Wednesday, December 17, 2008

Why do we need a middle class?

I mean, what's the problem with the Party of Hoover's "Mexico North" plan, where the top 1% of U.S. taxpayers are filthy rich and everybody else is really, really poor?

Well, the problem there is that the whole country is poorer at that point. The problem is that the investor class -- those who make more than is needed for a reasonable lifestyle -- don't consume all of their income. Instead, they stick it into bank accounts and stocks and such. So if you have an economy dominated by the investor class, what you have is an economy where consumption is a distant second to asset bubbles caused by a surplus of investment money. Indeed, this could be said to be a perfect depiction of what has happened to the U.S. economy after Ronald Reagan massively cut taxes on the investor class. We've seen one asset bubble after another happen as too much investment money chased too few assets, and no significant increase in consumption amongst the investor class.

If you're going to pump up consumption and thus demand, the best way to do it is to give the money to people who will spend it, rather than invest it. More money in the pockets of people who will not spend it adds nothing to demand. We're finding that out the hard way right now with $300B in TARP money to banks and $3T in Federal Reserve loans to all sorts of folks who, err, aren't spending it. We're back to Keynesian Economics 101 here -- unless you are putting money into the hands of people who will spend it, you might as well just shove it into an open pit and cover it up with topsoil, because it ain't doin' nothin' to foster consumption and thus generate economic activity.

A working economy requires a balance of investment and consumption, investors and consumers. If you have too much investment and not enough consumption, you end up poorer. If you have too much consumption and not enough investment, you end up poorer. Since Reagan, the U.S. has given special breaks to the investor class (e.g. the capital gains tax cuts, and the cuts in the top tax rates) and nothing to the consumer class, average hourly wages have declined for The result is the imbalanced economy we're currently enduring, which cannot continue because a poorer population simply cannot consume enough to keep everybody employed.

-- Badtux the Economics Penguin

1 comment:

  1. You get to something I often wonder, Tux: what's the endgame to the march toward fascism?

    If the rich bastards succeed, the top 0.1% will have enormous wealth and power over the serfs. All this also applies to politicians. But they'd be kings of a shit heap. Every time they left their gated compounds, they'd need guards to protect them as they drove through a shambolic land filled with trash heaps and raggedy-arse people. They'd have the biggest slices of the pie, but it would be a smaller pie that was moulding. And when you're surrounded by trouble, it seeps into your life, no matter how opulent it is in comparison to the squalour.

    Is it better for them to grab power over a declining empire than to be decently rich in a pleasant place? Maybe they can't glom the balance. They only want it all, all, all now, now, now. I've noticed amongst reichys an inability to grasp nuance. Not clear on the concept that YOU can be rich, and it's OK that there are other rich people too. No, they're more like selfish 3-year-olds.

    Or more likely, they don't ask any questions of themselves. No introspection, just acquisition. The future is a land where their minds do not live, except as it comes to investment strategy. Neither do malignant cancer cells ask how it's all going to play out as they consume their host.


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