Category: economics

I’m just left shaking my head over what’s going on in Ireland. We all saw the financial meltdown coming, but now the government is falling apart at the seams as well. What’s scary is that we still have Spain and Portugal to go in Europe. Scarier still is who holds the majority of Portugal’s debt. That would be Spain…

What kills me is that there wasn’t anything unusual going on in any of those countries. There were no wars or any other thing that was threatening the countries, they just had a badly constructed financial industry and things went south. The fact that the fallout of bad financial dealings is bringing down governments is even more amazing. Whatever you think caused this mess, it is clear that the governments, and by extension the tax payers in those countries, were far too involved for their own good. The fact that the taxpayers had no choice points out the on going issues of political power and money interests.

Many people look at what’s happening and yell that this proves that there needs to be more regulation, that the government needs to be more involved. It’s clear to me that the governments were too involved, that in their efforts to prop up politically connected groups and/or attempt to stave off the suffering that was going to occur because of the issues, they took everyone down with them. What isn’t clear to me is how having more government involvement will stop this from happening again. It seems to me that if the government tried to minimize the exposure to the problems, fewer people would be involved in the fallout. At the very least, the people directly involved would feel it more keenly.

I really hope that we aren’t seeing our future in Europe. On a national scale, we are in bad shape financially, we are going deeper and deeper into debt and we have ballooning liabilities in the form of medicaid and social security. Things on the state level look even worse. California is a leading indicator, but there are plenty of states that have unfunded liabilities well beyond what the taxpayers can pay. We will see what the future brings, but I’m afraid that too much central planning by the Fed, not allowing debt to be removed via deflation, and continued spending does not bode well for us. Let’s see how the PIGS countries fare. Even better, let’s see how the countries bailing out the PIGS countries fare. What are the odds that any of these places (including the US) will actually reform the relationship between the banking system and the national treasury such that a downturn doesn’t cause massive, system-wide collapse?

I promised a separate post on outsourcing, and here it is. I started to think about this a little more carefully in the context of income disparity. Outsourcing was the one thing I could possibly think of where someone in the top 1% could benefit at the expense of someone else. I do not believe that outsourcing is responsible for the numbers I have seen thrown around when it comes to middle class wages and I’ve come to the conclusion that even if it was responsible, it wouldn’t bother me.

I’ll start out by admitting to something that isn’t all that popular. I am at a loss as to why an American worker deserves a job any more than anyone else. Outsourcing doesn’t cause the loss of jobs, it causes a shift in who has the job. Most of the outrage over outsourcing really boils down to who they think deserves a job. I’m not going to pass judgment on that, certainly not from so far away. I will point out that phrases such as “They can’t compete,” should explain why outsourcing is done at all…

Anyway, if outsourcing is responsible for the 7% or so that the middle class’s wages have supposedly gone down in the US, it’s only fair to look at the increase in wages in other countries that outsourcing is responsible for. If you look at the countries most closely tied to outsourcing, India, China, Vietnam, etc. you will see an unambiguously positive rise in wages over the last 30 years. Those wages have gone up much more than 7%. This is why I’m not so worried about outsourcing in general. People were employed and products were made at lower costs. Some workers were made worse off, some were made better off, everyone else benefits from lower costs.

Is there a moral aspect to this? I dunno, it’s difficult to parse this stuff out in general. Yes, people here in the US lost their jobs. Of course they could just have easily lost their jobs to machines. On the other hand, other people got jobs and had their wages go up. Someone else could have made money on all of this, but not necessarily. Many things were outsourced just so the company could stay in business.

Bottom line is this, to complain about a 7% drop in wages in isolation to the rest of the world is a bit short sighted. In any case, I gave some other reasons why, if wages did go down over the last 30 years, it probably isn’t due to outsourcing and isn’t that big a deal anyway.

So I’ve been trying to say that the top 1% income earners aren’t by default crooks, and I’ve even tried to say that it’s no big deal if over the past 30+ years the top 1%’s incomes have gone up dramatically while hourly wages have gone down by 7% or so. Keep in mind, I’m not too sure of those numbers, but I’ll take it for granted that they are right. What could I possibly think would cause that and still be OK with it?

I’ve been trying to think about what the top 1% of earners could do directly that would cause their incomes to go up AND for folks beneath them to have lower salaries. The only thing I can think of is outsourcing. I am going to set that aside for a moment, I’ll do another blog post on it. It requires a bit more thought than I want to dedicate in this post.

Ok, so what’s an alternative story? It’s in two parts. First, what has changed in the last 30 years that could allow someone’s income to grow so much? Globalization. If you were a corporation, athlete, or author in the US in 1976, how big was your possible customer base? 200 million? 300 million? These days, it is closer to 3 billion. Not only has globalization allowed products and services into more markets, there are now many more people that can afford to buy things than ever before. The last 30 years have seen tremendous gains in Eastern Europe, Latin and South America, Africa, South Asia, and especially eastern Asia. People tend to think of things like cars and computers when they think of selling to other countries, but things like Clorox, condoms, cigarettes, soap, clothes, books, entertainment like sports, and gas have been exploding in popularity all over the world.

When you have markets that large, there are going to be vast sums of money involved. People involved in providing products and services to that many people are going to make a lot of money. How many customers does a big international company like Clorox or Exxon have? How many does a plumbing company have? You see where I’m going? The plumbing company (or just the plumber) could be doing just fine while his neighbor down the street could be making millions selling widgets worldwide. That’s a big income discrepancy. I do think a lot of the discrepancy results in comparing jobs that have very different ceilings when it comes to profit potential.

There are more companies doing business worldwide, or manage the money of people that do business worldwide, and that’s going to lead to more money for those people. Most professions do not allow you to make a killing, but that does not mean that the ones that do are bad.

Ok, what about the other end of the spectrum? If the top 1% aren’t causing wages to go down in real terms, what has? I think a lot of it can be explained with a single word, immigration. how many immigrants have come to the US in the last 30 years? I have no idea, but I’m sure it’s a lot. here’s the thing about averages, they can be thrown off by enough data points being added to the pool. If we take the average immigrant over the last thirty years, I think it’s reasonable to assume that they make less than your typical American when they first show up. If that’s the case, it is also likely that they have brought the average down even if no one else got worse.

Think about that for a second, if we are faced with a statistic that claims that hourly wages have fallen 7% over the past 30 years, what does it actually tell us? The average does not tell us how any person measured in 1976 is doing now. It doesn’t tell us how immigration has affected people that were already working here.

I’m not going to claim that these explanations explain everything, but I do think they are likely to explain a lot. I like to see reasons that don’t involve class warfare. It’s also nice to see how it’s possible that these groups of people could all be doing better. I am always suspicious of aggregates, especially when they aren’t carried over across time. The top 1% of income earners today weren’t the same as they were last year let alone 30 years ago. People that were poor back then are now doing better, and people that were fantastically wealthy before have dropped down as well.

There’s no need to worry about income discrepancies if my story is mostly true, and I think it is. There’s no reason to look for bad guys, and there’s no reason to look for ulterior motives based on what income bracket you fall into. Let’s spend our energies wondering why people in the bottom percentiles are there instead of gnashing our teeth over how much money some folks make.