Posts Tagged economics

The Reality of Multinational Corporations

The Wall Street Journal recently reported that many large U.S. corporations are hiring, but hiring more people in other countries than they are here at home.

Eager to highlight the evils of multinational corporations, Think Progress reported on the report, noting that some companies had even cut jobs in the U.S. while hiring abroad. References to the problem of outsourcing and a look at the article’s comments section make clear how Think Progress and the left see this issue, and that this sort of information is their evidence.

Here’s what they overlook. Think Progress calls out Wal-Mart specifically (because who doesn’t love to hate Wal-Mart), and then posts the chart at right. The bottom section is the group guilty of layoffs in America while hiring overseas.

But these aren’t outsourced call centers and sweatshops. UPS, Starwood Hotels, International Paper. Think about what these companies do. UPS employees get in trucks and drive packages around their city, or work in warehouses necessary in every city they deliver to. UPS isn’t going to hire a driver in Detroit to deliver packages in Peru. Attacking UPS won’t save any jobs, it will just make it more expensive to order products online. In the same way, it makes no sense to blast Starwood Hotels for hiring people in Brazil to staff their hotel in Brazil. It’s not like hotel chains run sweatshops in China. They open hotels all over the world, and staff them locally.

They go out of their way to mention Wal-Mart, though they didn’t even make the list. But Wal-Mart has opened almost 700 stores abroad since 2009, giving them almost 1200 more stores abroad than they have here at home. And they still employ almost twice as many people in America as they do in other countries (around 1.4 million). Are they supposed to fly cashiers from Minnesota to Singapore every day so that they can use American labor? Yet these are the numbers the left points to when they complain that businesses need to be more regulated and punished for not hiring American workers. This is the standard counterargument whenever someone uses the term “job creators.”

As it turns out, manufacturing in America is still strong. We’re still, by far, the most productive country in the world, and manufacturing salaries continue to rise (currently averaging around $50,000). International Paper, also on this list of offenders, is a good illustration of manufacturing in the modern world economy. International Paper runs paper mills and distribution centers in America to sell to America. They also have dozens of mills, offices, and centers in other countries. To do business in those countries. Just like Toyota and Honda have factories in Indiana and Ohio to make cars to sell in America. Just like American auto makers have opened factories in China–gasp!–to sell their cars in China. Doing otherwise would be inefficient and make their product more expensive. Attempts to impede companies’ ability to operate where it makes sense to operate will not save any jobs–it will only drive up the cost of products and services. It will make all stuff more expensive. Helping the poor, that ain’t.

I know there are companies that make use of cheap overseas labor. Yes, Apple has a lot of components put together in China. But they also employ 47,000 people here at home, more than twice as many people employed abroad. And that’s only direct Apple employees–that business supports literally hundreds of thousands of other US jobs in affected industries providing raw and technical materials, services, transportation, health care. If you forced the 23,000 employees in other countries out of their jobs, Apple might be able to hire some here, but they’d also lose a lot of their sales when the price of the new iPhone doubled, and have to lay those workers right back off. And thousands of people in China would be kicked off the lifeline that’s finally pulling that country out of a peasant economy.

So if you think Apple’s overseas factory is the reason for 14% real unemployment here in America, you’ll be disappointed to see the hundreds of thousands of American workers harmed by making it harder for Apple to do business. And since the most common fixative I hear liberals support in order to deal with this supposed problem is to levy extra taxes on companies that do business overseas, you’ll be disappointed when all that does is make your vacations and Amazon purchases more expensive. Most of all, if you think damaging UPS and Starwood Hotels’ business is worth it just to “get” companies like Apple, keep in mind the hundreds of thousands of US workers you’re “getting” at the same time, and driving up the cost of goods for every single one of us.

All the supposed solutions simply make imports more expensive. If you make imports more expensive, then the end product will be more expensive too, and that’s bad for the customer and manufacturer alike. That just means less business gets done, and you and I have access to less stuff. Protectionary tariffs are one of the things that led to the Great Depression. If you threaten businesses here, some may submit, but none will choose to do business in America any longer if they can help it.

Conservatives have an alternative. Free trade makes the world a better place. It’s hard to get many economists to agree on anything, but they generally agree on that. More jobs here, more jobs abroad. If one company moves a call center to India, another company opens its doors here in America. Cheaper goods everywhere. And the more markets we open for American goods to be sold abroad, the more American manufacturing jobs can be created.

If you really want to help the poor, that sounds like a good start.

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Why Debit Card Fees Aren’t Going Away

And, a Deep Difference Between the Camps

A few days ago, Bank of America announced that it was canceling its planned $5-a-month debit card fees. Sen. Durbin (D-IL) immediately rejoiced on the Senate floor, taking partial credit for the change that he claimed was due to “a combination of reasonable regulation and consumers voting with their feet.” [1] Politico calls it “a win for President Barack Obama and Occupy Wall Street.” [2]

All of which is shortsighted. We’re still going to get charged those fees.

I pointed out in a previous post (see: Why Government Decisions Matter) that Sen. Durbin’s public attacks on BofA and their proposed fee were ironic, considering that the fee was a direct result of legislation he successfully attached to Dodd-Frank that capped debit card swipe fees charged to retailers. First off, expecting any other response on the part of the banks was ridiculous on its face, and demonstrates that he either has zero understanding of basic math, or the whole thing was a political song and dance meant to further endear the Democrats to those of an anti-Wall Street bent. Since Sen. Durbin does not come across as stupid, I will assume the latter.

For the record, it really is simple, basic math. If you write a law forcing a business to cut price X, they will respond by raising price Y. It’s that simple. Businesses aren’t going to provide services for free. If you regulate the price of a Big Mac to $1 (to help the poor!), McDonald’s will charge 6 bucks for a Coke. If you command that everything on the menu must be $1, then they will charge customers a $5 fee just to get in the door. See the result here–your actual price to get a combo meal goes up, and people that just wanted a Coke to begin with really get screwed. Or customers simply decide it’s no longer worth it to patronize these stores, and McDonald’s lays off employees due to loss of sales. It doesn’t matter that you intended to help the poor. This is the real-world effect of this type of government control over the economy.

Meanwhile, all of our taxes pay for the army of government bureaucrats working to enforce the harmful regulation, it’s harder and more expensive to start a business, and personal freedom is further eroded. (And Democrats continue getting votes because they say, “We cut prices on your Big Mac,” and the people cheer, and think no more of it.)

But I was talking about the debit card fees. They are not going away. The banks are going to get paid for that service. Dodd-Frank made them stop charging the way they were originally–so they attempted to put the fee up front. Everyone freaked out, so they took it back. This just means they’re going to put the fee somewhere else. Like a cover charge for McDonald’s, we will see interest rate changes, a reduction in some previously free service (like free checking accounts), etc. We’ll still pay the debit card fees. They’ll just be better hidden.

In a further irony, Sen. Durbin is now crusading against hidden and complicated bank fees–he wants them all simple and up front. Yet his policies help create the very situation he’s complaining about.

This is useful in that it illustrates a basic, fundamental difference between conservatives and liberals today. When presented with a problem, liberals often see a need for the government to step in and solve it. Conservatives, on the other hand, often want the government out of the way–because we understand that government solutions always have these unintended consequences.

In 1993, President Clinton attempted to deal with “unfair” CEO pay by capping the salary a company could write off on corporate taxes at $1 million. The next year, the ratio of CEO-to-worker pay, relatively stable for decades, began a ten-year spike that peaked at around 300:1. [3] Businessweek wrote that, “As a practical matter, the law… quickly established $1 million as the minimum base pay any self-respecting CEO expected from a major corporation.” [4] Companies began avoiding the new tax by paying CEOs in stock rather than straight salary–which led to more unintended consequences on the side, namely, the CEOs found themselves with powerful personal incentives to boost short-term stock gains at the risk of long-term health. (Not to mention that they also found themselves now paying a lower tax rate on their dividends than their secretaries paid on their salaries.)

Liberals, however, don’t see the changes in CEO pay or new bank fees as consequences of government interference. The government regulations are well-intended, so you’d have to have bad intentions to be against them, they say.

Conservatives look deeper. Intentions are important, but consequences are ultimately what really matter. Regardless of intent, if these regulations make things worse, they should go. If government interference in the market hurts us, we’re right to want less government interference in the market.

This means Dodd-Frank has to go. This means Sen. Durbin’s and President Obama’s economic solutions will not work. And this means we all need to support conservative candidates in the next few months so that these changes can take place.


[1] http://www.cbsnews.com/8301-503544_162-20128729-503544/dick-durbin-bank-of-america-decision-a-win-for-consumers/

[2] http://www.politico.com/news/stories/1111/67339.html

[3] http://www.epi.org/publication/webfeatures_snapshots_20060621/

[4] http://www.businessweek.com/magazine/content/06_48/b4011079.htm

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Should We Raise Taxes?

The Historical Record

During a recent debate with some friends, I was presented with a very intelligent challenge:

How do you explain the 1990s — as a fluke due to the internet boom? Weren’t there more regulations and higher taxes on the wealthy and corporations then? Can you really just say “but that was a different time!”
I don’t understand the logic behind saying that IF we raise taxes back to that level everyone will suffer. Data that shows this has historically been true may exist, but I’m just not aware of it. Please let me know if there is anything except what you consider common sense telling you that’s the case.

This led me on a fascinating flurry of research about the modern history of taxes in the U.S. But before we dive in to that, there’s a direct response on the issue of regulations.

Regulations

The question refers to both taxes and regulations in the 90s. There’s no question that both will have an impact on the business environment (see also: Why Government Decisions Matter).

While it’s true that tax rates were higher then, that’s not quite the case for regulations. As I pointed out to my friend, the principal achievements of this administration have been huge regulatory increases–the Affordable Care Act, Dodd-Frank, the CARD act. The EPA this year has had to roll back its own implementation of new CO2 emissions rules because, by their own estimation, they would have to hire 230,000 workers to enforce them. Rather than admitting the new regulations are absurd, they simply decided to wait until 2016 to do it. [1] The FDA recently announced that it is reinterpreting a 1994 law in such a way that will add millions to the cost of doing business for an entire industry–possibly putting smaller companies out of the market. [2] [3]

This is a drastic change in direction compared to, really, any administration in the past 30 years. Even Clinton was caught up in a decades-long deregulatory wave (see Gramm-Leach-Bliley). [4] So yes, it’s clear in hindsight that the successes of the 90s were partially due to the tech bubble, but also due to the general reduction in government interference in the economy that started under Reagan and continued until the last couple of years, where we’ve experienced a major about-face.

Taxes

This brings us to the other half of the challenge, the question of taxes. If taxes were higher in the 90s and things were okay, what’s the harm in raising them back to those levels now? Why won’t we still be okay?

Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009

Here’s what I found. Income taxes have only gone up a handful of times in the past century, and for various reasons. There’s a spike for WWI, one at the outset of the Great Depression, another halfway through the Great Depression, then two more in generally healthy times–the 1945/51 range and the 1991/93 range. [5]

At least on the surface, small tax increases during healthy economic times don’t seem to hurt the overall economy too much (the late 40s and the early 90s). And a temporary tax hike to pay for WWI apparently did no lasting damage.  Let’s look closer at some of those big swings.

Everybody is familiar with the Great Depression. Less familiar is the post-WWI recession of 1920-1921. Despite its lack of popular recognition today, the recession that began in 1920 was rough. Various estimates of unemployment agree that there was a rise from 3% or less to as high as 8.7-11.7% at the peak. Industrial production fell 30%. Stock prices as measured by the Dow Jones Industrial Average fell 47%. [6]

The government’s response was summed up in an article by Thomas E. Woods, Jr:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923. [7]

Did we all catch that? This downturn was as severe as what we saw in 2007, as severe as the beginning of the Great Depression. Yet in less than two years, production had returned and unemployment was below 3%.

There was another market correction at the end of that decade. Industrial production fell. In 1930, unemployment was approaching 9% again, and this time, the government intervened. Immediately, major new tariffs were instituted to protect American jobs (sound familiar?). In 1932, taxes went up on everyone, falling largely on the top earners–top marginal rate went from 25% to 63%, the estate tax was doubled, and corporate taxes went up slightly (sound familiar?). Through the rest of the decade, taxes were raised again every year or two. The appalling lack of recovery after 6 years led to another large tax increase on the wealthy in 1935–raising the top rate from 63% to 79%. The stagnant economy responded by dipping back into recession though 1937 and 1938. [8] [9] [10]

Throughout the decade, unemployment stayed close to 15%–peaking much higher, around 25% in 1933. Despite massive government intervention and hiring, this depression simply would not end the way others did before and since.

Let me try to bring this all together. We have the following situations:

  • Raising taxes and more government involvement during good times: little immediate economic damage (late 40s, early 90s).
  • Cutting taxes and less government involvement during recession: quickly ending recessions (1920, see also early 80s and 2000-2001).
  • Raising taxes and more government involvement during recession: longer, deeper recessions (30’s).

Today, we have a choice. We see the effects already of 3-4 years of intervention since the first problems started in 2007. The lack of recovery is turning into a full-on double-dip recession right now. The President is currently asking for higher taxes and more intervention–the same policies that turned a situation like this one into the Great Depression.

I’ve presented the historical record on two general directions the government has tried. Our choice is, do we want to take a whole decade to get back to prosperity, like in 1930? Or do we want to take only a year to get back to prosperity, like in 1920?


[1] http://mediamatters.org/research/201109270014  Media Matters’ take on this is, “No, the EPA is not hiring 230,000 workers.” However, even in their own story, they can’t present any evidence that goes any farther than saying, “The EPA’s new rule would require 230,000 workers to enforce, but now they say they’re waiting until 2016 to do it.”

[2] http://thegormleyfiles.blogspot.com/2011/09/fdas-plan-to-cripple-health-food.html

[3] http://www.naturalproductsinsider.com/topics/new-dietary-ingredients.aspx

[4] http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act For the record, I’m not intending in this article to argue the relative merits of GLB or Glass-Steagall. I’m not comfortable with anything being truly too big to fail, but there’s interesting arguments on both sides of that issue. This is just to point out that Clinton’s record during the 90s is not exactly an island of Big Government surrounded by Bushes–he was deregulating too.

[5] I’m using the top marginal income tax rate for simplicity, but corporate and capital gains taxes generally followed the same curve: http://www.ritholtz.com/blog/2011/04/us-tax-rates-1916-2010/ The capital gains tax conspicuously breaks ranks throughout the 70s, and is raised in the late 80s as well, though offset that time by dramatic income tax cuts.

[6] http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

[7] http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b

[8] http://www.24hgold.com/english/contributor.aspx?article=2991697306G10020&contributor=Nathan+Lewis

[9] http://en.wikipedia.org/wiki/Great_depression

[10] http://www.infoplease.com/ipa/A0104719.html

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The Government Isn’t Magic

Limited Options

The government is necessary. I will never claim otherwise. Conservatives will never claim otherwise. President Obama argued irresponsibly when he said in his jobs speech to Congress a few weeks ago that conservatives want to “dismantle government, refund everybody’s money, and let everyone write their own rules, and tell everyone they’re on their own.”[1] This is the argument of just about nobody.

More to the purposes of this blog, he’s also arguing for government intervention based on false premises. One belief in particular comes to mind. His entire argument calling for a new stimulus is based on a belief that the government can, if people don’t have jobs, simply create jobs for them. It sometimes seems this is supposed to happen by magic. Economicus reparo. Poof. Don’t look behind that curtain.

To understand conservative solutions, you must understand that this premise is flawed. Conservatives understand that the government can never truly create jobs in and of itself. All work the government creates is offset by a reduction in the ability of the private sector to create.

Think about the economic actions that are actually available to the government. The government can regulate; that is, make laws saying that activity X is illegal and activity Y is only allowed to happen according to format Z. And the government can make programs that distribute money or confer various benefits, sure–all funded by taxes, the government’s only source of income. It all, with few exceptions, comes down to those two things: regulation and taxpayer-funded programs.

Here’s the rub: both of these options are inhibitory actions. Both of these options make business more expensive. And if business is more expensive, then less business will occur. This is just shy of being a law on par with gravity. If something is made more expensive, less people will do the something. Slapping a heavy tax on each pack of cigarettes leads to lower cigarette sales. When gas prices doubled, people took less long car trips.

Look at the two options, taxation and regulation, in the context of starting businesses or hiring new employees:

Taxation- Any new government program means a new tax. Nothing is free. Increased taxes–whether they are taken directly from the businesses, or indirectly by taking it from you and me–either way, it means businesses have less money to expand, hire, or in some cases, exist.

Regulation- Increased regulations means the businesses have to pay more money to remain compliant, or to pay experts to find ways to get around the regulations, or sometimes, to pay lobbyists or outright bribe officials so that they don’t have to be compliant. Ultimately, the same thing results–the business has less money to expand, hire, or exist.

Obviously, starting a business or hiring a new employee costs money. Take more money away, businesses will start and/or hire less. So that’s:

  1. More regulations, less money available to hire… less private hiring.
  2. More government programs, more taxes to pay for the programs, less money available to hire… less private hiring.

Regulations make it harder to do business–sure, that’s readily apparent. But let’s look more closely at the other point. Even government programs which (claim to) hire people to build bridges and roads lead, at the end of the day, to less hiring overall–because that hiring is paid for by taking away money that other companies would use to hire, and build, and expand. We might all agree that we want the new bridge or road and it’s worth it, but we must never neglect the fact that it’s paid for out of the same pocket that businesses reach into when they want to pay their employees. Government programs which hire people and support businesses and individuals do so by reducing the ability of the private economy to hire people and support businesses and individuals. You can have a great campaign line about the government stepping in and hiring if businesses won’t do it themselves, but it won’t actually have an effect on employment. Taking money out of the economy to put it in to the economy is a wash at best. And that’s only if the government is 100% efficient (ha, ha).

This is why George W. Bush’s stimulus of sending everyone a refund check for a few hundred dollars had no real noticeable effect on the economy. This is why Barack Obama’s 800 billion dollar stimulus had no effect on unemployment. This is why the proposed new 400 billion dollar stimulus will, if passed, also have no effect. The government cannot create, it can only get in the way–attempts to intervene generally make things worse.

Before I overcomplicate the explanation, here’s the overall logic again.

If the government’s only options for interacting with the economy all make business more expensive,

And the more expensive business becomes, the less business will occur,

Then the more the government wades into the economy, the less business will occur.

Simple enough, right?

Now let’s put this all in context before you all get up in arms about Crazy Marc the Right-Wing Anarchist.

For one thing, I mentioned that there may be other things the government can do outside of the tax-and-regulate model. The list of exceptions is small, but there are a few government services that attempt a fee-for-service model, or quasi-governmental agencies that don’t claim full public status, but are still run by political appointees and are often largely publicly funded. Some are more effective than others. For example, there are agencies such as the US Postal Service, and Fannie Mae/Freddie Mac. These exceptions, while a tiny fraction of the government’s real activity, illustrate a point coming in a further post about the effectiveness of government-run versus privately-run services. For now, I will leave it to you to decide if you think Fannie and Freddie, and the USPS, are stunning examples of government efficiency and productivity. Or not.

Then there are some things that virtually everyone can agree it’s necessary for the government to do. Certain things can only be effectively handled by a central government, simply because private solutions wouldn’t work. It’s a good thing that (be it local, state, or federal) roads are planned and constructed by the government. It works. I don’t want to see a private police force or fire departments. Certainly, national defense can only be effectively run by a central government. And, arguably, these things are real goods and services being produced—the government, in these cases, is not simply a parasite, but a productive part of the overall economy. Without getting into the government’s competence or lack thereof, if there are no other options for these necessary things, then we should have the necessary taxes to do these necessary things.

However, what I’m talking about here relates to the government’s interaction with businesses and the economy. And I even grant that when it comes to business, there are necessary regulations. Various business practices are rightfully illegal. Society is better off if things like usury and false advertising are not allowed. This is good and necessary, and you will never hear me say otherwise.

Here’s the but (you knew it was coming).

Let’s say the economy is a car. That was everyone’s favorite metaphor a few months ago, I can certainly beat it to death a little more. At its most basic, the car in this particular example is just an engine, wheels, and a seat. The engine of the economy is every business in the country, producing and selling goods and services. They want to. They NEED to, they live and die by selling something for a profit. The more profit, the better for them.

So this car, unlike a real car, wants to go pedal-to-the-metal, all the time, of its own accord. This car will always be trying to go as fast as it can. This is its natural state. If you sit back and do nothing, it will race forward as fast as possible, driven by the high-octane fuel that is the human desire to make a better life for ourselves. It’s a car with the accelerator strapped down.

The government can’t do much of anything to goose the car and make it go faster, if its natural state is to go as fast as it can. The government can, however, get in the way through various means. Remember when I talked about perfectly reasonable business regulations? Now the car has seatbelts, airbags, brake lights, anti-lock brakes. These are things, if left to our own devices, we might choose not to put in our cars—but we can all reasonably agree that we’re all better off if everyone has these things. And this is good government; we’re better off with certain reasonable regulations than without them. These are not things that keep the car from driving.

Where we get into trouble is when the government goes too far. There are regulations and taxes that, rather than giving us a smooth ride, are more akin to filling the trunk with lead. Confiscatory taxes—for example, taking fully half or more of someone’s income—remove incentive to be further productive. This is like attaching a parachute to the back of the car. You can get so much, but then the parachute inflates, and you’re not going any faster than that. Regulations that, say, prevent domestic oil exploration simply let the air out of the tires.

So now the car is objectively safer—now we can’t go faster than a walking pace. But we’ve also eliminated the usefulness of the vehicle, since we were already going that fast simply by walking. It’s gone too far. If the government can only slow the economy down–though we all agree that some restrictions are healthy–problems still arise when necessary restrictions give way to destructive ones.

On the surface, the disagreement lies between people saying, “We need more regulations,” or, “All regulations are bad.” I don’t think that’s really what conservatives argue, but regardless, we should all be able to agree that the right question is, “Which regulations are necessary?” Conservatives, rather than wanting to “dismantle the government,” simply want to keep the necessary regulations and toss the unnecessary ones that are only slowing us down. We don’t want the government to try to magically create jobs, because we know that it can’t. There is no magic spell for this.

Instead, we want to allow the private economy to provide jobs, because it’s the only way it ever really happens. Unlike the attacks against the GOP and Tea Party assert, the goal of conservatives is to actually look at reality and create a situation where everyone can find a job and take care of themselves. And that’s something we should all strive for.

[1]  http://www.politico.com/news/stories/0911/63043.html

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What Is Wealth?

Or, That Goofy Zero-Sum Game Argument

It’s important to understand that money isn’t the same thing as wealth. Money can be one form of wealth, but when we get down to it, it’s ultimately just a stand-in so we don’t have to trade chickens anymore. Wealth is any stuff, or the ability to get stuff, or do stuff. Thinking that “wealth” just means money and nothing else is like thinking that “TV” just means game shows and nothing else. Jeopardy is great, but if that’s all you think is on, you misunderstand the nature of TV and will have a hard time having any sort of meaningful discussion about it.

Here’s an example of what I mean about misunderstanding the nature of wealth. Liberal economics says that government spending always makes the economy better, because there’s more money moving around, so the GDP is bigger, which is how they define the economy. But GDP just looks at money. Remember- if wealth is all goods and services, then an improved economy would be producing more goods and/or services. Simply moving more money around, without increasing productivity, is meaningless. If I pay you 50 million dollars to sit on your couch for an hour, then you pay me 50 million dollars back to do the same, the GDP gets 100 million dollars bigger. But nothing actually happened. This is the fallacy of government stimulus. You can make the numbers look good without actually changing the real economic situation.

(side note: GDP can be useful. I know. Productivity causes money to move around. GDP, in theory, measures how much of that happens. But it does so indirectly and incompletely, and can be made invalid, as in this example. But it has its proper uses, so please don’t use this against me when I cite GDP as a useful metric a year from now.)

There’s a term that gets tossed around a lot at this point. Game theory involves the concept of the “zero-sum game,” or a circumstance in which one player’s gains are, by design, another player’s losses. To put it a different way, in order for one person or team to win, someone else must lose—that is, in a zero-sum system.

Liberals often argue for higher taxes or restricting businesses based on the idea that our economy is such a system—there is only one pie, and we have to split it up, so if one person has a lot of pie, that means someone else is getting screwed. Poor people are poor because there’s only so much money to go around, and the rich took too much of it. President Obama’s near-daily attack on those rascally millionaires and billionaires and their private jets comes to mind, not to mention his belief that it’s good to “spread the wealth around.” As I’m writing this line, I just heard Ed Schultz on his radio show claim that we need to raise taxes on the wealthy because–paraphrasing–the Bush tax cuts killed job creation and just led to the wealthy taking more money. In other words, the more money rich people got, the less there was for the rest of us. And I regularly get yelled at about the terrible, awful, no-good very bad “income gap,” often in the context of the Reagan years–based on the logic that, since the rich got richer during that time, the poor must have suffered.

But our economy is not a zero-sum system. Think about it: if I have $100 in my pocket, it doesn’t mean there’s someone out there that’s $100 poorer because of me. That $100 is in constant motion, as people make more stuff, and people get richer every time it moves–because, remember, what’s happening isn’t simply money moving from point A to point B, the money is just a convenient way to pay for productivity. If I give you that $100 and you build me a bookshelf that didn’t exist before, we both gain—you make profit on your sale, I get a bookshelf that I couldn’t make myself because I don’t have the tools or experience. This breaks the definition of a zero-sum system, because we both gain, nobody loses.

Look at the example again. We’re not on the couch this time. If I pay you 50 million dollars to build a giant golden statue of Zeus in my backyard, then you pay me 50 million dollars back to buy 300,000 tons of vitamin C, the GDP is the same as if we had been sitting on the couch trading money. But this time, we both have $50mil more worth of stuff. What matters is the productivity.

What this ultimately means is that people acquiring large amounts of money does not mean they are making other people poor. People acquiring large amounts of money is GOOD for the economy–it generally means they are being productive, which is making themselves and others more wealthy.

Let’s separate that one out, because it’s a big deal. As a general rule, people acquiring large amounts of money and wealth is good for the economy, and everybody in the economy benefits from it.

If all this is true, what about that income gap? Did Reaganomics help the rich at the expense of the poor? In fact, according to Census Bureau data, the opposite took place. From 1981-1989, Americans in every quintile saw their real (inflation-adjusted) income rise, and the number of Americans making less than $10,000 a year shrank by 3.4 million–whereas Americans in the lower-earning quintiles did lose ground in the 8 years before and after Reagan.[1] How about the current economic crisis? If the rich are losing, someone else must be gaining, right? And the rich have certainly been hit by the recession. The actual number of American millionaires fell from 9.2 million to 6.7 million between 2007 and 2008.[2] How have the poor fared? Have they picked up all that money?

Of course not. It’s all too easy to score political points by telling people that they are getting screwed and then saying to them, “If you vote for me, I’ll make things right!” But that’s simply not how things work. Punishing the rich doesn’t help the poor. Historically, it hurts the poor as much or more than the rich.

Here’s the thing. People usually (of course there are exceptions, but on the whole) get rich by being extremely productive. When that happens, not only is there more stuff for us all, but productivity doesn’t just create stuff, it creates jobs. No jobs created when we’re on the couch. But when we’re being productive? Someone’s gotta mine all that gold, drive the trucks to get it to my house, melt it down, engineer the statue, feed all those workers, provide the gas for the trucks, power for the tools, and so on, and on, and on. See the difference?

Let’s see where that leaves us:

  1. Money is not the same thing as wealth. Wealth is all kinds of stuff.
  2. Acquiring wealth usually happens through production, which is good for everyone.
  3. The economy is very much NOT a zero-sum system–and therefore, it’s not a contradiction to say that we can all–rich, poor, and middle–get richer together.

Finally, why don’t we take this opportunity to look at one of our common practical goals in light of these ideas? I hope we can all agree that we want to help the poor build better lives. According to this understanding of wealth, productivity, and business, just about the most effective way to help the poor will be to increase the productivity of the economy. This increases total available wealth, makes the wealth more affordable, and creates more jobs so that more people can access the wealth. More employment, cheaper goods, more vertical mobility. Bam!

The question then becomes, how?  What do we do to make this happen?  Should the government stimulate production?  More to the point, can the government stimulate production?

My first of many thoughts on that extremely big issue, coming soon.

[1] Niskanen, William A. and Stephen Moore (1996, October 22). Supply-Side Tax Cuts and the Truth about the Reagan Economic Record. Retrieved September 15, 2011, from The Cato Institute Web site: http://www.cato.org/pub_display.php?pub_id=1120

[2] The Economist (2009, April 2). Easier for a camel. Retrieved September 15, 2001, from The Economist Newspaper Limited website: http://www.economist.com/node/13356686?story_id=13356686

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