ECONOMICS, POLITICS

Oh, SNAP!

One of my closest friends, who happens to be a libertarian, recently posted an article on my timeline that exposes an extreme case of SNAP fraud, which (so the argument goes) evinces the ubiquitous presence of SNAP fraud within the United States and proves most Americans on entitlements are indolent good-for-nothings who choose to take advantage of a system paid for by honorable, righteous, and upstanding tax payers—halos optional.  (Forget, for a moment, the illogical argument that anything near the extrema of, say, the standard normal distribution can concomitantly represents the mean.)  Of course, if we’re to assume the above fraud case represents the rule rather than the exception, then one must conclude that most, if not all, of the 43 million SNAP recipients don’t actually need the money; that is, most of them are defrauding the system, able to live rent free without children or utilities or credit-card bills or any other expenses.  Libertarians often describe this nightmare scenario as a “tax-funded vacation.”  (Forget for a moment, too, there exists a maximum income threshold required to qualify for welfare/SNAP benefits: In IL, for example, this upper bound is $1,200 per month, which means libertarians must consider an annual salary of less than $14,400 to be not only generous but also unquestionably self-sustaining.)  But this perspective misses a crucial point: Why are so many people receiving SNAP benefits?  Consider these statistics from the U.S. Department of Commerce:

  • Number of states where Welfare pays more than an $8 per hour job: 40
  • Number of states where Welfare pays more than a $12 per hour job: 7
  • Number of states where Welfare pays more than average teacher salary: 9

Top 10 Hourly-Wage Equivalent—Welfare States (U.S.):

  • Hawaii: $17.50
  • Alaska: $15.48
  • Massachusetts: $14.66
  • Connecticut: $14.23
  • Washington, D.C.: $13.99
  • New York: $13.13
  • New Jersey: $12.55
  • Rhode Island: $12.55
  • California: $11.59
  • Virginia: $11.11

In other words, welfare rates for 20 percent of the nation pay more than low-wage jobs in those same areas, presumably a function of corporations trying to reduce labor costs.  My friend responds:

So the incentive to actually start working some where and working your way up into a company, is where?  If in 40 states I can sit on my butt vs going to work, why work? So your in a sense paying people to not work their way up anywhere, not try to learn more skills to become more marketable, and your telling young people that its ok to take advantage of the system because there is ZERO oversight of any kind.  What started with good intentions now hurts the very people it was meant to help. Their buying power with the very funds they are “given” vs earned keeps decreasing as the currency continues to be devalued.

This is a standard libertarian rejoinder.  Do entitlements quell incentives?  Absolutely. They quell the incentive to privilege a low-paying job above an entitlement that will increase—even if ever so slightly—one’s standard of living.  The point is simple: Come hell or high water, people are going to get their livable wages.  Why complain if welfare and Medicaid provide a better standard of living than the low-wage job that offers no health insurance?  Should we really expect someone in CT, NJ, or MA to take a job at Walmart or McDonald’s for $8.75/hour with no health benefits? After all, isn’t self-interest lionized as the conservative/libertarian/free-market way.  Yes, it is.  That’s Adam Smith.  If one wishes to eliminate entitlements—and, subsequently, an insidious “handout” mentality—make jobs irresistible, where the standard of living is so much better with a job—any job—that people will be crawling over each other to jettison entitlement benefits.  Until that happens, however, we can’t blame people for doing what’s best for themselves and their families.  It’s called economic self-preservation, and it took us 30+ years of wage stagnation to get here.  But now that we’re here, the solution doesn’t involve telling people to bash their economic toes with a Wal-Mart hammer.  If market principles (should) rule, then everyone should make decisions based on which course of action benefits themselves the most.  For many, that decision is the welfare system.  In a certain sense, capitalism is an immoral system for these precise reasons—there’s a very fine line between “self-interest” and “selfishness”—but our current brand of capitalism isn’t even the system Smith envisioned; for him, self-interest (indirectly) served a greater utilitarian end.  One marvels at the plutocrats, those “job creators” who designed and propagated an economic system that marginalizes the penury and eviscerates the middle class, because we often find them complaining about the surge in (inevitable) entitlement spending to which they’re asked to contribute.

Well, what about the issue of corruption?  It is unlikely we will eliminate every ounce of government malfeasance, so we can only balance the scales through progressive legislation that redistributes excessive profits from those who have way too much—more than they’d ever need, in fact—to those who basically have nothing.  At least helping the needy would be a moral choice.  But if fraud is the overriding concern, we could create a number of high-quality regulatory jobs that more vigorously research, investigate, and prosecute entitlement fraud.  Oh, but Republicans, Conservatives, and Libertarians want to cut government spending.  Well, the government is going to spend the money either way—either on jobs that boost demand (and GDP and fiscal revenue and financial autonomy and…) or on (legitimate and fraud-based) entitlements.  How would you prefer your tax dollars be spent?

I think progressive legislation continues the problem. To me, killing the food source makes more sense. The very ones you want the legislation to be enacted against are the ones writing the legislation! That’s how they got there!  In the last few weeks I have seen it very up close and personal and it even starts on the small local level.  I would say get the federal govt, at a minimum, out of doing all of it! Get it out of running businesses, running welfare programs that overwhelming fail, get it out of banking industry, get it out of all of it, and have it focus on its primary constitutional role. Protect the people from enemies both foreign and domestic, and help enforce strong contract, personal, property, liberty and privacy laws.Then let the local states and local communities enact special things if the people in these states choose. At least if its on a local level, there are less hands in the cookie jar and more oversight. The bigger the program, the bigger the fraud and waste. No tax dollars needed when you just shut it down.

Unfortunately, we’ve been slowly dismantling the progressive agenda since the late 60s. We’ve repealed union protections, corporate-governance laws, and market regulations. We’ve rolled back tax rates, depressed wages, awarded outsourcing, and paid massive corporations billions of dollars to file their taxes.  If anything, progressives—like Sherrod Brown, Elizabeth Warren, and Bernie Sanders—are Davids with their slingshot legislation in the face of the corporate Goliath.  If we could trust inherently selfish people to operate a free market without government intervention to protect the disadvantaged and less powerful, I might more carefully consider a less interventionist approach, but that’s simply not the case.  “Less hands in the cookie jar” might be easier to maintain, but state governments aren’t any less susceptible to corruption, and a corrupt state government isn’t any better (and might actually be worse) than a partially corrupt federal government.  Without federal oversight, who would control state regulators?  No, that just devolves the problem to a more local (and less restrictive) level.  It doesn’t solve anything, and we’ve already seen what happens when we give too much power and autonomy to the states.

[I]n a global economy where I can access money, sales, ideas, travel, ect…from anywhere, it wouldn’t be long before the very wealthy in this nation to take their much needed money and leave.  Report this week…..in just the 2nd quarter of this year, 4 months, almost 1200 wealthy people turned in their passports and citizenship to leave for more financially expeditious countries. Its in response to the current taxes and what thus administration has put into tax law to come in 2014. That’s a 6x increase over the previous year and is a high double digit increase since 08. The money is leaving……being the highest taxed nation in the industrialized world is gonna kill us. The rest of the world will take all the wealth because they are moving towards the things that made us great, as we run further from them.  U want the programs but you also want to run off the only ones with the ability to fund them?  Then what!  [The wealthy] also pay the highest in property taxes which directly effects you because its your local and states budgets. They also pay the most in sales tax because they buy more, and buy more expensive things. They also pay all of the business taxes that they have, which primarily also goes to your local and state budgets. The wealthy leaving here and the rest of the worlds wealthy staying away, directly effects you! Schools systems are paid for primarily through property taxes on personal and corp property and tangible property going to you local county and state.  Like it or not, you personally benefit from very wealthy people living in your city. If you have kids in schools, its paid for primarily through the property tax dollars of the wealthiest individuals. The biggest homes. All of the huge buildings downtown. Every hotel. All that is local revenue. In Tampa , the hotels downtown are paying about a half a mill each a year in a tangible tax on top of their property tax. I’m sure Chicago is much higher. Same for all the buildings. Its not just income taxes these people pay. Every time that guy buys a vette at the local Chevy dealer, chunks of sales tax goes to your local and state govt. It [a]ffects you.

This suggests a symbiotic relationship between the “haves” and “have nots.”  I’d like to know what the plutocrats and big-business executives have done that could even be remotely defined as mutually beneficial.  Our consumption turns them into billionaires, and they can’t even provide livable wages with healthcare and a sliver of mandatory vacation time.  Their money and assets weren’t creating quality American jobs (if any jobs at all), as evidenced by the enormous number of welfare and SNAP recipients, and neither were they supporting a greater egalitarianism because they weren’t investing in this country.  My standard of living certainly never improved because a plutocrat purchased a Veblen good, and truth be told, their money and assets were parked in an off-shore tax haven, probably only a few thousand miles from some factory where a CEO currently robs American workers by outsourcing jobs to exploited Chinese laborers earning $0.30 a day.  We’re supposed to be afraid of a massive plutocratic exodus—that’ll teach us to tax them!—but what are we really getting from them anyway?  The measly sum we receive from most corporations after all the loopholes are exploited—deferred compensation, carried interest, capital-gains exemptions—while major corporations receive massive subsidies to file their taxes?  If we were really getting all that revenue, we wouldn’t have a financial crisis in the country.  We’d be able to pay for everything we need without right-wing bobbleheads blathering on about austerity measures.  If the super rich think they can get a better deal in Britain or Canada or France or Germany or the Scandinavian countries, I’d like to see them try.   If they’re leaving, they’ll be back after they realize they have to subsidize healthcare and post-secondary education in Norway.   Of course, I think the reality of 40+ million Americans on food stamps represents a greater indictment of the plutocrats than their decision to leave is an ostensible blight on our fiscal policy.

Also, as a percentage of the population, very few people live in wealthy areas buttressed by plutocratic tax revenue.  If I’m living on the south side of Chicago, how do I benefit from tax dollars that are funneled into the Naperville or Skokie school districts?  If the city of Chicago benefited from tax revenues generated in wealthy districts, then the city wouldn’t be closing scores of schools because of funding issues.  We don’t benefit from plutocratic consumption because it does very little for the national economy.  I only benefit from the exclusivity of the gated community if I live there.  One’s children only benefit from fantastic school districts if that’s where they go to school.  I have a better plan: Let’s start by eliminating ZERO and NEGATIVE tax rates for major corporations, close all tax loopholes, enforce the rates currently on the books for EVERY corporation, upgrade corporate-governance laws that place an upper bound on compensation, regulate both rent-seeking activity and financial instruments, tax heavily speculative income, and make it a federal crime to off-shore funds and outsource jobs.

But no matter what the plutocrats decide to do with their wealth, the fact that nearly 20 percent of the nation’s citizens will earn more from welfare than the salary of the average teacher can be counted among the latest American tragedies.

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ECONOMICS, POLITICS

Adam Smith: The World’s Greatest Critic of Libertarianism?

One could argue a correlation exists between the conservative outcry for austerity and corporate tax avoidance.  It’s a simple idea: if the United States generated more revenue, the current recession wouldn’t be nearly as acute and the vertiginous arguments whirling around the issue of Spending—yes, with a capital ‘S’—would be rendered, for the most part, moot.  Is creative-but-legal tax dodging evidence of a certain moral slippage, or is it, as libertarians would have us believe, some exercise of one’s independence, a reification of Darwinian economic superiority within a disturbingly mountainous socioeconomic landscape?  If Apple can avoid paying its fair share of taxes and monster corporations like Pepco and GE (among many others) can enjoy negative tax rates of 508 and 4,737 million dollars, respectively, is it unreasonable to assume others might feel entitled (or even compelled) to pursue a similar path?  Isn’t the drive to pay the least amount of taxes, in a certain sense, representative of the other side of the socialist coin?  Imagine a company will pay its workers $10 an hour for eight hours of work, but it will not pay a penny more beyond that eight-hour limit.  It’s not difficult to conclude that every employee will work as little as possible to earn the daily wage.  We might model this behavior with, say, a crude function like

f(x) = -x^3(x-n)^{-1}

(where x – n > 0) , which describes employees trying to earn the full wage as close to n hours as possible—but without ever “going over the limit.”

[Aside: We wouldn’t use this function, however, if the maximum rate could only be achieved at precisely eight hours (i.e., n = 8); that is, imagine you lost ten dollars for clocking out even one second before the 480-minute limit (i.e., x = 8).  At that point, everyone would be standing around waiting to punch the clock at precisely the eight-hour mark, yet our function never gets there: 

\lim_{x\rightarrow8}f(x)=\infty

This socialist design, so we’re told, quells incentives to work, creating a climate where laborers try to gain as much as they can while expending the least amount of effort. But doesn’t that concept represent the underbelly of Adam Smith’s economic theory—specifically, the “invisible hand”?  To wit, from his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations:

Every individual….generally neither intends to promote the public interest, nor knows how much he is promoting it … He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.

So, if we’re being honest, shouldn’t we defenestrate—or, at least, repackage—capitalism when self-interest fails to buttress a utilitarian end? After all, that was Smith’s glorious utopia: a burgeoning collective as an outgrowth of discrete moments of tendentious market exchange, not the unbounded ascension of the autonomous billionaire to the exclusion and detriment of all else.  There would seem to be a palpable difference between exchanging for the collective and exchanging that benefits the collective.  True socialism rests in the former description, progressivism the latter.  We should wish to reinvent the current state of capitalism toward progressive ends, but, instead, we apply the convenient dysphemism of “socialism” to reference the self-interests of the less affluent, even though that limiting case still falls within the bounds of Smith’s argument. Why do libertarians lean toward such a conceit?  Because they are predisposed, for whatever reason, to equate baleful “self-interest” with welfare and entitlement programs rather than extending the concept, as we should, to yachts and tax avoidance and high-priced consumption and speculative income and rent-seeking behavior, activities which (1) do not create goods or services for consumption and (2) enjoy very restrictive and localized benefits.

The wide chasm of income inequality is—and continues to be—much “worse for society.”  In a very real sense, then, the greatest critic of the libertarian platform resides not in the progressive ideology of the New Deal or neo-Keynesian theory but with Adam Smith, the socioeconomic lodestar for me-first capitalists.

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POLITICS

Schrödinger’s Ca(ndida)t(e)

Full disclosure: I have a problem with Mitt Romney.  Yes, I disagree with his policies—in all their mercurial guises—but I take specific (though not exclusive) exception to the way in which he has managed his campaign strategy.  Romney moved so far to the right in an effort to win the nomination only to realize (in a panic, no less) he could never win the election by standing on an unabashed version of the GOP platform.  The solution? Blithely sprint toward the center (Clinton’s “moderate Mitt”), away from both his catalogue of previously-held positions and the pointed demagoguery that bought him—er, won him—the nomination.  But that’s profoundly the point.  If we could, metaphorically speaking, peek into a Schrödinger-style “political box,” we’d see four discernible Mitt Romneys: the winner of the GOP debates; the governor of MA who debated Ted Kennedy; the heartless business shark of Bain Capital; and the fumbling, hot mess we’ve seen in the last few weeks. And like “Schrödinger’s cat,” it is impossible to locate Mitt’s political position. I can’t decide what angers me more: Mitt’s shameless tergiversations (using both senses of that word) or GOP sheep who recognize Mitt’s etch-a-sketch tactics and support him anyway—simply because he’s “not Obama.” (I guess there exists an impossible third category: the GOP votary who sees Romney as a solidly-consistent economic wonk, but that, like unicorns and Santa Claus, is too laughable to address.)

Here’s the quantum-physics translation: Romney will say anything to get elected, he has no core, and he is unreliable. We didn’t even need to have last night’s debate. Mitt would have been just as easily served by sending an affidavit to Bob Schieffer certifying that he supported Obama’s entire foreign-policy position. Here’s the thing: Mitt has made a purposeful political calculation; he assumes the vast majority of Americans pay zero attention to the details of the quotidian political sludge, so when he stands behind the dais, for example, he can “reinvent” himself without risking significant political fallout. And he was—is—correct. Those of us who follow this stuff understand the game he’s playing, but for “undecided” voters and card-carrying Republicans who only watch (part of) the debates, who don’t see the GOP consistently walking-back statements he makes in speeches, who don’t follow policy wonks, who don’t track the inconsistencies of his claims, well, in two-minute snippets, Mitt Romney looks like a somewhat reasonable alternative to the president.  Oh, and he’s a billionaire, as the logic goes, so he MUST be a good choice for the economy, right?

Romney could have lost the election last night if—during the tough-on-China portion of the debate—Obama slapped him with the Sensata outsourcing (compliments of, yep, Bain Capital), a domestic-manufacturing debacle that’s happening, literally, right now in Freeport, IL.  An entire factory is being stripped and shipped to China—the workers forced to train their Chinese replacements, jobs lost and pensions decimated, an entire working-class town now endangered because unemployed factory workers can no longer support a local system dependent upon that income. (By the way, Sensata workers generated record-level profits last year—over 500 million dollars; so, no, this isn’t about eliminating inefficiency or halting a drain on resources or upgrading human capital.)  But here’s the best part: “Ol’ moderate Mitt” owns eight million in Sensata stock, and he stands to make a lot of money on the deal. (“Tough on China, Mr. Romney? What, does Sensata involve a “blind trust,” too? I guess we can add those unemployed factory workers to your “47 percent.”)

It is tragic, though, most voters know nothing of our little Midwestern pocket of manufacturing dystopia—even though the “Ed Show” did a live, on-location exposé last Friday night —because, as Mitt (or one of his campaign strategists) has accurately calibrated, most Americans either aren’t paying attention or, worse, just don’t care which Romney is “in the box” as long as he wins in November.

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ECONOMICS, LAW, PHILOSOPHY, POLITICS

Why I Am Not a Libertarian

“Decisions concerning private property and associations should in a free society be unhindered. As a consequence, some associations will discriminate….A free society will abide unofficial, private discrimination—even when that means allowing hate-filled groups to exclude people based on the color of their skin.” ~ Rand Paul (letter to the editor of the Bowling Green Daily News—May 2002)

Let’s be clear: Rand Paul thinks business owners should be able to discriminate (i.e., “install racist policies”) against minorities in the name of private-property rights. Such discrimination represents, for Paul, a certain level of acceptable noise within the libertarian system. In a hand-waving defense of libertarianism, a friend suggested we cannot “legislate morality.” So true. With respect to secular government—as opposed to, say, a theocracy—natural law is perforce reduced to a set of accepted coeval standards. So, no, we can’t (constitutionally) legislate morality—although the history of constitutional amendments and the rulings of the SCOTUS, to a certain degree, suggest something of a moral touchstone—but we can legislate against premeditated, reckless, or immoral behaviors that negatively impact others. Refusing to serve African Americans within one’s privately-owned establishment, for example, is hardly synonymous with refusing to have an eclectic group of friends with whom you associate, and wielding the Constitution to defend exclusively white lunch counters as a defense against generic racist policies even fails an objective logic test (i.e., ignoratio elenchi).

Because we cannot convince people to “live morally” with respect to others (i.e., the notion that choosing the moral path is, ipso facto, the reward for moral decision-making) is the reason we need legislation, “red lines,” to use Netanyahu’s familiar phrase, that regulate such behavior. Are you free to commit murder? Drive drunk? Run a stop sign? Cheat on your tax returns? Beat your children? Assist a suicide (in some states)? Bet against doomed investments actively sold to consumers? Sure you are, but the empowerment that emerges from individual autonomy will never stand as a justification for immorality. This is why we have laws in this country, a legislative feature of our democracy that implies the moral sentence of ignominy is simply insufficient to dissuade free moral agents from engaging in harmful behavior. If Goldman Sachs can generate 500 billion dollars by screwing a number of gullible clients, they will. And the shame they might feel as a result of their immoral-but-legal behavior—if they felt any at all—would be quickly washed away by the euphoric wave of, well, 500 billion dollars. This is when government needs to outline clear legislative restrictions.

Even in a more general sense, though, there’s something profoundly disturbing about the entire libertarian project, something akin to the infantile absurdity of “object permanence” writ large upon the socio-macroeconomic landscape. Libertarians wish to eliminate the conscious recognition of significant social and economic inequalities by placing severely opaque, ambiguous, and patriotic-looking objects—things like “individual liberty,” “property,” “private ownership,” and, worse, constitutional “originalism”—in front of, as it were, the objects that should truly demand our collective attention: poverty, the insidiousness of plutocratic rule, wage stagnation, corporate avarice, discrimination, economic and opportunistic inequality, and the insufficiency of our secondary educational system. Put a different way, libertarianism is that Brobdingnagian picture of some Parisian locale—the kind of deceptive photomontage used by, say, inner-city street vendors—where visitors can pretend their fatuous photographic moment temporarily transports them to a different reality, a vision far more pleasant than the project-ridden dystopia conveniently hidden behind the photo.

Such a tactic is even more embarrassing than the historically disingenuous attempts to distract us with those impossibly shiny objects—notions of the “American Dream” and “economic mobility”—that are waved at us by the trickle-down one-percenters, as if capitalizing the ‘a’ and ‘d’ increases the viability of such an ideal for the vast majority of Americans within the current economic infrastructure. Begin a discussion concerning disadvantaged families living in depressed areas without any real opportunity for economic mobility—an issue directly related to the sizable (and exponential) income-inequality gap—and the libertarian response is always the same, tired refrain:

“No one is forcing them to live there!”
“Other people have escaped, so why can’t they?!”
“They’re struggling because they haven’t taken responsibility for their lives!”

(That last statement sounds awfully familiar, Mr. Romney.) Such unacceptably tenuous, eyebrow-raising “arguments” really suggest an “object permanence” metaphor. If we shift our focus away from inequality and inequality of opportunity toward notions of “self-empowerment,” “freedom,” and “God-given autonomy,” as the libertarian project would have us do, then we replace genuine causation (imposed inequality) with a specious one (i.e., liberty—read: moral bankruptcy that results in substandard living as a function of one’s free, non-determined choices). That slight-of-hand moment, my friends, the moment where we replace the real cause of inequality with a weakly-constructed one, represents the seamy underbelly of the libertarian project, an ideology clothed in patriotic garb and painted with roll-up-your-sleeves, red-white-and-blue-sounding slogans that cleverly evoke the American machismo of “manifest destiny.”

This does not, however, represent the worst of libertarianism. The evil of the libertarian experiment resides not only in its desire to subversively enact a sort of bait-and-switch morality on the American people, but also because it models, in a number of abstract ways, the non-genocidal dangers of the National Socialist experiment: a desire to institutionalize public racism and discrimination under the guise of state-facilitated ownership; the individual-as-totalitarian state; rejection of general social contracts in the name of a fascist sense of “liberty”; support for economic internment camps, which replace barbed fences with economic immobility; and an economic “master race” that is fitter—in a fiscally eugenic sense—than the less fortunate and less educated. An insidious project must begin, as it always does, with a popular-yet-specious allure. Libertarianism has chosen the buzzword “liberty.”

To be sure, it is the principal desire of the libertarian project to effectuate a cognitive denial of the true cause(s) of inequality, and libertarianism secures this by suggesting its weakly-constructed alternative (free choice) is the real cause. That is, by effacing genuine causes of inequality, libertarianism is able to substitute its own prescriptions for inequality (e.g., indolence, lack of an entrepreneurial spirit, entitlement mindset, socialism, poor decision-making, etc.). In this way, libertarians have found a way to reject the very existence of inequality itself—and here is the important part—by claiming its presence within society is nothing more than a manifestation (and, with respect to the penury, an agglomeration) of individual decisions to be poor and disadvantaged. In other words, if inequality is simply a “decision to be unequal,” then even (the visual evidence of) inequality can be dismissed by the very libertarian dogma (i.e., free will) that reifies it.

How convenient.

And when libertarians respond by arguing that inequality IS, in fact, a product of free choice, then that statement, ipso facto, represents the vindication of my argument; it becomes the very evidence that libertarians—like ignorant viewers flipping through someone’s old vacation photos—believe the faux reality of the Parisian photomontage means we’re really in Paris. That is the immorality—the unshirted evil—of libertarianism, that the “solution” to the problem of inequity merely resides in its cause: an individual’s free will.

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ECONOMICS, MATHEMATICS, POLITICS

How to save the working and middle classes

I’ve been studying more macroeconomics lately, and I figured I would take a shot at proposing a tentative solution to the income-inequality gap—though the concept really emerges from a series of microeconomic shifts.  It is an idea, in more general terms, I’ve suggested to various friends and family members over the last few months: Close all the corporate loopholes, raise capital-gains taxes, and funnel the additional revenue back into companies replete with middle-class workers and laborers in the form of higher (real) wages. Is this a socialist, rob-peter-to-pay-paul strategy?

No, and here’s why.

Increasing aggregate demand (AD) usually translates into increased production costs because wages increase (either in the form of OT or hiring additional workers); this forces companies to raise prices, which means the additional costs are transferred to the consumer. This is essentially what happens in the situation here.

photo [3]

Within the standard LRAS/SRAS model (below), demand then shrinks, prices subsequently fall, and the price-output equilibrium is restored. Increased output under these parameters, then, can only be a temporary phenomenon. But what if the additional costs are covered by the hike in taxes on capital gains (i.e., prices remain sticky)?

photo [1]

The consumer is spared the burden of increased prices—so demand grows (AD to ADs curve) without rebounding—and wages rise for the average worker. As productivity rises (Y* to Yw)—a function of increased real wages—the company actually earns MORE money than it would have at “full” employment (i.e., at Y*). Joe CEO benefits because his company earns more money—the area of P*(Yw – Y*)—stretching his supply-demand curves to a new, better equilibrium, even though he’s initially taxed at a higher rate.  This cycle could, theoretically, continue forever IF we had unlimited stimuli that could shift the AD and LRAS curves to the right ad infinitum.

photo [2]

Such a strategy will help the overall economy: GDP will increase as productivity increases, consumption will increase (as will tax revenue), and unemployment will decrease because a company will eventually have to hire more workers. (There will be an upper bound for the productivity of Y* workers.) This will create a staggered increase in the wage-price ratio; in fact, if adjusted correctly, wages could double the rate of price increases, so real wages will grow. If a company uses price hikes—that is, P* shifts upward to Pw+n—to counterbalance increased labor output (Yw+n above) within a stimulus shift to AD, there will be a surplus of inventory, and the company is at risk for a loss.  (The shift to the new equilibrium through decreased demand is denoted by the shaded right triangle.)  But it is important to note that a company can STILL earn a profit on the surplus labor and inventory at Yw+iff

{Y}w(({P}w+n)-P^*)>{[(({Y}w+n)-{Y}w)(({P}w+n)+{P}^*)]}2^{-1}

Assume such a profit exists.  (If it doesn’t, then there was a miscalculation in trying to stretch output to Yw+n.)  We can use that profit to subsidize the temporary drag of the (Yw+n)-labor surplus, and if another stimulus is introduced, we will shift the demand curve again (from ADw+n to the right) and (1) eliminate the excess inventory at a maximum price—in fact, the additional revenue would be the result of [((Pw+n) – P*)((Yw+n) – Yw)]/2)—(2) allow a maximization of productivity (at Yw+n) by increasing wages while keeping prices sticky, and (3) create another revenue bump, which will equal

[(Pw+n)((Yw+n)-(Yw))]-[Yw((Pw+n)-P^*)]

Of course, we don’t need to manage the costs inherent in the increased Yw+n output; that is, as AD shifts, we could simply raise prices at Yw and maximize revenue that way—without having to deduct the costs of labor drag and inventory surplus.  This would be especially effective if output was maximized at Yw.  (Output would then increase to Yw+n during the next demand shift—with sticky prices at Pw+n—using the revenue gains from raising prices.)  In any case, this general cycle would continue until a new cost-demand equilibrium is reached—say, when total aggregate demand reaches an upper bound—and that could be a significant difference from the original price-output equilibrium.

What does this mean? The basic idea is simple: the LRAS, SRAS (long-run and short-run aggregate supplies), and demand curves shift over time to new (and higher) equilibria, stimulating business growth and minimizing inflationary measures with respect to real wages.  The best part is that it’s a win-win-win-win for everyone involved: the individual worker (higher real wage), the CEO (increased profits), the average citizen (benefiting from GDP growth), and the government (increased income-tax revenue and lower unemployment).  We can begin to close the gap if the rate of real-wage growth outpaces both the modest inflationary shifts and productivity-related profits, a likely possibility if the capital-gains rate is high enough with respect to the number of wages raised.

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