Wednesday, September 24, 2014

Me Probably Getting Economics Completely Wrong

I've been thinking about economics of late. Not just economics, but rather, how the economy works.

We have a few forces at play. Demand, trickle down and flow upwards.

Money, when starting at the bottom, i.e. given to our most vulnerable, flows upwards and in doing so creates demand. For example, you go to a dairy to buy a can of coke. The money from that coke goes to the dairy who then buys more coke from Coca-Cola (Coca-Cola Amatil in the Asia-Pacific region).

In increasing the demand on the dairy, that dairy is able to possibly hire staff (multiplying this out to an entire community. Not as likely given the scale of a dairy vs. Coca-Cola - but the possibility is there. This possibility should not be ignored). The trickle down... And Coca-Cola presumably hires more staff to meet demand (multiplying this out to the world).

Suppose a can of coke costs.... $0.20 to make and Coca-Cola sell it in bulk at $0.40 per can. Their distributors then put their margin on top. So everyone in the chain is getting a cut on it. Presumably everyone who puts a margin on top is putting around 100% on top. So while Coca-Cola make $0.20 / can, by the time the dairy sells it, they're making around $0.80 / can - though it's distributed through A LOT more dairies at this point. So we have a pyramid...

We have one entity at the top, 50 on the next level, 500 on the next. Although the profit margin increases as we move down the pyramid, each entity makes less. Remembering that as we move further down, we're closer to the actual people. The dairy owner, for example, is looking to feed their family. As you move up the pyramid, the concern stops being about the individuals and their families and more about the business as it's own entity. A multinational is less likely to care about the individual than the local dairy owner or baker.

Now... the trickle down. Trickle down does not exist in isolation. If you were to give Coca-Cola $100,000,000, that $100,000,000 does not suddenly create jobs. It wouldn't be in Coca-Cola's interests to increase/expand their operations unless the demand existed. So in order to stimulate an economy, it seems to me that it'd be far better to introduce that money at the very bottom.... presumably the unemployed.

However, what happens when those unemployed are getting more than those who are working full time? There's resentment. So, we need a minimum wage. That minimum wage needs to be set at just the right level. Too low and people become disillusioned with working as they seem to be working very hard to be impoverished (the working poor). Too high and businesses start to "trim the fat" or rather, look for ways of cutting staff (this presents big problems if done on a long term basis). BUT if people are over the poverty line, they are also able to create demand. So it's in a businesses best interest to keep all of their workers above the poverty line. Perhaps their workers aren't their intended audience, but there's a very good chance their customers rely on those people. So either which way, if a business relies on the minimum wage level to stay in business, they are essentially exploiting the system. It's an absolute minimum.

So when the number of working poor is increasing, a government must increase the minimum wage. The current argument of "increasing the minimum wage will decrease jobs" is a self-serving short thinking fallacy. In the long term, assuming a business is still relevant, their demand should increase.

Business and government seemed to have understood this in the past though this seems to have changed in the western world around the 1980's. Deregulation of banking systems have lead to big problems. For example, the amount of money a person is able to borrow from a bank, as a ratio of their pay, drives up prices for things like housing. As the cost of housing increases, so does rent.

In New Zealand, with an average income per household of around $58,000 / year (taken from here. Unfortunately there is no mention of whether they're taking about mean or median), it is estimated that about 25% of that income goes on accommodation and utilities (power and water). As we go lower, those costs don't decrease much while the income get's lower. So on $40,000 / year / household, that's around 35%. Our most vulnerable, at around $18,000 / year (I'm taking this figure from when I was working in one of Auckland's most vulnerable areas. This was the figure that was often kicked around), that's approximately 79%.

Which leads us to tax. This is why we have a progressive tax...

Imagine we have a flat rate tax system at 10% / year.

Imagine I make $18,000 a year.
Tax at 10%: $1,800
Housing and utilities: $14,190.80
At the end of the year, for clothing and footwear, food, healthcare, transportation etc. I have around $2,009 for the year.

Imagine now that I make $60,000 a year.
Tax at 10%: $6,000
Housing and utilities: $14,190.80
At the end of the year, for clothing and footwear, food, healthcare, transportation etc. I have around $39,809 for the year.

This can be corrected, to some extent, by having a progressive tax system. That is, your tax rate being dependent on your yearly income. So the person making $18,000 / year can have their tax burden cut in half to 5%. If we have 1,000,000 people only making $18,000 / year, in the flat tax example, that puts $1,800,000,000 into government coffers.

And if we have 500,000 on $60,000, that contributes $3,000,000,000 to government coffers.

We have $4,800,000,000 in government coffers to go on things like socialized services like healthcare and education, infrastructure like roading, parks (Conservation land untouched by mining hopefully) etc. If we need to keep that level, then in a progressive tax system, ignoring the people in between, if the people bringing in $18,000 / year are only paying 5%, then they're contributing $900,000,000 to the coffers. Which means that each of those 500,000 $60,000 / year earners need to contribute $7,800 / year in taxes each. Which puts them on a tax rate of 13%. Their burden has only risen by 3% whereas the low income earners have had their tax rate cut in half.

Now those earning $60,000 may declare this unfair and unnecessarily complicated. It'd far be easier to just tax everyone at the same rate. Those earning more than $60,000 may even call for tax cuts because they don't think it necessary for the government to provide the services and regulation that they do (neoliberalism - as I write this, it disturbs me that the word isn't in my browser's dictionary). Basically, the level of education/healthcare/whatever should be based upon how much an individual is willing to pay for it. The costs of all of those things go up because the individual has no bargaining power. Look to the American healthcare system for how damaging this is.
I think, if a government is truly serious about creating jobs, they need to:
  • Make it so that the jobs that they're creating don't have people working in order to stay impoverished by making sure the minimum wage rates are set accordingly.
  • Introduce money at the bottom as a stimulus rather than expecting a trickle down effect to happen without taking demand into consideration.

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