The Good Life Redefined
Subject: Economics, Success, Contentment, Robert Samuelson, Human Capital, Poverty Gap
“The paradox of our time is that we are feeling bad about doing well.” This is opening statement in Newsweek’s article on “The Good Life and Its Discontents: The American Dream in the Age of Entitlement 1945-1995,” by Robert J. Samuelson which speaks volumes on the current mindset of our society. As Americans, we are inundated with stories of despair, tragedy, poverty, crime, government deficits, rising cost of living, ...etc. We are left to imagine a time down the road when the weight of economic debt will come crashing down on the unsuspecting future generations. We are faced with the reality that government will not be able to solve our problems and provide us the security blanket we hoped to cling onto. We have come to understand, or least accept it as fact, the ‘real’ dynamics of the market which Samuelson interprets as, “... the economy moves by rhythms of growth and decay.”
Americans have, for the 2-3 decades, enjoyed a sense of growth and stability. The American staple has always been stability in the form of a steady growth economy or corporate loyalty. In the former, government had provided this nation with a sense of security in its ability to ‘control’ the market by keeping economic factors like recession and inflation in check. The latter, corporate loyalty, played the role of the proud parent in insuring individuals that they would always have a job if they were committed to the same ideals. The paternalism created by both the government and corporations gave rise to a sense prosperity ad infinitum.
In a sense, society could be accused of abdicating any individual initiative for insuring continued prosperity by identifying themselves with the collective whole called government or the company. By buying into the belief that either one of these entities will work things out for the better of society, we relaxed our vigilance over our own destinies. And, when the proverbial bottom falls out from either entity, the individual is left with little or no recourse. For example, when the economy goes bad and consequently companies resize themselves, the individual is often caught unprepared creating a sense of anxiety driven by fear. This feeling often leads to externalizing the blame outside the domain of personal responsibility. The individual feels duped by both government and corporations for not fulfilling an internalized belief that was in a sense a social contract. This belief system is sometimes based on altruistic assumptions, public opinion, or other line-item platitudes and bromides which form their social philosophy. When this philosophy cannot explain market dynamics, discrimination, layoffs, poverty, recession, inflation, intrusive government policies, supply & demand, opportunity costs...etc., they are left wondering whose to blame.
The Problem To ask the question, Are we better off today that we were yesterday?, leaves the answer in the domain of subjective interpretation of the market and one’s status within it. The underlying question, that at least permits a modicum of objectivity, is “What do we need to do to keep this economy growing and expanding?” The consequence of which will feed into all tributaries of society hoping to benefit those involved in the market. But an answer to this question won’t come easy. There is no clear route nor is there a singular truth to be found, only a comparative analysis of what is best for society.
I will try to identify the landmarks atop this capitalistic terrain that will hopefully provide us with a direction to where the answer(s) may lie. Questions such as, Is the Consumer Price Index (CPI) a true indicator of our prosperity? What about the rise in the median family income? Why hasn’t government fixed our social ills? How do Corporation justify themselves? What is the affect of Unions on business? How does any of this explain the gap between rich and poor ? These questions all try to answer, or at least give an indication, about an aspect of society’s progress that forms our impression about how well we are doing today compared to the past few decades. But, as Samuelson states,
“We are caught between the promises and expectations of the past and the insistent social and economic condition of the present. Sooner or later, something will give. It must. Either we will revise our expectations or condemn ourselves to constant disappointment.”
Economic Definitions & Concepts
Consumer Price Index (CPI): Index of inflation measuring prices of a fixed ‘basket’ of consumer goods, weighted accordingly to each component’s share of an average consumer’s expenditures.
Government Budget Deficit: Occurs when government expenditure exceed government revenues.
Inflation: Continual rise in the price level
Supplemental Security Income (SST): Federal programs that pays benefits, based on need, to the elderly, blind and disabled.
Technological Change: An increase in the range of production technique that provides new ways of producing goods.
Business Cycle: The upward or downward movement of economic activity that occurs around the growth trend.
Derived Demand: The demand for factors of production by firms, which depends upon consumers’ demand
Economic Profit: Profit (total revenue - total costs) defined according to economist’s definition of costs.
Monopolistic Competition: Many competitive firms in the marketplace.
Perfect Competition: Infinite competitive firms in the marketplace.
Marginal Revenue Product: Additional revenue a firm receives when it hires an additional worker.
Efficiency Wages: An above-average wage paid to a worker for bringing forth better effort.
Size Distribution Income: The relative division or allocation of total income among income groups.
Correlation: The joint movement of data points
Causation: A change in one data point causes another data point to change.
Analyzing the Problem
1.0 On Government
A report released by Senate Finance Committee led by economist Michael Boskin of Stanford titled “ Toward a More Accurate Measure of the Cost of Living” has begun a debate over the validity or accurateness of the Consumer Price Index (CPI). The report argues that the CPI has been significantly overstated at least since the 1970s and should be revised. The commission’s recommendation which calls for a truer cost-of-living index, have significantly budgetary implications, notably: government budget deficit and entitlement programs like Supplemental Security Income (SST). The CPI drives both automatic increases in federal handouts like Social Security and inflation adjustments in income tax rates. The commission believes that the CPI is overestimates inflation by at least 1.1 percentage points a year which translates into more than a trillion dollars in federal taxes and outlays between now and the year 2008.
By challenging the validity of the CPI, it also challenges our ‘gloom-and-doom’ view of the industry and economy at large. As Boskin points out in an article in the Wall Street Journal , “ The implications of overstating inflation for understanding economic progress are equally striking. Instead of falling by 13%, real hourly earning have risen by 13%, from 1973 to 1995. Certainly, there has been a slowdown in wage growth, but not a decline. Real median income for families over the same period of time grew 36%, not the puny 4% in the official statistics that deflate the CPI.”
Albeit, the report has its critics, but, if Boskin is right, than the world as we know it today is not gloomy and nor should our children expect an impoverished future. This ties in directly with what Samuelson claims in his article about our perception of our reality versus what we’ve been told over the last 2 decades. For example, if we look at the chart provided on page 27 (Progress But Not Perfection), we can see increases across many segments of society with regard to our standard of living.
As government moves to adjust the CPI, one must question their motivation. “Lacking any strategy to get rid of inflation, the intend to redefine it. Their new formula will show prices going up more slowly. This will help the government,...” If government statistics reveal less inflation, the tax brackets won’t adjust to price movements. The difference between actual and official inflation will net billions for the government. So then the real purpose, disguised quite nicely, is to extract more wealth from the taxpayers in a manner they won’t detect.
In Samuelson’s book he talks about the Age of Entitlements. This refers to a period after World War II where we expected government to be compassionate and all knowing when it came to matters of the economy. And what defines our pessimism today is the loss of confidence in the future. Part of the answer lies in what he states:
“They (political leaders, government) peddled visions of the perfect society and promised more then they could deliver. The result is a cycle of cynicism. Promise regularly exceeds performance, and voters conclude that all politicians are dishonest”
A good example of government intervention gone awry when trying to control inflation is when during the Nixon era Social Security benefits increased automatically by inflation. The higher the prices, the larger the paycheck. “A deliberate dumbing down of the CPI is a way of saving money.” The question to ask is why not simply, in this case, reduce or eliminate cost-of-living adjustments themselves? The reason, “It turns out that the American Association of Retired Persons opposes this direct route (emphasis added), but won’t oppose changing the inflation rate.” This gets back to Samuelson’s point about dishonesty in government.
On a final note with respect to entitlements, Samuelson hits the proverbial nail-on-the-head when he discusses how entitlements accentuate some social division. He states,
“The effect has been to strengthen a sense of group identity that transcends ordinary citizenship and at times is rivalrous.” He then goes on to say, “ People expect government to solve all their grievances, economic or otherwise, and blame government when it fails to deliver.” And finally, that, “Expanded government benefits for some can’t be had except at the cost of higher taxes for others or higher budget deficits for all.”
2.0 On Technology
Technological changes provide brand new ways of producing goods and consequently new services. A new technological innovation has the tendency to disturb the norm rhythms of production and the costs associated. Samuelson’s book seems to capture the positive side of technological innovation instead of succumbing to the popular rhetorical of its subsequent social upheavals and ensuing job displacements.
“Consider women’s greater freedom to move from housework to paid work, which was greatly enhanced by the advent to washers, dryers, dishwasher and other appliances.”
Although Samuelson goes on to say that their is more ambivalence today to this unqualified ‘liberation’, it should not detract from the significant affect that technology has had on reshaping, not only methods of production, but our social construct.
Technological advances were easy to measure in the earlier days. When progress is just a matter of getting more, it is often easier to recognize and measure. Innovation like those mentioned above were exciting back then and where measurable signs of progress. “Technology was a less capable yet far more wonderful thing in 1939 that it is today.”
But progress isn’t as obvious as it was in the earlier, poorer eras. “The ‘extensive’ phase of economic progress...is over for most products in the United States.” And that , “We’ve reached the ‘intensive’ stage, were incremental improvements and niche (market) products...become important.”
Samuelson reminisces about American’s expectation of both government and technology being able to provide the ‘right’ strategies for eliminating social perturbations. It got to the point where we expected them,
“We were entitled to solutions. We had more and more faith that American management and technology, whether wielded by corporate executives or government social engineers, could do almost anything.”
But as technological advances are introduced, a new dynamism creeps in to disturb the market’s equilibrium and create a new derived demand. Samuelson’s view of economic Darwinism is best expressed as follows,
“New technologies and business methods displace old ones; more efficient firms replace the less efficient.”
He go on to use Joseph Schumpeter’s term “ creative destruction” to describe this business cycle. The problems that Americans have is not ‘wanting’ to acknowledge this obvious aspect of capitalism. It is wrong for Americans to believe that they can have the best of both worlds, namely security and higher incomes. Whether or not government’s social engineers or corporate executives intended to give the impression of paternalistic overseer’s is inconsequential and does not excuse our continued mental dependency on this dichotomy.
3.0 On Corporations
Corporations also fall victim, in a competitive sense, with the introduction of new technologies. Any company that is making an economic profit in the market place is essentially inviting competition. Assuming we are discussing corporations in the spectrum (of the market structure) to be either Monopolistic or Perfect Competition continuum. It is not wonder that as the marketplace expands to allow for more competition to enter that corporations are faced with having to find ways to maximize profits by looking at Marginal Revenue Product when making decisions on whether or not to hire or consider downsizing.
Our disappointment, as Samuelson points out, is based on our contrived view of the corporation as a benevolent benefactor. Or, as he states,
“...Big Business would grow enlightened. We visualized Good Corporations...that marry efficiency and social responsibility. They would provide good wages, job security and generous fringe benefits.”
4.0 On Unions
In the graph on page 31 of the article titled ‘Squeezed Profit’ we can see how profit margins on the whole have had a declining trend. The competition as it points out is not solely domestic, but international.
It is interesting to note however, that during the period of 1980 to 1990, we begin to see an increase in profit margins by nearly 5%. It is of more interest to refer to our textbook and look at union membership during that same time period and observe that it had its sharpest decline during that time. Granted, part of the reason can be attributed to union success in fulfilling their original charter to protect the best interest of the employees from the exploitational hands of corporations. But, as corporations became more compliant and viewed employees as assets that add value to a company’s long term success, unions became more powerful and bureaucratic imposing at times financial and operational pressures on corporations by demanding higher wages and less flexibility for production issues. When unions accomplished their primary objectives of efficiency wages during that time period, it is not impossible to conclude that it became extremely difficult for companies to compete in the open market.
5.0 On Poverty Gap
The notion, as debated in class, that the rich get richer at the expensive of the poor is ludicrous. As the Colander restates in an article from the Wall Street Journal,
“...it has never been clear what the first observation (i.e., as rich get richer) has to do with the second (i.e., ..., the poor get poorer).”
The histogram shown in the article titled, “ The Rich get Richer...” is again another attempt to make a correlation and link (causation) between the rich and the poor. The Size Distribution Income, similar to a Lorenz Curve, merely shows what each quintile is making as a percentage of the population. In no way should this data be perceived as a Marxist gauge of exploitation by the rich on the poor.
I’ve attempted to address various aspects of the article with what I’ve witnessed and what is being reported in media. One cannot answer the question of whether or not we are better off today without realizing that the answer is subjective. Whether or not Americans are better off cannot be boiled down into some formula with specific parameters. One cannot list down the pros and cons, weight them and sum up the total in order for you to know the answer. The real answer lies in how we’ve faired during this change. This may sound selfish, but its realistic.
You have government on one hand that is unable to manage, let alone control, the perturbations of the market. You have corporations who’ve lost their objectivity by trying to increase revenues in the short term. They’ve also developed an altruistic mentality at times that has seen dollars go into programs that have nothing to do with business. You have people (e.g., senior citizens) who speak of concern for their children’s financial futures and at the same time fight to keep benefits far beyond what they’ve contributed. You have people who group together in unions to force (or coerce) employers into paying them more than they ought to get. In the public sector its called extortion, in the corporate sector it’s called collective bargaining.
So, no matter how selfish you think answering the question of being better is self-centered, stop for a moment and realize what is happening. I am not advocating that you take advantage of others, or act immorally. I am simply saying that you should look out for your best interest. The difference between selfish and self-interest is that the latter takes advantage of no one and doesn’t allow anyone to take advantage of you.
Government, corporations, unions and so on can not be counted on to look out for your long term best interest. The best way to keep this economy moving is to begin reducing their influence in all aspects of your life. Minimizing their intervention (government) and your dependence (corporations) is the driving force that will move us into the next millennium.
Recommendation: The fundamental question that encompasses all concerns is how to best to keep this economy moving and expanding. My plan of action would be outlined as follows:
What Should Government Do?
Whether or not the CPI is adjusted to reflect actual inflation, does not answer the overreaching concern over control of the National Deficit and growing United States Debt. All blessings and evils will flow from this central issue. Concerns over our future are partly based on governments inability to manage our societies accounts.
Concerning government distrust, institute term limit. This will help reduce the enticement factor of power that most politicians succumb to. See “Trashing Our Leaders” in the article.
The government should go to a Flat-Tax plan (15-18%). I do not recommend a 2- tier approach since it still exploits one group at the expense of another. This will increase the incentive of workers to want to work.
Military defense has been cut and measures should be put in place to minimize expenditure and maximize resources. R&D should be scrutinize, but contextualized with respect to the dynamics of international aggression.
Entitlement Programs: Government must take a hard-line, as it did with the Welfare Reform Act, to rehabilitate our spending habits. All affirmative action and/or quota systems should be dismantled and return to a universal policy of pay for performance based on ability and not social categorizations. Subsidy programs (e.g., sugar, farming...etc.) have to be eliminated in order for the invisible hand to work. Also, any type of corporate welfare that gives companies an unfair advantage in the market, whatever the guise may be.
All the above measure serve to reduce government by eliminating a lot of the overhead associated with maintaining these mini-bureaucracies
What Should Corporations Do:
Any corporation that exchanges short term profits for long term thinking and planning will fail eventually. Corporations need to put measures in place to ensure that they are monitoring the market and not their personal pocketbooks. Incentives for CEOs should include, aside from increasing market share, growth and job creation internally. This is typically driven by introducing new, innovative products into the market.
I do not agree that CEO should have a salary cap and that they should be obligated in any way to contribute to funds or charity unless they choose to do so. Companies provide for the community by creating jobs and create long term value by using monetary resources to grow the company, not to give it away. Money going to charity should first be earmarked for R&D.
Maintain vigilance over institute policies that eliminate discrimination.
Find way to incentives employees without resorting to price wars with other companies.
Finally, remain competitive.
What Should Individuals Do?
If you're on public assistance, get off it.
If you're not trained, get trained.
Human Capital: It is a foregone conclusion that technology will continue to advance. It follows that we are to remain ‘employable’ we must move along the same at axis of progress.
Victor Antonio G. is an author and motivational speaker. For more info go to:
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