It seems to me that even the economists, who should have been all over this, have missed the boat about tax cuts for the wealthy and for wealthy corporations will not create more jobs. They have also missed why tax increases on the wealthy will not cost jobs. It is the Law of Diminishing Returns.
While normally applied to factors of production, the law of diminishing returns extends to any goods or services, or anything one has acquired in life. Its definition is:
A classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input.
What does that have to do with taxes on corporations an the wealthy and its relationship to jobs? Here are a few illustrations.Illustration 1: When somebody is really hungry and has no food in the house, if he gets $10.00, he will go out and spend it all on food. After he has eaten, if he gets another $10.00, he is not as hungry, so he may only spend half of it on food. After that, getting another 10 spot may only cause him to spend $2.00 on food, and once he is full, he won’t spend any more of it on food. This is the law of diminishing returns. The first meal is a necessity, the second is a luxury, soon you need no more and trying to eat more stops being a good, it becomes a bad. You may get so stuffed that the sight of food is unappealing. Or think of zucchini. If your plant yields two zucchini, you may eat them. If it gives you 10, you may eat 8 and give two away. After 25, you may pay people to take them.
Illustration 2: Think of employees. If you have work for twice as many people as you have and can sell as much product as twice as many employees can produce, if you get some increased income or decreased expenditure, you will hire more employees. You will do so as long as the next person hired produces more than he costs. However, as soon as you have enough employees to meet demand, you stop hiring. In fact, if you hire more, they will get in each other’s way and will not benefit the company.
The wealthy and the corporations currently have their needs met, and most of their wants. They really don’t have anything compelling to spend money on. You could decrease their taxes to zero (and have in many cases), and they won’t buy more nor will they hire more. The money will sit around, lacking anything to spend it on. This is especially true for corporations in today’s economy. With people too strapped for cash to be spending freely, demand is suppressed. Making more product will not produce a return because nobody will buy it. It stops being a good and starts being a bad because you have spend money to store the excess. No well run corporation will do that.
However, if you were to tax the wealthy and the corporations, you could use that money on projects the country needs (think bridges, airports, schools). That would create jobs. At first, the new jobholders would spend on clearing debt and the necessities they have been without. That is a good thing, it gets money circulating again. Then they can start buying other things. That would stimulate demand. More demand would mean more products would be sold. More sold products means more profits for the corporations, but this time there would be a need for more employees. Who would allow the corporations to make more profits.
It is amazing that the corporations would fight the idea of ensuring people were employed so they could buy their goods. It is what the Marshall plan after WWII was all about – ensuring Europeans had income so they could buy American goods and services. It was what the labor movement has always been about – ensuring healthy laborers had income and time to enjoy it so the economy could thrive. (This also benefits employers because healthy, fed and happy employees are more productive.)
When the Republicans talk about how tax cuts for the rich creates jobs, we need to remind them of the most basic of Economic tautologies, the Law of Diminishing Returns.
I have read a lot of articles about how the new tax bill will impact people in this country and our economy. But I have read none that include the multiplier effect. That is probably the scariest aspect of the new tax bill and we had better understand it. I ran the model of the multiplier effect on this tax bill, but I only had old data, when our income inequality was not nearly as great as it is today. Even those old data indicated that the tax bill will constrict our economy by at least 15%, but with today’s income inequality numbers, the model probably understates the constriction. It won’t be just bad, it will tank our economy.
In order to understand the multiplier effect, you first need to understand the marginal propensity to consume vs. the marginal propensity to save, which I explained in a diary some time ago, here. The multiplier is the increase of money that arises from any injection into the economy.
Many models use a single marginal propensity to consume (hereafter MPC) for the aggregate economy. However, that is not accurate. The MPC is different at different levels of income. It is easy to understand why. People who are at the bottom of the economy are deciding among necessities. When they receive extra funds, they have necessities that they have had to do without, and they spend the entire amount of extra funds they get. People at higher income levels have been doing without niceties but not without necessities might save a little and spend the rest. People at the top income levels are already buying everything they want to buy, and will probably not buy more just because they get more. So while the MPC of the person at the bottom (and probably lower middle) will have an MPC of 1, people at the top will have an MPC of 0, and those in the upper middle somewhere in between. The multiplier will be around 5 when the MPC is 1, and around 0 when the MPC is 0.
So how does the multiplier work? Let’s say Ben (not his real name) is in the lower bracket. He has been putting off buying clothes and shoes for his kids and repairing the car in order to pay the rent. He gets $1000. As soon as he gets it, he goes and repairs the car for $800, and gets his kids the shoes and clothes they need, costing him $200. The repair shop has also been in tight financial circumstances, so they spend $500 on equipment maintenance and $300 on paint. The shoes and clothing store hires another person. The equipment maintenance company spends some on tools, etc. etc. etc. By the time the $1000 is circulated, it has generated $5000 worth of goods and services. As you can calculate, this is 5 times the initial cash infusion, thus the multiplier of 5.
Tom is in the next bracket. He has his basic bills paid, but has been wanting a new coat. He gets $1000, saves $200, and buys his coat for $800. The coat dealer saves a bit and spends a bit. It circulates to generate $4000 in goods and services for the $1000 injected into the economy, thus multiplier of 4.
Pete is in the top bracket. He has been buying all he wants, and has a lot stashed away. He simply adds that $1000 to what he already has. The injection of $1000 into the economy yields nothing in goods or services, thus a multiplier of 0.
This tax bill proposes to TAKE money from the bottom most extensively, and give it to the top. As a result, we will run into the negative multiplier. How does this work?
If we take $1000 from Ben, he will have to make even harder choices and do without more things. This will mean he has to somehow figure out how to not spend $1000 that he would have been spending. When he doesn’t spend, the places where he would have spent receive less income. They have to cut costs. They can either cut their purchases or their staffs. The reduced purchases and staff lead to other companies having to cut back. In the mean time, Pete is receiving more money, but he is not spending it. So no other companies have a reason to hire or buy more, Pete is doing nothing to increase demand. The economy constricts. The irony is, the large corporations and wealthy who are getting the most benefit from this income redistribution will also suffer. When people can’t buy goods and services, the wealthy have no place to generate income.
Using really old numbers, I calculated a multiplier of -15. It could be worse, depending on when and if the downward spiral is stopped. Unfortunately, there does not seem to be an equilibrium where it will stabilize. We did not see an equilibrium in the Great Depression, because of the New Deal efforts by FDR, and the world war. Had those not happened, who knows how far it would have gone?
I invite any economists who may read this to do their own calculations, hopefully on newer data. Do you find the same result? I don’t know how anyone could support this farce.
This is my next installation in my economic series about the coming Corporate Feudalism and how we avoid it.
I was raised in a Christian family, more specifically, a Methodist family. (I’m Catholic now, but was Methodist then.) In our church, while the adults attended services, the children attended Sunday school. In Sunday school, we would be told the stories in the Bible and talk about how those stories applied to our lives today. One of those stories was of David and Goliath.
I’m sure most of you are familiar with that story. Back in the days when Saul was king of the Israelites, a great Philistine army came to their borders. The Philistine general sent word to Saul that instead of the two armies fighting each other, each side could send out a champion to do battle, and if the Philistine champion won, the Philistine army would take over the land of the Israelites, and the Israelites would become their slaves. If the Philistine lost, the Philistine army would become the Israeli subjects. Then they brought forth Goliath. He was a huge man, and he had been supplied by the Philistines with the best weapons and armor that could be forged at that time. He struck fear into the hearts of those in the Israelite army. For 40 days, Goliath came out in the morning and at night shouting this challenge. For 40 days and nights, the Israelite army quivered in their tents and did not send anybody out to meet the challenge. Finally, one day, David (who wasn’t in the army, he stayed home tending sheep) was visiting his brothers in the army and taking them food. Goliath came out and bellowed his challenge. When nobody stepped forth, David said, “I can take him,” and volunteered. He picked up five smooth stones from a nearby stream and used his sling to hurl a stone at Goliath. The stone hit Goliath in the head, and Goliath died. David won, and the rest is history. Or a morality tale. I have no interest in arguing which.
So then the Sunday school teacher began to talk about how this story was applicable in our lives. She said, “You see? David was just a boy, not very big, not trained to be a soldier. But he was able to kill Goliath. If you have faith, and if God is with you, even you can beat the big bullies you come up against. You can beat the bad guys.” And so it seems, that whenever anybody goes up against a big corporation and wins, or goes up against a big anything and wins, we recall the story of David and Goliath.
I got to thinking about that story a while back (I don’t know why, I just do things like that sometimes). Today, there is a Philistine army looking to enslave us. It is corporate America. They have an army of Goliaths, in the form of managers. The armor they have given their Goliaths is the power of the corporation. The weapons include, “company policy,” and “it’s the going pay scale,” and “nobody else expects …,” and “if you don’t like it, we can always find somebody else,” and “team player.” Those words have as much bite to them as the sharpest Philistine sword, and they beat employees into submission even more quickly. You have to be quite a David to stand up to that.
And here’s where something about that story began to bother me. Suddenly it dawned on me. The passage in the Bible doesn’t say how big the army was, but in context you can gather that the army was tens of thousands. On top of that army, there were the non-soldiers of Israel, who, like David, were doing normal things. David was tending sheep. Others were also tending flocks, or raising crops, or building houses or whatever people did. So in all of Israel were more than tens of thousands of people. Yet, in all of those tens of thousands, there was only one David. Only one. The odds of that one in tens of thousands being any particular person were really small. Sunday school teachers were talking to the children as if each of them could be that one in tens of thousands. But in reality, there was a higher probability of any one of them becoming a professional NFL player than being that one David. Applying that to today, the chances of any employee being able to stand up to the Goliaths sent out by the Corporate Philistines is really, really tiny. The Corporations set forth their terms, and the employees surrender. Another thing. Saul had chartered David to represent the Israelites. Whatever David gained was gained for and on behalf of all the kingdom. If a single employee does somehow manage to be a David, he is not chartered to represent anybody but himself. Anything he is able to wrest from the local Goliath is only for himself.
Something else occurred to me. There was only one David, but behind him was an Israelite army of tens of thousands. That is a part I have never heard anybody talk about. Recall that every day, for 40 days, Goliath came forth in the morning and at night to bellow his challenge. 40 days. The Philistine Army sat idle for 40 stupid days. Armies aren’t meant to sit in a camp waiting to attack for 40 days. Why didn’t they just attack? Because in front of them was an army of tens of thousands. While the Israelite army was not full of Davids, it was made up of tens of thousands of trained, competent soldiers. Those tens of thousands were standing in solidarity, defending their freedom, defending their families, their land, their homes, their futures. They did not have to be Davids to be good soldiers. They were prepared to put up a good fight. Even if the Philistines were able to defeat that army of tens of thousands, many would die, and many more would be badly injured. And they could lose. For some reason, this feared army that had rolled over other kingdoms en route to Israel did not really want to fight this battle. So they sent their Goliath out in the belief that their Goliath could defeat anybody the Israelites could bring forward. If there had been no Israelite army, there would have been no David. Rather, without that army, the Philistines would have simply run over the kingdom killing anybody who got in their way. That would have included David. Standing alone, the people were helpless.
It is no different when the employee faces the corporate Goliath. If he stands alone, he has no chance. The corporation has all the advantages. It is only when employees band together into an army and stand in solidarity that the power is leveled. Because the union army will be standing in solidarity, defending their freedom, their families, their homes, their futures. When they form a union, join the union, and stand with the union, they are on a common footing with the corporations. It is then that the union can find and charter a David to go to battle on behalf of all the members. And what happened when David killed Goliath? “When the Philistines saw that their hero was dead, they turned and ran. Then the men of Israel and Judah surged forward with a shout and pursued the Philistines to the entrance of Gath and to the gates of Ekron. Their dead were strewn along the Shaaraim road to Gath and Ekron.” While we don’t expect the union army to kill all the corporatists, we can expect the corporations to back off. Back in the day, before Ronnie the Destroyer broke the air traffic control union and his party began to dissemble unions, unions had won for their members (and for many who weren’t in the unions) pensions, paid vacation, health care coverage, competitive salaries and safer work environments. As unions have been dismantled, all those benefits have either been eliminated or cut back drastically. We need unions to help get them back. Because we can’t do it individually. There was only one David. And even he didn’t stand alone. The Israelite army made David possible.
My next piece will be about how we help our unions regain influence and what unions need to do.
John Kasich was on Meet the Press on August 27 when he said, “The problem with the Democrats––I can’t figure out what they’re for. I mean, they have a golden opportunity, right, to be able to come in and win elections, but they can’t figure out anything other than the fact that they don’t like Donald Trump. I mean, they better figure out what they are. What’s happened to the Democratic party? It’s almost lost its soul and it better get its act together if they want to compete.”
The Democrats have been pretty clear what they stand for for the past 60 years or more. John, the only way you don’t know what they stand for is if you aren’t listening. But if you will listen, I will try to one more time try to make it clear for you. We Democrats may seek to reach these goals via different paths, but we share a final destination. (I will also acknowledge that I am but one Democrat, and others have their own ideas. Please feel free to present your own.)
First and foremost, Democrats believe that all people are created equal. It is surprising that Republicans don’t believe that too, but based on their policies, they don’t. We believe that all men and women are created equal and as such are part of the rich tapestry of this nation. This equality is conferred regardless of gender, sexual orientation or gender identity. This equality is conferred regardless of religion or belief system, whether or not they believe in any God. This equality is conferred regardless of ethnic origin or race. This equality is conferred regardless of economic status. It is these differences that make our country vibrant, and keep us moving forward. As such, all men and women have the right to live their lives free from challenge, obstruction, harassment or attack, whether by federal or local government, law enforcement or regular citizens. We believe that it is the obligation of all persons to do whatever they are able to ensure this equality, to extend respect to all persons and to encourage others to do the same. (On the other hand, we do not believe that corporations are people.)
We believe that every citizen should have the right to easy access to the ballot box. Any laws making this access easier should be enacted, and any laws making this access more difficult should be immediately repealed. We believe there should be an artifact of each ballot that can be audited should there be doubt about the outcome or legitimacy of the final count. We believe that the concept of democracy means of the people, by the people and for the people, and that the people means all the people.
To ensure that every citizen is equally represented by the people they elect, we believe that it should not be possible for large corporations and the wealthy to buy those representatives. To that end, we believe in the need for campaign reform. While PACs serve a valuable purpose in being a clearing house for fundraising and distribution of donations, we believe that the size of individual donations should be limited. Since we don’t accept that corporations are people, we believe that corporations should not be allowed to donate. We believe that dark money should be brought into the light. (Such regulations would also make it more difficult to use PACs for money laundering, which appears to have been happening.) The word “politics” is derived from the Greek “polis,” which means community. It is doing the work of running the community, whether a school district or the nation. It is not doing the work of the highest donors.
We believe that all persons have the right to determine their own destinies. They have the right to control their own bodies. They have the right to make their own reproductive choices. We believe that health care is a right regardless of social status, age or preexisting conditions, and that access to affordable care is an obligation of society to its members. We believe that health conditions should not bankrupt a person or a family, and that no person should be denied a full life due to a condition that can be cured or treated.
We believe that the surest road to a fair and open society is education. Basic education must be provided to all persons free of charge, and advanced education must be accessible and affordable. This education must not be biased toward any class or group of people. It is in the national interest to have a well educated public. Taxpayer funds should not be used for private or religious educational institutions, thereby diluting the educational opportunities for those who neither can afford the private institutions nor belong to the favored religious organizations.
We believe that immigrants make this nation richer and more vibrant. Foreigners on our soil should be treated with dignity and respect. Citizenship for those who wish to participate in our great experiment should be facilitated. Children who have known no other home should be welcome here as full citizens. We do not understand how a child brought to this country by his parents could be accused of committing a crime. Since when is it a crime to go where your parents go? We also support acceptance of refugees as a sign of our moral compass and a benefit to our country.
We believe in our future. To that end, we must be protectors of our environment. We believe that all people have a right to clean water and air. We accept the word of 97% of the world’s scientists that climate change is real, that it is being accelerated due to human behavior, and that we are nearing a time when we can’t avoid the consequences of neglecting our environment. Therefore, we should be moving from fossil fuel to renewable energy sources. As we do so, we need to focus on retraining those who rely on jobs in fossil fuel to enable employment in renewables. There will be plenty of jobs to go around.
We believe that public investments that have or will be made with public funds in infrastructure should not be turned over to private entities for their profit, whether those investments were in schools, utilities or roads. Turning those public investments over to private entities constitutes a taking from the public at large who paid for them in their taxes. Our infrastructure assets are a source of national security. These assets should be kept in public domain, invested in, and maintained. By happy coincidence, because they require workers to be local, jobs resulting from this investment cannot be offshored.
We believe that throughout their careers, workers have paid in to social security and medicare with the promise that that money would be available to them when they could no longer work. These are earned benefits, and are not negotiable. We oppose converting the funds they contributed to a scheme to balance the national budget while giving tax breaks to the wealthiest. We also believe it benefits all of us when we enable those who are disabled to contribute all they can to our society. We believe that it is the obligation of the government to stand up for the rights of the disenfranchised, the less privileged, the elderly and the disabled.
We believe in the right of workers to band together in unions to create an equal playing field with their employers. We recognize the lack of power of a single person when going up against a large corporation, and the only remedy is the power of numbers. We believe that no person who works full time should live in poverty, and that any job worth doing deserves a living wage.
We believe that, while gun ownership is a right, that right does not preclude sensible monitoring. This monitoring can and should include, as with automobiles, registration and the assurance that these firearms are not modified, or are modified in a legal way, and that they are in the proper hands. Gun owners, as with automobiles, should obtain licenses to ensure they are appropriate owners and that they know safe operation and storage procedures. Those owners become responsible for incidents involving their guns, whether accidental or intentional.
We believe that we live in a complicated world and there is always something to be fighting over. However, we believe that diplomacy should be employed as our first choice, and hostilities should be a last resort. We believe our military might should be used as sparingly as possible. When diplomatic options run out and hostility cannot be avoided, we believe we should provide our military with all necessary resources while on the battlefield, and services for those who serve should be freely provided for once they return. The notion of a homeless veteran is an embarrassment. The idea of soldiers coming home broken and their injuries, both physical and mental, being ignored is beyond immoral. Turning such services over to corporations to profit from these injuries is beyond corrupt. Moreover, it is an abomination when our national leaders appear to have a higher regard for our adversaries than our men and women in uniform.
Finally, we believe that the wealthier a person is, the more that person has benefited from the opportunities offered by this great land. We recognize that no person becomes wealthy without the benefits provided by the society at large, whether it be education, the infrastructure that makes enterprise viable, or the police and fire protection that make the enterprise safe, no person can become wealthy without such investments by the society at large. We therefore believe that such persons should happily pay a higher share of income to maintain the viability of those benefits. Thus, we believe in a graduated income tax. From those who have received more, more is expected – it is the license for prosperity.
Governor Kasich, is this a clear statement? In this, do you find a soul? Can’t you see a vision here? Compare this declaration to the behaviors and policies you have seen in your own party. Which more closely resembles your definition of morality?
The Republicans are racing to enact AHCA under cloud of secrecy and distraction provided by the Russia investigation. They are intent on their mission and won’t be denied. But why the hurry, why the secrecy, why the subterfuge and why the cruelty?
The AHCA and other upcoming bills tell us the agenda of the Republican party. If we analyze what they are doing, we can connect the dots as to why, and where they want to take our country. I can’t comment on the Senate version of AHCA because nobody has seen it. But I can comment on the House version. We can be confident that, while the Senate version may have some differences, the effect will be similar. The House and Senate are both controlled by Republicans, and those in charge share an agenda. Thus, while there may be differences around the edges, the substance will be intact.
We can derive from the CBO score that the House AHCA benefits those of privilege and the healthy young, while gravely harming the aged, the disabled, and the poor. The question we ask is why? Why are they protecting those in least need of protection and savaging those in greatest need of protection? What is the end game?
As I wrote in a post earlier (read it here), we are racing toward corporate feudalism. Based on their priorities and allegiances, it is obvious that this is the goal of the Republican establishment. They have a protected class, and the purpose of the rest of society is to serve, pamper and enrich the protected ones. The protected class consists of corporations and the wealthy. To complete corporate feudalism, they must have control of all factors of production, that is, the means of creating wealth. A read of the House version of AHCA and the CBO scoring of it shows that they are doing all they can to accomplish that. It also reveals a sinister undercurrent in the Republican Establishment thinking: Those who are not able to serve, pamper and enrich the pampered ones have a duty to die. I will say it again, those who do not fit the purpose of the elite have a duty to die. But, as I will explain later, they must die in the most horrible ways, and only after any wealth they may have been able to generate is returned to the corporations.
Let’s take a look at who is primarily targeted by the House AHCA. It is the elderly, the disabled, those with preexisting conditions, the poor and the sick. Why are they the targets? These are the people who contribute nothing or little to the corporate bottom line. These are the people Republicans have been calling the “takers.” Not the corporations making billions in profits while collecting millions in tax dollars. The “takers” are the people who continue to live while not enriching the protected. Based on the content of bills being pushed by the Republicans, it is clear Republicans believe these “takers” have a duty to die and stop using resources.
Those who are not targeted, the young and healthy at their peak of production, are covered by AHCA as long as they stay healthy. They bring in far more profit than they cost to cover. The protected class needs them to do the work. The young and healthy are the most valuable factors of production, and they are worth the investment to maintain. But the bill has some huge gotchas in it for them. If they have preexisting conditions, that will be out of pocket, and at a higher rate than the actual cost to treat those conditions. (For example, there is no way it costs $2000 a month to make and distribute insulin to a diabetic. But that is what they are going charge the diabetic. Same with a number of other drugs. The pharmaceuticals are having a heyday with life saving drugs.) The portion of the bill that allows lifetime caps on coverage for the employed is a way to exact maximum profit from workers and discard them when they are no longer profitable. It also discourages workers from accessing their coverage in order to have it available in time of great need.
Women and children are targeted in this bill. We should note that with this bill plus their other policies and practices, women are to be nothing beyond toys and incubators. There is to be no sex education (hence Betsy), no birth control (hence targeting planned parenthood and other Republican sponsored bills both in congress and in the states), no prenatal coverage (now, isn’t that crazy if you want a healthy baby?), no maternity coverage, no neonatal protection, and once the child is born, no public assistance (they are working on dumping WIC and severely restrict even food stamps), no assistance with child care. But if you don’t manage to raise the child the way they think the child should be raised, you can be fined, charged, arrested and even imprisoned. This only makes sense in a corporate feudal framework where women and children are little more than livestock. We should notice from their behavior that in their minds, the place of women in their society is the serving, pampering and enriching via sex. Going beyond reproduction, Republicans are pushing policies that would have children not from the protected class educated in institutions that push a religion that supports their caste system and restricts knowledge to those things that will make those children grow up to be little more than capital (financial assets, like machinery). Once their value is fully depreciated, they revert to being “takers.”
The “takers” have a duty to die. But if you look at the rest of the administration, you find that it is more than a duty to die. AG Sessions has spoken out against both medical marijuana and death with dignity laws. Why would he oppose those? The reason is evil in the rawest sense. Marijuana has been shown to relieve pain and other symptoms of disease and is relatively inexpensive. It has been shown to offer comfort for cancer patients, especially in their final stages. It has been shown to offer some help for dementia patients. Why not encourage its use? And why, when a person has been diagnosed with a terminal illness, not allow them to pass on peacefully and painlessly at a time of their choosing? I can only come up with one rationale for these things. People using medical marijuana are not using expensive pharmaceuticals. People who choose to die peacefully and at the time of their choosing wind up not using the pain killers or living in nursing homes. In other words, Republicans want to ensure that as you are suffering and dying, you will first cough up any assets you have managed to acquire in your life to corporate interests before you go. You have a duty to die, and to die broke and in agony. To serve the protected class.
I am not sure what can be done about our trajectory. Now that the GOP is in control of two branches of government and is about to cement their control in the judiciary (not only in the Supreme Court, but in all the Federal courts as well), a course correction may not be possible. As of this summer, we may be officially a corporate feudal state.