I rarely try to write about economics anymore, even though I’ve retained my sense of it - somewhere, in potentia - as the magnificently challenging Queen of the Social Sciences and of the Navigation of Spaceship Earth. My sense of how very much I don’t understand has matured . . . and my sense that I ever persuade anyone of anything complicated, on any topic, has dwindled.
(And my pride dreads blowhardery. A continual thorn in my helpless eye is the particular magisterial arrogance with which I often see people explaining supersimple phrasings of economics and economic policy - as if the entire matter could be explained on one 3”x5” index card, and as if anyone who would explain it differently is either brain-damaged or with the swindlers. Another focus of the “even if you’re right you’re wrong” thing that I will never be able to explain to the worst cases. And they never know when they’ve crossed the line . . . which means, of course, that I wouldn’t. My vanity cherishes a special terror of this possibility.)
But - the world rolls on, and these things are part of it. Certainly they are part of politics and public policy. (And - as I wrote in Facebook on a wry and too-honest evening recently - “If I propose a general rule or recommendation about which I couldn’t frequently be accused of being a hypocrite, then the rule or recommendation is probably not very important . . . because the situation probably does not come up very often.”)
So - this entry is about the idea that we should (in a number of phrasings) take care of the “job creators,” the rich business people and big businesses.
The idea is that we should take care of them so that they will - this is a very important phrasing - create jobs.
Their profit margins must not be reduced, and their costs must not go up; their incomes must not be taxed, certainly not their investment incomes, or the tax rates must be reduced on any portions that are taxed. They must not be made to pay their employees more. A curtailing or narrowing of their circumstances will inhibit them from expanding their business and creating jobs; if their circumstances are improved, they will expand their businesses and create jobs.
One phrasing of this is that, when the rich get richer, the benefits will “trickle down.”
An extension of this idea is that - if government largesse goes to the rich (sometimes real spending largesse, but more often meaning a “virtual,” negative largesse in which, instead of giving the rich money, the government lowers their taxes and, being poorer without that source of funds, cuts back on the things it does - or possibly it first cuts back on those services so that it will be easier to cut the taxes) - then the rich will create jobs, and the society will prosper more, and so society will need less of what government will now be doing less of. It’ll be a net win.
To dispose of one thing first: There is a sort of ghost implication, in this picture of the need, that businesses are actually paralyzed at the moment - where all of the potential money for their business expansions is being taken. But the prescribed medicine is not limited to horribly struggling businesses whose funds are somehow being completely taken away. This medicine is said to be good for everyone who falls into “the makers,” even for the richest and biggest . . . and who, after all, would be most in a position to create jobs? The biggest and richest. So it is quite proper that those who are doing best get this help. It is said that this medicine will work on them too.
Does it work this way?
I’m not sure which end of the cat to pick up first - there are two ends, and either may have claws - so I’ll flip a coin. There. The first thing I’ll show is something quite curious I saw a couple of days ago.
It involves the way money flows in an economy. First, to set up: Usually money circulates; it is passed between people as they exchange it.
When the economy is doing well, one aspect or side-effect is that prices may rise, because so many people are wanting to buy things. This rise in the price level is called inflation. Inflation isn’t bad in moderation, on balance - it goes with the improved economy, after all - but it can be bad if the rate of inflation gets too high, because the buying power of everyone’s money is draining away.
When the supply of money is increased - when government deliberately acts fiscally to stimulate the economy or when government simply spends more money in general, using their power to issue more money through the central bank - then more people have money to spend, and they pass it on to more people who then have more money to spend, and the ripples go outward, and there is a general economic effect. One of those effects can be inflation.
These are our presuppositions, the background knowledge.
Now here’s the curious article I saw. It is talking about some effects of the expensive efforts to save the U.S. economy during the end of the Bush presidency and the beginning of the Obama presidency. Some people predicted - some as a rock-solid certainty; one person did to me - that these expenditures would result in very high inflation or actual hyperinflation.
What the article finds:
One of the great “mysteries” of the last 7 years or so is why all the money from unconventional monetary policy hasn’t shown up as inflation. Many analysts thought that printing that much money must surely increase prices, but inflation indices in most of the developed world are barely up, and in many cases are flirting with deflation.
The answer is obvious, but you’ll hardly see anyone point it out.
First, who was the money given to?
Rich people and corporations.
Ok then, what do rich people and corporations spend their money on? Stocks, and real estate—high end real estate.
In America as a whole, let alone New York, housing prices have not returned to pre-financial crisis values. But luxury apartment prices now exceed pre-financial crisis prices. Real estate prices, period, in London, are now higher than pre-financial collapse.
Meanwhile, the Dow Jones Industrial Index is up about 175% off its lows of 2009. The annualized gain is therefore about 29% a year. GDP has not risen anything like that, neither have wages. Corporations, however, are flush with money, and they have spent a great deal of it on stock buy-backs, while rich people, of course, have bought stocks.
Inflation has, then, shown up exactly where one would expect, in the assets bought by the people who were given money. Ordinary people did not receive the largesse from unconventional monetary policy, rich people and corporations did.
This is not hard, this is not difficult, this is not complex. The fact that mainstream analysts and pundits do not connect the dots on this is because they do not want to.
That inflation has not shown up in much (though not all) of the rest of the economy is simply based on the fact that no one else except the rich and corporations has received (I can’t call it “earned”) more money. Nothing more, nothing less.
Makes sense, in itself.
But that’s what struck me about it. The revealing thing about it is that it is by itself.
Normally, as I say, money circulates. Yes, those special subjects of purchases of the super-rich entities increased in price. But why does this still stick out? Why did the money not then go on to be spent on more things, which would have passed it on to more people who would have spent it on things, and so on, so that the effects, including the price inflation behavior, would have become general throughout the economy? Those price increases should have been part of a general pattern, likely with some general price increase. Regardless of whom the money first went to. Why do those price increases stand alone and noticeable - without issue?
Awhile ago, Nick Hanauer, one of the initial investors in Amazon - who, as a result, would qualify as very rich in any room - wrote a piece to his fellow “plutocrats” about what is wrong with, and scary about, the extraordinary rise in the degree of economic inequality.
One of his arguments was that the conviction that lots of money going to the rich would lead to them creating jobs (that smaller floods of money going to them would mean they wouldn’t create jobs; that ensuring larger floods of money going to them would mean they would) . . . is a misunderstanding.
Because people who are in a position to create jobs do it in order to make a profit - they do it in order to be able to take advantage of demand.
And while he had a much, much bigger income than almost anyone, he did not buy fifty pairs of pants a day. One person doesn’t.
Likewise, he didn’t buy fifty pairs of new shoes a day, or buy a hundred breakfasts in restaurants every morning, or anything. He might have a very expensive car, or two, or five, but . . . Etc., etc.
He was right. Very, very rich people, and their fortunes and higher degrees of fortunes, don’t generally increase demand much - and they don’t even increase the demand for specifically rich-people things that much, by volume. They do create different demand.
When the prices of these special things that are bought and sold by super-rich entities are so gigantic, the money that buys them is not being transferred on and distributed in exchange for goods and services to more and more people who then buy things they need themselves, through the buyers and sellers and makers of things . . . Forget “trickle down,” or whether or not you use that, it’s not trickling through, at all. The money is simply being transferred in great blocs, from one very-rich-entity holding reservoir to another very-rich-entity holding reservoir. It does not behave in the same way as the legal tender currency that tiny bits of it alone might be. It is used for these giant super-rich things, and it does nothing else. It becomes a separate currency, for a separate world.
This behavior of the very large blocs of wealth intrigues me. I almost wanted to call it fossil money above, but it is still - barely - used, for these things. “Dark money” would be right (or “dark denominations,” denominations so massive that they are dark). It is held, and invested - in order to increase itself . . . and sometimes the investments need not even touch the physical world at all in order for it to be held in the reservoirs in larger amounts. Which is its point, at that scale - just to be held. It cannot be spent, so its purpose is to be held, and owned. . . . And I do not want to think about all the things that that last sentence means, and it may give me strange dreams.
These lightless expanses of noninteracting money do touch reality through investment. Do the investments create jobs? Investment can fund such things. But invested money will not create jobs if demand does not make those jobs profitable to create. (And, in the meantime, the investments will seek more profit by eliminating costs, very often the need to pay people.)
To be complete: When I talked about this in Facebook, a friend of mine commented that the super-rich “do create jobs, not by buying more pants, but certainly their multiple residences need looking after by a number of staff, money needs tending by accountants and other folk - they do create jobs just to support the infrastructure of their unimaginable lives . . .”
My answer: True, they do pay and employ people as staff, accountants, etc. for their lifestyles, but, beyond a certain point, not that much more than the merely very very rich, who in turn… The same thing applies: they live expensively, but they are, in the end, only a very few people. (The ten richest people in the world aren’t building Death Stars to fight duels with each other.)
But then my friend continued her comment on the rich creating jobs with,
“. . . let alone through the businesses that generated the wealth in the first place. Bezos, for example, has created numerous new jobs. Now, how many of those were as a result of the ‘creative destruction’ of other, storefront businesses (Borders, Filene’s) is an exercise for the student.”
This phrasing - their businesses, or Bezos, “creating jobs” . . . The objection is not just the matter she referred to, the question of whether those jobs just came at the expense of other jobs and may not have been a net gain.
The expression “create jobs” makes a persistent magic-wand “Originator” illusion.
It would be better and more operational to say that demand “generates wealth”, demand “creates jobs”, if we have to talk like that.
Demand makes it possible - because demand makes it profitable. Businesses do things that employ more people in response to demand, in order to be able to take advantage of and make money from the demand.
The more people who have spending money available, and the higher the average level of spending money, the better.
As Hanauer says, the rich don’t make the middle class, the middle class makes the rich.
But the notion I’m talking about insists the reverse.
The idea of “taking care of the rich” is also very strange in its consideration of incentives . . . an oddity which is itself very strange in an ideological latitude that trumpets the high regard in which it holds market theory.
Why would the incentive of rich people and businesses to do more things to earn more profit increase if they get to keep more of the profits they’re already making? They are simply successfully getting more of what they want. They’re doing better by doing what they were doing already.
Or, turn it around the other way: Do higher taxes and such things, that reduce their net profits, reduce their propensity or their reason to engage in profit-seeking activity?
If all net profit were actually entirely taken away from them, so that they received no profit from acting, then certainly the answer would be yes. But when they still do make a profit from doing something and a percentage of that profit is taken as taxes, they are still making a profit. What would it profit them to cease to seek more profit? And why would adjusting the percentage taken - at a level well short either way of taking away all the profit - make any difference in the answer?
Absent special circumstances - it wouldn’t.
And it certainly wouldn’t under all circumstances and in all weathers!
(And, in the meantime, again, the carrot floating in front of them is the demand that’s there for them to serve. How much there is, or isn’t.)
But they want to pay less taxes. They want their costs down. They want more money.
So they assent vociferously to - and they either sincerely believe, or they loudly pretend to believe and hope that everyone else will sincerely believe - an incoherent and nonsensical theory of incentives.
The giant reservoirs of wealth of the super-rich are a leak in the economy - certainly they are if government money is poured into them. The money in them does virtually cease to interact with the universe of market exchange. But they are, in the scale of things, quite small.
The tremendously larger leak in the economy, and in the society - in general effects and, most of all, in opportunity costs - is the politics that centers itself on, and urges, and acts on the idea of taking care of the rich and the “supply side” above all else, in the hope that if we take care of their incomes and their profit margins and their wishes they will “create jobs” from nothing.
This leak is incredibly defended by the super-rich, and, in doing so, they distort the world.
(Which leads, at least, to one category of very large expenditures by the super-rich that may actually go on to circulate through the economy: political expenditures. -sigh-)
They see it as defending themselves. Because these vast oceans of money are their owners’ personal right to live in . . . what would you call it? Royal fairyland? In which the shadows of the titanic sums that need not be actually spent in order to be there are their owners’ royal prestige?
And I have at this point either made my point, failed to make it, or lost my Reader long since. (And I’ve tempted fate enough on the oversimplification question.)
So I will end this with a link to a 23-minute video made by Bill Moyers, which gives an absolutely astonishing real-world example of the influence of the super-rich. Here’s the link. Thanks for reading.
Bill Moyers: The Long, Dark Shadows of Plutocracy
Last updated January 27, 2015