Tag Archive for 'economics'

The Rich are a Problem for the Economy

I don’t mean this in an ethical or classist way. I mean, the existence of wealth is a practical economic problem.

Our economy is based on people trading their work for the work of others. Money serves as a buffer for this act of trade — you have money so you can ask for someone’s efforts later, rather than now. But buffering money for too long results in the trade of efforts getting deferred. That’s why economist worry about money circulation.

Buffering money hurts us
stagnation

Rich people have accumulated money, which is to say, they performed work, but have not yet asked others to do equivalent work in return. They’re buffering that value, keeping it around for future use. While there’s nothing intrinsically wrong with that, it breaks the social contract of trading your work for the work of others. The longer the average dollar is buffered this way, the fewer people work, the more the economy suffers.

Investing isn’t good enough

You might argue that wealth is typically invested. But while investing is better than nothing, it’s not the same as purchasing.

If you buy a million dollars’ worth of Starbucks stock, the company may use that money to open up a new location, or they might not. Even if they do, someone has to purchase the coffee sold in that location, or the investment won’t recoup itself. Investment doesn’t create jobs, it serves as a stepping stone where jobs are already needed.

Compare that to spending the same million at Starbucks locations. This directly creates work for baristas, manufacturers, the transportation infrastructure, etc. Spending has a much different quality of impact than investing.

Really, investment boils down to rich people1 giving money to one another.

Socialism?

Of course, this whole line of thought reeks of socialism. I don’t recommend that we get rid of rich people, or the ability to become rich. The possibility for advancement is the driving force behind capitalism and our society in general.

But the implications of wealth need to be considered as well, and there’s clearly a problem with the accumulation of most money in a qualitatively stagnant state.

Encouraging economic growth

If the goal is to encourage economic growth, we need to balance the freedom of advancement with the cost of stagnation. And that might mean forcing more money into circulation by raising taxes on those who have the most.

This will, of course, take some toll on the private sector. But so long as we don’t go overboard, it won’t destroy it.

1 Operating under the corporations-are-people aegis.

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Ethics vs. Haggling

“Class warfare”, “fair share”, “job-stopping”, “skin in the game”. The talking points of the tax debate make it sound like there are fundamental, ethical decisions being made.

But really, the situation is analogous to this joke:

“Madam, would you go to bed with me?”
“Not a chance.”
“Well, what if I offered you ten million dollars?”
She paused. “Maybe.”
“Okay, how about fifty dollars?”
“What do you take me for?!”
“We already established that. Now we’re haggling.”

Haggling is exactly what we’re doing. The minimum / maximum tax rates have varied from 1% / 7% to 22% / 94% over the past century (currently ~10% / 35%). And less than a hundred years ago, there was neither social security nor medicare (and not many social programs you’d recognize).

And yet throughout that period, the US was a capitalist nation, a democracy and a viable economy.

So let’s be clear on this. We’ve established what we are. Now we’re just haggling over the price. Yes, this haggling will have a real impact on real people. But it’s not going to make the rich people leave or stop trying to make money, nor will it kill all the jobs, nor will it turn the country evil.

Balancing Revenue, Spending and Debt.

The details of this haggling aren’t that complicated, either. It boils down to balancing three money buckets: Revenue (taxes), Spending (social programs, military, etc), and Debt. We are currently at a balance that is unsatisfactory to many, so the debate is: what do we change in order to correct that balance?

The two problems: Not Enough Jobs, and Too Much Debt.

Those two are the particular concerns that most preoccupy us. The first is an immediate problem, the second is a long term problem, but any plan should try to address both.

To reduce debt, we can cut spending or increase revenue. How to create jobs is less obvious, but we can consider the impacts of spending cuts / revenue increases on them.

Increasing taxes reduces jobs because it takes away money from the private sector. It also has a long-term chilling effect on the economy, in that it makes productivity less attractive (this is largely only true at the extreme ranges of taxation, however).

Cutting spending also reduces jobs, since the money involved employs the workers who implement the programs (e.g. military, contractors), and any money given to the poor gets spent almost immediately on job-producing goods and services.

So really, which reduces jobs more? It’s tough to say.

It so happens that I believe that increasing taxes (within reason — not so much as to truly discourage capitalism) is preferable. Additional money in the private sector may go toward creating new jobs, but most of it goes into investment, which is not an effective way to grow the economy.

Conversely, additional money in the public sector largely gets spent outright, which means products get bought, services get rendered, and workers are employed. For the same amount of money, in the context of the current balance, social programs are better job creators than the private sector.

However, you can make the opposite argument. Just remember that you’re haggling over the price, not over the nature of the beast.

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Let the Government do your Thinking

Government Dog

Government is basically a mental abstraction. Consider:

When living in a society, you have to make communal decisions. The number of such decisions grows exponentially with the number of people, since every subgroup potentially has to cooperate1.

For a society of any scale (e.g. larger than 20), it’s impossible for everyone to make all the decisions related to living together. That’s why governments get created.

The purpose of government is to amortize mental energy. Everything your government does follows from that purpose.

The implications are vital to understanding your government’s role in your life. You are letting someone else do the thinking for you, and this is a good thing. You have only so much mental bandwidth, and it is insufficient to the task of making every decision the government makes, even if you were to devote your life to it.

1 While (2n – n) is an overestimate, the order is certainly exponential. If it had no tools to simplify the task, a society of 266 people would have about as many groups making decisions as the number of atoms in the universe.

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Luxury Economy

I’ve only now figured out that ‘consumer economy’ is not an absurd concept.

I happened across a semi-random web comic that made me ponder how the economy works. In particular, this statement troubled me: “jobs will disappear as technology and globalization rises”.

Hmmn.

The fundamental question that confused me is this: how can the economy change independently of the number of people and work they are willing/capable of producing?

I ended up in an interesting line of thought — possibly obvious to someone who’s taken economics courses, but new and interesting to me.

Consider a society of ten people, one of whom (Bob) owns and operates a machine that handles the basic needs (food, clothing, shelter) for all ten. And let’s say anyone could get such a machine, but operating it is a full-time job regardless of output, so this would be a waste of effort.

How would an economy work in this situation? Bob has what everyone needs, but no one else has anything Bob needs.

The intuitive answer is to work on things that Bob wants. This could be creating products (art, a nicer house, a sports car) or rendering services (cleaning, bringing food, having sex). In other words, when lacking needs, society creates luxury. And when luxuries exist, everyone will desire and trade for them, not just Bob.

So, a few things I didn’t understand until now:

  • The economy is based on trading your work for the work of others. You do not have to produce anything, you just have to do something others want. Likewise, you need to want things other people do.
  • We (the residents of the first world) live in an economy dominated by luxury goods – services we want rather than need. This means that the work most people do is creating luxury goods. Cutting down on such goods reduces the work available to others. This is true even if nothing about the capacity for producing work changes.
  • When trust diminishes, we reduce shopping for luxury goods and try to focus on our needs. In the ten-person society, the equivalent would be everyone only trading with Bob. Though none of the constraints change, everyone’s lifestyle worsens.
  • The economy is suffering because you’re not getting enough useless shit luxury goods. It’s crazy, but it’s true.

Suddenly, economics seems kind of interesting.

None of this addresses the credit/loan/bubble questions, of course.

Following on the above, thoughts on the ongoing tax debate:

  • The more you abstain from spending, the more people you’re robbing of work.
  • The rich are able to abstain more than the poor, since a larger fraction of their spending is luxury goods.
  • If we steal money from rich people and give it to poor people, this will benefit the economy because the poor are less able to restrain their spending.
  • Therefore, as a practical solution, increasing taxes on the rich makes sense.

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