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It is a truth universally acknowledged that a person in possession of a good fortune must be in want of people with whom to share it or in whom to invest it. However little known the feelings or views of such a person may be, this truth is so well fixed in the minds of his fellow citizens, that his wealth is considered to be rightly used only when it is employed for his and their benefit alike, whether by his own predilection or by taxation.  -- with apology to Jane Austen

Inequality and (the 2013 U.S.) Government Shutdown
Rick Garlikov

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[1] 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. 

The first 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 Shutdown
In 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

Here’s How Much The Government Shutdown Cost The Economy
By Eliana Dockterman

$24 billion.

That’s according to an estimate from Standard & Poor’s. The financial services company said the shutdown, which ended with a deal late Wednesday night after 16 days, took $24 billion out of the U.S. economy, and reduced projected fourth-quarter GDP growth from 3 percent to 2.4 percent.

Here’s a breakdown of some of the economic cost by our calculations:

·         About $3.1 billion in lost government services, according to the research firm IHS

  • $152 million per day in lost travel spending, according to the U.S. Travel Association
  • $76 million per day lost because of National Parks being shut down, according to the National Park Service
  • $217 million per day in lost federal and contractor wages in the Washington D.C. metropolitan area alone

Hundreds of thousands of federal workers bore the economic brunt of the shutdown. But small businesses also suffered from frozen government contracts and stalled business loans. Tourism suffered from closed national parks, and military families had to cope without childcare and other services. Federal workers will receive back-pay under the deal, but contractors will probably not get their lost wages. The stall in cash-flow could affect spending during the holiday shopping season.


Then the argument it cost nothing or almost nothing, from

There Will Be No $24B Economic Loss From The Government Shutdown
Jeffrey Dorfman

All this [supposed] lost spending is a perfect example of the famous broken window fallacy, just in reverse from the normal example. In the broken window fallacy, people perceive money spent to fix a broken window as a gain to the economy because they do not realize the money would have been spent somewhere else until it had to be diverted to fixing the window. In the current case money that was not spent somewhere during the shutdown gets shifted someplace else, but it still gets spent.

…losses do not hold in the aggregate because every loss will be offset by a gain.

…In the wider view of the whole economy, the money just ended up in different cash registers.

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] 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.


And concerning the argument that it didn't make much difference, from


Shutdown Savings and the Debt Ceiling
by Nelson D. Schwartz


“…with much of the government shuttered and not spending, the logic goes, there will be more cash left in government coffers…”

Schwartz argues against this, but only by saying that the shutdown is so limited that it won’t save much money compared with what is being spent each day.  And he seems to see the savings more in terms of cash flow adjustments or temporary postponements than as long term savings.  But one can infer that the people who offered the kind of argument he discounts seemed to believe that the $24 billion was an amount actually saved, even if it was negligible in terms of overall cash flow and debt. 


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. 

Going deeper into the arguments, those in favor of proposed government expenditures praise the programs for creating jobs which provide necessary goods or services -- they focus on the value government provides and on the jobs created to provide that value.  Those who don't want the programs focus on the costs and condemn them as being either inefficient spending at best (for goods or services which private enterprise could better or more efficiently provide) or totally wasteful spending. or worse, spending that is not only totally wasteful but counter-productive or that does the wrong things and adds to the debt and burdens the economy for bad purposes.  People who want to reduce government or shut down particular programs or departments point out the money that will save, as well as the prevention of any harm they think those programs do -- as in making business harder to conduct because of all the alleged unnecessary, wrong, or costly regulations, or as in the government's running allegedly inefficient and morally misguided public schools, which they think private enterprise and private schools could do better.  (But whether schools are teaching the right things or not is a separate issue from whether they are public or private.  Moreover private schools can teach the wrong and harmful things too and will not necessarily cater to the desires of individual parents any more than public ones will; sometimes even less unless the parents are able to fund the programs they want, and if there is a waiting list of children who will replace any withdrawn from enrollment because of a pedagogical dispute with their parents.) 

But all programs that have costs create jobs, and all jobs cost money.  The real questions are one of value and how best to bring about any important value -- whether it should be a role of government, business, or some other form of enterprise or collaborative effort.  Examining costs alone, without attending to the value that might be received from the payment of them and without comparing them to the costs of  other ways to achieve that value or what better things might be purchased for that money (i.e., the "opportunity costs"), is insufficient to determine whether the price is worthwhile to pay or not. 

As far as just the money part of economics goes, it doesn't matter whether money is circulated to pay for illegal drugs, contract killings, sponsoring professional sports on television, building highways or churches, funding schools or investing in restaurants.  The money is circulating to buy the labor of people who will spend it to buy other labor.  Money and its circulation facilitates trade -- trading of products and labor, not all of which are "goods" and "services", for some products are not good and some labor is a disservice; but nevertheless it is all trade and part of the economy.  The real question is the relative value of the labor and products that are purchased or created. 

But that is not the question always asked.  Instead what is often asked about is the investment value of spending money; will it bring a financial return, particularly a direct one?  There may be some investments more likely to voluntarily attract revenue in return (as when beer companies, car companies, pharmaceutical companies, and others sponsor sports on television), but that is not the whole of the value that could be created, and in some cases it is not clear that a way couldn't be found for that same money, or a substantial portion of it, to sponsor cancer research or other endeavors more worthwhile than sports instead, for a comparable financial return. 


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.

That is fairly straightforward when the trade is simply between two parties, but not when someone else controls at least part of what is being traded between the parties, such as a manager’s controlling a company’s money, the government's paying or not paying for programs you want (or don't want) with, in part your tax dollars, your health insurance provider's paying for procedures your physician advises, or a child's parents controlling what they buy for the child.  When someone else controls at least part of what is being traded, the parties have to convince that person or group that the trade is worthwhile.  That is sometimes difficult when the middleman can’t perceive the need or benefits and doesn't just purchase what you want because you want it.  And in government, the losing side in a vote on any expenditure that is approved will always say the expenditure is wasteful because they think it wrong, which is why they voted against it.  It is redundant for the losing opposition to claim programs are financially wasteful, since if they thought otherwise, they would have supported their passage and been part of the majority that passed it.   While many economists say that people are more likely to spend other people’s money, even if that is true in some cases, they may not spend it the way the other people would, and may even be reluctant to spend it at all, but particularly on what the would-be trader wants or needs. With regard to government, legislators may not spend your tax money as you want; with regard to private enterprise, your church or country club may not spend your contributions or dues the way you want.  A private or a public school may not teach your children what you want them taught, or in the way you think would be best.  Your boss or company's executive board may not buy what you think the company needs even though you bring in substantial revenue to the business.  Once they have that revenue, you have no control over it, though you in a meaningful sense or in large part earned it for them.


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 company buys a building and hires employees it doesn’t really need and that simply cost 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 wasteful. 

Plus, 2) as conservatives acknowledge, government
a) serves as a broker or agent between businesses and communities to pool community resources for the purchase of goods or services beneficial to the community as a whole which individuals cannot purchase themselves, such as roads and defense.  And government also b) serves to try to make sure that citizens treat each other in fair and right ways, including the treatment of customers, employees, and other stakeholders by businesses.  That involves preventing harms, but government also can c) try to coordinate positive good which businesses may want to achieve but cannot do so without regulation that prevents them from being at a competitive disadvantage for doing the right thing.  E.g., one industry spokesman one time in a radio interview pointed out that they had asked for government regulation requiring adding environmental cleanup equipment, because they thought it would be right to install that equipment but needed to be able to raise prices to pay for it -- which would put anyone who did it while others didn't at a competitive disadvantage.  So this role of government is something like a basketball coach who has to coordinate the team play that will be in the best interest of winning, rather than in the best interests of individual players' statistics or attempts to score on their own, if the team members cannot coordinate such a strategy among themselves.  While the so-called "invisible hand" often coordinates networking better than central control, there are instances where what is best for any individual person, company, or profession is not best overall for the society or even for the industry.  When that is recognized, a government or an industrial board needs to be able to coordinate activities, without its being illegal collusion.  Those roles of government (or of industrial boards) are not about making money (though they are about facilitating or increasing the productivity in society most broadly understood, in certain kinds of cases or circumstances), and thus it is not a relevant criticism  that they are not financially profitable.  The profit they provide is the harms they prevent or the beneficial services or products they make possible that we otherwise could not have. 

I recommended such a coordinated policy to a large medical center today -- that they try to coordinate a way with their staff and with insurance companies to offer a kind of triage service for patients who call for appointments that are unavailable any time soon about medical issues that need immediate medical examination but which might or might not need immediate medical treatment -- such as a suspicious looking skin growths.  The idea is to offer a medical intervention that is intermediate between a far off office appointment and an emergency room visit where immediate treatment might not be necessary.  The impetus for the suggestion was the two-month wait for an appointment for something that physicians are always saying should be looked at right away.  It seems to me there should be some way to have a triage appointment for various possibly serious medical conditions to see whether the patient needs to be treated immediately or could safely wait for the later appointment.  Health insurance plans, it seems to me, could be modified to pay for the triage in one of the following ways: 1) as a full appointment if the condition is found not to need immediate treatment and if the patient does not keep his scheduled appointment, 2) as part of the later kept appointment, or 3) as part of a full appointment where the treatment is initiated right away.  And staff could be taught to see this as part of the services they offer that doesn't necessarily need to be paid for immediately or a full separate office visit
, if they don't see this already.  But if such a plan, or some variant of it, is feasible, it will require working out new billing, payment, and health insurance policy procedures, and possibly require some new malpractice and/or risk management rules, laws, or procedures as well.  It is not likely something that could be instituted unilaterally by any of the parties involved, such as the clinics alone.  But it seems to me a service that a compassionate health care system (which insurance plans and medical centers often advertise themselves to be) would want to provide when regular appointment times are impossible to get in a timely way for conditions that are potentially dangerous not to immediately diagnose and treat.

Moreover, it is not a relevant or sufficient criticism of government that it might make businesses spend money those businesses don't want to spend, or make products or services more costly than they would be without those expenses. Some of those expenses are for meeting standards that are important and reasonable to require. The simplest example is making sure restaurants are not germ-laden, through health inspections requiring certain standards of cleanliness, which of course cost restaurants money to provide.  Clearly most people want and expect to eat off dishes in a restaurant that were properly washed using the proper equipment or techniques, not just plates licked clean by dogs, or simply rinsed off to remove all food particles.  So people pay taxes to local governments to inspect restaurants for them because they don't have the expertise to do it themselves and because no one wants to have to inspect a restaurant they are going out to dine in for a good time or even to get a quick bite to eat.  Again, health inspection is not going to earn the government money, and it will cost restaurants money, but its profit for us as a society is that it will decrease the costs of preventable illness and loss of productivity from it; plus food would not be enjoyable if one has to worry about how clean and sanitary the plates and utensils are. 

Yet while people pay taxes to make sure restaurants won't make them sick through germs, they do not yet at this point pay or want to pay to have the government make sure they don't get sick from too much fat or sugar in the food they want.  If they did, then that would be a legitimate and freely chosen function of government too.  All else being equal, expenditures people freely choose to make are more satisfying or less disagreeable than ones they are coerced to make, although an expenditure can be both freely chosen and also feel coerced -- particularly when payment is due after the novelty or joy of the purchase has worn off, or later when one wishes one had the money more than the goods or services purchased because they are not as satisfying after being used as they were to anticipate using.  Even when a good or service continues to be used and provide benefit, it often becomes taken for granted and less appreciated.  So people are not always even happy about voluntary expenditures.  But for the most part, taxes are often imposed by a majority on others, and the minority will not feel as good about spending the money as they would if they were buying something they actually wanted.

Of course, just as sometimes businesses fail to make a profit, governments sometimes fail to protect citizens from injustices, unfairness, or wrongdoing, including mistreatment from the government itself, and those are real problems, but not ones related to the purposes of business or government.  They may be related to systemic problems in how a given business or government is operated, particularly in regard to whether people are accountable for their job performances or not (in regard to actual, reasonable results, not just meeting mistaken criteria, flawed or pointless rules, or supposed standards), and those are legitimate concerns.  But again, that is not relevant to the purpose of business or government.


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 is 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 carpal tunnel syndrome, are increased in order to subsidize much more expensive procedures 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.

In the future, possibly government services could be paid for only by those who want them, with computers efficiently keeping track of who has paid for which services and thus have a right to use or access them, such as fire or police protection, or use of the recreation center, schools, or playgrounds.  However even if that is possible, there will still be free rider benefits (as externalities) for some people.  E.g., public health measures may require all people to be vaccinated or use proper plumbing and sanitary sewers, not just those who pay taxes for that.  So if you want to be healthy, you may have to pay for your neighbor to be healthy too if your neighbor cannot pay for it on his own, and you can afford to pay for his or hers.  Even education of other people's children may serve, or be necessary, as such an investment in one's own health.  If, for example, you want to have adequate medical care, automobile maintenance, or a host of other services, you may have to help provide education for other people's children to become physicians,  nurses, plumbers, mechanics, bankers, engineers, and heating and air conditioning specialists if they or their families cannot afford to purchase those educations.  Subsidized educational institutions of various sorts may be necessary investments in one's own future well-being. Good schools benefit communities, not just the individuals attending them.

Moreover, I don’t see any financial or economic difference between paying taxes that are for products or services I don’t care about, and may even oppose, and paying Microsoft or the local power company or my car and house insurance company sufficient excess money that the power company can use to buy sky boxes in a sports stadium for people they want to entertain (such as legislators or the state attorney general), my insurance company can use to sponsor football games on national TV, and Bill Gates can use to give away a billion dollars a year to people I would not have given the money to or traded with for causes I would not have supported and which I think wasteful. Or in working for a company, it may be particularly frustrating if you think about it that the boss or board may use part of the money you helped them earn to hire and pay someone you think is not worth having work there, particularly if they are hired to supervise or train you in a way that makes your work unnecessarily harder or your life miserable.


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.

Is Financial Inequality Economically Bad (for Everyone)?


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.

There's 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."

Paul Solman:
 But is [unequal distribution of wealth] necessarily a bad thing?

Robert 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....

Robert 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...

Paul 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.

There are at least two problems with Reich’s analysis:

1)      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.[2]  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.

He also seems to think that it should be obvious that there would need to be a redistribution if people cannot afford much 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.”  But lack of purchasing power by the poor is not necessarily a problem for the wealthy, at least not an obvious problem, as I will explain shortly.

The problem in both these issues – inequality and the government shutdown -- is in thinking that it should be clear to the wealthy that an economic system should be inclusive of everyone.  It is not clear, and purely in economic terms there is a normal sense in which it is not necessary. Just as there can be a rich nation in one part of the world and a poor one elsewhere, or even next door, there can be poor people within the borders of a rich country, without that necessarily adversely affecting the well-being of the wealthy -- as long as the poor do not commit crimes or revolt (either because they are docile or because they have enough to get by on and think that is sufficient, or fair even if insufficient[3]
) that the rich then have to spend money to protect themselves against.  Or consider an economy based in large part on slavery. The problem with slavery is a moral one; it is not an economic one except, of course, for the slaves.  Nor is it an economic problem if people who willingly accept their positions in a free market economy because they believe the supposed moral rationales for it, barely make a living much above slave wages.  And it is not an economic problem, though it is a moral one, in cases where people make a decent or even pretty good living but are not being paid enough fairly in proportion to the earnings they generate. 

In short, the wealthy can often provide for themselves or pay others minimal amounts to less wealthy people who have to work to earn a living, and they don’t need to help the poor do better than to be able to stay alive in sufficient numbers and sufficient health to have the ability and tools to work for them – other than for moral reasons.  In biology, natural selection just requires that a species has enough ability and resources to reproduce before it dies, not that it has the ability or resources to flourish.  Similarly in a free market economy which depends on the labor of those without much wealth; they only need sufficient wealth to survive and continue to work, not to thrive or thrive as much as they could.   But economically there is no need to expand the pie, even if morally there is. It is simply false, other than in monetary terms that, as Reich claims, “t
he rich would do better with a smaller share of a rapidly growing economy than they're doing now with a large share of an economy that is barely growing at all.”  Not if they have all they believe they want or need.  If a large share of a smaller economy is sufficient, the rich do not need to help the economy expand, rapidly or at all, to have what they believe they need and want.  The marginal benefits are not worth the costs to them.  Apart from collapse of the economy (or at least the part of it that supplies the specific products and labor wanted by some particular wealthier people) or revolution which would disrupt it, that is a moral issue, not an economic one for those with means.

Or so it would seem.  There is a way in which it is not necessarily true, but that is not the way Reich states it above.  The way in which it is not true is that theoretically the more people making a contribution to an economy, particularly their best possible contribution, the more goods and services will be available to everyone, some of which will include those which might benefit the wealthy that they do not now imagine, but which they might want if they did. 

If a slave or a poor person or any person who is otherwise discriminated against is denied an education or opportunity to work where s/he might learn and advance, then any medical, scientific, or engineering advance s/he might have made may have prolonged the life, health, or comfort of the wealthy people whose greed or parsimony denied him or her that education or opportunity.  Material wealth is, in a normal sense, relative to the age in which one lives; people in the middle and even lower socio-economic class today in advanced countries have far more and better creature comforts, health, and lifestyles than the richest of kings in the not too distant past.  Yet those kings felt very wealthy.  And material wealth is not the only important wealth or contributor to emotional and social well-being.  So whichever good ideas of any sort left unconceived due to lack of opportunity or education by those who would have had them are a loss to the wealthy, just a loss they do not miss because they do not imagine or because no one else has it.  Economies can continue to function for the wealthy when the vast middle class doesn't have the buying power to participate beyond the status quo achieved at any particular time, but that does not mean there is nothing materially or economically lost to the wealthy that they might have had and appreciated or needed; i.e., the potentially greater goods and services or even more leisure. 

And it is not that the optimal economy has expansion or the greatest expansion, but that it has the fullest expansion possible at any given time so it is the most productive it could be in terms of each person's making the greatest reasonable contribution s/he can.  And in regard to fairness, it should be that in at least some rough approximation, each able person receives a share of the benefits of productivity (including more leisure if desired, even if that leisure is used for productive labor that other people might consider work, but which the person doing it considers enjoyable) commensurate with his/her contribution to creating them.  I said "greatest reasonable contribution" one can make because with modern machinery and technology there could be an abundance of unnecessary material goods that harm the environment for no good purpose and that waste labor.  It is not that we want people working as much as possible to produce everything that can be produced, but that we want people working and contributing to a better world, and sharing the fruits (including leisure) of that collective labor in some reasonable and fair way. 

When Solman says: "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....", the morally fair response would be to spread the wealth and leisure more evenly in society, not just divert people by entertainment from aspiring to do better and achieve more good for themselves and others.  If the work is all done by robots, then wealth and leisure do not need to be spread among them, but if the wealth and leisure for some are created by the exploited or under-rewarded labor of others, then morality, not economics, requires a more fair distribution in the first place.  Redistribution of the fruits of society would be less necessary if they were distributed fairly in the first place by fair payment for work done which produces them -- payment commensurate with the contribution made to creating the company's and society's benefits and profits (i.e., overall available goods and services).

That leaves the separate moral issue of how to treat those who are unable to be or become productive or very productive to the extent that they help provide more than they themselves need.  I will not address that in this essay, but the idea behind the full employment of able people is that each able person working and trading in concert or cooperation with others produces more than s/he consumes, and the economic profit of any society is not in terms of how much money it has but is the difference in goods and services available for working and trading in concert over and above what each person could have working alone, and/or over and above what was provided previously by a smaller group with people who were unemployed or underemployed.  For a simple example, suppose two neighbors have trees fall across their driveways, and that neither neighbor can remove the tree from his driveway alone, at least not without a lot of time and effort.  Working together they might be able to remove both trees in a relatively short time, thus giving them opportunities for other pursuits they enjoy.  That time and the enjoyment it brings, which they otherwise could not have had, is the profit they get from working together.  As someone once said, it is better to consider each person as being two hands to help, rather than one mouth to feed.  That is another way of saying that working and trading cooperatively can provide more for each person than s/he can provide for her/himself individually or alone; the potential labor of people added to the work force can provide more for each of those already employed than what they will consume or take from each of them.  In developed countries, large cities with good employment available have more to offer everyone than smaller cities or towns do, even though the cost of living is often higher.  Wages are higher too. 

I do not know how that works, but it seems to, at least under conditions found in developed countries where cities are not just filled with teeming poor living in filth and squalor.  And it works not only geographically but temporally as well in that, for example, while prices in 2014 are some 10 to 15 times higher than they were in the mid 1950's, the average person has much more even materially.  Homes are bigger, families have multiple cars and televisions, people have computers, dishwashers, cell phones, and, or including, digital music players, high quality cameras and video, Internet access to information and education, more and better recreational equipment, etc.  What seems to be a paradox is that higher prices can coexist with greater general abundance due to greater collective productivity.  Much of that is attributable to industry and technology, but much of it is attributable to an increased labor supply that under certain conditions (not always fully understood) enriches the whole more than it takes from it.  Preventing people from working to their full capacity to contribute (under the right conditions) robs everyone, not just those who are unemployed or underemployed.  The right conditions I am talking about are those that allow jobs to be added to an economy, not just rearranged competitively in a Darwinian scramble for who gets the limited work.  E.g., free trade agreements theoretically allow more people to trade with each other, and for the total labor force among trading partners to increase and be more productive, but they too often, at least at first, hurt those who were prospering by taking their work from them and giving it to the new partners who will do it more cheaply.  The conditions which cause that and which do not help those displaced from their work attain as good or better replacement work and reward need to be discovered and overcome so that free trade does not become merely a game of musical chairs for jobs.

Now economics and psychology determine what people earn, but it is ethics and fairness, not economics, that determine what amount of reward is fair and that there should be for any given contribution.  Slaves, given the minimal amount to keep them alive and productive, and those who earn slave wages or exploitively competitive wages for the same minimal result, can give the same economic productivity as those rewarded commensurately for the contribution they make.  The difference between such societies is not an economic one but an ethical one based on a reasonable, even if rough or approximate sense of fairness.  

While the above seems to be about inequality, and that is the contemporary description of what is considered to be the problem, it is not really about inequality as such, which is not necessarily either morally unfair or economically unproductive, but is about the kind of inequality that produces unnecessary and unfair poverty in the midst of plenty, where resources are used to produce luxuries for some that prevent others from having the necessities which would allow them to flourish and development their fullest potential to make a contribution for the good of society and themselves.  This does not necessarily mean access to material goods, but to those material, intellectual, aesthetic, emotional, spiritual goods, and education in the broadest sense (meaning not just schooling), meaning development of those skills and other capacities that help one lead a good life and be both beneficiaries to the best of the past and benefactors contributing to the best of the future, so that each person is both an heir and an enriching ancestor to the graces of life -- someone who helps, or at least reasonably tries to help to the best of his or her ability, make the world a better place than it would have been without his or her presence in it. (This is different from the usual injunction to leave the world better than you found it, which can happen without your contribution, and which can be thwarted by others who might ruin it more than any contribution you might make no matter how great.)

Inequality (even involving great disparities of income) is not in itself unfair or unproductive, if everyone's basic needs for flourishing are met, and if everyone is receiving a portion of what s/he helped produce, at least approximately commensurate with his/her contribution to their creation.  Being a millionaire in a society of many billionaires is not a bad thing. But not having access to what could be readily available necessary resources for development of one's capacity for experiencing and doing good, because they are diverted to the unnecessary excesses of others, is.  It is that kind of preventable inequality that robs the economy of the best it could have to offer in the future.  And it is that kind of preventable inequality that is harmful economically even though the specific harms and losses may never be known.  It is that kind of inequality that is wrong and in many cases shameful.  That is different from inequality based on resources so scarce that only the most industrious and most fortunate can survive.  Such inequality as that is sorrowful but neither preventable nor a man-made injustice or unfairness.  Unavoidable inequality due to inadequacy of natural resources is unfortunate, but not unfair.

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:
"We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America."

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 government because 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 justice 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 done.

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[1] 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.)

[2] 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 insurance 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, offices, advertising, and other business expenses of the health insurance industry as well, which all would be unnecessary if physicians and hospitals charged more reasonably and fairly to begin with. Health insurance acts as a lottery where 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 benefits.  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.)


Enlightened self-interest does not make businesses do what they should if no noticeable, significant harm comes to them for not doing it or there is no perceived financial benefit for doing it; e.g., cleaning up a mess that no one forces them to (either through regulation or by boycotting the business enough to make a serious dent in earnings or profit) or paying employees (who have no real opportunity for more profitable work) more fairly.  Unfortunately, many people will tolerate legal and/or traditional acts they would not tolerate without the support of law or tradition, mistakenly believing that if the law condones them or tradition retained them, they must be morally right.  The economic art of running a business or a government is not to push people so far they rebel and topple it, but morality requires treating people better than just what you can get by with.  Economically (as opposed to morally) one only needs to pay enough to prevent needed workers from striking, quitting, causing a consumer boycott, or rebelling in some other way.  And one only needs to treat customers well-enough to prevent boycotts or losing to many of them to competition.  And democratically (as opposed to morally) one only needs to do what people are willing to tolerate without throwing you out of office or revolting.  Just as business doesn't want to cause insurrection or strike by obviously unfair wages or practices, government does not want to cause it by policies perceived to be unfairly coercive.  There is a limit to how much democratic government can force when it cannot convince or cajole change, even if the change is morally necessary and important.  But morality requires that business and government should seek as much improvement as they can achieve, not as little as they can get away with.
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