Sunday, February 22, 2015

Subsidies of Scale: how the poor and middle class help pay for the lifestyles of the rich

Preface: I'm well aware that genuinely new ideas in virtually any subject are few and far between. I haven't seen the following concept discussed anywhere before here and now. That doesn't mean it hasn't been. But if I've come up with a new insight, well, good for me!

The idea in a nutshell: economies of scale achieved by mass-producing goods for the lower classes help to make high-end versions of these goods more affordable for the upper classes. Absent the demand generated by the lower classes, these economies of scale would not be attained, and luxury goods would cost far more. Thus, the lower and middle classes are in effect subsidizing the lifestyles of the rich and famous. 

Most of the parts in a Cadillac are identical to, or derived from, parts in a Chevrolet. Most limited-production high-end spirits are produced by distilleries that sell large volumes of more affordable brands. In fact, a large proportion of luxury goods depend on mass consumption of less-costly versions for their availability and affordability.

Let's stick with the Cadillac–Chevrolet model for now. Tooling up to build a car is enormously expensive. The only thing that makes today's cars affordable is the fact that they are cranked out by the millions, so the tooling costs can be spread out over all those millions of units. In fact, key components like engines are almost always shared between different models and brands of cars, to achieve greater economies of scale and hence lower costs (as an example, the engine in my very modest Saturn was a joint development effort of GM, its German subsidiary Opel, Saab, and Lotus, and was used in numerous GM cars, including some Cadillacs).

Imagine that wealth inequality in America continues to increase, to the point that only the rich can afford new cars. The market for Chevrolets dries up, while the demand for Cadillacs booms. Where are those Cadillacs going to come from? Without a large base of Chevrolet parts to choose from, Cadillac engineers will be forced to design and tool more of their own. But instead of spreading out these costs over millions of vehicles, they'll only be able to amortize them over a few thousand luxury cars. Bottom line: the per-unit cost goes up massively. A Cadillac you can buy today for $60,000 could easily cost twice that or more. At $120,000, even a few rich people might think twice. If sales decline, the unit cost goes up even more, leading to a classic downward spiral.

So the key point is this: middle-class purchases of mass-produced goods subsidize luxury versions of these goods. Every new Chevrolet that's sold to a factory worker helps the worker's boss afford a Cadillac.

By providing support at the bottom of the market, in the form of demand for clunkers on their last wheels, even the poor help to subsidize fancy cars for the rich. If poor people could no longer afford to buy these cars on the used market, their current owners would wind up hanging onto them longer, depressing the demand for new Chevrolets, and again making Cadillacs more expensive.

This effect is just one of the things I've been thinking about, under the general topic of Rising inequality: how does this end? Taken to its logical extreme, inequality has consequences that even the 1% might be wary of.

Labels: , ,

Wednesday, December 17, 2014

Another reason not to trust Jeb Bush

OK, did anyone doubt that "the smart Bush brother" would eventually run for President? The only reason he wouldn't is if there were enough scandals in his background to make him unelectable. Of course, some of us think that handing the 2000 election to his brother is enough to disqualify him, but there's a lot more.

Including what I'm about to describe, which almost certainly won't be talked about in the campaign, but IMO is very important. It takes a bit of explaining, so bear with me…

Remember Terri Schiavo? The woman who was in a permanent vegetative state in Florida back in 2005? Her husband had a state court order to disconnect her life support, and her parents objected. They appealed to Federal court, which (quite properly) declined to get involved, noting this was a state matter. 

The Christian Right staged a massive freakout, which led to a special session of Congress passing a law to "save Terri" by transferring her case to Federal court. President Dubya flew back from Texas to sign the bill at 1:00 in the morning. (The Federal courts denied the appeals and Schiavo was eventually allowed to die.) 

The interesting thing about the case is that the right wing, which endlessly beats the drum about individual liberty, states' rights, and limited government, was anxious for the Federal government to get involved. One of the few sane Republicans, Chris Shays (from the Northeast, naturally), said "My party is demonstrating that they are for states' rights unless they don't like what states are doing. This couldn't be a more classic case of a state responsibility. This Republican Party of Lincoln has become a party of theocracy." 

There. He said it. In fact, it appears that the Schiavo matter was basically an early test case for the right wing in using the power of the Federal government to enforce their religious beliefs. 

In explaining how this involves Jeb Bush, I'll quote from Frederic Rich's novel Christian Nation
I think this incident is incredibly revealing of what we can expect from the fundamentalists. And it's not just the casualness with which personal liberty, states' rights, and the rest were thrown aside. This was a manufactured 'crisis.' Millions of good people around the country were manipulated into really caring about the woman. They cried when she died. And so the movement gained a martyr—a symbol that the puppet masters, when it suits their purposes, can use to reconnect the faithful with that emotion. … The movement flirted with violent resistance. [Governor] Jeb Bush actually dispatched armed state agents to forcibly remove Terri Schiavo from the hospice in violation of court orders, but those state agents were stopped by the local police who upheld the law. Jeb Bush should have been impeached and jailed for that stunt. But instead he became one of the heroes. 
I doubt Jeb cared much one way or the other about Schiavo's fate. But he was more than willing to use the power of his office to pander to the wishes of a group of religious fundamentalists for political purposes. Despite his bland exterior, the man is a snake. 

But hey, if you don't like Jeb for President, there's always Chris Christie (another snake), and, Lord help us, Mitt Rmoney! 

Labels: , ,

Thursday, December 11, 2014

Hey, Comcast customers: The company is wasting your money!

More than 15 years ago, my wife and I had a small company operated out of a post office box in our tiny little town in Puget Sound. As you might expect, the direct-mail marketers got wind of our existence and sent us all kinds of "exciting offers."

Before long, our company went out of existence, but you'd never know it to look at the mail we get. There are a few stalwart mega-corporations that haven't given up hope that our long-defunct business will someday, somehow buy something from them. And one of the most persistent is your friendly local cable company.

Just the other day, in fact, Comcast sent us a "business savings voucher." The terms of the offer aren't important; what's remarkable is that they are still chasing a company that hasn't sold a product, sent an email, run a website, run an ad, renewed a business license, or done anything in 15 years!

Now, direct mail as practiced by big companies is a pretty exact science. If you do it right, you spend your money on things that are likely to result in sales. You avoid things that have a low probability of success—including, I would argue, mailing to "prospects" that haven't been heard from in a decade and a half and aren't listed in any directory. By any reasonable standard, this qualifies as scraping the bottom of the barrel. Any savvy marketer regularly "cleans" their mailing list of obsolete or defunct entries.

The logical conclusion is that whoever runs Comcast's direct-mail operation is stupid or incompetent. Either that, or the company has so much money that it isn't troubled by wasting it chasing ghosts. Whichever, Comcast's customers are paying for this egregious waste, and they shouldn't be happy about it.

Now, about those credit cards that Chase is constantly offering our defunct company…

Labels: ,

Monday, July 21, 2014

Are environmentalists using the wrong strategy about climate change?

You can sympathize with owners of beachfront property for not wanting to face the fact that their homes are doomed, but legislating "head in the sand" policies is just nuts.

This makes me wonder if environmentalists are using the wrong strategy about climate change. Many years ago as a young ad copywriter, I learned the principle that you should never present your product as the solution to a problem that is too horrible to contemplate.

So, for example, filtered cigarettes weren't marketed as a way to prevent lung cancer: the ads talked about preventing those unsightly nicotine stains on your fingers. Or they ignored the issue entirely.

With climate change, we truly have a problem that is too horrible to contemplate. So maybe activists should talk about stopping it so you won't have to worry about getting your shoes damp as you walk on the beach.

It seems it couldn't work any worse than telling us we're all going to die is working.


Wednesday, April 23, 2014

Tax credits are unfair to poor people

How come nobody ever talks about this?

I'm referring to the common practice of structuring government subsidies in the form of tax credits, meaning amounts that you get to deduct directly from your tax bill (as opposed to tax deductions, which are subtracted from your taxable income). For example, the $7,500 tax credit on electric vehicle purchases.

For a rich person who pays more than $7,500 in income tax, this benefit is worth the full $7,500. In fact, it's worth a good deal more than that because in order to take home $7,500, a person in the top Federal bracket would have to earn about $12,400—even more in states and cities that add their own income tax.

So, for a rich person, that new electric car is quite affordable. But for a poor person, not so much. If you don't pay income taxes, the tax credit is worth precisely zero, and you'll pay full price for that new Leaf.

So why should the government subsidize electric cars for rich people, but not for poor people? In this perverse world, the people who need the subsidy don't get it, and the people who don't need it, get it. It seems to me that a much fairer policy would be for the government to send a $7,500 check to the purchaser, which would be added to their taxable income. This would make the subsidy less valuable for the rich than for the poor, and increase revenue to the Treasury.

I'm not sure if it's still in force, but there once was a program that gave tax credits to people who invested in affordable housing projects. This is a lot more defensible because (a) poor people aren't likely to make these kinds of investments anyway, and (b) the effect of the tax credit is to raise the effective rate of return on the investment, making it more likely that the rich would choose to invest their money in something socially beneficial. I get that. I don't get the electric car thing.

Yet another example of tilting the playing field in favor of the wealthy.

Labels: ,

Monday, April 21, 2014

The Fundamental Theorem of American Politics

Here's the sad truth, folks: our politicians don't really give a damn what you think (unless you happen to be a billionaire who's out slumming in the blogosphere).

How do I know this? Here's how: A recent paper (pdf) by Martin Gilens and Benjamin Page at Princeton. 

They analyzed polling data and policy outcomes over the last 30+ years, and found that when the policy preferences of average citizens were different from those of the elites and of organized interest groups, guess who wins?

Maybe this explains why large majorities of the public want a higher minimum wage and background checks for gun purchases, but we still don't have them.

In any event, thinking about this has led me to a breathtaking insight, which I have immodestly christened The Fundamental Theorem of American Politics. Here it is:

To be successful, a politician must serve the interests of the elites while convincingly appearing to care about the interests of the common people. 

OK, maybe you already basically thought this, but looking at it in black & white helps explain a lot. For instance, Mitt Romney failed simply because he wasn't convincing in his attempts to claim he cared about non-rich people. Had he been a better actor (see: Ronald Reagan), he'd probably be sitting in the White House today.

And I don't say this just to dump on politicians; actually, it's quite a skill to be able to simulate caring about popular issues while actually doing nothing concrete to support them, and in many cases doing the opposite.

But it might help if we held their feet to the fire more often.

Labels: ,

Wednesday, December 04, 2013

Matt Miller on Republican dishonesty about Obamacare

Proving yet again that Republicans have retired the concept of hypocrisy:

As I have noted before, Miller has basically built his career on coming up with creative, pragmatic solutions that both liberals and conservatives can support. But it seems he has finally thrown in the towel when it comes to working with today's Republicans. Here's his conclusion: 

I've spent a lot of time over the years arguing that we can solve big problems such as providing insurance coverage in ways that honor both liberal and conservative values. It's entirely doable — John Rawls and Milton Friedman can be reconciled, trust me. Apart from being sound policy, I've assumed such approaches would also be necessary, because with power closely divided in the United States, we'd need to strike big cross-party deals to make progress. The breathtaking intellectual and moral dishonesty of those driving the Obamacare debate in the GOP today makes me feel foolish for having tried.