Fair Play Benefits All of Us

The Popular Economics Weekly

The idea of fair play may be the key issue in 2012—both with the Presidential campaign and economic growth. How so? Both political parties are jockeying to portray their message as fair—Democrats want to restore the middle class, and Republicans still believe the wealthiest are already paying their fair share of taxes. So they maintain any tax increases at all will harm growth prospects.

And President Obama’s message in his 2012 State of the Union speech was even more encompassing. He said “A return to the American values of fair play and shared responsibility will help us protect our people and our economy. But it should also guide us as we look to pay down our debt and invest in our future.”

How will it protect our economy and pay down our debt? Obama wasn’t clear on this, but past history and economic research tells us why. Simply put, the more equal distribution of wealth even up through the 1990s when the maximum tax brackets for income, capital gains, and even dividends’ taxes were higher, produced a thriving middle class so that overall economic growth was higher that it is today with a vastly reduced middle class.

And fair play is in the news. Andrew Kohut’s most recent New York Times Op-ed highlighted a recent poll which “found that 66 percent of Americans believed there were “very strong” or “strong” conflicts between the rich and the poor — an increase of 19 percentage points since 2009”. And, “they care about policies that give everyone a fair shot — a distinction that candidates in both parties should understand as they head into the 2012 campaigns’.

“An awareness of economic inequality is not new,” said Kohut. “Pew surveys going back to 1987 have found an average of 75 percent of the American public thinking that the “rich are getting richer and the poor are getting poorer.” As far back as 1941, 60 percent of respondents told the Gallup poll that there was too much power in the hands of a few rich people and large corporations in the United States.”

In fact, fair play is a very important part of consumer and business confidence, say economists Robert Shiller and Nobelist George Akerlof in Animal Spirits, How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, which further develops famous economist John Maynard Keynes’ thesis that animal spirits, or emotions, drive most financial decisions. And we can measure the degree of confidence at any time in the economy, mainly via the two major confidence surveys of the Conference Board and University of Michigan.

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Graph: Inside Debt

What is most obvious from the survey data is that consumer and investment spending rises and falls with confidence levels. For instance, retail sales sank to negative levels from 2008-2010, at the same time as both confidence surveys. And we know that consumer spending makes up almost 70 percent of economic activity, with 50 percent of it coming from retail sales.

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Graph: Econoday

What is their confidence based on? Akerlof and Shiller list 5 elements, of which fair play may be the most important:

  • The cornerstone of our theory is confidence and the feedback mechanism between it and the economy that amplify disturbances.
  • The setting of wages and prices depends largely on concerns about fairness.
  • We acknowledge the temptation toward corrupt and antisocial behavior and their role in the economy.
  • Money illusion is another cornerstone of our theory. The public is confused by inflation or deflation and does not reason through its effects.
  • Finally, our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.

Akerlof and Shiller’s Animal Spirits therefore develops Keynes’ thesis further. A major part of any business decision is whether the public has confidence in and trusts the economic conditions that determine whether they should spend or save, invest in expansion or lay off workers.

In other words, when the playing field is not perceived as fair, then the public retreats to inaction. “If this is what we mean by confidence, then we immediately see why, if it varies over time, that it plays a major role in the business cycle,” say Akerlof and Shiller.

President Obama was talking not only about the huge decline in income inequality over the past 30 years, and un-progressive tax code that allowed countless tax loopholes and benefits for those individuals and industries that needed them the least, but the loss of opportunity and social mobility that has put the U.S. near the bottom of all developed countries in quality of life factors, according to Richard Wilkinson, a leading authority on the effects of inequality.

And we know a more progressive tax structure means more economic growth and increased tax revenues. President Clinton proved this with his combination of reduced government spending and higher maximum tax brackets that caused 4 consecutive years of budget surpluses.

Whereas the Republican’s sense of fair play doesn’t play well with most Americans, according to the Pew survey. “Just 11 percent of Americans say they are bothered by the amount they pay, while 57 percent of respondents say they are bothered by what they believe are unfairly low amounts paid by the wealthy.”

Then why is it Republicans in particular continue to oppose any government help to boost economic growth? It could be what Robert Frank calls cognitive illusion, in a recent Sunday New York Times Economic View article. Their wealthy supporters believe higher taxation means they will lose out on the things they value most, and which go to the highest bidders—waterfront properties, precious jewels or art, etc.

“But a tax increase is different,” says Frank. “It affects all participants in the bidding for positional (i.e., luxury) goods. And because it leaves everyone with less to spend, it has essentially no effect on the outcomes of those contests. The same paintings and the same marina slips end up in the same hands as before.”

So there is no reason for the 1 percent not to enjoy the benefits of fair play, as well. “…higher spending on many forms of public consumption would produce clear gains in satisfaction for the wealthy,” says Frank. “It’s reasonable to assume, for example. That driving on well-maintained roads is safer and less stressful than driving on pothole-ridden ones.”

Harlan Green © 2012

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Keynesian economics, Macro Economics, Weekly Financial News and tagged , , , , , , , , , . Bookmark the permalink.

5 Responses to Fair Play Benefits All of Us

  1. G says:

    The whole income inequality argument is disingenuous at best. Please research income mobility or check out my blog for a shortcut. The reason some people correctly don’t want the government doing anything to artificially boost the economy is the government and the Fed caused the housing bubble that got us into this mess to begin with. We have a Federal Government-caused education bubble about to burst soon as well. We need more freedom in this country with a level playing field that produces fairer opportunities, not a government with leveling policies creating an unfair playing field just in a vain attempt to show “fairer” results.

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    • No, housing bubble was caused by Greenspan’s Fed holding interest rates below inflation, while Wall Street evaded all regulations that controlled leverage, derivatives trading. Remember this happened on GW Bush’s watch, when “deficits don’t matter” (Cheney quote). Bush shut down regulators, so that little or no government was functioning. A more level playing field means that the top 1% have to give up some of their tax breaks, to bring back the middle class. There is little freedom when only the wealthiest and Big Business control the levers of power.

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  2. G says:

    As I said, and you repeated, the Fed kept interest rates below inflation leading to more money being available encouraging malinvestment. Derivatives trading added to the collapse, and possibly leading to it’s own collapse, but the Housing Bubble was caused by the federal government. Please research the following and find out for yourself:

    Malinvestment
    Community Reinvestment Act
    Policy Statement on Discrimination in Lending
    Clinton’s new subprime authorization
    HUD Mortgage Policy
    Fannie Mae My Community Mortgage
    S.E.C. fraud charges against Fannie and Freddie
    Regulator James Lockhart statement on Fannie & Freddie being adequately capitalized

    There is plenty of blame to go around, but the government deserves most of it, regardless of party affiliation.

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    • Sorry, but when 25 lenders originated more subprime and negatively amortized mortgages than Fannie/Freddie; including BofA, Wells Fargo, World Savings (Alt-As), Wachovia, and all the hedge funds;Bear Stearns, Lehman Bros., Goldman Sachs, et. al., funded the fly-by-night Mortgage Banks that made most of the liar loans, you can hardly put most of the blame on government!…You forget that the bubble happened on Dubya’s watch–i.e, right wing, ‘government is the problem crowd’ who didn’t want any regulation of derivatives, etc. Fannie/Freddie’s underwriting criteria are the gold standard, which require income, asset verification, plus probability of continued employment. You are right on one thing, though…bubbles happen because too much of something is produced, and that is regardless of party affiliation!

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  3. G says:

    Do you truly want to put the blame on George W. Bush, but somehow otherwise hold the government unaccountable? That is laughable. (You do realize that GW Bush was the President, thus part of the Federal Government, right?)

    I am not sparing anyone due to party affiliation the responsibility of what happened. I am casting blame where it belongs. Bubbles happen because too much money is available to pursue the hot item, thus creating a bubble that will eventually burst (research “malinvestment”). Government is most often the culprit in allowing too much money being available due to their policies. I do agree that the Fed is complicit as anything. Even though the Fed consists of private banks, do not forget it also consists of government oversight by Congress and a federal government appointed Board of Governors. I’m not saying private banks are free of blame. I am drawing the accurate conclusion that the government is (at the least complicit and) ultimately to blame.

    It is obvious that you are blinded by pre-held beliefs and you spent zero time researching the items I suggested to you. Do you truly believe that banks would risk all their capital making loans to people that could not afford to pay them back if they did not have some security against it? The federal government bailed them out just as they expected. Profits without risk is not capitalism. Don’t blame the player (the banks), blame the game (government regulations).

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