Posted by on July 18, 2016

(Dear Reader: This is the first in what will become a regular feature of this blog, “The Son Also Rises” series. These postings are done by Artus Barris – hence the hopefully witty allusion to Hemingway’s The Sun Also Rises, although neither of us suffers from the unfortunate war injury of this novel’s protagonist, Jake Barnes – and will focus on basic economic concepts, such as today’s post on “opportunity cost.” Artus will also try to pick subjects that are especially interesting for younger readers. Lastly, Artus will use these postings to push back on the mind-numbing, left-wing conformity of the university population in which he finds himself and which afflicts much of his generation.) – Roger

It was highly ironic that The Wall Street Journal published an article on Frederic Bastiat’s birthday about the economic benefits of India’s recent decision to raise wages for government employees.

Bastiat has appeared before in this blog as proof that France once actually produced economists, instead of charlatans like Thomas Piketty. Bastiat is the father of the economic doctrine of “opportunity costs,” the belief that the real cost of anything is the value of the foregone alternatives. Bastiat is also remembered for his satirical writings, such as the “broken window fallacy” and the famous “Candle Makers Petition,” in which the chandlers decried their unfair competitor (the sun) and requested governmental protection.

When reading the rest of this, it is important to keep in mind that “opportunity cost” is a concept I have learned in my Business Studies class at the ripe old age of 15 or 16 years. The Wall Street Journal really has no excuse.

India’s state cabinet has approved a wage increase of 23% for 10 million governmental employees and pensioners, thus increasing government spending by US$15 billion over the next two years. This is equal to more than half the fiscal stimulus India injected following the 2008 financial crisis. The WSJ article goes over the “benefits” of such a change and it was indeed a “wretched hive of (Keynesian) scum and villainy,” as Obi-Wan Kenobi would say (if he had studied economics on Coruscant instead of the ways of a jedi).

When a Keynesian discusses increases in governmental spending to boost aggregate demand and thus growth, he often seems to forget that all the money the government has comes either from current taxpayers or future taxpayers (in the form of debt). As such, how can one convincingly say that increasing the wages of governmental employees, paid with taxpayers’ money, can increase overall spending? Doesn’t one eventually realize that it is merely recycling the spending lost by taxing people more than needed?

To this, some answer that the tax is mostly aimed at the rich individual who “hoards” his money and dares not spend. As Sanders’ supporters enjoy repeating, it is supposed to “increase the velocity of money” – probably the only economic phrase they ever bothered learning, although not really understanding.

The fact that some people actually believe rich people hoard their money baffles me with its stupidity. There are two things that someone can do with his money. Either he spends it, creating the sort of demand that Krugman loves. Or he invests it, creating wealth and jobs, and therefore spending if that is what you care about – although I don’t.

It seems to me that anti-wealth people have been overly influenced by childhood images from Donald Duck, with Uncle Scrooge bathing in his money while allowing most of his wealth to decay through ZIRP, inheritance and wealth taxes, and inflation. At least, actress Jodie Foster seems to think this.[1]

As such, this wage increase solely does one thing and that is to divert spending and investment done by taxpayers to government employees. You know, the sort of government employees that make Washington D.C a city with a per capita income of $45,877, the highest in America. The trend is no different in India, as governmental employees have a recommended minimum wage of 18,000 rupees per month, while mere mortals working in the city of Delhi have a minimum wage (the highest in India) of 361 rupees per day, which is just under 11,000 rupees per month if one is able to work every day (including weekends). This does not include the myriad of extra benefits that come with being a governmental employee, including the cosy 9am-6pm working days or the excellent access to bribery opportunities, which 62% of Indian citizens report enduring.[2]

To conclude, this WSJ article simply depressed me in its lack of insight. I have a soft spot for developing economies as I feel like a father proudly watching a child grow thanks to economic liberalization. Yet, it seems I always end up heartbroken. India has (had) a huge potential thanks to its cultural ties with the English-speaking world; its growing, young and large population (compared to China’s aging one); and a culture that venerates education and actually focusses on subjects that matter, such as the STEM fields. However, if the intentions behind the wage rise are widespread, this promises a gloomy future.

Artus Barris,
Cannes, France

[1]Sitting on a fortune of about US$100 million, Jodie Foster has claimed that “attacking the rich is not envy, it is self defense. The hoarding of wealth is the cause of poverty. The rich aren’t just indifferent to poverty; they create it and maintain it.” Paid around US$10-12 million per film, Foster is the first known individual to have succeeded in multiplying her wealth by about ten times her salary without “hoarding”. Bravo!

[2]This statistic was found on page 1 of this report. It is a bit aged but India seems to have gotten no better in the following ten years as, in 2015, the Corruption Perceptions index gave it a score of 38 out of 100, where a 100 means a very “clean” country and anything below 50 is extremely corrupt.

 

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Posted in: Economics, Policy

Comments

  1. Ada
    July 22, 2016

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    I have observed that wealthy people do hoard money. If they didn’t, they would quickly cease to be wealthy. It stagnates in their hands and in their circles.
    There is such desperation for consumption and growth to increase internationally, that we are resorting to success of 1920 boom tactics to try and persuade Indians to peruse consumerism.
    Economic growth is unsustainable, it is the equivalence to a Jenga structure in the final rounds of a game. The key to our problems is not increase in birth rates or increase in spending.

    • Artus
      July 23, 2016

      Leave a Reply

      I have mentionned in the article that an individual cannot stay wealthy by “hoarding” wealth, especially in our economic environment. I am not denying that some may just sit on their cash but such illogical individuals will be less successful than logical individuals thus replaced. As Roger already mentionned – the market punishes irrational individuals.

      I would agree with your point about “desperation” for growth. I think that it is a result of bad economic measures of success such as GDP.

      In what ways is economic growth unsustainable? Lack of resources? Pollution? Fixed – pie? These are all fallacies I intend to debunk in future posts.

      I did not understand what you meant with your last sentence.

  2. Hans van der Weide
    July 24, 2016

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    Dear Artus,

    Enjoyed your debute “blogg” look forward to the next! Plenty of time to read in Greece, which feels, by the way, as a free place! Haven’t seen a policeman yet, no traffic rules, no parking money to pay, or yellow lines were you can or can’t park!! Helmet on your head whilst driving on your scooter?? Up to you!! And everything goes well and the people are happy. Regards Hans

    • Artus
      July 25, 2016

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      Hello Hans,
      Thank you for the encouragement. I’m really glad you enjoyed it!

      That sounds great. One of the advantages of a bankrupt government – they can’t afford to monitor people’s lives haha

      Have a great trip.
      Bests,
      Artus

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