The Economics of Bootstraps

This need for business to have plenty of customers with disposable income used to be widely understood. There was a time when wage supports, be they labor contracts or minimum wage increases, where almost universally supported.

This was a comment that appeared this post by James about the number of people applying for jobs at Wal-Mart.

The problem with this view, and I think it is a view that is somewhat pervasive on the Left, is that it can’t ultimately work. The basic notion here is that we can, in effect, tax ourselves into prosperity. Granted Ken, the author, did not mention taxes, but things like the minimum wage work in many ways like a tax. The minimum wage raises the price of labor for the demander (firms) just as tax would. Further, the minimum wage comes with a deadweight loss just as with taxes.

It is the former that is a particular problem for the view point suggested above. Suppose we raise $100 in taxes on the rich, and it is transferred to the non-rich as a straight income transfer. The idea, as expressed by Ken, is that the poor, with their higher marginal propensity to consume will spend that money on things produced (directly or indirectly) by the rich. Thus, the economy keeps chugging along. The problem is that, the cost of the tax isn’t simply $100, it could very well be $150 and unless $50 in additional value is produced as a result of the additional transactions induced by this tax-and-transfer policy the economy is actually worse off. Basically, it is a variant of the Broken Window Fallacy.

On top of this, there is the issue of savings and investment. The rich might very well be able to afford the $100 tax, but they are surely going to change their behavior. They will either consume less, invest less, or both. Hence, $100 has been taken out of the economy at one end (the rich end) and put back in at the poor end ($100). It is a wash. And lets not forget the cost of bureaucracy. The tax collector will need to be paid, the person who distributes the income transfers will need to be paid, and lets not forget the bureaucrat that is in his cubicle watching television, he needs to be paid too.

This kind of notion of growth is just completely specious. Yet it seems to be very popular way of looking at the economy. We’ll take from the haves, give to the have-nots, and the economy will actually be better off. While there are undoubtedly arguments for taxes, income transfers and other governmental activities this isn’t one of them.

FILED UNDER: Economics and Business, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. nfn fnke says:

    The problem with this view, and I think it is a veiw that is somewhat pervasive on the Left, is that it can’t ultimately work.

    I didn’t realize that Henry Ford held views that are “somewhat pervasive on the left.”

  2. McGehee says:

    I didn’t realize that Henry Ford held views that are “somewhat pervasive on the left.”

    Well, he was also reputedly anti-Semitic, which is also something we’ve been seeing a lot on the left of late.

  3. Eneils Bailey says:

    There was a time when wage supports, be they labor contracts or minimum wage increases, where almost universally supported.

    Yeah, and there was a time when doctors used leeches to suck bad blood out of people to make them well. Same thing, let’s move on.

  4. Steve Verdon says:

    I didn’t realize that Henry Ford held views that are “somewhat pervasive on the left.”

    An employer voluntarily paying his employees more than the market wage is not the samething as a mandantory minimum wage. Any other questions with obvious answers you need me to help you with?

  5. none says:

    You people don’t seem to get it! Not everyone in this country is in the upper income brackets and doin’ just fine. Your only response is about Hitler and leeches? Bloomberg poll today says 58% of this country thinks Bush and his policies are a failure. I agree that might not be you. Particularly if you’re in the protected class but, there are many more who aren’t doing well at all. Stop talking political semantics and start talking reality. If the present trend continues, the only jobs there’ll be are for prison guards and private security to protect the wealthy. God bless America!

  6. Eneils Bailey says:

    Sorry none, I can’t relate to you. I have more money than a big horse could shit, and I worked my ass off for every damned penny I have taken home. And yes, there are some truly unfortunate people in the world and our country. I don’t begrudge helping the truly unfortunate, but trying to ensure economic equality simply does not work. Everyone in this country is better off that the rich can get richer, while some people are not able to or mismanage their opportunities. By the way, heard your screed all my life, how we are going to economic hell in a hand basket. Things have always gotten better. And yes, God Bless America, we pray, but not for the government to ensure we are taken care of, but that each individual to achieve their maximum potential.

  7. none says:

    Eneils,

    I too am among the very fortunate. Not sure I have more money than a big horse could shit but I’m well into the top 2-3%. I also realize that a sustainable society cannot exist on the backs of the many for the benefit of the few. Don’t talk to me about screed! Things are only better for a select group of citizens – worse for the many. You want to pray? Pray that this bunch of self rightous, self serving bunch of assholes is voted the “F” out of office. You should really ask yourself a serious question, as the winners take all, what is left for the losers to do but come for you?

  8. bryan says:

    I do think that the general point is important to bear – our economy is chugging along because 70 percent of it is running on consumer spending. Without disposable income from well-paying jobs (whatever those may be), consumers will spend less and the economy will suffer.

    I think Steve would agree with that much of the point. As I see it, the real issue isn’t the minimum wage folks, but the middle class. The middle class keeps the engine running by spending discretionary income.

    Anything that sucks the discretionary income out of the middle class (think $3 per gallon gasoline for an extended period or the loss of a huge chunk of middle-income jobs) would impact the economy enormously.

  9. McGehee says:

    You people don’t seem to get it! Not everyone in this country is in the upper income brackets and doin’ just fine.

    You want we should run around in circles screaming bloody murder because of this earth-shattering revelation of yours?

  10. G A PHILLIPS says:

    Dear Mr. None,I work in a non union crane factory and I don’t make much,just enough to barely make ends meet. but it is the best job I could find for my skill level. I don’t cry or blame or hate others because they’re better off then I am. I also grew up poor, but then again I grew up white whith a single mom who was poor but had job so she made to much to benefit from any of your sacred liberal social programs.But I don’t cry or Blame or hate others because they’re better off then me.And now since you brought up reality let me cut you in on some;reality check part 1;if you think a poll will tell you what 58% of the country thinks you are smoking the wrong kind of tobacc(a poll is somthing that is ten feet long that liberal won’t touch the truth with)dude.Reality check 2;leeches are just like librerals,they suck life blood out of this country and the screem when you pull them off whatever there sucking on.reality check3;if the current trend continues the only job will be to join the resistance to fight against you socailist hitlerites.P.P.My mom made 15,000 a year, and I don’t cry,blame,or hate because for most of my life iv’e been trying to be a follower of the Christ.

  11. G A's girl says:

    Dear Mr. None,
    I live on a $22K a year, after all of your taxes are taken out, that gives me about $15k to live on. In which percentile does that put me? As a single woman, I have worked very hard to continue to support myself for the last 20 years. You know what, sometimes I had to take a second job to get through the hard times, and a few times even a third. But even so, I always knew that I was not really trying to succeed. I know many people who are as successful as you and Enails. Even though I have been envious at times, I always knew that those people earned all of what they have. For 7 very long years I worked almost exclusively with people who lived on entitlements….ie. Welfare and SSI and SSD recipients. Of course, there were people who aspired to more; but the system had them trapped. Overwhelmingly, it keeps people hopeless without even enough pride to take out their own garbage, they just left it piled in the house. Imagine living every day with no hope, nowhere to go, no one counting on you, no accomplishments, no growth, no future….What’s left? Booze and drugs. I really feel that is the true aim of these social programs. A job at Walmart with a chance to prove yourself and advance sounded good to the thousands of applicants that showed up in Chicago this week to apply for the 325 jobs available at the new Walmart going up.

  12. David Kohlhoff says:

    You’re wrong about deadweight loss associated with the minimum wage. In reality the US labor market is an oligopsony wherein a rise in mandated wages actually leads to a rise in employment. Since GDP is largely irrelevant to societal well-being this is silly anyhow.

  13. none says:

    Dear GA and Girl,

    You guys are exactly what the Republican Party loves; you keep on smiling while you’re bending over. Don’t forget to grab your ankles, it makes it easier.

    First, after 20yrs working you’re at 22k/yr. That makes you about 35-40 years old making $10/hr. My daughter is a junior in high school and makes that much! You are either incredibly unskilled or unmotivated. I can recall making 1.65/hr, I now make over 50/hr. I guess liberals just have it better eh?

    Yeah, I know it’s hard. I’ve been on food stamps, I’ve had no heat for months at a time, and guess what, and I’ve gotten through it too. That doesn’t mean that all is well. You should keep a few things in mind; in an agrarian economy, a banker is worthless. In an industrial economy, a banker is king. What’s the difference, perceived value to the system? Are the farmers and laborers then not worth anything? If so, lets kill them all so we don’t have to keep supporting them. A society that doesn’t address the needs of outplaced is doomed to failure.

    Second, you erroneously imply that you pay 25% taxes. People in your income bracket pay > 30-35% in total tax burden. Just add it up, Federal, state, real estate(even if you don’t own you still pay through your landlord), sales tax, excise tax, social security, Medicare plus the employer contributions and on and on. For some reason, people in your situation believe they don’t pay a heavy tax burden compared with the wealthy. You’re wrong! People like Trump pay about 15-20% total burden! How does that make you feel? Sure they pay more in dollars but not more in percent, and not more in effective pain of taxation. You know, Trump doesn’t pay any SS or Medicare because it’s a wage tax. Guess what, he doesn’t have any wages, so he starts off with a 15% advantage over you poor suckers. Wouldn’t that be nice to have 15% more money? You say the liberals are a bunch of leeches but you don’t in fact realize that the ones who are leeches sucking the blood from us all are the extremely well off. They have all the tax and income advantages and you got nothin’! You’re a fool not to see it.

    I am not promoting socialism but more egalitarianism. A fair and just society should provide for all. That means if you have no skills and can only do menial labor, you should at least be able to live and eat. And you know what, if that means Paris Hilton can’t inherit 100’s of millions from her dad, so be it. What do I really care about that?

    I’m not talking about welfare, redistribution of wealth or anything like that. I’m talking about fairness and reality. I know you think I’m just another liberal ass fool, but just imagine what your life would be like if there weren’t us liberal ass fools looking out for you.

  14. floyd says:

    none; i long for the day when when some “liberal *ss fool” isn’t looking out for me![lol] or maybe approaching me in the manner mentioned in your first paragraph.evenso i am growing weary of the position from the so called right that wages are nothing but theft of profit.

  15. Eneils Bailey says:

    none,
    Could you please explain fairness and reality as a legal/constitutional concept. Personally, I think it is fair if governments use some portion of the taxes I pay to help unforunate people. The reality of the situation is that we have created sub-cultures in this country that look to the government, using our taxes, to provide them with food, shelter and medical care as an accepted way of life. Since you are preaching fairness and reality, could you please contrast that to personal responsibility and citizenship. Please don’t feel compelled to look out for me or the people I count as associates and friends. We can do very well without you shepparding us to economic bliss. Oh by the way, you want to cut the gap between your so-called “winners and losers,” try Cuba. They tried making everyone an economic “winner,” and everyone who lives there is now a real economic “loser.”

  16. Dave Tufte says:

    “…Things like the minimum wage work in many ways like a tax.”

    Most texts don’t emphasize the point, but every price floor – like the minimum wage – can be exactly duplicated with a tax. The trick is that the revenue collected has to be completely transferred to suppliers (who, in this case, are the workers).

    So, they are really talking about taxes … they just prefer not to use that word.