The Law of Diminishing Returns – or Why Tax Cuts for Wealthy Corporations Won’t Create Jobs

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.

The Negative Multiplier Effect and the New Tax Bill: Tanking the Economy

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.

Duty to Die. What the Republicans are Pushing in AHCA

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.

 

 

 

Citizens United and its Impact on Constituency

When I was growing up, My father was active in politics.  You would never see him on the stump, and he never ran for office.  He was a critical member of various politicians’ teams, mostly republican.  One thing he was particularly good at was fundraising.  I remember him telling me, “The small donation from a family is important.  If the person who handles the family money will give you $5.00, you have to understand what that means.  $5.00 is a roast and all the fixings (this was the 60’s, after all).  That is at least one family meal.  They have given you a meal off of their table.  If they will give you that, they will give you their vote.  These donations are a sign that they are with you.”

Was the small donation also a way to gain influence over the candidate?  Probably, but it didn’t matter.  The donation was small, and their were a lot of them in relation to the district.  Lots of donations of similar amounts meant that the influence was dispersed across a whole lot of families.  The politicians had to listen to a lot of people with a lot of different ideas if they wanted to fund their campaigns and win their elections.  While they hated having to beg for donations, the process led to democratic (small d) representation.  Those families, and their neighbors, were the constituency, and the politicians never forgot it.

When I returned to Colorado in 1989, I joined up with the Douglas County Republicans, because I lived in Douglas County.  We were immediately involved in the local elections and midterms.  I was looking forward to putting into practice the things I had learned from my father.  However, something had happened to Colorado politics while I was away.  I was told, “We don’t do fundraising that way any more.  It is too hard, too time consuming, and undignified.  We have big dollar sponsors now.  All we have to do is select candidates that our sponsors can support.”  And so it was.  At the time, the big donors were people like Marvin Davis and Philip Anschutz and  corporations like major banks and large developers.  It soon included the Koch brothers and other donors at the national level.  While the smaller donations were never turned down, they were no longer the focus of fundraising.  With the change in fundraising came a change in the constituency.  The politicians no longer had to accommodate the families who made up the small donor class.  They had to accommodate the big donors.  And the influence was no longer dispersed, it was concentrated.  The constituency was now the wealthy individuals and corporations, who seemed to have the same policy focuses.

Then came the The Bipartisan Campaign Reform Act of 2002, also known as McCain Feingold Campaign Finance Act.  But first, a bit of history on campaign financing.

The first federal laws concerning campaign finance were passed in 1867 to prohibit Navy yard workers from being solicited for campaign funds.  I don’t know why this law was passed.  Over the years, other laws were passed to regulate campaign financing.  Essentially, these laws were meant to limit contributions to ensure that wealthy individuals and special interest groups did not have a disproportionate influence on Federal elections, prohibit certain sources of funds for Federal campaign purposes (i.e., the Tillman Act prohibited corporations and national banks from contributing money to national campaigns), control campaign spending (laws passed in 1910 covering U.S. House of Representative races, and 1911 to add the Senate, both laws limited the amounts that could be spent on a candidate’s election), and require public disclosure of campaign finances to deter abuse and to educate the electorate (essentially the Federal Corrupt Practices Act of 1925).  The public disclosure was an important element of the regulations passed.

However, these laws were approved without including a way to enforce them.  Thus, the campaign finance provisions of all of these laws were pretty much ignored. In 1971, Congress passed a more rigorous set of disclosure provisions under the 1971 Federal Election Campaign Act as the primary law regulating political campaign spending and fundraising. It focused on increased disclosure of contributions for federal campaigns.  

After Watergate, Congress passed the Federal Election Campaign Act Amendments of 1974, which put new limits on contributions to campaigns.  Unfortunately, within four years, the FEC had decided that donors could donate unlimited money to political parties, but not the candidates themselves, as long as the party used that money for “party building activities” such as voter registration drives, but not to directly support candidates.  Political parties still used this money to support their candidates.  This money donated to parties became known as soft money.  In 1992, President George HW Bush vetoed a bill restricting use of soft money.

Because of a series of scandals (including Enron) brought the issue of campaign finance to the fore of public consciousness in 2001, and the McCain-Feingold bill was passed.  The important provisions of this act included a prohibition of national political party committees from raising or spending any funds not subject to the federal limits previously set, and limited the use of issue advocacy adds.  It also prohibited any issue advocacy ad from being paid for by a corporation, including non-profit issue organizations, or union general treasury funds.  It also included a ban on foreign corporations or foreign nationals being involved in decisions regarding political spending.  Mitch McConnell was a major opponent of this act.

To comply with McCain-Feingold, many “527s” have been registered.  527s get their name from section 527 of the IRS code. 527s are mostly funded by wealthy individuals, labor unions, and businesses.  While 527s existed before McCain-Feingold, they became more popular after it was passed.

McCain-Feingold had in it a section known as the “millionaire’s amendment,” which tried to equalize campaigns by increasing the legal limit on contributions to candidate when his opponent used personal wealth to overwhelm the spending of the candidate.  As McCain said, “Money does buy access in Washington, and access increases influence that often results in benefiting the few at the expense of the many.”  In other words, the millionaire amendment was specifically designed to offset the ability of the very wealthy to buy elections.  This is the provision that the Supreme Court ruled as unconstitutional in the case known as Citizens United in 2009.  Specifically, Citizens United struck down campaign financing laws related to corporations and unions.  The minority argued that the court erred in allowing unlimited corporate spending, arguing that corporate spending posed a particular threat to democratic self-government. However, it did also make it easier to hide the source of funds.  According to President Barack Obama, “With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests—including foreign corporations—to spend without limit in our elections. I don’t think American elections should be bankrolled by America’s most powerful interests, or worse, by foreign entities. They should be decided by the American people. And I’d urge Democrats and Republicans to pass a bill that helps to correct some of these problems.” He also said the decision was, “a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”

In fact, the Supreme Court decision in 2009 did make it easier to hide where soft money was coming from.  The elections of 2012 and 2016 are evidence of this fact.  Now our elections are largely financed by the 1%.  We know that Robert Mercer was a major contributor to the Trump campaign.  We know that Sheldon Adelson largely funded the failed Newt Gingrich campaign and was sought by all the Republican candidates in 2016.  We also know that the Koch brothers have invested heavily in elections throughout the country from school boards to state assemblies and legislatures to U.S. Congress and President.  So financing campaigns has been moved from the family donations to the company donations to corporate and special interest donations to the 1%.  So the influence, and thus, the constituency, has shifted accordingly.

However, these are the things we know about soft money.  The difficulty in finding out the sources of funds in the soft money world opens up a whole new problem.  Because of the lack of transparency, there is every possibility that a significant portion of that soft money is in fact laundered money from foreign sources.  We do know that there are questions about several individuals involved in the Trump campaign as to whether they have been laundering money.  There are transactions, for example, that Manafort has been involved in that have all the earmarks of money laundering.  It is not a far stretch to ask whether the Trump campaign was an experiment in a new way to launder money.  If the Trump campaign was benefiting from laundered money, was he the only one?  If politicians were accepting money from foreign sources, then who do they represent?  Does the influence belong now to foreign entities?  Are these foreign entities now the true constituency of our politicians?  This is a really scary thought.  Imagine if the real constituent to whom our congress and President are responsible to is Vladimer Putin.   Perhaps the time has come to ask our congresspersons, who are your real constituents?

 

 

Where We Are Headed: Corporate Feudalism

In my last posting, I wrote about the indefensible theory of supply side economics.  Today I posit where this theory is heading.  Whether or not it is the goal of supply side proponents, the result will be corporate feudalism.  Let me explain.

Feudalism is defined as “the dominant social system in medieval Europe, in which the nobility held lands from the Crown in exchange for military service, and vassals were in turn tenants of the nobles, while the peasants  were obliged to live on their lord’s land and give him homage, labor, and a share of the produce, notionally in exchange for military protection.”  From a historical perspective, I’m sure this definition is as accurate as one can get while being brief.  I am not a historian (I welcome relevant input from those who are).  I will be looking at feudalism from the viewpoint of an economist, and my focus is on the factors of production.

A better definition of feudalism from an economic standpoint is a system of government based on the tenure of land, or the system of land tenure and of government in which the landholders are the governors.  These governors were the nobility, and were part of a structure that will be described later.  The term tenure means the right to hold property, however it does not mean the right to own that property.  The person is allowed to live on the land in exchange for his services.  If a lord was displeased with a tenant, he was allowed to remove that tenant from the land and give the right to live there to someone else.  No compensation was involved.

The feudal hierarchy was like a pyramid.  At the very top was the pope, and initially, the emperor.   Technically, the king was at the top, but he could be unseated by the pope if the pope became displeased.  Below the king were nobles – lords and ladies, sometimes counts and countesses, etc., who were granted land (hence the term counties) in exchange for an oath of fealty, or loyalty.  The nobles were expected to support the king in both offensive and defensive wars.  In turn, the nobles granted land to knights in exchange for their services.  According to one source, knights were expected to provide two months per year of service in peace times, and whatever time was necessary during war.  Below these were tradesmen, who did not have land per se, but did have housing in exchange for their trade. At the bottom were peasants, who were allowed to stay on the land in exchange for farming and herding.  Ownership of the crops and herds appears to have varied from place to place. In some locations, the land was mined for various ores, and those who worked the mines were granted housing near those mines.  Many of the forests were retained by the king, and in England, hunting in the King’s forests was subject to execution.

In economic terms, the pope and the kings controlled all the factors of production.  Factors of production are defined as follows:

Resources required for generation of goods or services, generally classified into four major groups:

Land (including all natural resources),
Labor (including all human resources),
Capital (including all man-made resources), and
Enterprise (which brings all the previous resources together for production).

These factors are classified also as management, machines, materials, and money (this, the 4 Ms), or other such nomenclature. More recently, knowledge has come to be recognized as distinct from labor, and as a factor of production in its own right.

Source: http://www.businessdictionary.com/definition/factors-of-production.html

The nobility controlled all the land, the capital and determined the enterprise.  They controlled trade routes crossing their land or ports. The only thing technically not controlled by the nobility was labor.  However, in a practical sense, the nobility also controlled the labor, because an individual peasant could not provide for his own livelihood without land or work.  Since the peasant could easily be replaced, he was in a position of having to work for the lords, or leave.

Today, the factors of production are the same, but they have a different flavor.  In place of kings, we have large corporations.  In place of the nobles and knights, we have the companies that are part of the large corporations supply chain.  In place of the peasants, we have the workers.  And, in the place of the pope, we now have a president who appears to be prepared to bestow rights and assets to corporations or withhold them at his whim.

Corporations largely control the factors of production today.  They own the rights to much of the land (i.e. corporate farms, mining, drilling, etc.)  They are pressuring congress to give them the rights to critical infrastructure that the taxpayers have built and the people own.  They have convinced the Supreme Court to grant them rights of persons when it is to their advantage, but not the obligations of persons.  They are rapidly rounding up the resources and means of distribution.  They do not yet control labor, but they are reaching a point where their control of jobs means that labor must submit to their rule.

One element of feudalism that allowed it to continue was the control of education.  Knowledge was controlled by the church.  We all know the price Copernicus and Galileo paid for presenting science that was not approved by the church.  We do not know how many other scientists were silenced.  For the most part, only male nobility could learn to read and write or do basic arithmetic, and while there are instances of women and lower class persons doing so, they are the exception. Books were primarily in monasteries and lords’ castles.  Lords would hire a monk or priest to educate their sons. The education provided to the peasants was of a religious nature, and a fearful type to keep them in line.

As with feudal times, those currently in power are trying to disrupt public education.  They would put in its place private and religious schools.  Already we see many recommending watering down education to those things a person needs to ply his or her trade.

The similarity between the feudal system in what we call the Dark Ages and the direction we are heading with the corporate world is startling.  The speed with which we are moving in that direction is breathtaking.  If we continue on our current trajectory, we will be soon entering a corporate Dark Ages.

Eventually feudalism was pretty much broken.  I will discuss the key to breaking corporate feudalism in my next installment, The Antidote to Corporate Feudalism.