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.

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.

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.

Why have they gotten so blatant about it?

Has anybody else noticed that the filthy rich and their bought-and-paid-for politicians seem to have gotten a lot more blatant lately about just telling the rest of us "Screw you. We're no longer even pretending that some gift we want will have those wondrous (if elusive) trickle-down effects that will benefit you too. We're taking what we want because we can, and that's it. If you don't like it, move to France, loser!"

I mean, remember when Dubya was first trying to sell his huge tax cuts? He said—lying with a straight face, of course—that "most of the benefits go to the middle class." That's sort of been the norm for a long time: if you're a Republican trying to push some pro-rich policy, you have to at least make a token argument that you're really doing it to help the little people. That's what all the bogus crap about the rich being "job creators" is about. And sadly, no matter how fatuous your case was, you could depend on the media's obsession with false balance to make them present your argument without openly mocking it—which is all you need to cover yourself.

But we seem to have entered a new era. Sure, we still get lectured about the necessity of coddling those job creators, but more and more, it seems like they're just throwing things out there and telling us to like it or lump it:
• Sorry, we can't afford a safety net; end of discussion.
• College too expensive? Tough—borrow a bunch of money from your parents and start a business.
• Drowning in an underwater mortgage? Hurry up and get your ass out of that house so the investor class can snap it up cheap, get your equity for free, and make a killing when the market recovers.

The poster boy for this "new callousness" is, of course, Mitt Romney, and I guess you could just write it off as the inept messaging of a staggeringly out-of-touch and tone-deaf rich guy.

But I think something else may be going on, and it's this: the Right has simply picked all the low-hanging fruit in their campaign to restore feudalism. All they've got left are things that are so egregious that there's simply no way to put a middle-class-friendly face on them. Thanks to their BFF Supreme Court, they can now buy any election they want, so why waste time even pretending to care about the 99%?

Either that, or they're waiting for an even-more-brilliant successor to Frank Luntz, who will crank out messaging miracles that will make us lambs positively enjoy our trip to the slaughterhouse.

5-Hour Energy to the rescue!

I was struck by a TV commercial for "5-Hour Energy" that I saw recently. It showed a woman fighting off sleep at her desk, eventually rescued by downing a little bottle of this stuff, which I think is the typical mix of caffeine, sugar and such. Thusly perked up, she's able to get through her afternoon. What a relief! Thank you, 5-Hour Energy!

How great. She's probably exhausted from working two minimum-wage jobs to try to make ends meet, and I'll bet you she doesn't get sick days or vacation. Pension? Don't make me laugh.

The best part is, from the employer's standpoint, that she has to buy her own dope to keep going. The boss doesn't even have to provide it.

Is the whole "energy drink" phenomenon a symptom of our oppression? Nothing like making huge profits off social pathology, eh?