If men were angels, no government would be necessary

Posted June 2nd, 2008 by Herb Starr

No less a conservative than columnist George Will has observed that consumer spending is the engine that drives the economy, I agree.

The question is wouldn't our economy and the general welfare of our people be better served if more people could have more money in their pockets to spend without increasing labor costs? Logic would seem to say yes. I say yes.

Mr. Will seems to say yes also, but in the main, limits his advocacy for the cause to tax cuts. I see other ways far more effective and less damaging to our balanced budget efforts. Before we discuss how to put more money in more consumers pockets lets first demonstrate to all that this is a valid goal for our nation.

For purposes of this essay lets limit the discussion to whether or not we can all agree that the more citizens we have with disposable income beyond life's necessities of food, shelter, clothing and health care the better our economic growth and general welfare is served. In this effort let's ask a simple rhetorical question: which of the two following scenarios would likely generate the greater consumer spending and economic growth. Assume that $20,000 is a bare bones subsistence income, allowing for food, shelter, clothing and basic health care only.

Scenario A

100 people earning a combined annual income of $5,000,000 divided evenly at $50,000 each.

Scenario B

100 people earning a combined annual income of $5,000 000 divided at 99 people earning $20,000 ($1,980,000) and one earning $3,020,000.

Which of these two groups would likely spend more dollars on the following:

  A B
New Homes x  
Home Furnishings x  
Travel and Vacations x  
Computer and Related Services x  
Appliances x  
Clothing x  
Entertainment x  

The answer is obvious. Group A has 100 people with excess disposable income. As much as $15,000 to $20,000 each even after taxes.

Group B however, has 99 people just barely capable of meeting life's necessities of food, clothing, shelter and health care. This leaves but one person with excess disposable income.

Group A has 100 engines driving the economy while group B only has one. Since both groups have the same $5,000,000 in income, group A has not produced wage based inflation. Costs to those meeting the "$5,000,000 payroll" are unchanged. If wages in total are unchanged we have not introduced more dollars chasing fewer goods - inflation defined!

No matter how you slice it, 100 financially capable people are going to buy more new cars than one, 100 financially capable people are going to put more home builders to work than one. 100 financially capable people are going to buy more airline tickets than one. 100 financially capable people are going to spend more on computers and related services than one.

Now while my exaggerated scenario is obviously not to be taken as literally practical (or even desirable) in the real world, it does illustrate a point.

EXCESSIVE WAGES FOR THE FEW ON THE UPPER END OF THE ECONOMIC SCALE AT THE EXPENSE OF EXCESS DISPOSABLE INCOMES FOR THE MANY ON THE LOWER END ARE INHERENTLY CONTRARY TO THE GENERAL WELFARE OF OUR NATION AND ITS ABILITY TO GROW THE ECONOMY.

We don't have to speculate on the validity of this axiom, all we have to do is look back at our own history. We don't have to go back very far to do it.

It is more than just a coincidence that our country’s greatest economic growth period NOT fueled by massive growth in public and private debt occurred from the 1950's through the mid 1960's. This was also the period of the most equitable sharing of the economic pie in our history.

To illustrate, I offer some first hand observations. My father was considered a fairly wealthy man during this period. He owned his own business - debt free. He owned a pleasant older house in a nice middle class neighborhood and a summer cottage on the lake, both also debt free. He had a 23 foot speed boat. He drove a brand new Cadillac every year - spent a month every winter in Florida, dined out often, and in general lived a very comfortable life.

He could have afforded to put all three of his children through private colleges had they so chosen. When he died at age 63 in 1967 he left his widow with a large enough estate (after estate taxes) that she was able to go on comfortably for the next 20 years without having to get a job.

He accomplished all this on a top salary of $25,000 per year, only ten times the lowest paid worker in his plant.

While my father had the American dream lifestyle, his lowest paid workers all could afford their own apartments (or homes in two workers families) and in general a secure and pleasant standard of living. His middle management engineers and teamster drivers earned wages from 1/4 to 1/2 of his income and indeed enjoyed a solid middle class lifestyle. Simply, while my father did enjoy a virtually luxurious lifestyle, every one of his employees earned enough to enjoy a reasonable lifestyle and were indeed consumers above and beyond a bare bones existence. In addition to their basic cash income they also received paid holidays, paid vacations, complete health care for the entire family and a modest pension on retirement.

Most of these employees, given what they did have, were actually from the lowest skilled and lowest paid segment of the labor force. Virtually all other business' during this period had employees with even greater excess disposable income.

Business large and small boomed as a result of all these consumers, yet inflation was never a major issue. All this occurred when there was virtually no access to credit cards. Cash was king and growth was real. Nearly everybody had discretionary income to spend.

One certainly has to draw at least a tentative conclusion that possibly no other element is as responsible for sound economic growth as a reasonable distribution of income.

If we as a people can't all agree with this historical demonstrable reality, I fear for our nation’s survival. Could anyone possibly argue that the greater the gap between the rich and the poor, the better our nation is served?

If we as a people can agree, we are well on our way to a solution. After all, recognizing the problem is half the solution! Let the private sector lead the way. Let the conservatives show us the way to greater consumer spending capability for all working Americans. If they can, the private sector is always the first choice. If they can't, Franklin Roosevelt already showed us how the government can.

Any worthwhile goal of national import that is not met by the private sector alone (always the first choice) must be met with government participation - that's why we have a government in the first place – as Hamilton and Madison said (in Federalist Paper #51), “If men were angels, no government would be necessary.”