Friday, August 25, 2006

Economic inequality, power and the discipline of economics.

Paul Krugman writes another of his outstanding editorials.
"Recently, Henry Paulson, the Treasury secretary, acknowledged that economic inequality is rising in America. In a break with previous administration pronouncements, he also conceded that this might be cause for concern.

But he quickly reverted to form, falsely implying that rising inequality is mainly a story about rising wages for the highly educated. And he argued that nothing can be done about this trend, that "it is simply an economic reality, and it is neither fair nor useful to blame any political party."

History suggests otherwise."
The real issue is which society - through the government - values more, Wealth or Labor. Whichever is valued more will be what public policy will work to reward more.

So which has the greater power to increase the economy, wealth or labor? This is not an absolute. It is a balancing act. Both are required. The one in greater shortage is the one which society should work to reward more. So which matters more right now?

More from Krugman:
"I've been studying the long-term history of inequality in the United States. And it's hard to avoid the sense that it matters a lot which political party, or more accurately, which political ideology rules Washington.

Since the 1920's there have been four eras of American inequality:

The Great Compression, 1929-1947: The birth of middle-class America. The real wages of production workers in manufacturing rose 67 percent, while the real income of the richest 1 percent of Americans actually fell 17 percent.

• The Postwar Boom, 1947-1973: An era of widely shared growth. Real wages rose 81 percent, and the income of the richest 1 percent rose 38 percent.

• Stagflation, 1973-1980: Everyone lost ground. Real wages fell 3 percent, and the income of the richest 1 percent fell 4 percent.

• The New Gilded Age, 1980: Big gains at the very top, stagnation below. Between 1980 and 2004, real wages in manufacturing fell 1 percent, while the real income of the richest 1 percent — people with incomes of more than $277,000 in 2004 — rose 135 percent.

What's noticeable is that except during stagflation, when virtually all Americans were hurt by a tenfold increase in oil prices, what happened in each era was what the dominant political tendency of that era wanted to happen."
Krugman makes the point that this is merely an association, not proof of cause and effect. But it is a strong association.

What are the social differences between wealth and labor?

Wealth allows its owner to buy power. The amount of power bought is related to the size of the wealth available to the individual decision-maker.

Labor actually creates things and makes society and the economy operate, but does not by itself gain great power in society to the extent pure wealth does. Individual workers rarely gain sufficient wealth from their work to buy significant amounts of social power. The number of workers is too large compared to the total power of Labor. It is much more difficult for wealthy workers to gain enough power to actually have their individual decisions effect society. Workers can only have power by working together. Unions are the social organizations which allow workers to work together to use their power.

The totally free-market libertarian (and wealthy Republican) view is that labor needs capital to be most productive. The Libertarians then state that this means we need to add to wealth so that the wealthy can invest in capital and make society more productive. They gloss over the fact that American financial markets have gotten so efficient that anyone who can convince a lender or investor to provide the funds can get whatever is needed for capital. The real shortage in modern economies is highly effective labor, not capital.

Want to know how we can tell that there is no capital shortage? The S&P 500 companies are right now sitting on the largest amount of cash they have ever had as a percentage of their value. They literally have no place to invest that cash. The decision makers with the power to decide how to invest that capital cannot find investments that offer a return sufficiently greater than the return on cash to be worth the risk involved in investing it in productive investments.

The tax cuts of the Bush administration suggest that giving them more money will increase the productivity of the economy? How? The investors who have money and have the decision power to actually create jobs can’t find anyplace to invest the funds they already have?

So what value is there in giving tax cuts to wealthy people and at the same time increasing the price of tuition of education for those who actually produce the goods and services?

Financial people will try to convince everyone that the best way to increase Gross Domestic Product is to increase the reward to invested capital. But what happens when no one needs more capital? When there ARE no recognizable opportunities to invest cash? Companies begin to build up cash, that's what.

That's because capital, by itself, does nothing for the economy. If no one is producing anything to buy, it really doesn't matter if you walk into the market with $5, $500, or $50,000. There is still nothing to buy until someone decides to provide the goods or services. The people who do that are labor. And if no one knows how to provide what you want to buy, you are SOL.

The cash incentives are important, but they are secondary to the trained labor required to produce the goods and services you want to buy. The training of labor is a cost on the economy which does not provide a foreseeable return. Investors will not pay for it. The training of labor in the responsibility of the individuals themselves, and for extended training government has to pay for it. Refusal to pay taxes for such training is self-defeating, but the individual taxpayer who wants to pay less taxes is clearly acting in his own interest. This is the Free Rider problem. If the taxpayer doesn’t pay for training labor, then someone else will or the economy will be less productive. But at no time does the taxpayer who refuses to pay the taxes ever seen that his income drops as a direct result of his failure to pay for the training of labor.

Labor as a whole may become wealthy, but unless the rules of society favor labor over wealth, they will not become powerful. Because the source of power of labor is diffused over all productive workers and not concentrated in any small group or individual, labor will never become as powerful as the owners of wealth can. Because of this, a truly productive society must protect the power of labor from the power of wealth.

This is worth it, because it creates a larger total supply of wealth to distribute. The wealthy don't like it, because they see all the wealth escaping them and going to labor. As soon as the wealthy can gain enough power over the government and the propaganda outlets, they will gather the power and wealth to themselves and share as little as possible. The result is two-fold.

First, there is less total wealth in society, and second there is greater inqualityb of income.

Go read the Krugman Editorial we are now in a period in which inequality of income is growing. People have greater difficulty getting trained to be more productive, and even if they do they have less income. Why? Go read Perfectly Legal: The Secret Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else by David Cay Johnston.

Then try to separate in your mind the economic and the power effects of various groups of people. There are fewer wealthy people, so they have more power to cause their decisions to become real. Every dollar is worth one thing only. It causes someone else to do something for the posseser of that dollar. That's not economics. That's power.

The economists will consider such power elements to be what they call “exogenous causes.” Those are defined as things that effect an economic transaction, but are not explained by economics.

Economists work with economics since economic exchanges can be clearly explained by mathematics. Power does not easily find itself described in mathematical terms. That is why the study of economics and government are two different academic departments in Universities. An Economist is an applied mathematician, but a student of government and power is only a Social Scientist with a knowlege of statistics.

The problem is that power cannot be easily defined. Don't get me wrong. If you ask individuals in an organization who has power, almost everyone agrees. But ask them why, and it simply isn't clear. Whereas if you ask what is important economically, everyone goes to an accountant and asks for “the numbers.” The definition of economic transactions is quite clear and easily quantified (comparatively.) Power is not. How do you quantify who has more power and who has less? It depends on who they are and how they use it, in comparison with others around them. Each decision also has different distributions of power. There is no clear "power transaction" which throws off an easily quantifiable number.

Unfortunately, the most obvious and quantifiable item is used to explain what is happening. It is hard to argue against the total of quantified economic transactions in an organization, but it is easy to argue that the outcome of a decision by a powerful individual has a lot of non-quantifiable causes. This is the real source of the argument between economists and Marxists. Economists consider only the clear quantifiable transactions, and Marxists consider how those economic decisions affect human beings.

The result in American politics (the discipline of political power) has been that the economists dominate and ignore the effects of the political power they demand on real human beings. This is the reason for "Trickle-down Economics." Trickle-down economics is the direct result of the dominance of the economic discipline based on clear numbers over the much more vague disciplines of government and sociology.

In the end this free-market bias it will be self-defeating. The overall economy is the resultant of all of the academic disciplines of economics, sociology and government. The strongest and wealthiest international economy will be the one which gets the balance correct.

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