I’m always a little befuddled by economics, as what seems to be apparent never is by the time the eggheads are done discussing it. Some things stick in my head, and no amount of lecturing from the right wing on “Econ 101” will dislodge them.
This is very, very basic. It’s where I’m at. I haven’t read Adam Smith, but did read Milton Friedman way back when, and struggled through Econ 101, 102 and 103 in college, though I hated it. (It seemed as though nothing tied in to the way the world really worked, though I surely didn’t understand well how it worked.) Oh, and I recently read a book, The New Golden Age, by Ravi Batra, but that seemed more crystal ball stuff than bonehead econ. What I know about econ I have picked up over the years – certain things that seem true stick with me, things that don’t make sense don’t stick with me.
Here are the things that stick in my head and will not dislodge:
Labor is the source of all wealth. Wall Street has gone broke playing with funny money – financial products that don’t in and of themselves create wealth. They allocate money, often putting it where it can do the most good. That’s an important function, but not wealth creation. Only labor creates wealth.
There are many types of labor, and many new tools for labor to use in the creative process, and creative people have done wonders in opening up the world and making labor more efficient and productive. Bill Gates and Steve Jobs deserve every penny of their wealth, but it’s still about labor. In the end, we convert natural resources to commodities, and commodities to products. If you follow natural resources, you’ll see them work their way through the economy with value added at many points … by labor. That’s wealth creation.
Before I am ambushed, investment is critically important in enabling labor. Capital is stored wealth created by labor. It constantly needs to be recycled, but does not in and of itself create wealth.
Demand drives the economy. Wages drive demand. Since 1980, we’ve concentrated on supply, and have concentrated tax breaks in the top brackets thinking that they would invest and create products. Labor productivity has increased since 1980, but wages have not kept up with productivity. Consequently, demand has suffered. To keep up, consumers tapped credit lines, and borrowed on their houses to boot, draining their best form of savings. Now many of them are tapped out. More supply won’t help us now. We need workers earning wages to recover.
I guess I’m a demand-sider.
Most business people are short-sighted, and cannot see that if workers don’t prosper, there aren’t enough consumers to buy their products. The Big Three bailout should be a no-brainer.
High marginal tax rates don’t hurt, might even help. The gospel according to the right wing is that the private sector is the wealth-creation machine, and that taxes are only a drag on that machine. Ergo, higher taxes yield slower growth. The problem with their theory is that we experienced steady and stable growth (fewer bubbles) in the period 1940-1980, when marginal rates were very high – as high as 90% on the equivalent of income over $3 million. They don’t explain that.
Here’s how we did it: 1) We tax wealthy people at high rates, but encourage them to avoid high marginal rates by making certain tax-favored investments – tax free bonds, intangible drilling costs, for example. We also gave them an investment tax credit if they bought and held equipment. Secondly, we double-taxed dividends from corporations, which encouraged investors to leave capital in companies, cashing out with capital gains (often taxed at favorable rates) instead. In a way, it was an industrial policy.
It all seemed to work. We had a thriving domestic economy with a strong manufacturing base. It’s heresy, I know, but higher taxes drive investment. Re-investment of wealth, coupled with high wages, make a healthy economy.
Since the era of tax cuts, we have had periods of growth, but tax cuts are often followed by bubbles. We are currently in the ebb phase of the Reagan era and all it has given us – tapped out savings, monstrous debt, outsourcing, a shrinking middle class, increased poverty, and extremes of wealth. We were better off in 1979 than now.
Did I just say that high marginal tax rates prevent bubbles and boom and bust? I think I did.
There’s nothing wrong with protecting markets. South Korea is often mentioned as a poster child for capitalism, and it is indeed a wealthy country. It’s has also been protectionist during its growth phase. Likewise Japan – there would be no Toyota without Japanese protectionism. The United States, throughout history, had very high tariffs, which allowed our domestic industries to grow. We should allow the same for Mexico, Central and South America – allow them to protect and grow their own industry, and then when they are healthy and on an even keel with us, drop those barriers. As it is, free trade between us and developing countries merely allows us to have cheap resources while we export American jobs. That’s a bad thing. (Free trade between developed countries seems to work quite well.)
I’m not yet at a point where I can put my economic theories in book form – when I am, I will approach Marvel Comics.
Piece of Mindful 
How long can a “healthy economy” be measured in growth, before finite resources run out, shutting down the entire system? A new model prioritizing sustainability might be more prudent in a world of increasing population, technology, productivity, and declining natural resources. We need a new book.
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Economic theories abound. Any policies that retain/increase our leadership in per capita GDP should be celebrated.
I’ve linked our status via Wiki.
Funny how freedom relates to income, and Cuba is missing a rating.
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I’m going to have another one “waiting moderation”.
But anyway, found these comparisons between Marx and Smith at Wiki on the value of labor.
http://en.wikipedia.org/wiki/Labour_theory_of_value
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Ladybug, have you read “Deep Economy” by Bill McKibben? He makes your same point – that growth only improves the human condition up to a certain point, after which it actually causes a decline in our standard of living.
http://www.billmckibben.com/
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>>>>Labor is the source of all wealth.
I’ll agree with this. But the boys on Wall Street claim they are laboring and creating wealth.
>>>>Demand drives the economy. Wages drive demand.
One should keep an eye on both supply and demand. If we find a big gusher of oil, supply is increased, the price falls, and we are better off economically. To talk of “supply side” is just using a term.
—-Labor productivity has increased since 1980, but wages have not kept up with productivity.—-
This is a bit misleading. Wages have kept up with most productivity measures but have been swamped by the huge increase in health and housing costs since 1980.
—-Most business people are short-sighted, and cannot see that if workers don’t prosper, there aren’t enough consumers to buy their products.—-
I suppose this should trigger a lecture on the difference between micro economics and macro economics. Things work best when there is a fit between wages and productivity.
>>>>High marginal tax rates don’t hurt, might even help.
There is something to this, but I don’t agree with your following analysis. 1940-80 wasn’t that smooth.
>>>>There’s nothing wrong with protecting markets.
This is a “sort of” proposition. If the protected industry will eventually be world class, it seems to work. But if you are forever protecting a loser, not so much.
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They are busy creating new financial instruments and then leveraging them beyond the pale – not new wealth, but illusory wealth, typical of a bubble economy.
While it seems like a chicken-egg argument, fact is you can produce all you want, but if people don’t have the wages to buy what you produce, you don’t sell. Just as labor creates wealth, compensation for labor also creates demand, which drives supply.
Never is. But I’m talking about extreme bubbles such as the late 1990’s and the current situation. See if you can find post-depression parallels.
Regarding productivity and wages, I’ve seen graphs that say many things, and most economists would argue that wages have kept up. However, a curious thing has happened in the past thirty years – demand has been supported by credit – plastic and drawing down on housing appreciation. Why?
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“Cheap” (credit) money substituted for wage gains. Track minimum wage since Carter, it’s worth over $12/hr now adjusted for inflation, but only paying half that.
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Just a few comments:
First I don’t know how you can understand Friedman if you haven’t read Smith. (Hell, I don’t know how you can understand Marx if you haven’t read Smith.)
Labor is not the source of all wealth. Let’s look at it in terms of agriculture – with no cow there is no milk even if there are lots of milkers. In other words, wealth is created by combining labor, natural resources, and capital. If labor gets too expensive as a production input it is replaced by capital – like milking machines – where the marginal efficiency of labor goes way up and renders all of those manual milkers obsolete. The reality is that all three input categories are required to create wealth.
If you’re defining capital as money you have it wrong. Money is simply a storage device for capital – one of many.
Supply v Demand.
Supply siders theorize that demand can be created by increasing production through the deployment of capital. In doing so they create wages which spurs demand. Demand side, or Keynesian economics, posits that demand can be spurred by government spending to create jobs. Keynes argued that classical economics was wrong and even if supply and demand are at equilibrium there still could be high unemployment – which dampens demand. Hence, he believed, that only government intervention by creating work could lift the economy to equilibrium. It works over the short term but isn’t sustainable without creating either mind numbing debt or inflation. The Carter years were the ultimate outcome of demand side economics.
Supply side economics has obvious limits as well. If too much capital is deployed then more goods than services will eventually push the market out of equilibrium – like now. It also can have the effect of causing huge fiscal deficits if tax revenues don’t match expenditures by trying to pump the supply side of the equation.
Like I said, both can succeed and both can fail at some point.
But I’ll assert this, if demand is constrained by wages supply will adjust downward and capital will become less valuable (look at the stock market for example.) In a market economy it’s self-correcting. The problem with too much government intervention is that is almost impossible for a centralized mechanism to efficiently allocate resources by tweaking either supply or demand.
High marginal tax rates.
It’s sophomoric to assert that they don’t hurt the economy. What would happen if the top marginal tax rate was 100%? The question is, and there are too many other variables to answer it, is at what level marginal tax rates are optimal. But the reason that history is a poor guide is that there was vast amounts of Keynesian spending going on in the 50’s through the 80’s (think of the interstate system and defense spending.) We simply cannot know. That said, the issue of fairness and equity will always be with us.
People serious about the study of economics know that both are right and both are wrong inasmuch as both have limits.
Protecting markets.
Refer to Adam Smith. The theory of comparative advantage is still the most compelling argument for open trade policies – of which we have very little.
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I didn’t say I understood Friedman. My understanding of economics in general is very limited. Hence, my baseline assumptions, which you are addressing.
Regarding labor, it precedes capital, and natural resources are of no use without it. You’re certainly more correct than I about this, though.
I’m glad you chimed in on this. What your wrote there is what I wanted to hear. I’m only going to add one thing – we can direct capital with high marginal tax rates and favored deductions and credits. You may not like that, you may not like having an industrial policy along those lines, but I do.
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No, I don’t like industrial policy because it favors the already rich, it’s antithetical to liberty, and encourages corporatism.
But labor cannot precede natural resources. Think about a cave man. He could not build a spear without a stick and the spear couldn’t have been build without his labor. Once the spear is built it is capital. So I would agree that natural resources and labor precede capital. But once the capital is created it becomes valuable in creating wealth. The ability for man to hunt efficiently has then had a quantum leap and that capital becomes integral to the economics of wealth.
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Good notes by Dave Budge.
I guess I was trained by Marxist economists, who state that capital is fixed and labor is variable. If milking machines make labor more productive, it is because someone labored to make the milking machines, and thus their labor deserves the credit. We can chase this a little farther and ask why Mexican auto mechanics do the same job but are paid less than US auto mechanics. (US mechanics serve a higher paid clientele, thus their services are more valuable. I find this an argument in favor of “a rising tide raises all boats.”)
>>>>But I’m talking about extreme bubbles such as the late 1990’s and the current situation. See if you can find post-depression parallels.
Every age thinks they have things the worst. Truman went out of office on a low economic note. There was a big turn down in 1966, and the 1973 onward recession set lows we haven’t seen since.
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You’ve got it exactly backwards. The constant is downward pressure on wages exerted by those who come to control capital. Mexican wages are lower, therefore capital rushes to employ them. If Mexican wages start rising, capital will head to Peru or China or Bangladesh. The key to stopping this downward spiral is to protect markets and jobs. But capital, which exerts more influence on government than labor, and also employs intellectuals to justify its behavior, won’t allow this. Labor, the source of wealth, takes it in the shorts.
Tell me then about the bank closings, massive layoffs, bailouts and loss of major manufacturing companies in the early 1950’s and 1973.
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>>>>Mexican wages are lower, therefore capital rushes to employ them.
Yes and no. I don’t see many Mexican auto mechanics in my area. There still are barriers.
>>>>Tell me then about the bank closings, massive layoffs, bailouts and loss of major manufacturing companies in the early 1950’s and 1973.
We’re still going downward, so I don’t know where it will end, but unemployment in the mid “70’s was worse than what we have now.
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Mexican wages are lower in Mexico, and Ford and others have rushed to build factories down there.
Check this out.
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