San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, January 17, 2014

Income Inequality And The Structure Of Production

Robert Reich, former Secretary of Labor under King Clinton, made some extremely wrong economic assertions while lecturing in Denver last week.  I commented on some of his comments in yesterday's post to this blog.  Today I would like to go into a bit more detail about one of his assertions.  In particular, Reich (and many others of equal ignorance) believes that economic growth is generated when consumers purchase finished goods from final producers.  He also believes that it is the purchasing activity of those buying the finished goods that creates all of the jobs that are involved throughout the entire production process.  His belief, although common, is entirely in error. He fails to take into consideration the structure of production before coming to his many fatal conclusions about the nature of economic reality.
Reich said that "it is the middle class and the poor that are the job creators, not the people at the top."  By "people at the top" he means those profit seeking businessmen who make a lot of money because they make things that people want to purchase and then sell them to consumers at a price they are willing to pay.  How evil!  Reich's entire concept is predicated upon the incorrect belief that production has only one level.  According to Reich, and all other Keynesians, there are those who produce goods and services and there are those who buy those goods and services.  Those are the only two levels in the economy of Reich and they are exclusively represented by those who make things and those who buy things.  That belief is so staggeringly wrong-headed it defies imagination that anyone would ever believe it.  Still, all economists who work for the government subscribe to the theory of one producer, one consumer.
To disprove that theory I will refer you to the simple pencil.  For the complete story about the simple pencil, go here. Where do pencils come from?  Does some person sit in a shop somewhere making them?  Is there only one producer of pencils from which all consumers must make their pencil purchases?  Or, more accurately, is there only one level of production involved in the process of making a pencil?  If Reich is correct in his assumption about the nature of our economy, there should be only one level of production for a pencil.  If he is wrong, there will be many layers of production for a simple pencil.   Let's think about it for a moment.
Let's assume that a pencil is constructed from the following items:  wood, paint, steel, rubber and graphite.  In order to make a pencil it is necessary to have all of these intermediate goods in one's possession.  If any of these intermediate goods is not available, a pencil cannot be constructed.  Somewhere someone has to cut down a tree.  Does that lumberjack know he is making a pencil?  Is the person who eventually purchases the pencil responsible for creating the lumberjack's job?  Hardly.  He cuts down trees because the mill he sells them to will pay him for the wood.  The mill then processes the rough lumber into lengths of wood of various sizes and types.  One of those sizes and types is suitable for pencil construction.  Meanwhile, in another part of the world, somebody has stuck a plug into a rubber tree.  Does the person extracting the rubber care about making pencils?  No. Has his job been created by virtue of the fact that someone somewhere else has just purchased a pencil?  Hardly.  He sells his rubber glue to a rubber manufacturer who is willing to pay him for the glue.  One of the many things made by the rubber manufacturer is pencil erasers.  Meanwhile, in another part of the world, someone is drilling for oil.  That oil is refined and combined with pigments, made by someone else in some other part of the world, to make paint.  Was the paint manufacturer's job created by the person who just purchased a pencil?  Not likely.   While all of this is going on someone else is mining graphite.  He sells his graphite to hundreds of different producers of intermediate goods.  The graphite is used for hundreds of other purposes, including pencils.  Next door to the graphite mine is a iron ore mine.  Ore from the mine is smelted and refined until steel is produced.  That steel is sold to hundreds of different intermediate producers who use it for hundreds of different purposes.  The iron ore miner has no idea what is going to happen with the ore that he mines.  He just knows that he gets paid for digging it out of the ground.  He is also smart enough to know that his job was not created when his neighbor went to Wal-Mart and purchased a package of pencils. To believe something that ridiculous one must have a degree in economics.   Eventually all of these things come together, under the oversight of a pencil manufacturer, and a pencil is made.   He then sells the pencil to a consumer.  Nobody supervised this process.  No government bureau oversaw the pencil making project.  The entire process took place by means of Adam Smith's "invisible hand."
Now, I ask you, how did the consumer who purchased the pencil create all of the jobs involved in the production of that pencil?  How did the poor or middle class person who purchased that pencil create the job of the graphite miner, the rubber tree horticulturalist or the oil well driller?  The intermediate productive processes are so far removed from the final product it is impossible to connect them.
The school of economic thought known as Austrian economics has done us a tremendous service by explaining the structure of production.  Mark Skousen has written a book by that title that is well worth reading.  You can find it on Amazon if you are interested.  For an excellent summary of the Austrian view of industrial production summarized on a simple blog posting, go here. I have extracted the diagram and comment below from that blog post.  I think you will find it informative.
The diagram below illustrates an imaginary finished good with five levels of intermediate production.  For my purposes here you can ignore the part of the diagram devoted to "interest".  That is another Austrian concept that I am not discussing at this time.  What I find of greatest interest for our purposes here is the fact that in this illustration there are a grand total of 270 monetary units of productive activity involved in the production of a single 100 monetary unit final product.  Those 270 monetary units of production, and the jobs associated with them, are ignored by Reich and the Keynesians.  They are concerned exclusively with final products and they pretend as if the productive process has no structure whatsoever.  That is a fatal flaw in their economic view of the world.  Ponder the diagram below and read what its author has to say immediately below:





"Another interesting fact that is revealed in the above example, is that in order to produce consumer goods worth 100 monetary units (m.u.'s) , the total amount of gross savings forwarded in the form of present goods by capitalists in the five stages amounts to 270 m.u.'s (200 m.u.'s to capitalist of higher order stages, 70 m.u.'s to land and labor). If we add to this the 100 m.u.'s spent on consumer goods, then given a synchronous constantly repeating process, the total gross output in a year is 370 m.u.'s. This is why the commonly heard assertion that 'consumer spending represents 70% of GDP' is actually not really true."

In this particular illustration there are 270 monetary units of production to account for a final product of 100 monetary units.  According to the Keynesians, only 100 monetary units of production have taken place.  That is because it is only the final sale of the final good to the consumer that matters to them.  That final sales price is the figure that will show up in the government's official GDP statistics.  According to Reich, only those jobs related to the final stage of production actually exist.  That absurd belief is made necessary in his system of thought since consumers allegedly create jobs by purchasing finished goods only.  Consumers are not involved in any way in the purchase of intermediate goods so they could not be involved in any way with the creation of the jobs responsible for the production of those intermediate goods.  Yet those jobs and goods produced in the intermediate levels of production far outnumber those involved with the final sale.  There are far more jobs involved in the various steps involved in intermediate production than there are involved in the final step which produces the consumer good.  Reich's system is far to simplistic to represent the real world and does not allow for the economic fact that many more jobs are involved in the various levels of production than are involved in the final finished good that is purchased by the consumer. 
Who creates those intermediate level jobs?  Just as is the case in all job creation, those jobs are created by the profit seeking businessmen who are producing those intermediate level goods.  Do those intermediate level producers care what happens with the goods they produce after they are sold?  Not in the slightest.  Do they have any interest in what their goods are finally able to produce?  Not at all.  Are they even remotely related to the folks who make the final purchase of the finished good?  Never.  These things being true, how can it possibly be true that jobs are created by consumers? Answer:  it can't.  Jobs are created by profit seeking businessmen as they pursue their own self interest.  In a free market all profit seeking businessmen are guided by an "invisible hand" that causes the productive outcomes consumers eventually purchase.  The consumers of those products are not responsible for any part of the productive process unless they have saved some of their income and invested that savings into the business producing the intermediate or finished goods.  The consumers of those goods most certainly do not create the jobs that produced the goods they are purchasing by the mere act of purchasing those goods.  Reich is wrong.  Several things follow from his error.
Since goods are produced by businessmen who create them, it is necessary that those businessmen have access to the funds required for each step in the production process.  That money comes from the savings and investments of people with a long time horizon who are willing to give up present consumption for future reward.  Those future rewards are known as profits and they flow to those who produce things others want to buy.
People who purchase consumer goods are just that....people who purchase consumer goods.  They have no part in the productive process and, therefore, deserve none of the profits.  To use the coercive power of government to take the profits from the producers and award them to poor consumers is an act of theft.  It is immoral and it should never be done in a civilized society.
To argue, as Reich does, that the "entire structure of our society is in danger" simply because those who produce goods and services are rewarded for their efforts is the ultimate act of folly.  To use the government to redistribute that wealth is the surest means to guarantee that the productive process will be stymied and fewer and fewer consumer goods will be available to the citizens of that society.  We need go back in history no further than Soviet Russia to see a perfect case study in the failure of socialism and wealth redistribution.  Russians had plenty of rubles.  They just didn't have anything to buy with those rubles.  They had no production, and consumers had nothing to buy, because they had no savings and investment.  The combined energy of the sum total of all desires of all consumers to purchase stuff did nothing to create the stuff they wanted to buy.  Their desire to spend rubles did not create things to spend rubles on.
I conclude that Robert Reich is an idiot who is preaching a message that is immoral and dangerous.  He is convincing the poor that they have a right to the fruits of the work of others.  Worse still, he is warning the productive members of society that if they do not willingly give up a great portion of their profits to those who have not earned them they should expect violent social revolution in which their rightfully earned profits will be taken from them by force.  Convincing the envy filled members of the SDA that they have a moral claim on the property of others is a very easy thing to do.  It is also a very dangerous thing to do.  Income inequality is not a threat to our society.  Reich's message is the most dangerous element in our society today.  Robert Reich needs to shut his mouth and mind his own business. 

Thursday, January 16, 2014

Robert Reich Incites Class Warfare

Robert Reich is a former Secretary of Labor (under King Clinton) and current professor of public policy at the University of California - Berkeley.  He is emerging as one of King Obama's most faithful useful idiots.  He is on a speaking tour in which he is preaching the gospel of income inequality.  His slant on the topic is a bit different than others I have read recently.  He was in Denver last week and declared that income inequality is "a threat to our way of life."  According to Reich, income inequality "isn't just bad for those losing ground but could jeopardize the country's future if unchecked."  Although I did not read anything in the article about his speech that described his solutions to the alleged problem of income inequality, I did read several arguments about how income inequality is going to destroy the Socialist Democracy of Amerika.  His absurd arguments struck me as quite novel, as well as being amazingly ignorant of economic truth.  I would like to consider some of them here today. 
Reich begins his ignorant diatribe against the "rich" by declaring the Keynesian maxim about spending driving economic growth is true.  When a conference attendee asked Reich why it is not more important to reduce government intervention in the economy in order to stimulate economic growth, Reich countered by declaring "that the US economy, where 70 percent of activity is tied to consumer spending, can't achieve its potential unless more money finds its way into the hands of average consumers."  How is more money to find its way into the hands of average consumers?  By placing extortionate taxes on the rich, of course.  Putting Reich's argument another way,  consumer spending creates economic growth.  Consumer spending is responsible for the creation of capital goods and services.  Keynes would be proud to hear this modern day troubadour repeating his ridiculous belief that growth comes from spending.  Once again, let's go back to the family.  Most folks who get confused about the nature of economic growth usually do not have any trouble understanding the concept when put in terms of the family rather than the entire economy of a country.
How do you increase the net worth and income of your family?   If you made $100,000 last year and then proceeded to spend all of that money you would have ended the year with no increase in net worth and $100,000 in spending.  If you used your credit card to increase your spending, and therefore your net worth according to the Keynesians, and ended up putting an additional $20,000 on the card, have you actually increased your net worth or your income?  Of course not.  All you have done is go into debt by $20,000.  If you invested that $20,000 that you borrowed from the credit card company you might have increased your net worth if the investments you made were worth more than $20,000 at the end of the year.  If your investments were worth exactly $20,000, you would have broken even for the year.  If you spent the additional money on consumer goods (most likely scenario) you would have ended the year with the same income and a lower net worth.  Everyone understands this concept when it applies to the family.  Why, suddenly, when we discuss spending in the national economy, do we believe that spending money somehow magically makes everyone more wealthy?
Consumer spending does not create wealth.  Wealth is created in only one way.  People (entrepreneurs) either use their own money or money that others have saved to produce new goods and services.  They bring those goods and services to the market place where consumers weigh in on their relative values.  If the entrepreneur has produced something the consumers want at a price the consumers are willing to pay, he makes a profit.  It not, he suffers a loss.  As businesses produce goods and services that consumers want to buy, the capital stock of the economy grows.  It does not matter if consumers have billions of dollars to spend if there is nothing to spend that money on.  It is only because of prior production that consumers have anything to buy with their money.  And where do consumers get the money to purchase the finished goods and services they want?  By selling their services (labor mostly, sometimes professional services) to the production process that is directly responsible for creating the goods they now can buy.  Reich's erroneous belief that consumer spending creates wealth leads him to the equally erroneous conclusion that getting more money into the hands of the "middle class" is the way to combat the evil of income inequality.
Reich's second point was new to me.  He began by declaring that "we need to reframe the debate."  How are we to reframe the debate?  According to him, "the middle class and the poor are the job creators, not the people at the top."  He disagrees with the economically correct position that jobs are created by entrepreneurs as they expand successful business operations, thus requiring more labor services.  His argument is that since jobs in the economy are created by the middle and lower classes, if those two classes do not have enough money they will be starved and jobs will not be created.  If jobs are not created the entire economy will collapse, taking the rich people at the top, who are allegedly constantly exploiting the lower classes, down with it. 
I looked around the internet and discovered that this argument is becoming very popular.  Henry Blodgett of Business Insider argues, "Entrepreneurs and investors like me actually don't create the jobs -- not sustainable ones, anyway. Yes, we can create jobs temporarily, by starting companies and funding losses for a while. And, yes, we are a necessary part of the economy's job-creation engine. But to suggest that we alone are responsible for the jobs that sustain the other 300 million Americans is the height of self-importance and delusion.  So, if rich people do not create the jobs, what does? A healthy economic ecosystem — one in which most participants (especially the middle class) have plenty of money to spend."  Now that is a fascinating idea.  I didn't realize that economic transactions constituted an "ecosystem", whatever that is.  If it is truly the middle and lower classes that are responsible for job creation, and not the wealthy entrepreneurs, then why don't they just create jobs and make themselves rich?  If they are the machines of job creation Blodgett believes them to be, they should have no trouble making money and getting rich.  Of course, once they become rich they will no longer be able to create any more jobs.  They will then have to divest themselves in order to become poor again.  Then they can repeat the cycle.  How can anyone with a sound mind believe this nonsense?  Where is the evidence for this explosion of jobs coming out of the lower and middle classes?  There is none.  In fact, that is not even what Reich and Blodgett mean when they give credit to the lower and middle classes for job creation. 
According to these two fellows, "What creates a company's jobs is a healthy economic ecosystem (there is that biological term again) surrounding the company, which starts with the company's customers. The company's customers buy the company's products. This, in turn, channels money to the company and allows the the company to hire employees to produce, sell, and service those products. If the company's customers and potential customers go broke, the demand for the company's products will collapse. And the company's jobs will disappear, regardless of what the entrepreneurs or investors do."  So, in actuality,  all we have here is another version of the earlier argument that consumer spending creates economic growth.  Notice how this imaginary economic world begins with the "company's customers buy(ing) the company's products."  Where do these customers get the money to buy the products?  Where did the products come from?  We don't know.  These things just magically appear in their universe.  Notice that after the customers have been buying these imaginary products that came out of nowhere the company is then finally able to "produce, sell and service those products."  How did the company end up selling products to its customers that had not yet even been produced, sold or serviced?  They don't say.  They never do.
Once again (I wish we could put this idea to rest forever) we have to see and understand that spending does not create economic growth.  The products these customers are initially buying do not just appear out of nowhere.  Some entrepreneur (a rich person, no doubt) either used his own money or the money of his fellow rich friends to create something that the lower and middle classes want to buy.  The fact that the lower and middle classes purchase those goods has nothing more to do with the jobs created to produce them than I have to do with the production of an I Phone.  The jobs are created by the businesses that produce the goods and services that I want.  I don't, merely by purchasing a good or a service, ever create a single job.
Reich's third point is the one I find the most dangerous, obscene and immoral.  He essentially warns those on the top of the income inequality scale that he believes popular rebellion and outright theft of their property is justified.  He is giving nodding approval  to those idiots in the lower and middle classes who are so riddled with envy for the rich and tells them to go ahead with their plans to go to the rich and take their wealth by force.  Here is how he concluded his speech, "Greater inequality results in a more polarized political climate and more scapegoating.  Left unchecked, a frustrated populace will be more susceptible to demagogues on both the right and the left.  Business leaders and the top 1 to 5 percent have as much at stake in the case of rising income inequality."   Does that sound like a threat to anyone besides me?  Does that sound like an attempt at extortion of the rich to anyone else?
Quite obviously Reich believes that the rich should immediately volunteer to divest themselves of their wealth.  I don't know what mechanism he conceives of to transfer that wealth to the poor, but it must be done before civil unrest inevitably occurs.  I suspect he would be in favor of a government bureau that would be responsible for the necessary wealth redistribution.  Reich warns the rich that if they do not immediately surrender the great majority of their wealth and incomes, some demagogue will come along and incite the lower classes to violent rebellion against them.  Imagine McMansions around the land being stormed by meanly-clad hoards and you get the picture Reich is trying to paint.  Reich, simply put, is inciting the envy-filled lower classes to violent rebellion.
In one way Reich's pitiful country already exists.  The "demagogues" he speaks of are career politicians.  They constantly make speeches in which they blame the rich for all of the nation's woes.  They have created a magnificently "polarized political climate" as they seek the votes of envy-filled members of the lower and middle classes.  The only reason the members of the lower classes are "frustrated" is because they believe the propaganda spilling out of the mouths of career politicians and liberal intellectuals which tells them that it is impossible to advance economically in this country by any means other than political action.  Meanwhile, the top 1 to  5 percent of the income population is ripped off daily.  They are forced to pay most of the nation's federal tax bill.  Then, to top if off, they are labeled as selfish for doing so.  I do believe that Reich's world is already here. 
Rather than fomenting class rebellion Reich should be using his bully pulpit to preach against the sin of envy.  He should be telling consumers that they do not create any jobs.  He should be lecturing people about how industrial production is not a by-product of the fact that people like to purchase stuff.  Most importantly he should be telling those who envy the rich that the way to prosperity is not by stealing from them but by emulating them.  If you want to get rich I have some simple suggestions.  Start saving.  Stop spending more than you make.  Start investing.  Start looking around at others and ask yourself, how can I serve these people?  Stop looking at others though envy filled eyes, dreaming about how much you can legally steal from them, but look at others as potential customers for goods and services you can provide.  Stop using government to take what isn't yours from your neighbor.  Take responsibility for your own life.  And most of all, when some egg-headed, ex-government employee exhorts you to violently steal from your neighbor, run the other way.

Wednesday, January 15, 2014

The Economy Is Not A Static Pie

One of the unspoken presuppositions that under girds all discussion about income inequality in the Socialist Democracy of Amerika is that the size of the economy never changes.   I have heard hundreds of news items telling me that the poor are being oppressed by the rich but I have never heard one single report about how the size of the economy is constantly growing.  I am incessantly informed that the poor need to scramble for "their fair share of the pie" as if the "pie" is of one size and has never changed in size over time.  On those rare occasions when the size of the economic pie is discussed, it is always in terms of its shrinking, such as during periods of recession.  Then I am informed that the poor are being ripped off twice; once by the oppressive behavior of their greedy rich masters and again by the impact of the recession.  Socialists, career politicians (overlapping groups) and their media lackeys preach the same message over and over again.  It has been drummed into our pretty little heads that in the absence of government intervention the evil rich will inevitably steal as much of the economic pie as they can, leaving the poor with an ever decreasing share.  It is time to expose the presupposition of the static pie economy for the fraud that it is.
Below you will find a graph of the real (inflation adjusted) Gross Domestic Product per capita in the Socialist Democracy of Amerika.  The grey areas of the graph are periods of recession.  As you can see, the economy is generally growing in size except for brief periods of recession when it contracts:


Graph of Real GDP per Capita in the United States

Another way of looking at the growth of the economy is to look at the change in its total size on a year over year basis.  The following graph gives you the continuous year over year change in the value of the SDA economy for every year since 1960:



FRED Graph

Once again you will note that the SDA economy is not static.  It never stays the same size.  For all periods except those in which we are in a recession, the economy of the SDA is growing.  Growth rates range from a low of just above zero to a high of over six percent in one year.  By fixing your gaze upon the zero percent growth line you can immediately see that the economy grows most of the time. That explains the first graph where you can clearly see that the real (inflation adjusted) size of the economy has almost tripled in the last sixty years.
GDP measures the size of the economy.  If the economy were a static pie its size would never change.  We would have exactly as much in capital goods today as we had in 1960. I am shocked and amazed at the level of economic ignorance on display when envy-filled socialists complain about how they have less and less every year.  If you were alive in 1960, try to remember what life was like.  Remember life without air conditioned homes, two or three (or more) automobiles in every garage (if you were lucky enough to have one) and a television (big screen) in every room of your 3000 square foot home.  Imagine life without computers and microwave ovens.  Imagine life where you had no time to pursue dozens of recreational activities because you had to spend all of your time working just to pay your mortgage.
Look at the size and number of cities in this country today.  Compare that vision to just thirty years ago.  I have lived in the Denver metropolitan area for thirty five years and the size of the metropolitan area has at least doubled in that time, maybe more.  There are many more large buildings housing thousands of businesses that didn't exist thirty five years ago.  There are tens of thousands more homes and all of those homes are much, much bigger than the house in which I grew up.  The capital stock of the SDA has tripled in the past fifty years.  How can anyone in his right mind assert that his piece of the economic pie has decreased in size during that period of time?
Poor people, however they are defined, who live in the SDA would be considered rich in just about any other nation of the world.  Poor people, however they are defined, who live in the SDA today are rich in comparison to the poor people who lived here thirty or forty years ago.  Why is this so?  Because the economic pie is constantly growing.  Everyone has more of everything.  Everyone is better off.  Nobody has lost anything.  So what do the envy-filled "poor" and their pandering politicians do about this state of affairs?  They complain that their share of the pie is not growing as quickly as the "rich".  Boo Hoo.  Get over it.  Would you rather have a 10% share of a million dollar pie or a 5% share of a three million dollar pie?  Are you so stupid you are going to complain that your share of the pie has halved while, at the same time, your wealth has increased by 50%?  Idiots, all of them.  Envy-filled idiots.  Incidentally, those who constantly complain about how they are being ripped off and not getting their fair share never have anything to do with actually causing the pie to grow in size.  That task falls to another group.
Proponents of the static pie theory argue that a person can realize a profit only when another person realizes a loss.  They adopt the warfare view of economic transactions.  Under their stupid theory they concoct the notion that when two people voluntarily engage in a transaction one of the parties will win, as shown by a profit being realized, and the other will lose, as evidenced by his financial loss.  The advocates of this ridiculous theory ignore the rather obvious truth that nobody will voluntarily enter into a transaction in which he experiences a loss.  People voluntarily conduct transactions with each other because each party to the transaction wants what the other person has more than what he has.  Otherwise a transaction would never take place.  Free market transactions always benefit both parties to the transaction.  It is only under the terms of hegemonic transactions (always created by criminals or government agents) where we find people experiencing losses as they are forced to engage in a transaction against their will.  Being required to buy health insurance under the terms of Obamacare is an excellent example of this type of transaction.
Prior to being able to freely trade our goods with each other there has to be somebody who is responsible for creating those goods.  Bill Gates and Steve Jobs have created a lot of goods in the past fifty years.   These men are called entrepreneurs and they are the ones who are directly responsible for economic growth.  Much to the surprise of the ignorant masses who believe that government and career politicians create economic growth, the economy actually grows because risk taking entrepreneurs take their money, or money that they borrow from people who save and invest, and use it to attempt to serve the wants and desires of consumers.  When they deliver goods and services that consumers desire, they become rich.  When they don't, they go bankrupt.  You don't hear them crying when they go bankrupt.  They get up, dust themselves off and have another go at serving the consumers.  Entrepreneurs are the real heroes of our society.  They are the ones who make the pie grow in size.  They are the folks you should be walking up too, shaking their hands and thanking them for their service.  Without them the economy would not be growing and we could quite possibly all be much worse off.  So if you see a businessman today, walk up to him and give him a hearty word of appreciation.  He will probably be shocked.  He is accustomed to being railed at by the ignorant and the envious.  He is used to being called a greedy monster who cares for no one but himself.  Shock him, thank him for his service to you, the economy and the SDA.

Tuesday, January 14, 2014

The Global 1%

 I am constantly being exhorted to "Think Globally, Act Locally."  That sounds like pretty good advice to me.  I am not sure what it means to think globally so when I think about the globe I think about poor, hungry people in Africa.  After I think about those poor, hungry people I jump into local action.  My local action usually consists of baking a cake and eating the entire thing in one sitting.  That makes me very full.  As I contemplate my fullness I rejoice that I have just practiced global thinking and local action.  I tell myself that I am a very good person.  Sometimes I actually believe it.
I don't suspect that my application of the "Think Globally, Act Locally" principle is the original intention of the socialists who coined the phrase.  I would guess that most of them meant to assert that I should think about how rich I am when compared to the rest of the world and then do something to transfer my wealth to the world's poor people.  I don't like that idea.  I believe that what I have belongs to me and I should not be forced to give it to someone else, whether he be rich or poor.  If I want to give some of what I have away to others, whether they be rich or poor, that is my business, not yours.  Mind your own business and leave me alone please.
What I find wildly ironic is how so many socialists who preach the global/local dictum also believe in the principle of the 99%.  Remember the 99%?  That is the group of folks, really the 51%ers who make the least amount of income each year, who want to expropriate all of the wealth and income of the top 1% or, actually, the top 49% as the situation works out.  These poor folks are so riddled with envy they are incapable of any rational thought.  They want those who make more money than they do to pay for all of their bills.  They believe they are entitled to the wealth and income of those who make more money than they do simply because they make more money than they do.  Poor fools, their simultaneous belief in the global/local principle and the 99% principle illustrates the depths of their depravity, ignorance and irrationality.  Allow me to point out why.
When the principle of the top 1% is applied on a global scale some very inconvenient truths emerge.  Although the bottom 51% of the income population loves to consider themselves as poor, the fact of the matter is that when compared to the citizens of the world, they are quite rich.  Politicians pander to this self image of poorness to become career politicians.  Representative Sheila Jackson Lee (D-Texas), not one of the brightest bulbs in the House, has said, "Quite frankly, of all the wealthy nations, we have the lowest safety net and the highest poverty, because we’re not willing to accept the fact that sometimes an American needs help."  She is smart enough to recognize that citizens of the SDA are some of the richest in the world.  But she is incapable of letting go of her career enhancing envy so she concludes that some Amerikans have the right to use the state to expropriate the income and wealth of those who make more money than they do in  order to pay their bills.  She refuses to acknowledge that the "poverty" she speaks of would be considered a condition of great wealth throughout most of the world.
Here are some facts:
  • The members of the wealthiest 24 countries in the world make an average of more than $34,000 per year.  The ten richest countries in the world, in ascending order, are:  Austria, Australia, Canada, Switzerland, Hong Kong, USA, Brunei, Norway, Singapore, Luxembourg and Qatar.
  • One half of the world's richest citizens live in the SDA.  "Of the 60 million or so people who make up the world's richest percentile at the time of the most recent data, around 29 million live in the US."  Meanwhile, the citizens of the bottom 163 countries of the world make less than $34,000 per year.
  • To get into the top 1% of the world's income population you only need an annual income, per capita,  of $34,000.  For comparison purposes, in the SDA 40% of the citizens of the land make more than $34,000. The median household income is ~ $42,000 and the average personal income is $51,700.
King Obama and his lackeys have made income inequality their pulpit.  They are preaching a message that informs us dullards who don't know any better that differences in income are inherently immoral.  They recognize no moral reason for why income inequality might exist.  Anytime there is a difference in income between two groups of people they assert that there is some immoral condition that is bringing that inequality about.  Inevitably the immoral behavior is discovered within the group which makes the greater income.  The poorer groups are never behaving immorally.  Furthermore, they are preaching that the solution to the immoral condition of income inequality is to have the federal government intervene into the market place and make some adjustments.  These allegedly highly moral actions on the part of the federal government include extortionate levels of taxation on those who make more money, with the largess being distributed to those who make less, dramatic increases in the minimum wage, a guaranteed lifetime income, massive taxation on estate transfers and inheritance, taxation of religious institutions and direct taxation of assets, not just the income produced by those assets.  All of these proposals are designed to eliminate the scourge of unequal income found between various groups of people.
Hear Ye!  Hear Ye!  I have just discovered a case of income inequality that far exceeds anything thus far witnessed in the Socialist Democracy of Amerika.  This case of income inequality is the single most immoral thing that has ever existed in the history of the world.  Although I know you will find this hard to believe, it is worse than Hitler!  Open your eyes to the truth.  Look, see and perceive.  Recognize this horrible evil for what it is.  My fellow citizens, here is the bottom line truth:  40% of the citizens of the SDA are in the top 1% of the income population of the world. One half of the richest people in the world live in the SDA. It therefore necessarily follows that at least 40% of the citizens of the SDA are engaging in rampant immorality that can only be stopped by government intervention. Something must be done.
How did this horrific state of affairs come to be?  I think we all know the answer to that question.  We, the citizens of the SDA who make more than $34,000 per year, have exploited the citizens of the world for our own selfish gain.  We, everyone who made more than $34,000 in 2013, selfishly refused to pay a living wage to those who worked for us around the world last year.  You, if you made more than $34,000 last year, practiced the economic principles of rape, pillage and plunder.  That is the only possible way to explain how you came to be a member of the Global 1%.  You are a vile capitalist who cares for no one but yourself.  You are the epitome of evil.  How can you do what you do when you look around the world and see the poor who live on it?  How can you be so uncaring?  How can you be so dispassionate about the plight of the poor of the world?  Even worse, how can you contribute to their sorry condition by your greed and malice?  Have you no shame?  Have you no heart?  Do you even think about the plight of the poor as you drive your car, sit in your air conditioned home and watch football on your big screen television?  Don't worry.  I have a solution for this sinful condition.
I am calling for a one world government to rise up and fix this disgusting and sinful situation.  Only the power of a united government will be able to overthrow this sort of crony capitalism that is destroying the planet and plunging its citizens into poverty.  I would be happy to head this new world government.  You may call me Carpathian.  My first act will be to tax all income above $34,000 at the rate of 75%, with the proceeds being distributed to the 99% of the population of the world that does not make that immoral amount of money.  Certainly nobody with a moral conscience can disagree with this tax.  It only affects the top1% of the global income population.  I will also tax land and capital.  Prepare for a "net worth tax".  Don't worry, it will only be imposed upon the top 1% of the world's income population.   I will guarantee a minimum yearly salary to all those below the poverty level of $34,000/year and you, the citizens of the SDA earning the grossly unfair amount of $34,000/year or more, will pay the bills.  If you complain, I will cut off your heads.  After all, it is impossible to create a beautiful omelet without breaking a couple of eggs.

Monday, January 13, 2014

Income Inequality And The Minimum Wage

You are going to be hearing a lot about income inequality in the future.  King Obama has made it a key part of his self-perceived future legacy.  Given how he has bungled his current legacy, he is desperately trying to find something that will cause historians to classify him as a "good" president when he is forced from office at the end of his second term as King.  Others who wish to pander to the envy of the bottom 51% have jumped on the bandwagon and are preaching the gospel of government intervention to prevent the evil of income inequality.  All of the arguments are of the same sort.  Free market capitalism, the only type of capitalism there is, allegedly creates an immoral condition in the market place in which some people make more than others.  The fact that some people make more than others is considered to be an immoral state of affairs that requires correction and, sometimes, punishment.  Those who make more (unless they are "celebrities") are bad, those who make less are good.  Government, namely career politicians, promises to intervene into the free market, thus creating an un-free market and destroying capitalism, and fix this horrible evil.  Many programs are proposed to prevent income inequality.  One of the favorites is establishing a higher minimum wage.  Let's consider that strategy for a moment.
I was watching the John Stossel show last week.  He had a guest on the show who had a hairdo just like Sideshow Bob (a "Simpsons" reference for those of you not in-the-know).  This guest was in favor of doubling the current federal minimum wage to make it somewhere around $15/hour.  When Stossel queried him as to whether such an action would be good or bad for the economy he said that it would be good.  When asked why it would be good he said something like this:
"An increase in the federal minimum wage would be fantastic for the economy because it would give lower and lower-middle class people more money to spend in the economy.  As they earn more they will spend more.  As they spend more they will increase aggregate demand.  As they spend more they will increase sales tax revenue.  Both of these are good things for the economy.  As they increase aggregate demand and sales tax revenue both government and for profit corporations make more money.  As both government and for profit corporations make more money they can pay higher wages.  As they pay higher wages the entire cycle starts over again.  In a very short period of time we will have rates of economic growth that stagger the imagination and make everyone in the Socialist Democracy of Amerika rich beyond his wildest dreams."
John's guest is not the only crazy person to think this way.  He is not the only one who believes that we can spend ourselves to prosperity.  It is a dominant belief among career politicians, the lazy and the envious.  The Sunday Denver Post featured an AP article about Ron Unz, a "Silicon Valley multimillionaire and registered Republican who once ran for governor and, briefly, U.S. Senate."  Mr. Unz "wants state voters to endorse the wage jump that he predicts would nourish the economy and lift low-paid workers from dependency on food stamps and other assistance bankrolled by taxpayers."  Unz wants California voters to increase the minimum wage from $8.00 to $12.00 per hour.  Just like the guest on Stossel's show, Mr. Unz believes that mandating a higher minimum wage will cause an economic boom that will make the 1920s and 1990s look like depressions.  Unz believes that a higher minimum wage will "lift millions of Californians out of poverty, drive up income and sales tax revenue, and save taxpayers billions of dollars."  Has everyone gone crazy?
When Sideshow Bob made his ridiculous comments about the minimum wage John Stossel quite properly asked him if increasing the minimum wage by 100% is such a good thing to do, why not increase it by 1000%?  If increasing the minimum wage from $7.50/hour to $15.00/hour will usher in a period of amazing economic growth, why not increase it to $100/hour and make everyone currently below the poverty line into a millionaire in just a couple of years?  The question can be asked various ways.  Ultimately the question is this, if increasing the minimum wage has no negative impact upon the economy why not increase it so much everyone can be pulled up to an annual income of at least $100,000?  All of the proponents of increasing the minimum wage say that its increase not only will not harm the economy, it will drive amazing rates of economic growth.  If this is true, why limit how much is mandated?  Let's raise it to $5,000/hour and see what happens!  It a little is good, more is better!
When Stossel asked Sideshow Bob this question it was telling that Sideshow Bob would not answer it.  His answer to the question was another question.  That is never a good sign.  When a man can't give a straight answer to a question but is forced to answer the question with one of his own it is generally the case that the question has just exposed the weakness of his entire position and he does not want to admit it.  Sideshow Bob responded by asking Stossel this counter question:  "Why not just run the minimum wage down to zero?"  Stossel quickly countered that he thought that would be a good idea.  He thought that the government should not be imposing terms upon employers and employees as they negotiate the terms of employment contracts.  When Stossel quickly agreed that eliminating the minimum wage altogether was a good idea Sideshow Bob had no snappy comeback.  He also never answered the original question.  Is it possible he realized that raising the minimum wage is really harmful for the economy?  It sure seemed like it.
Raising the minimum wage does not create wealth.  To believe so is to be a Keynesian.  Keynesians believe that wealth is created by government decree rather than by savings, investment, industrial production and free trade.  The belief that raising the minimum wage creates wealth is similar to the belief that government spending creates wealth.  Both are false.  Both government spending and raising the minimum wage are harmful for capital creation since both merely increase the amount of cash in circulation without any commensurate increase in the capital stock.
This concept is so simple to understand I am amazed so many people seem incapable of grasping it.  If you want to increase the balance sheet of your family, can you do so by borrowing money from a bank?  Obviously not.  The cash balance is offset by the loan liability.  At best you have a zero sum game.  If you then spend that money on things that immediately depreciate (consumer goods) you are actually losing money.  Your net worth will go down and you become poor.  If you cannot increase wealth by borrowing money in the family, how is the government able to bring about that result in the economy?  Answer:  it can't.  Printing more money does not create wealth.  It merely depreciates the currency already in circulation.
In the same fashion mandating a higher minimum wage does not create more income.  It merely takes money out of one worker's pocket and puts it into another.  Half of those workers who would have been earning the minimum wage at $7.50/hour are fired and the remaining half make $15/hour.  How has this solved the allegedly immoral situation of income inequality?  How has this action removed people from government assistance?  How has this saved taxpayer dollars?  Answer:  it hasn't.
It is necessarily the case that government enforced minimum wages that are higher than the free market price for labor create unemployment.  It is the old law of supply and demand.  When the price for a supply of something (labor) goes up, there will be less demand for that thing (jobs).   We do not need to try and measure how many jobs "the economy" has created or lost as government intervenes.  We know this truth a prior.  It is necessarily the case.  Jobs will be lost, or fewer of them will be created,  when wages are mandated to be higher than the free market would pay.  That will create higher unemployment and reduce overall economic production.  The economy will either go into recession or grow less rapidly.  Those economic truths are necessarily true.
I have another question for those who believe government mandated minimum wages are good for the economy.  If you hold to that position please answer this question for me.  Don't dodge it and ask me a different question.  Just tell me, if raising the minimum wage does not initially harm the economy, but will eventually harm the economy if raised to absurd levels like $5000/hour, where is the break point?  Those who argue for a higher minimum wage should be able to answer that question.  Somewhere between the current $7.50/hour and proposed $5,000/hour there is an exact number at which going one penny higher suddenly begins to harm the economy but every figure below that number aids economic growth.  Where is that number?  It is crucial that that number be discovered and all wages immediately set at that level.  Maybe it is $3,573.89/hour.  If so the minimum wage must be set at that level for the economy to operate at peak efficiency.  Yet, proponents of increased minimum wages never even talk about this magic number.  They should.  It is the single most important number in their system.  And yet, they ignore it.  Why?  I suggest it is because they know it does not exist.  They know that all minimum wages set by government higher than the free market rate are deleterious for the economy and should be abolished.  But that inconvenient truth would cause them to lose their jobs and sully their legacy.  We can't have that, no matter how many people must remain unemployed as a direct result of their pride and arrogance.