Comments in Response to Marxism-Inspired Article in New York Times

The main article on page one of today’s (February 10, 2014) New York Times is inspired by Marxism. The article attempts to deny that raising wages reduces employment. The substance of its denial is the mere fact that employers make this claim. The Times’ position is that if capitalists claim something, it can’t be true—because it is capitalists who claim it. The Times and its staff are wedded to the proposition that capitalism is a system functioning exclusively in the interests of a handful of capitalist exploiters and against the interests of the overwhelming majority of mankind (think of the “1%” vs. the “99%,” which is the current popularization of this dogma). This belief is assumed to be true beyond any possible question and any attempt to challenge it, it is believed, can only reflect dishonesty on the part of whoever dares to do so and should immediately be ignored as soon as the slightest connection can be found to the interests of capitalists.

I have tweeted on the article on Twitter.

More importantly, I’ve managed to get The Times to publish two comments of mine relevant to the article. My comments appear on The Times website, accompanying the online version of the article. Each comment can be found by clicking on its title.

My First Comment that can be found on The New York Times website:

One of the most fundamental principles of economics is that, other things being equal, the higher is the price, the lower is the quantity demanded. Applied to wages, this means that, other things being equal, the higher is the wage, the smaller is the number of workers employed.

The truth of these propositions is not diminished in any way by the fact that interested parties use them. In this case the interested parties are using a scientific truth, just as a patient with an interest in saving his life relies on the scientific truths established by medical science.

Empirical studies showing wage increases without decreases in employment, indeed, wage increases accompanied by actual increases in employment, do not invalidate the fact price (wage) and quantity demanded are inversely related. The relationship holds OTHER THINGS BEING EQUAL. If over the same period of time that wages rise, the quantity of money and volume of spending in the economic system also rise, the same or a larger number of workers can be employed. However, if their wages did not rise, or rose by less, the number of workers employed would have increased by still more. In this case, the unemployment that results from a higher wage is to be understood as being in comparison with the greater amount of employment that would have existed in the absence of the wage increase.
A fundamental fact to keep in mind is that any given amount of spending can buy more the lower are prices/wages. This is a fact of arithmetic.

My Second Comment that can be found on TheNew York Times website:

Whoever is concerned with raising the standard of living of the average wage earner needs to realize that that standard of living is not determined by the height of the worker’s money wages. What it is determined by is his wages RELATIVE TO THE PRICES he must pay as a consumer. Before the introduction of the Euro, every Italian worker earned millions every year—millions of almost worthless Lira. Despite being multi-millionaires, the standard of living of Italian workers was very low, because prices were extremely high.

The standard of living of all workers taken together is simply not increased by increasing their money wages. What increases money wages across the board is basically just an increase in the quantity of money and volume of spending in the economic system. But that same increase operates equally to raise prices, thereby preventing any rise in the general standard of living.

What allows the workers’ standard of living to rise is improvements in the output per worker. The same number of workers, or a larger number of workers, each on average producing more, implies an increase in the supply of consumers’ goods relative to the supply of labor, and thus, as far as it goes, a fall in prices relative to wages.

However counterintuitive it may be, the rise in the workers' standard of living comes about not by virtue of the workers earning more money, but by virtue of the rise in output per worker holding the rise in prices below the rise in wages.

The Very Deserving Super Rich

In a recent New York Times column titled “The Undeserving Rich,” Paul Krugman writes, “You almost never see apologists for inequality willing to talk about the 1 percent, let alone the really big winners [the top .1 percent].”
 
Here is my totally unapologetic defense of the most extreme economic inequality: the building of great business fortunes, fortunes reaching into the billions and tens of billions of dollars. Such fortunes are accumulated by a minority far smaller even than .1 percent of the population.
 
I do not offer a defense of each and every such fortune, only those which are built on a foundation of productive innovation and the saving and reinvestment of the proceeds of such innovation. I exclude fortunes built on a foundation of government subsidies, or government regulations harming competitors, and those built merely on a foundation of inflation and credit expansion. In today’s “mixed economy,” many great fortunes have mixed foundations. In such cases, my discussion applies only to the free market element in the mixture.
 
A great business fortune is accumulated by means of earning a high rate of profit on capital and heavily saving and reinvesting that high rate of profit year after year. For the sake of illustration, earning a 100 percent rate of profit and then saving and reinvesting practically the entire profit achieves a doubling of capital every year. At this rate of increase, in 10 years an initial capital of $1 million, say, will grow approximately 1,000-fold to somewhat more than $1 billion. This is the necessary arithmetic of fortune building: the combination of a high rate of profit and a high rate of saving and reinvestment to achieve a high compound rate of growth of capital.
 
A high rate of profit is achieved by introducing newer, better products or producing existing products at a lower cost.
 
Sooner or later, competition brings down a high rate of profit to the general level. To go on earning it, further innovation is necessary.
 
For example, to maintain its high rate of profit, Apple has had to repeatedly improve its products and introduce major new products. To maintain its high rate of profit, Intel has had to repeatedly reduce the cost of production and price of its computer chips, to the point where gigabytes of RAM now sell for less than megabytes did a generation ago.
 
Had Apple or Intel stood still, its initially very profitable products, made obsolete by competition, would now be selling at huge losses.
 
The high profits are generally invested in the means of producing the very kind of products in which the innovations take place. For example, Apple’s profits are invested in the expanded and improved production of Apple’s products.
 
Thus, business fortunes under capitalism represent ever better, less expensive products produced with capital constituted by those fortunes.
 
The fortunes originate in profits and are used as capital. Both ways they serve the general buying public. They also pay wages and salaries.
 
The existence of fortunes under capitalism benefits everyone in his capacity both as a buyer of products and seller of labor.

The process of fortune building has been the driving force of economic progress and rising living standards for more than two centuries. It was responsible for the steam engine, the cotton textile industry and mass produced clothing and shoes, railroads and steamships, coal mining and iron and steel production, oil and natural gas production, electric power and light, the automobile industry, motion pictures, radio and television sets, and consumer appliances of all kinds, such as air conditioners, refrigerators, and washing machines, and now, in our day, such things as personal computers, tablets, and smart phones. At every step, the building of the fortunes rested on innovations and then their increasing and improved production based on capital accumulated out of profits earned from the innovations.

Those who have earned their fortunes by means of such positive productive contributions fully deserve them. They are truly benefactors of mankind.

The enemies of such economic inequality are ignorant of economics. They know nothing about profits, innovation, or capital. They do not realize that in entailing the confiscation of high profits and aborting the earning of fortunes, their policies would stifle economic progress.

The enemies of such economic inequality believe that wealth is a pile of consumers’ goods that somehow is just here and can be taken for granted. They believe that the capitalists, whom they depict as fat men, allegedly have too much of this pile. Some of it, they claim, must be given to the starving masses. On this basis, they are led to advocate a policy of seizing capital in order to consume it— a policy of eating the seed corn and being impoverished.

In their ignorance, the enemies of the free-market’s economic inequality are fueled by envy and resentment, biting the hands that feed them.

Socialism/Communism is their philosophy. Stalin and Mao are their heroes. Famine, slave labor camps, and mass death are their legacy.
  
Copyright © 2014 by George Reisman. This article may be reproduced electronically provided this note is included in full. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics, and the author of Capitalism:A Treatise on Economics and other titles  His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com. Follow him on Twitter at @GGReisman.

Preventing Low-Skilled Workers from Competing: a $15 Minimum Wage

The campaign for a $15 minimum wage has been in and out of the news over the last few months. It will almost certainly be back in the news again before very long. What follows is a brief analysis of the consequences of enacting such a minimum wage, one which is far above the prevailing market wages of millions of workers.

The efforts underway by the Service Employees International Union, and its political and media allies, to raise the minimum wage from $7.25 to $15 per hour would, if successful, cause major unemployment among low-skilled workers, who are the prospective alleged beneficiaries of those efforts.

The reason is not only the fact that higher wages serve to raise costs of production and thus prices, which in turn serves to reduce physical sales volume and thus the number of workers needed. There is also another, equally, if not more important reason in this case, a reason which is only very inadequately indicated by reference to the substitution of machinery or automation for the direct labor of workers when wages are increased.

This is the fact that a low wage constitutes a competitive advantage for less capable workers that serves to protect them from competition from more capable workers. A wage of $7.25 per hour for fast-food workers, for example, serves to protect those workers from competition for their jobs from workers able to earn $8-$15 per hour in other lines of work. The workers able to earn these higher wage rates are not interested in seeking employment at the lower wage rates of the fast-food workers.

But if the wage of the fast-food workers, and all other workers presently earning less than $15 per hour, is raised to $15 per hour, then these more capable workers can now earn as much as fast-food workers as they can in any of the occupations in which they had been working up to now .

Moreover, the widespread rise in wage rates to $15 per hour will cause unemployment in all of the occupations affected. The unemployed clerks, telemarketers, factory workers, and whoever, who otherwise would have earned between $8 and $15 per hour, will have no reason not to apply for work in fast food, which will now pay as much as any other occupation that is open to them. And since those workers are more capable, it is overwhelmingly likely that to the extent that they do seek employment as fast-food workers, they will be preferred over the low-skilled workers who presently work in fast-food establishments. Thus, the rise in the wage of the fast-food workers will serve as an invitation to the competition of large numbers of workers who do not presently think of working as fast-food workers and who, being better qualified, will almost certainly take away their jobs.

Between less employment overall in the least-skilled lines of work such as fast food, and the incentive created for vastly increased competition for employment in those lines coming from more qualified workers, the effect could well be to close those lines altogether to the employment of workers at the low end of skill and ability. That, of course, would deprive these people of the opportunity to acquire skills and abilities from work experience that otherwise would have enabled them to become capable of performing more demanding jobs later on.

What the demand for a $15 an hour minimum wage represents is a case of low-skilled workers being led to reach for a high-wage “bird in the bush,” so to speak. Unfortunately, at the high wage, there are both fewer birds in the bush than are presently in hand and most or all of them will fly away into the hands of others, who possess greater skills and abilities, if the attempt is made to reach for them.

This must ultimately be the result even if somehow, the present fast-food workers and the like could be enabled to keep their jobs for a time. Even so, practically every time that it became a question of hiring someone new, the new employees would almost certainly be drawn from the ranks of workers of greater skill and ability than those who had customarily been employed in these jobs. Thus, even if not immediately, in time there would simply be no more room in the economic system for workers at or near the bottom of the skills ladder.

No one can question the desirability of being able to earn $15 an hour rather than $7.25 an hour. Still more desirable would be the ability to earn $50 an hour instead of $15 an hour. However, it is necessary to know considerably more than this about economics before attempting to enact sweeping changes in economic policy, changes to be achieved by attempting to organize a mass movement that is based on nothing but a desire for economic improvement and no real knowledge whatever of how actually to achieve it.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. His website is www.capitalism.net. Follow him on Twitter at @GGReisman.

 

 

 

 

 

 

 

Uh Plus Duh May Spell Trouble for Obama

Uh: Headline in The New York Times of Thursday, October 31, 2013: “Voters’ Anger Over Shutdown Is Inspiring Democrats to Run”

Duh: Headline in The New York Times of Friday, November 1, 2013: “Troubled Start for Health Law Has Democrats Feeling Anxious”

Uh Plus Duh May Spell Trouble for Obama: This is because the government shutdown was the result of the Democrats’ adamant refusal to delay the imposition of the Obama health law, which was clearly identified by its Republican opponents as a “train wreck waiting to happen.”

The voters are now seeing that train wreck in the form of a totally botched web site designed to handle enrollment in the Obama program. They are also seeing it in sharply increased health insurance premiums and reduced insurance coverage, results that have occurred because ObamaCare forces medical insurance companies to accept people with pre-existing conditions at the same premiums as people without such conditions. This requirement means that people without preexisting conditions must help to cover the higher costs of insuring those with preexisting conditions. When the costs of providing insurance are increased, premiums must increase and/or coverage decrease to hold down costs, or companies must go out of business.

This carnage could have been avoided, along with the government shutdown, if only Obama and his henchman, Harry Reid, the Democrat Majority Leader of the Senate, had relented and postponed the imposition of ObamaCare. That would have given the members of Congress a fresh opportunity to actually read and study the law they passed without bothering to perform this very elementary and essential aspect of their duties as the people’s representatives.

If the voters have the ability to put two and two together, which, unfortunately, is by no means certain, then perhaps there will soon be a third headline in The New York Times, one to the effect that those responsible for ObamaCare are fleeing to the hills to escape the wrath of the electorate.

Copyright © 2013 by George Reisman. Permission is given to reproduce and distribute this note electronically, provided the present paragraph is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: ATreatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com.

 

 

Leftist Fanatics Responsible for Government Shutdown

In 2010, a Democrat-controlled House of Representatives, without a single Republican vote, passed “ObamaCare” by a margin of 219 to 212. In a staggering act of misfeasance, hardly a single member had read, let alone studied, the 1,900 page law (2,700 pages according to some authorities), which had been dumped into the House only days earlier. The 219 members of that House who voted for ObamaCare were willing to impose massive, and massively expensive, legislation on the American people without any real idea of what they were doing. Had those members been members of the board of directors of a private corporation, their complete and utter lack of due diligence would almost certainly have exposed them to enormous law suits and, quite possibly, criminal penalties.

Largely in consequence of the passage of ObamaCare, the House of Representatives elected later in 2010, contained a substantial Republican majority, which was continued in the elections of 2012, despite Obama’s reelection, and is the basis of the Republicans’ present control of the House.

Today, the Republican majority in the House is exercising its constitutional power over the federal government’s spending by insisting on excluding any funds for the implementation of ObamaCare in the coming fiscal year. This is actually an extremely modest exercise of the House’s power over the budget. It should be seen as giving the Democrats in the House and Senate an opportunity finally to read and study the law they have passed (along with the 20,000 pages of government regulations that have already been written in order to carry out its provisions). Moreover, the elections of 2014 will give the supporters of ObamaCare a chance to present their case to an electorate that can then decide the issue by determining the makeup of the next Congress.

However, instead of agreeing to this very modest and thoroughly justified proposal, the Democrat leadership of the Senate has dug in its heels in a fanatical defense of ObamaCare, to the point of closing down major portions of the federal government in order to implement it, irrespective of not knowing what it is and irrespective of its consequences. The Republican majority in the House does not want to shut down the federal government or have it default on the national debt (which could happen later this month). It is fully prepared to fund the federal government and has repeatedly done so, with the single exception of ObamaCare. It is for the sake of maintaining ObamaCare that the Senate Democrats have shut down the federal government.

The House Republicans should hold fast, even to the point of a default on the national debt, for which the supporters of ObamaCare, not they, would be responsible, if it took place. Their first obligation is to uphold the Constitution of the United States and protect its citizens from a government that knows no limits to its reach and power, as manifested in ObamaCare.

Yes, terrible consequences can result from upholding principles. The United States has fought wars in order to uphold the principle of individual freedom. The House of Representatives should be willing to risk a default on the national debt to uphold that same principle today.

Few people in public life today have any principles, neither Democrats nor Republicans. Most of them are concerned with nothing beyond favorable “photo-ops” and their standing in the latest public opinion polls. They change their views as though they were outfits of clothing, to be changed whenever doing so will make them look better by some undefined standard. In the same way, they will talk with anyone and negotiate with anyone, no matter how evil and vicious, if they believe that doing so can improve their popularity.

This should imply that if the Republicans do hold fast, the Democrats will yield. The only thing that makes this assessment uncertain is that it well may be that the Democrats in the Senate hate individual freedom and love the augmentation of government power more than they hate or fear anything else. They well may hate liberty more than they fear nuclear weapons in the hands of Iranian religious fanatics or North Korean Marxist fanatics. And if that is the case, then while they would meet and negotiate with the Iranians and North Koreans and in some ways agree to their demands, they will not be willing to be as accommodating to the House Republicans and thus will be willing to bring about an actual default on the national debt.

The only way to deal with this possibility is for the Republicans to do everything in their power to make sure that the American people understand what the issue is. Namely, responsible, knowledgeable legislation consistent with the principle of individual freedom, or reckless, power-grabbing legislation of a kind enacted by Congressmen who might as well have been drunk or asleep as far as their votes for ObamaCare were concerned.

If the American people can be made to understand this, then even a default on the national debt will serve as the basis of a great victory and be well worth the price. It would establish a turning point in American history: the point at which the relentless advance of government power was stopped by unyielding, principled opposition.

There are signs that here and there in the Republican Party, there are some men of principle, men who understand what is at stake and are prepared to do whatever is necessary to remove the legislative detritus that is ObamaCare. If their existence can be confirmed by their behavior in the coming weeks, it will be remarkable indeed, representing a virtual evolutionary leap in the ranks of our country’s politicians.

Unfortunately, Speaker Boehner’s pledge, reported in The New York Times of October 5, to avoid default, implies that the Republican opposition will collapse, isolating whatever men of principle there may be in the Republican Party. The pledge not to allow a default should have come from Harry Reid, the Democrat majority leader of the Senate. Yet, somehow, Reid and the other supporters of ObamaCare are thought to be free of any obligation to avoid a default. Only the opponents of ObamaCare are thought to be under such obligation.

This perverse inequality of obligation is taken for granted as proper in the media and probably by most of the general public. Barring some unforeseen development, it will almost certainly result in yet another Republican capitulation rather than in the great victory that is possible if the Republicans stick to their principles. Let the Democrats and the media think of these Republicans as lunatics if necessary. They are almost always prepared to humor lunatics through compromise. This time, let them compromise their statist principles by giving up ObamaCare for the next fiscal year, for the sake of avoiding a default on the national debt. Surely, there is no moral basis for maintaining a law that was passed by men who did not and could not know what they were doing and which as more is revealed about it, can only be expected to wreak great harm.

 

Copyright © 2013 by George Reisman. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com.

 

 

 

September 29, 2013 is the 132nd Birthday of Ludwig von Mises.

Read Reisman’s tribute to Mises on the occasion of his 100^th birthday.

Newly Published: Edith Packer's LECTURES ON PSYCHOLOGY

All of Dr. Packer's pamphlets are now together in a book, at Amazon.com, in Kindle format. Price: $9.99.

The full title of Dr. Packer's book is LECTURES ON PSYCHOLOGY A Guide to Understanding Your Emotions.

Here is the book's table of contents:

 
Preface

Chapter 1 The Psychological Requirements of a Free Society

Chapter 2 Understanding the Subconscious

Chapter 3 Anger

Chapter 4 The Obsessive-Compulsive Syndrome

Chapter 5 The Art of Introspection

Chapter 6 Toward A Lasting Romantic Relationship, Part I

Chapter 7 Toward A Lasting Romantic Relation Ship, Part II

Chapter 8 Happiness Skills

Chapter 9 The Role of Philosophy in Psychotherapy

Chapter 10 An Interview with Edith Packer on Psychotherapy

About the Author


 
For further information about this book, please click on the book's title, above, or simply click right here.

 

 

 

More Dangerous than the Factory Building Collapse

The recent collapse of a garment factory building in Bangladesh, resulting in the death, at latest count, of more than 1,100 workers who were employed there, has led to international outrage not only against the building’s owner but also against the various retailers in the United States and Europe, many of them prominent, that have sold clothing produced in that building. It is demanded that they assume responsibility for working conditions in the factories that supply them and not deal with factories that do not provide safe and humane conditions and pay fair wages.

Such demands rest on the belief that, if left free of government interference, the profit motive of businessmen or capitalists leads them to pay subsistence wages to workers compelled to work intolerable hours in sub-human conditions. And, more, that the profits allegedly wrung from the workers in this way exist in the hands of the capitalists as a kind of disposable slush fund as it were, at least some more or less substantial portion of which can be given back to the workers from whom they were taken, or used on behalf of those workers, with no negative effect except to deprive the capitalists of some of their ill-gotten gains. It is generally taken for granted that the reason the kind of conditions that prevail in Bangladesh and the rest of the Third World do not exist in the United States and Western Europe is the enactment of labor and social legislation, and that what is needed is to extend such legislation to the countries that do not yet have it.

Every aspect of this set of beliefs is wrong and its consequences are highly destructive, above all to the masses of workers in the Third World who already live close to starvation and who are in danger of being driven into it by needlessly increasing the cost of employing them either by arbitrarily raising their wages or by requiring that they be provided with improved working conditions that must be at their expense and which they cannot afford.

One of the most elementary propositions of the science of economics is that the higher the price of anything, the smaller is the quantity of it that will be purchased. This applies to labor no less than to goods. If wage rates in Bangladesh are arbitrarily increased, fewer workers will be employed in Bangladesh. In that case, workers who would have earned low wages will earn no wages. They will starve. If employers in Bangladesh are compelled to make improvements in working conditions of a kind that do not pay for themselves, the cost of those improvements represents the equivalent of a rise in wage rates. Again, there will be unemployment. The unemployment could be avoided only if workers’ take-home wages could fall sufficiently to offset the cost of the improvements. In that case, the situation would be comparable to making the workers use their already meager wages to pay for improvements that they simply cannot afford.

These are not outcomes that the advocates of imposing labor standards want. What they want is higher wages and better working conditions. Their problem is that they do not realize what is actually necessary to achieve these results.

What will achieve these results is leaving business firms in Bangladesh and throughout the Third World alone, to be as profitable as they can be. (It should be obvious that the loss of a factory building and its machinery was not profitable and that while it may be legitimate to denounce the building’s owner for criminal recklessness and negligence, it is simply absurd to denounce him for seeking profit, when what he actually achieved, and could only achieve through such conduct, was total loss.)

The high profits that can be earned in a Third World country, if not prevented by too many obstacles, will be heavily saved and invested, mainly in that Third World country. As the experience of Taiwan, South Korea, and now even mainland China  shows, a generation or more of such a process results in a vast accumulation of means of production in the country—i.e., numerous new factories, with better and better equipment. This results in an intensified competition for labor and thus rising wage rates. As wage rates rise, workers can more and more afford to accept lesser increases along with improved working conditions of a kind that must be at their expense.

Economic freedom, not government interference, is the road that the wealth of nations travels.

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Copyright © 2013 by George Reisman. This article may be reproduced electronically provided this note is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Amazon Kindle Edition, 2012). His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com.

 

“Tax Expenditures”: Not Taxing Is Allegedly Spending

Runaway government spending is among the most important economic problems of our time. It is absolutely urgent that it be brought under control and progressively reduced until it is sufficient to provide for no more than the essential government functions of defense and justice. Only then will the citizens have the greatest possible individual freedom to decide how their earnings are spent and the greatest possible motivation to increase their earnings and improve their standard of living.

As recognition of the importance of bringing government spending under control has grown, the enemies of individual freedom have seized upon a tactic which they hope will avoid the necessity of reducing government spending, indeed, will allow them to go on increasing it, under a fraudulently created appearance of reduction. The tactic is described by the words “tax expenditure.”

A tax expenditure is a tax that the government has the power to collect but chooses, for any reason, not to collect. More precisely, a tax expenditure is a fictional, non-existent tax accompanied by an equivalent fictional, non-existent expenditure. Although the government does not actually collect the tax, the fact that it has the power to do so is used as the basis for pretending that it does collect the tax and that it uses the proceeds to make an expenditure that goes to those from whom it has chosen not to collect the tax. In this way, the taxes that are not collected are treated as though they were collected and then used as a subsidy paid to those from whom they were not collected. In effect, the government’s not taking is alleged to be giving. Its not taxing is alleged to be spending.

Examples of tax expenditures recently provided by The New York Times are the taxation of capital gains and dividends at lower rates than ordinary income; allowance for deductions from taxable income of the payment of interest on home mortgages, the payment of property taxes, state and local income taxes, charitable contributions;  and the absence of taxation on employees for health insurance and pension benefits paid for by employers on their behalf. All in all, according to The Times, “Tax expenditures cost the federal government more than $1 trillion a year in lost revenue.”

When one recalls that in World War II, there was a 90 percent bracket in the federal income tax, and that the government has it in its power to impose such a tax rate on everyone but presently chooses not to do so, then it becomes clear that by the logic of the concept, the cost of tax expenditures to the federal government is not just $1 trillion, but many, many trillions. It is, in fact, everyone’s entire income and wealth.

The philosophical principle underlying the concept of tax expenditure is that we are all serfs or slaves in the power of our Lord and Master the Almighty Government. It owns us and all of our income and wealth. All that we earn and possess, we do so by virtue of its largess, by virtue of its giving to us what we may have believed was ours to begin with.

The concept of tax expenditure is as hostile to the principles on which the United States was founded as any concept can be. It flies in the face of the fact that here, in this country, government is supposed to be the servant, not the master; that it is the people who support the government, not the government that supports the people; and, above all, that what the people have earned and saved, they hold by right, not subject to any arbitrary appropriation by the government.

What the government does not take, even though it may have the power to take it, is not something that the government gives. It is the property of the individual citizens who earned it. They do not receive any of it from the government by virtue of the government’s decision not to take it from them.

To claim that government spending will somehow be reduced by reducing tax expenditures is a moral outrage. Its only possible meaning is increasing taxes, which will allow government spending to continue on without reduction, indeed, with possible increase.

When, for example, the government taxes capital gains and dividends at a lower rate than ordinary income, it is not giving anything to the people who pay the capital gains and dividend taxes. On the contrary, they are giving money to the government; they are giving the taxes they pay. The fact that they are giving the government less money than it would like to receive and has the power to take, does not change that fact. If the tax rate on these incomes were increased, there would be absolutely no reduction in government spending. But the government would be in possession of additional funds with which to continue its spending and possibly increase it.

To reduce government spending means to reduce the money the government pays out, not to reduce the money it has chosen not to take in. The first is a reduction in government spending; the second is an increase in taxes. Confusing the two is of benefit only to con men who worship an omnipotent state.

Copyright © 2013 by George Reisman. Permission is hereby given to reproduce this article, royalty free, in digital/electronic format, provided only that this biographical note is included. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012).  His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com. See his Amazon.com author’s central page.

 

New Kindle Book by Reisman

Labor Unions, Thugs, and Storm Troopers is now available as a Kindle book from Amazon.com, for 99¢. It comes with no "digitial rights management," which means that it's not copy protected and that you can send copies to whomever you like, without any additional charge. Here's its cover Please be sure to note the caption under the drawing.

 



Labor Unions, Thugs, and Storm Troopers

1. New York Times Columnist Eduardo Porter on How to Raise Wages

The following three paragraphs are a quotation from the article "Unionizing the Bottom of the Pay Scale" by New York Times columnist Eduardo Porter. The article appeared on the front page of the business section in the December 5, 2012 National Edition. The subject of the article is the present attempts going on to unionize the employees of such establishments as fast-food restaurants and Walmart, whose workers are at the low end of the general wage scale in the US.

Union leaders know they are fighting long odds — hemmed in by legal decisions limiting how they can organize and protest, while trying to organize workers in industries of low skill and high turnover like fast food. But they hope to have come upon a winning strategy, applying some of the tactics that workers used before the Wagner Act created the federal legal right to unionize in 1935.

“We must go back to the strategies of nonviolent disruption of the 1930s,” suggests Stephen Lerner, a veteran organizer and strategist formerly at the Service Employees International Union, one of the unions behind the fast-food strike. “You can’t successfully organize without large-scale civil disobedience. The law will change when employers say there’s too much disruption. We need another system.”

In the 1990s and 2000s, the S.E.I.U. unionized tens of thousands of mostly Latino janitors from Los Angeles to Houston, including thousands of illegal immigrants, who were until then considered impossible to organize because of their legal status. It did so by putting pressure not only on the building maintenance contractors but also on the building owners who hired them, often resorting to bare-knuckle tactics. In 1990, the union asked members to mail their trash to Judd Malkin, the chairman of the company that owned buildings in the Century City complex in Los Angeles, printing his address on garbage bags. Mr. Malkin met Mr. Lerner soon thereafter.

Porter believes, wrongly, that labor unions are able to improve the standard of living of wage earners throughout the economic system and that they do so by means of securing increases in money wage rates. He, along with almost everyone else, commits the fallacy of assuming that because earning more money is obviously an intelligent policy for an individual wage earner to pursue, it follows that it must be an intelligent policy for all wage earners taken together to pursue. He is totally ignorant of the fact that increases in money wage rates obtained by labor unions reduce the quantity of labor demanded and thereby cause unemployment, less production, higher prices, and an added burden of supporting the unemployed. He is ignorant of the fact that what serves to increase money wages without causing additional unemployment is merely the increase in the quantity of money and consequent increase in the volume of spending in the economic system. But this phenomenon serves equally to raise prices and thus does not improve the standard of living of wage earners.

To state these points in the customary terminology of demand and supply, the only way that wage rates can rise is either if there is less supply of labor, which means unemployment, or more demand for labor, which will also mean more demand for consumers’ goods and thus higher prices of consumers’ goods. Thus, however surprising it may be, we must conclude that higher money wages, whether obtained through less supply of labor or more demand for labor based on a larger quantity of money, simply do not raise the standard of living of the average wage earner. We must conclude that if they really wish to raise the standard of living of the average worker, the unions are utterly misguided in making the increase in money wages their goal. But that is their goal and they have no other comparably major goal.

I want to acknowledge that there is a way that an increase in the demand for labor can raise wage rates without increasing the demand for consumers’ goods and prices. And that is insofar as it takes place as the result of an increase in saving. What would contribute to this would be reductions in government spending accompanied by equivalent reductions in  taxes that are paid out of funds that would otherwise be heavily saved and invested. In this category are the corporate income tax, the progressive personal income tax, capital gains taxes, and inheritance taxes. The additional savings that resulted would be expended in substantial measure in paying additional wages. The wage earners would be in a position to increase their consumption spending correspondingly. This would not represent an increase in overall, total consumer spending, because it would be financed by an equivalent, indeed, more than equivalent reduction in consumer spending on the part of the government. Thus, while wages rose, nothing would be present to make prices rise. Of course, such tax reductions are absolutely anathema to the labor unions and their supporters.

What does improve the standard of living of wage earners is increases in the productivity of labor, i.e., the output per unit of labor. This serves to increase the supply of goods relative to the supply of labor and thus to reduce prices relative to wage rates. It can be accompanied by prices actually falling while wage rates remain unchanged. Or, when the effects of an increase in the quantity of money and volume of spending going on at the same time are allowed for, by prices staying the same while wage rates rise, or by both prices and wage rates rising but with prices rising by less than wage rates.

I must point out that an essential foundation of a rising productivity of labor is a sufficiently high degree of spending to produce capital goods rather than consumers’ goods. This outcome too is supported by reductions in government spending accompanied by equivalent reductions in  taxes that are paid out of funds that would otherwise be heavily saved and invested.

Porter and almost everyone else is totally unaware of these facts. Above all they are ignorant of the fact that the wage earners' standard of living does not rise from the side of wage rates rising but from the side of prices falling. As indicated, the fall in prices need not be an absolute fall. But it must at least be a relative fall. That is, prices must fall at least in comparison with what they otherwise would have been if the only factor operative were an increase in the quantity of money and volume of spending.

When one grasps the fact that the standard of living of wage earners rises from the side of prices falling rather than wages rising, it is but a short step to the conclusion that labor unions are not only utterly ignorant about how to raise the standard of living of wage earners in general, but operate in diametric opposition to the interests of wage earners in general.

Labor unions can raise the standard of living of narrow groups of workers, by gaining monopolistic privileges that limit the number of workers who can be employed in a given line of work or by causing or maintaining an artificial need for the services of workers of given types. But in these cases they reduce the standard of living of other workers.

The workers who are barred from working in the unionized fields must find work in other fields, where their added numbers serve to depress wages. If minimum wage laws prohibit that fall in wages, then the workers displaced end up simply as unemployed or take the jobs of other workers who become unemployed.

Compelling the continued employment of more workers than are needed to produce a product despite the fact that economic advances have made their employment in that line of work no longer necessary, has the effect of maintaining a product price that is unnecessarily high and thereby of depriving wage earners throughout the economic system of the funds they would have had available as the result of a lower price to spend on other products. And, it should be realized, the production of those other products, previously not affordable because of lack of available funds, would have required the employment of an amount labor equal to the labor initially displaced.

In the light of these facts, one can understand how the productivity of labor over the last 225 years or so has risen by enormous multiples with a comparably enormous positive effect on real wages and the general standard of living and no negative effect whatever on the overall rate of unemployment. Indeed, the total number of wage earners employed has also increased enormously, in line with the increase in population made possible by the rise in the productivity of labor and consequent rise in the standard of living.

The only contribution of the labor unions to this process is to impede it. At every step of the way, they fight the rise in the  productivity of labor whenever it threatens to reduce the number of jobs available for their members. Indeed, they openly pride themselves on "making work" rather than making goods, apparently incapable of grasping that making work by requiring more labor to produce a good than is necessary, serves to prevent the production of other goods, that would have been available in addition to the one, particular good they are concerned with.

Labor union membership in private employment has greatly declined over the decades, from about 35 percent in the mid 1950s to about 7 percent today. The reason is the fact that unionization imposes artificially high costs on firms. It does so in the form of above-market union wage rates and reduced efficiency and quality of product resulting from union hostility to improvements in productivity, arbitrary work rules, and the difficulty or even impossibility of firing incompetent workers.  Under such conditions, firms cannot meet the competition of other firms, foreign or domestic, that are non-union, and thus sooner or later must go out of business. The most recent large-scale example is that of Hostess Brands. It finally had to close when one of the major unions it had to deal with was unwilling to accept a wage reduction, with the result that 18,000 workers became unemployed. This kind of story, repeated hundreds of times over, explains the decline in union membership.

To continue in existence, labor unions need "fresh blood" to drain. Their most fruitful source in recent decades has been government employees, who now account for about half of their overall membership. By making huge contributions to the political campaigns of corrupt politicians, and having their members vote for those politicians en masse, the public-employee unions can secure outlandish wage and pension benefits for their members, financed by the taxpayers. In the face of governmental bankruptcies or impending bankruptcies, this process has encountered growing opposition and, hopefully, may now be nearing its end.

I must briefly comment on the specific main subject of Porter's article, the current attempt to unionize the lowest-paid workers in the economic system. If successful, it may well serve to improve the standard of living of those workers in this group who keep their jobs. They will receive higher wages.

But the rise in price of things such as hamburgers and other fast foods, and the kind of goods that Walmart sells, that will be necessary to cover the higher costs imposed by the rise in wages, will result in a reduction in the quantities of these goods that buyers can afford to buy. This in turn must result in a reduction in the number of workers who are employed in producing or distributing these goods. These workers will then either be unemployed or drive down wage rates elsewhere in the economic system.

In addition, the real wages—the standard of living—of workers throughout the economic system who buy these products will be reduced because of the need to pay higher prices for them, including, of course, the very considerable part of this group who are themselves low-income earners. And the prices that they pay will be higher not only because of the union-imposed rise in wage rates, but also because of the union-imposed reductions in the productivity of labor.

Can this outcome really be Porter's and the unions' idea of economic improvement for the poor?

And now I come to one point on which Porter is right, the point that appears in the final paragraph that I quoted from his article. It is Porter's realization that to achieve their goals, labor unions must rely on tactics of intimidation and thus, implicitly, on force and violence. This is the meaning of the "bare-knuckle tactics" that he lauds as having proved successful in union organizing efforts in the past. Porter refers only to "the union ask[ing] members to mail their trash to Judd Malkin, the chairman of the company that owned buildings in the Century City complex in Los Angeles, printing his address on garbage bags." He does not mention such things as preventing access to factories and stores by mass picketing, physically assaulting non-union workers, setting off stink bombs in factories, and shooting out truck tires. But the implication is clear. It is does not go away by using the word “nonviolent” before “disruption.”

Intimidation, force, and violence, that is Porter's and the unions' s theory of how to raise the standard of living of the average wage earner. It is the theory of those whose heads are as empty of knowledge of economics as were the heads of our apelike ancestors.

2. The California Federation of Teachers Incites Hatred Against the Rich

The California Federation of Teachers describes itself, on the home page of its
web site as "the statewide affiliate of the American Federation of Teachers. The CFT represents faculty and other school employees in public and private schools and colleges, from early childhood through higher education."

The CFT is a labor union. Its parent organization belongs to the AFL-CIO. As such, it is an organization founded on precisely the same kind of ignorance of economics that I have just described. The effects of its operation on the quantity and quality of the product of its members and their employers (principally the California Department of Education) are what one would expect from the influence of a powerful labor union. Namely, in this case, very low performance on the part of the students and graduates, who generally rank near the bottom nationwide in math and English test scores.

However, when it comes to matters of knowledge of economics, and all that depends on knowledge of economics, such as understanding much of modern history and modern literature, current events, and contemporary public policy, the effect of its existence is even worse. This is because in these areas, it and many, if not most, of its members, work to fill the minds of young students, who are in school to gain knowledge, with worse ignorance than that with which they came to school. Its and its members' ignorance of economics serves to produce hordes of ignorant malcontents who are hostile to the capitalist economic system, individual rights, economic freedom, and the founding principles of the United States.

(Of course, here and there, one might find a member of the CFT who would disavow all of its destructive beliefs and activities and agree with the principles I've expressed. But can anyone believe that he would be allowed freely to teach those principles? That he would not encounter overwhelming pressure not to do so and that his life would not be made very difficult, to say the least? Whatever else it might be, the CFT is almost certainly not an organization devoted to supporting free inquiry and open discussion that would constitute a challenge to the basis of its very existence. The fact that it uses dues paid by its members to advance its political agenda, irrespective of the convictions and choice of the individual members, is confirmation of this fact.)

It should almost go without saying that in addition to teaching the same kind of pro-union ideas that Porter propounds, the CFT and its members also teach much of the rest of the Marxist body of doctrine, above all, the exploitation theory. This is the belief that capitalists and the rich (in today’s jargon, “the 1 percent”) systematically steal from and impoverish the great mass of the people (i.e., “the 99 percent”).

The vacuum-filled heads of the Marxist “teachers” contain absolutely no awareness of the fact that under capitalism the wealth of the rich is accumulated through the repeated introduction of new and improved, more efficiently produced products that serve to raise the standard of living of everyone. And that as that wealth is accumulated, it does not stand as a giant pile of food on the plates of gluttonous capitalists but as capital, i.e., as means of production that produce the products that everyone—capitalists and non-capitalists alike—buys and that provide the foundation of the demand for the labor of all those who are wage earners. The wealth of the capitalists—the “rich”—in other words, is the source of the supply of goods that non-capitalists buy and of the demand for the labor that the non-capitalists sell. Everything that reduces this wealth, reduces the demand for labor and the supply of products. In both ways, it reduces real wages and the general standard of living.

Thus, contrary to the beliefs of the ignoramuses of the CFT, taxing the wealth of the rich does not serve to transfer food from the plate of a glutton to the plate of a starving person, or to provide benefits of any kind to the poor that in any sense are free. On the contrary, it serves to make people poorer, by reducing the demand for their labor and the supply of products available for them to buy.

In the light of this background, one should consider the animated cartoon video that the CFT released the other day and that is now prominently featured on its web site. The video is titled “Tax the Rich.” It is narrated by Ed Asner, a Hollywood actor.

I urge readers to watch this video in full and listen carefully to Asner's commentary. It is a work not only of ignorance but of the kind of malicious ignorance with which one would try to incite a mob—the kind of ignorance that under the Russian Czars was used to foment pogroms and that under Hitler was used to set off the infamous Krystallnacht, i.e., the night in November of 1938 when Jewish-owned stores across Germany were attacked and wrecked by Nazi mobs.

Hitler depicted the Jews, who comprised not quite 1 percent of the German population, as a sneaky, gluttonously greedy conspiratorial group working to better themselves at the expense of the 99 percent or more of the German people who were non-Jews. He blamed the Jews for Germany’s defeat in World War I, for the hyperinflation that followed, and for the Great Depression. In the same way, the CFT and Asner depict our 1 percent—“the rich”—as another sneaky, gluttonously greedy conspiratorial group working to better themselves at the expense of the 99 percent or more of the American people who are not “rich.”

They blame “the rich” for the bubbles and crashes in the stock market and real estate market, and for people’s loss of their jobs and homes. Again and again, they claim that the suffering of 99 percent has been caused by the deliberate evil of 1 percent. So malicious is their propaganda, that in their attempt to ridicule the productive contribution of “the rich,” which the left has long been in the habit of mocking as “the trickle down theory,” their video shows a rich man urinating on members of the 99 percent. (It’s possible that this frame has now been removed from the video in response to complaints. But it is reproduced here.)

This is the kind of class hatred the California Federation of Teachers is peddling to the American people and which is being taught to the intellectually helpless children in the classrooms of its members. How long will it take if 99 percent of the people become convinced that all of their problems in life are the result of the evil of 1 percent of the people, before the 99 percent turns on the 1 percent in an orgy of hatred and destruction?

That is the outcome that the CFT, Ed Asner, and all the rest of the mindless left are preparing. They are in process of organizing the persecution of a highly productive and provident minority of 1 percent of the population by an increasingly miseducated and manipulated 99 percent.

*****

The first portion of this article showed how the success of labor unions in imposing their demands depends on the activities of thugs. Thugs are needed by the unions to perform such activities as mailing garbage to employers otherwise unwilling to deal with them and for creating "too much disruption" for employers to stand. Their tactics, "bare-knuckle," as Porter describes them, or brass knuckle, as one in fact should say, are required if the unions are to have their way. The thugs make offers, that in the terminology of The Godfather, employers "can't refuse."

The California Federation of Teachers and its members are pursuing policies that go far beyond the employment of thugs every now and then. Their policies and their day-to-day teaching are serving to manufacture a generation of hate-filled, mindless zombies, who know nothing but leftist propaganda and who will be readily available to serve as storm troopers in a future war against capitalism and "the rich." Their claim to knowledge will be little more than their ability to chant that they are part of the 99 percent and that they hate the 1 percent.

So long as the California Federation of Teachers controls most education in California, a foremost civic duty of every legislator and every voter in California is to take every opportunity to vote to cut the budget of the California Department of Education insofar as it is used directly or indirectly to promote the doctrines of class hatred and class warfare espoused by the CFT and its members.

An excellent opportunity to do this was offered in last month’s elections. A proposition was on the ballot in California, Proposition 30, that threatened a $6 billion cut in funding for public education unless the voters approved $6 billion in new and additional taxes. The voters clearly should have rejected the proposition and urged that whatever cuts that were to be made, be made above all in the funding for courses serving to spread the hate-filled ideology of the CFT and its members. Such spending cuts are as necessary in the body politic as is the surgical removal of malignant cancer tissue in the body of a human being.

At the present time, the public should demand apologies from the CFT, Ed Asner, and the producers of their disgraceful animated video. While its production was not a crime, the class hatred it espouses, along with all the class hatred regularly inculcated in students by the CFT and its members, serves to produce an intellectual climate in which crime—on a massive scale—will certainly be the result.


Copyright 2012 by George Reisman. This article may be reproduced electronically provided this note is included in full. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics, Senior Fellow at the Goldwater Institute, and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996; Kindle Edition, 2012). He is also the author of The Government Against the Economy, Warren Buffett, Class Warfare, and the Exploitation Theory, and The Benevolent Nature of Capitalism and Other Essays. His website is www.capitalism.net. His blog is georgereismansblog.blogspot.com. See his Amazon.com author’s central page.