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Inequality and (the 2013 U.S.) Government Shutdown
I want to examine two economic issues which do not seem on the surface to be related, but which I think are related in an important underlying way. Too often, almost always in fact, these issues are discussed merely in arithmetical financial terms of dollar amounts and/or they are discussed merely in regard to the ethical concept of distributive justice, and both obscure the underlying significance of labor and trade, which should be the essential concern of economics.
issue is what the economic cost of the 2013 U.S. government shutdown was, if
any, about which there is debate, and the second is Robert Reich’s claim that “that
inequality is bad for everyone, not just the middle class and poor” … because
aside from ‘issues of fairness or public morality’…“no economy can continue
to function when the vast middle class and everybody else don't have enough
purchasing power to buy what the economy is capable of producing without going
deeper and deeper into debt.”
… and ”The problem is that that would require redistribution.”
I will try to show here that both issues are about loss of that productivity which is not cared about by too many of those people with the ability to prevent or correct it, and who therefore do neither.
"Economics" of the 2013 Government ShutdownIn regard to the first issue, individuals thrown out of work by the government shutdown or who lost revenue because of it, are, of course adversely affected (apart from those who received back pay for the period in time to pay their bills), but I want to examine this more deeply and broadly than that, in terms of what happens overall “economically” (and what that means) when a shutdown of this sort occurs, particularly in light of conflicting arguments about whether there even was a cost or not and whether there might even have been an economic savings instead.
First, the argument that it cost a lot, from http://swampland.time.com/2013/10/17/heres-what-the-government-shutdown-cost-the-economy/#ixzz2ivbUqEEo:
Then the argument it cost nothing or almost nothing, from http://www.forbes.com/sites/jeffreydorfman/2013/10/22/there-will-be-no-24b-economic-loss-from-the-government-shutdown/:
And concerning the argument that it didn't make much difference, from http://economix.blogs.nytimes.com/2013/10/02/shutdown-savings-and-the-debt-ceiling/?_r=0
The Underlying Meaning and Significance of the Above Disagreements
In a nutshell, arguments that government shutdowns are costly focus on goods and services that are lost; arguments that consider it a savings, are only looking at the financial savings of not buying goods and services they do not want or think worthwhile; and the argument that any savings or losses are only temporary and minimal are not considering the value of the time that is lost and the significance of the productivity lost in that time. Time is important in some cases and cannot be made up. For example, emergency services unavailable at a given time may cost lives. Those lives cannot be recovered later by using the money saved during the shutdown to pay for longer shifts or to purchase more equipment, even if the longer shifts and added equipment then save other people's lives. Or consider research. Yes, research can be resumed later, but whatever benefits the research might bring are not available in the meantime, and that can be a significant loss to those who need it at the time. It makes no difference to us now, healthwise, that penicillin was discovered in 1928, rather than in 1828, but it makes a difference to the people who would have been saved by it between those two dates, and it makes a difference to us in terms of not having whatever contribution those people might have made to civilization that were not made by others, and which would be of great benefit to us. But there is more to it than this, and I want to examine relevant underlying ideas before turning to the issue of inequality and showing the relationship between it and the issue of the government shutdown.
As I explain in my Ethical and Philosophical Foundations of Economics, many disagreements about the costs of government programs turn on disagreements about the value of what is purchased without that being explicitly stated in the main claims. Politicians or legislators who want the programs say they create jobs, and those who do not, say they are too expensive and will add to the debt that hurts the economy and that the money is better being saved, not spent. But what is really underlying the debate is a disagreement about whether the programs at issue are worthwhile or not. It is not unlike a husband who wants a bigger television arguing with his wife about the affordability of the diamond earrings she wants, where he argues the earrings will cost too much and she argues the TV will cost too much. It is not that they don't have the money, but about whether the goods are important enough to spend it on one or both or not.
Now in any good, reasonable, fair trade, paradoxically both
sides get more than they trade away in the sense that what each gets is more
important to him or her than what he or she gives up.
In fully voluntary (as opposed to trades which circumstances force us
to make -- voluntarily in some sense but not happily or fully willingly
-- such as spending money for car repair) what
we trade is an affordable excess to us
at the time for something we want or need (more than we need what we are
trading) that is important enough to us to trade
for. In either case what we are trading away is something we
believe to be of less (immediate, at least) importance than what we are
receiving in trade. And that is why
we buy things to consume for enjoyment, not as a financial investment,
though of course to buy anything one will consume, one is spending
money one will not get back for it, so any profit is not going to be monetary; it will be the
enjoyment or the met need of the use of what we have bought.
Now some government programs, such as research and infrastructure
construction, generate additional jobs or even industries in the private
sector, which conservatives generally opposed to government sometimes extol. But other programs do
not do that, and though considered important by many liberals, are considered
wasteful by free market conservatives.
But 1) private enterprise wastes money sometimes too, as when a
buys a building and hires employees it doesn’t really need and that
it money. One company I know of spent half a million dollars on a
computer system that didn’t work to do what they purchased it for,
against the advice
of the person in charge of their computer systems who had told them from
the beginning it would
not work. But the executives who controlled the purse strings
wanted it. Or consider the Ford Edsel, as opposed to the Mustang. The
Edsel was a waste of money for Ford; the Mustang a
great investment. In both cases the executives responsible for the
decision to manufacture the cars wanted them and thought they would be
good things and good financial investments. It is not just
government that wastes money; it is not just private enterprise that adds to
our quality of life or even to our material wealth.
Even in medical and pharmaceutical (or any other sort of) research, any
dead end is a waste of money and effort, but gaining knowledge requires
a certain amount of trial and error; and all the error will be in some
sense wasteful, even if necessary in contributing to gaining the
knowledge. If we knew ahead of time which research, which products, or which ideas
or services and practices or policies would pay off in the end for
improving our lives and society, wasting time on the dead ends would not be
necessary and there wouldn't have to be errors with the trials.
But until that is possible, there are going to be errors that are in hindsight
And although free market economists point out that government spends money like water (which it often does) because it is not “their” own money they are spending or perceiving themselves to be, that is just as true in business when managers spend “company” money also that does not come out of their pockets, or that they do not perceive as coming out of their own pockets. Corporate excesses such as expensive unnecessary trips instead of video or phone conferences, or conventions at resorts, executive country club memberships, lavish office buildings and furnishings, and outlandish executive salaries and bonuses clearly occur. And it does not mean in government or business that what is purchased is what is perceived to be important enough to spend the money on by the people who contributed, or earned, the money in the first place.
Moreover, if work needs to be done and it is going to cost money to have it done, theoretically there should be no difference economically whether it is done by and through government or through private enterprise -- at least if people who do the work are accountable for its quality. If we look at state universities versus private ones, there are some great state universities and there are some great private ones. The quality of the product is theoretically equivalent, at least in regard to academically equally ranked departments between them. Good students should be able to get stellar educations, and go on to get good jobs in successful careers that make a contribution to the community, at either.
But it is said that taxpayers subsidize
the costs of those
who use government services, such as attending state universities. That
true, but in the private sector, customers also subsidize the costs of
others, though perhaps to a lesser extent and only when purchasing
something one wants or needs, actually using the business, or when making a voluntary or charitable contribution. For example, more popular food (and particularly drink) items will subsidize other dishes at a restaurant.
Many people complain about having to buy a full cable or satellite package of
programs that include many they don’t watch, thinking it costs them money they
shouldn’t have to spend, but I have never heard anyone criticize a restaurant
for providing more dishes than they themselves want. While they feel they are
just buying what they want, they are actually paying for more than what they
want in order to help keep the restaurant in operation, including decor they
may not care about, as long as it is not so ostentatiously expensive that it
seems to drive up the cost of menu items beyond what seems acceptable. If a restaurant sold only one's favorite
dish, it is not likely to be able to stay open.
Even pizza places offer varieties of food, and toppings not everyone
wants; and even McDonald’s at the height of its Big Mac success offered other
foods as well. And if you order takeout, you often get less food than if you
dine in, and you have less service, but yet pay the same price, because you are
helping subsidize the cost of wages for waiters that those who dine in use. Or
consider that in medicine today, the charges for
relatively simple, quick medical procedures, such as surgical remedy for
syndrome, are increased in order to subsidize much more expensive
that otherwise few people could afford, even with insurance. But
also, insofar as many people buy the same products, that often decreases
the price for others of it. Or when new goods or services are
introduced at expensive prices, the fact that some people pay those
prices, allows the company to stay in business until its goods and
services can be more broadly marketed and sold at lower prices to
others. Or people who drive more efficient cars pay the same price
per gallon for gasoline as those who drive the gas guzzlers which
drive up the price per gallon of gas -- thus distributing the increased
cost of gasoline among everyone and essentially subsidizing the
increased cost caused by
the increased demand of it by those who use the most or use it most
inefficiently. The latter have to buy more gasoline, at least per
mile driven, but when they do, they are not paying for all of the price
increase they cause.
Anytime you buy anything or contribute to anything, the money you pay that is profit for any trade may then be used to pay for something you think not worthwhile and that may not benefit you directly. That is true for government or for private enterprise and for any hybrid of the two, such as utilities that are regulated by government.
It is also the case that government often funds programs with intangible benefits that not everyone needs at any given time, if ever at all, such as the arts, PBS, or recreation centers for senior citizens; in some cases, even schools, or at least some of the subjects taught in schools that seem to have no material or financial value. And people without school-age children (or perhaps grandchildren) do not personally need schools, or do not think they do, at least not particularly expensive ones. One government official even bemoaned increasing longevity as causing a financial strain on the Social Security program because it had to pay out more money longer to retired people. Apparently helping seniors stay alive has too little financial or tangible benefit for that official. Perhaps s/he will feel differently when s/he is the age s/he currently doesn't think is worth keeping alive. In all these cases, we are still talking about collectively paying for something that could or would not likely be financed by private, individual sales alone. It is about pooling resources -- but by subgroups in the society, rather than the whole society paying for each subgroups' goods or services. But, it may turn out that it is less costly for everyone to fund services they don't currently directly use, or may never use, than for each group in society to have to fund the services they do use directly at the time they are using it. That is, it may be more efficient to pay for schools and senior citizen recreation centers even if you don't have children in school or are not a senior at a given time, than to have to fund schools if and when you do have school age children or grandchildren you want to have educated and to pay for recreation centers you want when you are older. It is an empirical matter, not a philosophical or ideological one about which way is more efficient to fund services that different, or only some, people need at some times, if there is good and sufficient reason to have those services at all. If it turns out to be efficient and feasible to tax only those people willing to pay for various services they themselves use and collectively want at a given time, then there will not be the problem (apart from externalities) of taxes subsidizing government services you don't use which are desired or required by other people.
It may well be that government subsidizes more or to a greater extent than private enterprise does, since those who manage a business primarily or only by efficiency will often eliminate any costs they don’t see as having earning value, even if it is otherwise important. But, as already pointed out, it is not generally the purpose of government to make money from its services, though in some cases it does -- as in providing "vanity" license tags for additional revenues -- an example of a voluntary tax some people are willing to pay because they get something they think worth having immediately in return, over and above what the tax money is being spent on by the government. And some of those services do what is "otherwise important" that business won't do because it costs them money without bringing a return, and because traditionally they didn't have to and don't want to begin to have to now, thinking in some cases that it should be government's or the public's responsibility, not theirs to remedy or prevent any harmful externalities discovered after the business has been in operation a long time. Now I would like to turn to the second issue, Robert Reich’s claims about the economics of equality, before returning to the issue of the economics of government shutdown.
Robert Reich [speaking about his own argument]: The argument is that inequality is bad for everyone, not just the middle class and poor. The rich would do better with a smaller share of a rapidly growing economy then they're doing now with a large share of an economy that is barely growing at all. It's not growing because there's not enough purchasing power in the middle class, and the lower-middle class and everybody aspiring to join the middle class, to keep the economy going.
We've seen this from the pioneering work of Emmanuel Saez and Thomas Piketty, looking back at tax records. They've brought that research up to 2012 and they see that 95 percent of the gains, the economic gains, since the recovery began in 2009, are going to the top 1 percent. Meanwhile, median household income keeps dropping, adjusted for inflation. Well, where are people going to get the money they need to keep the economy going? We can't go back into debt like we were in before 2008. So there's a fundamental threat to the economy.
also a very fundamental threat to the democracy we live in because, as even
Louis Brandeis, the great jurist, understood in the late 19th century, when we
last had this extraordinary gap, "We can either live in a democracy,"
he said, "or we can have a huge amount of wealth concentrated in few
hands, but we can't have both."
Reich: Well it's a bad thing in two regards, even if
you don't particularly worry about issues of fairness or public morality. It's
bad, number one, because no economy can continue to function when the vast
middle class and everybody else don't have enough purchasing power to buy what
the economy is capable of producing without going deeper and deeper into debt.
Seventy percent of the entire economy is basically consumer spending. And if
consumers don't have the wherewithal to spend because all the money's going to
the top, and the people at the top only spend a very small fraction of what they
earn, then the economy is almost inevitably destined to slow.
Paul Solman: Well, I can imagine a future in which there's enormous productivity generated by relatively few people. (That may be happening even as we speak.) So there would be enough wealth to keep people fed and safely sheltered, and lots of diversions like video games....
Reich: You're right. We're approaching that already.
The problem is that that would require redistribution. Structural unemployment
is already very high. We also see that the ranks of the poor are growing. We're
up to about 15 percent (of all families) under the poverty line, and that's
very conservative. And the poverty line understates the true amount of poverty
because it measures it as three times the breadbasket that a family needs, but
it doesn't consider all the other things that are inflating far, far faster
than food prices. You've also got 22 percent of American children in poverty
right now. Those trends are getting worse and worse. So your scenario where yes,
we're getting more productive and so people may at least have adequate food and
clothing and shelter...
Solman: And good medical care...
Robert Reich: But look at the fight over the Affordable Care Act. In order to pull this off, we would have to have the kind of social spending that we (supposedly) cannot afford. The wealthy have so much political power, they've been managing to reduce their tax bills and enlarge their tax benefits. And the middle class -- basically their incomes are stagnating -- so they can't pay more taxes. So we can't even today finance the social safety net that, under your premises, we would need to keep everybody up to a minimum standard of living.
When he talks about the moral issue of fairness, he
probably has the idea that an imbalance between rich and poor is itself unfair,
regardless of how it arose. The reason I say that is because he thinks it will
take “redistribution” of money to correct that.
I will argue a fair distribution of money in the first place would
eliminate or seriously reduce the problem, which would then eliminate the need
for a redistribution of money in many cases. If he were talking about
unfairness of incomes that leads to the imbalance, I think he would have called
for fairer incomes, not redistribution of incomes. Plus, if it is the working
poor that redistribution of income is meant to assist, it would be far less
expensive for their income to be fair in the first place if the money used to
assist them comes from those who paid them unfairly less in order to make more
money for themselves, because then the tax money doesn’t have to also support
the bureaucracy and the people who work in it that redistribute incomes.
It would be far less costly and wasteful for business owners to pay
their labor force a fair profit than to have government take the money that
should have been paid and give it to the employees, because then part of
the profit of the company earnings is paying for the government to
distribute the money, instead of its all going to employer and the
workers. It is more efficient and beneficial to have fair payment
proceed from Owners ---> Employees than from Owners --->
Government ---> Employees. And that frees up people who would
otherwise have to be in government doing this work, that should and could
be unnecessary, to do work that actually would be necessary and
beneficial, whether through the government or the private
sector. When government labor has to be used to right wrongs that
people ought to know better than to commit, that wastes labor which
could be better used to help us all collectively -- labor that would
generate a greater contribution to wealth and leisure in society.
It is inefficient and wasteful for government to have to continually
force and provide fairness that businesses ought to be providing
themselves. But that requires people to be moral and understand,
know, and willingly accept to pay, what is a morally fair wage to pay
their employees. Still, that should be feasible to expect and work
toward; it is not that business owners are willful miscreants in the
way outright thieves or violent criminals are.
The Underlying Similarity Between the Government Shutdown and Inequality
The underlying similarity between the government shutdown and inequality of the sort that robs people of the chance to flourish is that both cause the loss of productive, potentially beneficial contribution that labor creates. But in both cases, the productivity lost is not missed by those not directly affected by it, even though they are indirectly or potentially affected by it. Unfortunately, once a critical mass of desired labor and services can be obtained by a sufficient number of people in a democratically governed society with a relatively free market, there is little perceived psychological incentive to be more inclusive. So a government shutdown or an unemployed or underemployed or underdeveloped labor force does not sufficiently harm those already comfortable with the market and a bare bones government, to cause them to remedy the inequality or prevent the shutdown. That prevents a great deal of both moral and financial or material good that could be done and should be done by a well-functioning government and a more inclusive, more productive economy. In his analysis above, Jeffrey Dorfman does say that "It is true that many government services not performed during the government shutdown will never be replaced, as government workers will not all be able to make up the lost productivity" but he seems to see no particular significance of that, and insofar as he says "Because the government workers are being paid for the days they did not work, the cost of government services will not decline and, therefore, neither will the government contribution to GDP. Citizens will get less for our tax payments, but the official economic value of government will be the same" clearly "official economic value" means something different from real value. Paying people for work they do not perform and cannot make up hardly gives one any real value for your part of the trade -- your monetary payment.
Whether any given labor is good or bad is a matter for specific argument, but presumably there are, or could and should be, many good and important government services, services which not only are morally obligatory to provide direct recipients, but which also benefit the society as a whole, not just the direct recipients of the particular service. For example, currently the Veterans' Administration is behind in its treatment of soldiers returned from the wars in Afghanistan and Iraq. That is a morally unfair disservice and harm to those soldiers we sent to do dangerous work for us, and to their families, but it also harms the communities in which those veterans could be more productive if they had their medical needs met in the timely manner they should be.
Now many people believe in the dictum that the government of business should be no part of the business of government, and that government should let business just operate according to the laws of economics and the policy of "enlightened self-interest" based on the competitive need to attract (and possibly keep) sufficient customers. But there is more to morality than enlightened self-interest. Morality trumps economics and it should trump law, particularly in America, since the basis of United States law is the Constitution, and the purpose of the Constitution is given in the preamble to it, which essentially is a statement of moral concepts and principles:
Insofar as the laws
incorporated in the Constitution fail to foster or permit a more perfect
union, promote the general welfare, provide justice, and secure the
blessings of liberty (including a free market) for ourselves (meaning
not just the wealthy or successful) and posterity, they are inadequate
or wrong. It is claimed that we are a country of laws under
the Constitution, but that claim is incomplete because the Constitution
has moral purposes, and the laws are intended to be a means to that
end. They are not meant to be arbitrary and capricious, nor even
complex and deliberated but mistaken, rules simply passed by the
it has the power to legislate, but are supposed to have the moral
significance to make us a better, more blessed, more prosperous, and
more just nation, society, and culture. Insofar as business and
economics alone fail to do that, the government has every right and
every obligation to assist, though that, of course, does not mean that
every proposed or adopted government regulation will be right and
helpful, or not harmful. Specific laws and regulations need to be
reasonable and just, and most helpful where possible; i.e., whenever
and fairness do not conflict in an ethically overriding way with
utility. It is better, and nurtures more domestic tranquility,
when everyone sees that and has at least a moderate understanding of how
to achieve it and voluntarily tries to achieve it, and can recognize
when and whether it has been achieved or whether more work needs to be
 For a fuller account of how statements about money often camouflage significant real value, see my Ethical and Philosophical Foundations of Economics, which is free online. Two examples here: 1) New York City is a very expensive place to live and many people have high incomes to be able to live there; it has a large economy with a high GDP. But there are more livable cities with a far lower cost of living and subsequently a lower GDP. An imaginary paradise island where no work needs to be done other than to go outside and pick food from trees or other plants would potentially be an even better place to live and have a zero GNP. Economies are proportional to the amount of work that needs to be done and is paid to be done, masking the point that a smaller economy may mean only that less work is necessary, not that needs are being unmet. 2) When people are employed doing work that is unnecessary, it adds to the GDP, but not to quality of life. E.g., if for some reason some people were paid to dig and re-dig holes and others to fill them in (a standard example in economics), that would add to the GDP, but not have any purpose or real benefit for society. While it would seem ridiculous to have such work, we do it all the time; e.g., a huge food (or tobacco) industry that produces products that make us ill, supporting a huge medical industry necessary to counteract the effects of the food we shouldn’t be buying and eating. Or gyms and health clubs that people drive to in order to get exercise, or that are on higher floors of buildings that people take elevators instead of stairs to get to so they can get the exercise they are paying a membership fee to have. Basically any paid unnecessary work adds to “the economy” but does not add any human value. Conversely work that is unpaid, such as neighborly assistance, often makes a significant contribution to human life, but adds nothing to the GDP. (Return to text.)
There are certain professions, supported by other, which drive up the costs of
the ones that support them in ways that are camouflaged. Income redistribution bureaucracy
is one of them, as above. Medical
is another, in that the money you have to pay for health care has to
support not only all the doctors and hospitals, but all the people,
advertising, and other business expenses of the health insurance
well, which all would be unnecessary if physicians and hospitals charged
reasonably and fairly to begin with. Health insurance acts as a lottery
the payoff is in the form of medical benefit payments made from the
premiums of those
who do not incur particularly high medical costs, but who buy into the
lottery with their premiums in case they were to need the
Insurance is about the distribution of risk, not collectively
minimizing it. And it is not only people who do not become
seriously ill that don't get "their money's worth" out of their
premiums; it is also people who die quickly or suddenly who cannot
benefit from medical intervention. Basically insurance benefits go
to those who are relatively ill, not who are either relatively well or
suddenly dead. (Return to text.)
The Brandeis passage Reich quotes is false: "We can either live in a democracy," he said, "or we can have a huge amount of wealth concentrated in few hands, but we can't have both." A democracy can have serious wealth inequities of the sort at issue if the majority of voting citizens believes such inequalities are fair. Friedrich Hayek claimed that "an optimal policy in a [free market economic system] may aim, and ought to aim, at increasing the chances of any member of society taken at random of having a high income, or, what amounts to the same thing, the chance that, whatever his share in total income may be, the real equivalent of this share will be as large as we know how to make it." What that entails is the belief that a system is fair if there is opportunity for anyone to rise to the top or to achieve great wealth. And many people who are not wealthy, but who make enough to survive (especially somewhat comfortably or happily) and feed their family, believe that is true of our system and that it is therefore fair. So they neither want to tax the system to death nor overthrow it by force or violence. That is probably the point of Solman's statement: "So there would be enough wealth to keep people fed and safely sheltered, and lots of diversions like video games...." That is why many people who are not wealthy support the system and don't want to change it in a way that would subvert what they consider to be their opportunity to achieve wealth, even though there is very little chance they will ever realize that opportunity. Only in a system in which those with little feel they are being denied what is rightfully and justly theirs will they use the democratic process, if possible, or force, if necessary, to redistribute wealth. But even many wealthy people are "liberal" in regard to the democratic process that way when they believe that the poor, particularly the working poor, are not receiving their fair share of what they helped create. And again, that is a moral, not an economic, matter. (Return to text.)