Trickle-Down Misery

[KevinDW78]

http://ap.google.com/article/ALeqM5iDN-xMI...NtLzPQD92B73SO0

It may have taken longer and it may not be as acute, but there are early hints that the economic slump is crimping the lifestyles of the wealthy.

They are investing more conservatively, spending less on luxury goods and are being more thrifty with their credit cards. Many are asking their personal shoppers and private-jet travel providers to seek the best deals rather than over-the-top extravagances.

That news may produce a shrug from many people who have lost their jobs or homes in this economy. The problem is that when the wealthy get stingy, it trickles down to the rest of us.

[adrock3215]

This is Keynesian nonsense, where economic well-being and fluctuations are judged according to consumption. It brings to mind Keynes' famous phrase "animal spirits".

[eriatarka]

This is Keynesian nonsense, where economic well-being and fluctuations are judged according to consumption. It brings to mind Keynes' famous phrase "animal spirits".

Huh? Why do you think the article is Keynesian? Edited August 6, 2008 by eriatarka

[John McVey]

Huh? Why do you think the article is Keynesian?

While the article is definitely written from a consumptionist view, and is accordingly dead wrong in its inferences from rich people's actions, there's nothing specifically Keynesian about it. The latter comes only by association, because Keynes was the pre-eminent modern consumptionist.

JJM

[D'kian]

These past few days I was thingking along the lines of trickle-up taxation. It is so slef-evident, I hadn't posted abotu it because I thought I was merely belaboring the obvious. But this topic is related a bit.

Say you impose windfall taxes to oil companies. They can do two things: 1) raise their prices, 2) reduce their profits.

Now, option 1 means everyone else pays more for gas and petrochemicals in order for Exxon, as an exmaple, to meet its tax burden. therefore Exxon's customers are taxed indirectly in the same proportion. Option 2 means slower economic growth, as there is less money available for investment. This also affects Exxon's customers in proportion, albeit less directly.

Is this not self-evident?

[Tenure]

Self-evident, yet most people fail to see this relationship between the two. They've been taught by the dominant intellectuals that something else is going on, that production is not the source of economic prosperity, but consumption is, so how much you tax the producers has no real effect, since we're not concerned with how easy it is to make things, we're only concerned with how easy it is to consume them.

[eriatarka]

I would assume that the windfall tax thing is more likely to be used as a threat to force oil companies to lower prices. But I think it;s unlikely to happen either way.

Edited August 7, 2008 by eriatarka

[01503]

In South Park, there was an episode I thought had a good moral to it. Although the story was a bit silly, the moral stayed true. A boy named Tweek was getting his underpants stolen by the "Underpants Gnomes". Tweek and his friends followed the Gnomes to their village, and revealed a corporation. The Underpants Gnomes showed them the three steps:

1. Gather Underpants

2. ???

3. Profit

The point of the story is that most people don't realize what happens between the gathering of resources, and the profit that corporations make. They simply think that one immediately follows the other.

To get off the topic of South Park, corporations do not simply rape the people and pillage. People have the choice whether or not to buy the product(s) sold by the corporation. They are not physically forced to buy.

To quote Rearden in Atlas Shrugged:

Man in Court: Mr. Rearden, do you not think that the people should have a means of regulating your prices?

Hank Rearden: Of course, they can stop buying my product.

Or something of that nature.

[John McVey]

Say you impose windfall taxes to oil companies. They can do two things: 1) raise their prices, 2) reduce their profits.

option 1 means everyone else pays more for gas and petrochemicals... Option 2 means slower economic growth, as there is less money available for investment... Is this not self-evident?

Option 1, yes, every Tom Dick and Harry can see that, but want to avoid it by using other government powers to prevent price rises. Part of that will be the enactment of option 2 in various ways to avoid option 1.

What is not self evident is profits being used for investment. In many people's minds there is a great disconnect between profit and investment. A lot of people, I find, think that profit is a dead end and the money just exits the economy, leaving nothing behind. This is also implicit in the consumptionist fallacy - in fact, if memory serves me, Mr Salsman spoke about this in one of his lectures as an explicit aim by the Hoover administration as a response to the Great Depression: the severe curtailment of profit as the means to attempting to keep wages high and thus consumer spending high. What's interesting about the original article this thread started with is the care and concern for the well-being high income earners, even if only as milk-cows and with a flawed economic perspective to express that concern through. In times past there would just have been naked calls for taxing them out of existence and redistributing the money to lower income earners so they will spend it.

I think there's also a disconnect between want of more competition and the curtailment of investable funds by large corporations on the one hand with the total amount of investment activity on the other. Some people don't want ExxonMobil et al to invest, they want the door left open for others to do the investing (think of the "day in the sun" attitude on the part of the small oil companies when Wyatt quits). These are the people who whine about the lack of competition, and want the Big Oil stopped so as to let smaller operators in - more competition to keep down both prices and profits. This is a premise behind anti-trust rules, and as Dr Ridpath noted in the article "The philosophic origin of Anti-trust" in the Objectivist Forum (republished in the book "The abolition of anti-trust"), the anti-trust movement got real teeth only after Frank Knight noted that some profits were superfluous and added nothing to the economy (a tie-in to the above). People who think like this are implicitly thinking that total investment can somehow continue as before, creating jobs as normal, irrespective of the bars in the way of the best companies earning profits to invest with. Thus, they wont be bothered at all if "only" the big corporations have their profits cut and investment plans derailed by "windfall" taxation.

JJM

[brian0918]

People who think like this are implicitly thinking that total investment can somehow continue as before, creating jobs as normal, irrespective of the bars in the way of the best companies earning profits to invest with.

While the windfall tax seems quite absurd to me (as does any other tax for that matter), I don't understand what the difference is between a big company doing the investing, and the public doing the investing. So let's say they tax an oil company for $300,000,000, and give it to everyone. Everyone takes their $1 and invests it as they please. Whichever innovations or ideas get the most investment are the most popular and most likely to have the resources to succeed.

What I am basically asking is how you or D'kian arrive at the conclusion that there would be "slower economic growth" simply because one company has less money. That money isn't being burned. It's being redistributed (forcefully, of course) to others who will likewise invest it. Or am I misunderstanding what is meant by "investment"?

Edited August 8, 2008 by brian0918

[softwareNerd]

What I am basically asking is how you or D'kian arrive at the conclusion that there would be "slower economic growth" simply because one company has less money.

Think about this a little more abstractly first, and return to the concrete later:

Suppose there are two people with investment ideas: one wants to invest in one type of production, and the other wants to invest in another type of production. The first convinces investors to put up the money, while the second does not. What if the government intervenes. What if it takes the money from the first and gives it to the second: how can we know if that second person might not actually do better with the money than the first would have done?

[John McVey]

I don't understand what the difference is between a big company doing the investing, and the public doing the investing. ... What I am basically asking is how you or D'kian arrive at the conclusion that there would be "slower economic growth" simply because one company has less money. That money isn't being burned. It's being redistributed (forcefully, of course) to others who will likewise invest it.

It's not the who by itself, it's the conditions of how the who have what they have and what they are allowed to do with it. All that the money physically does is pay for resources (capital goods, input materials, labour, and so on). What the issue of who gets the money under what conditions determines is what particular resources are purchased and who uses them. There would be no essential difference between a single person and a broad range of people investing if in both cases it was all people's own money they were investing. When people are free, this rapidly leads to the best outcome because people fail or suceed dependent on their own rationality and productivity: the best get rewarded in a way that increases their ability to produce more, and conversely for the not so good. If, on the other hand, there is some law preventing the people most adept at investing or using investments in particular fields from investing, then even if the public invests in that same field the results wont be as good because the actual front-line users of the resources are highly likely not to be as good at selecting and using them as the adept people would be. Rationality and productivity are no longer the sole considerations, so that means resources are wasted to a much greater degree than normal lack-of-knowledge would cause, in turn causing a detriment to what our standard of living could have been.

On top of that is what I mentioned before, that the caprice of taxation makes it harder to produce forecasts. One way of compensating for that is increasing the risk premium component of minimum required rates of return ("hurdle rate") used to judge potential investments against. The greater the scope for caprice, the more risk premium, so the higher the hurdle rate used by a given investor. As that rate goes up it can be shown that it leads to less and less efficient modes of production, even though throughout all this the amount of money in exchange and the frequency of exchanges may remain unchanged.

JJM

Edited August 8, 2008 by John McVey

[adrock3215]

While the windfall tax seems quite absurd to me (as does any other tax for that matter), I don't understand what the difference is between a big company doing the investing, and the public doing the investing. So let's say they tax an oil company for $300,000,000, and give it to everyone. Everyone takes their $1 and invests it as they please. Whichever innovations or ideas get the most investment are the most popular and most likely to have the resources to succeed.

The reason why the government would be able to tax an oil company for $300,000,000 is because the company offers a product that is in high demand and which gives a high amount of utility to consumers. Being so heavily taxed, oil companies will have less money to invest in capital goods or other goods and services necessary for oil exploration (off shore rigs for example). What this means is that oil supply will not keep pace with oil demand, there will be a "shortage", and prices will rise. Your example would work from an economic point of view if the $300,000,000 was given to everyone, and each individual took their $1 and invested it back into the production of oil for future use.

Or producers could just keep the profits they are entitled to.

[brian0918]

Suppose there are two people with investment ideas: one wants to invest in one type of production, and the other wants to invest in another type of production. The first convinces investors to put up the money, while the second does not. What if the government intervenes. What if it takes the money from the first and gives it to the second: how can we know if that second person might not actually do better with the money than the first would have done?

By "better" do you mean simply investing in particular technologies that you believe will lead to profit? I guess it makes some sense that the most profitable company knows how to invest toward further profits.

However, we are not working in a free market. Let's say, for example, that the oil companies decide to invest in biofuels. They profit simply from the fact that the government has made it profitable to invest in biofuels. Yes, they would achieve great profits, but those profits would not advance the economy because the money is being taken from the people to create a fuel for a car that most people are not willing to buy.

If that is not what you meant by "better", please clarify.

Edited August 8, 2008 by brian0918

[softwareNerd]

By "better" do you mean ...

I meant more wealth and more growth.

However, we are not working in a free market. Let's say, for example, that the oil companies decide to invest in biofuels. They profit simply from the fact that the government has made it profitable to invest in biofuels. Yes, they would achieve great profits, but those profits would not advance the economy because the money is being taken from the people to create a fuel for a car that most people are not willing to buy.

Your earlier post sounded like you were asking why government direction of investment would more likely be mis-direction. However, this changes the premises. If we go with this as being factual, what you're saying is that government is already causing the misdirection of investment. If so, the solution is for the government to stop doing so, rather than adding a "positive" to counter-balance a "negative".

Added: To make the example more realistic, one must also keep in mind that money from taxes is mostly channeled to consumption, not to investment. On balance, taxing the rich and helping the poor means less money invested, and in less profitable ways.

Edited August 8, 2008 by softwareNerd