Nick Hanauer’s TED talk—the one that apparently was “banned” (i.e., not immediately released on the TED site but available on YouTube)—makes the argument that middle class consumers, not businesses, create jobs. Consumo ergo sum, as Fr. Robert Sirico describes the general attitude in his new book, Defending the Free Market: The Moral Case for a Free Economy. Hanauer says it is “disingenuous” to attribute job creation to the wealthy when in fact it is the middle class, armed with sufficient spending power (i.e., wealth taken from the rich and redistributed), that drives up demand for products and thus creates jobs. Creating new jobs, Hanauer points out, is the “last resort” of businesses—only when demand outpaces production capacity will a business hire new workers.
Though roughly stated, Hanauer’s talk offers nothing very new or surprising. Other than his partisan indictment of Republicans and non-Keynesians more generally, there is certainly nothing incendiary or even particularly provocative about his ideas. Besides, Hanauer is an entrepreneur, not an economist, and his talk was only five minutes long. It would be unfair, then, to impugn him for failing to point out that Americans have already cracked the code of affluence and now enjoy an abundance of it. Tyler Cowen explains that America picked all the “low hanging fruit” in the decades following World War II. Compared to 1950, we expend half as much labor for a gallon of milk, a third as much for a kilowatt of electricity, a quarter as much for an hour of air travel, a fifth as much for a refrigerator, a seventh for a three-pound chicken, a tenth for a home air conditioner, and a fiftieth for the cost of a coast-to-coast phone call. We “have access to penicillin, air travel, good cheap food, the Internet and virtually all of the technical innovations that [Bill] Gates does,” Cowen observes. We have so much affluence, in fact, that John Kenneth Galbraith complained that man’s desires were “no longer even evident to him,” and that modern Americans “needed an adman to tell them what they wanted.”
Like Hanauer, I’m not qualified to challenge an entire school of economic thought, but let me pose this question: If Galbraith was right and modern Americans by and large are free from poverty classically understood (though not free from the modern liberal recasting of poverty as that “new and deeper searing” that arises with “envy of his neighbor’s new car”), then what meaningful economic progress is yet to be made? The modern economic problem, in my humble estimation, is precisely that, without continued innovation and entrepreneurial risk-taking, we would be left to conclude that the project of economic innovation and production is substantially done and that what’s left is to proceed with divvying up the loot. That is, Hanauer seems to suggest the fact that demand is high has nothing to do with the fact of innovation and entrepreneurial risk-taking—as if there was a demand for tablet computers before Steve Jobs created the iPad. While further prosperity is left to be had, Cowen points out, it will come only with increased investments of skill, capital, risk, and innovation. If there is merit to Keynesian theory, certainly it reached its peak in the mid-20th century when America was flooded with supply—the “low hanging fruit” which Cowen says we’ve gotten sick on. The need to incentivize new kinds of products and services, it seems to me, can only increase in an affluent society where the routine necessities of life—as well as a lot of really cool toys—are cheap and abundant.
Chief among these impediments to economic progress is our failure to address the rising costs of health care and the concomitant market distortions.
This raises a related point, so for the sake of discussion, I’ll stipulate. But health care is a good that knows no limit on demand—people will always want better health care, so there will always be investment in new innovations, and the newest innovations will always cost a lot until the investment is recouped. Also, the problem of what constitutes a “baseline” is thrown in sharp relief in the health care discussion. It makes no difference that a health care good is on the bleeding edge: if it’s available, there is a strong psychological, emotional, and arguably (by some) moral claim to access that good. Sure, this applies to discussions about poverty, e.g., that the average poor person in America has two color TVs, a DVD player, a Playstation, etc. But the baseline issue is a real problem in health care, and it raises the question I asked in the OP: do we consider the innovation project over and just work with what we’ve got? That has a chance at being “fairer” than the alternative, in which only the richest have access (at first) to the newest health care innovations. Or can we live with inequality, consoling ourselves with the fact that, taking the long view, it makes us all better off?
Considering the price we (the US) pay for health care, and the outcomes we get, vis a vis the rest of the First World, I think “health care costs” are a red herring.
They’re drowning the middle class only insofar as we have ludicrously overpriced healthcare compared to everyone else (for no better outcomes. Replace our system with Canada’s or the UK and every American would see their per capita health expenditures drop in half or more. A sizeable sum) and because median wages are flat.
Healthcare costs are rising while incomes are not, because it appears the increases in economic growth — all the new wealth being generated by an economy that is, if nothing else, forced to grow via population growth — is concentrating in a single, very small, group.
A rising tide DOES lift all boats. Unless all the water is being diverted to a private lake. In which case your boat probably sinks some, while the yachts shoot upwards at some multiple of the actual rising tide.
Can you point to any materials that can address what, I think, is the most obvious objection: that other countries’ more centralized health care thrives only because the innovation wing of the health care project is carried by the U.S. health care system?
I think we disagree on your latter point, but I also think it’s beside the point. My question is, does it matter that there is inequality in access to health care (vis a via respective wealth levels) if the system that breeds that inequality also breeds desirable health care innovations that eventually will be more affordable and thus accessible?
Except of course, that 1/3 of all medical research is funded by the NIH and a lot of the other 2/3 is wasted by Big Pharma trying to find Claritin Plus instead of normal Claritin.
However, I’ll feel for Big Pharma’ fear of losing their ability to innovate when they start spending more on R&D than advertising.
Can you point out any materials that indicate those other systems thrive because of our innovations?
Or am I supposed to just assume that the rest of the first world is free-loading off of the Awesome Americans?
Because you’ve got assumptions on assumptions there, and you seem to think they’re givens. I don’t see the US as some hotbed of medical science unlike any other first world country, I DON’T see any reason to believe our outsized medical costs are caused by Awesome New Medical Science, I don’t see us GIVING it freely to the rest of the first world (rather than, you know, making them pay the same as us).
So you dig up support for the forty three baselesss assumptions there, get some numbers together, support your base there and once we figure to what (if ANY) extent we, America, somehow subsidize the rest of the First World (medically) we can decide if it’s worth paying twice as much, per person, as the next most expensive system and leaving a sixth of the population totally uninsured to boot.
I’ll wait.
When Pfizer bought Warner-Lambert, I did a lot of the integration. Some interesting numbers came to light. Pfizer spends more on marketing than R&D. So did Warner-Lambert.
In answer to your question, yes it does matter. Health care innovations don’t come out of either Big Pharma or Big Healthco. They mostly arise from university research. Most Big Pharma research these days is dedicated to creating isomers of existing drugs so they can get them back under the patent umbrella.
I’ve heard this claim made before, that the US healthcare system is more expensive because it is more innovative, and other country’s healthcare systems are able to be cheaper only because they don’t pay for innovation. I’ve never seen this claim adequately substantiated, although I believe I know where it originated. The onus does lie on those making it to back it up since, since on the face of it, its not plausible, and there are much more plausible alternative explanations for the cost of US healthcare.
Why is it not plausible? Because actual treatment innovation happens universities and teaching hospitals (largely in the US), and most of its cost is paid for by governments and charitable foundations (often not in the US). Drug companies do innovate, but drug innovations that significantly improve treatment outcomes are rare anyway and have been even rarer recently. Anecdotally, it seems like medical appliance innovation is largely prevented by the monopoly equipment suppliers, but I welcome correction on that point. Even if drug companies and medical equipment suppliers were power-houses of innovation, the proportion of the cost of treatment that goes to them is miniscule. The vast majority of the cost pays for salaries of the hospital staff and doctors. Do they innovate? Not so much.
What’s the more plausible explanation? Complete and total lack of price transparency at every level. To give a recent example from my personal experience, a recent hospital bill for a significant amount of money broke down as follows: 11% paid by insurance, 2% paid by patient, 87% written off as “in network discount”. What that says to me is the hospital over-bills uninsured patients and those with the misfortune to be away from home by a whopping 550%. Why else would they accept only 13% of what they bill on a regular basis? Its not like you can achieve economies of scale by doing surgeries in bulk …
If you ever tried asking a doctor (let lone a hospital) what a given course of treatment will cost, you will know that they can’t tell you. Even if you’re uninsured. This is one of the reasons market-based approaches to price control like HSAs currently don’t work as advertised. We actually tried using a DHCP plan for one year – the main thing we learned is that hospitals don’t even understand their own bills. They billed us and the insurance for different amounts of money and were never able to explain why. They just wrote it off. And this is just at the consumer level. Apparently, hospitals generally do not actually know what it costs them to treat a patient, and further back down the supply chain the companies that supply equipment to hospitals typically do so in such a way that the hospital doesn’t know what it will be paying until it already used the materials. This is a mess on a scale even Comecon never acheived – they used tables of western prices. Possible the US healthcare system should use tables of Canadian prices? If its anything like the British NHS, their hospitals will know the cost of treating a patient down to the last penny.
If we take Hayek at all seriously (and we should) we should know what happens in a system where no-one knows what the prices are – rent seeking by priveleged actors that have hidden information, and a complete failure to coordinate activity to maximise welfare. This is exactly what we see.
I’d be a lot more sympathetic to complaints about liberal healthcare reforms if I saw an effort from conservatives to say how this will be fixed. I see a lot of posturing about making consumers manage their consumption, but its fairly clear the issue is endemic to the whole supply chain and encouraged by mis-regulation, so consumers cannot fix it themselves.
Excellent comment (as usual) Simon K. And one little note:
Apparently, hospitals generally do not actually know what it costs them to treat a patient
I submit they do know. It’s the most they can get.
Simon K,
I opted not to respond to Morat20 because of his demeanor. I’m happy to give you a response.
I did not claim that “the US healthcare system is more expensive because it is more innovative.” I do not deny that our health care system is needlessly expensive. What I was responding to was the argument that attempts to prove that a health care system based on a free enterprise model, viz., the U.S. health care system, is a failure by comparing it to centralized health care systems. I saw a fascinating compilation a couple years ago that listed all the significant health care advancements of the past 20 years or so, corresponding with the countries principally responsible for developing them. The U.S. was far and away the most ubiquitous country. I can’t seem to recall where I saw that list now, but here’s a useful link that makes the point generally.
http://www.nytimes.com/2006/10/05/business/05scene.html
The burden-shifting argument is sometimes distasteful, but I do think it is reasonable to presume that centralized systems are generally regarded as less efficient and less innovative when it comes to large and dynamic markets. So, when proponents of a centralized health care system claim that it keeps costs down, that’s facially plausible. When they say it keeps costs down and it’s just as innovative—no downside!—there’s going to be trouble passing the smell test.
But mostly, I was genuinely interested in hearing some recommendations for reading material, not trying to put anyone to a burden of proof.
The problem, as I stated at the beginning of this thread, was market distortions. The fact is, there’s really only one part of medicine where the doctor will give the patient an upfront price: plastic surgery. That’s because insurance doesn’t cover it.
The USA does not have a free market in health care. Period. If it did, doctors would print up sales brochures.
Hi Tim,
I think if you tabulated the major advances in almost any field over the last 20 years, you’d find they mostly occurred in the US. I suspect, although obviously I can’t prove, that this is more to do with the nature of US society as a whole and the fast that by most accounts at least 15 of the world’s top 20 universities are in the US (only one is not in an English speaking country). The nature of the US healthcare system at least isn’t a necessary part of an explanation of why medical innovation is concentrated in the US.
I do think a market based healthcare system would be notable more innovative than a centralized one. However, I do not believe the US has such a thing. If I had to describe the US healthcare system I’d say it privately run but mostly eliminates any element of competition through government granted monopolies. You cannot, for example, start a medical practice with predictable pricing because you would fall under insurance regulation. You cannot start a new hospital in an area that’s determined to already have adequate provision because you won’t get the necessary permits. You cannot start a new business making (say) syringes because companies with government-granted near-monopolies dominate the business of selling equipment to hospitals, are paid a proportion of the costs, and have no interest in making it cheaper. The Swiss or French healthcare systems are closer to a true market than the US, in spite of having backup insurance to ensure universal coverage. You can make an argument that the UK NHS’s “internal market” is closer to a true market than what goes on in the US.
Stillwater – They charge what they can get, and obviously do some kind of weird price discrimination where those most able to pay are charged less. But they do not know their actual costs. The beginning of any kind of half reasonable pricing regime would be for suppliers to know their costs.
I didn’t watch the TED talk but does he actually say anything like this “the middle class, armed with sufficient spending power (i.e., wealth taken from the rich and redistributed),”?
Here’s the conclusion of his talk:
http://lybio.net/nick-hanauer-ted-talks-the-inequality-speech/people/
hmmm okay…i’m not seeing taxes going to public goods like research and infrastructure as “redistribution” to middle class peeps so they can spend, spend , spend.
The middle class in the USA is shrinking. The American economy is now dominated by fewer and more powerful investors who now face a marketplace where fewer middle class consumers will purchase their goods and services. This predicament is good for nobody.
It stands to reason we ought to engineer this society to promote saving and investment, not more profligate spending. The rich are now paying an ever larger fraction of the total tax revenues because there’s not much middle class left to tax.
As both the investor class and middle class head counts shrink, who will bear the burden? Has lowering the tax burden on the rich created more middle class jobs? Let recent history show it has not. The investor class has damned near broken the capitalist system. Had the government not intervened in a massive way, I believe our society would have collapsed. We have cracked the code of affluence, you say. We did more than crack it, the investor class smashed it to pieces and the much-maligned State was obliged to pick up the pieces.
There are so many begged questions in your essay, I think I’ll just stick with Hanauer’s thesis: lowering taxing the rich does not create jobs. It simply hasn’t.
“The modern economic problem, in my humble estimation, is precisely that, without continued innovation and entrepreneurial risk-taking, we would be left to conclude that the project of economic innovation and production is substantially done and that what’s left is to proceed with divvying up the loot.”
This supposes, does it not, a kind of static Utopia (for lack of a better word) you reach after you complete X. Is it not possible that it is the very act of continually trying to better ourselves economically that allow us to be prosperous? That success comes not from reaching a destination, but committing to a process?
Or, if I may…
We don’t look back to 200 hundred years ago and say, “Boy, compared to those rubes our level of medical knowledge rocks! So we might as well stop all further research!” Neither do we do that with science, nor any of the arts, nor even with intangible things like theology and philosophy. Why should we decide whatever level of poverty and or the inequality of income opportunity (different that income inequality) we see around us is okey-dokey?
Tod,
I agree with your drawing the line between inequality of income and inequality of opportunity. That’s the real common ground we should all be able to share. Larry Lessig tried to convince the Occupiers to find that common ground with the Tea Party, a movement that has made actual progress in tackling opportunity inequality. (The Occupiers weren’t having any of it.)
And you’re also correct that there is no “static Utopia.” The prosperity of a state is kind of like happiness of the individual: it’s the road, not the destination.
“Why should we decide whatever level of poverty and or the inequality of income opportunity (different that income inequality) we see around us is okey-dokey?”
Because I don’t look back at myself at age 4 and conclude that I should now be twenty feet tall, fluent in twelve languages, and married to four women.
That’s what the bit about low-hanging fruit means. “Keep people from starving!” Okay, we got that covered, in fact we’re maybe doing a little too well. “Eliminate income inequality!” Okay, well, first you need to define “income”, “inequality”, and “eliminate”.
That is, Hanauer seems to suggest the fact that demand is high has nothing to do with the fact of innovation and entrepreneurial risk-taking—as if there was a demand for tablet computers before Steve Jobs created the iPad. While further prosperity is left to be had, Cowen points out, it will come only with increased investments of skill, capital, risk, and innovation.
Well, I’m not an economist and surely some if not all of what I say here might be wrong (and I’d be happy to be corrected!). But…
So it seems to me that Hannauer is saying that consumer demand is what drives job creation, so creating new jobs (all other things equal) requires increasing consumers disposable income. (Not a new idea, to be sure.) Cowen’s point is that innovation can increase disposable income and therefore lead to the creation of new markets, hence an increase in jobs. But his argument for increased-jobs-through-innovation-and-risk-taking makes sense only if the new products actually increase consumer’s disposable income. So Hannauer’s point stands.
His point was the same as Henry Ford’s apocryphal point. (I don’t think Ford actually said it, but maybe it is a real quote) — paying your workers enough to buy the product they make means more products sold.
Which makes you more money, longer term, than paying your workers the bare minimum and cutting them out of your own market.
Flatly put, a vibrant middle class is a spending middle class, because they are (1) Rich enough to be able to afford luxury goods, in large quantities (compared to the poor, who spend their entire incomes on necessities such as food, shelter, and energy) and (2) Not so rich that large chunks of their income remain unspent.
Now, there’s a tension there — we want an investment, after all. But in the age of 401(k)s and increasing income inequality, there’s so much ‘excess’ wealth (wealth in the hands of the ultra wealthy, who cannot spend even the interest on their wealth, and thus pile up larger and larger piles of money seeking investments) that Wall Street has become more casino than investment.
I don’t think, at the moment, we have an issue with “insufficient funds for investment and growth”.
But a middle class that can’t afford luxuries anymore? THAT is a problem for any business in the US that is not selling things aimed solely at the Paris Hilton’s of the world.
Hanauer makes the point that the rich can only buy so much stuff, so at some point, it’s better if the wealth is shared broadly. Money will be spent more quickly if more broadly distributed. My point is to remind Hanauer that the middle class is already fairly saturated with wealth. How many color TVs or Playstations does a middle class family need? Giving the middle class money won’t increase demand for stuff they already have. This is the trouble of an affluent society, the need to drum up desire for stuff along with the stuff itself. The problem’s been around for a half century and, so far as I can tell, Hanauer doesn’t seem to know it exists. Again, I’m basing this off a 5-minute talk, so it wouldn’t be fair to put this all on him. But more broadly speaking, it’s not much addressed by leftist economists, as far as I’m aware.
Oh, Tim, now you’ve put your foot in it. As I’ve been reminded many times, having a color TV, an IPhone, an Xbox, a 2500 square foot house, 2 cars and 17 microwave ovens doesn’t make you middle class unless you have both rock solid health insurance and absolutely no worries that your job might ever disappear.
Now it just remains to be seen if our commenter who has several times claimed that middle class starts at $270k a year will chime in.
Oh right, I forgot you were part of the “unless it’s as bad as 1850, poor people should quit whining” wing of the commentariat here.
I forgot you were part of the “unless it’s as bad as 1850, poor people should quit whining” wing of the commentariat here.
Wait, I thought libertarians were in love with the Gilded Age?!??!
Jesse,
There’s no point in discussing this with you. There’s nothing that can pierce your ideological commitments to life being a living hell for today’s middle class.
Not a living hell, but much worse than it could be, largely due to the actions of people who believe the market can fix everyyyyyyyyyyything and the greed of corporations.
Well, I think both of you have valid points. James is quite right that material conditions for the middle 60% of the population are pretty damn good relative to any other time period. And Jesse is right (IMO) that wealth distributions have gone radically out of whack. And James, for all I know, you even agree that the distribution is out of whack, but you for sure disagree with Jesse about the mechanisms by which they should be brought back in line.
That’s in interesting conversation to have, actually. (Or, to have again, as the case may be.)
Stillwater,
First I have to be persuaded that the wealth distribution is actually a problem, something that needs to be addressed. I’m probably persuadable, but “they got more gain since 1980 than we got” isn’t a path toward persuading me.
It’s kind of funny that Jesse gets worked up by my comparing today’s middle class to past years’ middle class, but he’s doing a comparison as well–just comparing today’s middle class to today’s upper class. I honestly don’t understand why that comparison is more valid than mine–it’s not like we can ever make the majority of the population upper class (that’s just a statistical impossibility–a majority can’t be in the upper quintile), and if the argument is that the middle class deserves to be better off, we return to my point, which is that they are, considerably so.
The problem is that you don’t get the fact you can afford some shiny iPod’s and HDTV’s in the modern middle-class doesn’t really mean that much when you need to borrow $50,000 for in-state tuition and your new job doesn’t even offer health insurance.
The problem is that you see this as “wanting to return to the 50’s” when in reality, I say we can have the technological advances of today and a welfare state that is expansive and inclusive. Why do I say this? Because there are XBoxes in Stockholm too.
Tod aptly framed the inequality question: The problem we can all agree on is about inequality of opportunity, i.e., as a result of crony capitalism and discrimination and the rest of those unmitigated evils. That one person just happens to earn more than another is, by itself, no injustice. Perhaps wealth disparity creates economic problems, but surely that’s not what we get hot and bothered about.
“the fact you can afford some shiny iPod’s and HDTV’s in the modern middle-class doesn’t really mean that much when you need to borrow $50,000 for in-state tuition and your new job doesn’t even offer health insurance. ”
It’s funny how you’re dead-serious repeating the exact thing Hanley said as a cynical joke.
Hey, I find a lot of things libertarians say hilarious that they say dead-serious. I won’t bing Hanley for doing the same.
Giving the middle class money won’t increase demand for stuff they already have.
I don’t know what ‘giving’ them means in this context, but it seems to me Hannauer’s point is a conceptual one: if you want to increase prosperity thru job growth, you need to increase consumer’s disposable income (all other things equal). If you want to increase prosperity by creating new markets via innovation and risk taking (all other things equal), that project requires an increase in consumer’s disposable income. Consumer’s disposable income can be increased by lowering costs relative to income or raising income relative to costs (AOTE). But either way you look at it, if the goal of innovation and risk taking is to increase monetary-based prosperity, it can only occur if consumer’s disposable income is increased. That, I think, is Hannauer’s point.
“if you want to increase prosperity thru job growth, you need to increase consumer’s disposable income”
This is the theory behind state and federal tuition assistance. In practice, tuitions increase as necessary to absorb the assistance.
Actually, tuition has increase because of decrease state support and heavy investment in infrastructure (new dorms and computers), but it’s a nice conservative shibboleth.
Duck and Jesse are both right about causes behind tuition increases. All those things are going on. But subsidization helps make the other parts possible.
How comparable is non-assisted tuition (ie private schools) compared to before? If we looked at total spending for state schools (public subsidy plus tuition & fees), has that gone up or down?
The “spending more on infrastructure” is not mutually exclusive with what Duck is saying (the extra money has to go somewhere!). Though, while we’re talking about it, has technology become more expensive or less expensive in the last 30 years?
The dorms have certainly gotten more expensive, though. No question there. But it’s far from clear that this would be happening without the student loan system we have. (I say this as someone who does want college to be affordable – at least for the kids we want to be going to college – and supports government support to those ends.)
“The numbers are clear: Between 1997 and 2007, tuition in the U.S. rose by 94% at public four-year colleges, but only by 22% at private nonprofit four-year colleges.” (a href=”http://www.dailyfinance.com/2012/03/07/public-universities-cost-middle-class-students-more-than-harvard/” target=”_blank”>Source.)
That doesn’t answer your question entirely, of course.
And as far as the increased spending on dorms and such goes, it’s unpleasant in some ways and undoubtedly a factor in the increase in costs. But schools are doing it because they have to compete with each other for students (every year, a small number of colleges closes its doors, outcompeted). As much as they dislike increasing tuition, students all too often are willing to make the tradeoff of higher tuition for nicer facilities.
Ironically, given the discussion here, one of the things most demanded by students nowadays is single rooms, because so many of them grew up not having to share a bedroom with siblings and they can’t quite envision having to share that space. Of course having single rooms for your middle-class kids instead of dumping two or three of them into one room doesn’t actually mean anything in terms of evaluating middle class standards of living…
No access to actual number, but off the top of my head.
1. Private school tuition has gone up as well, but there’s an argument to be made that tuition at the high-end Ivy schools is actually lower than it should be because of the networking you encounter.
2. I don’t know total spending, but I know the amount per student being funded directly by the state has gone significantly. There’s also the fact that even when you throw in tuition, it doesn’t actually cover 50% of the actual costs of the university.
3, Technology is less expensive, but in a lot of cases, we’re starting from virtually zero. A college campus in even 1990 had a computer lab w/ some five-year old IBM’s and phone lines. A campus now has to have ISDN lines, hundreds of computers, and wireless.
4. I think one underreported problem with “student loans” is for-profit schools that basically steal money from people by basically figuring maximum grant-plus-loan that students can get — so students are pulled in with a promise of “free” education, the college collects the money, and if the student never shows up (or logs in, for online classes) or flunks out, the college doesn’t care. College gets their money, student is on the hook for the loans, Federal government is out the grants and probably the loan guarantees.
But, I think with student loans, we simply need to shift back toward fully funding our educational system through taxes, and shifting from loans to grants for tuition.
I think on student loans, we need to revert back to dischargeability. The incentives are whack.
“I think with student loans, we simply need to shift back toward fully funding our educational system through taxes, and shifting from loans to grants for tuition.”
So college tuition would work just like Medicaid! That would be space awesome.
Or like the US before the 80’s.
Btw, this is funny (amusing, not weird):
Hanauer makes the point that the rich can only buy so much stuff, so at some point, it’s better if the wealth is shared broadly. Money will be spent more quickly if more broadly distributed. My point is to remind Hanauer that the middle class is already fairly saturated with wealth.
So, the argument Hannauer makes is that the wealthy have so much wealth that they can’t spend it all on consumables, so it’d be better if the excess was dispersed throughout the classes. Then you pick up on this by saying that the middle class is already saturated with spending!, there is nothing left for them to want or need!, they’re capped out on purchases!, as if there is some upper ceiling on middle class desires such that the additional income would languish unused, just like it does for rich people.
Funny. But also probably not relevant to the point Hannauer is trying to make.
Stillwater,
It was Galbraith who remarked that modern Americans “needed an adman to tell them what they wanted.” Since after WWII, our problem has not been how to get money in the hands of consumers. If that were the case, they could work more hours, like their parents and grandparents did. In the 100 years leading up to 1950, the work week dropped from 70 hours to 40 hours. Galbraith drew the obvious conclusion: people had the stuff they needed. They could consume more, but they decided it wasn’t worth the effort. This is what Cowen calls “threshold earners,” people who work to get what they need, but value free time and leisure over the consumables they otherwise could have had.
The job of an entrepreneur in an affluent society, then, is to figure out how to convince these threshold earners that they can’t live without whatever it is you’re selling. Hanauer, distilled, is suggesting that we tax the entrepreneur a dollar and give it to the threshold earner so that he can give it back to the entrepreneur. Aside from the basic immorality of the thing, the entrepreneur would be a dollar none the richer.
Hanauer doesn’t address the threshold earner problem, so his idea’s got no legs. Maybe we propose forcing people to engage in certain private transactions to keep the economy moving? That’d outwit those individuals who don’t make the right private decisions that benefit the general welfare. Pelosi would even call it “ironclad,” because she “know[s] the constitution.”
Tim, I think we’re understanding Hanauer’s talk differently. His claims were: 1) that middle class consumption is the cause of job creation (remember the part where he says the hiring is the last resort of the capitalist? you hire if and only if there is increased demand for your product); 2) that the reification of capitalists as Creators caters to a privileged and incorrect view of the dynamic in play; and 3) that he’s proposing that the lions share of taxes ought to be born by the wealthy since lower taxes on the middle class lead to more consumer spending. He never said anything about taxing the wealthy and ‘giving it to the poor’.
No matter how much money he had, the average middle-class consumer was not going to buy an iPhone in 2006. Taking all of Steve Jobs’s money wouldn’t have changed that.
How bout this Tim: suppose two scnearios. In scenario A, the current tax rate for the wealthy on investment income is very low (effective rates below 15%) and yields X dollars in after tax income to members of that class, while leaving the middle class ‘underfunded’ in terms of what they would spend given their disproportionately higher tax rate. In scenario B, the tax rate on investment income for the wealthy is increased while the middle class’s employment rate is lowered in such a way that the total after tax income of the wealthy remains X (because there’s more demand), but the middle class enjoys the consumption of more goods and services.
Given that the after tax income of the wealthy in both scenarios is the same, is there a reason to prefer one over the other?
Sure, the way you’ve drawn it, scenario B is obviously better (though I think you meant to say that employment rate is increased, not lowered). To the extent there is a tight correlation between the capital gains rate and employment, then sure, we might explore tweaking it to find the right balance. But is there a tight correlation?
Errr, I meant the middle class’s tax rate is lowered. Sorry bout that.
But the reason I mention the two scenarios is that form what I could gather, that’s what Hanauer was driving at. If you raise taxes on the wealthy and lower taxes on the middle class, the wealthy will make as much if not more (because demand spurs innovation!) while the middle class will be better off. And that’s no small thing: without a healthy middle class, capitalism – as we practice it – is dead in the water.
I’m not sure about the economics of it – it’s sorta a ceteris paribus situation as far as I can tell, and things normally aren’t CP – so I don’t know how tight the correlation actually is. But conceptually it makes sense. To me, anyway.
Conceptually, sure, it makes sense. But concepts only go so far as their parameters. As I’ve said, Hanauer doesn’t consider the threshold earner phenomenon and other factors that arise in an affluent society, factors which foul up economic theories like Hanauer’s. It’s not to say there’s no value to the theory, but I overheard him on a podcast saying something to the effect that this is going to be a new paradigm in thinking about economics. For the reasons given, I’m skeptical.
Yeah, I agree. One thing that Hanauer’s view has in it’s favor is that the concepts it employs are constitutive of the American Theory of Capitalism. But I agree with your more general point: just because it appears to be conceptually sound doesn’t mean a helluva lot. It’s the practice that matters. And that requires some evidence.
I’m middle class.
Giving me more money? Taking a real vacation. Upgrading appliances. Replacing aging (20 year and 10 year) TV’s. Replacing an aging computer (10 years). Purchasing a needed laptop. Replacing a fridge and a washing machine. Adding a fence. Doing something about the fact that my lawn is thatched and half dustbowl.
That’s just off the top of my head. There’s also painting that needs to be done, reroofing, a new car (our son is about to start driving and one of our two vehicles is 12 years old), the soffits are sagging in two places, and I’ve got some debts that I’d like to pay off. Oh, the stove probably needs replacing and frankly I’d like to remodel the kitchen.
And I, income wise, and pretty darn well off for where I live and my house is not at all costly. (It is, in fact, small, older and even now would sell for about 7k more than we paid for it).
How many color TV’s and playstations do you think the middle class HAS? Why do you think that’s all they need? Or even want?
I have a list 20,000 dollars long of home improvements, some necessary some just because I’d prefer it. I have tens of thousands of dollars of student loan debt, which amounts to hundreds of dollars a month I could be spending on everything from resteraunts to movies to whatever.
However, I live within my means. That doesn’t change the basic fact that if you raised mine and my wife’s combined salary by 20%, I’d stimulate the CRAP out of the economy by making a whole bunch of deferred or desired purchases, upgrades, and repairs.
Playstations and TV’s — what a crock. The sheer wrongness of that line of thinking is appalling. “We have iPods! So even if you’re living hand to mouth and you haven’t had a raise in real income in ten years, you’re SO RICH COMPARED TO YOUR GRANDMA! STOP WHINING”.
Should I start bowing and scraping for my Galtian Overlords now, or what?
Hey, as we all know, if a single mom scraped together 200 bucks over the course of a year for a secondhand XBox, that means she doesn’t really need Food Stamps.
And again, the average cell phone bill, even with a data plan, I’m damn sure isn’t that much different from the cost of an average landline phone bill from the 80’s. Having an iPhone w/ a data plan is equal to having a decent long distance bill back in the 80’s, which wasn’t seen as some luxury.
And again, the average cell phone bill, even with a data plan, I’m damn sure isn’t that much different from the cost of an average landline phone bill from the 80′s. Having an iPhone w/ a data plan is equal to having a decent long distance bill back in the 80′s, which wasn’t seen as some luxury.
Absolute hogwash. Long distance calls in the past, even in the ’80s, damn sure were seen as a luxury. My grandmother lived one hour away, but it was a long distance call, so when we made plans to go up their for Sunday dinner, the call was very short. Long distance calls any longer than a couple of minutes sure as hell were seen as luxuries by the middle class.
So let’s say, as you suggest, that consumers today spend about the same amount on phone service as people did back then. Then ask yourself, what do they get for it, then and now? Would you prefer to pay $X for a fixed line phone that you can’t take with you anywhere, on which each long distance call adds to the cost, doesn’t take pictures, doesn’t play games, doesn’t allow you to find nearby restaurants, can’t be used as a calculator, scheduling book, alarm clock, etc., or would you prefer to spend the same amount on something that does all that?
And if none of that stuff really matters, are you willing to put your money where your mouth is by giving up your cell phone and going back to a fixed landline? You’d be just as well off, right?
The difference is, of course, I understand all of that. Yes, the modern iPhone is a better deal. But, I also believe we can have the iPhone, national health care, and decent pensions for middle class people.
But, of course, even the fanciest iPhone in the world doesn’t offer health insurance or pay for decent schools in an area with low tax revenues.
The difference is, of course, I understand all of that.
Really? Then why did you treat them as equal?
But, of course, even the fanciest iPhone in the world doesn’t offer health insurance or pay for decent schools in an area with low tax revenues.
Part of the problem here, Jesse, is that you can’t take the time to listen because you’re so outraged. You seem to think that I don’t see a problem with lack of health insurance and poor schools, but of course I do.
My point is that if you’re going to have no health insurance and a lousy school, all other things being equal you’re still better off as a middle class person today than in the 1950s, because despite leftist romantic mythologizing about the 1950s, lots of them lacked those things back then, too.
And if none of that stuff really matters, are you willing to put your money where your mouth is by giving up your cell phone and going back to a fixed landline? You’d be just as well off, right?
Better off. Work couldn’t call me when I’m out at a baseball game. And if there were no cell phones, I wouldn’t have to listen to morons yammer away on theirs when I’d like to enjoy a few peaceful minutes on the train. There is really nothing sadder than people who talk on their phones until the minute the stewardess forces them to shut them off, and then turn them on the minute the plane touches down, because God forbid they should be alone with their thoughts for a minute longer than absolutely necessary. But screw health care, education, or some level of economic security, we have iPhones.
I’m not going to get into the broader discussion (except to say that I believe Hanley is being grossly mischaracterized in his responses – and this is a subject on which he and I have clashed before), but wanted to respond to MikeS’s thing about the iPhone.
An unmitigated good. I do not see it as being chained to work when you are away. Rather, I see it as having a peace of mind. I find cell phones and the ability to be contacted 24/7 as liberating. Why? Because I don’t have to spend my entire vacation worrying that something has gone wrong or that there is any sort of emergency. I know that, if something has come up, I will be informed about it while I’m gone. It may distract me temporarily, but it ends and then I know that anything happening on the homefront can wait until I get back. That leaves me free to enjoy being away.
Better off.
Revealed preference suggests not, else you’d have done it.
I do agree about idiots on their phones in public, though. I think everyone else should have a landline, while I have a cell phone.
I believe Hanley is being grossly mischaracterized in his responses
Oh, no, no. I hate the middle class, and I’m angered that they have it better off than my grandpa did. My real goal is to ensure that they never have anything they need, just pointless baubles to distract them while the rich steal all the resources of the earth.
It must be a Stockholm syndrome kind of thing, since I’ve pretty much been middle class my whole life.
Mike,
My colleague was bitching up a storm after his cell phone dropped a call one day. He claimed phones in the old days were better because they always worked. I pointed out that they didn’t work when you were at the grocery store, waiting in the airport, on vacation, at the ballgame, or when you were broken down by the side of the road. Then I suggested he actually switch back to a landline if he thought it was better. His first words were, “Hmm, I wonder if that’s possible?” “Sure,” I said, “you can still get landline service to your house and you can chuck your cell phone in the trash; easy as pie.” Next phone conversation we had was, “Hey, James, check this out. I got a new cell phone, and this time it’s a smart phone because I got tired of always having the most archaic cell phone of anyone in my circle of friends.”
I was, for one of the few times in my life, charitable enough to let the moment pass without comment.
I don’t think you hate the middle class James, I just think you severely underestimate the damage that has done do the structural parts of the middle class and understate the amount that the middle class for the past few years or so has stumbled forward with the help of gobs of easy credit and the technological advances of the past thirty years that make life a little more comfortable.
After all, and I think I’ve said this on this board before, I firmly believe 1/3 to 1/2 of the country wouldn’t even recognize that elections didn’t happen anymore as long as American Idol was still on TV and they could get a $10 pizza from Pizza Hut.
I’m not saying these people are stupid, I’m just saying they’re tired and don’t have the time to wonder why they’re working harder than their parents did for less security.
Revealed preference suggests not, else you’d have done it.
Yes, I’d rather have a professional job, which requires 24/7 connectivity, than a job flipping burgers. Clearly this shows that I’m lying about disliking cell phones.
Jesse, and you overestimate how god things were for the middle class before the 1980s, as well as underestimating just how unique the circumstances were that allowed such income growth for the middle class after WWII.
Mike, I wasn’t accusing you of lying, just of speaking casually. Let me know what phone system you choose when you retire (assuming land lines are still available). I certainly won’t judge you negatively if you dump the cell then.
For myself, cell phones are great because I have kids. They’re also great because they help developing countries move forward without having to spend so much on fixed infrastructure and enable poor farmers And fishermen ion those countries figure out when to take their goods to market.
That doesn’t change the basic fact that if you raised mine and my wife’s combined salary by 20%, I’d stimulate the CRAP out of the economy by making a whole bunch of deferred or desired purchases, upgrades, and repairs.
But you don’t know what that 20% salary increase would have gone for otherwise. Your stimulus has to be discounted by whatever stimulus that 20% creates. Without actual data, you can’t know if your net stimulus is significantly positive, insignificantly positive, or negative. Not all stimulus comes from purchases–stimulus comes from investment, too.
Actually, I DO know.
At least for me? My company CEO’s gigantic bonus this year. Meanwhile, despite the fact that I’m technically paid by a third party (my services are contracted out) and a 3% annual increase in wages is part of the contract, our (and by “our” I mean “everyone on the contract”) base raise got cut by a full third. Now, I know for a fact our customer paid the extra 3% for this fiscal year for my services.
So where did it go? Well, the shareholders aren’t making out like bandits (I know, I am one!). Everyone on the lower tiers of management down to the newest intern aren’t making out — as noted, we got less than before.
But the CEO? He made bank this year, as he has every year. Even when we were taking unpaid days because of the ‘economy’.
Second reply for a reason: Investment? Don’t make me laugh.
Go look at the stock market. There’s so much “investment money” floating around that it’s turned into a casino. People don’t invest in companies anymore. They gamble on stock prices, and stock prices react.
It’s the ridiculously rich trading money back and forth while the house (the brokers) takes a huge rake. (Which, at least with the hedgies, pay a neat 15% tax rate on). Actual investment? What do you think this is? The 1990s?
Even the businesses themselves are just sitting on piles of cash, when they’re not awarding themselves giant bonuses.
Wall Street’s making me sound freakin’ marxist.
There’s so much “investment money” floating around that it’s turned into a casino. People don’t invest in companies anymore. They gamble on stock prices, and stock prices react.
I’m sure there’s a technical term for this, but I call the difference you’re getting at the ‘productive’ versus ‘unproductive’ uses of money. I think transaction taxes, higher taxes on purely financial sector income, or whatever, are justified to compel people to invest in productive uses of their cash. It’s not like there’s a shortage of it.
Morat,
You didn’t demonstrate that you know your use of the money would have been more productive than the CEO ‘s. You’re making assumptions about where his money went, and basing them on ideologically-based storytelling, not a reall analysis of where investment money goes.
Counter-story, based on exactly as much evidence: The money went into a startup firm that in 3 years is going to employ 5,000 people and produce a product that consumers everywhere will be standing in line for.
Stillwater,
I’m no expert in this area, but I doubt there’s such a technical term. I think that as you start digging into ideas you find it’s harder to make such distinctions than it initially appears to be.
You know James, I’m pretty sympathetic to that argument. But I also find it a bit irritating – like scratchy and jumpy irritating. Maybe James K or Simon could chime in here, but it seems to me that some uses of money are not useful except in terms of ROI for the individual investor. That is, there are no ancillary benefits derived from the use of that money. (Of course, I know all about how these so-called non-productive uses of money are actually, evidence to the contrary, incredibly socially useful!) So part of the irritation is the idea that once a person has gobs of money and can actually dictate terms to some extent, the social utility of that money, which was derived from social structures which that person didn’t pay into in proportion to the benefit received, can be used for purposes unitarily determined by the holder of the cash.
I find that a bit scratchy. Maybe I shouldn’t.
Here’s another way to say it: suppose that there is a baseline of cost incurred by government to establish sound markets and fairness wrt contract enforcement. If so, then who ought to bear the cost? Who can exploit the baseline for their own advantage? Who can, in turn, impose conditions on how that cost is born via taxes?
It seems to me that people ought to pay into the maintenance of the framework in proportion to the benefits received. And that means the wealthy, since their playing a different game than the rest of us.
The degree to which “middle-class” life came to lean heavily on debt would’ve been a nice tangent from that.
> If Galbraith was right and modern Americans by and large
> are free from poverty classically understood… then what
> meaningful economic progress is yet to be made?
Sustaining the status quo against globalized downward pressure on wages? That’s sort of the trick, right now.
A nitpick:
> And taxing the rich to make investments will make the
> middle-class grow and thrive.
This isn’t about redistribution in the classic sense that most people imply when they use the word: I will take a dollar from Rich Guy Ned and give sixty cents to Poor Guy Ted and another thirty cents to Middle Class Guy Jed, eating ten cents ’cause I’m inefficient.
This is wealth transference in the sense of I take a dollar from Rich Guy Ned and give forty cents to Poor Guy Ted and put fifty cents towards rebuilding a road that is in savage need of rebuilding. Which actually results in benefits for everybody; a lower cost of car maintenance for Middle Class Guy Jed and a lower cost of shipping which benefits Ted and Jed, to be sure… but Ted and Jed put those reduced costs back into the economy pretty quickly, which in turn benefits Ned, because Ned makes didge off of investments, really.
Put another way: if liquidity flow is an essential driver in economic activity, moving money out of less liquid agents hands and making it liquid improves economic activity. One can argue about the justice of it, and one can argue about how well the government handles all this, and one can argue against paying someone to dig holes and paying someone else to fill them… of course! … but it’s pretty much a given that if ten million dollars is shifting between different long-term investments (gold! no, t-bills! no, mutual fund! no… uh… not foreign capital exchange… what now?) with little of it actually being spent in the here-and-now, taking that ten million dollars and spending it on building a bridge injects liquidity into the commodity supplier, the construction industry, and reduces costs for everybody who uses the bridge.