Cutting Spending Leads to Growth

[cpwill]

Savings = Current Income -Current Consumption

really. so when i put money in the bank, the bank keeps all that money? what about when i save in the form of investment?

 

[Kushinator]

really. so when i put money in the bank, the bank keeps all that money? what about when i save in the form of investment?

Investments often force you to purchase something. Like a stock, bond, antique, etc..., all of which are less liquid than cash. Even US treasuries can be a pain in the ass to liquidate (series H and HH).

 

[MCS117]

really. so when i put money in the bank, the bank keeps all that money? what about when i save in the form of investment?

Savings = Investments. Anything earned can be put to work into a company to buy new technology to increase production. That or savings is still a form of investment as it is gaining interest from staying in the bank.

Also I believe some governments are reaching the crowding out part of when continued government spending will smother the private investments. When this happens, cutting government spending will help private investors to start investing which in turn will improve economic growth. Government spending only helps if there is not that much government spending to begin with and the extra consumption can clear the private sector's inventories which will help the companies want to produce again to fill up their inventory and that can jump start the economy again.

Think of it like government spending as fuel and private investment as air/oxygen. When an engine is coming to a stall, pump more fuel in and it will stave off the stall. But put too much fuel in, less oxygen is in the system and it can stall the engine completely. Not enough fuel, it will just stall out if there is literally nothing to give the "stimulus" to the engine.

 

[phattonez]

So when the government doesn't spend then the engine will stall? Please then, explain how the US grew at its tremendous rate before the federal income tax was introduced.

 

[obvious Child]

So when the government doesn't spend then the engine will stall? Please then, explain how the US grew at its tremendous rate before the federal income tax was introduced.

What do you define as tremendous? On average the US grew at 2%. Not tremendous at all, but did lead to sizable growth over decades.

Furthermore, IMF poison pills suggest that lack of government spending during recessions is bad.

 

[phattonez]

What do you define as tremendous? On average the US grew at 2%. Not tremendous at all, but did lead to sizable growth over decades.

Is that real growth? Per capita? What stat exactly are you using? Data from that time period are known for their problems.

Furthermore, IMF poison pills suggest that lack of government spending during recessions is bad.

Gee, I wonder if the IMF had any bias that lead them to that conclusion.

 

[obvious Child]

Is that real growth? Per capita? What stat exactly are you using? Data from that time period are known for their problems.

I believe so. Per capita real growth. I got it from Sach's "End of Poverty."

Gee, I wonder if the IMF had any bias that lead them to that conclusion.

Besides the fact that the IMF is questionable nothing more then a pawn of the 1st world? Not that I don't like the fact that the ending point of payments from IMF bailout countries is a US bank account feeding interest into our wallets, but it doesn't change the fact that generally when a country does what the IMF wants, it get totally fracked up.

 

[phattonez]

I believe so. Per capita real growth. I got it from Sach's "End of Poverty."

Take a look at the chart here. It was the quickest thing I could find, but a pretty good comparison. It's table 4 in this link.

A History of the Standard of Living in the United States | Economic History Services

Nevermind that the US has the higest GDP per capita listed there in 1998, but in terms of growth from 1820 to 1998, only Finland and Japan beat the US. Japan for obvious reasons (being so isolationist in the 19th century), and Finland also was pretty low on that list in 1820. So I'd say comparatively, the US had a tremendous growth rate.

So what about 1820 to 1913, the time period I've mainly been talking about? It's not even close. The US has a growth rate of 422% per capita, that's about 4.5% per capita per year (I had to do this on Excel, but you can check for yourself if you don't believe me). The next closest country on that list was Germany, with about 345% growth in that same time frame. That's 3.71% per year.

So yes, I'd say that the US had pretty stellar growth during this time period. 4.5% per year. From 1913 to 1998, that growth rate drops to 2.9% per year, which is even more interesting when you consider that government spending has increased greatly since 1913 which positively affects GDP (and I'd say bloats the number since government spending is never as efficient as private spending).

I don't see anything about this stating it being real growth, but I compared these numbers to a chart at the beginning of the webpage and yes, these are real numbers.

 

[samsmart]

I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....

Indeed.

But what irks me about libertarians and conservatives is that they pressured the government to take away regulations on credit lending that allowed them to give out easy credit to people who had no way to pay it back. I think they did this to fuel consumerism that their businesses could profit from. However, they didn't really benefit, as all their products haven't been paid off yet.

But it's also a Catch-22, as credit is the only way that the poor and lower-middle class can lift themselves up out of poverty. They can't go to their jobs if they don't have a car, but their job doesn't pay them a high enough wage to pay for a car unless they do so on credit. The same goes for student loans and mortgages.

On the gripping hand, I do have to say that the credit that the poor and lower-middle class get wouldn't have to be so high if housing developers and auto manufacturers would build houses and cars that the poor and lower-middle class could afford even with credit. Instead of building big houses and expensive cars and provide more credit to the L-MC, they instead should be building smaller, more efficient houses and less expensive cars that the L-MC can afford even with credit.

I think that that will be the future of our economy. Manufacturers will produce "value" products for the L-MC to mass consume, then premium products for the Middle Class, and luxury products for the Upper-Middle Class and for the wealthy.

 

[samsmart]

Savings = Investments. Anything earned can be put to work into a company to buy new technology to increase production. That or savings is still a form of investment as it is gaining interest from staying in the bank.

Also I believe some governments are reaching the crowding out part of when continued government spending will smother the private investments. When this happens, cutting government spending will help private investors to start investing which in turn will improve economic growth. Government spending only helps if there is not that much government spending to begin with and the extra consumption can clear the private sector's inventories which will help the companies want to produce again to fill up their inventory and that can jump start the economy again.

Think of it like government spending as fuel and private investment as air/oxygen. When an engine is coming to a stall, pump more fuel in and it will stave off the stall. But put too much fuel in, less oxygen is in the system and it can stall the engine completely. Not enough fuel, it will just stall out if there is literally nothing to give the "stimulus" to the engine.

Well, here's the issue as I understand it.

Cutting government spending won't lead to growth.

Your premise is that if we cut government spending we are forced to cut taxes, and if we cut taxes people have more of their own income to spend how they will. Specifically, they can invest in companies and develop savings through such investments.

But here's the problem with that.

We have a consumer based economy. Private enterprises profit by having people consume their products. But people aren't consuming as much any more. Instead, people are saving more and more.

However, they aren't necessarily investing those savings. And the reason why is because businesses they invest in are extremely uncertain to provide returns. Why? Because people are consuming less. Which means less demands for products. Which means less production by businesses. Which means fewer returns on investments.

So while I agree that, in some areas, government spending does need to be cut, I don't think that such cuts would necessarily lead to greater growth, especially through investments, since Americans are focused more on savings right now than on consuming.

 

[PeteEU]

Well, here's the issue as I understand it.

Cutting government spending won't lead to growth.

Your premise is that if we cut government spending we are forced to cut taxes, and if we cut taxes people have more of their own income to spend how they will. Specifically, they can invest in companies and develop savings through such investments.

But here's the problem with that.

We have a consumer based economy. Private enterprises profit by having people consume their products. But people aren't consuming as much any more. Instead, people are saving more and more.

However, they aren't necessarily investing those savings. And the reason why is because businesses they invest in are extremely uncertain to provide returns. Why? Because people are consuming less. Which means less demands for products. Which means less production by businesses. Which means fewer returns on investments.

So while I agree that, in some areas, government spending does need to be cut, I don't think that such cuts would necessarily lead to greater growth, especially through investments, since Americans are focused more on savings right now than on consuming.

Kudos, well said.

In fact cutting taxes now will just lead to an even bigger budget deficit and hence raising the debt, and larger saving, because people are even more worried because of the constant barrage by the right about the deficit and debt. It is basically feeding it self at the moment. The lack of confidence will not be changed with a tax cut as it stands now.

And cutting government spending will only lead to even more misery for the average American, which will hit confidence even more... and so on and so on.

Now getting to grip on spending and income at a state and federal level, and setting down the regulations needed (not too much or too little) so the markets can calm down, will get confidence up and ultimately consumption.

And since the politicians refuse to do the right thing on spending and taxes and keep to their partisan bs tactics, then well.... catch 22.... you all are screwed.

 

[imagep]

Indeed.



But it's also a Catch-22, as credit is the only way that the poor and lower-middle class can lift themselves up out of poverty. They can't go to their jobs if they don't have a car, but their job doesn't pay them a high enough wage to pay for a car unless they do so on credit. The same goes for student loans and mortgages.

On the gripping hand, I do have to say that the credit that the poor and lower-middle class get wouldn't have to be so high if housing developers and auto manufacturers would build houses and cars that the poor and lower-middle class could afford even with credit. Instead of building big houses and expensive cars and provide more credit to the L-MC, they instead should be building smaller, more efficient houses and less expensive cars that the L-MC can afford even with credit.

The part about the lower middle class not being able to climb up is mostly true, but I have a different conclusion as to why this happens. I think it is as simple as them being underpaid for the value of the work that they do. You cant tell me that the CEO of large insurance companies are as productive and valuable as 2,000 of their clerks or janitors or lower paid employees. One human is simply not THAT much more valuable than another.

This is evidenced by the wider and wider gap between the rich and the middle class. Disporportional income distributation is the largest flaw in capitalism. Income distribution is not only effected by supply and demand and valued in relationship to productivity, it is very much effected by things like cronieism and other personal "power" issues that distorts the law of supply and demand in a way which tends to grossly distort income distribution.

I once had a friend who had many years of executive level sales experiance. He was trying to give me some "good" advice and told me that my value (as CEO) to my company was my companies entire gross sales divided by the number of hours that I worked. Yup, that made me feel very good personally, but the reality is that with large corporations, the CEO is simply not worth anything like that (and neither was I). Of course if I actually got paid that much there would be no money left for anyone else including our vendors. Many people use that type of mis-logic to justify crazy salaries. The reality is that the larger the company the less the CEO affects operations or profitability.

I think that that will be the future of our economy. Manufacturers will produce "value" products for the L-MC to mass consume, then premium products for the Middle Class, and luxury products for the Upper-Middle Class and for the wealthy.

I thought they already did that.

 

[UtahBill]

Indeed.

But what irks me about libertarians and conservatives is that they pressured the government to take away regulations on credit lending that allowed them to give out easy credit to people who had no way to pay it back. I think they did this to fuel consumerism that their businesses could profit from. However, they didn't really benefit, as all their products haven't been paid off yet.

But it's also a Catch-22, as credit is the only way that the poor and lower-middle class can lift themselves up out of poverty. They can't go to their jobs if they don't have a car, but their job doesn't pay them a high enough wage to pay for a car unless they do so on credit. The same goes for student loans and mortgages.

On the gripping hand, I do have to say that the credit that the poor and lower-middle class get wouldn't have to be so high if housing developers and auto manufacturers would build houses and cars that the poor and lower-middle class could afford even with credit. Instead of building big houses and expensive cars and provide more credit to the L-MC, they instead should be building smaller, more efficient houses and less expensive cars that the L-MC can afford even with credit.

I think that that will be the future of our economy. Manufacturers will produce "value" products for the L-MC to mass consume, then premium products for the Middle Class, and luxury products for the Upper-Middle Class and for the wealthy.

You can't lift yourself out of poverty by borrowing money for non-esentials, and the poor in the USA have plenty of non-essentials. Small houses are alreadly available, as are inexpensive cars. They won't be new, but they will be affordable to anyone making a living wage. But instead of spending wisely, our "poor" have gadgets and services that they don't need. They forego medical insurance for their children, but these same children have ipods and cell phones.
SOme of our LMC do the same thing, they make a good wage, but waste it on jacked up 4x4 trucks with huge tires on fancy wheels and it is just used to go to and from work. Most 4x4 trucks rarely go off road, so why do people waste their money on them?
It's a "look at me" thing. Men want to appear more macho, kids want to be accepted by their peers, women are constantly playing "dress up".....
Financiall success for most of us is a slow growing process, but too many of us believe the hype in commercials that make us want things just because others have them.
Well, others have excessive debt, they jumped off a cliff, and we follow like lemmings...

 

[imagep]

Well, here's the issue as I understand it.

Cutting government spending won't lead to growth.

Your premise is that if we cut government spending we are forced to cut taxes, and if we cut taxes people have more of their own income to spend how they will. Specifically, they can invest in companies and develop savings through such investments.

But here's the problem with that.

We have a consumer based economy. Private enterprises profit by having people consume their products. But people aren't consuming as much any more. Instead, people are saving more and more.

However, they aren't necessarily investing those savings. And the reason why is because businesses they invest in are extremely uncertain to provide returns. Why? Because people are consuming less. Which means less demands for products. Which means less production by businesses. Which means fewer returns on investments.

So while I agree that, in some areas, government spending does need to be cut, I don't think that such cuts would necessarily lead to greater growth, especially through investments, since Americans are focused more on savings right now than on consuming.

Exactly.

Our economy is very much consumer driven.

I would seriously doubt that fewer government jobs and government contracts for businesses would at this particular time increase consumer confidence levels. I know that if I was a government contractor and I was worried that there was a pending cut in my contract that I wouldn't hire any more employees, I wouldn't purchase additional equipment, I wouldn't expand my building, and I wouldn't purchase any vehicles. If I was a government employee and I was expecting or notified that my job was going to be eleminated I wouldn't spend a dime that I didn't absolutely have to, I may even try to sell my property so that I would have some extra cash on hand. If I was a company that provided goods to companies that were government contractors I would do the same.

If today our elected leaders all magicaly saw "the error of their big spending ways" and immediately slashed government spending, we would still be in a recession - it would probably become even worse. I'm not saying that during good economic times we shouldn't do that, we absolutely should, but at this particular point in time, our consumer confidence level is so low that without some government spending we would immediately sink lower.

 

[imagep]

You can't lift yourself out of poverty by borrowing money for non-esentials, and the poor in the USA have plenty of non-essentials. Small houses are alreadly available, as are inexpensive cars. They won't be new, but they will be affordable to anyone making a living wage. But instead of spending wisely, our "poor" have gadgets and services that they don't need. They forego medical insurance for their children, but these same children have ipods and cell phones.
SOme of our LMC do the same thing, they make a good wage, but waste it on jacked up 4x4 trucks with huge tires on fancy wheels and it is just used to go to and from work. Most 4x4 trucks rarely go off road, so why do people waste their money on them?
It's a "look at me" thing. Men want to appear more macho, kids want to be accepted by their peers, women are constantly playing "dress up".....
Financiall success for most of us is a slow growing process, but too many of us believe the hype in commercials that make us want things just because others have them.
Well, others have excessive debt, they jumped off a cliff, and we follow like lemmings...

Sure, all of that is very true. But in aggregate, our society obviously CAN afford those things, this is evidenced by the fact that we HAVE those things. We have built all those houses, we jacked up thosee 4x4 trucks, we made those fancy wheels. Why is it that when we are productive enough to make stuff that we don't get paid enough to purchase it? Why is it that in order to own the stuff we have to borrow money from the rich? Why is it that the rich only have to pay 15% tax on the money that they make but the guy who actually has to build stuff has to pay a higher incremental rate on the money that he makes? Why is it that the average employee used to make 1/30th of what the top CEO's made, but now the average employee only makes 1/600th of what top CEO's make?

And I am not sure why so many people (like a lot of the commentators on those Sat morning Fox money shows) suggest that some home owners dont "deserve" a loan to purchase a house. If the lower middle class can afford to rent a house for $1,000 a month, whats wrong with them making a $700 a month house payment to the bank (for the same house)?

 

[phattonez]

Indeed.

But what irks me about libertarians and conservatives is that they pressured the government to take away regulations on credit lending that allowed them to give out easy credit to people who had no way to pay it back.

Companies that did that should have gone out of business, but instead were bailed out. Don't blame a lack of regulation when market mechanisms were not allowed to operate.

I think they did this to fuel consumerism that their businesses could profit from. However, they didn't really benefit, as all their products haven't been paid off yet.

Oh yeah, there's no way that people could actually believe in that capitalism nonsense. :roll:

But it's also a Catch-22, as credit is the only way that the poor and lower-middle class can lift themselves up out of poverty. They can't go to their jobs if they don't have a car, but their job doesn't pay them a high enough wage to pay for a car unless they do so on credit. The same goes for student loans and mortgages.

Credit serves an important purpose, no doubt.

On the gripping hand, I do have to say that the credit that the poor and lower-middle class get wouldn't have to be so high if housing developers and auto manufacturers would build houses and cars that the poor and lower-middle class could afford even with credit. Instead of building big houses and expensive cars and provide more credit to the L-MC, they instead should be building smaller, more efficient houses and less expensive cars that the L-MC can afford even with credit.

Cry me a river. Those things are built because they will buy them. If they wanted cheap cars then they could buy cheap used cars or cheap new cars. A product won't be built if people don't expect a reasonable demand for that product.

I think that that will be the future of our economy. Manufacturers will produce "value" products for the L-MC to mass consume, then premium products for the Middle Class, and luxury products for the Upper-Middle Class and for the wealthy.

It would make sense, but we need to stop the subsidization of people living beyond their means.

 

[UtahBill]

Sure, all of that is very true. But in aggregate, our society obviously CAN afford those things, this is evidenced by the fact that we HAVE those things. We have built all those houses, we jacked up thosee 4x4 trucks, we made those fancy wheels. Why is it that when we are productive enough to make stuff that we don't get paid enough to purchase it? Why is it that in order to own the stuff we have to borrow money from the rich? Why is it that the rich only have to pay 15% tax on the money that they make but the guy who actually has to build stuff has to pay a higher incremental rate on the money that he makes? Why is it that the average employee used to make 1/30th of what the top CEO's made, but now the average employee only makes 1/600th of what top CEO's make?

And I am not sure why so many people (like a lot of the commentators on those Sat morning Fox money shows) suggest that some home owners dont "deserve" a loan to purchase a house. If the lower middle class can afford to rent a house for $1,000 a month, whats wrong with them making a $700 a month house payment to the bank (for the same house)?

We are not borrowing money from the rich, not as much as we are borrowing from each other and then using the same money to compete with each other in the marketplace. I totally agree that CEO's are greedy. IT is better to have a thousand milliionaires than one billionaire. That means a thousand consumers instead of just one. But the rich are not the major part of the problem. It is the poor and LMC who want what everyone else has without earning it, and that means staying in school til you graduate, for starters. When we spend more than we make, there is NO PROGRESS. It took about 30 years for me and the wife to get where we are, got out of the Navy at age 31 with a 3 year old dodge dart, a wife, 2 kids, and $8000, and spent that money on a down payment for a modest home. I went to college at night, after working my full time job. We worked hard for our success, only to have some of our neighbors tell us how "lucky" we are.

Aiming high in life and falling a llittle short does not make us failures.
Aiming low in life and hitting the mark does not make us successful.

Expectations are part of the mix as well. On my side of our family we have a lot of poor folk, onlly 1 other siblinlg achieved financial success, most of the nephews and nieces are just getting by.
On my wife's side, nearly all are college graduates, all are employed, and only 1 nephew is struggling.

 

[phattonez]

Well, here's the issue as I understand it.

Cutting government spending won't lead to growth.

Your premise is that if we cut government spending we are forced to cut taxes, and if we cut taxes people have more of their own income to spend how they will. Specifically, they can invest in companies and develop savings through such investments.

But here's the problem with that.

We have a consumer based economy. Private enterprises profit by having people consume their products. But people aren't consuming as much any more. Instead, people are saving more and more.

However, they aren't necessarily investing those savings. And the reason why is because businesses they invest in are extremely uncertain to provide returns. Why? Because people are consuming less. Which means less demands for products. Which means less production by businesses. Which means fewer returns on investments.

So while I agree that, in some areas, government spending does need to be cut, I don't think that such cuts would necessarily lead to greater growth, especially through investments, since Americans are focused more on savings right now than on consuming.

What is the purpose of saved money? Do you put money in a bank expecting to never, ever spend that money or pass it along to friends and family when you pass on? Answer that question and you'll see that savings is not a net negative to the economy, especially when you consider that savings is the basis of a lot of capital investment.

 

[phattonez]

The part about the lower middle class not being able to climb up is mostly true, but I have a different conclusion as to why this happens. I think it is as simple as them being underpaid for the value of the work that they do. You cant tell me that the CEO of large insurance companies are as productive and valuable as 2,000 of their clerks or janitors or lower paid employees. One human is simply not THAT much more valuable than another.

The person is not 2000x as valuable, but the work they produce most certainly is. There is no way that a clerk can do the job of a CEO. That talent is much more rare and hence much moer compensated.

This is evidenced by the wider and wider gap between the rich and the middle class. Disporportional income distributation is the largest flaw in capitalism. Income distribution is not only effected by supply and demand and valued in relationship to productivity, it is very much effected by things like cronieism and other personal "power" issues that distorts the law of supply and demand in a way which tends to grossly distort income distribution.

This is not a flaw. Everyone's incomes have been rising. The rich getting more means that they are investing more means that we get more production means that prices fall for everyone. It seems more expedient to me that the rich get more money since they know how to invest it better. Investing pays off for everyone, not just the one who gets the capital gains.

I once had a friend who had many years of executive level sales experiance. He was trying to give me some "good" advice and told me that my value (as CEO) to my company was my companies entire gross sales divided by the number of hours that I worked. Yup, that made me feel very good personally, but the reality is that with large corporations, the CEO is simply not worth anything like that (and neither was I). Of course if I actually got paid that much there would be no money left for anyone else including our vendors. Many people use that type of mis-logic to justify crazy salaries. The reality is that the larger the company the less the CEO affects operations or profitability.

If you even cut the CEO's salary in half, it wouldn't mean much more money to the workers at that company. Executive compensation may cause a lot of outrage, but it really is insignificant.

 

[imagep]

We are not borrowing money from the rich, not as much as we are borrowing from each other and then using the same money to compete with each other in the marketplace. I totally agree that CEO's are greedy. IT is better to have a thousand milliionaires than one billionaire. That means a thousand consumers instead of just one. But the rich are not the major part of the problem. It is the poor and LMC who want what everyone else has without earning it, and that means staying in school til you graduate, for starters. When we spend more than we make, there is NO PROGRESS. It took about 30 years for me and the wife to get where we are, got out of the Navy at age 31 with a 3 year old dodge dart, a wife, 2 kids, and $8000, and spent that money on a down payment for a modest home. I went to college at night, after working my full time job. We worked hard for our success, only to have some of our neighbors tell us how "lucky" we are.

Aiming high in life and falling a llittle short does not make us failures.
Aiming low in life and hitting the mark does not make us successful.

Expectations are part of the mix as well. On my side of our family we have a lot of poor folk, onlly 1 other siblinlg achieved financial success, most of the nephews and nieces are just getting by.
On my wife's side, nearly all are college graduates, all are employed, and only 1 nephew is struggling.

Yup. Nothing pisses me off more when someone comes into my business and tells me how "lucky" we are. I have had zero luck, everything that we have has been earned by me and my wife working 60+ hours a week for over 20 years. I have nothing against the rich what so ever, as long as they worked for what they have, but I do get very frustrated when I hear about CEO's making $50 million a year. Wealth should come over a lifetime of work, savings, and investing. When a net worth of $5 million is generally considered as being "entry level" rich, but we have people who make $5 million every five weeks (insurance company CEO's), and then they raise the price of their goods by 28% in just one year, there is something really wrong. When we have CEO's earning over $10 million a year and getting huge raises each year - but are simultaniously running their company into bankruptcy (ie GM and Chrysler) there is something really wrong with our wealth distribution system.

I am very much a capitalist, I believe strongly in private enterprise, I have faith that generally the free market resolves price and distribution issues, but I also recognize that for whatever reason (typically failure in checks and balances due to human behavior), sometimes the free market doesn't work exactly how it should. When things arn't working as they should, I have no issue with altering our system (possibly requiring government intervention) to make it work better.

 

[UtahBill]

Yup. Nothing pisses me off more when someone comes into my business and tells me how "lucky" we are. I have had zero luck, everything that we have has been earned by me and my wife working 60+ hours a week for over 20 years. I have nothing against the rich what so ever, as long as they worked for what they have, but I do get very frustrated when I hear about CEO's making $50 million a year. Wealth should come over a lifetime of work, savings, and investing. When a net worth of $5 million is generally considered as being "entry level" rich, but we have people who make $5 million every five weeks (insurance company CEO's), and then they raise the price of their goods by 28% in just one year, there is something really wrong. When we have CEO's earning over $10 million a year and getting huge raises each year - but are simultaniously running their company into bankruptcy (ie GM and Chrysler) there is something really wrong with our wealth distribution system.

I am very much a capitalist, I believe strongly in private enterprise, I have faith that generally the free market resolves price and distribution issues, but I also recognize that for whatever reason (typically failure in checks and balances due to human behavior), sometimes the free market doesn't work exactly how it should. When things arn't working as they should, I have no issue with altering our system (possibly requiring government intervention) to make it work better.

one guy who called me lucky got some advice from me, do it the way I did, get into the military with a gauranteed school and use that as a springboard to a civilian job after your service is over. His response, "I don't want to go into the military"....
another one, had a good education but was teaching school and bemoaning the low salary. I suggested he apply where I worked, which was an hour long bus ride away. His response, "I'm not wasting 2 hours a day commuting".
I think there must be a shortage of silver platters lately....:lol:

 

[imagep]

The person is not 2000x as valuable, but the work they produce most certainly is. There is no way that a clerk can do the job of a CEO. That talent is much more rare and hence much moer compensated.

Absolutly. But they probably aren't 2000x times rarer either. I suspect that when employee's start passing the $400k or $500k mark, there salary has very little to do with the value that they bring to the company, or how hard they work, or how rare they are. Of course there may be exceptions.

This is not a flaw. Everyone's incomes have been rising. The rich getting more means that they are investing more means that we get more production means that prices fall for everyone. It seems more expedient to me that the rich get more money since they know how to invest it better. Investing pays off for everyone, not just the one who gets the capital gains.

A rising tide does lift all boats. But it does so equally, if the tide rises 3 feet, it doesnt matter if it is a battleship or a rowboat, they all rise 3 feet. If our aggregate wealth was to grow by 10%, then the wealth of the middleclass should also grow by 10%. But when the upperclass somehow is able to capture more than 10% of the new wealth, it is then impossible for the middle class to increase their wealth by 10%.

If you even cut the CEO's salary in half, it wouldn't mean much more money to the workers at that company. Executive compensation may cause a lot of outrage, but it really is insignificant.

Maybe. Depends on what you think of as being significant. Also, the issue is not just with CEO salary, it is also with board member compensation and the compensation levels of other top executives. So lets say that a particular insurance company cutstheir top salaries by 50% for a total of $100,000,000 (which seems very doable) and they happen to have 10,000 employees, then they would have an extra $10,000 in the compensation pool per employee.

Your average worker would consider $10,000 very significant, although it doesn't mean jack to the CEO (who may still be making $25,000,000 a year). Over the course of a lifetime, that $10,000 may make the difference between Joe Worker retiring with nothing but social security or retiring with a million bucks in investments - for 10,000 people! It may make the difference between them getting adequit healthcare or not. It may make the difference as to wheather that family can afford private school for their child. Or whether they have to drive the junker car with worn out brakes. While to the CEO, the pay cut will not effect his standard of living at all.

Now granted in the case of GM, cutting the CEO salary will not make as much difference because the CEO doesn't get paid as much and GM has a lot more employees (and they are overcompensated to begin with thanks to the unions), but better controling labor cost over a period of decades would have likely made the difference as to whether or not the company ended up in bankruptcy. The way I see it, the last CEO of GM did nothing to control costs. He was weak and worthless when dealing with the unions. Why should someone who is weak and worthless get paid millions of dollars (other than for the fact that he was the "darling" of some board members)? How is it possible that a small company in a not-so-profitable industry ran by an idiot like me can make more money that GM?

Could it be that some CEO's are actually not "worth" any more than your typical idiot (like me)? Could it be that I actually work harder and make better decisions than a $15 million dollar a year CEO? Am I worth $15 million a year? Probably not. But neither are many $15 million a year earners.

 

[phattonez]

Absolutly. But they probably aren't 2000x times rarer either. I suspect that when employee's start passing the $400k or $500k mark, there salary has very little to do with the value that they bring to the company, or how hard they work, or how rare they are. Of course there may be exceptions.

Are atheletes worth the salary that they get paid?

A rising tide does lift all boats. But it does so equally, if the tide rises 3 feet, it doesnt matter if it is a battleship or a rowboat, they all rise 3 feet. If our aggregate wealth was to grow by 10%, then the wealth of the middleclass should also grow by 10%. But when the upperclass somehow is able to capture more than 10% of the new wealth, it is then impossible for the middle class to increase their wealth by 10%.

But again, so what? The wealth of everyone is rising. Furthermore, the rich invest the money better leading to more production and that benefits everyone.

Maybe. Depends on what you think of as being significant. Also, the issue is not just with CEO salary, it is also with board member compensation and the compensation levels of other top executives. So lets say that a particular insurance company cutstheir top salaries by 50% for a total of $100,000,000 (which seems very doable) and they happen to have 10,000 employees, then they would have an extra $10,000 in the compensation pool per employee.

Your average worker would consider $10,000 very significant, although it doesn't mean jack to the CEO (who may still be making $25,000,000 a year). Over the course of a lifetime, that $10,000 may make the difference between Joe Worker retiring with nothing but social security or retiring with a million bucks in investments - for 10,000 people! It may make the difference between them getting adequit healthcare or not. It may make the difference as to wheather that family can afford private school for their child. Or whether they have to drive the junker car with worn out brakes. While to the CEO, the pay cut will not effect his standard of living at all. [/quote]

But how realistic is this example? I would suggest reading Thomas Sowell's Economic Facts and Fallacies, more specifically the chapter on "Income Facts and Fallacies." I'm sure it's in a local library and it should answer a lot of your questions. If you don't have access I'll try to post some snippets from it.

Now granted in the case of GM, cutting the CEO salary will not make as much difference because the CEO doesn't get paid as much and GM has a lot more employees (and they are overcompensated to begin with thanks to the unions), but better controling labor cost over a period of decades would have likely made the difference as to whether or not the company ended up in bankruptcy. The way I see it, the last CEO of GM did nothing to control costs. He was weak and worthless when dealing with the unions. Why should someone who is weak and worthless get paid millions of dollars (other than for the fact that he was the "darling" of some board members)? How is it possible that a small company in a not-so-profitable industry ran by an idiot like me can make more money that GM?

Nobody there could have done anything and GM should have gone bankrupt. No CEO of that company should be making a lot of money because no one can pull it out of the mess that it's in.

Could it be that some CEO's are actually not "worth" any more than your typical idiot (like me)? Could it be that I actually work harder and make better decisions than a $15 million dollar a year CEO? Am I worth $15 million a year? Probably not. But neither are many $15 million a year earners.

But if a CEO makes a change that brings in $5 million more in revenue then would that CEO justify a salary of $3 million?

 

[imagep]

But if a CEO makes a change that brings in $5 million more in revenue then would that CEO justify a salary of $3 million?

If a CEO makes a change that costs the company $5 million in profits that it would have otherwise made, do we make the CEO pay the company $3 million? Nope.

 

[phattonez]

If a CEO makes a change that costs the company $5 million in profits that it would have otherwise made, do we make the CEO pay the company $3 million? Nope.

The company unloads him quickly just as they would any other employee that cost the company money. Nobody ever asks the burger flipper to pay the company money for the business he lost by burning everything he touched.