Sunday, July 29, 2007

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.
The numbers are not made up. taken from a study using figures from 2001 you can see for yourself here. Because of the basic needs limit that was described in past 2 posts, we know that earnings greater then these need can potentially gathers in the larger pool and becomes stagnant.
In the drawing the first pool represents this 10% of the population. They are people with so much accumulated wealth that it would take many lifetimes to spend it all. Their Buying power has been maximized and any further earnings is of no advantage to the economy.
The second pool is that of those who belong to the class that can afford to meet their basic needs, buy some luxuries, and even save a little. They also earn more then the amount required to meet basic needs. The difference is that they have not reached their maximum buying potential. They could have a nicer home, car, or other luxuries, but they don’t own enough wealth not to be somewhat frugal. Most of us like to believe we are part of the middle class. Most of us are not. A description of what it means to be "poor" in America will have to wait for a different post.
A minimum percentage slows down the "buying power" being directed into the stagnant pools of the top 10 percent and unclogs the pipeline feeding the middle class and poor. Real investments into the American economy are more likely to happen by enabling the entrepreneurial spirit of the middle class. What a minimum percentage does is effectivly put a control valve on the system so that if the valves opens to the bigger pool, a direct but not equally proportional result occurs in the "valves" of the other spouts. Cash, after all, is a hard piece of paper. Buying power is relative.
There are a few requirements. For one you have to be part of the work force. When every lawn mower, housemaid, fruit picker, and drywall installer can afford to cover their basic needs, then welfare will be unnecessary. The 4.5% of the unemployed Americans can take jobs that are not going to put them further in debt, and the 4.5% of the illegal immigrants can be pack up and shipped back home.

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.
Realistically the reduction in power would be less then the poor and middle class would be increased. This is in part due to the fact that wealthy people don’t need and use credit in their personal finances. Credit has an evaporating effect on money in the economic system. But that is for a different post.

2 comments:

The Raging Republican said...

You said- "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."

Actually, trickle down economics have been around long before Reagan. JFK (Who I think has to be the only Dem politician to ever take an economics class) was preaching this long before Reagan was ever in office. What do you think he meant by " A rising tide lifts all boats"?

Tax cuts for the rich benefit everyone. When you increase minimum wage and increase tax cuts for the poor they go out and blow that money on Rims and lottery tickets (And like you point out, Hookers). However, when rich people receive tax cuts they do things with their money that benefits everyone associated with our economy. They invest: They open small businesses, and higher new employees. They put money into other people's businesses which in turn increases their revenues and the company's stock price which grows people's 401K's. Its Econ. 101

Raising the tax burden on the rich does nothing to help level the playing field. When rich people are taxed heavily they hide their money so that it can't be taken away from them. Conversely, if you lessen the tax burden on the rich they take their money out of hiding and start spending. And when rich people spend their money they create jobs and grow our economy. THIS BENEFITS EVERYONE!

Lord of Logic said...

Actually “trickle down economics” is a derogatory term for theory called “supply-side economics”. It was part of the theory developed by a British economist John Maynard Keynes in the 1970's. Truth be told the back and forth between supply and demand side perspectives has been waging since the Roman Empire. However “trickle down economics” is meant and understood by most to be a shot at Reaganomics. I agree that the tides need to be risen, and the only way to do that is to put more money into the flow.

There was meant to be sarcasm in the hookers statement. It is highly stereotypical to say all poor people are going to spend money on things many would consider non-productive goods or services. First, the definition of “poor” as I qualified earlier in the post, is anybody who when subtracting debt and basic and extended basic needs from income and savings you have a less then 0 balance. I actually trimmed the definition during the edit, but hopefully the idea is still the same. Maybe I should revise it if it is not clear. That said, there are a lot poor people making middle class capable wages. Instead they buy houses, cars, and high class “massages” witch is beyond their means. They actually do more damage to the economy by spending on credit, and then eventually going bankrupt. That is “evaporated cash flow”, keeping with the theme of the post. Never has a bum walked into a lawyers office and said, “I need to declare bankruptcy.” However, Donald trump has. That brings me to the second point. The point meant by the sentenced referenced pertaining to hookers was that every cent given to the poor, even the ones that go to buying lottery tickets, return directly to the system to do more work. The same can not be said about giving to the rich. You can only get so much work out of a citizen. The top 10 percent can only do so much. Not to mention that money given at this level has a very real threat of leaving the economy and getting invested in overseas markets. Maybe they will invest it in a stock market. That money may or may not get spent wisely. We have certainly see our share of companies misspending investment monies. Many of these CEO's have been seen gambling, smoking cigars, and getting drunk with prostitutes in Vegas. That I understand is way different then buying lottery tickets, smoking Newport's, and drinking malt liquor with a $5 crack whore in the projects. The truth is that one $12 million mansion employs only about at best, a 1/8 of the people employed by 48 quarter million dollar houses. By the same token 100 $5 crack whores can be employed for the cost of one $500 Vegas “show girl.”

The post was not about raising taxes. I even stated that I would be willing to lower taxes on the wealthy more if they would agree to a minimum percentage. A minimum percentage encourages the wealthy to make more money. It encourages them to keep it in the economy. The Idea is that for every dollar they make, one day, their lowest paid employee will make 3 cents. Right now I would settle for a .8 cent to the dollar wage.

You made a contradicting statement. You said, give money to the rich and they will invest it. Then you said they hide it. Which is it?

Look we can't keep telling people that they need to pull themselves up and then tell them we don't think they deserve the resources to do it because they won't. It is a futile situation for them. When you start with nothing, it is hard to trade up. This theory doesn't give money away for free. As a matter of fact, if the right would agree to a minimum percentage I would agree to shit can welfare all together. As a matter of fact I believe welfare is the second most destructive policy of our economy. It encourages population growth of the poorest and most uneducated faction of our society. Nothing good can come of that.

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