Monday, January 23, 2012

Breaking Say's Law

French economist Jean-Baptiste Say (1767-1832) is best known for “Say’s Law”. One simple formulation is “Supply creates its own demand”. What that means is that the amount paid to produce something for labor, raw materials, services, taxes, and profit goes to people who will spend it. Thus, supply and demand will be in balance.

In our present economy, we are breaking Say’s Law. The result is a depressed economy and high unemployment.

Currently, about a quarter of all income goes to the top 1% of our people. They cannot possibly spend all their billions. For example, Sam Walton bequeathed about $72 billion to his children, representing money that he accumulated rather than spending it. According to the Forbes survey, by last year, the childrens’ fortunes had grown to $84 billion, another $12 billion not spent. When the super-rich accumulate more money than they can spend, demand is reduced, representing a drag on the economy.

The rich argue that their wealth is necessary to fund investment to put people to work. The generalization the investment is needed to create jobs is certainly true. However, corporate America is awash in cash, as profits have soared with increased productivity and lower wages. They aren’t investing because there isn’t enough demand for their goods. With the decline in income of working people, that is not surprising. Where M. Say went wrong is in assuming that all the money spent producing things would be spent in turn, creating its own demand. He couldn’t imagine the kind of enormous wealth that today’s super-rich have.

When the recession hit, the federal government initiated a $700 billion stimulus package “to jump-start” a recovery. Unfortunately, that amounted to only about 5% of annual GDP, and was spent over the course of more than one year. It may well be that the money going to the top 1% and not spent was greater than the stimulus package, completely cancelling it out.

The income of the top 1% is roughly $3 trillion per year. If that income were taxed at 67%, it would yield $2 trillion, about three times the size of the stimulus package. It would be more than the entire federal deficit, and still leave the top 1% with an average of over $3 million per year to scrape by on. No one would suffer and we would have enough left over to invest in education, in our decaying infrastructure, and to provide health care to all.

The fundamental problem is the disparity of income in the U.S. It is not only greater than in any other industrialized country, but also greater than in such countries as Tunisia, Egypt, and Libya. If incomes were distributed more evenly, Say’s Law would apply, more would be spent, demand would increase, and people would be put back to work.

Unfortunately, the rich have acquired so much political power that the disparity in incomes is growing. They have managed to get the top income tax bracket reduced from 92% under Eisenhower to 35% today, with proposals to reduce it to 25%. The tax on huge estates has been reduced from about 50% under George Bush to 35% today. Meanwhile, the real incomes of even those lucky enough to have a job have fallen over the last ten years.

Increasing taxes on the very rich so that the middle class could have more would increase spending, increase demand, and create jobs.
But if we continue to break Say’s Law, the unemployment problem may continue to be with us indefinitely.

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