The financial education of Eric Cantor

After listening to Eric Cantor talk one too many times about how rich people and small business create jobs as a result of keeping their taxes low, I feel it is my duty as an American citizen to give him a short lesson on how poor and rich people spend money differently. It’s not very complicated or that long of a lesson, so he can even read this blog post on his iPad while the president is talking during the meeting tomorrow. Really, nobody will notice.

How a poor person spends money
For purposes of this post, let’s say a poor person is someone making $10.00/hour at a full time job, even though there are many more people making far less at minimum wage ($7.25/hr just to refresh your memory. It was an issue the last election.) Besides, the math is easier at $10.00/hour.

Working a full day will gross this person $80.00 each day or about $67.00 net after payroll taxes (that is the Medicare and Social Security contribution in addition to income tax, which they are likely to get back as a refund at the end of the year, so we won’t count that.) At the end of the week, that is $400.00 gross, $335.00 net.

That is the income part. Now, let’s look at how they think about their paycheck.

Rent is usually seen as “Can I cover this month’s rent with one paycheck?” If the answer is yes, that is good. Most often, though, it is a week and a half, maybe two. But poor people never do a percentage of income calculation. They don’t see that housing is costing them 25-50% of their net pay. They just look at weekly paychecks.

Let’s take a look at one more example; buying lunch. If a poor person goes to McDonald’s during lunch and it cost $8.00 it never occurs to him that he just spent 12% of his net pay and has worked a whole hour to pay for a lunch that took ten minutes to consume. Poor people just simply do not do this math; it is too scary. It would paralyze them and make them unsuitable for the cheap labor capitalism needs to maintain productivity.

If you gave a poor person a $1,000 check, he would go spend it on something like a television or toys for his kids or some material thing that some company made and hopes to sell. Most likely he would treat his family to a steak dinner at the Roadhouse and maybe buy a tshirt at the next soccer tournament his kid plays in. I’m not perpetuating a stereotype here, just making an observation about how most poor people would spend a “windfall.” You can do the math about how many televisions you need to sell for companies to make more, and hire more sales people to help people buying sets, etc, etc. to get to a real stimulus number. In short, poor people circulate money which gets the economy going.

How rich people spend money
I’m going to skip the income part of rich people and say that they make way more than $80.00/day gross, $67.00 net. Let’s say that is their per minute rate. The difference lies in their awareness of how much things cost as a percentage of their income and how much return they can make on a dollar invested. They are aware of their housing costs, their health care costs and the rate they paid in taxes last year. They are also aware of the rate of return on their portfolios and whether it makes sense to spend or invest money received as a windfall.

If you give a rich person $1,000, they won’t need it for anything. Instead of buying something or creating a job, they will simply turn it over to their portfolio that invests in companies that are rewarded for keeping head counts and the wages for those they need low. The money is not circulated into the economy; it is just parked in a stock market where gains and losses are recorded in some computer. The money is doing the exact opposite of what the economy needs. Sure, it contributes to creating wealth, but all wealth really is is money someone didn’t spend.

$1,000 to a rich person or a company is nothing. A tax break is seen as that $1,000; not enough to actually do anything like create a job but large enough to not just throw away. It goes into the bank or the portfolio. For a company to create a job, it needs to either see a lot of demand for its goods and services or it needs to have very, very large incentives. In all instances, it will take the former.

Mr. Cantor, your theory of business people creating jobs by cutting their taxes just doesn’t mesh with the way they think. I know this because I is one of them. I was also once a poor wage earner so I know how they think. The rich are hoping you keep saying your line because they are accumulating wealth a little bit each year and the poor don’t really understand finances all that much to know that your line is crap.

But you know the difference. And to continue perpetrating your perverse logic under the banner of fiscal responsibility is anything but.

*I should disclaim my motivation for trying to educate Mr. Cantor on how poor people spend money. My business is going to need a lot of poor people spending money irresponsibly on their kids in the near future, so if given the choice, I’d much rather have 10 million poor people with an extra $1,000 in their pockets than 400 really rich people socking money away in the stock market.

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About Rufus Dogg

I'm a dog who writes a blog. It is not a pet blog. It is a real blog that talks about real ideas. No, really. I do my own writing, but I have a really, really cool editor who overlooks the fact that I can't really hit the space-bar key cause I don't have thumbs. I talk about everything from politics to social issues to just rambling about local problems. And, sometimes I just talk about nothing in particular. Google+
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15 Responses to The financial education of Eric Cantor

  1. James Dibben says:

    Okay, then instead of giving the rich person $1,000 you will need to give them $60,000 since according to your science a rich person makes per minute what a poor person makes per hour.

    So now does that rich person do something other than throw that money into the market? Is just throwing money into the market how the rich person got rich in the first place? Maybe on Wall Street it works out that way but not around here. I know a few millionaires around here and none of them got rich that way. They worked their ass off, for years. Now someone in the government decides to tax them less and it gets called a ‘hand out’.

    Since when is it a hand out when the government lets you keep more of your own money?

    The rich people I know just aren’t very greedy, I guess. I’ve gotten a lot of help from some rich people I know. Some short term loans so I could try my latest idea. Some free cash gifts to help me make it a bit longer. A short term loan so I could make payroll till I received a big check. That helped me dump quite a bit of cash into the economy and feed my family in the process.

    Some poor person making $10/hr couldn’t do that for me.

    If someone gave me 1k right now I’d put it in the savings and I’m a long way from rich.

  2. Rufus Dogg says:

    It is not about “fairness.” That is a whole other argument. The only thing I am going to say about that is two examples. WalMart would never have been able to get big if the Interstate highway system was not built and Google would not have been able to get big if not for the Internet, both of which were taxpayer-funded. Why should they then be able to keep all that profit? Shouldn’t it all be shared a bit? Just because they were able to take unfair advantage of a system’s weakness and keep others from tapping into it? We tend to forget that we got here firstly through the endeavors of those who came before us. http://www.dogwalkblog.com/my-political-leanings.html

    The amounts and where the money comes from really doesn’t matter. Replace government with Aunt Mable and the examples still work the same way. Rich people and poor people spend money differently, regardless of the source. To not apply that in an economic policy is just being dumb.

    Trickle down does not work because rich people do not circulate into the economy. Really, it is just that simple. The Bush tax cuts cost the US Gov approximately $1.2 trillion dollars and has not returned on its investment in 10 years. Prove me wrong. Compile a chart of everyone receiving a tax cut and link that to a specific job that was created. I’ll wait.

    The 2009 stimulus did not work as well either because it used that same top-down approach. 40% of that was tax cuts, the rest went into buckets of money that got dispensed by state and local governments. What did they do? Plugged up deficits when they should have created jobs. Same with TARP; banks just shored up their balance sheets when the money was supposed to go out as loans.

    Programs like this get instituted because Washington does not — or will not — understand fundamental human behavior. All economic theory is just understanding how people make and spend money. I can get more information about how people spend money sitting in Times Square for an hour than an economist gets after 2-4 years getting an MBA. It’s not science and charts. These guys study the wagging tail when they should be looking at the dog.

    Know what did work? Hiring Census workers. The only problem with that is it was an ultra short-term program. Folks knew it when it would end so business did not invest in any long-term capital acquisition to service the additional customers those paychecks would create. They just tightened up for the short term. These jobs were lower-paying, temporary jobs, but lots of folks lined up to get them. If the US Gov were to just hire people directly at $10-15/hour, think about how little they would have to pay compared to a stimulus package. Hire artists, writers, web designers, social media folks, construction workers, landscapers, curators, librarians, cabinet installers to just do stuff we wish we could get done but don’t have time to do… like a huge NPR or PBS. In 3-5 years, most of these folks would have cycled into the private sector eventually as that grew and needed their services, the public works would wind down and we would have been left with a pretty rich nation with their efforts. Grossly over-simplified, but the core is there.

    Tickle-down does not work; trickle-up does. The smart guys like you and I will be building systems to catch the dollars as they get spent so we’ll get our “tax handout” on that end. Poor people will always only get the money; rich people figure out how to turn that money into more money. But first, we need customers to spend it. Hand up, not hand out.

    It’s not a choice between a nation of rich people and poor people. We need each other! I’ll be the first to admit I need a bunch of parents who don’t watch their expenses to be spending lots of money at a disproportionate rate on their kids for soccer. (http://www.tourneycentral.com) but it is not in my best interest to make them unemployed and insolvent. Trickle-down policies do that.

    There is nothing wrong with being a rich person in a poor person’s body. I was there and am far from the rich of the top 2% we keep hearing about. But I know what an asset is and how to make money from it. When I worked at Target Stores as a department manager, know what my lunch was? Two packets of crackers for .25 and cup of ice water for .05. Why? Because if you bought crackers, you could get all the peanut butter you could eat in little cups. I had carbs, protein and fluids. Perfect lunch for .30. Lunch was an expense, not something that made me money so I spent as little as possible on it. (Just to give you an idea of how cheap I am.) Now, I’ve spent hundred of thousands of dollars on computer and camera equipment and more on software programmers because top quality tools allow me to make money. I still eat frugal lunches, if at all these days 🙂

    We need to quit thinking about what is fair and start thinking about what works. I have every confidence smart people will be able to take advantage of any situation, regardless.
    http://gerardmclean.com/there-are-no-disadvantages-in-business-only-leverage-you-have-yet-to-discover.html

  3. Jim Dillingham says:

    Hi Rufus,

    Very well said. I have tried to make this very point several times on my blog. I think you did a much better job here. In my view, the marginal propensity to save is higher as your discretionary incomes goes up.

    Companies have a lot of money right now. I’m not guessing. This information is readily available. As you noted, portfolios grow as company values go up, and yet they are not spending. Why? There are no customers.

    If I build bookshelves but there are no customers, I will lay off my workers once my warehouse is full. I will hire them back once I see that demand exceeds my warehouse’s ability to supply.

    I invite you to my blog http://jamesdillingham.com. Look for the tab called The Big Lie. That summarizes my overall view of the GOP’s plan.

    Thanks for the article. I will refer to it in my post today.

    Jim

  4. Rufus Dogg says:

    I hate paying taxes but I hate not having customers (revenue) even more.Taxes is something I only pay when I have profit and profit happens only when my revenue exceeds my expenses. I can cut my expenses all I want but if I eventually run out of revenue, taxes do not matter one little bit. The tax rate could be 70% and it would simply not affect me.

    I also hate when my deadbeat neighbors get free money from the government, but that will never exceed the amount of money I can make taking that handed out money from them during the course of my business. Make me sustainable customers and I really don’t care what ideology drives it.

  5. Pingback: Throw the Tea Party Into the Harbor… | View From The Cheap Seats

  6. Jim Dillingham says:

    “Quit thinking about what is fair and start thinking about what works.”

    I like that.

    I understand your argument perfectly and am in complete agreement. This is not about the evils or wealth or handouts for the poor.

    I see it more as a short-vision v. long-vision type thing. In the short run, the rich and use their influence to become richer. However, in the long run, they know that a balanced economy serves them much better.

    However, there are a few rich people (see the top contributors to Eric Canton’s PAC) who don’t care about long term, so long as they get theirs now. These “few” are using their substantial influence in Congress right now.

    The result is a Speaker that can’t control his own house because too many of them have been bought and paid for (once again, check Cantor’s PAC contributors).

    If tax breaks for the rich worked, I’d be all for them. They don’t. History says they don’t. A little knowledge tells us why they don’t.

    So let’s move on to something that works.

    Here is another interesting link about jobs since the GOP took over the house: http://www.washingtonmonthly.com/political-animal/2011_07/post_hoc_ergo_propter_hoc030754.php

  7. Michael Chadnoffsky says:

    He is a lot like that twelfth grade bully who, after making other students’ lives unpleasant, still has got the credit for something he didn’t do. Don’t you think? Eric Canter is synonymous to bullying. He’s a lot worse than Boehner. That’s just my opinion.

  8. Jim Dillingham says:

    I don’t see Cantor as a bully. I think he is very, very smart. And that makes his proposals even worse. He must certainly know he is wrong and yet…he continues to push. He want’s Boehner’s job. So, he put’s his boss in a situation where he can’t win. When Boehner fails, Cantor will step in as the newest Tea Party hero.

  9. Rufus Dogg says:

    @Jim I was just going to make that assertion. Cantor is an opportunist and is squeezing Boehner. I never really like Boehner, but I kinda feel sorry for the guy.. there is no way out of this situation for him. He will be a one-term Speaker because he has jackals in his party.

  10. Jim Dillingham says:

    I’ve tended not to like Boehner simply because of his positions. He always looks like he’s saying something that he’s not comfortable saying.

    Lately, I’ve actually heard nothing but good things about him from both sides. I think he’s probably a good man in a bad situation.

  11. Jim Dillingham says:

    Rufus,

    Sorry to keep posting here but we seem to be of similar mind and I need to vent (aside from what I do on my blog).

    If you get a chance today, watch MSNBC with Chris Matthews. He has former labor secretary Robert Reich on who discusses the fallacy of the idea that tax hikes destroy jobs.

    jim

  12. Rufus Dogg says:

    I tweeted just as Matthews introduced the segment about questioning the taxes kill jobs. It’s about time (10 years too late!) that someone started asking for proof. I just want a matrix of everyone who got a tax cut and the corresponding job, along with the living, breathing person’s SSN who filled it. Just prove the statement otherwise we’re all just arguing about whether the sky is blue or not.

  13. Rufus Dogg says:

    To understand Boehner, you need to understand his district. BTW he likes to tout his small business ownership chops, but the reality was his family owned a bar/restaurant and he worked at a plastics plant before Congress.. so he never really actually owned his own small business.. this needs to be said and hardly ever is…

    Anyway, he got elected to some local city councils, then the Ohio House and the Congress following some guy who had some sex scandal in 1990 (I think) His district is 90% Republican and he manages in Congress like he has his business career. He is a great, SAFE middle manager.

    He did not ever ask for earmarks for his district… it doesn’t need any federal money as it is well-heeled. His district works in Southern Dayton/Northern Cincy corporations and goes home to their lush, gated communities on golf courses. They do not want Fed government and Boehner’s only responsibility is keep Fed gov out of the district. As long as he does that, they don’t give a crap who is in the House. They could have a trained monkey in his seat for all they care as long as the Fed gov stays out of their affairs. (A tame, GOP Tammany Hall if you can imagine)

    That is Boehner’s whole point of view of America. His district is the perfectly manicured lawns, kids going to well-funded public schools or private schools — it is the perfect Hollywood manufactured community.

    So, he now finds himself in this mess where the House needs a strong henchman and he has the skills of a glad-hand man. Oops.. right guy, wrong time… He may figure out how to survive this or not.. my guess is he will retire after this Congress (or the next) and say to hell with that crap; I’ve served my country and these rich a**holes long enough. Life is too short, I like my weekends, Merlot and golf.

  14. John says:

    Wow! You have rich friends. The whole system works.
    Could I get the names of your rich friends so I can move closer to my job. I’ve never imagined having rich friends was the secret to achieving the American dream but it makes sense to me now. Please give me the names of many of your rich friends so I can spread the generosity around.
    I think I might just be getting ahead!

  15. Rufus Dogg says:

    John, I always appreciate snark, but I appreciate a well-reasoned argument to a comment or post much more!