Comment by maxxxxx | Hacker News Reader

Comment by maxxxxx | Hacker News Reader

Parent Full thread

I am not an economist but I am pretty sure you could design tax policies that make it more attractive to pay higher salaries for the average worker or maybe give them shares in the company.

Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million.

Obviously this won't happen but it's a thought that should be brought up from time to time.

>"Can you imagine how much demand there would be if average wage growth would have kept up with productivity? People who make 30000/year would spend much more if they had 40000/year. I don't think a CEO's behavior will change much if he has 30 million or 40 million."

There might be more demand for the consumer goods popular for low-middle income citizens, but then again, this could reduce capital investments and reduce productivity in the long term, thus reducing wage growth in the future. I suppose my answer is that I can't imagine how much 'demand' there would be if average wage growth kept up with productivity, largely because the economy is a complicated beast, and 'demand' is not a simple thing.

How would more demand reduce capital investment? If anything it should make it more attractive to invest. Supply and demand?

I am assuming that we hold M2 velocity of money constant for the purpose of this analysis; which is to say that I assume richer people and poorer people hold on to money for the same amount of time before re-allocating it (to stocks, bonds, consumables, durable goods, etc.). If this assumption is true, both will create the same total 'demand', but for different goods. Richer people tend to spend much less (as a proportion of their income) on consumables and personal items than poorer people; the rich also tend to invest the vast majority of their money, and that money often goes to capital investments.

Supply and demand works the same for industrial buildings, robots, software, and trains as it does for homes, couches, and cars. The primary (economic) difference between these goods is their impact on long-term productivity.

>I am assuming that we hold M2 velocity of money constant for the purpose of this analysis

Poor people have to spend money on essentials as soon as it comes in. Rich people don't. That's pretty much the simplest possible definition of being poor. So that is not a valid assumption.

>If this assumption is true, both will create the same total 'demand', but for different goods.

This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?

Poor people spend money on essentials, and perhaps a little distraction and entertainment.

Why would the total demand from both somehow be the same?

> The primary (economic) difference between these goods is their impact on long-term productivity.

Which is the crux of the problem - speculative casino "investment", which is based on gaming markets, isn't economically productive. Neither is an economy that leans heavily on usury.

Productive investment in R&D, small business development, and wage growth stimulates economic capacity and increases confidence.

Speculative investment - including speculative gambling, systems of forced debt like student loans and payday lending, and asset inflation which drives up rents and property prices - destroys demand and economic capacity.

The fact that we're even discussing negative interest rates while in the middle of severe commodity deflation proves the core problem hasn't been addressed.

>"Poor people have to spend money on essentials as soon as it comes in. Rich people don't. That's pretty much the simplest possible definition of being poor. So that is not a valid assumption."

Rich people invest money in capital goods as soon as it comes in, either through a direct purchase, or because the investment bank where they hold the money gives it to someone who spends it.

>"This can't possibly be true either. Rich people spend money on essentials and on luxury goods and on investments and keep some spare cash on hand, because why not?"

I said 'as a proportion of income'; rich people spend far less on living expenses than the poor do as a proportion of income. They might have a car that is 10x as expensive, but with 100x the income to pay for it.

>"Poor people spend money on essentials, and perhaps a little distraction and entertainment."

This agrees with my previous statement.

>>"If this assumption is true, both will create the same total 'demand', but for different goods."

that seems like a strange assumption when we know for a fact that most americans live paycheck-to-paycheck.

You might be living paycheck-to-paycheque, yet still take the same time to allocate money as someone much more well-off. A full time investment management staff can allocate money quite quickly, and tend to plan ahead (thus avoiding delays). Being 'leveraged' does not hasten allocation of funds, it affects how the money is used.

totally fair point, i think i misunderstood your meaning before.

> I am assuming that we hold M2 velocity of money constant for the purpose of this analysis; which is to say that I assume richer people and poorer people hold on to money for the same amount of time before re-allocating it

There are two problems with that: the most obvious is that differences in velocity at the first level is one of the main bases on which distribution differences are held to effect demand growth, so you are just assuming away the main issue.

The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)

>"There are two problems with that: the most obvious is that differences in velocity at the first level is one of the main bases on which distribution differences are held to effect demand growth, so you are just assuming away the main issue."

Demand growth for what? CNC machines and tools, or LCD televisions? Making a capital investment in semiconductor fabs will affect production and inspection equipment demand, as well as driving down production costs for a wide variety of goods, whereas buying an LCD television will increase demand for TFT screens, backlights, and slightly increase demand for television production machinery. I am making an assumption because we have to. No one has ever make a comprehensive economy-wide microeconomic model that worked, and no one ever will; this is the essence of the calculation problem.

>"The second is even assuming away velocity differences at the first step, you also have to assume that velocity is the same in the different markets to which the rich and poor allocate funds: even if velocity were the same in the first case, this assumption would be invalid. (In both the first instances and later steps, this is even more true when you are considering growth of the domestic economy, where you aren't just concerned with velocity at each step, but also the propensity to spend within the domestic economy.)"

I agree that there is probably a difference between velocity of spending between rich and poor, but I'm not sure which one is faster (; please provide a link to such information if you have it). It seems likely that the poor spend more money on low cost foreign imports (stuff made in China) than rich people who are investing in very expensive specialty goods made in the West, so I think it likely that allocating more money to the rich is beneficial from a mercantilist point of view.

Some people don't change their lifestyle and save the extra income they make.

Money that an individual saves is re-allocated by their savings institution.

Reply on news.ycombinator.com