novatownhall blog

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Browsing Posts in Economics

With the notable exception of Gina Rinehart, the ten richest women in the world all inherited their billions, while the ten richest people (all men) all earned their billions.  Yes, Rinehart did inherit her three-quarters of her father’s company, Hancock Prospecting, in 1992.  But she turned her $A75 million inheritance into the $A10B it is today.  That’s a 20+ percent annual return for 25 years!

The other nine — not so much.  There is nothing wrong with inherited wealth.  The idea of leaving something for our children and grandchildren drives many of us to work and save and invest.  But inheriting wealth and creating wealth (even with the intention of passing it on to your heirs) do not benefit the world the same way.  Creating wealth for oneself invariably requires that one create wealth for others, too.

It’s a bit old, but a relative linked to it on Facebook, and I thought I would look into it. It is the “Wages Haven’t Kept Up With Productivity” mantra:

productivity-versus-wages

“Something happened in the mid-70′s”

Well, I went to BLS.GOV, and plotted Series PRS85006093 (Nonfarm Business, Labor productivity (output per hour)) and Series PRS85006103 (Nonfarm Business, Hourly Compensation). Guess what? The results don’t match!

In fact, adjusting the index to 100 in 1970, the productivity index was 231.7 in 2016, and the hourly compensation index was a whopping 887.2! Relative to their productivity, people were earning almost FOUR TIMES what they should have in 2016.

productivity-versus-unadjusted-wages
(This is a semi-log scale, which is more appropriate for the data.)

So how could this be? What could account for this discrepancy?

Well, I did more digging, and found Series PRS85006153 (Nonfarm Business, Real hourly compensation). This index is inflation-adjusted, while the others are not. This is the data series they were using in their comparison. They were comparing inflation-adjusted wages with non-inflation-adjusted productivity.

So, what happened in the mid-70′s? INFLATION.

It’s getting a bit stale now, having been released in January of 2015, but I am sure they will come out with a new steaming pile soon. Anyway, allow me to present Who Pays? (5th Edition) A Distributional Analysis of the Tax Systems in All Fifty States. Even the title is wrong, since they include the District of Columbia, but I digress.

While complaining, as progs are wont to do, that the State tax systems are not “fair,” they never actually bother to define the word FAIR. Be that as it may, when we get down to the section on real estate taxes, we have this:

Renters do not escape property taxes. A portion of the property tax on rental property is passed through to renters in the form of higher rent — and these taxes represent a much larger share of income for poor families than for the wealthy. This adds to the regressivity of the property tax.

This is quite reasonable. If the property-owner is to make a profit, he needs to pass his tax burden on to his renters. But the authors then follow up with this:

The business tax component reduces the regressivity of the property tax as it generally falls on owners of capital….

That’s right. Somehow, one type of business (rental property) is able to pass the cost of taxes to its customers (renters), but other types, such as retailers and manufacturers, cannot. This simply makes no sense.

The authors want to emphasize their assertion that lower-income people pay a higher percentage of their income to State and local taxes than higher-income people do. To do that, they say that property taxes on rental property are passed through to the renters. However, if they admit that retail and manufacturing business can do the same, and pass their property taxes on to their customers, then they must also admit that businesses can also pass on to their customers the cost of corporate income taxes, and thus the corporate income taxes are as regressive as sales taxes are. This they cannot do.

This really is one of the dumbest articles I’ve ever seen from “The Economist”, and that includes the one where they neglected the fact that twice a year one gets THREE bi-weekly paychecks in a month!

Germany has a trade surplus, and according to “The Economist”, this is a Bad Thing:

For a large economy at full employment to run a current-account surplus in excess of 8% of GDP puts unreasonable strain on the global trading system. To offset such surpluses and sustain enough aggregate demand to keep people in work, the rest of the world must borrow and spend with equal abandon. In some countries, notably Italy, Greece and Spain, persistent deficits eventually led to crises. Their subsequent shift towards surplus came at a heavy cost. The enduring savings glut in northern Europe has made the adjustment needlessly painful.

Germany did not force Italy, Greece, and Spain to spend more than they made. Germany did not force Italy, Greece, and Spain to borrow money to buy what they could not afford. They chose to do that all on their own. If one group of people, collectively, spend more than they make, then some other group must make more than they spend.

Progs like to push the Minimum Wage as a way to reduce income inequality:

“It will reduce inequality. The question is how much and for whom. It’s not going to have a huge impact, but that’s because there’s no politically feasible policy that would have a big impact,” said poverty and fiscal expert Isabel Sawhill, co-director of the Center on Children and Families at the Brookings Institution.
http://money.cnn.com/2014/01/15/news/economy/income-inequality-minimum-wage/

As the above article points out, increasing the Minimum Wage would not narrow the gap between the “one-percenters” and those making the Minimum Wage:

Consider the 5-figure paycheck of a janitor versus the 8-figure salary of a CEO. Raising the minimum wage to $10.10 from $7.25, as a leading proposal in Congress would do, wouldn’t narrow that chasm.

There’s also a big gap between those making 6-figures and the bazillionaires at the very top. A higher minimum wage can’t touch that.

What a higher Minimum Wage will do is tilt the balance between labor and automation in favor of automation. If the cost of hiring a teenager to sweep the floor gets too high, the owner will just buy a Roomba. On larger scales, except for Oregon and New Jersey, you just don’t see full-service gasoline stations any more. The Minimum Wage is too high to hire grease-monkeys. There are self-checkouts now in major grocery stores. Baggers? Fuggetaboutit.

The paradox is, the higher Minimum Wage goes, the higher productivity goes. Machines replace manual labor, so the productivity per remaining worker increases. Of course, the remaining workers do not see any commensurate increase in their wages. Why should he? He’s not the one putting his money down to buy the machines. The owners are. If a plowman could plow one acre a day walking behind a mule, and his employer buys a tractor with which he can plow ten acres a day sitting down, will his employer pay him ten times as much? Of course not. He might even pay less, because the work is not as difficult.

The result of a higher Minimum Wage, then, is fewer people employed and higher productivity, with the benefits of the higher productivity going to the owners.

Who are the owners?

The one-percenters.

French Economist Thomas Picketty has published a new tome touted by the left entitled Capital in the Twenty-First Century.  I picked up this book (downloaded the Kindle version, actually) because I simply could not believe what the progs were saying about it, which is that Picketty claims that, if the average return on capital (r) exceeds the rate of growth of the economy (g), then wealth inequality increases.

I read this and said to myself, “Self, these fool progs obviously cannot understand what this man is talking about.  It is obvious that he must mean the growth in the valuation of the economy; that is, of all the capital goods in the economy.”  This is, of course, quite obvious.  If the average annual return on capital investments is 5%, but the total valuation of the capital of the economy increases 6% per year, then someone besides the original investors must own that newly created 1%.  And if the total valuation of all the goods in the economy only goes up 4%, then the investors must be getting their extra 1% from someone else, and wealth inequality will increase.

Alas, the progs were right, and Picketty’s hypothesis, which they swallowed hook, line, and sinker, is a total dud.  He really is using the wrong growth rate for comparison.

A simple example can illustrate the problem.  Let us assume that economic output (GDP) does not grow from one year to the next.  But the economy does still have output.  It is still producing durable goods — cars, televisions, houses, etc.  If the production of those goods is greater than the depreciation of existing goods (cars, televisions, and houses eventually wear out and are replaced), then the total valuation of the goods in the country increases.  If that valuation increases more than the return on the capital invested to create them, then wealth inequality must decrease, even with no growth in output.

Still, Picketty’s tome is valuable for the data it presents.  It will also be used as a tool for the progs to argue for a wealth tax (as Picketty recommends).  Thus, the work is important because one must understand its premise, the data it presents, and the flaw in Picketty’s logic, so that one can successfully counter the arguments the progs will make based on this work.  Thus, I will endeavor to write several posts on this book, one section at a time.

A government “fix” is like “fixing” a cat — it’s never quite right afterwards.

Well, the bean-counters at the Social Security Administration decided it was time for a Cost-of-Living adjustment (COLA) for beneficiaries.  There wasn’t one last year.  No inflation, they said.  So the great adjustment for this year is 0.3% — about $4 per month for the average recipient.  That’s one extra Big Mac per month.

Meanwhile, the Social Security Wage Base will go up 7.34%, from $118,500 to $127,200.  How does that work?

Simple — they just use different calculations.  The benefits are increased by the inflation rate, and the wage base (when there is a COLA) is increased based on the Average Wage Index.  Isn’t that cute?

Well, it turns out that the Wage Base has increased 35% over the last twelve years, but the Cost-of-Living Adjustment has only given beneficiaries a 22% increase.

Does the word BOHICA mean anything to you?