The other day I viewed the documentary “Inequality for All” by Robert Reich for the first time on NetFlix. I was struck by its similarities to articles I have written in past posts such as The Economic Power of the Middle Class March 19, 2013 and Prosperity is with the MassesSeptember 16, 2013 in terms of the disparity in income between the very rich and the typical middle class as well as the parallel conclusion we both drew that the well being of our economy depends largely upon the ability of a large middle class to spend on goods and services. As a matter of fact our mutual conclusion seems quite self evident so I fail to see why so many people don’t realize this.
Let me simplify things a bit for the skeptics. Let us say that there is a 5% upper class and a broader 95% middle class. Let us further simplify it and look at a typical population of 100 people in which 5 individuals represent the upper class and 95 represent the broader middle class. Let us look at how much each earns and consumes and how many American workers are employed to provide them with goods and service:
Upper Class – The average earning per person is about $10,000,000 per year or a total of $50,000,000 for all 5 people.
Middle Class – The average earning per person is about $50,000 per year or a total of $4,750,000 for all 95 people.
Thus the 5 upper class people earns more than 10 times as much as all the 95 middle class workers put together.
Upper Class – Average cost of each car is about $200,000. 5 cars for 5 people is $1,000,000.
Middle Class – Average cost of each car is about $25,000. 95 cars for 95 people is $2,375,000.
Thus the middle class spends about 2.4 times more money on cars and buys 19 times (95/5≅19) as many cars as the upper class. It takes almost as many people to manufacture a $200,000 car as a $25,000 car. So 19 times more people are employed to produce middle class cars than upper class cars.
Upper Class – The average house costs $20,000,000 each or $100,000,000 total for the 5 people and needs 50 workers each or 250 workers total to build.
Middle Class – The average house costs $400,000 each or $38,000,000 total for the 95 people and need 10 workers each or 950 workers total to build.
So the 5 upper class people spend almost 3 times as much for houses as the 95 middle class but the middle class employes almost 4 times as many workers for construction.
- Cell Phones
Upper Class – The average cell phone costing about $1000. Thus 5 people own $5,000 worth of cell phones.
Middle Class – The average cell phone costing about $300. Thus 95 people own $28,500 worth of cell phones.
The middle class spend almost 6 times as much on cell phones as the upper class. It takes about the same number of people to sell one $1000 cell phone as it does a $300 cell phone. Thus 19 times as many workers are employed to sell cell phones to the middle class compared to the upper class. All cell phones are manufactured abroad so do not employ U.S. workers.
This list goes on and on for fast foods, groceries, computers, tablets, TVs and all the other services and commodities. For every item the upper class buys the middle class buys far more simply because there are far more middle class people. Far more workers are needed to provide goods and services for the larger middle class people than the much smaller wealthy upper class. But the rich will argue that they invest in companies that manufacture goods and services which helps stimulate the economy and create more jobs. That is not entirely true. They invest their excess wealth in sound companies that will earn them even more money in stock appreciation. But what makes a company appreciate its stock value? Growth, sales, and profits → consumer buying, not investment capital.
I’ve already shown that the middle class are by far the greatest consumers. So a middle class that has money to spend will spend more on goods and services rather than invest since they don’t really have that much excess money to invest. Companies that produce goods and services which the middle class likes and can afford to buy will be the ones the rich will invest heaviest in. The objective of the rich is to make money, not to produce good and services. The rich do not invest in loosing companies simply to boost their sales. They invest in companies that are or have potential to appreciate in value due to increases in sales and earnings.
On the other hand the middle class is interested in spending their money on goods and services if they can afford them. And it is the sale of these goods and services that employ more workers to provide more goods and services which in turn increase stock values. The more the middle class spends the more such companies will grow and employ even more workers. Contrast this with what happened during the crash of 2008 when no matter how much the rich invest in companies, their stock continued to plummet due to the lack of business from consumers, predominantly the underemployed and broke middle class.
So it is in the interest of the very rich to keep the middle class happy and especially spending. In order to do this more money must be left in the hands of the middle class so they can spend more thus stimulating further economic growth and appreciating investment values for the rich. We don’t have to worry about the rich who have more money than they know what to spend it on. They will always invest their money to make more money even if they have to pay more taxes on it. The rich will invest as long as they make more money than not investing. After all what else can they do with all their money; place it in a saving account earning 0.01% interest? Thus raising taxes on the rich will change little as long as they can still make money but lowering taxes on the middle class will leave more for them to spend and everyone comes out the winner.
So leaving more money in the hands of the middle class by reducing taxes and increasing wages is the key to a health economy. Their higher income will also bring in more taxes to offset the lower tax rates. Henry Ford invented this concept of compensating employees well and became very rich because of it. Extreme inequities between the very rich and everyone else is bad for the economy. Spending by the middle class stimulates economic growth far more than investing by the very rich.