By JLP | August 27, 2012
A friend posted a link to this interesting piece by Diana Furchtgott-Roth on Why Henry Blodget is Dead Wrong when it comes to fixing the economy.
Blodget thinks spending is the problem and so his solution is for companies to increase wages and all will be good. From the piece:
Your conclusion is a call for employers to take “a few percentage points of your record profits and use it to hire more employees and pay your existing employees more.” That way, you say, employees will spend more money and corporations will have higher revenues and profits.
Obviously, Blodget has little economics training. Even I know that a company’s goal is not to hire employees UNLESS there is a need to hire them. But, I expect this from Blodget who seems to be taking the populist approach these days. I’m wondering why Blodget didn’t hire a bunch of people back when he was making the big bucks as a securities analyst.
Anyway, this piece takes on Blodget and does it really well. Her work sounds a lot like Thomas Sowell. It’s also what I have been saying here on AFM. For instance:
Some increase in perceived inequality since the 1980s is due to the Tax Reform Act of 1986, which lowered top individual income-tax rates from 50 percent to 28 percent. This led to more income being reported on the individual, rather than corporate, tax schedules.
In addition, the composition of households has changed over the past 30 years. Women have moved into the workforce in record numbers, and there are more two-earner couples at the top of the income scale and more one-person households at the bottom, including students and retirees.
When two individuals get married, if both have worked and continue to work, they comprise a household with higher earnings—and the measured distribution of income in society widens. There are more such households now than in the 1980s. In 2010, 58 percent of married couples were in the top two quintiles, and only 7 percent of married-couple families were in the lowest quintile.
Finally, I LOVE this point:
If you want to reduce inequality, Mr. Blodget, the simplest way would be to allow only one member of the household to work. It’s two-earner couples who are pumping up the incomes of the top fifth of the distribution. The CEOs and the star athletes are just a tiny fraction, outliers on a massive bell curve. The real culprits are two-earner couples.
Now, I do disagree with Ms. Roth on one point at the beginning of her piece where she talks about the effects of welfare (food stamps, rent supplements, Medicaid-funded health care, subsidized school lunches, and other social programs) on spending. She writes:
…those at the bottom are doing better than they did 25 years ago because they have greater spending power, after adjusting for inflation. This is important for the bottom fifth—economically, socially, psychologically.
Spending is vital because it is the principal determinant of standard of living. It influences confidence in the future.
I disagree that spending derived from welfare is good for people psychologically. Why? Because, in the back of their minds they always have to be worried about the government taking it away from them (a card consistently played by politicians. “So-and-so will CUT YOUR BENEFITS if he’s elected.”).
Spending derived from income that is EARNED is what helps people psychologically.
Other than that, I agree with everything else Ms. Roth said in her piece. I think she effectively schooled Blodget on his economic idea.