Trusting our Intuition – Common sense economics
It has long been my belief that most of we humans know when something does not make sense. We may or may not know or be able to articulate why something does not make sense, but often, if we are paying attention, we ‘know’ what makes sense or does not make sense.
Learning to trust what I am going to call intuition or the “common sense buzzer” is, for many of us a process. Many factors can prevent us from fully trusting this internal buzzer. We may not know the language or we may not have done sufficient research to be able to launch an articulate or cogent argument to connect the dots but we “know” when something does not quite make sense.
One of the economic issues which has caught my attention for some time has concerned the argument that increasing the minimum wage would have a long term negative effect on the economy. I have heard a number of people posit that if the minimum wage is raised to $15.00 an hour (or even less) companies will have to lay off employees or perhaps even shut their doors. Those who argue this positon claim that this will result in more people being out of work which in turns means that they will not be able to spend money and, in fact, will eventually become homeless resulting in a further drain on the economy. This argument is based, in part, on the trickle-down theory of economics. The trickle-down theory of economics very simply stated is:
“Definition: Trickle-down economics is a theory that says benefits for the wealthy trickle down to everyone else. These benefits are usually tax cuts on businesses, high-income earners, capital gains, and dividends.
Trickle-down economics assumes investors, savers and company owners are the real drivers of growth. They use any extra cash from tax cuts to expand business growth. Investors buy more companies or stocks. Banks increase business lending. Owners invest in their business operations and hire workers. These workers spend their wages, driving demand and economic growth.
Trickle-Down Economic Theory
Trickle-down economic theory is similar to supply-side economics. That states that all tax cuts, whether for businesses or workers, spur economic growth. Trickle-down theory is more specific than supply-side theory. It says tax cuts targeted to corporate, capital gains, and savings work better than general tax cuts…
Both trickle-down and supply-side economists use the Laffer Curve to prove their theories…
Arthur Laffer showed how tax cuts provide a powerful multiplication effect. Over time, they create so much growth that make up for any lost government revenue. That's because the expanded, prosperous economy provides a larger tax base.
Most proponents ignore Laffer's warning that this effect works best when taxes are in the "Prohibitive Range." If taxes are already low, then tax cuts will only lower government revenue without stimulating extra growth.
(useconomy.about.com)”
On the surface this theory may seems to make sense. X makes a lot of money. X uses profit to expand the business resulting in more hiring which results in more spending and a larger tax base. As stated above Laffer warmed that if taxes are already low, then government revenue will be lower and growth will not be stimulated.
The other result which is not discussed in this trickle-down theory is that if the average worker is not making enough money to afford the products which are being manufactured then the economy is not going to grow. Even on a minimum wage of $15.00 an hour one’s gross income if working an average of forty hours a week (not necessarily the case) one gross monthly income is only $3,100.00 (need I remind one that gross income can be vastly different than spendable income). If I use a very conservative amount of 5% to be deducted for taxes, etc. one’s take home pay would be $2964.00. Using 2013 conservative estimates on stretcher.com if one spent the following:
$1200.00 Housing
$ 444.00 Transportation
$ 220.00 Utilities
$ 378.00 Food
$ 188.00 Health care
Balance available:
$ 534.00
Notice that I have not included any money for insurance, clothing, school fees, appliance repair or replacement, equipment for lawn maintenance, laundry, or other basics. $534.00 a month is not going to cover those expenses. How many products is that family going to purchase outside of that budget? None. How many products are the wealthy families going to buy? Even if the wealthiest families spend, spend, spend, their numbers (N) is not great enough to keep an expanding economy going.
One of the significant concerns of the average person in the United States in recent years is that their spendable income has shrunk while that of the top 1 % has risen. It is also true that the number of decent paying jobs in manufacturing, mining or other similar union protected job has decreased. Many of the new jobs are in the service industry which generally pay a very low amount. Whether one is working as a clerk for a department store, a low level office worker in a a service company, or for fast food one has seen a rise is expenses and a decrease in spendable income because of decrease in actual salary, paid hours or benefits. When one shops at the grocery store, pays utilities or other bills, one is acutely aware of an increase.
Some of the current political candidates have captured the attention of those frustrated with their increasing inability to take care of themselves and their families.
Something is clearly not working and a lot of people know it. It is also true that in this age of the internet, information is shared. In the past one could be fired for revealing even to one’s co-workers one salary and benefits. This is no longer the case. If the information is not openly shared by the company enterprising tech person will hack into a computer system and find it.
Additionally, there are individuals such as Nick Hanauer who openly describes himself as a plutocrat sounding the alarm. In a Ted talk on August of 2014 entitled “Beware fellow plutocrats, the pitchforks coming”, he states:
“So what do I see in our future today, you ask? I see pitchforks, as in angry mobs with pitchforks, because while people like us plutocrats are living beyond the dreams of avarice, the other 99 percent of our fellow citizens are falling farther and farther behind. In 1980, the top one percent of Americans shared about eight percent of national [income], while the bottom 50 percent of Americans shared 18 percent. Thirty years later, today, the top one percent shares over 20 percent of national [income], while the bottom 50 percent of Americans share 12 or 13. If the trend continues, the top one percent will share over 30 percent of national [income] in another 30 years, while the bottom 50 percent of Americans will share just six.
I know I must sound like some liberal do-gooder. I'm not. I'm not making a moral argument that economic inequality is wrong. What I am arguing is that rising economic inequality is stupid and ultimately self-defeating. Rising inequality doesn't just increase our risks from pitchforks, but it's also terrible for business too. So the model for us rich guys should be Henry Ford. When Ford famously introduced the $5 day, which was twice the prevailing wage at the time, he didn't just increase the productivity of his factories, he converted exploited autoworkers who were poor into a thriving middle class who could now afford to buy the products that they made. Ford intuited what we now know is true, that an economy is best understood as an ecosystem and characterized by the same kinds of feedback loops you find in a natural ecosystem, a feedback loop between customers and businesses. Raising wages increases demand, which increases hiring, which in turn increases wages and demand and profits, and that virtuous cycle of increasing prosperity is precisely what is missing from today's economic recovery.”
When I listened to this talk by Mr. Hanauer, I was delighted to find someone much more qualified and articulate about the current economy and the trickle down economic theory in particular who could confirm what I already “knew”. What I had previously thought was confirmed as basic common sense. His talk was just one more reminder that it would behoove all of us to trust our intuition – our common sense internal buzzer – more often. Very frequently when something does not seem to make sense perhaps it is because it in fact does not make sense. We may need to get better at using the vast resources of libraries, the internet, and other available resources to do our research. We may need to rely on folks who are experts in particular area – who know the language – but thankfully the wisdom of those folks is more available in the age in which we are living.
It did not surprise me that Mr. Hanauer has a bachelor’s degree in philosophy from the University of Washington. I have previously argued that we need to be teaching basic philosophy courses to our very young children. We need to be encouraging and teaching children to think. Children, if healthy and living in a relatively healthy environment start asking questions at an early age. They want to know how things work. Most original thinkers in all areas of life – music, art, literature, business, engineering, computers – were, from an early age, curious and excelled in exploring putting pieces together. Whether those pieces are ingredients for new food creations, notes and space for music, colors or perspectives for art, a new building, or computer codes the basic approach is the same.
The above is just one example of why we need to trust our common sense buzzer test. I personally think that we humans know when something does not make sense. We only need to encourage each other to trust that intuitive part of our brain which I think originates from the part of our brain which we usually think of as logical. We may be missing some pieces of the puzzle but we “know”.
Written May 16, 2016
It has long been my belief that most of we humans know when something does not make sense. We may or may not know or be able to articulate why something does not make sense, but often, if we are paying attention, we ‘know’ what makes sense or does not make sense.
Learning to trust what I am going to call intuition or the “common sense buzzer” is, for many of us a process. Many factors can prevent us from fully trusting this internal buzzer. We may not know the language or we may not have done sufficient research to be able to launch an articulate or cogent argument to connect the dots but we “know” when something does not quite make sense.
One of the economic issues which has caught my attention for some time has concerned the argument that increasing the minimum wage would have a long term negative effect on the economy. I have heard a number of people posit that if the minimum wage is raised to $15.00 an hour (or even less) companies will have to lay off employees or perhaps even shut their doors. Those who argue this positon claim that this will result in more people being out of work which in turns means that they will not be able to spend money and, in fact, will eventually become homeless resulting in a further drain on the economy. This argument is based, in part, on the trickle-down theory of economics. The trickle-down theory of economics very simply stated is:
“Definition: Trickle-down economics is a theory that says benefits for the wealthy trickle down to everyone else. These benefits are usually tax cuts on businesses, high-income earners, capital gains, and dividends.
Trickle-down economics assumes investors, savers and company owners are the real drivers of growth. They use any extra cash from tax cuts to expand business growth. Investors buy more companies or stocks. Banks increase business lending. Owners invest in their business operations and hire workers. These workers spend their wages, driving demand and economic growth.
Trickle-Down Economic Theory
Trickle-down economic theory is similar to supply-side economics. That states that all tax cuts, whether for businesses or workers, spur economic growth. Trickle-down theory is more specific than supply-side theory. It says tax cuts targeted to corporate, capital gains, and savings work better than general tax cuts…
Both trickle-down and supply-side economists use the Laffer Curve to prove their theories…
Arthur Laffer showed how tax cuts provide a powerful multiplication effect. Over time, they create so much growth that make up for any lost government revenue. That's because the expanded, prosperous economy provides a larger tax base.
Most proponents ignore Laffer's warning that this effect works best when taxes are in the "Prohibitive Range." If taxes are already low, then tax cuts will only lower government revenue without stimulating extra growth.
(useconomy.about.com)”
On the surface this theory may seems to make sense. X makes a lot of money. X uses profit to expand the business resulting in more hiring which results in more spending and a larger tax base. As stated above Laffer warmed that if taxes are already low, then government revenue will be lower and growth will not be stimulated.
The other result which is not discussed in this trickle-down theory is that if the average worker is not making enough money to afford the products which are being manufactured then the economy is not going to grow. Even on a minimum wage of $15.00 an hour one’s gross income if working an average of forty hours a week (not necessarily the case) one gross monthly income is only $3,100.00 (need I remind one that gross income can be vastly different than spendable income). If I use a very conservative amount of 5% to be deducted for taxes, etc. one’s take home pay would be $2964.00. Using 2013 conservative estimates on stretcher.com if one spent the following:
$1200.00 Housing
$ 444.00 Transportation
$ 220.00 Utilities
$ 378.00 Food
$ 188.00 Health care
Balance available:
$ 534.00
Notice that I have not included any money for insurance, clothing, school fees, appliance repair or replacement, equipment for lawn maintenance, laundry, or other basics. $534.00 a month is not going to cover those expenses. How many products is that family going to purchase outside of that budget? None. How many products are the wealthy families going to buy? Even if the wealthiest families spend, spend, spend, their numbers (N) is not great enough to keep an expanding economy going.
One of the significant concerns of the average person in the United States in recent years is that their spendable income has shrunk while that of the top 1 % has risen. It is also true that the number of decent paying jobs in manufacturing, mining or other similar union protected job has decreased. Many of the new jobs are in the service industry which generally pay a very low amount. Whether one is working as a clerk for a department store, a low level office worker in a a service company, or for fast food one has seen a rise is expenses and a decrease in spendable income because of decrease in actual salary, paid hours or benefits. When one shops at the grocery store, pays utilities or other bills, one is acutely aware of an increase.
Some of the current political candidates have captured the attention of those frustrated with their increasing inability to take care of themselves and their families.
Something is clearly not working and a lot of people know it. It is also true that in this age of the internet, information is shared. In the past one could be fired for revealing even to one’s co-workers one salary and benefits. This is no longer the case. If the information is not openly shared by the company enterprising tech person will hack into a computer system and find it.
Additionally, there are individuals such as Nick Hanauer who openly describes himself as a plutocrat sounding the alarm. In a Ted talk on August of 2014 entitled “Beware fellow plutocrats, the pitchforks coming”, he states:
“So what do I see in our future today, you ask? I see pitchforks, as in angry mobs with pitchforks, because while people like us plutocrats are living beyond the dreams of avarice, the other 99 percent of our fellow citizens are falling farther and farther behind. In 1980, the top one percent of Americans shared about eight percent of national [income], while the bottom 50 percent of Americans shared 18 percent. Thirty years later, today, the top one percent shares over 20 percent of national [income], while the bottom 50 percent of Americans share 12 or 13. If the trend continues, the top one percent will share over 30 percent of national [income] in another 30 years, while the bottom 50 percent of Americans will share just six.
I know I must sound like some liberal do-gooder. I'm not. I'm not making a moral argument that economic inequality is wrong. What I am arguing is that rising economic inequality is stupid and ultimately self-defeating. Rising inequality doesn't just increase our risks from pitchforks, but it's also terrible for business too. So the model for us rich guys should be Henry Ford. When Ford famously introduced the $5 day, which was twice the prevailing wage at the time, he didn't just increase the productivity of his factories, he converted exploited autoworkers who were poor into a thriving middle class who could now afford to buy the products that they made. Ford intuited what we now know is true, that an economy is best understood as an ecosystem and characterized by the same kinds of feedback loops you find in a natural ecosystem, a feedback loop between customers and businesses. Raising wages increases demand, which increases hiring, which in turn increases wages and demand and profits, and that virtuous cycle of increasing prosperity is precisely what is missing from today's economic recovery.”
When I listened to this talk by Mr. Hanauer, I was delighted to find someone much more qualified and articulate about the current economy and the trickle down economic theory in particular who could confirm what I already “knew”. What I had previously thought was confirmed as basic common sense. His talk was just one more reminder that it would behoove all of us to trust our intuition – our common sense internal buzzer – more often. Very frequently when something does not seem to make sense perhaps it is because it in fact does not make sense. We may need to get better at using the vast resources of libraries, the internet, and other available resources to do our research. We may need to rely on folks who are experts in particular area – who know the language – but thankfully the wisdom of those folks is more available in the age in which we are living.
It did not surprise me that Mr. Hanauer has a bachelor’s degree in philosophy from the University of Washington. I have previously argued that we need to be teaching basic philosophy courses to our very young children. We need to be encouraging and teaching children to think. Children, if healthy and living in a relatively healthy environment start asking questions at an early age. They want to know how things work. Most original thinkers in all areas of life – music, art, literature, business, engineering, computers – were, from an early age, curious and excelled in exploring putting pieces together. Whether those pieces are ingredients for new food creations, notes and space for music, colors or perspectives for art, a new building, or computer codes the basic approach is the same.
The above is just one example of why we need to trust our common sense buzzer test. I personally think that we humans know when something does not make sense. We only need to encourage each other to trust that intuitive part of our brain which I think originates from the part of our brain which we usually think of as logical. We may be missing some pieces of the puzzle but we “know”.
Written May 16, 2016
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