Fen phen fiscal policy…
Posted March 18, 2014on:
Good afternoon Widdershins.
Last week there was a story that passed without much notice. There was a big headline, but without some context the story generated little more than a collective yawn — much akin to trying to understand the plotline of Basic Instinct by focusing on the undergarment choices of Sharon Stone’s character during the interrogation scene.
The focus of the story was the enormity of Wall Street bonuses. The bonuses for 2013 were sufficient to basically double the earnings of every American minimum wage worker. That was the headline, but as with most things the most intriguing aspects were more nuanced.
The total reported amount of 2013 bonuses for Wall Streeters was $26.7 Billion. The bonuses were up by 15% for the fifth consecutive year of record profits since 2008 for the same Wall Street guys and gals who wrapped the economy in aluminum foil and promptly microwaved it. That same $26.7 Billion would effectively double the wages of the 1,085,000 American workers paid the federal minimum wage. Now the rest of the story and what we can learn from it.
The $26.7 Billion was limited to just those Wall Streeters employed in New York City since the data was collected by the New York Controller. It did not include any bonuses paid to bank employees or traders outside the city. It included neither stock options nor any deferred compensation. Suffice it to say, with the huge “off site” operations of the Wall Street banks and their convoluted compensation structuring, the $26 Billion was merely a tantalizing leg crossing to divert our attention from the basic instinct of Wall Street. To engage in a little zero-degree separation of Michael Douglas films, “Greed is good.”
The headline doesn’t do justice to the real importance of the story. This unbridled concentration of wealth might be great for the Ferrari dealerships and the Patek Phillipe watch salespeople, but it is an all too alluring incentive for the continued high-risk behavior putting the entire financial system at risk.
It is also bad for the economy. Here’s why — it clearly demonstrates the harm to the economy from the enormous disparities of income inequality. Every dollar paid to the people who harvest our food, cook, clean, manicure our yards, care for our children or our parents adds $1.21 to the economy. Every dollar paid to the likes of these Wall Street warriors adds only $0.39 to the economy.
Therein lies the paucity of “trickle down” supply side economic theory that has worked irreparable long-term harm to our economy. It’s as simple as this — no matter if you eat brown beans or Beluga caviar, you can only eat so much. If you wear a threadbare cloth coat or cashmere, you can only wear one coat at a time. If you drive a 1990s Ford or a 2014 Ferrari, you can only hold one steering wheel at a time.
Low wage workers must spend to live, while high wage workers sock it away as a badge of deluded self-worth. There isn’t any miraculous mass trickle down. There isn’t an invisible pent-up demand. As for supply, it is adequate to satisfy the whims of the moneyed when it comes to the likes of coffee beans steeped in the digestive juices of the Sumatran civet and plucked from their feces.
As Robert Reich points out, fifty-years ago the largest employer was General Motors and the typical worker was paid $35.00 an hour. Today, the largest employer is Wal-Mart and the typical worker is paid $8.80 an hour. We too often dismiss the present day retail worker for the romantics of the auto line worker, but when comparing their educational attainment it is similar, their physical demands of standing for long periods of time are similar, and their uses of technology are similar. The two workers are only separated by five decades and one-fourth the hourly earnings power.
The great irony is through government transfer payments, we have empowered both the worker and the moneyed class. We have empowered the kings of Walton mountain to capture low wage earners in the revolving door of non-subsistence level jobs while rigging the system into rewarding the rarefied kings with riches so plentiful they would embarrass Croesus. We are complicit in this insanity not only through unwitting political empowerment — we are actually footing the bill. Paying for it to the detriment of the overall economy and our own long-term interests.
Remember fenfluramine/phentermine, the diet wonder drug known as fen phen that everyone craved. It was all the rage until the long-term adverse effects of heart disease and heart valve damage became clear. Thirty-years of supply-side economics is no better than the fen phen phenomenon — a seemingly miraculous panacea all the rage until the long-term effects finally cripple and kill.
This is an open thread.
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