Wednesday, November 09, 2005

How The Rich keep on Getting Richer

...and how to close the income gap

Or, On the Economics of Deficit Spending

Imagine, for a moment, that there is a group of people out there that produce a highly valuable commodity... a commodity that is valuable for all the right reasons. It makes the lives of everyone who has it better. It is also a new commodity... not many people are producing it yet. Those that do produce it make a lot of money.

As a result of this, lots of other people try to get into producing this product. Those who are already doing so come up with ways of making more than they already are, to generate more profits. The class of individuals and groups that produce this product grows, many lured into this business by the fact that it is a very good, well paying occupation. As more people get into producing it, the price for this commodity is driven downward. Pretty soon, everybody who wants some has some, and people stop buying it at the rate they used to. Prices drop so far that the producers start going out of business. Those that don't have to struggle just to get by.

Imagine that this makes you very sad. You understand history as the story of how noble, how valuable these people were. You regard this profession with a sort of nostalgic romanticism, and would like to see measures implemented that will preserve this class of men. What sorts of things could be done to help these people out?

Well, one thing you could do is buy up and destroy their product, ensuring a continuing level of demand that will keep prices up to where they can all make a profit. Another thing you could do is make them exempt from certain taxes, and paying a lower rate than most on others--this also helps their bottom line. A third thing you could do is pay them directly... a direct subsidy for these producers. All of these things would ensure that these people continue to make the profits they once did.

Every place you see a group of people making a great deal of money--without the use of force to ensure that no newcomers are allowed to horn in on their territory, or the use of force to take unearned resources directly--you can bet that the basic rules of supply and demand is the reason. These people produce a product or service for which there is great demand, but a low supply. Over time, however, the amount produced overall should increase, as more and more people get into that business. Eventually, prices fall, providing a windfall for the consumer.

On "The Rich"

One thing that everybody knows is that the more money you have, the more money you can make. A poor man spends all his money on necessities. A wealthy man can invest his money, thus making more money. In general, the reason for this is the same as for any case where one group of people is making more than another: they provide a valuable product or service. And the product these people provide is called Capital.

Capital can be used to meet any need in life. It can be spent to buy quality food, expensive clothing, fast cars, big houses, rare breeds of dog, and political influence. However, the person who spends capital this way exclusively will soon find he hasn't any capital left. It can also be used to buy tools, machinery, land, and buildings. It can be used to pay the salaries of scientists and inventors. In short, it is used to produce more capital, which can then be used to make yet more capital, and more, and more, and more...

And capital is a valuable commodity. When a person borrows money from someone who has more than they in order to start a business, promising to pay back with interest, they are essentially "buying" capital. Even the poor person who charges on his credit card and pays back with interest is buying capital, generally at a higher rate at anyone else. Capital is very useful, very valuable, and the wealthy who use it wisely in order to get more wealthy are also creating jobs for people who would otherwise be unemployed, and more products and services at better prices for consumers. The real estate investor expands the housing supply; the wall street investor expands the supply of products and services. This is why they make money. They provide a valuable product--capital.

However, like any product, eventually, the supply must exceed the demand, and capital is no exception. Eventually, all the money there is to be made has been made. Now, the factory owner, lacking machinery to buy, must start paying his workers more if he wants to maintain an edge over his competitors (the better paying factory gets better workers). Contractors and architects must make better buildings to attract buyers away from their many competitors--this means attracting more skilled laborers, which means paying them more. The person who's sole profession is investing sees slimmer and slimmer profit margins, until the day comes when investors need a day job. Labor becomes more valuable than capital, thus workers make more money than people who's sole virtue is access to a large supply of capital!

Neat theory, but I'll bet you're wondering why this doesn't seem to happen. We've had two-hundred years of capitalism, and the gap between rich and poor continues to widen, largely due to the seemingly inexhaustible value of capital. Why is this? Remember: I began this essay with a discussion of the means by which a government can prop up a particular class of producers who are no longer benefited by the laws of supply and demand, due to the fact that they are overproduction. Let us look at each one in turn.

The third was to pay the producer a direct subsidy. I don't know enough about the different subsidies to demonstrate direct payments by government to the capital class, so I'll move on.

The second was lower tax rates for the producer than for everyone else. Capital gains taxes are lower than income taxes--labor is taxed at a higher rate than making money by spending it. The tax code also contains many tax breaks you need a tax lawyer to find... thus the rich can avoid those as well, while poorer people cannot. The property tax exemption is most valuable to those with the most valuable property... another way the rich are taxed at a lower rate.

However, the first I mentioned is the biggest benefit of all to the upper class: purchasing and destroying product to artificially drive up prices. The government does this through massive amounts of deficit spending. When the rich run out of real investment opportunities, there are always government bonds to invest in. The government "buys" capital from these people, and then "destroys" it, by paying bureaucrats to do nothing, or do what they do inefficiently. Every time some liberal proposes more spending to benefit the lower classes, what they're really proposing is yet more buy-and-destroy to prop up the wealthy, while throwing a very small bone at the people they are claiming to help.

Government funded research is another way the government helps the wealthy stay ahead. Technological progress opens up new demand for capital, as new tools and techniques are invented and discovered. Capital is required to exploit these new technologies. And for the general investor, it doesn't matter that these new techniques are open for anybody to exploit--all they have to do is invest in multiple firms, and they get a piece of the action wherever it appears. An added bonus is that because government research is typically politically (rather than technologically) motivated, it is less efficient than private sector research... thus wasting more capital. The best part is that technological progress goes forward without investors having to risk their capital paying for the research. Government bonds get paid back with interest, no matter how unsuccessful and inefficient the borrower is.

Notice that both of these things are things that liberals advocate, ostensibly to benefit the poor and the general public. Their efforts are quite counterproductive. The real benefactors are people whose sole virtue is access to a large pool of capital.

Probably the best thing liberals could do to advance their cause is to join with fiscal conservatives in a genuine call for balanced budgets. As capital stops being wasted through this "government purchase program," the people who have it will have to invest it elsewhere. The value of labor will increase as the supply of capital outpaces demand. The minimum wage would go obsolete! If this sounds like "Reganomics", remember that the deficit soared during his administration. He may have talked the talk, but he most certainly did not walk the walk. Were liberals and fiscal conservatives to get together on this issue, the result would be a windfall for labor, and a severe blow to the capital class.