and productivity would slow to near stopping. The faster the wealth flows, through the system, the more work done, the more productive and happily the society is moving.
We expect policy makers to develop policies that create more jobs in effect reduce unemployment, make basic needs affordable such as health care, and dissuade the development of unfair advantages, or in other words breakup monopolies. A big part of keeping the game fair is reducing the time it takes to meet the basic needs. Then it is up to the individual if they want to spend that extra time and capital educating and bettering themselves and the community or standing on a corner drinking a 40 oz and smoking Newport's.
In the 80’s Ronald Reagan developed "trickle down economics." His policies were designed to give money to the already wealthy Americans with the intention that it would inspire investment and create more jobs. It only succeeded to speed up the widening of the disparity trend already in motion. Many of them also invested in over seas ventures draining money out of the economy.
The most effective way to encourage money flow is to increase volume to the 2nd (middle class) and 3rd (lower class) pools. Think of it this way. If you give Bill Gates a $1000 he is probably going to laugh, and deposit it into his bank account to sit with the other billions of dollars till the end of time. Nobody is going to get any work out of that money for a long time. However if you give that same $1000 to a bum on the street, the money will immediately be returned to the economy. As a result, a liquor store clerk, a hooker, and a fast food staff will get work. Because of this work they will earn money, they use to buy product such as gas, schoolbooks, and more liquor. And now that money is rolling through the economy.
An idea such as the one to give $400 to most families in the US was an attempt to add money into the economic stream. The problem is that today’s poor and middle class have so much debt, that such a small contribution is consumed by work that has already been done but not paid for (debt). The same is said about using "tax breaks" to stimulate the economy. The problem with tax breaks is that most of us get so little out of them that the only result is that creditors get paid one more month.
So the answer is, would I "take from the rich and give to the poor?" is a resounding and definite "not exactly". A minimum percentage doesn’t take wealth already accumulated from those who have accumulated it. Heck I would agree to decrease the tax burden on the top 10% in exchange for a minimum percentage policy. What will happen is the future wealth will be turned into buying power and diverted to people who will return it more quickly back into the economic system.