A Lesson from the Other Side of the Rabbit Hole

I love connecting the storyline of two separate newspaper articles, which the editors see as disparate, but are actually interrelated.  On July 19, 2011, the Wall Street Journal published two articles: “Get ready for 70% marginal tax rate" by Michael J. Boskin and "Notable and Quotable" a quote of a Heather McDonald statement on the University of California's diversity obsession. When read as one, the two articles lay bare an assumption that is critical to the liberal progressive view of government:  government never has a spending problem – it is always a revenue problem.  Really?  Only if you are Alice in “Wanderland.”

When progressives look at government – as Alice might have – “through the looking glass,” they see a well-oiled, efficient, and effective machine, which can only be harmed if taxes are not raised.  When conservatives look at government through a microscope, they see an out-of-control bureaucracy whose tax-and-spend profligacy robs them of their individual rights to life, liberty, and the pursuit of happiness – the basis of which is economic freedom. 

In “Get ready for a 70% marginal tax rate," by Michael J. Boskin, the author addresses the perilous nature of our economic future under a tax-and-spend scenario.  Boskin states “the current top federal rate of 35% is scheduled to rise to 39.6% in 2013 (plus one-to-two points from the phase-out of itemized deductions for singles making above $200,000 and couples earning above $250,000). The payroll tax is 12.4% for Social Security (capped at $106,000), and 2.9% for Medicare (no income cap). While the payroll tax is theoretically split between employers and employees, the employers’ share is ultimately shifted to workers in the form of lower wages.” Using California as an example, state income tax is about 10.5%. Thus the marginal tax rate paid on wages is approximately 44.1%. As Boskin points out, this is a net figure because state income taxes are deducted from federal income. Under this scenario, for a California citizen, the expiration of the Bush tax cuts in 2013 will result in the addition of a 0.9% increase in payroll taxes to fund the Affordable Health Care Protection Act. Obama's proposal to eventually uncap Social Security taxes will lead to a combined marginal tax rate in California of 58.4%.

But things get worse. The non-partisan Congressional Budget Office projects that an additional $841 billion deficit in 2016. Assuming a goal of a balanced budget through tax increases, all income tax rates will have to be increased by 31.7%, raising the combined marginal tax rate for a California citizen to 68.8%. Mr. Boskin then uses this argument to make the point that a California teacher, earning $60,000 a year, would keep approximately 30% of her wages or about $18,000. He states, “At the margin, virtually everyone would be working primarily for the government, reduced to a minority partner in their own labor.”

In the second article, Heather McDonald paints a clear picture of California’s true situation as it stares at the brink of economic disaster.  She states that “California's budget crisis has reduced the University of California to near-penury, claim its spokesmen.” “Our campuses and UC Office of The President already have cut to the bone," the university system's vice president for budget and capital resources warned earlier this month. According to Ms. McDonald, they have not cut their staff to the bone. “The University of California at San Diego is creating a new, full-time Vice Chancellor for Equity, Diversity, and Inclusion." This position will augment UC San Diego's already massive diversity apparatus which includes the following:

·         The Chancellor's Diversity Office

·         An Associate Vice Chancellor For Faculty Equity

·         The Assistant Vice Chancellor For Diversity

·         Faculty Equity Advisors

·         Graduate Diversity Coordinators

 

·         Staff Diversity Liaison

·         Undergraduate Student Diversity Liaison

·         Graduate Student Diversity Liaison

·         A Chief Diversity Officer

·         The Director Of Development For Diversity Initiatives

·         The Office Of Academic Diversity And Equal Opportunity

 

·         The Committee On Gender Identity And Sexual Orientation Issues

·         The Committee On The Status Of Women

·         The Campus Council On Climate, Culture, and Inclusion

·         The Diversity Council

·         Directors of the Cross-Cultural Center

 

·         The Lesbian, Gay, Bisexual, Transgender Resource Center and

·         The Women’s Center.

I wonder if the California teacher – whose take home pay is about 30% of what she earns – believes that the University of California may have a little further to go before they “reach the bone.”   That is unless she works for UC, in which case, the progressives’ view of the Utopia has come almost full circle: the teacher will be working almost full time to pay the taxes that pay her own salary.  

Alice would be proud.

Economics In One Page

In the article “Rebuild wages to restore economy," by Holly Sklar, (Virginian Pilot July 23, 2011), the author states "it's time to stop stuffing the penthouse of the economy with gold and rebuild the crumbling foundation." She argues that minimum wage should be raised to $10.00 per hour because $7.25 per hour ($15,080 per year) does not pay “… for rent, groceries, transportation, medicine and everything else.” She asserts that this will not harm the economy. She quotes John Shepley of the Business for A Fair Minimum Wage: “ … the notion that raising the minimum wage will kill jobs is just bunk. People at the lower end of earnings tend to spend 100% of their after-tax income. They put it right back into local businesses buying food, clothing, car repairs and other necessities. When the minimum wage is too low it not only impoverishes productive workers, it weakens the key consumer demand at the heart of our local economy."  While this article quotes many "facts," these facts do not tell the truth.

First, it is neither an employer’s fiduciary responsibility nor the government’s Constitutional responsibility to “rebuild wages.” Wages are set by supply and demand.  In fact, if an employer is able to produce a high-quality, high-demand product at a market-based price and produce that product with absolutely no employees, it will do so. Businesses are concerned with productivity not employment.  To the extent that employees can provide a function that can be done more economically than by a machine, they will be employed. This is demonstrated by the history of manufacturing in the United States since 1940.

Second, the author correctly asserts artificially raising wages does keep employees employed and provides them with more money to spend in the economy – at least for a time. However because they are adding no additional value to the product or service they are providing, within a short period of time the increase in wage is subsumed into the ongoing cost of business, increasing the price of the product to the consumer. The employee may be better off, the consumer is not.  The consumer’s increased price for a hamburger represents dollars that are no longer available to be spent on other innovative, productivity enhancing products or services like personal education. In fact, minimum wage only increases the inefficiency of the marketplace, making overall business less competitive. This is the lesson we have learned and will continue to learn from India and China.

Last, Ms. Sklar points out that minimum-wage workers have only $15,080 to pay for the basic necessities of life, but she fails to mention that these workers qualify for a plethora of government programs that subsidize their basic income, including food stamps, housing allowances, back to work programs, et cetera.  These benefits are part of government “entitlements” that in total represent about 70% of our annual federal budget, which the guys in the “Penthouse” make possible through the jobs they do provide.

Fundamentally, conservatives and progressives have two diametrically opposed views of the way the world works. A conservative believes that one creates wealth through one’s labor, first saving for future investment, and then taking a risk to start a business that meets a real demand. Progressives believe that wealth is created by the government through printing paper money, distributing it to those who are dependent upon the government, who save none of it, and who seek some fictitious future that never materializes. If a conservative fails, the business’s capital – which was created by the owner – is redeployed to alternative economic uses.  If a progressive fails, the government simply prints more money.

So, if one is concerned about low-wage workers well-being, perhaps he or she should donate through their church or a local charity.   Raising minimum wage is an ineffective, inefficient way to accomplish this objective, as proven by the fact that almost half of all citizens receive some form of government subsidy.  Instead, we have created is a large, centralized progressive government that threatens to destroy liberty and freedom for everyone.

CAFE Anyone?

More and more I'm beginning to understand how Alice felt when she fell down the rabbit hole into Wonderland. We are now living in a world in which political science trumps engineering science. Don’t even think about applying engineering economics principles. In this brave new world, the consequences of big business being in bed with big government are becoming readily apparent. Nothing illustrates this better than the Obama administration decree – using linear thinking in a non-linear world – that car manufacturers achieve a 56.5 mile per gallon average efficiency standard by the year 2015. The current standard is 35.5 mpg.

In the Wall Street Journal article "Over Caffeinated CAFÉ" by Holman Jenkins (July 6, 2011), Mr. Jenkins correctly points out "engineering is absent." No consideration is given to the state of the technology or our ability to deliver this mandated efficiency goal. Sean McAlinden of the Center for Automotive Research reports that to meet the stated goal the demand for materials needed to produce ultra high-mileage cars will exceed the supply by several times over. This is in a world where the latest Honda Civic is 42% heavier than its 1990 model and has nearly twice the horse power. The consequences of this mandate will be the production of cars Americans do not want at a price they cannot afford. What is the auto industry’s response to this? They have asked that the timeframe for achieving this goal be extended so that they have time to lobby for its repeal under a new administration. They do not want to directly confront Obama on this issue because they do not want to bite the hand that bailed them out.

So just like the electric utility industry, where over the past 10 years the number of electronic devices owned by each American has gone up by a factor of four to five, but the administration wants to replace high-energy density conventional electricity production with low-energy density solar and windmill production, at three to four times the cost of these conventional sources, the Obama administration wishes to raise fuel efficiency goals without any consideration of technical or economic feasibility.

Just like Alice in Wonderland – where up is down and down is up – the Obama administration will not allow engineering reality to stand in the way of political goals. The overarching natural principle of government is at work – the law of unintended consequences. Taking every gasoline powered vehicle off the road and replacing them with electric vehicles will substitute the carbon dioxide they otherwise would have produced with carbon dioxide that is generated by fossil fuel coal plants to produce the electricity they will require. In the process, as Obama has correctly stated, “prices … will skyrocket.” Does this sound like a good use of precious investment capital to you?

Economic Discovery "Turns To"

In “Economic Recovery Turns 2: You Feel Better Yet,” (Paul Wiseman, VA Pilot 7/5/2011), the author quotes many facts to make the same old progressive talking point: because corporate profits are up 59% (since 2009) and CEO pay is up 25% (since 2009), “evil” [my word] corporations, the CEOs who run them, and stockholders are doing well, but the average employee, whose wages are down 1.6% (since 2010) is not. Translation: “evil” corporations are not meeting their social obligation to hire people or pay them a fair wage.


First, profits are not necessarily a bell-wether of the state of the economy. Most companies on the stock exchange are large corporations (20% of all companies in the US) and are generally multi-national. A large portion of their operations are outside the United States. A better measure of corporate health is gross revenues, generated by business units within the United States.

Second, most new job creation is from small and mid-sized businesses (80% of all companies in the United States). The revenue (and profits) within this segment have been and are currently stagnant.

Third, and most important – listen carefully – the purpose of a company is not to create jobs and hire people (wages). Its purpose is to produce a product or service as efficiently as possible (productivity), thereby generating profit. So, if my small business can produce a high-quality, low-cost, high-demand product or service, without one employee, that is what it will do. Wages are set by local / global market forces. If government wants companies to employ more people, it should encourage a business environment in which companies thrive and employing more workers is economically attractive: an environment of limited but appropriate regulations, low taxes, and a fair legal system.

Government never has nor ever will create wealth: productive people -- free of government regulation and taxation -- do that.