Thursday, May 31, 2012

Progressive Taxation Encourages Investment

Progressive taxation can be an important tool in conserving natural resources, since it increases the relative present value of future returns, by reducing the returns to immediate exploitation of the resource.  Consider an example:  A capital good, a wood lot, say, provides an income stream of $100,000 in perpetuity.  Now, if the tax is flat, and the resource can be cashed out, for $2,000,000, and invested at interest for 5%, then the owner would be indifferent to exploiting or conserving the resource.  On the other hand suppose, with a progressive tax, the $100,000 was taxed at a miniscule rate, and the $2,000,000 at 50%.  Then the owner would have to be able to invest the $1,000,000 that remained after taxes at a 10% rate in order to be indifferent to preserving or exploiting the resource.  If this rate were unavailable, he would be more interested in conserving, rather than exploiting, this resource.

Indeed, progressive taxation increases the relative present value of any future income stream, and so encourages investment in the future.

Tuesday, May 8, 2012

The Extraction of Money from Communities in the New Economy

     The sound you don’t hear is the sound of money being sucked out of your community.  But you can see it.   Walmart is merely the biggest.  Target, Home Depot and Lowes.  Best Buy.  Staples.  McDonald’s and Wendy’s, Burger King.  The old standards like  Penny’s and  Sears. Even  PetCo,  Starbucks and ToysRUs. CVS and Walgreen’s.  The grocery chains.  Shell and Mobil and Sunoco.  And then of course  the big banks, Bank of America ,Wells Fargo, the rest.  They are pervasive.    Everywhere. 

      And what are they?  They are all extractive industries. 

      And that is what they extract?  Money.  Money from your community.

      And this is a new thing, this reorganization of the American economy.  It used to be, in the days of mom and pop stores, of locally owned factories and family farming, of small banking, that more of the money remained in the community, helping to maintain the flow of resources within and through the local economy. Factories and farms brought in the money.  Returns of production costs of the product went to the community.  Merely the cost of the materials which it used in manufacturing went outside the community, and this it recouped through the price of selling. The community also retained the profit, when the owner of the factory was local. See Diag 1, the factory in the Old Economy. (The sizes of the arrows within each diagram are merely indicative.  The important thing is the difference in sizes of the arrows between the diagrams.  Remember also the flow of money is opposite to the flow of goods and services.  When goods go out of the factory, and are sold in the Rest of the World, money flows in.)  The factory is a part of the community.  The factory brings money into the community by selling its product to the Rest of the World outside the community.  The only money it exports is for the material and energy which goes into making that product.  The rest of the money goes either to the workers, or to the owner.
      The workers, and the owner, who was a part of the community, spend some of their money in the Rest of the World, but spend most of their money in the community.  It is thus more likely that the amount of money retained by the community is greater than the money which leaves the community.  So the community prospers and grows.   
(Note, however, it grows by extracting money from other communities.  With a constant money supply, this is a zero sum game.   One community’s gain is another community’s loss.  Indeed, for a community to grow without deflation, it must have an influx of money.   And it is difficult for a community to grow with deflation, because under deflation, on average, businesses are nominally losing money.)

      The ‘Old Economy’ is no longer.  Now the profit goes to the headquarters of the giant corporations.  And to their owners, who take the money extracted from your community and spend it in theirs.   This makes their communities prosperous, while yours declines. See Diag 2, the factory in the New Economy.  The diagram is really no more complicated. All the flows of money are in the same directions. The extra solid arrows indicate increases in money being spent.  The clear arrows indicate money which is no longer being spent.  Thus in Diag 2.  the extra arrow going from the factory to the Rest of the World is the increase in costs due to the fact that the factory must buy its factors from oligopolies, while the clear arrow indicates money lost due to increased competition and the fact that it must sell to oligopsonies in the Rest of the World.  The money going to the owner does not necessarily change, but now, since the corporate owner is no longer in the community, the profits from the factory also leave the community.  Facing oligopsony, the Factory’s return is minimized, reducing profits and forcing the reduction of overhead.  This means replacing workers with machines.  So the capital costs leave the community, and the lost jobs reduce income to the community.  The clear arrow from the Factory to the workers in the community represents the reduction in income to the community due to decreased payrolls, a result of increases in productivity and mechanization.  Since the workers, as well as the factory, are now buying from oligopolies, more money leaves the community through them, and the clear arrow to the community indicates that less is retained by the community.  Thus the direction of the flows are the same, but the quantities are different, with more of the money from the operation of the factory leaving the community, and less staying in the community.  
      While it is possible for this community to also be prosperous, it is more likely, than in the old economy, that it is not, but rather that more money is being taken out of the community than is coming in.  It is still possible for the factory to be operating at a profit, that is the money coming into the factory is greater than the money going into the rest of the world and the workers. The owner is then making a profit.  However, it is more likely, than in the old economy, that the money going to the workers is also less than that leaving the community.  Thus, the community would be in decline.

      We can make a similar comparison of diagrams between old and new economies by studying the flow of money through their respective stores.  In the old economy, the store is locally owned, in the new, corporately owned. 

      Consider Diag 3, the store in the Old Economy.  The store is locally owned.    Money comes into the community from outside, say through a factory.  It could be farm production, or just the returns from the labor of members of the community in other communities.  Some is spent at the store, some circulates through the community, some leaves the community through other channels.  Of the money spent in the store, some goes to the Rest of the World, that money the store spends on products there.  But much, even most, is retained by the community, as wages, as profit to the local owner, as money paid to local producers.  Of the profits paid to the owner, some are spent in the Rest of the World, some spent in the community.  In any case, a relatively high percentage of the money spent in the store remains in the community. 

      Compare this to Diag 4, the store in the New Economy, in a ‘typical’ modern community.   This is the chain store, owned by a distant corporate owner. (Some of these are franchises, locally owned, but all sending a cut to the distant corporation.)  Again, the diagram is really no more complicated than the first one, the store in the old economy.     The flows of money are all in the same direction.   The added solid arrows indicate an increase in the flow of money, the clear arrows a decrease.  Money comes into the community from outside, through what the community produces.   This may be farm production, the production of a factory, or the labor of members of the community in other communities.  This is reduced from before (clear arrow from Rest of World to Community,) because the Community faces oligopsonies.  With a chain store, there is an increase in flow into the Rest of the World.  First, of course, the profits of the store go to the corporate owner, and leave the community.   This is also indicated by the clear arrow from the Corporation to the Community.   Second, there is little or nothing bought from local producers, so that arrow now points into the Rest of the World. Finally, there is the increase in money due to the fact that the goods the store buys are now bought from oligopolies, and thus at a higher cost. 

       This last needs to be discussed, because it is not so clear cut. While the chain store faces oligopolies, it is often an element of an oligopsony, and thus can command lower prices for the goods it buys.  Further, there is the natural savings due to trade.  (But this tends to drive out the local producers.) What is certain that it can, with its volume purchases, command prices from its suppliers lower than a locally owned store, and thus put the locally owned store at a competitive disadvantage.  This reduction is indicated by the clear arrow from the community to the store.  Indeed, because of this, the chain, so far as it presents substitutable goods, tends to drive the locally owned store out of business, and replace it.

      But to continue, the chain store, where it is larger than its competitors, can reduce labor costs two ways.  First, through more efficient labor practices, that is selling a greater volume of goods per unit of labor, and second through oligopsony in the labor market, driving down the costs of labor to a minimum.  It tends to drive wages down to the minimum, actually.    This is indicated by the clear arrow from the store to the workers.   Since the workers also face oligopoly in the rest of the world, the flow of money from the workers to the Rest of the World increases.  Together these factors reduce the amount of money the workers circulate in the community.  This needs to be discussed.

      The cost of labor to the store is really a zero sum for the community.  The greater the labor costs, the more the community must pay.  The less the labor costs, the less the community must pay. But in either case, the money comes back to the community as wages paid to the workers.   So it is really only a factor in the chain store competing against local businesses, lower labor costs allowing lower pricing and thus greater competition against the local business.  This forces down the price of labor in the local businesses, so long as they remain competitive.  It does change the distribution of money in the local community, reducing the share available to low wage earners, but this is another matter. 

      Aside from the differences due to oligopoly and oligopsony, the two major differences are the profits  leaving the community to the corporate owners,  and the money that leaves the community instead of going to local producers.  As in the new factory economy, the bottom line is the increase in money flowing out of the community, and the decrease in money flowing into the community, making it more likely, than in the old economy, that the community may be losing money rather than gaining it, and so be in decline.  If we realize that a prosperous community is only a few percentage points to the good, that is, the community typically makes only a small ‘profit,’ this is a significant difference, and may mean the difference between success and failure.

      And a successful community may be an extractive community, that is, one that relies on the extraction of resources from other communities.  We have indicated how successful factory communities extract money from other communities.  But we look now at Diag 5, the Store in Owner Communities.  

      The arrows have been simplified and reduced, but otherwise it is the same as Diag 4, except the corporate owner is a part of this community, and is responsible for a great influx of money into the community.  Indeed, the owner may be the major, or even the only source of money to the community. (By owner here, corporate owner, we don’t necessarily mean just the owner per se.  For instance, in a community with a corporate headquarters located in it, all the staff of the headquarters would be included under the term ‘owner.’  Even a corporate engineering office would qualify, (although that could also be analyzed as a factory, as could the headquarters itself.)  Not that they are necessarily actually owners, but rather that their employment is dependent on the flow of money from distant stores and factories.)   

      In any case, the inflow the sum of profits extracted from many communities, is more likely greater than the outflow.  For oligops living in communities distant from the ones they exploit, the fate of these other communities is secondary to their profits. 
      And what are the symptoms of excessive extraction? 

      Well, you can tell the poor communities, because few of the extractors mine there.  The money is gone. The ore has been played out.   Oh, perhaps the inferior extractors, like Dollar Tree, or Family Dollar, or the Payday Loan check stops, still plough the poor soil.  But the better ones, even many of the not so good ones, have left.   Those that require the rich ore, the high end extractors, the Bergdorf’s, the Saks, the fashion boutiques, the Abercrombie & Fitchs, the Aeropostales,  who require higher margins from their smaller volume;  the Apple stores, have long gone, if they ever came.        
      A community  may benefit from trade, where it is a net producer of goods, but this is increasingly difficult.    Free trade exposes a community to oligopsony and oligopoly.  Oligopsony minimizes the benefits the community receives from its own production, whether it be factory, or farming, or mining.   Oligopoly maximizes the extractions from the community, of goods sold in the community.   So a community may suffer from trade, even when it remains a producer.  It will likely benefit, where it is an extractor/owner community, but theses are comparatively few.  A community either benefits from the advantages of trade, or instead suffers extraction, of which a deficit in the public budget, is one aspect.  As money is sucked out of the community, unemployment rises, and locally owned businesses decline.    The tax base erodes. The schools decline, and maintenance of roads and infrastructure deteriorates.     The public commonweal is destroyed.

      Corporations are not interested in the typical communities of America, except as a source for the extraction of money.  Indeed, according to Milton Friedman, their only social responsibility is to increase their profits.  That is, their interest is in the destruction of the community.  Look at Apple.  They send their jobs to China and their profits to Lichtenstein.  They do not love AmericaAmerica to them  exists only to be exploited.   Their store is here.  They are interested in investing in stores here, but not so much in factories.  This is because in a community which is still a source of extraction, which still has money, everything costs more.  And this means the cost of labor, and thus the cost of production, is higher. 

      That is why corporations are not investing in America, except in extractive industries.  They are not investing in producing in America, because it means investing in the communities of America, and they have yet to be depleted by the extractive actions of these same corporations.  The costs are high, because of oligopoly, and the returns are low, because of oligopsony, oligopoly and oligopsony these corporations themselves inflict.  

      As for the extractors, they cannot spend their money fast enough.  And, because they cannot spend it fast enough, they put it in banks, often overseas.   From there, it makes its way back to the front banks in the US, where it is loaned to members of your community, and the interest is extracted.  Or they invest it in other extractive industries, other retail chains, or factories overseas.  The products of these factories are used to extract money from the communities in which they are sold. And the money from the production of these products, no longer made by factories in the community, is extracted by these overseas factories.   And the cost of shipping from overseas is also extracted.

      We come to an interesting conclusion.  As long as there is money to be extracted, extractors will come, with their stores, and seek to extract that money from the community.  (But worse is Amazon, which you do not see.   Amazon spends nothing in your community.  The entire monetary value of the imported product is extracted from the community.  Because those brick and mortar stores you do see spend most of their overhead in their respective communities, at least the community retains that, and the damage is less.  But Amazon and the rest of the mail order companies spend nothing, and are engaged in pure extraction.)

       And the members of the community become a party to the destruction of their community, and their own destruction.  Because the extractors do not bear the cost of supporting the community, they can sell at lower prices.  And the members of the community, in perceived self interest, benefit from these lower prices.   But their community does not, because the money saved is merely spent at other stores, and still exported from the community.  Not enough money is retained by the community to maintain the money supply in the community, and that supply declines, along with the community welfare. It could be said that the community consumes itself to death, as increasingly each act of consumption, in the New Economy, costs the community money.