Consumers: Diving the economy or swept up in the business cycle?

Economics textbooks have all kinds of concepts that make consumers sound really important. They talk about aggregate demand curves, and consumer price indices, and disposable personal income, etc., etc. They talk about supply and demand with a reverence befitting a couple of cosmic powers. Indeed, to some extent, the laws of supply and demand are so cosmically obvious they must be true. Consumers differentiate between various products competing for their attention and their dollars, and determine of which products they want more and which fewer. It’s a pretty efficient way to decide the allocation of effort and resources.

However, once you add the element of time, supply and demand starts to look like much more of a consequence of economic trends than an antecedent of them. I remember, at the beginning of the current recession, starting to hear news reports of the “Global Financial Crisis.” Sounded scary. But also sounded a little ridiculous. It was like hearing tornado sirens go off when there’s not a cloud in the sky. In such a situation, since I don’t happen to be equipped with my own personal meteorological radar system, I, average everyday tornado fodder, have to decide whether to trust the experts’ warnings of impending doom or to trust my own common sense appraisal of the situation. Unfortunately, in the case of the Global Financial Crisis, the meteorologists were right. Impending doom was on the way even though the sky was blue.

My point in belaboring this metaphor is that I and presumably all the other average consumers out there who don’t have our own sensitive prediction models or devices were the last ones to know that something seriously nasty was headed our way. We were happily spending and borrowing and spending and borrowing like nothing at all was going on. But something was going on. And soon the effects started getting a little more obvious. Soon we knew people who were being laid off. Soon our retirement accounts weren’t looking so peachy. Soon a neighborhood business shut its doors. And then, when the sky was distinctly darker and the trees had started creaking, we realized it was definitely time to do something. And what does one do in a tornado? Well, one either takes a video of it on their camera-phone in an attempt at YouTube stardom, or one hides in a hole. And that’s what people did. They started hiding from the economic whirlwind, and stopped spending and borrowing and spending and borrowing. Then supply and demand showed up and became the justification for businesses to scale back production, which cost jobs, which gave people less to spend, which scaled back production…

To return to the very beginning of this blog and of the economics textbook, we learned that the basic economic questions are about goods and services. What, how and for whom will we produce goods and services (p. 17)? But if that is truly the center of our economic system, why is it that the production of goods or services can be so dictated by financial forces so totally beyond the scope of the average everyday consumer of goods and services? Isn’t the consumers’ interest in stuff, the aggregate demand of an economy, a fairly stable thing? And yet somehow we end up with a business cycle that everyone regards as inevitable as warm and cold fronts. The cycles move in and drastically affect families’ economic outlooks, while they sit huddled in their basements waiting out the storm. Something seems very off to me. It sure feels like I, as a consumer, am much more like tornado fodder than I am a cosmic force. Why?

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

Life Story on a Car Ride Through North Minneapolis

It ain't us if it ain't tough.
It ain't right if it ain't rough.
his grandpa told him.
That stuck with me, he says.

It ain't us if it ain't tough.
It ain't right if it ain't rough.
his grandpa said in an Arkansas drawl.
From a town smaller than a Minneapolis ghetto.
A town, he complains, that don't even have useless billboards to look at.
Just fields.
Fields that make him claustrophobic in their emptiness.

He went back down there 'cause Grandma was sick.
Real sick.
Until Auntie told her, You raised nine kids and you're going to let a little cancer get you down?
(He only counts six aunties and uncles, but doubtless at least three more had found their way from somewhere. Kids know love (and food) when they see it, even in Arkansas.)
Auntie told her, You raised nine kids and you're going to let a little cancer get you down?
So Grandma got up.
Apparently she knew that
It ain't us if it ain't tough.
It ain't right if it ain't rough.

But he wants to buy his wife a truck.

We pass a women in the rain.
She's got an umbrella but she's soaking wet.
'Cause the umbrella's draped over the stroller
so all you can see are little pink Velcro shoes bouncing happily under their cozy canopy.
Bouncing happily while mama's feet
walk and walk
pushing the stroller
getting wetter and wetter
to their destination.
He doesn't want his wife roughin' it like that.
Toughin' it like that.
He'll take the rough and the tough.
He's not afraid to work hard and get dirty
if it means he can buy his wife that truck.
He wants his kids bouncing happily under a cozy canopy of steel girders and airbags.
All things precious to him tucked for safekeeping in a fortress on wheels.

'Cause things happen out there.
And he's got the dent in his skull to prove it.
See, he had a lot on his mind that day.
He'd just donated so he had some money and the baby needed Pampers and he needed something to eat and he had a job interview so he was cutting across the street to get home to his wife to get her the Pampers money and

BAM!

Stay with me! Stay with me!

Hmm. Ambulance. Well, at least I'm in good hands...

C'mon now, stay with me!

But he doesn't like to dwell on the past.
It was rough but it didn't kill him.
Ran up 10K in chiropractic bills after he called 1-800-PAIN but he's ok now.
Cause after all,
It ain't us if it ain't tough.
It ain't right if it ain't rough.

The Bruise

Poverty is...
...the bruise on Amber's arm.
Pulsating, purple.
Vivid and violent.
Snaking its way from the front to the back,
torn up capillaries like trees after a tornado.
A massive bruise that makes you wince
and wonder, "how..."

Poverty is a bruise so public and alarming
that perfect strangers on a bus offer Amber phone numbers to safe houses
and encouragement to leave him.
If only she could.
Because this abuser leaves bruises on her flesh,
and slices worry lines into her sweet young face.
He denies her dinner.
And breakfast.
And lunch.
Til she's at the point of fainting.
(You know, those days when there's no more in the pot after the babies have eaten.)
Yes, this abuser's a mean son of a b**ch.
But there's not a restraining order in the world to keep this one at bay.

See, poverty has found his way into her veins.
In through the puncture wound
out of which the plasma flows
when the money's low.
Lifeblood flowing with a generosity that's both beautiful and terrifying
to someone who's used to her veins
(and her wallet)
being contained, predictable, private.
Poverty wormed its way in and spread like a pandemic,
branding her body as a member of its herd.

Poverty is the bruise on Amber's arm.
Pulsating.
Purple.
Vivid.
Violent.

Slavery and the Modern Welfare State

So I’m currently reading A People’s History of Poverty in America by Stephen Pimpare. Pimpare asserts that if we define the welfare state to be any government approved and government enforced system for providing (to some extent) for people’s basic needs, then in the United States we have to consider slavery to be one of our first systems of social welfare.¹ This is a pretty provocative idea, at least for a social welfare history wonk like myself. Most social policy histories start with the Progressive Era, move into the New Deal, and then continue to chart the growth and reforms of the welfare state from there.* The convenient thing about that approach is that it gets to start with good news: the moral righteousness and overall awesomeness of Jane Addams and her crew of settlement house reformers and muckrakers. According to this version of history, all social welfare has sprung forth from her saintly benediction, so we see social welfare as a benevolent and moral institution. Any abuses that have occurred, any indignities suffered by the recipients of our benevolence, can easily be explained away as the fault of miserly politicians or a few bad apples among social policy practitioners.

However, when we consider the welfare state in this country to have included slavery, then we have to realize that the Mr. Hyde side of the welfare state has always been there, infiltrating the Dr. Jekyll half we like to think about. Mr. Hyde has economic interests in maintaining a pool of low cost (in slavery’s case, virtually no cost) labor. Mr. Hyde has all kinds of pseudo-scientific justifications for why poor people and black people, and heaven-help-me poor and black people are inferior, unindustrious, and incapable of their own care. Mr. Hyde denies people freedom to control their own lives, their own families, their own work, in many cases their own bodies, but calls them ungrateful when they aren’t sufficiently humbled by all they have received. Mr. Hyde employs a sector of overseers and bounty hunters to make sure his “clients” follow the rules, and Mr. Hyde has vicious punishments waiting if they don’t.

It is unnervingly easy to draw parallels between the welfare institution of slavery and the welfare institution of Temporary Assistance for Needy Families in which I work every day. This is not to say that those parallels aren’t grossly exaggerated. They are exaggerated. To say that the modern welfare state is like slavery would be an unfair assessment of the progress of the last century and a half, as well as a severe understatement of the horrors of slavery. Nonetheless, it is undeniable that there are aspects of control and coercion in the modern welfare state. Today’s system is, as it was then, ultimately managed by powerful people with powerful economic interests. As much as egalitarian practitioners may try to avoid it, today’s system is influenced by racist and classist assumptions, or (less malevolent but equally problematic) simple ignorance of the true experience of, causes for and implications of living in poverty. And today’s system certainly employs an army of people who make a living by monitoring the behavior of this era’s “grateful” beneficiaries of their services.

Does any of this mean we need a Declaration of Emancipation from the welfare state? Certainly not. Having a welfare state, albeit a flawed system, is better than a system of callous indifference based on a euphemistic rhetoric of individualism. But it is critical for practitioners, and especially reformers, to realize that the evils of the welfare state have not always simply been the result of a few wayward miscreants, nor have they always been simply due to a lack of resources or capacity. Rather, there have always been injustices woven right into the fabric of any kind of safety net we have ever constructed. Welfare benefits have never truly been something-for-nothing. There have always been costs in dignity, privacy and choice. The only differences have been that the severity has vacillated with changing times and changing political administrations. This is crucial to understand, because denial has never done much to combat injustice. The sooner we recognize that Mr. Hyde has always been a part of us, the sooner we can figure out how to confront him.

*I re-read my unfortunately rather dusty textbook from my social policy course ² to see if its account of history conforms to the norm of starting with St. Jane [Addams] and moving on from there. In actuality, the history chapter does devote four pages to pre-Progressive era United States history. And while it mentions slavery, it focuses on the impact of the English Elizabethan Poor Laws in shaping U.S. policy. It states that “the Elizabethan Poor Laws were not applicable to slaves, who had no legal claim to social welfare support.” So, the book’s perspective seems to be that from a social welfare perspective, one of the innumerable injustices of slavery was that it excluded slaves from the social welfare state. That, of course, is a far cry from slavery being considered one of the institutions of the welfare state.

Oh, and the picture at the beginning of the history chapter is of St. Jane reading to children.

1. Pimpare, Steven. (2008). A People’s History of Poverty in America. New Press: New York.

2. Segal, Elizabeth and Brzuzy, Stephanie. (1998). Social Welfare Policy, Programs, and Practice. F.E. Peacock: Itasca, IL.

Tax Policy and the Purpose of a House

As much as possible, the tax code shouldn’t bias investment decisions. As it is, the tax code is too heavily weighted in favor of housing… Congress should level the investment playing field by treating capital gains on real estate, stocks, bonds and other assets the same… Doing so would also reduce the incentive for speculative investment in real estate and remove some disincentive to investing in the stock market. My guess is that investors would shift more of their money into Corporate America, especially innovative companies that create the wealth of the future (p. 214).

Upon the initial reading of my economics textbook, the above passage first convinced me that I might have something to say in response to the BusinessWeek perspective on the world. The article complained that the Taxpayer Relief Act of 1997, by eliminating capital gains taxes on real estate profits (under certain circumstances), promoted speculation within the housing market and lead to unsustainable gains in housing costs, which have now lead to a whole host of other economic troubles. This seems to me an extremely narrow vision of the world. First of all, this article ignores the large proportion of the American populace who don’t have any spare wealth to invest in real estate or any other form of investment. Then there’s the even larger proportion of the American populace whose home is their only investment. I would imagine, although I can’t say that I’ve ever spoken with him about this personally, that Bill Clinton was aiming the tax code much more at that middle class voting block than at the small percentage of folks making a fortune from real estate flipping. If that’s the case, then the merits of the Taxpayer Act can certainly be debated, but they must be debated by considering a much wider sphere of influence and possible consequences. People don’t just buy houses to resell them. They buy them to live in, because human beings need shelter. Obvious stuff, but it leads to a different set of questions when evaluating housing policy. Did the tax benefits increase the stock of homes? How about the affordability of those homes? Did it allow people to move up to a better house than they might otherwise have been able to afford, leaving their previous residence available for someone else? Did it create jobs for homebuilders? And, to be fair, how did it affect the likelihood of speculation and price inflation within the housing market?

Then, once we have resettled our perspective to realize that most homeowners who may have benefited from the tax policy were not speculators trying to merely cash in on a profitable investment, we have to ask how much influence was truly wielded by the few who were. Although I do find it plausible that certain investors may have made some clear calculations and decided to invest in real estate due to the particulars of this bit of tax policy, I find it quite implausible that these people could have had such a profound impact. Could those few speculators have really set off the forest fire that swept through the housing market? Or was it more like a thousand campfires of individual homeowners hoping to get in on the heat?

And that leads me to the issue of the susceptibility of any kind of investment market to bubbles and panics and all sorts of other changes in elevation that are much more fun on a roller coaster ride than they are in an economy. But I’ve already grumbled about just how fishy the whole stock market seems to me, so I suppose I’ll just let that rant go for today. I’ll just get back to reading tax code and plotting my next investment strategy.

Christopher Farrell. A Housing Boom Built on Folly. in Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007

GDP and the Measure of a Good Economy

Chapter 12 is entitled “Measuring Economic Performance. (p.185)” It begins by describing Gross Domestic Product (GDP)—a measure of the total goods and services produced in a country in one year. What do we think of this measure?

Many people have lodged many criticisms at GDP. I don’t know the details to judge the merit of their arguments, but they often include something about what is or isn’t counted toward the total productivity of the nation. For instance, many tasks that have been traditionally performed by women such as childcare, food preparation, and community work haven’t been monetized (or at least not as readily) as tasks traditionally performed by men. So work performed in the home has no value, even while the same work performed for strangers could have value. Other arguments center on whether the goods or services produced really contribute to quality of life. For instance, the production of weapons and other items in our vast military budget count toward GDP. But what do they provide for the nation’s quality of life?

But if we step back even further, using GDP as the measure of an economy’s “performance” implies that what we really want an economy to do is produce stuff. Goods and services. Is that really the primary function of an economy? Certainly it is important. And I will admit that I have always had the privilege of living in a society (and a social class within that society) where the ill effects of too much stuff are more obvious than the ill effects of too little stuff. I have never had to stand in a bread line, or wait in a gas line, or really experience a shortage of anything at all. So I probably do take production for granted to some extent.

Even so, aren’t there other things we want an economy to do? If all of us worked in factories producing stuff that only a couple families got to use, would that be a “performing” economy? Does distribution matter? How about employment, for that matter, another way of getting at the same issue? Don’t we want our economy’s performance to be tied somehow to the percentage of our citizenry that is able to earn their living? Later in chapter 12, employment numbers are described as coincident economic indicators (p. 199). Indicators of what? What is this ephemeral “economy” that employment is “indicating?” Isn’t employment the outcome, rather than just a subordinate indicator to some primary economy?

Of course, economists rarely just use one value to describe an entire economy. That would be like trying to describe a climate with only the rainfall totals. But it is worth considering whether our go-to economic indicators truly reflect what we as economic agents really want from our economy. Do we want stuff? Perhaps even distribution of resources? Or would we prefer stratification? How about weighing stability versus mobility? Do we want quality of life and is that measured in dollars? Do we want everyone’s needs met, or do we want rough and tumble individualism? There are many different options for what constitutes a high-performing economy, based on many different economic value systems. So measuring the economic climate requires a full meteorological bag of tricks.

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

Warren Buffet: The Greatest Capitalist??*

Apparently, corporations constitute 19.9% of all American businesses, but account for 88.8% of all sales and 71.4% of all profits (p. 135).* Those are some pretty astounding numbers. Small businesses, considered such a lifeblood of the American way of life, bring in just over 10% of all sales, and less than 30% of all profits. A relatively small number of mega-corps bring in all the rest.

The book describes a crucial difference between the profit earning potential of corporations versus simpler forms of small businesses as the corporation’s seemingly unlimited capacity to raise capital (p. 131). A sole proprietorship is limited by the collateral of its owner as to what money financial institutions are likely to invest. Corporations, by contrast, get to sell ownership shares (ownership without any resulting liability, somehow) directly to whoever wants to purchase them. From there, the corporation gets to keep reinvesting the money virtually infinitely without paying any interest. Sure, there is the theoretical obligation to pay dividends to shareholders. But many companies eternally delay this step, convincing shareholders that the money is better re-invested in the company (or the CEO’s end-of-year bonus) than spent on dividends. And shareholders are usually untroubled with this explanation, because they have more potential to make money in the future by selling their shares of a highly valued corporation than they ever would have received in dividends anyway. (This of course presumes that the corporation continues to be highly valued by the market, and that there is somebody out there with enough capital to purchase the current owner’s shares.)

Does this seem to anyone else like a wink-wink, nudge-nudge house of cards system? If I invest in some shares of a company, all I have really purchased is the hope that down the line somebody else will want my little scrap of paper with hope written on it. That’s the only risk I’ve taken. My likelihood of making money seems to rely more on the winds of public sentiment than actual business performance, so perhaps it’s fitting that my action, my “ownership,” has very little impact on the performance of the corporation I “own,” anyway. And unless I’m purchasing initial public offerings, I’m not even contributing any actual money to the corporation.** So why is this considered the most capitalist of capitalist endeavors? Why is Warren Buffet, who as far as I know is not responsible for producing anything beyond books describing how to be like him, considered the Greatest Capitalist?

I know stock and bond markets are old, pre-dating Adam Smith, pre-dating capitalism itself. I’d like to know more about the history. If this house of cards truly is a flimsy but surviving relic of our aristocratic and mercantile past, why is it held up as the most modern and advanced element of post-industrial, globalized capitalism? Why do we continue to accept this system so susceptible to human frailties like panic, so exclusive in its beneficiaries, so myopically focused only on short term gain, and so obsessively good at creating massive, virtually stateless profit machines that are understood by no one and answerable to even fewer people?

* "It may seem a bit odd that Warren Buffett, one of the greatest capitalists the world has ever seen, resides firmly in the liberal camp when it comes to tax policy. (p. 181) Janjigian, Vahan. Even Buffett Isn't Perfect: What You Can--and Can't--Learn from the World's Greatest Investor. New York: Portfolio, 2008.

** Interestingly enough, the discrepancy between 88.8% of all sales and 71.4% of all profits would seem to indicate that corporations are dollar for dollar less profitable than sole proprietorships or partnerships.

*** Admittedly, my purchase might indirectly benefit the company by indicating demand for its shares and faith in its profit-making potential, which could then increase its capacity to attract capital. But that’s just another layer of wink-wink nudge-nudge.

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

Price Floors Versus Equilibrium and Implications for Globalization

“Is the minimum wage, then, a bad idea? Economists agree that it is not as efficient as a wage set by supply and demand, but some maintain that not all economic decisions should be based on efficiency. They favor a minimum wage because it raises the incomes of poor people. Others believe that a minimum wage actually increases the number of unemployed people because employers do not hire as many workers. Still other economists believe that a minimum wage has little meaning in the real world, because it is often lower than the lowest wage paid in many parts of the country. (p.92)”

Prices, for labor as well as everything else, tend to fall toward an equilibrium price based on interaction between supply and demand. If supply is too high, if there is a surplus of goods relative to demand, then prices will tend to fall in order to increase demand. Producers will eventually cut production so that the surpluses do not continue. On the other hand, if supply is too low, if there is a shortage of goods that people want, then prices will tend to increase, which will prompt existing producers to make more product, or will entice additional producers into the market. Production increases, and prices will return to equilibrium.

In the case of “selling” labor, the supply is controlled by the willingness of people to enter the labor market, and demand by the willingness of employers to employ them. So if you imagine a particular job, say toothbrush salesperson, (although the same mechanisms would apply to the “average wage” across the whole economy), you can imagine a supply schedule. At a certain salary, say $20,000 a year, there may be 10 people who would be willing to travel around the city visiting dentists and pitching toothbrushes. Now, if the toothbrush manufacturer were offering $80,000 a year for dental health crusaders, they would probably get a lot more applicants. Of course, at $80,000, the toothbrush people couldn’t afford nearly as large a toothbrush sales force as they could at $20,000 a person, so the demand schedule would show an inverse relationship. Larger the salary, the fewer people employed.

Now the textbook shows a pretty little picture like this one. You can easily see where the equilibrium price ought to be, where the two lines cross. Simple right? *

Now the fun starts if there is a price floor—a minimum price that must be observed regardless of market conditions. The minimum wage is an example of a price floor. The price floor boosts the price above the pretty little equilibrium, so then you end up with a graph that looks more like this:
The second graph shows the ugly green gap between the supply of labor and the demand of labor—representing all the people who would be willing to work but who can’t get jobs because the employers can’t afford to pay them at the higher than equilibrium wage floor. That ugly green gap is the compassionate conservative’s explanation for why the minimum wage is a bad thing. It creates unemployment. The conservatives pose a conundrum to minimum wage advocates: Which would you prefer? More people with lower paying jobs, or more people with no jobs at all?

The book quotes “other economists” as saying that the minimum wage is somewhat of a moot point. And it may be true that most American workers are already paid well above minimum wage, in which case the ugly green gap isn’t worth much consideration because it is either nonexistent or negligibly small. However, if this is true, it is not because the equilibrium price for labor for American companies has risen. Instead, I am quite confident that the equilibrium price of labor has fallen dramatically, for the simple reason that American companies are not just paying American workers anymore. Free trade policies and ever more efficient transportation have ushered in the era of globalization, which has meant that on our pretty little labor supply and demand graph, the supply line has shifted massively to the right, bringing the equilibrium price dramatically down. A global context is thus crucial to the consideration of labor dynamics. Businesses certainly look at labor decisions that way. Shouldn’t macroeconomics as well?

From a global perspective, we can begin to see the other side of the minimum wage argument. Many countries around the world have posed the minimum wage conundrum, and have decided (or had it decided for them) that they prefer more people with lower paying jobs. And is that the right choice? GDPs have certainly risen in some countries. And global sweatshop scandals have led to international pressure for at least basic worker’s protections. But some economists have argued that countries can get stuck in a poverty trap. Without spare income for investment, without imports to balance out exports (which leads to a devalued currency), and without adequate human or technological capital (which tends to get “brain drained” away to more advanced economies with more opportunity), workers in poor countries spend their meager incomes before they’ve earned them, and the economy never gets to a point of self sustaining growth. Sounds like a cycle of dependency on a macroeconomic scale that could be quite similar to that on a microeconomic scale of families at the bottom of the economic ladder in “developed” countries. Would a global minimum wage break the cycle? Or would it just cut developing countries out of any economic activity whatsoever?

Thus we see that the old minimum wage conundrum now can be recast as an interrogation of globalization itself. The minimum wage has always been a fascinating policy argument, either on practical or purely philosophical/ethical grounds. In either mode of argument, however, these days it is crucial to consider a global context.


* The supply and demand curve of labor is a model, so it is by definition a simplified version of reality. But even just considering the behavior of labor supply and demand themselves (leaving alone all the other factors that could influence supply and demand and price for labor), I imagine the graph would be a bit more simplistic. Labor supply is not a very elastic factor, because most people can’t simply decide not to work. So the quantity of available labor is likely to stay quite high, even at low wages, because people have to work for something. Similarly, as the price of labor goes up, the quantity demanded will decrease at an accelerating rate, as incentives to replace labor with technology or other means increase. So I imagine a supply and demand curve would look more like this:


Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

"Perverse" Production Incentives and Liberal Laissez-Faire??

The book contains an article from Business Week claiming that most government incentives are perverse—propping up inefficiencies that the market in all its wisdom would have eliminated long ago, and therefore dragging down productivity and limiting prosperity for everyone. The author bemoans that a crop subsidy may keep “the family farm alive, but [it] reduces the incentive to raise the yield per acre, thus increasing the price of food for everyone. (p. 75)” Further, the government not only imposes such an insidious effect on food prices, but then it actively discourages the productivity gains that somehow manage to occur in other sectors, by taxing the consequent increases in profitability. If only government could realize that is has everything bass ackwards, reverse course and start rewarding productivity, then “overall, real wealth would expand, and our society would become more vibrant. (p. 75)”

My initial response is, “Duh!” Of course government actions don’t reward productivity; they aren’t intended to! Increasing productivity is not government’s job. Government’s job is to look out for those euphemistically defined “negative externalities” that the business realm produces, things like the demise of the family farm. Now, whether saving the family farm is a worthy object of public policy is a matter for debate beyond my realm of expertise, but the intention seems obvious enough. Those who have implemented the policy feel that the social value of preserving the farming way of life is worth the decline in productivity. Everyone knows that mega-corporate farms are more efficient. But efficiency is not the only thing that makes society “more vibrant.”

This issue of the role of government in either tempering or spurring business growth relates to a concept I’ve been thinking about as I’ve watched the current government’s frantic response to an economy in a serious recession. On a number of recent occasions (bailouts for auto manufacturers in particular) I’ve been surprised by the tacit belief in trickle-down economics implied by the Democrats’ arguments. For the sake of the employees and Main Street we have to bail out the employers and Wall Street. Really? I would have expected leftists to let the bigwigs take the fall, and provide an ample safety net for anyone else taken down with them. The sight of the head of a union, the CEO of a mega-corporation and the Democratic committee chair sitting in a room more-or-less agreeing to a particular course of action seemed rather bizarre to me. Was anyone else a little nonplussed?

Examining my incredulity, I realized that to a certain extent I’ve always thought of leftists as more laissez-faire than the conservatives, ironically enough. I thought leftists shared my position that increasing productivity is not the government’s job. That, instead, government’s role is to look out for those things to which the market does not tend well—poor people, the environment, schoolchildren, etc. By implication, then, if the government is not responsible for productivity and economic growth, it must be because business is able to take care of itself. Even to take care of itself well enough to absorb some productivity drains in the name of social welfare, environmental protection, or education. I always assumed that if there were corporate favors to be doled out, they would come from the other side of the aisle, although always carefully shielded by a rhetoric of government detachment.

Was I wrong? Now, I realize my characterization of Democrats shows a certain naiveté about the pervasiveness of corporate influence in governmental affairs. But what I observed during that hearing, when UAW, GM and Congress were happily rub-a-dub-dub in the same bailout tub, was beyond shady campaign-contribution influence buying. Democrats weren’t even pretending that they didn’t want to act in the service of a multi-billion dollar multi-national. Was it always this way? Or is this some neo-liberal reversal? Was there a time (I’m imagining about 1912—Progressive Era heyday) when progressives really were as laissez-faire as I’ve always thought, and eager to do what they could to drain the corporate/conservative rub-a-dub tub?

Greg Blonder. Policy That Rewards Productivity. in Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

The Law of Diminishing Marginal Returns and Affluence

The Law of Diminishing Marginal Returns says that as people use more of a product or service, the satisfaction they get from each additional purchase declines. This is used to explain why demand for a product goes down as the price goes up. At a high price, I may be willing to buy a product once, but my return (satisfaction) from a repeat purchase will be too small to make me willing to pay that high price a second time. If I paid $30 for a steak dinner, I’m unlikely to order another even if I’m still hungry. However, at a lower price, the return from a repeat purchase will still be great enough to make a second or even a third purchase worth it. If I’ve only paid $4 for a Big Mac value meal, if I’m still hungry I might just go through the drive through again. So, across a whole economy, there will be many more Big Macs sold than steak dinners. Makes sense.

Clearly, this theory is meant to apply to repeat purchases of a single item, or at least purchases within a class of items that are roughly comparable. And, presumably, choices made in one sphere of consumption – say fast food consumption – would not be expected to grossly effect choices made in another sphere of consumption – say entertainment electronics. The number of Big Macs I ate today, and the diminishing marginal returns that I got for each additional Big Mac, should not have much of an effect on my willingness to pay for a big screen TV.

Or does it? If we consider categories of consumption that are different but not as different as fast food consumption versus entertainment electronics, there in fact may be a relationship. Let’s take clothing consumption and gift item consumption (by which I mean all those commemorative knick-knacks languishing in the dark corners of closets across America). Now, on immediate consideration, my demand for t-shirts would seem to be fairly independent from my demand for piña colada scented candles. But both t-shirts and piña colada scented candles are things that people buy in malls or other shopping venues where they go to shop for entertainment. And when people “go shopping” for entertainment, they usually aren’t searching for particular items, or even classes of items. What they are consuming is in large part the experience of consuming—an entertainment “service” of sorts which comes with “goods” as a bonus. What we have then is that consumption of consumer goods has a return (a level of satisfaction) above and beyond the value of the good itself—the entertainment return.

That entertainment return must be subject to the eternal law of diminishing returns, right? If I have already been shopping for most of the day and I have spent $200 on clothing, I am going to be much less likely to go into that gift store, spend a half an hour more on my feet, just to spend $15 more on that adorable little porcelain kitten for Grandma. Now the value of the good may not have changed. That porcelain kitten may be just as perfect for Grandma now as it was this morning when I entered the mall. And I may be just as willing to spend $15 on Grandma’s happiness now as I was this morning. What has diminished is the return I’m getting from the service of the shopping mall—the shopping entertainment experience. I’ve already spent $200 for the previous six hours of the shopping entertainment experience, and I don’t really want to spend $15 for an additional half an hour of porcelain knick-knack browsing bliss.

This example shows how the Law of Diminishing Marginal Returns could, in fact, apply not just to a particular item being purchased at one particular time, but could apply to overall household consumption across time. Theoretically, a household could reach a point where additional consumer goods could potentially bring satisfaction, but the diminishing marginal returns of the experience of acquiring them, storing them, cleaning them, insuring them, fixing them, building a bigger house to hold them…. starts to eat away at demand. Could it be that the spiritual ills of materialism and “affluenza” are built right into the fundamental laws of supply and demand? What does this mean, then, for an economy that is built on ever further and faster growth, which is built on ever more extensive and extravagant consumer spending?

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

The Basic Economic Questions and the Meaning of Scarcity

“An economic system consists of all of the ways a nation or society uses limited resources to satisfy its people’s unlimited wants and needs. Scarcity forces nations to make tough choices. As a result, every country has to answer three basic economic questions: What goods and services will be produced? How will those goods and services be produced? For whom will they be produced? (p. 17)”

I have heard faith leaders working to end poverty say repeatedly that they come from a religiously based, philosophical assumption of abundance. God provides abundantly for God’s people. Certainly abundantly enough to meet the basic needs of all people, even if not to provide for every want. “Now to [God], who by the power at work within us is able to accomplish abundantly far more than we can ask or imagine, to [God] be glory” (Ephesians 3:20-21).

I never realized just how radical this was until reading about the economically based, philosophical assumption of scarcity that pervades the very opening lines of an introductory economics text. Abundance, as espoused by the divinely inspired anti-poverty activists, is directly contrary to the philosophical foundation of economics! Now that’s sounding pretty radical!

Economics assumes scarcity. And scarcity teaches us that there is never enough to go around; we are always confronted with “tough choices.” Scarcity teaches the sanctity of private property. If there is never enough to go around, every person had better hold tightly to what they’ve got. Scarcity teaches judgment. Any person who is not judged to be contributing to our collective (and paradoxically individual at the same time) war against scarcity deserves nothing.

But if we assume abundance, that there is always more than enough to go around, then there is no need for punitive or blaming economic/social systems. There’s only need for sharing and love and other religion-y virtues. An assumption of abundance dramatically changes the answers to the “three basic economic questions.” What goods and services will be produced? At least enough to meet everyone’s basic needs. How will those goods and services be produced? Equitably and with dignity. For whom will they be produced? For all of God’s creation, of course.

Now, there are plenty of ways to rationalize the scarcity worldview. Scarcity can make us ambitious, industrious, creative. Individual interest in private gain creates Adam Smith’s mysterious and miraculous “invisible hand” which has molded a system of efficiency and prosperity, not to mention cooperation and interdependency beyond that seen in any utopian society supposedly guided by principles of “sharing and love.” Even God would know better than to spoil creation by providing too abundantly, right?

So scarcity makes us punitive, but it makes us productive. Abundance makes us sympathetic, but it makes us sluggish. In what, then, should we trust? In an invisible God or in an invisible hand? Are good things scarce, or are they abundant, and which would we actually prefer?

Perhaps the crux of our confusion is in yet another assumption. To return to the introductory declaration of our introductory economics text: “An economic system consists of all of the ways a nation or society uses limited resources to satisfy its people’s unlimited wants and needs.” Unlimited wants and needs. Any parent can tell you that wants and needs are two fantastically different things. To satisfy a child’s every want is a) impossible and b) not very good for the mental health of either child or parent. But to satisfy a child’s every need is a) hopefully possible and b) fundamental to being a parent. In social law, we recognize a distinction between want and need, and call it criminal when parents don’t provide the latter for their children. So why wouldn’t economics make the same distinction? “Unlimited” really only applies to wants. Needs are pretty darn stable, limited by biology and broad, slow to adapt social conditions. (Admittedly, no one needed electricity before the grid was invented, but we have much less need today for candle wax and fire wood!) So if needs are limited, then abundance is possible. Our insatiable wants, however, will always require ingenuity, ambition and effort.

The hard, cold fact is that abundance does exist to cover needs. There are enough square feet and enough calories to adequately house and feed everyone in this country.* Couldn’t we loosen our grip on the scarcity doctrine enough to recognize this abundance and make basic needs a human right? The methods, of course, can and should be fiercely debated—redistribution, social control on industry, some more creative options we haven’t thought of yet… But if God is working through us to accomplish abundantly far more than we can even ask or imagine, can’t we imagine this?

*There’s enough food to feed everyone in the world!

Downey, Matthew. Contemporary’s Economics. Chicago: McGraw Hill Wright, 2007.

Finally Econ 101

So my latest project has been reading an introductory high school level economics textbook. I had so many friends in college tell me I needed to take economics, and four years later I'm finally taking their advice, on my own terms. I'm hoping that at this point, my study of the subject will be improved by a little more experience hearing from and working with the people who are left out of our current economic system. Better B.S. detectors as it were.

So, my posts here will be my reactions to what I'm reading. Some of my puzzlements may just be a result of a very shallow understanding of the subject. But hopefully some of them will also reflect a critical examination of a field with enormous importance in the world today.

My very own blog!

Hello world! Welcome to one woperchild's random thoughts and reflections.

First issue to address, predictably, is what is a woperchild? Someone explained this term to me in college. A devoted feminist somewhere was trying to come up with a non-gendered noun to describe herself. Woman wasn't satisfactory on account of the "man" in it, suggesting that a woman was somehow a derivative of a man. (Very biblical, huh?) So she tried woperson. But that has "son" in it, also gendered male. So she went for woperchild. Perfectly non-gendered, and to me anyway, perfectly hilarious. The lengths some people will go.

So here I'm intending to post things I've written, reflections on things I'm reading, maybe an occasional recipe or picture. My husband and I are both pretty terrible at remembering to take pictures, so those might be rare. But, since I have been out of school for four years, I no longer have any Doctors of Philosophy being paid to read what I write, so I'm going to have to hope for the benevolence of friends and strangers to give my words an audience. Hopefully you're in the mood to waste some time.