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Income inequality and diminishing marginal utility

Calvin is referring to economic law of diminishing marginal utility.  In general, it states that consumption of preceding goods or services won’t deliver the same level of satisfaction relative to the first (or in Calvin’s case, the second).  As Calvin illustrates, his third or fourth bowl of chocolate frosted sugar bombs will make him sick.  The same is true with almost anything that we can purchase.  You may be satisfied with a lamp you bought to light up your room, but you wouldn’t you buy another to light up that same room.  You might buy a second to light up a different room but you eventually stop buying the lamp because its utility drops.  A second and third car, bedroom set, or dinner won’t make you as happy when you bought them the first time.

What does this have to do with income inequality?

Think about the amount of money you need to purchase the things you want.  Obviously, the wealthy have enough to purchase everything that they want four, five, or ten times over.  Much of the time, however, they don’t and this has to do with diminishing marginal utility.  Sure, there are many top income earners who buy several cars and houses, but spending habits of a small consumer elite can’t sustain a healthy economy.  The automobile and housing industry would prosper with a large consumers base, not a small one.

In truth, the wealthy spend their money differently than the rest of Americans.  A middle class family will likely spend a tax cut on groceries, clothes, or medical bills, etc.  A tax cut for top income earners, however, will most likely be invested.  Below is the distribution of financial investment ownership.

The top 1% of Americans own half the distribution of stocks, bonds, and mutual funds while the bottom 50% own less than 1% of that distribution.  In other words, you can’t expect the top 1% to maintain necessary levels of consumption; the law of diminishing marginal utitilty makes the wealthy consume less and invest more.

Investment is obviously important.  However, our economy suffers from a lack of demand because ordinary Americans don’t have the purchasing power to consume the things they need.

Income equality is not just a moral concern, it’s good economics.


Obama believes in redistribution…and so do I

As Romney recovers from his remarks about the “47% of Americans”, republicans deflect attention back to the democrats after the release of a video of Obama saying that he “actually believe[s] in redistribution.”  As if they found a secret weapon, Romney and the GOP are using that phrase to paint the President as a socialist.  The video below shows how conservatives are framing the President’s statement.

Mitt Romney has even gone as far to say that “redistribution has never been a characteristic of America.”  This is a remarkable comment because it completely ignores the fundamental structure of America’s progressive tax code.  It ignores the basic function that government plays in providing necessary services like veteran’s benefits, food stamps, medical services, and so on.  Things that we may take for granted like education, police, infrastructure, and health all require basic levels of redistribution…and that’s the heart of what the President was saying.  Below is the quotation in its entirety.

I think the trick is figuring out how do we structure government systems that pool resources and hence facilitate some redistribution because I actually believe in redistribution, at least at a certain level to make sure that everybody’s got a shot. How do we pool resources at the same time as we decentralize delivery systems in ways that both foster competition, can work in the marketplace, and can foster innovation at the local level and can be tailored to particular communities.

Read in full, his belief in redistribution sounds a lot less like socialism and more like basic governance, especially when he mentions working with the marketplace and fostering competition and innovation.

On another note, conservatives may have picked a losing battle as their views of redistribution are out of sync with the average American.  Below are the results of Gallup poll asking respondents if the current distribution of wealth is fair or if they feel that wealth in this country should be more evenly distributed.

1984-2011 Trend: Views on Distribution of Wealth in the U.S.

On average, less than 35% of Americans feel that the current distribution of wealth is fair while 60% of the population generally believes that there should be a more even distribution.  These 60% of Americans don’t feel this way because they are looking for a handout.  As I’ve written before, America’s labor force is working harder than ever despite stagnating wages.

Meanwhile, the majority of America’s wealth has been concentrating at the top income brackets.

It’s clear that our economy doesn’t distribute wealth evenly and that the invisible hand is neither fair nor efficient.  Americans works hard, yet many can’t make ends meet.  Given the inequality in economic reward, it makes economic and political sense that some should pay extra for their success.  However, ignoring the imbalance in economic distribution, conservatives are attacking government’s re-distributive policies that create balance.

People forget that capitalism is a source of distribution itself, but one of asymmetry.  Look at nurse’s pay compared to the average pay of corporate executives.  They both perform essential jobs in our society, yet one is rewarded ten, or even a hundred, time more than the other in terms of income.  The purpose of government re-distribution is to ensure that those income inequalities don’t prevent hard working Americans from receiving public goods they otherwise wouldn’t be able to afford.  This is basic governance, not socialism.

Mitt Romney’s 47% who pay no taxes

Illustration: John Darkow

The democrats wasted no time attacking Romney’s remarks he made at a fundraiser dinner where he claimed that 47% of American’s don’t pay income taxes.  He then stated that his job “is not to worry about those people.”

Watch his remarks in the video below.

The Tax Policy Center breaks down that “47%”.

Tax Policy Center - 47 Percent with annotation

To suggest that those 47% don’t pay taxes is very misleading.  Two thirds of that group does pay payroll tax. The other third don’t because they are very poor and qualify for certain tax credits or are elderly and receive special kinds of deductions (many of these deductions for the poor and elderly were put into effect by republicans, by the way).  Don’t forget that everybody pays other kinds of taxes, primarily the sales tax which is a much larger percentage of the poor’s income than anyone else.

Where do these people live?  David Graham from the Atlantic provides a map the non-payers by states.  Those state in red have the highest shares and the blue states have the lowest.  Notice how the states in red also tend to have more republicans as well.

This is not to say that the 47% are mostly republicans.  One would have to look at party vote share by annual income to get a better look.  However, what we can say is that Romney’s off-the-cuff remarks are going to make it much harder for him in those states above.

Politics aside, Romney has a problem – his remarks demonstrate a seething contempt for the poor.  He sees them as free-riders.  I’m not sure where this antipathy for the poor comes from, but we have to stop demonizing them as if they are cheating the system.  These 47% are not lazy or scheming, but hardworking folks like everyone else.

I plan on writing future articles about why we demonize the poor, and why those who do have the wrong idea – so stay tuned.