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.