Friday, January 21, 2005

The Des Moines Consensus

The Des Moines Register’s Editorial Board (DMREB) ran this opinion piece in the Des Moines Register yesterday about the “Ownership Society.” Seems the President is trying to create a country where people, as individuals, possess society’s assets, instead of relying on the government. The theory isn’t new to libertarians—people who own their property manage it better than the government. Vouchers and private health coverage will bring better education and insurance, respectively. I’m hardly one to applaud the Bush administration, but this is certainly a step in the right direction (but he still has a long way to go).

The DMREB article disagrees and, not surprisingly, their arguments are riddled with economic errors and factual suspicions. They say: “Unfortunately, Bush's tax cuts have had the effect of concentrating wealth more, instead of spreading it around.” I don’t really know that they can say that. As I pointed out in “Why Lou Dobbs Is Wrong, Part II,” job growth in the highest income quartile is skyrocketing, exceeding all other quartiles, combined. This may or may not be because of the tax cuts—economics is complicated that way—but there’s no evidence that “concentrating wealth.”

We can double check with economics. The anti-tax cut theory tends to go like this: more money for the rich doesn’t help the economy because the rich spend it on yachts or stocks or whatever and not on things people need. The middle class do—which helps the economy. But as I point out in “The Magic Yacht,” that’s an absurd argument. People build, sell, maintain and design yachts. Some of the revenue from selling stock goes to buy things, which others have to provide. Money in the bank is loaned out to others (that’s how banks make profit) which they use to buy things, which people have to provide. All of these production roles are real jobs, ones based on genuine demand, and pay real incomes, not government hand outs. Money moves and people get richer.

Conversely, the article gives credit to the Democratic opinion, which says, “[t]he best way to build more wealth for more people is to raise wages, so people can afford to save…” As individuals, that’s true. If I want more wealth, the best way to accomplish that is to pay me more. But “more wealth for more people?” Hoover tried that during the Depression by encouraging industry to keep their wages up despite a plummeting demand. Economists call this the purchasing power fallacy: high wages are the key to economic expansion and they can be maintained even if productivity does not increase accordingly. Of course, wages are an expense like anything else and inflating them without reason bars companies from hiring more workers. Thus unemployment increases. High wages are a sign of economic expanse (they go up because productivity goes up) not a cause of it.

If the Hoover logic held, then a nine dollar-an-hour minimum wage would be good for the economy, thus a nine hundred dollar-an-hour minimum wage would be really good for the economy and a ninety thousand dollar-an-hour minimum would be amazing for the economy. Of course, the logic doesn’t hold and creating minimums creates more wealth for fewer people—exactly what the DMREB accuses the Bush administration of doing.

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