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Debunking The Notion That Inequality Wouldn't Impact The Economy

ProudProgressive 2012/02/11 16:19:21
It's always been pretty obvious to me that income inequality can have a disastrous effect on an economy. However, the Right Wing has long tried to pretend that concentrating more and more of the nation's wealth in fewer and fewer hands is meaningless, despite the lessons of history. This "supply side economics" canard was responsible for the Great Depression, the Reagan collapse of 1987 and Bush's Great Recession of 2007 (and 2008 and 2009), but still they push on. Common sense has never been a conservative strong point. Give $1000 to a milionaire and it goes into a hedge fund and generates no economic activity. Give the same $1000 to struggling working people at the lower end of the economic scale and they'll buy food and clothing and books and maybe even go out to a restaurant. That means that the food sellers, the clothing sellers, the book sellers and the restaurant all see increased business and increased profits, and then they hire more people to meet the increased demand. Simple common sense. But here's a better analysis than I could make.

Article excerpt follows:

Debunking The Notion That Inequality Wouldn't Impact The Economy
February 10, 2012
By State of thought

It's been claimed — incorrectly — that overall activity would neither be increased nor diminished by how evenly or unevenly money is distributed within our national economy. According to that line, we'd get the same amount of commerce regardless of whether we have a larger share of the pie held by the wealthy or by the lower and middle classes. "Money is money," or so they say.

Except that in reality, lower average propensity to consume (APC) results from significantly increased real income.1 Who has how much matters because people tend to spend different portions of their income at different levels of wealth. Wealth and income distributions make a significant difference to effective demand. We're not concerned with what people would like to have if they had enough money; we're concerned with what people will spend with the money they're getting. If Warren is a wealthy person and John is a poor person and over time Warren attains a higher share of the available money, total spending — effective demand — generated by those two consumers will drop.

If there's $1,000,000 of total income between the two at time T1 and Warren gets $950,000 while John gets $50,000 and Warren spends 33.33%2 of income to John's 100% of income, then total spending by these two individuals at time T1 will be:

T1: $316,635 + $50,000 = $366,635.00

When income ratios shift and there's an inflation-adjusted $1,000,000 of total income at time T2 and Warren gets $975,000 while John gets $25,000, Warren's spending ratio (APC) will likely have fallen slightly from the previous propensity, but we'll stick with 33.33% for simplicity and understatement. Meanwhile, John can't spend as much as before because John's available funds have dropped. Even if Warren still spends at the same rate — which is unlikely — then total spending would be:

T2: $325,967.50 + $25,000 = $349,967.50

That would be a drop from time T1 to time T2 of $16,667.50 in inflation-adjusted spending. I've picked an arbitrary APC for Warren, but herein we're just showing the rough effect. The dollar values are merely for illustration of the concept. Even if the exact average amount might vary slightly from the $16,667.50 of our illustration, the point remains that there would be a shortfall. With more of the money shifted to those with a lower APC, you get lower consumption which is to say lower effective demand.


Even if total income increases, with enough shift from those who will spend higher percentages of their income to those who will spend lower percentages of their income, total spending can fall. More total wealth does not necessarily translate to more total spending. More total wealth will only increase total spending when distribution among varying APCs (and thus the overall APC) remains sufficiently stable. Having wealthy people is useful; but we need enough money in the hands of average consumers to support that wealth. Concentrate too much of the available wealth into too few hands and you get less ability to consume which means less effective demand.

Confronted with that reality, the "money is money" crowd rely on APC's flip-side, average propensity to save (APS). They're two sides of the same coin. As APC drops, APS rises. Our hypothetical Warren has a lower propensity to consume but a higher propensity to save. Some try to claim that the reduction in APC would be balanced out in terms of economic activity by the corresponding increase in APS. Unfortunately, that would only hold true in a closed economy with no outlets for investment other than productive investments (such as business start-ups and expansions). We're not a closed economy, so even when increasing APS does translate the savings into productive investment, those investments need not necessarily be domestic. For the United States, given that foreign returns are out-pacing domestic returns from such investments, much of the savings naturally translates into foreign investment which does absolutely nothing to balance out the reduction of consumption in our domestic economy.

Even if we were a closed economy, we have a variety of investment options beyond just productive business investments alone. For instance, Warren might buy gold ETF shares from Glenn who might then use the proceeds to speculate on the British Pound or perhaps to buy Treasuries.3 A dollar of savings lacks any certainty whatsoever that it would spur even a penny of business investment. Particularly when many businesses are avoiding expansion because they already have more than enough capacity to meet projected demand for their goods and services for the next several years, we find ourselves in a situation where there is both a shortage of effective demand from consumption and a shortage of available productive investment options due to insufficient need to expand caused by that same shortage of effective demand.

This all matters because we need a certain level of effective demand in order to sustain full employment. Without sufficient consumption, businesses need fewer workers. With less demand for labor, wages fall. Dropping wages and employment both further depress the nation's ability to consume, leading to yet more unemployment and dropping wages. With too much of our wealth concentrated at the top, we can't support as much wealth. That's bad for rich and poor alike. As Franklin D. Roosevelt said, "we all go up, or else we all go down, as one people." We as Americans believe in promoting wealth and affluence. But to do so effectively, we must have enough of a strong base underneath the top to support a growing top. To have steadily growing affluence, we must mitigate the divergence of our most wealthy from our lower and middle classes.

Notes:

1. When the shift is initially happening, we refer to the marginal propensity to consume (MPC), essentially the rate of change in APC. Herein, we're not concerned with the rate of change but rather just the implications of such a change from one state of APC at one point in time to another state of APC at a second point in time.

2. The 33.33% and 100% value are arbitrary representations of the fact that higher income consumers spend less of their total income than lower-income consumers. The actual observed multiplier for various income levels may vary. What's important here is not the specific percentages but rather the impact of the difference in percentages.

3. Treasuries arguably could indirectly contribute to productive domestic investment when the government spends within the economy. Likewise, the gold seller could use the proceeds to invest domestically. However, neither of these have the direct impact on domestic economic activity seen from domestic consumption or direct domestic business investment. They're not a clear proxy for domestic activity. They're a case where savings may or may not translate to investment.

Read More: http://www.addictinginfo.org/2012/02/10/debunking-...

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Opinions

  • Reichstolz 2012/02/11 16:27:22
    Reichstolz
    Once again your premise is false.
    "Give $1000 to a milionaire and it goes into a hedge fund and generates no economic activity. Give the same $1000 to struggling working people at the lower end of the economic scale and they'll buy food and clothing and books and maybe even go out to a restaurant."
    In order to give the government must first take. That is the fallacy of keynesian economics. The economy is not a fixed sum, it is ever expanding and contracting. If government gives, it first must destroy a productive entity in the economy. Whether that destruction be confiscation, monetary manipulation, or borrowing, all destructive forces in production. Moving the same dollar from one pocket to another, is not stimulation.
  • ProudPr... Reichstolz 2012/02/11 21:04:03
    ProudProgressive
    Taxes do not "destroy a productive entity". Taxes enable that entity to be productive. How productive would a business be if we had no interstate highways or no internet or no postal service? How long would a business survive in this country if we had no army and no navy and no air force?

    As for Keynes, wasn't getting this country out of the Great Depression (caused by supply side economics) and ushering in the greatest sustained prosperity (until Reagan burned the economy down) in American history enough for you???
  • Reichstolz ProudPr... 2012/02/12 01:49:05
    Reichstolz
    How does confiscation enable productivity? You are correct government has a constitutional role to protect liberty, nothing more.
    Keynes as with obamanomics lengthened the depression and recession respectively. The greater the interference into the market the longer the cycle.
  • 3003573 Reichstolz 2012/02/12 14:33:23
  • Reichstolz 3003573 2012/02/12 14:48:49
    Reichstolz
    "Actually, if you've ever read the Constitution, government has a lot more responsibilities than that. "- I would contend you have not read the constitution.

    "Everything the government does costs money."- you are correct and 90% of what government currently spends money on is not directed for them to do, in the constitution.

    "Even if what the government does for a person only costs them one dollar"-the government is not given the power to "DO" anything for its citizens.

    "As it stands right now, people aren't paying enough taxes, because the government doesn't have enough money (hence the budget deficit) "- the government is spending 1/3rd more than what it is confiscating, there is no possible way to raise taxes enough to cover the deficit.

    "since tax rates are at unprecedentedly historically low levels across the board."- and revenues are also at a stable rate 22% of GDP

    It is obvious you have no grasp of what government's constitutional role is, nor do you understand basic economics.
  • 3003573 Reichstolz 2012/02/12 15:55:22
  • Reichstolz 3003573 2012/02/12 16:01:28
    Reichstolz
    The reason for the "surplus" , which is a misnomer anyway, government does not budget unfunded liabilities, was due to economic expansion not increased taxes.

    Regarding Article 1 section 8.
    Please tell me where it gives government the power to do one single thing "FOR" you. That article enumerated what the government should do for itself to protect its citizens, raise money to fun that protection, present itself to the world, not one word to give government the power to do anything for you.
  • 3003573 Reichstolz 2012/02/12 16:12:04
  • Reichstolz 3003573 2012/02/12 17:19:15
    Reichstolz
    Those are not directives to do something for YOU.
  • 3003573 Reichstolz 2012/02/15 03:06:47
  • Reichstolz 3003573 2012/02/15 04:06:48
    Reichstolz
    Actually no they are functions of the government that provide just as much for government as they do for you.
    Government has yet to invent a vaccine.
  • 3003573 Reichstolz 2012/02/16 02:12:04
  • Reichstolz 3003573 2012/02/16 14:46:42
    Reichstolz
    They may have provided some funding but government invents nothing.
    "In this study, we have used the term PSRI in a broad sense to include all universities, research hospitals, nonprofit research institutes, "- hardly worth mentioning if your definition is that broad.
  • 3003573 Reichstolz 2012/02/18 03:53:06
  • Reichstolz 3003573 2012/02/18 14:43:02
    Reichstolz
    Sure!
  • 3003573 Reichstolz 2012/02/18 21:50:57
  • Reichstolz 3003573 2012/02/18 22:32:42
    Reichstolz
    The issue is a federal mandate, states are allowed. You do not see a federal mandate for car insurance, but it is perfectly acceptable for states to do so. An individual can leave a state to find regulations more to their liking. When the federal government over steps its constitutional role the only option for citizens is to protest the over reach. Which the ACA clearly is.

    It is federal government clearly trampling the first amendment.
  • 3003573 Reichstolz 2012/02/19 00:44:38
  • Reichstolz 3003573 2012/02/19 05:07:10
    Reichstolz
    You are correct they cannot infringe on the practice of religion. Mandating conscience is a strike against the first amendment.
  • 3003573 Reichstolz 2012/02/19 05:26:39
  • Reichstolz 3003573 2012/02/19 18:02:56
    Reichstolz
    "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."

    The mandate "prohibits the free exercise thereof ." If government can dictate which parts of your religion you can abide by then you have no freedom of religion. Hence, mandating conscience.
  • 3003573 Reichstolz 2012/02/19 18:34:40 (edited)
  • Reichstolz 3003573 2012/02/19 23:43:06
    Reichstolz
    You mistake health insurance as a right, which it is not.
  • 3003573 Reichstolz 2012/02/20 01:31:38
  • Reichstolz 3003573 2012/02/20 14:41:48
    Reichstolz
    Wrong, please show me in any federal document beside the unconstitutional ACA that health care is a right.
    You as with all the ignorant liberals project rights were none are to be found. Good luck, it doesn't work to well when you run out of other people's money.
  • 3003573 Reichstolz 2012/02/20 19:42:50
  • Reichstolz 3003573 2012/02/21 02:27:11
    Reichstolz
    First- you omitted the word FEDERAL

    Second- the AMA represents less than 20% of practicing physicians in the nation.

    Third- there is no right to health insurance, it is a product to be purchased, not something to be granted.

    Last I checked the WHO wasn't a governing body anywhere in the world.
  • 3003573 Reichstolz 2012/02/21 03:21:50
  • Reichstolz 3003573 2012/02/21 14:57:08
    Reichstolz
    We are not governed by an international body, hence the term FEDERAL.

    The WHO has no authority over sovereign law, hence not a "governing" body.

    "While membership has shrunk since the 1980s, the group still describes itself as the "house of medicine" with a membership of about 236,000 physicians from a wide swath of specialties-- but 30% of them are students, who don't pay dues, and only about 50% are practicing physicians....

    there are about 1 million physicians in the USA in 2009. The AMA has about 125,000 active physicians on its rolls. That's about 1/8th of the total . "
  • 3003573 Reichstolz 2012/02/21 22:24:18
  • Reichstolz 3003573 2012/02/22 01:40:22
    Reichstolz
    "including residents, students, retired practitioners" -which account for roughly 50%.

    By the way I served on the California Medical Board for 4 years.
  • 3003573 Reichstolz 2012/02/22 02:20:20
  • Reichstolz 3003573 2012/02/22 02:47:00
    Reichstolz
    Once again you neglect retired practitioners. The AMA as an organization is nothing more than a waste of time for an ACTIVE practitioner.

    I find your willful ignorance amusing. Thank you for the laugh.
  • 3003573 Reichstolz 2012/02/22 03:25:19
  • Reichstolz 3003573 2012/02/22 14:54:07
    Reichstolz
    They are political puppets.
  • 3003573 Reichstolz 2012/02/22 17:52:14
  • Reichstolz 3003573 2012/02/23 02:58:00
    Reichstolz
    They are not the largest association, among active practitioners, they are the national association of students who are only members because it is free, and political puppets who need to feel important.

    If you want to know what active practitioners think and do, AAPS is the site where what the active industry puts its views forward.

    http://www.aapsonline.org/
  • 3003573 Reichstolz 2012/02/23 03:32:17
  • Reichstolz 3003573 2012/02/23 03:36:08
    Reichstolz
    You left out the term ACTIVE.

    The proof is agreeing with the ACA and the further need of a single payer system.

    I understand you think it cute to drop context from a sentence, it just shows your ignorance.
  • 3003573 Reichstolz 2012/02/23 05:06:32

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