On Mark Cuban’s “freaky” idea for the economy

An interesting piece at Mark Cuban’s blog also mentioned in his recent WSJ interview and my comment to the” idea for the economy that will freak people out but could be fun to discuss:”

Mark,

The key to your argument is neither in the 10 year nor the $100M clause–rather it is in the statement “PICK A GOAL”. Yes, since things in the economy are highly linked, you have to start somewhere–and getting to the picked goal will cost money. Like any kind of subsidy, this will not be Pareto efficient, of course, i.e., it will cost more than the benefits it delivers at the overall society level and in a neo-classical economic framework–but the clause above, interpreted strictly, indicates a conscious choice, so now it is a matter of gauging the magnitude of the cost.

Now, for a solid exercise in intense hand-waving:

Bill above is incorrect and too hasty with his web searches–those companies are direct mail related. The total number of companies with over $100M in revenue is larger, 41,777. Accoding to the Bureau of Labor Statistics (bls.gov) report for July 2011, the unemployment rate is 9.1% representing 13.9 million people. That in average would call for each of those companies to add about 333 new “free” people, a sizeable number.

The median salary in the US in a 2010-2011 survey is $46,300, presumably excluding benefits–let’s say $55,000 with benefits, if the government agrees to pay for those too. That means the amount needed for the plan in order to get to full employment, net of administrative costs, is about $770 billion (hoping I got all my 0s right). While Warren makes that in 30 minutes and Tiger can pay that in a settlement, that amount is roughly the size of the Bush bail-out, i.e., quite huge, meaning, among other things, that it it equivalent to giving every living human being in the world $100, for example. But again, if the goal picked is to solve unemployment, then that’s the (net) price.

Economically, the effect would be to reduce the labor costs going into the products of that company set, i.e., to shift the supply curve for those products lower. Note that insofar as material costs are involved, the total costs of production for these companies would go up, if the “free” employees are actually part of the variable costs, i.e., they contribute to the company’s product quantity. In any case, they would benefit from a lower price/higher quantity/lower cost combination at the new market equilibrium point…if that is achieved. Presumably, these being the largest companies in their field, their participation in your program would move the market price “efficiently.” However, this may have disastrous effects on smaller market participants who are shut out of the “free” employee program and cannot survive at the lower market price thus arrived at–this adds to the deadweight cost of the subsidy and basically moves unemployment from where it is today to those specific, less than $100M in revenue companies. Will the program also provide for rescuing them?

Finally, if the “free” employees are hired in positions not directly related to production, i.e., they constitute subsidized fixed costs, the total cost structure of production for the participating company is unchanged. This would constitute, at first blush, a pure subsidy to the company as society does not benefit from lower product prices in the short-run (yes, you can say that R&D will, in the long run; but “the long run is a misleading guide to current affairs. In the long run we are all dead”, said, serendipitously enough for this topic, Keynes). The counterweight to that is the newly employed who become more willing-to-pay consumers thus increasing demand for products in the marketplace but thereby driving up their prices.

Advertisements

About socot

- Economie - Istorie economica - Finante - Administrarea crizelor
This entry was posted in Uncategorized. Bookmark the permalink.