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Friday, November 26, 2010

Q: How Wisely Do ‘Wealth-Friendly’ Policies Employ Capital? A: Not So Wisely

To say that reaction to my latest post has been ‘mixed’ would be generous.  While grasping the way the Bush-era handouts to the richest 2% reinforce wealth redistribution, it seems that folks may not yet see just how they're like a ‘Death Cult’.  At least in the opaque allegorical form I set out in part one of the newly planned 3-part series.  For most readers, the point still seems a little abstract.   So here I lay down some more explicit exposition.  Today I will demonstrate the difference between ‘Wealth’ and ‘Productivity’.

The Right Wing may be many things, but subtle is not one of them.  Their financial platform is quite clear:  Profit is the ultimate yardstick of economic progress, tax cuts and deregulation of markets allow perpetual increases in the level of profit; ergo continual reductions in tax and regulation guarantee the wisest allocation of resources.  But is this true?

Answer:  Not Unless You Think The Lottery Is A Sound Investment
Far from it.  We’ve already disposed on multiple occasions with the Laffer Curve myth1.  We’ve already demonstrated the relationship between tax cuts for the richest 2% and deterioration of the income for the median tax filer2.  And we’ve even provided an analysis from uncontested data from the Bureau of Economic Analysis and the Federal Reserve showing that the federal government is typically 4,700% times more productive than the financial sector.3  But now take a gander at the chart above. 

Note the difference in the % of the total money supply our ‘wealth-friendly’ policies allocate to each sector and their relative productivity in terms of GDP.  We literally piss away over 34% of our money on a sector (i.e., Corporate Finance) that provides only 0.8% of our productive capacity3.  Not too shrewd now, is it?  That’s more or less like a man in 2008 making the average annual salary of $43,000 spending $14,710 of it on lottery tickets4.  Is that what voters of Wisconsin elected Paul Ryan to do?  Spend over 34% of our national productive capacity on Powerball tickets?

Wasted Money and Wasted Jobs
“But wait,” you say.  “Aren’t there other ways of measuring the inefficiency of this resource allocation?”

Indeed there are.  While it’s not possible within this short space to exhaust all the possibilities or perform  superfine, CBO-quality calculations, it’s still worth performing a rough, back-of-the-envelope calculation to determine the relative magnitude of the inefficiency.  Here are my guesses as to the maximum potential figures for Wasted Money and Wasted Jobs:

  • Wasted Money:  Holding all price levels equal to those of 2008, the last year for which fully comparable data was available for all variables, we typically throw away $1.9 TRILLION or $1 out of every $12 in circulation.  Smooth move, X-Lax. 
Now keep in mind that represents the net negative impact Gross Domestic Product or "GDP" of our current, un-optimized resource allocation.  Basically this means to say that by spending $X's in less productive areas of the economy instead of spending that same dollar in the more productive segments of the economy, we lose $1.9 trillion of GDP.
Of course the reality is more complex than this because there is the possibility that radical changes in the allocation of resources to a sector can alter its aggregate productivity (e.g., per unit step fixed costs may not vary directly with the scale of operations, and the introduction of too much liquidity in a given market all at once may result in a certain amount of inflation).  But it is still an interesting, thought-provoking exercise to estimate the maximum potential cost of inefficient allocation, even if the assumptions used are pretty basic.
If you care to see details of my calculation, look at cell V118 on the tab ‘Velocity of Money by Sector’ within the workbook here.  I can answer more detailed questions upon request.

  • Wasted Jobs:  68.7 million jobs sound like a big number to you?  Well, it should—that’s 47.5% of our total employment base of 144.5 million jobs per the October release by the Bureau of Labor Statistics.  “Fuckin’ ape-shit crazy!” you say.  “How the hell can that be right?”

Well, take a look for yourself.  See cell BB118 on the tab ‘Velocity of Money by Sector’ within the workbook here for more details.  That’s the best shorthand calculation available based on data from the Bureau of Labor Statistics and Bureau of Economic Analysis regarding wages and total compensation by sector and their typical percentages of GDP through 2008 and current employment base as of October 2010.

“But WTF could that possibly mean that we have a supply of capital that could fund employment at a level 136.1% of our actual workforce?”  Well, among other things it means that the current “magic-of-the-markets” system of allocating wages ain’t so fair.  But you already knew that based on our analysis of income inequalities from the Bush-era tax regime2, right?
“Goddamn, that’s disgusting!” you may be thinking to yourself.  And so it is.  There is no freakin’ way we should tolerate simpletons like congressman Paul Ryan (R-WI), senator elect Ron Johnson (R-WI) and Right Wing pundit David Frum5 to be pushing yet MORE tax cuts for the wealthiest 2% and stonewalling every effort to regulate the pitifully unproductive financial industry.  Get on the horn or send an email straight away to your  representatives and senators telling them:

  • “NO WAY” to renewal of the Bush-era handouts to the richest 2%.
  • “Get working NOW on further financial regulatory reform”
  • “Stop messin’ around with baloney cuts to high value-add programs like Medicare and Social Security—they actually provide economic benefit, instead of hamstringing the economy like tax cuts do.”6
As a nation we just can’t afford to go on like this.

1    See the inaugural blogpost here decisively discrediting the baloney notion that tax cuts invariably boost the economy.
2    See this blogpost detailing how the Bush-era tax cuts for the richest 2% ended up increasing the average income of the wealthiest Americans by at least 20% while DECREASING average income for Joe Average by 17%.
3    Read here how $1 dollar in the federal government sector typically increases GDP by 9.4 times whereas $1 in the financial sector DECREASES it by 80 cents.
4    Yeah, for real.  See data on average wages on cell F12 on tab ‘Profile of Typ. Ee-2009’ and the % of total money supply within the financial sector within cell AK115 on the ‘Velocity of Money by Sector’ tab all within this workbook.
5    That’s the former speech writer for Bush II.  I’m referring especially to a recent radio commentary on “Marketplace” where he again puked forth another plea to give away more tax cuts to the wealthiest 2%.  Contact them and let them know how much bullshit you think that is.

      But one further thing I’d like to call to your attention:  David Frum maintains dual citizenship with both the U.S. and Canada.  Now does it seem right to you that a guy who doesn’t see fit to commit 100% to a country should have a whole lot of influence on policy?  I’ve got nothing against Canadians—I have lots of friends in Montreal myself.  But they seem to know that if you’re gonna flood the airwaves asking a country to go to war, you’d better be fully committed to said country yourself; they’re all single-country citizens of Canada.
6    And don’t just take my word for it.  Mark Zandi, chief economist at Moody's testified before the Senate in September about the positive fiscal multiplier effects of these programs.  Forward this to  representatives and senators  if they just don’t seem to get it.

[Editorial Note December 2, 2010:  See item #1 regarding revision to calculation of M3 here.]

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