Disposable Income and GDP Growth

Posted by PITHOCRATES - February 25th, 2013

Economics 101

With less Disposable Income there will be less New Economic Activity Created

The key to economic growth is disposable income.  For when we live from paycheck to paycheck economic growth is flat.  It’s when we have disposable income that we can spend money beyond our basic needs.  Such as on a vacation.  A new car.  A television.  New windows, carpeting, appliances, furniture, etc.  Movies, ball games, dinners, the theater, etc.  New clothes, jewelry, shoes, accessories, etc.  Tennis rackets, skis, baseball gloves, hiking boots, fishing gear, etc.  Smart phones, MP3 players, iPads, laptops, etc.  Jet skis, boats, motorcycles, mountain bikes, etc.  Radio-controlled cars/helicopters/planes, Game Boys, Xboxes, Wiis, PlayStations, multiplayer role-playing computer games, etc.

Buying these things creates a lot of economic activity.  But we can’t buy any of these things unless we have disposable income.  So the only way to increase economic activity is to increase disposable income.  Which means there is a direct relationship between GDP and disposable income.

There’s been a lot of talk about real incomes being flat.  Even falling during the Obama presidency.  Which is bad.  For if median incomes are falling people will have less disposable income.  And with less disposable income they will be buying less of all those things that create new economic activity.  The things we enjoy.  That make our lives more fun.  More enjoyable.  And less miserable.  Those things that increase our standard of living.  And the quality of life.  So a flat and falling median income reduces our standard of living.  And our quality of life.  As we live from paycheck to paycheck.  Making barely enough to meet our living expenses.  And sometimes not even making enough for that.  Having to turn to government assistance to make up the difference.

We add Disposable Income and Discounted Government Spending to get the Net Add to GDP

The key to disposable income and GDP growth is jobs.  And the more jobs the better.  So job creation is very important.  Which means we need a business-friendly environment.  With a minimum of costly regulations.  And low taxes.  To encourage employers to hire more people.  So more people have jobs.  Those who do use their income to meet their living expenses.  And use their disposable income to create new economic activity.  The more disposable income they have the more new economic activity they can create.  So what’s the best way to increase their disposable income?  The same way we encourage employers to hire more people.  Low taxes.  We can illustrate this in the following table which is based on assumptions and approximations.

GDP Discounted Required and Average Calculations

The effective tax rate a person pays includes all taxes he or she will pay.  Property tax, sales tax, gas tax, telecommunication tax, liquor tax, cigarette tax, import tariff, dog license tax, fishing license tax, luxury tax, watercraft registration tax, vehicle sales tax, state income tax, federal income tax, Social Security tax, Medicare tax, capital gains tax, etc.   Median income and living expenses are constants.  We subtract taxes from median income to get net income.  Subtracting living expenses from net income gives us disposable income.  We then calculate these numbers for additional effective tax rates that are multiples of 4%.

We add disposable income and stimulus together to get the net add to GDP.  What we call ‘stimulus’ is a percentage of all those taxes reentering the economy through government spending.  In our example 80% of those taxes find their way back into the economy.  While 20% is lost through waste and inefficiency.  This stimulus can pay for a government worker, a government contractor or a direct government benefit that helps people meet their living expenses.  This redistributed income is money that the income earner would have spent had it not been taxed away.  Instead, someone else will spend it.  But not as efficiently.  As it must first pass through an inefficient government bureaucracy.

Giving People Benefits does not Replace Disposable Income

We extend the table out to an effective tax rate of 52% and graph the results.  We see that as the effective tax rate increases disposable income falls.  As does GDP growth.  Showing that increasing taxation reduces GDP.  That said, average GDP growth has been approximately 3% during the latter half of the 20th Century.  Despite increasing taxation reducing GDP.  So how do we reconcile a falling GDP and a 3% GDP growth?  With aggressive increases in productivity.  And investments in capital equipment.  Allowing business to produce more with less.  Resulting in a rising real GDP growth rate.  As shown in the following graph.

GDP Discounted Required and Average

In order to maintain a 3% growth rate in GDP we need a rising real GDP growth rate (in one America doing very well despite government) to offset the falling discounted GDP growth rate due to falling disposable income (in another America not doing well because of government).  When we add the real and the discounted GDP growth rates together we get the constant 3% of average GDP growth.  Which is why businesses have never been more profitable despite stagnant economic growth during President Obama’s time in office.  They’re doing well because they’re producing more with less by exchanging people for new capital equipment.  Hence the higher profitability along with chronic high unemployment.  With more unemployed workers than available jobs there is a downward pressure on median income.  That combined with higher personal effective taxes has greatly reduced disposable income.  And new economic growth.  Which subtracts a lot away from that real GDP growth.

Giving people benefits does not replace disposable income.  For government assistance helps people meet basic living expenses.  While having a job offers the ability to earn disposable income.  Which is key for new economic growth.  If we bring the effective tax rate down the discounted GDP growth graph will flatten out.  As this happens the gains in productivity would remain.  Leaving real GDP growth unchanged.  With real GDP growth unchanged and discounted GDP growth decreasing the average annual GDP growth would therefore increase.  And approach real GDP growth.  With double digit GDP growth tax revenues would soar even at lower effective tax rates.  Requiring less borrowing.  Which would give us smaller deficits.  While reducing the growth in the federal debt.  Perhaps even reducing the debt.  Solving all of our financial problems.  By simply cutting taxes.  And the spending those taxes fund.



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Slavery, the Cotton Gin, the Jacquard Loom, Punch Cards and Computers

Posted by PITHOCRATES - December 7th, 2011

Technology 101

African Slaves came to the New World because the Colonists needed Laborers

The Europeans didn’t invent slavery when they introduced it to the New World.  It’d been around since the dawn of civilization.  And it’s been a way of life in many civilizations for thousands of years.  Where no one was safe from the slave traders.  Some were born into slavery.  Some were simply soldiers captured in battle.  Even children were bought and sold.  Perhaps the saddest story is the Children’s Crusade of 1212.  When about 50,000 poor Christian kids walked from Central Europe to free Palestine from Muslim control and return it to the Christians.  They got as far as boarding ships in Italian ports.  But those ships did not deliver them to Palestine.  They delivered them instead into the Muslim slave markets of Northern Africa and the Middle East.  Where they were never heard from again.

African slaves came to the New World because the colonists needed laborers.  They tried enslaving the Native Americans.  But it was too easy for them to escape back into friendly territory.  And blend in with the indigenous population.  Not the case with black Africans.  Who didn’t know the surrounding country.  Or the languages.  What they knew was an ocean away.  Also, the locals had a tendency of dying from European diseases.  Especially smallpox.  Whereas the Africans were long exposed to smallpox.  And built up some resistance to this scourge of European colonialism.

So the New World colonies began with slaves harvesting their crops.  Slaves that the Europeans bought from African slave traders.  Who had long been selling captured Africans to the Arabs.  And had no problem selling them to the Europeans.  And so began the problem of slavery in America.

With the Cotton Gin Separating the Seed from the Cotton Fiber became not so Labor Intensive

When the British American colonists started talking about liberty the slavery problem was the elephant in the room that they were reluctant to talk about.  When Jefferson wrote that all men were created equal they knew that meant those enslaved against their will, too.  Yet here they were.  These liberty-seeking people were enslaving people themselves.  But there was a problem.  To form a united country the Founding Fathers needed the southern states.  Who used slaves as the basis for their economy.  And they weren’t going to join a union without their slaves.  So they wouldn’t talk about the elephant.  Instead they tabled that discussion for 20 years.  With the population growing they didn’t need slaves anymore.  There were few in the North.  And the South should follow suit.  It was inevitable.  Leaving just one problem to solve.  What to do with their slaves as they transitioned to paid laborers.  Which the Founding Fathers were sure the southern slave owners could solve within those 20 years.

Slave-labor was not efficient.  George Washington wanted to sell his slaves and replace them with paid laborers.  Because paid laborers cost less.  You only paid them for their labors.  And then they went away.  And if you changed your crops you could easily hire new laborers skilled in the new crop.  Not quite so easy with a large slave labor force.  So those in the North had good reason to believe that slavery would slowly give way to paid laborers.  Even in the South.  Or so they thought.  But one of the staple crops of the South started to shape events.  Cotton.

Cotton was a labor-intensive crop to harvest.  And separating the seed from the cotton was even more labor-intensive.  Until someone mechanized this process.  With a cotton engine.  The cotton gin.  Patented in America by Eli Whitney.  A hand-cranked device that used hooks to pull the cotton fiber through a screen.  The holes in the screen were small enough to let the cotton fiber through.  But not large enough for the seeds to pass.  With the cotton gin separating the seed from the cotton fiber became not so labor intensive.   In fact, these little machines could clean cotton faster than the slaves could harvest it.  Which meant, of course, there was a lot more cotton that could be grown and harvested.  Which created a new slavery boom.  And dashed all the hopes of the Founding Fathers.

Cheap Cloth Unleashed a lot of Economic Activity which Improved the Quality of Life

Many blame the cotton gin for extending the institution of slavery in America.  And the bloody American Civil War that ended it.  But apart from this the cotton gin was a fundamental step in modernizing economies everywhere.  And helped to spur the textile industry forward.   By creating an abundant source of material for weaving looms everywhere.

The textile industry was important because everyone wore clothes.  And we made clothes from cloth.  Once upon a time people made their own clothes.  Or spent a lot of money for store-bought clothes.  Leaving them with little time or money for other things.  So cheap cloth unleashed a lot of economic activity.  Which improved the quality of life.  The Chinese started this process.  By giving us an advanced loom that used foot-power to lift thread.  And the spinning wheel to make yarn.  All the weavers needed were abundant sources of fiber to feed these machines.  Such as American cotton.

The Chinese also made some beautiful silk tapestries with complex patterns.  Which were very difficult to reproduce by hand in the West.  Until the French automated this process.  When Joseph Marie Jacquard improved on the works of Basile Bouchon, Jean Baptiste Falcon and Jacques Vaucanson.  And created the Jacquard loom.  This automated the pattern process coming from those Chinese looms.  By using punch cards to automatically lift the proper threads to reproduce that complex pattern.  An impressive advance.  But one that did not impress the French.  Who were busier with revolution than fancy weaved patterns.  But the British were interested.  And they used the Jacquard loom in their booming textile industry.  Fed largely by that abundant American cotton.  Until the American Civil War, at least.

An Advanced Automated and Mechanized Economy has no Room for Slavery

The British also used this punch card idea to automate their shipbuilding industry.  To speed up the riveting process.  By automating riveting machines.  To make ships that carried immigrants to the new world.  Who swelled the American population.  Making the census taking more and more complex.  And another punch card system made counting these people simpler.  The tabulator.  Where an operator punched holes in a card to represent information for each person.  Age.  Marital status.  Country of origin.  Etc.  IBM would use this idea of punching information into a card later.  To program some of the first computers.  Machines that increased efficiencies further.  By replacing ever more people with machines.

So it is an interesting turn of events.  Eli Whitney created the cotton gin in America.  A machine that was part of a series of technological developments that increased efficiencies and reduced the number of workers needed to perform once labor intensive tasks.  All during this process fewer people were able to do more things.  Except one thing.  Planting and harvesting cotton.  That would take first a civil war.  And then steam-powered farming equipment.  To automate farming.  Which came later to the South than it did in the slavery-free North.  And other parts of the world.

Life got better for everyone the more advanced the economy became.  Sure, a lot of people lost jobs.  But that’s progress.  A few lost jobs is a small price to pay when the masses can enjoy a better life.  Thanks to automation and mechanization.  And that includes slaves.  Or, rather, former slaves.  For an advanced automated and mechanized economy has no room for slavery.



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Free Labor

Posted by PITHOCRATES - December 5th, 2011

Economics 101

Unlike Slaves Paid-Laborers Worked, Went Home and Fed & Housed their Own Families

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  And to sustain this economic growth we needed something else.  Free labor.

Slavery as an economic model has serious defects.  For one the labor is not free.  People are restrained against their will.  And only work to minimize their pain and suffering.  They do not think or innovate.  Their human capital is wasted.  Because no one voluntarily thinks and innovates to make a better life for others.  Especially if it  won’t improve their own life.  A slave, then, has little incentive to think or innovate.  Their incentive is to follow orders.  Because that was the proven way to minimize their pain and suffering.

Buying human beings is also less efficient than renting them.  Not everyone in a slave family was in their working prime.  The elderly couldn’t work the fields anymore.  Neither could the infant children.  But they all needed room and board.  Unlike a paid laborer.  Who you paid only for the hours they worked.  You didn’t feed or house them.  They worked and went home.  And fed and housed their own families. This is why George Washington wanted to sell his slaves and replace them with paid laborers.  To increase his profits.  But he found people were only interested in buying slaves in their working prime.  He could sell some.  But not all of them.  Which meant breaking up slave families.  Something he couldn’t do.  So he kept his slaves.  Settled for lower profits.  And kept the slave families together.

The Slave-Economy in the New World was a Step Backward toward Old World Aristocracy

Not everyone was as kind as Washington.  Some people had no problem breaking up families.  Or abusing their slaves.  But they all had to exercise restraint.  Because a maimed or a dead slave couldn’t work.  A problem for slave owners because they bought their slaves.  Often borrowing money for the purchase.  So it was costly to replace them.  As well as to train them.  One skilled in picking cotton may not readily take to harvesting and drying tobacco.  Whereas you could simply advertise for a hired hand who was skilled in harvesting and drying tobacco if you used free labor.

Free labor added to the economy.  Because they had earnings for economic exchange.  Slaves didn’t.  The slave owner provided their room and board.  So they were not only enslaved they were also dependent on others for everything free laborers bought with their earnings.  Economic exchanges in a slave economy, then, were limited to the wealthy landowners.  Making it a system much like European feudalism or Russian serfdom.  Only instead of peasants or serfs there were slaves.  Who were less free.  And even poorer.

Thus the slave-economy in the New World was a step backward toward Old World aristocracy.  (And a little beyond it.)  Where there were a few rich and a lot of poor.  Agricultural reform came with the help of the Black Death.  When the balance of power tipped from the landed aristocracy to the much thinned out labor force.  Who could then demand wages and better conditions.  And then came capitalism.  For those new wage-earners had money for economic exchanges.  Which they made.  Thus producing a prosperous middle class.  Which took root in the New World.  At least, in the parts of the New World that used free labor.

Our Capacity to Think is the Key to Unlocking our Human Capital, Economic Growth and the Quality of Life

The great problem of slavery (other than the moral one) is that it excluded a great part of the population from the economy.  Slavery excluded millions of people from making economic exchanges.  And millions who might have thought and created didn’t.  Their human capital was wasted.  Setting economic development back.  As well as the quality of life.

In a modern capitalistic economy there must be no slavery.  Or dependency.  Because those enslaved or dependent do not create.  Or innovate.  They just exist.  And do not maximize the gift of being human.  Our capacity to think.  Which is the key to unlocking our human capital.  Economic growth.  And the quality of life.



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Advanced Civilization takes a Huge Step Forward with the Bronze Age

Posted by PITHOCRATES - November 2nd, 2011

Technology 101

Bronze gave the Artisans the Tools to Unleash their Human Capital and Increase the Quality of Life

Two things put man at the top of the food chain.  The ability to think.  And hands that could build the things we thought of.  In particular, tools.  First it was sharpened sticks and antlers.  Stone and flint.  These were steps forward.  But the quality of these tools was poor.  They weren’t ideal.  They were the best we could chip out from what we could find.  And they didn’t hold a sharp edge very long.  But that all changed with metallurgy.

Enter the Bronze Age.  Where man could cast pretty much any tool he thought of.  By pouring molten metal into a mold.  This was a huge step forward.  Because we could make tools to fit the job.  Any job.  They were strong, too.  And could hold a sharp edge for a longer time.  This exploded the growth of cities.  Farms.  And urban life.  Artisans now had the tools to unleash their human capital.  Cities became rich in finished goods.  Things that increased the quality of life.  And attracted the attention of envious neighbors.  And the uncivilized barbarians beyond the civilized frontier.

With bronze they could make better weapons to defend themselves.  And they did.  The Sumerians used bronze to create one of the most formidable defensive units of the time.  The phalanx.  A formation of soldiers armed with bronze-tipped spears.  This spear could reach further than a sword.  So swordsmen attacking a phalanx were at a disadvantage.  The phalanx could stab with the spear before the swordsman could stab with his sword.  The same principle of the defensive mechanism of the porcupine.  The phalanx was such a formidable defensive unit that it saw service for many centuries.  Letting civilizations grow because they could defend themselves from their envious neighbors.

It took Regional and Long Distant Trade to get the Copper and Tin to Smelt into Bronze

The Stone Age lasted a long time.  And the change to the Bronze Age didn’t happen overnight.  Because you don’t mine bronze.  You make it.  When you melt two or more metals together.  And the two most popular metals of the time were copper.  And tin.

The Sumerians used bronze tools and weapons.  But the Fertile Crescent didn’t have any ore deposits.  So the metals necessary to make bronze were not indigenous to the Fertile Crescent.  That land between the Euphrates and the Tigris.  So how did a people with no ore deposits smelt copper and tin into bronze?  Trade.

You have to dig copper out of the ground.  You have to dig tin out of the ground.  And you typically don’t dig copper and tin out of the same mine.  Worse, tin wasn’t as close to the Sumerians as copper was.  So it took regional trade.  And long distant trade.  To get the ore to smelt into bronze.

Trade gave us the Bronze Age and Advanced Civilizations

The Bronze Age created advanced civilizations.  But it took an advanced civilization to make bronze.  So what came first?  The Bronze Age?  Or advanced civilization?  That’s an easy answer.  Trade.

An advanced civilization could create great things.  As long as they had the ingredients to make those things.  Some of these things were indigenous to their civilization.  A lot of them were not.  So you traded.  To get the things you needed but didn’t have.  With the things you had.  And the things you built.  From both.



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Posted by PITHOCRATES - October 31st, 2011

Economics 101

People Traded the Things they Made to have Things they couldn’t Make

Agricultural advances gave us food surpluses.  Food surpluses gave us the division of labor.  And spare time.  For the first time everyone didn’t have to hunt or gather food.  They could do other things.  Think.  Experiment.  Innovate.  Create.  And they did.  Becoming specialists.  A middle class.  Artisans.  People who became very good at doing one thing.  So they kept doing that one thing.  Finding ways to improve that one thing.  And created surpluses of their own.  Potters made excess pottery.  Shoemakers made excess shoes.  Tanners made excess leather goods.  Metalworkers made excess metal goods.

Cities grew in the center of the sprawling farmland.  And it was in the cities where these artisans lived.  Where they honed their specialties.  And met.  With other specialists.  And with farmers.  To trade.  The potter would trade pottery for shoes.  The farmer would trade food for shoes and metal goods.  The tanner would trade leather goods for pottery, shoes and food.  And so on.  People traded the things they made.  To have things they couldn’t make.  Everyone was able to have more things.  Thanks to this trade.

This unleashed the vast human capital of the people.  Their cities.  And their civilization.  Cities on the coast fished.  Cities closer to the forest harvested wood.  Cities closer to the hills mined silver, gold and copper.  And coal.  And the cities traded their surpluses with other cities.  Metal workers and potters traded their goods for fuel for their forges and kilns.  Miners traded their ore and coal for grain and fish.  Either directly.  Or indirectly.  When other people traded their large surpluses with other people in other cities.  With the miners getting a portion of these large-scale trades for all their efforts to make those trades possible.

As Civilizations became more Complex they became more Dependent on Trade

All of this trading made cities grow.  And as a result the civilization they belonged to grew.  And became more advanced.  People ventured further.  Looking for other resources.  And met people from other civilizations.  Who had raw materials that were different and interesting.  As well as finished goods that were different and interesting.  And these civilizations traded with each other.

Civilizations established trade routes with each other.  Which connected civilizations with others in the unknown world.  Beyond the civilizations they knew.  Markets appeared on these trade routes.  Bringing the exotic from the furthest corners of the world to everyone.  As well as new ideas.  And innovation.  The civilized world grew more advanced.  More interdependent.  More peaceful.  And better.  There was more food.  More technology.  More goods and services.  And more leisure.  Giving rise to the arts.  And entertainment.

But it was not all good.  As cities grew they grew attractive to the uncivilized barbarians beyond the frontier.  Roving bands of hunters and gatherers.  Who were more partial to plunder than trade.  So a portion of their surpluses had to be set aside for city defenses.  The building of city walls.  Implements of wars.  And standing armies.  To defend their cities.  Their civilizations.  And their trade routes.  For as civilizations became more complex they became more dependent on trade.

Trade Improved the Quality of Life which is the Hallmark of an Advanced Civilization

Trade unleashed our human capital.  Because it drove innovation.  There was a big world out there.  Creating a lot of fascinating stuff.  And the only way to get it was to trade your fascinating stuff for it.  And when we did everyone won.  Life got better.  We learned new and interesting things.  That we used as building blocks for further innovation.  And further advancement.  Which led to a better quality of life.  The hallmark of an advanced civilization.



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The iPhone is Impressive but the Plough is a True Technological Wonder

Posted by PITHOCRATES - October 19th, 2011

Technology 101

The Plough allowed us to Grow more Food in Virtually any Soil giving us more Free Time to Think

The iPhone is an amazing piece of technology.  Whenever a new one comes out lines form with anxious people clamoring to get the new phone.  Steve Jobs was a brilliant entrepreneur.  He knew how to give the people what they wanted.  But he had some help along the way.

What made the iPhone possible?  Was it touch-screen LCD technology?  A little.  Was it the miniaturization of integrated circuits?  Well, that helped no doubt.  How about the transistor?  This was big.  It opened the door to the integrated circuits.  But it took something before that.  Vacuum tubes?  What the transistor replaced?  No.  Was it wireless radio transmission?  Antenna technology?  The development of electromagnetic field and wave theory?  No.  You have to go further back.  Even before the genius of Nikola Tesla (electrical engineer, inventor and father of AC power).  The telephone?  The telegraph?  The printing press?  No.  All necessary steps on the road to the iPhone.  But none of these are the prime mover that set things in motion to make the iPhone possible.  To find this prime mover you have to go way back.  To the dawn of civilization.  To the one piece of technology that changed everything.  The plough.

The first civilizations sprung up on the fertile banks of the great rivers.  The Hwang-Ho.  The Indus.  The Nile.  The Tigris.  And the Euphrates.  Where the flooding of these rivers made the soil nutrient-rich.  And easy to work.  The masses could scratch it with a stick.  Sow their seeds.  And pray to their gods for a bountiful harvest.  The plough changed that.  It let us grow food in virtually any soil.  And the work of a few could do the same of the masses in those river valleys.  This produced two things.  A food surplus.  And spare time.  Everyone in a society no longer had to farm.  They could do other things.  And think.

The Plough gave rise to Artisans, the Free Market Economy and a Middle Class

It all started here.  The plough unleashed the human mind.  It transformed us from working machines at the mercy of our environment.  To masters of our environment.  Where we transformed our environment to better serve us.

This gave rise to artisans.  Blacksmiths.  Tanners.  Cobblers.  Inventors.  Entrepreneurs.  What we call the rise of a middle class.  These people didn’t have to grow food.  Because they could trade for food.  With the things they created.  And like the farmers, they created surpluses.

We traded this surplus of food and artisan goods in markets.  The free market economy was born.  These markets became cities.  As the economy grew capital formation grew.  Banking and finance.  The joint-stock company.  The corporation.  Capitalism.  Which eventually gave us Steve Jobs.  And the iPhone.

The Plough put us in Control of our Environment, Reduced Famine and Improved the Quality of Life

None of this would have happened without the plough.  Because before the plough everyone grew food.  And lived at the mercy of their environment.  Where famine would devastate civilizations because of a bad growing season.  But the plough gave us food surpluses.  That let us live through a bad growing season.  And allowed a middle class to continue to grow.  Improving the quality of life for the first time in history.



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