It has been noted that people report increasing happiness up to an annual income of $75 000. Above that there does not seem to be more happiness but people report somewhat higher life satisfaction. The reason for these results is that boredom is unhappiness. At around $75 000/year people have enough money to do something interesting, something they enjoy, whenever they want. Below that level they have time but not enough ready cash to stay amused, above that point they have no additional time so they must try to improve the quality of how they spend their time: instead of a $20 lunch, they have a $100 lunch; instead of a $100 lunch, they have a $500 lunch, and then what? A $1 000 lunch? Similarly; instead of skiing in the Catskills, they ski in Vail; instead of skiing in Vail, they ski in St. Moritz; instead of skiing in St. Moritz, they hire a helicopter to drop them on an unskied mountain slope; but I will repeat my question, then what?
The need to improve the quality of time becomes increasing expensive and leads to conspicuous consumption, McMansions and trophy wives. People feel the need to enjoy their money even if they have run out of ideas on how to spend it.
Look at it another way, what would be the cost of making the next choice, how much money would it take to have another choice. If someone is earning $50 000/yr, $50 could represent a choice, a pair of discount shoes, a nylon jacket, going out to dinner. At $500 000/yr a choice would be on the order of $20 000, buying a new car. At $5 000 000/yr the choice would have to be $1 000 000 buying a beach front house, all the less expensive choices would have already been made.
Consider a car that costs $25 000. A person drives it 500 hours per year, has a usage rate of 500 hours per year. The person owns it for 10 years, a total of 5 000 hours of usage or $25 000/5000 = $5/hr. To that must be added gas, maintenance and finance costs,for a total of maybe $15/hr. Someone buys a yacht for $50 000 000, he sells it 20 years later for $20 000 000. In the interim, he uses it 60 days each year, since he is sleeping for 8 hours each night, he uses it for 16 hours each day or 60 X 16 = 1 000 hours each year; for 20 years = 20 000 hours; $50 000 000 - $20 000 000 / 20 000 = $1 500/hour plus financing fuel and maintenance, at least $2 000/ hour. Between the two people $2 000 / $15 = 130 times the cost of choice for each hour, one unit of choice. If the person who buys the yacht earns $20 000 000 /yr and the car owner earns $50 000 /yr, the number of 130 gives a relative scale of the difference of the cost of choice between them.
The curve of choice illustrates this process. The point C represents $75 000/ yr above that the curve bends and begins to continuously flatten towards the horizontal. At the toe end, 0-0 , it is also flatter since the purchases made at very low incomes; soap, laundry detergent, toilet paper, do not represent a lot of choice. Once income rises above that minimal level choice begins to rise rapidly until $75 000/ yr, at which point the person saturates on time and must begin spending more money to improve the quality of time, with increasing expenditure and decreasing rise in choice. The ordinate, vertical axis needs a label and so a name must be chosen for the unit of choice. Since George Washington is on the dollar bill, I will call the unit of choice the george, G.
It has been reported that people of moderate incomes give a higher percentage of their money to charity than people of higher incomes, A versus B on the graph, The most reasonable explanation for this is that generosity is a function of the ability to change one's level of choice. At A, the choice rises rapidly with an increase of income, at B it rises more slowly requiring a greater increase to have an equal percentage increase in choice.
To completely make up an example, let us say at A choice rises evenly with dollars up to $80 000 /year, $1 for each G and that then it increases at one fourth that rate, it takes $4 for each G. At $50 000 /yr, $5 000 would represent a 10% increase in both dollars and george. In a normal economy, that $5 000 would be relatively easily obtainable by working overtime or obtaining a part time second job. At $200 000 /year, the startind george would be 80 000 george for the first $80 000 and then an additional $120 000 / 4 = 30 000 george for a total of 110 000 george to increase that 10% would require 11 000 george or $44 000. That would be non-obtainable in most circumstances. That inability to change the level of choice is why so many people earning $200 000 fell under stress and even under more stress than people earning $50 000, because they cannot change their condition and, consequently, feel trapped.
Europeans tend to donate to charity at lower rates than Americans. This can be explained through choice. For an increment of pay, european taxes tend to be higher. Therefore the choice to the wage earner is lower. In addition it is more difficult to work second jobs and so the total ability to change choice is lower than in the United States. and, therefore, on would predict lower rates of charitable giving.
The prediction from this is that a tight job market, where people cannot change choice, will reduce charitable giving, even if the total economic activity is not reduced.
Economists claim they have an anomaly as to whether raising taxes or cutting services will have a greater negative effect on the economy. This is because the idiots are using the wrong variable. The argument of economists that if taxes are raised , people will spend down savings to hold their total spending constant, so raising taxes should not cause much of a negative effect on total economic spending, but cutting services results in their loss and would have an immediate negative effect.
Consider choice, instead. If someone is taxed $1 000 that person loses the entire choice value of that
$1 000. Money removed from savings is another loss of choice, people have savings to have choice to be able to make necessary or opportune purchases. If government services are cut, people do not lose the full choice. If one half of all parks are closed, the others are still open, they may be more crowded and less convenient but not all of the choice is lost. Taxes reduce choice and reduce economic activity.
Economists say that $=f($), that money flow is a function of money. The correct answer is $=f(G), money flow is a function of choice. To increase the flow of money, gross product, increase choice. Economists are using the wrong variable and are getting the wrong answer.
Choice is a function of having money and having available product, both must exist for the choice to exist.
If someone is willing to pay $1 000 for a leather jacket, one wants the right one. If one store does not have the right style, the money will not be spent. If another store does not have the right size, again, there will be no purchase. If another does not have the right color there will also be no sale. The more time it takes for the right product to be found the longer the money does not go into circulation, the money is not active in the economy. By having more choice the money is spent more quickly and the rate of economic activity increases.
Transferring money form past point C, such as B, to a point on the lower side, such as A would tend to increase choice, but there are some complications. If point A is $50 000 and $5 000 is added, a significant amount of the increase will go to higher housing prices. Most people choose to live in areas with saturated housing markets, thee are always active bids for any available housing. In the U.S., cities with large populations have increasing population, smaller cities have decreasing populations as people prefer to live with there is a high level of activity. The consequence of this is that any increase in income will drive up housing prices as someone will increase their bid for available housing to obtain preferred housing. This does not increase choice. Paying $300 000 instead of $250 000 for a house does not increase the choice of that house, the owner obtains the same choice at higher cost, this is true in general of inflation.
So, if there is an increase of $5 000, some fraction, maybe half goes to higher housing prices without an increase in choice. That means that the increase in choice is the remainder of the money, in this example, one half or $2 500.
If $50 000 is transferred from B to A, in this example, $25 000 goes to an increase in choice. If, at B, the choice per dollar G/$ is one half the rate at A the choice will be constant. But again it is more complicated.
The $50 000 transferred from B, will lower housing prices for that purchase class, just as it raised it at A, the reduction in available money will eventually reduce the bids on available housing. So, the dollars that reduce choice will be less than $50 000 in the long run. In the short run, people will have to pay current rates for housing with less money, it is only after the next transfer, or contract period for rent, that the prices will begin to fall.
For taxes, the amount of income above C, all of the people with income below C plus the income at C,
$75 000/yr subtracted form everyone who earns above C, is about 30% of all personal income. Personal income is about 80% of the gross product, therefore, 30%X80% = 24% of the gross product is above the most efficient point of choice, everyone is happy for the minimal amount of money. That is the money that can be safely taxed without grossly affecting choice. If the tax rate is set at 60%, there is a maximum rate of taxation above which people just stop earning money, then the maximum rate of taxes that does not severely handicap the economy is about 14% of gross product, Total government spending is about 30% of gross product, it is necessary to have damaging taxes applied to the highest point of choice versus money to fund the government, in the first analysis taxes must directly hurt choice and the economy.
The only way to justify that is if government spending increases the net choice of those people. Historically, the biggest contribution the government made to increasing choice was free public education. The opportunity it provided was the single most important factor in improving economic productivity and the availability and affordability of goods and services. The national highway system was probably the second biggest contributor. After that was most likely various college programs.
For a person at A, if government spending cannot be shown to increase choice it is hurting the economy, that is why government waste and incompetence is so intolerable. It is also why having some government payment to private schools is worth considering, people in that range paying school fees are hurt by taxes for public schools since they are not using the choice form the public schools.
There is the topic of protective, or police functions, they are hard to evaluate. They include; police, courts, prosecutors, prisons, coast guard military and others. There point is not to increase choice but to prevent the loss of existing choice. The minimal amount that provides acceptable protection is the correct economic answer, but evaluating either acceptable protection or determining the minimum service necessary to provide it has no ready answers.
Some people, as a criticism, say that social democracies slow economic activities. I would question that, but it is irrelevant; the purpose of social democracy is not to maximize national economic activity, it is to maximize national choice, and I think that it does raise economic activity unless it is done really stupidly.
There is then the question of what are the measuring units of product or service choice. It is time, hours, times a quality factor.
There was a guy who got a Noble prize for arguing that there is a total transactional cost that determines purchase decisions. If a pair of shoes is available two blocks away from a potential purchaser for $200 and the same exact pair is available twenty miles away for $150, assuming the purchaser is aware of both, the location of the purchase depends on the customers evaluation of the value of his time in travel to buy the cheaper pair. It is a choice decision. The limiting value of someone's life is time, so time is the measure of decisions. How much time will be gotten out of a new stove? If the purchaser does a lot of entertaining, that could be 3 hours each time for 200 days in a year or 600 hours a year. Most people drive cars for less than 500 hours per year, so the stove could give higher choice.
There is a quality question. What was the quality of the time? 20 hours fishing for catfish in a local lake might not provide the same quality as fishing for marlin for 20 hours off of the Bahamas. Some people might prefer the catfishing, but the catfishing might cost $200 and the marlin fishing $5 000. Unless the quality is 25 times as high for the marlin, the cost per choice, george, is higher.
The same two factors, time and quality, can be applied to all possessions; blenders, Rolex watches, second homes, mistresses. In all cases, thee is a rapid rise in the cost for each unit of choice with income above
$75 000/yr.
All choice is equatable, going to a religious service, going to the opera, going to a political rally or going to a rock concert can all represent the same value of choice. The fact that one is expensive,another is free and another has a voluntary contribution is irrelevant. Different people may prefer different choices, but it can not be said that one is higher choice than the others. Free speech has economic value just like a new car. The Chinese government, in limiting speech, is also limiting choice and is, to some extent, hurting its own economy and limiting economic growth, The effect might be small or large but it will have some effect.
The reductions in freedom by the Chinese government means that all choice must be purchased, instead of having free choice available and people only spending money on high choice items. The selective purchase of choice available with freedom makes money more flexible and more efficient.
Determining quality factors to quantify choice would not be easy and there would be, inevitably, a fair amount of approximation in any such numbers.
Trade between areas ad countries will be strongest,and most aggressive, for high choice products.
The distribution of income, which leads to the distribution of choice, is determined by two factors; the total size of the gross product and the individuals negotiating strength. The gross product can be local, national or international. The negotiating strength is a double factor for most people, the employers negotiating strength and the individuals strength with the employer. If the employer manages to negotiate $10 000 000 in income an employee might negotiate $1 000 000 of that. If the employer negotiates $1 000 000, the employee would have to settle for less. The negotiating strength is based, in most cases, entirely on perception, ability, competence and efficiency are only what the person paying imagines.
The king of Bhutan announced that he was going to track gross national happiness instead of product. I think he was very close to the right idea, but I would say the correct formulation is gross national choice.
Republican voting is higher between incomes of roughly $40 000 to $120 000, this is explainable through choice. Between D and E the curve of choice rises fastest, meaning that taxation also produces the fastest decline in choice, these are the people most susceptible to taxes. Below D people view government, and the choice it provides as a benefit. Above E the removal of money through taxation does not effect them that much in their total choice because their choice rises slowly with income and falls slowly with taxes. But between D and E people do not see themselves, whether rightly or wrongly, as receiving much choice form government but do fell the loss form taxes. Similarly, Republican votes are maximal for bachelor's degrees, people with graduate degrees tend to vote Democratic as do people with only a high school education. The income form bachelor's degrees falls in this wage range.
People above E don give to charity because they do not feel they have the freedom to do so, yet they do not mind taxes as much, it might seem like a paradox but it is actually the difference between prospective and retrospective. Similar to going to a dentist, it might seem awful to contemplate, it is not so bad when it is over.
Similarly, the thought of giving up money is difficult, but when taxes are taken it does not affect lives that much.
To construct the curve of choice, a first approximation is to assume the rate of change of the curve is proportional to the rate of charitable contributions and then use G0=$0 and choose another point, say $75 000 and then choose an amount, which could be G75 000 as a normalization point. It is only proportionalities that are of interest so the specific value is unimportant, but equating G75 000 = $ 75 000 makes it easier to see the effects of choice.
Executive bonuses are completely useless, the pay for executives is so far out to the right of the curve that increasing that pay through a bonus can produce little change in choice; the choice cannot be changed through paying the bonus, so the executive cannot be motivated by the bonus, increasing choice is motivation. The bonuses payed do not work to increase executive response and cannot work, they are a waste of money which would be better spent an middle income employees where the money would increase choice and motivation.
Choice has a strong communal component. If Bob goes fishing with Bill, then if Bill loses his job he cannot afford to go fishing and Bob loses his choice of fishing, fishing is no fun alone. Bob does not have his choice restored until Bill gets a job, repays his debts and rebuilds his savings account. Any money Bob would spend on fishing is unspent and the economy slows. This is why recovery from recessions take so long, the choice must be collectively restored and therefore the slowest rate of restoration ultimately determines the time to regain previous economic positions.
There is a similar effect with inventory. If there are no sales, items will not be reordered. When people start buying products again, they may not find what they want and spending will be delayed.
Jobs with inherent choice are viewed as high status jobs. These are jobs that allow for some autonomy and individual decision making and scheduling.
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