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This is something that I hear and read frequently, and it always annoys me: People who say “blue collar” or “working class” when what they mean is white working class people. As if people of color somehow don’t count as part of the working class. Ever since the election, this has come up a lot in “why did Hillary lose” analysis.
I don’t usually laugh at my own cartoons, and what I do laugh at is sort of random. But the final line in this comic strip, for whatever reason, makes me chuckle.
(The two paragraphs above, taken together, summarize the job of being a political cartoonist:: Think of something that pisses me off, and then try to make it funny. )
Right now the art looks pretty good to me – but it usually does, right after I finish drawing it. I mainly concentrated on trying to keep the figure drawings loose and lively; I have a real tendency to stiffen up which I’m always fighting against.
TRANSCRIPT OF CARTOON
Panel 1
Two women are having a discussion on the street, a brunette and a redhead. Redhead is speaking intensely.
REDHEAD: Democrats abandoned blue collar voters! That’s why they lose!
Panel 2
BRUNETTE: But don’t democrats push a lot of stuff to help the working class? Minimum wage, obamacare, college grants, the dream act…
REDHEAD (dismissively): Those all help urban people.
Panel 3
BRUNETTE: Besides, Clinton WON blue collar voters, so-
REDHEAD: She only won the blue collar vote if you count urban voters.
Panel 4
Redhead is now looking annoyed, with her arms folded; Redhead leans forward and yells angrily.
BRUNETTE: So to clarify, when you say “blue collar,” that means “white skin”?
REDHEAD: I HAVE NEVER ADMITTED THAT!
First off: No, FRED used figures from the Federal Reserve, which they passed through their own process. You think those figures accurately describe disposable income? Ok. Explain to me how it is that the average American has $40,000 of disposable income with an Average earnings of $56,000. What the hell do you call “disposable”? Everything after tax? Food? You don’t really need that, right?
But you’re even interpreting it in a way that FRED didn’t. No one who looks at those numbers with any real understanding thinks that the buying power of the average American family has increased by 300%. “But Jeff, I didn’t say that.” No, you said that the disposable income has increased… Maybe in raw dollars But that’s irrelevant in the fact of inflation, and so making that point, in that context is either proof of ignorance, or deliberate deception. You could not walk around in 2017 with $12,000 and buy the same basket of goods that $12,000 would have bought you in 1960. Period. If you continue this point, I will think less of you.
And by the way, explain to me how the average American has $40,000 of disposable income when the average American makes about $56,000 (cited above).
Phew, I’m glad I didn’t make that argument. No, so long as their marginal wealth increase is positive, even at 99% tax, one would assume that people would still take that 1% gain. Why wouldn’t you? Maybe some people or companies will move to lower tax zones *cough*BurgerKing*cough*, but generally you’ll be OK.
What I’m AM actually saying is that if you take money away from wealthy people, they will have less money, and because they have less money, they will invest less. And that leaving money at an investment level is healthy for production.
Imagine you had a budget: You have an amount of money, and with that money you allocate the necessities of life; Food, clothes, you pay the bills, you pay the mortgage, at the end of which, you have a certain amount that we’ll call “disposable”. Up until now, you’ve spent some of that on novelties… things you don’t NEED, but you sure enjoy, given some away to charity, and invested the rest in your pension fund. A pension fund, by the way, large enough to see you and your children, and your children’s children set for life. All of a sudden, your tax bill comes in slightly higher. Well, you can’t cut the necessities out. So now you have to make a choice…. Do you cut out the novelties, the things you really enjoy, do you cut your charitable donations, Or… Do you stop paying into the pension fund that you’ll never conceivably deplete?
I think it’s far more likely that people will continue to live the kinds of lives they’re accustomed to than that people will sacrifice their lifestyle in order to upkeep numbers on a balance sheet they’ll never actually need. Why do you think differently?
“You just want people to die” *snort* No, I want you to remember first and foremost: I argue for single payer. What I’m saying is that if you shock the system with sudden influxes of cash, there won’t be any more doctors to see people than there are now, that the doctors that exist can only see so many people, and so simply giving people more money won’t necessarily increase care, it will either mean the costs will increase to weed people out, or wait times will increase dramatically.
I think you continue to misunderstand the idea of investment dollars. You seem to be conflating them with luxury dollars, and that’s a mistake. Do I think that poor people, if handed money, would buy more luxuries than the people who had that money previously? Absolutely. Because I still reject the premise that wealthy people will forgo their lifestyles in order to build their investment portfolio. You won’t be taking luxury dollars to fund some mix of necessity and luxury, you’ll be taking investment dollars and funding some mix of necessity and luxury.
I’ve been enjoying this discussion, but could we please dial the withering sarcasm down a notch? I mean, if you two are fine with it, so am I (but try to keep it funny). But I’m worried it’ll escalate to actual flamewar.
In particular, please forgoe comments indicating that the other person doesn’t know a thing about economics. Such as this:
Humble, the chart that Nobody linked to is very clearly labeled “chained dollars.” That means that the figures have been adjusted for inflation. “Real dollars” is also a term that means adjusted for inflation.
“Disposable income,” in the context of a government or economic chart, is a technical term referring to money left over after income taxes. But in more casual conversation, people often use it to mean “spending money.”
You seem interested in knowing about the money left after spending on necessities (taxes, but also food, mortgage or rent, health insurance, transport, etc). The technical term for that is “discretionary income,” not “disposable income.”
I’m pretty sure that Nobody was discussing velocity of money – and not just printing more money.
If we simply print (or electronically create) tons more money, we could get hyper-inflation, as you said. But if the velocity of money increases – that is, if dollars are spent more times before being taken out of the money supply (M1) – then the increase in spending won’t lead to hyperinflation. (There may still be inflation, but I don’t think any realistically-achievable velocity of money could cause hyperinflation.)
If you’d like to increase the velocity of money, one thing to do is to redistribute more money to lower-income people, who are more likely to spend it. That doesn’t necessarily mean that money won’t get invested; it just means that it’ll circulate more prior to being invested.
I should point out that exactly what the velocity of money means, and if it even means anything at all, is controversial. But in mainstream economics, it’s considered a real concept, and it’s one reason why giving money to lower-income people is considered a better way of fighting a recession than giving the same amount of money to wealthy people.
I think there’s another error with what Humble Talent is saying besides the disposable vs discretionary income thing (and thanks for that clarification, Amp–I didn’t know the distinction there).
[snip]
It’s helpful to distinguish the average value of something from the value the average American has.
“Average American” is usually used to mean typical American–someone somewhere in the middle. The closest mathematical concept is the median: if you line up all Americans by income, the person right in the middle would have the median income. The average disposable income, however, is the sum of everyone’s disposable income divided by the number of people there are. The median and mean can be very far apart, or very close, depending on the distribution (for example, a bell curve has equal median and mean).
For example, take 100 people who earn $1 each. The median person earns $1, and the average is (100*$1)/100=$1 too. Now take 99 people who earn $0, and one person who earns $100. The median person earns $0, but the average is (1*$100+0*$99)/100 = $1, same as before.
So no–nobody (not even Nobody) is saying the typical American has seen their discretionary income triple. In fact, that’s the point. If productivity gains had been distributed the way income was distributed at our reference point, they would. And so that shows just how much of the productivity gains have been captured by the very top of the income/wealth distribution (distinct but related, of course).
By the way: $56,000 is the median household income, not the average household income. The median household income in 2014 (the last year for which I can find avg income) was around $54,000 and the average household income was $73,000.
Humble Talent:
I think this is the biggest flaw in your position. Sure, wealthy people tend to “invest” their excess wealth. However, this doesn’t mean it results in “investment” spending in an economic sense; that is to say it doesn’t mean the wealth gets spent increasing production (building factories, hiring & training new employees, investing in R&D, etc). A lot of wealth simply gets stored in non-productive assets (land, gold, bonds, etc).
Demand is a big factor in determining how much wealth gets put into increasing production vs how much simply gets stored. Increasing demand, for example by (re)distributing wealth to the less wealthy, will increase the profit returns from production and cause more wealth to be invested rather than simply stored. Although redistributing wealth might reduce the total wealth that could potentially be invested, the increase in proportion of that wealth being invested can result in a net increase in investment. This results in more production, and more wealth to go around in the future.
A sign that this balance is out of wack is significant asset inflation. If you look at trends in the prices of non-productive assets, such as land and gold, over the last 20 years or so, you’ll see them rising quite fast. This suggests that there is an economically unhealthy preference for the wealthy to store their wealth in non-productive assets rather than actually invest in productivity. Thus, any increase in taxes on the wealthy will result in a reduction in asset values, rather than a reduction in productivity investments.
Hi, Michael! I wanted to acknowledge this – you make a good point. And yes, I can definitely be fooled by my own preconceptions. I try to be cautious about that, and to correct it when it’s pointed out to me, but it certainly happens.
You’re right about the definition of chained dollars… But without seeing the methodology, I’m not sure they actually used it. they’re saying that the average per capita, post tax, inflation adjusted earnings have increased from $12,000 to $40,000 between 1960 and 2015. Inflation was 800% over that period of time. The average wage went from about $1.90 to about $23.00, all this, in fact, as the tax rates decreased. Using those measures, I frankly find it surprising that the difference is only 300%
But even if I was completely and utterly out to lunch, nobody’s original point was that America has enough to pay for the big ticket items, because the average disposable income has increased. Now, I assumed, and maybe this was my mistake, but I assumed when he used “disposable income” he was using common parlance… That is “money that is not going to necessities” if he is, as his source is, using the economic definition “all after tax earnings” then you have a problem.
And that is that despite the earnings dollars being adjusted for inflation those numbers fail to take into account the realities of the differences between 1960 and now. Healthcare, for instance, costs were about 70 times cheaper.
“In 1958, per capita health expenditures were $134. This may seem astonishingly small, but it actually includes everything, inclusive of care paid for by government or private health insurers. A worker earning the average wage in 1958 ($1.98) would have had to work 118 hours—nearly 15 days–to cover this expense. By 2012, per capita health spending had climbed to $8,953. At the average wage, a typical worker would have to work 467 hours—about 58 days.”
Yes yes yes, now go back and reconcile that to nobody’s first comments. I’m not convinced that he meant to use the economic definition of “disposable”. He said that disposable income is the highest it’s ever been, so we should be able to use it to fund additional government programs, and my response was “What do people eat with?”, which by the way… You just answered with “part of their disposable income.” Ok…. Then disposable income really can’t just slide neatly into your communist paradise programs, without including a program to feed everyone. The point does not do what he needed it to do.
The reason that printing a whole lot of money money creates hyperinflation isn’t merely that there is more money in the system, it’s because the money in the system has increased relative to the production capability of the market. From that perspective… If billionaires sitting on dead money decided say…. They wanted to build and stock end-of-the-world bunkers, and bought whole stores worth of hard goods and foodstuffs to stock them with, it would have a similar effect on market prices: All of a sudden, the demand for food and building supplies would go up (even if it was temporary), production couldn’t possibly keep up in the short term, and so we would see some amount of inflation.
And wrap your head around what would happen if instead of a billionaire building end of the world shelters, you just took an equal amount of money and gave it to the population at large…. Yes, the fortunes of the people you gave it to would temporarily increase, at least until inflation kicked in, but from a market forces perspective, it’s not any different. from the perspective of market forces, there is no differentiation between printing billions of dollars, the wealthy choosing to spend billions of dollars on consumer goods, and billions being taxed from the wealthy in order for the not so wealthy to buy billions of dollars in consumer goods. The best argument for your side is that it’s a difference of scale… That you’d never ask for so much to be taken as to cause hyperinflation. I’ll agree with that. I’ve always said “SOME” amount of inflation, which is all I need to show that wealth distribution isn’t all sunshine and lollipops.
I’m frustrated. It was obvious to me by the context that nobody used “disposable” that he meant “discretionary”, I chose not to get hung up on semantics. I understand the difference between “disposable” and “discretionary” and it seems you and Barry do too. What I don’t understand is why you’re focusing on me for an apparent lack of understanding of the terms when the real application of those terms destroys the argument that I was responding to. If disposable income is not discretionary, then it’s not up for grabs.
Yes…. but… Look, some of nobody’s assertions were so outlandish I had to put them through a filter of “What do I think he’s trying to say” and then I tried to interpret them charitably, in this case I think I just failed. I assumed he was saying that the average person’s disposable income had increased… In fact, I thought he was saying that the average person’s discretionary income had increased, because I thought he was trying to figure out a way to pay for government programs, and the way to get there was taxing discretionary income. It didn’t occur to me that he was trying to say that the disposable income was clustered at the top, and that’s where the taxes should come from. I don’t know why I didn’t think of that, it’s standard ‘tax-the-rich’ faire, except perhaps that I had just wrote several hundred words describing the difference between consumer spending and investments spending, and I thought we were building off that.
I don’t think that’s a flaw, never mind the biggest one. The biggest one, I think, is that I assume that additional tax dollars paid for the rich will primarily come out of investment dollars. I don’t know that. I think that, I believe that, I can back that belief up with logic… But I don’t think we have any actual studies to work with. But the fact that not all investment income is productive? Irrelevant. It belongs to a class of currency that investment dollars almost uniquely come out of. If there’s a shock to the system, investors tend to flee to precious metals, because they’ve historically held their value. Even if the dollars don’t come out of the investment pool, they tend to come out of the productive investment pool. At the very least, there’s no universe where taxing the rich increases production investment.
FRED Economic Data is a publication of the the Research Division of the Federal Reserve Bank of St. Louis, one of the twelve regional Federal Reserve Banks.
Yes. Just below the graph of net disposable personal income, per capita, is a link to A Guide to the National Income and Product Accounts of the United States (NIPA). The definition of disposable personal income appears on page 5: “Disposable personal income is personal income less personal current taxes. It is the income available to persons for spending or saving.”
As Amp noted, “real” refers to inflation-adjusted data. Again citing net disposable personal income, per capita, to find the link to NIPA, page 1: “In 1951, annual estimates of real GNP and of implicit price deflators were introduced as supplementary tables. Real GNP was calculated by holding fixed the prices of a particular base year that is—GNP was calculated in ‘constant dollars.’ In 1954, these inflation-adjusted estimates were formally integrated into the standard NIPA tables.”
You can find a discussion of chained-dollar measures at NIPA, page 16.
Indeed, your comment @98 includes the statement, “2015, where disposable income is slightly less than $40,000 (A number I find highly suspect seeing as the average household income is about $56,000)….” In support of this statement, you provide a link to the Wikipedia page on US household income—a page festooned with graphs from FRED Economic Data, ironically.
But I fail to find where the web page you link to supports your claim that the average household has an income of about $56,000. The page does contain some commentary about the median household income of $56,516 in 2015. The page also contains a helpful discussion of important distinction between average (mean) and median household income: “Unlike the median household income, which divides all households in two halves, the mean income is the average income earned by American households. In the case of mean income, the income of all households is divided by the number of all households. The mean income is usually more affected by the relatively unequal distribution of income which tilts towards the top. As a result, the mean tends to be higher than the median income, with the top earning households boosting it. Overall, the mean household income in the United States, according to the US Census Bureau 2014 Annual Social and Economic Supplement, was $72,641.” Harlequin made the same point.
This is the main point here: The growth in household income seems implausible–and it is, if we were talking about median income. But the implausibly large growth reflects the fact that the wealthy have grown richer as such an astonishing rate as to pull the entire nation’s average figure up. We have to wrap our heads around the magnitude of this wealth disparity.
Yeah, I get that. But if the dynamic you described really reduced aggregate investment capital, then there would be less capital available for firms. Firms, competing for this finite, “budgeted” supply of capital would drive up the price—that is, the interest rate.
Yet we do not observe high interest rates. Why is that?
Well, various reasons. First, the world is awash in unprecedented amounts of wealth seeking investment opportunities. Second, the Fed has sought to stimulate the economy by pumping cash into the market via the bond market, and via “quantitative easing.” And voila, concerns about lack of capital for investments evaporate.
True, the Fed does not intend to engage in this stimulative policy forever; it is in the process of backing off–as the economy improves. Thus, the time when you would seem to worry about a lack of investment capital would only arise when the economy is sufficiently recovered to eliminate the need to worry about a lack of investment capital.
Seriously, could we find news accounts of firms that lack for investment—and then see what is impeding their access to capital? I suspect we’ll find that the problems arise not because there are no lenders/investors, but because the firms cannot demonstrate customer demand sufficient to justify the investment. (See, for example, Sears—especially in Canada.)
So we return to the challenge: What policies would boost demand?
Why wouldn’t a single payer system have the same consequences for the health care market as a wealth transfer? Both systems would permit people to demand medical care that they were previously too poor to pursue.
I drafted a response to Humble Talent’s remarks here, but declined to post them after he acknowledged that his comments had been based on a misreading of my remarks.
But, in short, I never said that there was anything good or bad about removing money from circulation. I merely observed that Humble Talent argued for the good that rich people do with their investments—which is fair—but then ignores the good that poor people do with their spending, specifically, by stimulating more production. That is, as far as production was concerned, Humble Talent seem to regard giving money to poor as akin to taking the money out of circulation. That’s all.
Anyway, just as I was not passing judgment on the merits of contracting the money supply, I also wasn’t opining on the velocity of money. At least, that wasn’t my intention.
Not quite. My original point was that American has enough to pay for the big ticket items because GDP—the sum of all goods and services that are produced within a nation’s borders over a specific time interval, typically one calendar year–has increased. You argued that GDP figures were distorted by taxation. So I then cited some after-tax figures to show how much richer the US had grown. That’s all.
Surely we can all recognize that the thing labeled “health care” in 1958 and the thing labeled “health care” in 2017 are not the same things. This is an apples-and-oranges comparison. Health care in 1960 could push life expectancy up to 70; today it’s closer to 80. Thus, the price increase is not merely a function of inflation, but of increases in quality and increases in quantity demanded.
What aspects of living a 1958 lifestyle would be more expensive today than in the past? If you took an average person’s phone bill in 1958, inflated it into today’s dollars, how much phone service could you buy? How about the food budget? Clothing budget? Utility rate? Air fare rate? Even housing: If we inflated the price of a Levittown house, could you afford to by an equivalent (that is, small, under-insulated, a/c-free) house in a featureless lot today? Heck, even income tax rates were higher.
In short, I’m not persuaded that the cost of living a 1958 lifestyle has grown out of control. Rather, I think our living standards and expectations have grown. I’m happy for that; I want them to grow more! But let’s strive for accuracy in our assessments.
Seriously–During Pride Week, you’re gonna rain on my flaming? Dat’s cold….
HumbleTalent:
I wasn’t talking about “investment income”, so I’m not sure where you got that term from. Regardless, the fact is very relevant if you want to argue that wealth stored by the wealthy is beneficial to society at large.
Directly, no. But indirectly, through increased government spending it can. Firms will invest in production in order to win government contracts for all sorts of products and services, and they will invest in production in order to profit from the spending of welfare recipients. Without such government spending creating such opportunities, that same wealth may end up just being stored, not causing economic growth, and being of no benefit to wider society.
I thought in the context of your argument you were trying to make the point that the increase in disposable income was proof that Americans could shoulder a higher tax burden… And to an extent you are, but you also seem to be making the argument that because that disposable income is clustered among the wealthy, that the tax burden should sit there. That second part is an important distinction, and one I didn’t catch. Disposable income doesn’t mean discretionary income, but I thought you had the two confused because if your plan was to increase tax rates generally your plan would be self defeating… Despite an increase in disposable income there is no evidence of an increase in discretionary income for the vast majority of Americans. The reason I assumed that’s what you meant is that governments, loathe to avoid what look to be large tax increases, generally try to hide hikes in the lowest tiers, because they can raise the most money with the smallest percentage increases, because more people pay the lower tiers.
Now to the meat of your actual plan….
People see dollars accumulating at the top and recoil: “No one should have that much wealth.” You’re still falling into the trap of seeing those dollars as earmarked to be spent on consumer goods. That wealth isn’t currency the way you use it. That amount could be a million times the size that it is, and it would have no effect on the consumer market, because it is part of a different system. Is cash being removed from consumer circulation? All the time. And that’s OK. Beneficial, in fact. The amount of value invested and stored in the systems that facilitate the production of goods is how the expansion of production is funded, and under a ZPG (Zero population growth) system, not having that expansion might function… But seeing as our population is growing, our production has to as well.
You’re describing a scenario where the tail wags the dog. There isn’t any competition for borrowing. Almost every corporation has debt. The amount banks are able to lend is functionally infinite and the amount corporations are able to borrow is only slightly less so. Those limitations on borrowing depend on their risk appetite and the amount of interest they’re prepared to pay, because banks look at leverage… That is the ratio of debt to assets. As that ratio increases, so do lending rates. Having more investment means that the corporation is able to borrow more money at cheaper rates… Even if someone was attempting to divest their holdings, usually those holdings are bought by someone else at the same rate… But if there was a big dip in investment dollars, and I’m loathe to even suggest this because the situation is so unlikely, because I mean a BIG dip in investment dollars, all of a sudden the market could shift in value because people would be looking to liquidate. In that case, the share value, that is the capital value of the corporation could decrease and there’s the possibility of breaking a covenant (a contract corporations sign when they borrow, promising to maintain a certain debt/asset ratio, breaking one usually means higher rates). None of which has any standing on the prime borrowing rate, the rates corporations are held to are usually described as “Prime plus X”.
(tl:dr)Why don’t we see interest rates go down when investment capital is scarce?
Because a dollar invested is not simply a dollar invested, it is a dollar invested, plus whatever can be borrowed against the leverage it represents, and so the goal is to get as much utility out of that dollar is possible. The central bank,
which controls the prime rate, lowers the Prime rate when investment capital is scarce to try to coax investors back into the market with relatively cheap borrowing.
That’s actually closer than you think. I picture the production market and the consumption market as two quasi-self contained systems with three kinds of money in play: Production/Investment dollars, which ideally never move into the consumption market. Consumption dollars, which circulates within the retail environment, and dollars in a state of flux. Those flux dollars are things like production employee wages that make it back into the consumption market and profit dollars that leave the consumption market. Giving production dollars to the consumption market DOES (temporarily) take them out of production circulation.
I did no such thing. Taxation is not a component of GDP. GDP is basically the total of everything that is bought in a calendar year, it does not track the way those purchases were paid.
Attempting to use GDP to justify increased spending is… a fundamental misunderstanding of the GDP. “I spent more this year then I did last year, so I should be able to spend even more next year” doesn’t work if you’re already borrowing the better part of a trillion dollars annually to pay for this year’s purchases, and that’s before you start adding new expenses to the mix.
I’ve written so many words at this point, I’ve given up on proofreading, “investment income” should have been “investment dollars” or simply “investment” and no, the exact mix of investment dollars invested in production compared to dollars invested in commodities (as an example) is still irrelevant.
Investment dollars don’t really come from anywhere else. That mix, taken as a whole, still benefits society, and taking money out of it is still a bad idea, because there is no way to guarantee that the money taken out would be taken out of commodities… In fact, using history as a guide, when there’s uncertainty, generally, investors tend to flee to commodities.
Wait…. Are you suggesting that government spending is somehow tied to tax intakes? Oh honey, let me introduce you to this historical deficit chart.
I was thinking while re-reading this if I could think of a different source for investment dollars… And the answer is not really. Pension funds come close… Pension funds on aggregate represent the single largest investor in American markets…. But they’re constantly paying back out to the consumption market, so at best I’d lump them in with flux dollars. Maybe government spending? Although governments tend to be so far in debt and hand to mouth, that despite owning a lot of real estate, I hesitate to call when they spend “investing”.
Not me. I want everyone to have that much wealth.
Why not?
Look, there’s nothing magic about the share of wealth currently accruing to the upper strata. GDP growth has been on a fairly steady upward march since 1950. And until 1970, hourly compensation grew at the same rate. Since 1970 the paths diverged, with productivity continuing its upward trek, but hourly compensation flatlining. Why? Lots of reasons: Economic rivals recovering from WWII (esp. Japan). Women entering the workforce, increasing labor supply. Immigrants increasing the labor supply. Globalization in effect increasing the labor supply. Automation and the declining reliance on muscle power. Etc.
The point is, until 1970 roughly half of US productivity was allocated to labor. Since then this share dropped to about 40%. I propose a policy to boost the share of productivity accruing to those lower down the income scale, as in days of yore.
I have no problem with people investing rather than consuming. But let’s let lower income people have the opportunity to invest, too.
And why would poor people choose to invest rather than consume? For the same reasons as rich people: They’ll choose to invest the marginal dollar when they think that this would offer the best return, given all their other alternative uses for the dollar. The principle difference between rich and poor is that poor people have so many more unmet needs—that is, so many more potential uses for the dollar.
(Thus, I don’t subscribe to Humble Talent’s thesis that Production/Investment dollars differ from Consumption dollars. I acknowledge, however, that there has been research showing that people engage in “mental accounting” whereby they distinguish between apparently identical dollars.)
Let’s be clear: Consumption is not bad. Consumption is just a form of investment that generates benefits that cannot be transferred. At what stage of life should you take that vacation? If you take it when you’re young and healthy, you will have the rest of your life to reflect on all the happy memories it gives you. Sure, you may well accrue similar memories if you take the vacation when you’re old—but you’ll have many fewer years in which to derive the benefits. In short, a vacation creates a lifetime annuity in the form of a stream of pleasing memories. It’s a long-term pay-off. And, like many things with a long-term pay-off, it makes sense to make the investment early.
So if people further down the income ladder can now afford to go to amusement parks, will this encourage firms to invest in amusement parks? If they can now buy cars, will this encourage firms to invest in more car plants? If they can afford health car, will this encourage firms to build more med schools (or someone to fund more residencies)? Yes, yes, and probably. Demand will generate supply. It works for illegal drugs; it can work for the rest of the economy, too.
But if you believe all this, then shouldn’t you want society to allocate lots of money to the young early in life so that they can make all these investments? Yes–and we already have such a society, although we tend to focus our investments into something called “public education.” It’s a program that taxes the old (and relatively wealthy) and transfers benefits to the young (and relatively poor).
More generally, as society has grown richer it has delayed adulthood ever longer. At one time a child was considered an adult as soon as he could join the other adults in whatever labor they did—hunting, farming, gathering, etc. (Ok, there would also be rituals around puberty, but that’s a different concept of “adult.”) Today we have infancy, toddlerhood, childhood, adolescence, youth. The affluent portions of society value prolonging the nurturance period in order to imbue the child with productive human capital, but also in order to prolong a period of installing happy memories to enrich the child’s life.
And far from crashing our economy, these patterns of investment have strengthened it. So if wealth transfers result in poorer people simply investing in making their own lives happier, even if it generates nothing that can be bought or sold later, I won’t cry. I fully expect that when poor people spend money, it will result in all kinds of measurable economic activity. But rather than regarding that economic activity as the sole goal, I’m also interested in the soul goal.
OK. So—is it growing? How would we know?
Well, we could look at real GDP growth per capita. Or, if you have concerns about the effects of taxation, we could look at real disposable (that is, after tax) personal income per capita. If anyone would like to propose a different measure for consideration, please share.
Again, according to the web site you selected, GDP is “the sum of all goods and services that are produced within a nation’s borders over a specific time interval, typically one calendar year.” Total productivity strikes me as a relevant measure for evaluating how much resources society has for things such as a social safety net—especially since “spending” on this safety net overwhelmingly consists of simple wealth transfers, not consumption.
Different than what?
If we need to replace investment by the rich, we could pursue investment by the poor. Or by the Fed. Or by foreigners; they’re generally quite enthusiastic to invest in the US, provided there’s a viable business idea—that is, a business where people are demanding what the business provides.
In any event, the answer is NOT not.really. That’s my brother, and he’s broke.
Humble Talent:
Please explain how this works. How do you invest without any of that money going to pay wages or salaries, and hence flow into the “consumption market”? I don’t see how there can be an isolated “investment market” that doesn’t actually involve a lot of your “flux dollars”.
So, under your theory, there is a source of investment dollars that comes from the “consumption market”. Hence if we increase the “consumption market” it can result in an increase in the “investment market”?
You are amazingly preoccupied with GDP. There are things GDP is good at measuring, and then there’s everything you want it to do. If the price of a TV goes from $50 in year 1 to $100 in year 2 and your entire economy only sells one TV a year, then your GDP doubled despite not a single extra iota of production. GDP does not measure production.
What does? Not much. You can look at indicators, like fuel consumption, and the health of the transport industry… But there aren’t many clear lines to measure production. Is it growing though? It has to be. Every year as the population increases we still find food to cram in everyone’s mouth, clothes to wear, cars to drive and so on and so forth… The question is: Is production keeping up with demand? And to that… I think generally yes. If it weren’t I think the CPI would start to rise faster than it is.
There are two misunderstandings here… The first is in the word “Sum”; GDP is not calculated in units, it’s calculated in dollars, see my TV example. The second is in the word “produce”; something is deemed to be produced upon sale. If a farmer has a silo of grain spoil before it sells at market, despite having existed, having been produced, it will never be counted.
Maybe it would help to think of investment dollars as something other than dollars. One of the largest capital expenditures for any business is their building. Imagine for the sake of understanding that all the investment dollars a business had went towards the purchase of a building. Once the building is owned, you can’t pay wages with it.
Add to that… If you’re paying wages and salaries out of your equity dollars, your business is in a bad place. Wages and Salaries are generally paid for with dollars taken from sales. In fact… If you can’t pay salaries and wages out of your sales, and earn a profit on top of that, then you should save yourself some time and close shop.
Absolutely
That calculation is part of the income statement. You take all the sales a store has, you subtract the cost of goods sold to get your margin, and then you subtract expenses (including wages) to get your profit (complete rough and dirty breakdown, but it works) That profit is then divided among the owners… Who use it to purchase their own necessities of life, luxuries, and then the remainder becomes something other than consumer dollars, and that could be investment.
But that said… You can’t increase investment dollars by taking them away from the people who have already invested and giving it to people who MIGHT invest… But probably won’t. At best that’s neutral, but more likely, it has a negative impact on investment dollars.
Fair enough; GDP doesn’t measure production. But real GDP does. The hypothetical set forth above describes an economy with 100% inflation. In inflation-adjusted terms, real GDP would show that the economy was equally productive in each year—and it was.
Humble Talent raised concerns that GDP neglects to reflect cost of production—and in the case of depleting a natural resource or creating an unpriced externality, this is a fair criticism. But in the case of using up assets that were bought from some other source, GDP would simply recognize the value of those assets. For example, a car has many components. GDP would reflect the initial retail sales price of the car, without deducting the cost of the components. But when GM bought those components, someone else produced and sold those components to GM. We could deduct the cost GM paid for components, but then we’d have to recognize the productivity of the component manufacturers by adding the same number back into the calculation. What’s the point?
(Of course, some components are imported. The value of these components would be reflected in the GDP’s calculation of net exports—that is, the value of all exports minus the value of all imports.)
True, GDP measures productivity in dollar units. But given that fact, I see little problem with the spoiled grain hypothetical. I expect GDP “counts” the spoiled grain in the same manner as it counts any other produce: according to its market value. If spoiled grain has a market value of $0, then that’s the number that would get incorporated into the GDP calculation.
But GDP is not a theater for a morality play. The fact that a farmer (or anyone else) lavished effort on some endeavor in the hope of generating a profit has no bearing on the GDP calculation. Likewise, if 3M just happened to stumble upon the adhesive used for Post-It Notes, that wouldn’t render the discovery any less productive. GDP measures what is actually produced according to its market value, intentions be damned.
HT:
All your arguments here have still not actually supported your original claim :
As Kate pointed out 20 comments ago, many countries provide those big ticket items (universal health care, free college education, a substantial social safety net, national industrial policy). The difference between those countries and the US is that the US has a government revenue as a percent of GDP is around 25% and the countries that provide health care and social services and free education through college have government revenue of 40-50% of GDP. So the US has 15-25% more of GDP that it could tax in order to fall in line with the social democracies.
I know, you have some bizarre theories about the GDP and claim that actual production is unknowable- fine, if it is unknowable, then you have no way of knowing whether the US can afford the government services of many other OECD countries, and your original claim is still baseless.
I keep struggling with whether to respond to your bizarre claims along the way. I can’t resist this one
[Edit, I took too long posting this, so nobody.really already pointed out the huge flaw with the TV toy example GDP, so I’ll skip it]:
Oh, and this one:
You just completely skipped the process of turning money into a capital asset. In order to go from “no warehouse” to “warehouse” wages were payed to architects, to contractors, to laborers, to salespeople at the businesses that sell the materials and equipment used in the building, to factory workers who made that equipment and materials, and on and on. Some money also changed hands at some point to buy land (or an existing structure), but then that money also probably mostly got used for something by the former owner, and that money also got paid as wages to someone. Once the building is owned, you can’t pay wages with it (except by borrowing against it and using that money to pay wages), but that is because the money invested in owning that building has already been paid out in wages.
I’ll stop with that.
On the other hand, Scott Alexander at Slate Star Codex offers a lengthy and sobering observation about the economic phenomenon known as Cost Disease:
“[I]n the past fifty years, education costs have doubled, college costs have dectupled, health insurance costs have dectupled, subway costs have at least dectupled, and housing costs have increased by about fifty percent. US health care costs about four times as much as equivalent health care in other First World countries; US subways cost about eight times as much as equivalent subways in other First World countries.
I worry that people don’t appreciate how weird this is. I didn’t appreciate it for a long time. I guess I just figured that Grandpa used to talk about how back in his day movie tickets only cost a nickel; that was just the way of the world. But all of the numbers above are inflation-adjusted. These things have dectupled in cost even after you adjust for movies costing a nickel in Grandpa’s day. They have really, genuinely dectupled in cost, no economic trickery involved.
And this is especially strange because we expect that improving technology and globalization ought to cut costs. In 1983, the first mobile phone cost $4,000 – about $10,000 in today’s dollars. It was also a gigantic piece of crap. Today you can get a much better phone for $100. This is the right and proper way of the universe. It’s why we fund scientists, and pay business people the big bucks.
But things like college and health care have still had their prices dectuple. Patients can now schedule their appointments online; doctors can send prescriptions through the fax, pharmacies can keep track of medication histories on centralized computer systems that interface with the cloud, nurses get automatic reminders when they’re giving two drugs with a potential interaction, insurance companies accept payment through credit cards – and all of this costs ten times as much as it did in the days of punch cards and secretaries who did calculations by hand.“
Again:
How much does additional health care spending contribute to life expectancy?
“Applying the estimates from published studies to the observed increase in health care spending in the Netherlands between 2000 and 2010 would imply that 0.3% to almost 50% (1.6 years) of the increase in life expectancy is caused by increasing health care spending.”
A caveat: While education level correlates with wealth, and cancer risk generally decreases with education level, education increases the likelihood of getting brain tumors. Moral: Fate is spiteful.
Ah. My lack of education spared me from a more common and dangerous location of my tumor. That’s a piece of luck!
That was planning ahead. Nice work.
I believe this is what Republicans are talking about when they say your health comes down to personal responsibility.
FFS, at the start of that study the Netherlands already had national healthcare for over 30 years. Of course at some point one is going to reach a point of diminishing returns.
The study of mortality rates that is most relevant to the American context is the Massachusettes study, which conluded:
This observaton by Harrold Pollack gives more context
The Oregon study which Pollack mentions was too small and short term to analyze mortality rates, or signifiant gains in health outcomes, concluding:
However, the improvements that it did find seem like they would be a good foundation for future gains in other areas, and are worthwhile in their own right in any case.
If you need any help wrapping your head around this growth in income disparity, the New York Times has a dancing worm for you!
It’s a graph that shows the rate of growth in all Americans’ incomes, broken down by percentile. Back in 1980, poor people were still getting smaller raises than rich people. But as a percentage of their income, people in the bottom percentile were seeing real (inflation-adjusted) after-tax annual income growth of almost 3.5%, while people in the top percentile were getting raises of about 1.5%. But as of 2014, people in the bottom percentile were actually losing earning power each year, while people in the 99th percentile were seeing increases exceeding 2% per year. And people in the 99.99th percentile were seeing annual increases of 4%. And people in the 99.999th percentile were seeing annual increases of 6%+. When you compound this over decades, you begin to see how America has stratified.
The NYT shows how this graph has changed over the years, cycling through the data in a manner that makes the line writhe in spasms of inequality. You gotta see it. If nothing else, it’s an inspired way to present data.