The 6 Pack Economist

What fascinates the hell out of me is that some very smart people do not understand that not everyone can be rich.  Nor can everyone be poor either.  We are rich or we are poor based on the people around us.  Both Ted Rall and Cynthia Tucker do not understand how basic everyday economics work.

Although both are correct in criticizing the executive pay of these failing institutions, what they fail to recognize is aside from pulling back a little bit on the pay for CEO’s there will always be both wealthy, rich, poor, and a bunch of levels in the middle.  I also made a very conscience decision putting in both wealthy and rich as different levels. 

To the primary reason I wanted to post about tonight.  The amount of middle class people has not changed in percentage of the population.   The primary reason has nothing to do with economic policies or anything that complicated.  The middle class are the people who make more than the lower class but less than the rich.  The factory workers were never really middle class.  The manager at the plant was middle class and the diner owner was middle class.  Could the factory worker live comfortably with the two point five kids and a white picket fence?  Maybe it really depended on the supply of houses with white picket fences.  But that is my point.  What does the average person today have in comparison to thirty years ago?

Today the average household owns two cars (with reliability and features Mercedes Benz did not have), a HDTV in one or two rooms, air conditioning in almost every room, cell phones, cable TV with 100 plus channels, a computer with internet, some type of game system, and health care that those in the 1970s could only dream of (even if it’s expensive).   

Mean while in the 1970s when according to Cynthia Tucker all was great, the average American made car was complete junk, went 0-60 in 3.4 months, got about 15mpg, and were good for about 80K miles.  Air conditioning was something only the rich people in the neighborhood had.  A house might have two TVs only one worked.  Cable was something for rich people also, if they even had it all.  There were no cells phones.  Ok that last one is bonus.  The personal computer was just a series of blinking lights.  Geeks really were geeks.  The internet was for even bigger geeks.  And healthcare although cheap was abysmal by today’s standards. 

So where did all the productivity gains that the rich people ran away with go? It came back to the “poor people” in the form of better stuff for “poor people”.   One can argue that all the stuff is not worth it, but when it comes to economics the stuff and the services that people can have does matter.  Also if someone did not want the stuff they do not need to purchase the items.  

The second point I want to make is directly related to the statistic mentioned in Cynthia’s editorial.  I don’t think there is anything wrong with it.  I think it actually shows exactly what it should show.

A few years ago, Earl Wysong of Indiana University and two colleagues published a study on social mobility in this country. As outlined in the Economist, a right-leaning British news magazine, they “compared the incomes of 2,749 father-and-son pairs from 1979 to 1998 and found that few sons had moved up the class ladder. Nearly 70 percent of the sons in 1998 had remained at the same level or were doing worse than their fathers in 1979. The greatest social mobility occurred in those families already at the top of the income ladder,” the magazine reported.

So 70 percent of the study did not move up the income ladder?  No kidding.  Not everyone can move up the income ladder since they have to move past someone else and then that person would move down the income ladder.   I would bet the statistics would come out that 1/3 moved up, 1/3 stayed the same and 1/3 went down.  Also 66% is really close to “almost 70%”. 

The second part of the statement deals with that most of the social mobility was in the upper income brackets.  This too can be easily explained without it coming down to something evil republicans did by reducing taxes.  In 1979 a college degree was still a premium and those with them came from more affluent backgrounds.  While a high school education pre 1979 may have been good enough, after that is simply was not good enough.  One needed to have something besides a high school education.  So simply showing that those who were affluent made better gains was primarily because they had access to a college education and valued it earlier.  In addition it tends to the children of the rich that become the wealthy.  The grandchildren become drug addicts and home move porn stars.  So it sort of works out in the end.

Did some people become obscenely rich, while others were brushed to the wayside?  Yes.  Do I wish that people could live in a minimal of comfort even when they are on the lowest rungs of the economic ladder?  Yes.  And they do, but in comparison to the truly poor in this world they are doing pretty damn good, even if everyone else around them is doing better.

In today’s America dual incomes are the norm.  But are they really worth it?  I am not going to look into the value that someone places on going out and earning an income but I am just going to look at it from the stand point of supply and demand.

 I believe that the first people that went out and began the dual income lifestyle were the only ones to truly see a bonus.  This is because they were able to take advantage of the market before it adjusted to the increased supply of labor.  When the two income household began to be the norm it increased the labor force.  And given supply and demand this would have decreased the price of this labor.  The market soon adjusted to this increased supply of labor and soon made dual incomes almost mandatory. 

 This of course was not all bad.  Sure one hours of work pre-dual income was not the same but it also brought down prices because it increased the amount of goods and services.  And I am not talking about the services offered at the Caesar’s of Atlantic city by the friendly women out of you league that talked to you.  They are usually single income households unless she lives with her pimp.  I am talking about the fact that there are more doctors, lawyers, factory workers, etc. that are in the workforce creating things you want or services you need.

 The one thing that I believe that did get out-of-whack was real estate.  This is primarly because no amount of extra labor can make more land.  Well it can but its very expensive and environmentalist don’t like filling in swamps.  The amount of land to put a house on has not increased but the money available for people to spend has.  So if there is more money going after the same amount of resources the price will increase.  And it has.

 I will speak about the other costs and bonuses of dual incomes from a day to day life in a later post.

Living in the northeast super city corridor (Washington DC to Boston Mass) I am used to reading about all the different taxes that get thrown around.  From Philadelphia city wage tax to 12 dollar cigarettes in New York City the region in very tax happy in general.  I am not against taxes.  I think we need them for many community based projects that the private sector simply won’t do or can’t do for a price people are willing to pay.  That being said I hate taxes that are counter productive, like Philadelphia wage tax, or just wasteful like cigarette taxes that go to programs that will be around after everyone finally quits smoking.

My personal and what has been historically accurate view is that government is the most wasteful organization to dump money into.  To list the sheer amount of waste that goes on is too much for a blog read by about 4 people.  Similar things happen in the private sector also but their (used to be at least) consequences to this, like losing your money.  Current bail-out excluded, government usually gets more money for failure then success.  In the government if you run your department more efficiently, thereby reducing your budget, you do not receive a bonus; instead you lose power as some other department takes your budget surplus. 

I have tried to sell the idea of taxes as the purchase price of government services for an area.  So instead of looking at taxes as something that is just taken from you, think of it as the purchase price for government services.  Perhaps if we looked at government more like we look at say Walmart, Target, or Best Buy perhaps we can reward those governments that give us the best bang for the buck. 

Let’s take Philadelphia wage taxes.  Back in the fifties or sixties (I can’t be bothered to look it up) they put this temporary tax on income to build something or other. Back then our economy was based around manufacturing and large labor forces.  So if you wanted access to large labor pools you had to be in the city.  The seventies and eighties changed the standard manufacturing economy (for better or worse).  What replaced it was a service oriented economy and smaller work forces.  Without the need for access to large labor forces companies moved out to the suburbs to avoid the wage taxes (not to mention the oppressive business taxes).

This brings me to the conclusion that when you offer less for the money you have to lower your prices.  This is what happened to Philadelphia, except that instead of lowering their prices to service more customers (residents and businesses) they kept them at the same high rate or only marginally lowered them. The large labor force offered by Philadelphia did not matter, nor did Philadelphia have name recognition like New York City (which is why New York City can run the tax system they do).  The mass exodus of highly paid people and service based businesses soon moved to the suburbs. This began to take its toll on the city. 

I have worked in Philadelphia many times both in the out skirts and center city region.  What I can honestly say is that I have no idea where the wage tax went.  Simple things were not done.  Trash is piled in corners on the streets, abandoned cars on major streets are ignored and just general disrepair is rampant.  Certain portions of the city were great like center city or old city, while other portions just needed general “take care of this crap” to be great.  Of course other areas would require a Marine escort, but we can pretend they are not there like the rest of city hall currently does.   This leads me to the fact that what I get by working in the city or god-forbid starting a business (even more frustrating) in the city is not worth the price paid to do it. 

So the Big 3 American Auto companies look like they are screwed.  I have mixed feelings about this.  First off I think they put themselves into this situation, from the CEOs to the UAW.  On the other hand I always like my Fords, Dodges, and Cadillac (I drive two GM products right now) so I would hate to think that they would be gone.

 I do believe that the big 3  treated their customers like a bunch of dumb hicks for way to long especially from 70’s to late 90’s.  In the late 90’s even GM realized they may have to put money into research and development.  In addition they had to at least compete with the imports (Japanese, the Germans have never been too much better then the domestics) on the issue of quality.  The Japanese put out a very reliable automobile in most segments.  By the time the 1990s came around the Japanese cars have established a reputation for reliable cars (sure the wheel wells rusted out, but it still ran).  Meanwhile GMs, Fords, and Chryslers were making a reputation for inferior quality.  The market began to change and the big 3 refused to recognize this.  Unfortunately once your reputation for long-term reliability is lost it takes a long time to get back. 

 The only thing that saved the big 3 or at least staved off this problem for a few more years was the low-gas prices, OJ Simpson making Ford Broncos famous, and a series of bad winters in the north east.  The SUV and Big Trucks ruled the road and the Big 3 were good at making them.  Even during the dark days of the “80’s crappy domestics” the American companies were good at rear wheel drive V8s. 

 In what has become typical of American corporations all emphasis was on short term profitability.  R&D and marketing went into SUVs while the lower profit cars languished.  The Japanese were able to make steady gains within in the car market which was virtually ceded to them by the domestics.  Other then ford, which had a few nice cars in the late 90’s, looking for a domestic car was pretty disappointing.  All of their money or profit was going to marketing SUVs.  These short sighted fools held onto a belief that gas prices will never rise or that the imports will not start making some fine SUVs to compete with the domestic golden goose.

 In late 2006 the weather forecast was in and a perfect storm was coming.  Gas prices were rising, imports were making better SUVs, and a recession was on the horizon.  The big 3 had all of their eggs in one basket and that basket was smashed.  The innovation and quality improvements that they made in their product came too late, the well they poisoned for so long was going to take a lot longer clean up. 

 
My next post will go into what the UAW did to help cause this.

I think that what will eventually kill capitalism is these moron CEOs.  Capitalism depends on that the people who are rewarded, are also to take the risk.  But the latest issues with these CEOs who have golden parachutes have thrown the whole system to the wolves.

 I have no problem with the money they were paid per se, what I have a problem with is the amount of money they made with little to no risk.  They screwup and are forced to resign, the company is in ruins and they walk away with a multi-million dollar severance package.  That’s like walking into your neightbors house and throwing your feces on the wall and charging them for painting their house.

 This type of compensation for failure just pisses a lot of people who then vote in a socialist who say that they will take care of everything and tax the rich.  PS taxing the rich never really works.  They tax them which just trickles down to the person who put the socialist in office to begin with.  Which in turn brings more taxes on you etc….  I have whole posts on this crap.

 I would love for these guys to be hung out to dry.  Lets be honest most of these guys are not that smart anyway.  They really do not have some grand talent that makes them really deserve this kind of money. Then again they are not that stupid either they were able to set themselves up in such a way that if they succeed they make money and if they fail they make money and get a vacation.  I guess in the end they are smarter then I am.

 How to solve the problem?  I don’t know.  But rewards for failure should not be part of it.  I think the top salary should be limited.  I know it sounds socialist but the guaranteed pay should be limited.  Everything else should be bonuses.  With something nominal for becoming disabled or whatever, but the principle is simple.  Do good get stuff, do bad don’t get stuff.

 There should also be rewards for post retirement kind of like a five year bonus plan.  One bonus for yearly achievement and then more bonuses for two, three, four, and five year achievement.  This way short term actions that kill the company long run will not be undertaken.  It could be a dividend based system or some other method. 

 Think about it this way.  You go into your neighbor’s house (your neighbor had some bad luck).  You promise to make your neighbor more money this year then your neighbor made last year. They agree (we are going to pretend they really don’t know you too well).  Afterwards you sell everything they have including the house.  Take your 50% cut and leave them with the shirts on their back.  You on the other hand get to walk away with your 50% cut. At the end of the year they have more money but the next year does not seem too good for them.

 The only real punishment for these crooks is to empty their bank accounts and sell their assets.  Then force them to live off a janitor’s salary for 5 years with no-contact of their former business associates.  Then again their business associates are the same people giving out the punishment so fat chance there (Politicians are cheap).