Edward Conard

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Krugman Ignores Buyers Surplus and the Motivational Value of Status

In today’s “The Showoff Society” Paul Krugman continues to blame the drive for status among America’s most successful workers for abundant waste that yielded stagnant wage growth.

Yesterday, he failed to recognize the drive for status fuels investment, risk-taking and innovation that helped spur U.S. job growth to twice the rate of Europe and three times the rate of Japan since 1980, and that the slowdown in wage growth likely resulted from open trade and immigration borders in the face of a worldwide surplus of labor.

Today, Krugman ignores buyers’ surplus—the value of goods to buyers over and above their price, which, according to liberal economists like Dean Baker and Brad De Long, is perhaps 5 times larger than the value captured by producers. In other words, producers and investors only capture 20 percent of the value created by their work, innovation, risk-taking, and investment. Consumers capture the other 80 percent.

Moreover, according to a study published by the Federal Reserve, high-income Americans save upwards of 40% of their income on average—the wealthiest invest an even higher portion. As well, the portion of income used to buy existing assets, like art and real estate, doesn’t consume economic resources; it merely transfers ownership rights from sellers to buyers. So a highly paid worker wastes a smaller portion of the value he or she produces than Krugman admits. And if ostentatious spending  raises the bar for status and subsequently motivates other talented worker to work harder, take more risk, and invest more, that consumption is not simply wasted either.

These dynamics drive free enterprise, which has lifted mankind out of poverty and raised living standards to extraordinary levels over the course history.

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