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.