Monday, January 12, 2015

Scientific proof that consumers are the job creators

I believe that I have found scientific proof that consumers are the job creators: the law of diminishing marginal utility. The law says that the utility of a product decreases with the number of units consumed. To put this in context, when you go to an all you can eat buffet, the restaurant owners know you can eat only so much before you're full. They measure consumption and price the admission per person accordingly. I know this for myself. I love Indian buffet and one plate is about all I can eat.

The law applies in every area of economics you care to consider. Apples? Well, there are only so many apples you can eat before they rot, so you only buy enough for a few days or a week. TVs? Where do you want to watch TV? You only need one TV per room, right? Many people have more than one TV, but once they're done buying TVs, they're done. No more until the next newfangled model comes out.

Cars show an even more obvious aspect to the law. One person doesn't really need two cars unless redundancy is required. Most days he will drive the car of his preference. If that breaks down, he drives the other car while his preferred car is repaired.

The diminishing utility of the things we buy is apparent from consumer goods to food, to homes and washers and dryers. Along with the diminishing utility of the things we buy comes a decreased willingness to pay more for more. Cheaper by the dozen is the maxim here. We buy paper towels, but we buy them in bulk in one big package. Once we have one, we have no need to buy another one as we are not willing to store more than one and one lasts a long time. Same with toilet paper and other non-volatile goods (stuff that doesn't decay quickly).

Now, lets place this in the greater context of inequality. Scratch a conservative and he will tell you that the billionaire class are the job creators. But they wouldn't have businesses without demand for their services. People who aren't billionaires provide that demand.

A billionaire will only buy so many phones, probably just one for daily use. He doesn't need a backup as he can have a new phone in a few hours. Even billionaire Nick Hanauer admits that he only needs a few jeans. He's not going to buy 400 just because he's wealthy.

I once knew a wealthy man who sideswipped a Kenworth truck, taking out the left-rear quarter of his car. The truck was fine, but his car was going to be in the shop for a few weeks for repairs. In just a few hours, he had a new car, same model, not the same color, but they were both fast and fun to drive. After that, he had no need to buy another car.

Wealthy people don't really create that much demand. Why? There are only so many to go around for businesses to support. Wealthy people are wealthy because they don't like to spend money. They are averse to debt and prefer to use cash they have in the bank. This is not the picture of your typical consumer using credit cards to buy the things he wants on time.

We're talking about the 1% here. They have 40% of the wealth in this country. Since about 2009, greater than 90% of all the new growth in the economy has been vacuumed up by the top 10%. Some put that number higher. These are people who are consumed with accumulating more money, not spending it, so I don't expect them to pump the economy. The last thing they want to see is for wages to go up when labor markets get tight. Better to lay low and save money, right?

On the other hand, the vast majority of us are consumers. We don't run businesses. We get a paycheck and go home to be with our families or to enjoy our free time. At the same time, we have witnessed a wage stagnation for more than 30 years as inflation makes life more expensive. Yet, somehow, we are expected to buy and consume more of what is produced by business.

What is happening is that the wealthy are working hard to wring more and more wealth out of the economy as if that's a good thing. They are enjoying some of the lowest effective tax rates in history. The percentage of their income consumed to satisfy basic needs is so small that it's a rounding error. The percentage of their income spent on things they want is still very small. They have time and money. What to do?

The smart ones invest in technology that could help us all. Elon Musk is the best example to come to mind. He founded Tesla Motors, pioneering a new way to sell cars, electric cars. He founded SpaceX to help commercialize space travel. He has a vision for travel by land called Hyperloop, a system that will allow consumers to travel by vacuum tube at speeds up to 800 miles per hour.

Sadly, some of the wealthy seem to think they alone can run the country. Rather than invest in R&D, they choose instead to invest in senators and representatives willing to sit in a Skinner Box, begging for money for about 4 hours a day, every day. Continuous pressure, repetitive messaging, with spoonfuls of rewards for laws well crafted in favor of the benefactor produces what we have today. A regulatory scheme that favors businesses and the people who run them so much, that most of the new wealth is vacuumed up by the wealthy before the middle class ever sees the fruits of their labors.

We've been doing Tinkle Down Economics for more than 30 years and it hasn't worked. The wealthy aren't going to spend their money just to keep the economy going and there aren't enough of them to keep it going. The middle class spends far more money than the wealthy are willing to spend, and they spend it much faster than the wealthy do because they have to.

When the wealthy write laws, they are writing based on their own experience and making the assumption that what worked for them will work for everyone else. But they have enough money that they are insulated from the effects of their laws, and they often profit from those same laws. They might complain about "one size fits all" government, but they are the most guilty of imposing it on others with their ideas when they shut out input from everyone else.

By the way, there is one area of economics where the law of diminishing marginal utility seems to fail. That is security. The wealthy pay huge sums for security. Cameras everywhere, bullet proof cars, gated enclaves, exclusive vacations, body guards and the police state. The middle class didn't wake up one day wishing for a police state.

But a class of people with the power to push through treaties like the Trans Pacific Partnership, or the Transatlantic Trade and Investment Partnership, without input from the public, is not planning on a treaty that benefits everyone. In fact, once the wealthy get comfortable spending money on politics, they are looking for ways to get entrenched through government intervention in the market. Some call this the Conservative Nanny State.

The wealthy may talk about free markets, but they sure don't mind government intervention in the markets when it suites them. Tinkle Down Economics suites them. Most of them, anyway. Once a man gets beyond things like buying a home, putting his kids through college and saving money for retirement, it's just a numbers game where everyone else is supposed to lose. As we have seen through scientific evidence, looking at piles of cash encourages people to cheat. Crunching numbers tends to leave people bereft of compassion. We're supposed to admire these people?

This is why Tinkle Down Economics doesn't work and it never will. Teddy Roosevelt and Dwight Eisenhower understood this. But the modern Republican, lost in the fog of Ronald Reagan, does not. Hopefully, there is a conservative out there, in Congress, who knows that consumers create the jobs and is willing to act on that knowledge. I'm not worried about the liberals on this one. Many of them already know this.
Post a Comment