Copyright (c) 1999 ,2007 Douglas Dunn / Word Wizards communications -- all rights reserved
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In all parts of the world, and in all eras of history, economic policies based on greed have failed to generate prosperity. While public policy should not compel individual moral beliefs or practices, and economic policy should not be used to enforce personal ethics, such policy perhaps should at least be consistent with values such as compassion which, like the justifications for public policy themselves, are based on the manner in which we interact with others. An economic system consistent with compassionate policies would:
To whatever extent possible, these goals should be achieved with a minimum of government intrusion into the personal lives or private economic decisions of individuals. They should rely primarily on positive market forces and incentives to attract compliance, but use reasonable regulatory controls when needed.
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Policies rooted in ideological extremes have always failed to deliver economic betterment for all participants. Americans are fed up with partisan bickering. They perceive Republicans as helping the rich get richer and Democrats as wasting money on social experiments. On a global level, people reject extremes Communism as well as pure, unregulated capitalism.
In the early 1990's we witnessed the collapse of Communism while, at the same time, un-regulated market economies also failed the test of compassion. While Eastern Europe was throwing off the yoke of Communist domination, and the Soviet empire was dismantled, nations with inadequate protections for workers and consumers in the name of free markets found themselves mired in economic failure, and trying to cope with problems of crime, poverty, homelessness and extremes in the distribution of wealth.
In the United States, during the greed-oriented decade of the 1980's, hostile takeovers, deregulatory strategies favoring investors and leveraged buy-outs in the private sector resulted in a collapse of major markets and financial institutions, weakening the economy. Cutbacks in productivity and innovation caused the United States to lose ground in its technological leadership, resulting in trade deficits, budget deficits and industrial stagnation. Health care became inaccessible to many. Home ownership, virtually taken for granted from the late 1940's to the mid-1970's, became almost impossible for first-time buyers until the market collapsed under its own weight in the late 1980's, while paper wealth equity created a tremendous windfall for those who got in and out of the cycle at opportune times, as inflation in housing galloped at a rate far above general inflation. Poverty, desperation, lack of educational and employment opportunities or mental health services drove increased numbers to drugs, crime and violence. While the middle class shrank and poverty became more widespread, wealth was increasingly concentrated in the hands of a few who benefited greatly -- with the result that sales of luxury cars, multi-million dollar homes, expensive artwork and costly electronic toys increased dramatically [Kevin Phillips, The Politics of Rich and Poor, Random House,1990]..
In third world countries, feudal economies with virtually no industrial regulation resulted in a concentration of most productive resources in the hands of a very small wealthy class while masses of the poor live in urban squalor or in impoverished rural villages. The gap between rich and poor is carried to its farthest extreme.
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If Communism, capitalism or third-world feudalism all fail to meet community needs, what does work? There are success stories: Despite their own ups and downs, Germany and Japan have recovered from the physical, spiritual and economic devastation of 1945 to become economic superpowers. The Scandinavian countries are doing quite well. Singapore and Taiwan are still prospering even though, like Japan, they lack adequate land and natural resources. Japan and Germany are free-market economies, right? Mostly. But in both Japan and Germany, industry responds to market demands, yet works closely with government to manage resources and influence distribution of wealth, largely due to social traditions along with regulatory systems imposed on them by Western occupying forces following World War II.
American history also offers a successful economic model. In the 1930's, despite rich natural and land resources, we suffered from the economic devastation of unrestrained free-market policies. But the New Deal, a basic free-market system with moderate regulatory protections for workers, consumers and investors, set in motion an unprecedented economic recovery and prosperity that continued for the next four decades.
Why did we retreat from this successful model? By the 1970's, the regulatory controls designed to protect us from the extremes had themselves become excessive. Ridiculous examples of bureaucratic waste, inefficiency and outright corruption became commonplace. There were many demands for bureaucratic reform and reduction in the size and scope of government influence. It became necessary to identify and correct legitimate examples of government excess, institute safeguards against future abuse and adapt programs and policies to meet changing needs. What we got instead was an attempt to completely dismantle all the regulatory protections that had created this prosperity and kept it going for so long. Recession, reduced productivity, and a widening gap between rich and poor are the consequences.
Regulation? Government intervention? Does this contradict the all-American values of individual responsibility and self reliance? Not at all.
Even with the ideal of a basic free-enterprise system, with its cornerstone of personal responsibility, not every person is born with equal access to free-market opportunities. It's not just money. It is not necessary to be born with money to become wealthy. There are so many people who were born with nothing, yet became successful that the phrase "rags to riches" has become a cliché. If you take all the money away from a self-made millionaire, he'll quickly earn it all back. The difference between the rich and poor is not just money -- it is knowledge, resourcefulness, motivation, "networking" connections and self-confidence. The mere loss of money cannot defeat such wealth.
But children who are born to violence, abuse, crime, drugs and hopelessness, with a constant message of hopelessness and inferiority, will never achieve the true potential of their human birthright. It is not just a matter of poverty, but a negative perception of themselves and the world which must be reversed and replaced with positive values. Since their environment doesn't offer these positive influences, public policy must intervene to provide not equality of results, but equality of opportunity for every participant. Certainly the primary responsibility for the teaching of values and for providing an environment conducive to readiness for opportunity lies with a child's parents. But if the parents neglect this responsibility, society suffers too much damage in the form of increased crime and economic loss (not to mention interpersonal unhappiness) just to ignore it. With emphasis on helping the family to assume its proper role, and helping provide the tools to do so, society must also be prepared to step in as a backup, in a purely secondary role, through its educational and social institutions.
Compassionate public policy that addresses the underlying causes of hopelessness and poverty must support individual responsibility utilizing practical factors of supply and demand. The goal is to find the middle-ground balance of both "rugged individualism" and a sense of the community's proper role. I call it "Free Market Plus." Let's see how it works:
1980's deregulation was based on a theory of "Supply Side" prosperity developed by Arthur Laffer. The basic idea was that policies of taxation and regulation favoring the wealthiest citizens, who own or control the productive resources, would encourage spending for investment, resulting in an increased "supply" of goods and services and thus a total growth in the economy. A stronger tax base from a larger economic pie would lead to greater income for the government, offsetting the lower tax rates. An increased supply of goods would result in lower costs of those goods, thus benefiting consumers. Increased wealth for investors would "trickle down" to employees. While the wealthy would gain the greatest immediate benefit, the economy as a whole was supposed to grow. Everyone would benefit!
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Many proponents of "Supply Side" economics, such as 1996 vice-presidential candidate Jack Kemp, are well-intentioned and compassionate. Many were very surprised when ambitious tax cuts and economic incentives for the rich, coupled with huge spending increases, resulted in greater deficits than ever before in American history. The assumptions of the "Supply Siders" were simply based on several key misunderstandings about how the economy helps or hurts people:
Supply separated from demand. Focus on the "supply-side" of the supply/demand equation attempts to separate supply from demand. The supply side can only be considered in conjunction with demand-side factors. Supply side theory tries to set the various economic factors against each other in a counterproductive way. Any compassionate economic theory must bring people together so that all segments of the community -- workers, investors, consumers -- are pulling together for mutual economic prosperity.
Misconceptions about "supply." Supply-Siders assume that "supply" is controlled by those who own or manage the productive resources in an economy. If that element could be stimulated, supply would be enhanced. But those who own productive resources mostly just deal in transfers of "paper" wealth -- they seldom actually create anything. They merely own and control wealth which is produced by others. This is not to say that their role is not important. On the contrary, they allocate resources and create the environment in which the creation of wealth becomes possible, but they are not the ones who actually create that wealth.
The Real "Supply Side." In order to fully understand the failure of supply-side "Voodoo Economics" (term coined by George Bush while running against Ronald Reagan for the 1980 Republican presidential nomination) we must understand the real nature of the "supply side" of the supply/demand equation, without separating it from the "demand" side. "Supply" of goods and services occurs when those goods and services are produced. The creation of wealth --"supply"-- is not accomplished only by those who buy and sell stocks, trade ownership of real estate or invest in industrial ventures. Such investors have an important role in the management of those resources, but this administrative role cannot be put into conflict with the role of productive labor.
The creation of wealth occurs when raw materials are collected, processed and converted into products, or when services are provided. Cars are not made when investors transfer shares of GM, but when workers go into the mines, gather and process steel, and hammer it into shape. Real estate value is created not only when investors acquire dwellings to rent out or for speculative resale, but when construction laborers transform raw land and materials into homes. Health care value is not just created by those who own hospitals, but by health care professionals who treat patients.
The "supply-side" theory is that if you give tax breaks to the rich or otherwise put more money into the pockets of those who already have the most, that they will use it to create jobs. While it is primarily the wealthy who invest the capital needed to create more wealth (and jobs), jobs are not created just because people have money. If they just have money, and that's all, they'll just keep it or spend it on themselves, as they always have done in the past. Jobs are not created as acts of charity for working people that the wealthy elites don't even have personal acquaintance with. Jobs (and broad-based wealth) are created when those in a position to administer productive resources see a demand for goods to be produced. And if they see such a demand, they will generate the increased production -- create new jobs -- whether or not they have the money on hand -- even if they have to raise money by borrowing the necessary capital for financing. If the general public, which is made up far ore by working people than by the wealthy elite, does not have discretionary income to spend on products, the broad-based demand needed to stimulate wealth creation (and job creation) is inhibited. It has more to do with creating a broad base of demand than by making sure rich people have enough money.
Stimulating the real supply side requires economic incentives for the real producers (workers) as well as the investors, in policies consistent with universal compassion for all contributors.
Socialist economies fail because they offer no incentive for workers to actually produce. Restaurant servers are paid the same whether cheerful and prompt or slow and surly; workers in factories or farms are paid whether efficient or incompetent; managers are paid no matter how much or little they contribute to increased production. The only incentive is to do as little as possible and not "rock the boat." Perhaps the failure of Socialism has more to do with the lack of incentives than with the attempt to operate a centrally-managed system. (The one area in which Eastern block nations did incorporate strong incentives, yet which remained centrally managed, was their competitive sports program. In this venture, even small, troubled nations such as Romania and East Germany were able to achieve dramatic successes.)
By the same token, in totally-deregulated economies favoring those who own productive resources, the incomes and benefits of owners, investors and top-level managers skyrocket, while those on the front lines who create real wealth must endure cutbacks in pay. This is not a consequence of the recession, but a cause, as productive incentives are reduced. It is also not compassionate.
When taken to the furthest extreme, in third-world feudal systems, where there are no protections for workers, there is no incentive to produce beyond mere survival at a subsistence level. The economy becomes totally stagnant, resulting in widespread poverty of the most squalid form. Beggars, thieves or masses of brutally impoverished workers earning subsistence wages crowd the streets. Some say they are lazy. Yet the beggars, hustlers and thieves start early in the morning and stick with it all day, every day. Survival is hard work. Those who do have jobs work fiercely to keep them, even at poverty wages, knowing there are many who are even more desperate, ready to take their places.
Spending the windfall. 1980's deregulators assumed that the wealthy would invest their extra money back into the economy. But by making the rich richer and everyone else poorer, they set one class against the other and hurt everyone. There was no "trickle down." The rich did not invest their windfall in jobs -- they kept it. Narrowly-focused elite sales of exotic autos, high-priced electronic gadgets, expensive fine arts, jewelry, fashions, and high-tech toys (purchased by a small elite) increased dramatically, while more broad-based sales to the general public of middle-class autos, household appliances and everyday goods (previously purchased by many) plummeted and workers on the assembly line saw a steady decline in their paychecks. Purchases of expensive homes climbed exponentially, as did the acquisition of rental holdings (previously owned by the people who lived in them), while the number of owner-occupied dwellings fell.
The money was spent in a smaller economic circle. Even the workers who found jobs creating those elite products saw a larger share of the money from those sales going to the small circle of owner/investors instead of to themselves as the general pool of lower-paid workers and consumers, turned toward a two-tiered economy with an income gap separating the rich and everyone else. Because of regulatory protections remaining in place, the United States did not become a two-tiered economy like those in third-world countries, but began taking small steps in that direction. Supply-side theory provides no incentives to guarantee adequate wages or benefits to workers. There was little compassion in the economy of the 1980's.
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In the 1930's, following two decades of failed economic policies pitting investors, consumers and workers against each other, the United States found itself in a Great Depression with squalid conditions similar to what we now see in the third-world. Government spending didn't help. Many forget that Herbert Hoover, a fiscal conservative, spent more for economic recovery than any previous President. But, like modern Supply-Siders, incentives were aimed at investors. A few profited, while others remained poor. It was the New Deal of the next administration, with federal spending to create jobs and protect the productive work force, that ended the Depression. It was not just "government spending," but spending to benefit the productive sector, to protect workers and consumers, that led to 45 years of uninterrupted prosperity. Many today look back and complain that Franklin Roosevelt introduced Socialist tendencies. Nothing could be farther from the truth. When the economy collapsed under Hoover, many believed that it could only be saved through Socialism; many today forget how popular Socialism was during the 1930's. Roosevelt strongly rejected this approach and was a rabid anti-Socialist. He recognized the difference between government or public ownership and operation of productive resources and a vibrant system of free enterprise, operating within a protective framework of regulations to protect workers, consumers and the environment (you have the freedom to do whatever you want as long as you don't hurt others). Roosevelt understood that regulatory protection does not undermine the free market -- just as rules don't undermine a sport, they make it possible; and rules of the road don't impede mobility, they make it possible. Similarly, in Japan, productivity is encouraged with a system of unprecedented protection and incentives for workers and cooperation between business and government, in a partnership that Ross Perot calls "21st Century Capitalism."
Could this work in the third world? Perhaps there is no place in the world where poverty is more severe than in Bangladesh. As chronicled by both PBS and the CBS News magazine "60 Minutes," a Harvard-trained economist named Muhammad Yunus was frustrated in his attempts to help impoverished workers. He tells of a woman who was paid two cents a day for her skillful weaving of exquisite baskets which sold in the market for much more than that. But because the woman could not raise enough capital from her subsistence wages to pay a mere six dollars for her own equipment and supplies to make a basket, she could not break free from the grip of poverty. Yunus was tempted to give her the six bucks and be on his way, but realized that giving $6 to one woman would not solve the widespread poverty. So he loaned her the $6 at 16% interest, to be paid back from the higher earnings of her economic self-sufficiency. With this loan, the woman became financially secure. This experience led Yunus to establish the Grameen Bank, which has since made small loans to millions of impoverished Bangladeshis. The model is now being replicated by others, including the World Bank, and with its incentives for real production, addresses underlying causes of poverty with compassion and dignity for those most in need. [Alex Counts, Give Us Credit, Times Books, 1996]
Public Capitalization for Private Enterprise. A proposal that takes the Grameen Bank concept even further might entail some role of the government in funding the capitalization of larger industrial operations (such as factories for heavy machinery, high-tech electronics, solar energy or zero-emission automobiles), providing good jobs at good wages (production coupled with the enhancement of a domestic market of consumers), and then sell them back to the workers as employee-owned cooperatives. This would allow private-sector investments and profit incentives to go directly to the workers who create the wealth, effectively combining ownership, investment and production.
In third world countries, such a proposal would allow the government to stimulate, but not own or operate, private industry while using the terms of the charter to spell out favorable standards for wages, environmental standards and consumer protection that other industrial firms would then have to compete with, generating widespread economic growth in a compassionate framework.
In industrialized free-market economies, such a proposal would allow the government a mechanism for moderating shifts in markets, such as when an obsolete industry is being phased out or military contracts are being scaled back. The government could capitalize new industries that require help in getting established, concentrating in areas hardest hit by economic or social shift, setting standards for wages, employee safety, and protection for consumers and the environment, putting competitive pressure on other firms as an alternative form of industrial regulation. Yet the intervention would always be transitory, because the very act of chartering the cooperative would spell out, from the beginning, the terms of its transfer back to the private sector. Truly, "Free Market Plus!"
A note about inflation: While long-range economic strength depends on a broad base of high-wage, productive employment, in the short run wages can not be increased too rapidly. If the supply of money is drastically increased at a rate too far ahead of increased productive output, there will be too much money and not enough goods to buy with it. This imbalance between supply and demand of money causes inflation. In the short run, inflation must be countered in two ways: first, tying any increase in the total money supply to commensurate increases in total productivity; and second, indexing prices, wages, fees and public benefits as broadly as possible, so that, to whatever extent any price adjustments do occur, they will be distributed evenly.
The long run solution for inflation, of course, is an economy built on a foundation of full employment at maximum productivity. Putting everyone to work creates a strong supply of labor, resulting in downward pressures against excessive wage increases after adequate levels of compensation have been reached so that those who produce goods and services can also afford to buy them. Beyond that, further wage increases are not necessary because full productivity creates an abundant supply of available goods and services, keeping prices as low and as stable as possible.
Including "Demand Side" Factors. Socialist systems fail because consideration of demand factors is not directly linked to decisions about production, which are determined by central planning committees. Similarly, Supply-Siders fail when they seek to separate supply from demand in the economic equation. It is demand from consumers which stimulates production by real producers. And who are these consumers? Everyone in the economy! But since the productive work force is the largest single segment, the same individuals who actually produce wealth (supply) are the largest single component in creating demand for it. Demand is stimulated when the real producers become the consumers.
The overall success attributed to free-market economies is the result of the close link between supply and demand. Demand creates supply. Industries will produce what consumers will buy. But it is not an impotent demand of wishes, rather a demand based on actual sales. If consumers (mostly from the productive work force) cannot afford to become a potent demand-side buying force, the economy becomes stagnant and everyone suffers.
In the 1930's, when the productive work force enjoyed protections which enabled creation of the supply-side, the same consumer force also developed the economic clout to generate demand, which generated further supply, and so on. As long as those who produce the goods can afford to purchase what they create, a domestic market is created and a cycle of economic prosperity ensues. As New Deal protections were solidified over the next four decades, our economy became increasingly prosperous and the gap between rich and poor steadily narrowed. Only in the last decade, under deregulation, have these gains been reversed. Wages for workers decrease, while salaries at the top skyrocket. The rich get richer. There is less buying power (demand) from the labor force (producers/consumers). The economy slows down.
The old economic truism asserts that the economy prospers during a "wartime economy." Why is that? Why should an economic boom result from diverting productive resources away from the production of consumer goods and services, towards products such as bombs and bullets that destroy real wealth? Because a massive redistribution of payments is suddenly diverted away from top-level salaries and profits, towards legions of soldiers (consumers), generally recruited from the bottom levels of the economic strata.
Why shouldn't we have, instead, a "wartime economy" based on productive rather than destructive expenditures, in which good jobs are provided at good wages for building roads, hospitals, housing and manufacturing resources under regulatory controls to prevent the balance of wealth from becoming unbalanced -- concentrated in favor of those who own and control such resources as the economy sags into a top-heavy recession.
This is the essence of "Free Market Plus": to use free market incentives in private enterprise, with just enough government intervention and regulation to balance out the extremes and bring the interests of owners, investors, workers and consumers together in harmony -- a compassionate approach that benefits everyone.
In the extreme example of third-world feudalism, we can see this even more dramatically. If we could take all the hard-working survivalists off the streets and put them in factories producing televisions, autos, appliances, food, and housing, there would be more than enough increased wealth to go around. It wouldn't matter whether those factories were capitalized by private investors, charities, the government, or any combination.
So why don't we put them all in factories? Because, under raw capitalism, if they work in a factory, competitive pressures among the investors who own the productive resources will cause them to be paid as little as possible. This means just enough to survive on. If one owner raises salaries, it is not enough to make a dent in the system, and they reduce their competitive edge in pricing against those who continue to pay the lower salaries. No single investor has the economic clout to go first, so the productive work force does not have enough money to buy the products they could have been producing. There is no mechanism for distributing the wealth that could have been created, so there is no incentive to actually take the laborers off the street and make them productive. The people remain poor, while the investors miss out on a great opportunity. The vicious cycle can only be broken when the community as a whole, through government, establishes minimum standards to protect workers and consumers, reflecting its compassion.
In theory, Adam Smith's "Invisible Hand" of lassiez-faire capitalism is supposed to regulate such excesses, as workers exercise their "economic freedom" to enter into voluntary contracts with investors, exchanging labor for money. But in practice, there is no "free market" if both sides do not have equal bargaining positions. In completely unregulated feudal economies, where wealth is concentrated in the hands of a few, agreements are based on duress: workers have to take what is offered or die from starvation and exposure. The economic imbalance inherent in feudal systems is perpetuated by force, just as it was created by force.
In the European "Middle Ages," those who had military power in an age of ongoing warfare could offer protection to those who would pledge them fealty and enter into the safety of their castles in exchange for "voluntarily" becoming their subjects. This "social contract," passed on through succeeding generations, became the basis for the "divine right" of kings, although failure to accept such "voluntary" terms of extortion would have meant certain death. Similarly, in the Southern United States prior to emancipation, great wealth was created for plantation owners by workers (slaves) who did not even enjoy a token gesture of "free choice." Although that wealth was passed on by inheritance to succeeding generations, any attempt to restore portions of such wealth to the heirs of its creators has always been labeled "reverse discrimination." In nations victimized by colonial oppression, such as in India, Africa and the Philippines, invaders conquered native populations and expropriated the land and its wealth which was, again, passed on through inheritance to succeeding generations even after the end of colonial rule. Yet those who have inherited unearned wealth in these modern feudal economies still refuse to accept economic reforms to restore any portion of such wealth to the heirs of those from whom it was taken by force, who are still forced to accept an unequal economic contract, with a result of widespread poverty.
Raw, unregulated free-market capitalism does not work. Socialism also doesn't work. We need a balance between the extremes. "Free Market Plus" is a basic free-market system, with supply and demand incentives, but with adequate regulation to protect workers and consumers in a compassionate way, ensuring the balance between supply and demand. Policies of greed, or incentives of taxation that favor a few wealthy instead of the general population of producer/consumers, are counter-productive.
Those on the extreme political right wing worship free enterprise like a dogmatic religion, in a free and purely unregulated form, while those on the extreme left would like to throw out the free market altogether. Sensible people see a balance in the middle: the free market provides the foundation for our successful economy, but is one among many factors to consider. We can compare it to sex: sex is the basis of life and free enterprise is the basis of economic life. Both are powerful motivational forces. Long-range sexual satisfaction is maximized within the boundaries of stable relationships, not by just letting the sexual impulse run wild and unrestrained. Similarly, the free market can be destructive when it runs wild and unrestrained, causing extremes of poverty and wealth, and allowing those who own and control productive resources to shut out those who do not and manipulate market forces to gain an unfair advantage over workers and consumers. Reasonable limitations on the excesses of capitalism do not diminish the legitimate operation of free markets any more than rules of the road hurt the safe use of automobiles.
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Helping producer/workers also become domestic consumers of their own production involves broadening the economic base. This means they must have sufficient share of the medium of exchange (money) to buy an equitable share of what they produce. While many aspects of public policy may hinge on welfare policies or benefits for those who cannot or will not work, this commentary is limited to the subject of those who are working and, in many economic sytstems, constitute a large mass of "working poor."
Broadening the economic base requires that policies are in place to ensure adequate wages to those who actually produce goods and services. Ensuring strong wage policy may take many forms: educating front line workers (or non-workers who could become workers) so as to make them more economically valuable, ensuring policies of collective bargaining so that working people actually have a position of bargaining strength when negotiating terms of employment with those who own and/or control the productive resources, maintaining standards of worker safety and healthy working conditions and, at the lowest level, ensuring a minimum standard of wage protection (such as a minimum wage or "living wage").
Broad-based education is one of the key pillars of broad-based economic prosperity. Free public education of children has been the foundation of making the United States the wealthiest nation on earth, as people become more productive and can contribute more to the creation of real wealth. The communities with the weakest educational systems also have the highest levels of poverty. Communities that seek to achieve financial savings of public money by cutting back education are counterproductive. As educational resources are more narrowly focused, the future work force becomes less productive, and lower paid workers are, themselves, less able to participate in creating a broader base of consumer demand. And as high-population generations such as the "Baby Boomers" age, how can a shrinking labor force of lower-wage, less productive workers expect to support an expanding base of retirees? The solution is to expand universal free education beyond K-12, to include free college educational opportunities for everyone. This may sound expensive, but the alternatives are more expensive: building more jails for the uneducated, desperate poor, and lower levels of productivity and innovation that create wealth. In the long run, schools are a community resource pay for themselves many times over.
Broadening the economic base strengthens the overall economic system in several key ways:
Differing Marginal Utility of Money. Money spent in the economic system affects the broad-based economy differently depending on the level at which it is spent. People are equal; dollars are not. Primary layer dollars represent bare survival. Secondary layer represents more security at the survival level. Next is improved quality of survival goods and addition of minor luxuries. Moving far enough up the scale is a very high quality of survival goods, extensive luxuries and tremendous discretionary spending options, which can go for savings, investment, or other categories. It is similar to an economic version of psychology's Maslow's hierarchy. Money spent at the top layer does not have the same broad-based effect as money spent at the bottom; it goes for different things, to a different set of recipients and affects prices in a different way as discretionary spending than would cautiously guarded survival dollars by coupon-clippers. The money IS processed differently by the wealthy and lower paid workers -- just as the principle of supply and demand dictates that increased supply causes lower price, the higher quantity (supply) of money held by a rich person lowers the monetary value (price) and efficiency of each unit (dollar) relative to someone who holds far fewer dollars, though the total monetary value still remains higher.
A high-income owner spends his money differently than a low-income employee: Buying a car? It is likely that a high-income owner/investor will buy a car which is far more expensive than that purchased by the low-income employee; the difference in the cost of a $200,000 luxury sports car and a $10,000 urban runabout is much more than the mere cost of either labor or materials, but includes differing market value based on the owner's ability to pay more; i.e., it is arbitrarily and inefficiently inflated because of the differing marginal level. The same would apply to the differing marginal utility in choices and costs of restaurants, housing, clothing, etc., where the difference in PRICE exceeds the difference in cost to produce or even any objective standard of "quality." In addition to the different ways they spend money on similar products, the wealthy also simply buy things that the working poor do not, such as fine arts, jewelry or collectibles -- all of which saw a tremendous inflation in price (excess of inflation) during the widening gap between rich and poor after Reagan was elected (which even Clinton, barely a Democrat, did little to reverse). As to banking practices, it is far more likely that the low-income employee will make a straight bank deposit and keep all or most of his savings in a bank, whereas the owner/investor would be far more likely to invest in more exotic investment instruments of greater risk (which he can afford), or perhaps in real estate (buying investment properties and, competing with the worker for a house the worker might own but the owner would rent out, driving up the cost of housing for the worker), etc.; the mere range of fluctuations in the owner's investments at a high income level could, in many cases, exceed in a month the employees entire annual income -- a high level of marginal difference. As to the possibility of investing in other businesses, I believe this option provides the greatest option for economic expansion and SHOULD be encouraged with tax incentives -- but the emphasis should be on capitalization and job creation, not time of sale.
Avoiding a Two-Tiered Economy. In the absence of economic protections for workers/consumers, the money does NOT circulate throughout the entire economy. This can be seen in historical, modern and theoretical models.
When workers are being paid little and owners/investors (even on the SAME TEAM) receive a lot, even if the rich owners spend their money at other stores or points of sale, the money doesn't go to other workers (who, by definition, are low-paid) but goes to the owners/investors of those companies that keep the bulk of the revenues in excess of other overhead, resulting in a two-tiered economy.
I do NOT claim that this is the case in the U.S. today -- in recent years we have begun taking steps in that direction (retreating from the greater economic parity of the 50s and 60s), but we are far from there, especially when compared to other nations, which is one key to our fabulous prosperity here.
It WAS the case here during the age of industrial sweatshops or prior to the Depression, and IS the case in many third-world countries. When workers are paid little and owners keep more of the revenue, then increased spending does NOT cause money to "trickle down" to the working class, but merely to circulate in a small, narrowly-focused economic circle. I prefer to see a system where there is the broadest circulation of wealth among all those who help to create it.
The most extreme example of this (both in "wage gap" and in the results) would be slavery: where workers work productively for NO wage, and all the wealth goes to the owners. The owners spend their wealth at the business that are owned by other slave owners. The money only circulates among the "haves"; it does not circulate at all among the slaves.
As workers begin to have minimal income, then there is broader circulation of income, but if their income is less than their productive value, then to the extent that this is a broad-based economic standard, the income spent by the business owners (which is thus disproportionate to their own productive value) also circulates among other owners, not to the economy as a whole.
Fairness. Why should some members of the same productive team be paid many, many multiples of wealth over what others on the same team are paid, who also contributed to the production of the wealth? While there must always be some variation to allow incentives, multiples of several hundred to one are far beyond the "incentive" for personal advancement or increased production. If this is simply a result of unregulated market forces, then it is an example of a case in which the market, by itself, generates results that are not in the best interest of overall economic policy and requires moderate regulation to protect workers and consumers.
Similarly, for those who dispute my claim that avoiding the two-tiered economy not only broadens its base but increases the size and power of the economic engine ... even if you dispute this, why would we not want to at least broaden the base (even without the expansion) to include as many working people as possible in the fruits of what they produce? Or is the answer related to the belief that some people want to keep the circle of economic beneficiaries as small as possible ... as long as THEY are included among the elite few inside the circle?
International Influence. Just as public policy standards are needed because a single business or industry cannot generate the necessary competitive effect on the overall economy, the effectiveness on "broadening the base" depends on the scope of the community. It is difficult for a local community to implement regulatory protection if the town across the river does not; many businesses are able to simply move out of range of such standards and those unable to move are hurt by the ability of those who can to undercut their costs and keep wealth concentrated at the top. At the state level results are more effective, though many business are still able to move to other states. At the national level policy can be implemented more broadly, but still some jobs flee to foreign labor markets where costs, benefits and protections leave those who produce the goods living in third-world squalor and detract from their ability to become domestic consumers of their own production. Ultimately, some kind of international policy is needed to standardize universal benefits.
Yet one country cannot violate the sovereignty of other nations and mandate economic treaties or the internal regulation of domestic economic affairs. But nations can and should take their own DOMESTIC actions which elicit voluntary cooperation by would-be economic partners. For example, the United States cannot impose wage, labor or environmental standards in Mexico. But Mexico wants to sell products made by its low-paid workers in United States markets. This is action which occurs within the U.S. The U.S. can and should initiate its own domestic policy requirement that all goods sold in this country be produced by labor paid at a minimum standard of wages and working conditions based on a percentage of the American standard, computed at the current exchange rate. We could establish a target goal of, say, 60% of American wages, which could be phased in gradually, over a period of several years, for existing import operations, but would apply immediately to new ventures.
Any company importing goods should be required to accept two conditions: 1) That all such goods are produced at the wages and working conditions required by law; and 2) That, in consideration of importing goods to the United States, they accept American judicial review of complaints by workers, so that workers could sue in our courts to recover unpaid wages under this policy (with a treble damages penalty to put some real "teeth" into the proposal and eliminate corruption and favoritism in foreign courts).
This proposal would raise wages for all workers and drive up the competitive value of labor in Mexico, as well as other countries that sell goods here. At the same time, American companies would lose the incentive of cheap labor from foreign production of domestic sales, thus limiting foreign investment to foreign sales. As labor standards improve, workers in Mexico (as well as other third-world countries where there is now an economic draw to the United States) would have less incentive to seek economic refuge in the United States. They would be able to buy the goods and service they produce, thus creating their own domestic market, and the start of an improving economic cycle which they so badly need, while simultaneously addressing the problems of our immigration dilemma.
We already have tariffs to ensure prices, and enforceable tariff rules to ensure compliance with United States standards of product safety and environmental standards. Why should protections for the workers who actually produce tangible wealth, both here and abroad, be exempt from protection? It is time now to include a wage tariff which would protect labor here and abroad, broaden the economic base from the bottom up and improve conditions in other countries without infringing their sovereignty in any way since the proposal only regulates their lucrative commercial operations in the United States which they would adopt on a purely voluntary basis in consideration of such desirable trade opportunities.
Jump to Subheading:
Failure of Extremism | Balance
Between Extremes | Fallacies of Supply
Side
Models for Success | Broad-based
Economy | Fiscally Responsible Compassion
The common solutions for today's most pressing social problems lie in policies that are consistent with personal and public standards of compassion (without trying to compel compassionate feelings nor legislating personal morality). But "compassion" does not necessarily require grandiose and expensive bureaucracies. In the 1960's, during the "Great Society," combined federal and state taxes for Americans of average income were much less than today. Yet the government was able to provide more programs and services, with budget deficits a fraction of today's (and even budget surpluses in some states). But today, despite budget-cutting efforts, we pay more taxes for fewer services.
The old saying goes, "If you give a man a fish, you feed him today; if you teach him to fish, you feed him for a lifetime." We need to stop the ongoing and constant expense of giving out fishes, and invest in teaching skills and attitudes to those who have missed out on nurturing growth opportunities so they will not only survive, but prosper, and with a better life for themselves and a more productive economy for everyone.
"Programs" which invest in developing productive human potential do not cause deficits. While examples of outright waste and fraud need to be cut, the real solution goes much deeper. Even many good programs are riddled with layers of fat (inefficiency, waste, counterproductive incentives to claim entitlements, top-heavy management and corruption) that could be cut. The government is like a fat man whose doctor tells him to lose twenty pounds. He eats another plate of bacon and cuts off a leg. Instead of merely deciding whether to cut or keep existing programs in the budget, we should ask why the program costs so much, and how we can cut back the fat while maintaining the same or better service. Because politicians are protective of "pork-barrel" waste that benefits their special interests and constituents, whenever they are cornered with the need for cutting government costs, they scare away the reformers by threatening to reduce or eliminate essential services, like police patrols or trash pickup, instead of the real budgetary reform process that's really needed.
Real budgetary reform, to allow enough money for the operation of government in its proper but limited role, consistent with compassionate public policy, must include the following measures: 1) we must require spending priorities that favor preventing rather than solving problems; 2) we must mandate maximum levels of administrative overhead; and, 3) we must replace the built-in negative incentives of "base-line budgeting" with positive incentives that favor more prudent spending.
Proactive spending priorities. In order to return to the more efficient days when we spent less and got more for our money, we must again pay for less expensive programs to prevent problems (education, mental health, early childhood training, adequate minimum wages and relief for poverty and hopelessness), instead of more expensive programs to solve them after they occur (jails, law enforcement, and drug enforcement).
I witnessed a dramatic example of this through my work with Deaf people. One day I got a call to help out with a 20-year-old youth who had gone to a recovery house for drug addicts, asking for help. If he had money or insurance, a private hospital bed would have been available. They told him that, on an emergency basis, they could have a bed open as soon as six days. But when an addict is standing there saying, "Please, help me," six days might as well be a lifetime. By tomorrow he might no longer be in the mood for help. Of course, six days later he was nowhere to be found. The next time I saw that young man was several months later, when I got a call from the jail after he had been arrested for a burglary to support his drug habit. In the middle of America's "War on Drugs," one of the "enemy" wanted to voluntarily surrender and we didn't have the money to help him. How much more do you think it cost for the police, courts and jails, not to mention costs to a victim and to the lost soul of a young deaf man, than if we had just helped him the first time he asked?
I've also seen the reverse -- the successes when we did help. A couple years later, I got another request to help out a different 20-year-old fellow. He had one foot in the gangs, associating with people encouraging a deeper involvement in drugs and crime. We got him into an adult education program, followed by job training and job placement. With improved self-esteem based on real accomplishments and confidence that he had viable, positive alternatives, he was able to choose a better direction for his life. Those services cost money, but we didn't have to pay the higher costs of less desirable future consequences. Today, he is a happy, productive member of the workforce who contributes to his community.
Limiting administrative overhead. Levels of administrative overhead in the public sector are many times what free-market competition allows for private businesses or charities. We must develop strict definitions of the differences between overhead and front-line services. Required budget cuts to meet spending limits would necessarily cut salaries or personnel from administrative staff (by attrition or by reassignment to front-line service duties) until target ratios were achieved, before any services could be cut.
Positive incentives to save. Current base-line budgeting policies encourage waste and inefficiency. If an agency doesn't spend its entire budget, next year's budget will be reduced accordingly. In order to trim the fat from the budget, incentives to conserve must be written into all funding measures. In the private sector, the profit motives provide such incentives. We need similar positive incentives in the public sector. For employees, monetary rewards based on a percentage of savings for cost-cutting suggestions would encourage them to reveal where much of the fat his hidden. For managerial and administrative staff, salaries should be cut by a substantial amount, and replaced with bonus options tied to a combination of budget reductions and service performance levels. People who work in public-sector offices know where they've padded the budgets. In the present system, they've had little choice if they wanted to survive. But with a revised system of incentives aimed at their own pockets, you'll be surprised how fast they cut budgets to earn bonuses!
Long range solutions. The budget can only be cut so far by "cutting back," because of "safety net" payments guaranteed by law. The way to reduce costs for "entitlements" (welfare, Social Security, Medicare, etc.) is not to cut people off and throw them out into the street, but rather to offer attractive alternatives for real personal development. When people have a good educational foundation and access to job training in an economy that offers good jobs to the productive sector, they enrich society instead of draining its resources. The most practical approaches for long-range solutions demonstrate how all our resources -- law enforcement plus education plus social services -- must work together, in ways that are compassionate as well as fiscally-responsible.
"No man is an island." Economic policies which perpetuate poverty do not benefit the rich. We all pay the price, in a sluggish economy and the higher costs of side effects such as crime, drug abuse and urban blight. Just as personal policies of compassion promote the opportunities for personal wealth, so also do public policies consistent with the compassion of "Free Market Plus" strengthen the overall economy.
In addition to other books and articles by the author noted
below, specific analysis of fairness issues related specifically
to tax policy can be found in the commentary "Flat Tax Fiasco"
by the same author, at:
http://www.wordwiz72.com/flattax.html.
Copyright (c) 1999,2007 Douglas Dunn / Word Wizards communications
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