Let’s talk about the concept of surplus. As adults each of us has the primary responsibility of taking care of ourselves, first and foremost. That involves providing the goods and services necessary to survive on a day-to-day, week-to-week, month-to-month basis — the air, water, food, sleep, clothing, shelter, etc. Over and above that it is necessary to use our limited time, energy, resources and funds (TERF) to fulfill any obligations and commitments that we have taken on. Let’s call that our primary objectives. Either we produce the goods and services required to satisfy those objectives ourselves or we purchase them with the income received from the goods and services we provide to others.
Here is how an individual and the aggregation of individuals — what economists call the household — can decide to use its disposable TERF (the amount left over after satisfying the primary objectives). Some of it can be used in the following ways: to increase the consumption of goods and services; be put aside for future consumption — into saving; used to pay off previous loans; or assist other individuals and households that do not have sufficient disposable income to survive long-term. Some of the funds can be set aside to cover unexpected expenses. Or can be devoted to the attempt to develop new products or processes of production — innovations (some of which may be successful) or used to create works of art, or anything else the individual or household may decide to do with its remaining TERF.
Any income that we have left over after fulfilling the primary objectives is our disposable discretionary income — the surplus. The left over funds can be used for anything else we choose to do with them. How we choose to use the surplus is up to each of us. For those at the lower-end of the income distribution—almost all, all and sometimes, even more than all of their disposable income is used up just to survive. The more of our income that we are able to withhold from current consumption, the greater the surplus.
Importantly, a loan can be taken out to increase current consumption. Loans make it possible to do things currently that we cannot do without them. However, if the disposable income and surplus in the future is not greater than it is now, a loan makes the one who took it out worse off.
The loan, the interest and any penalties become an obligation that must be paid off first. The net result is that paying off the loan takes priority and reduces the available surplus in future periods. An excellent example is the burden imposed by the repayment of student loans. The funds required cut deeply into surplus. It is especially burdensome because it is at a time in one’s life when the extra surplus would make adjusting to the new circumstances much easier.
From an economist’s perspective the system is working as it is supposed to when the price we pay for any product just covers the cost of producing and distributing it in the most efficient way. The mix of products we get are the products we want most. Furthermore, laborers and other resource providers who contributed to the production of the products are reimbursed for the goods and services they provide. That income allows them to purchase the goods and services they want most.
When the price charged is greater than the long-run cost of production, the supplier makes “excess profits” — sometimes called monopoly profits. Historically, those funds have been used to enable the firms to engage in activities designed to maintain or enhance its control over the market. In addition, the excess profits increase the revenue of the company and income of its executives, managers and owners.
The company’s increased revenue and the individual’s additional surplus make it possible for them to be in the upper-end of the income distribution. That enables them to promote their private economic and political agendas.
Some of those funds have been used to manipulate the system to their private benefit. For example, the funds can and have been used to engage in various activities designed to reduce a company’s tax burden, including by moving corporate headquarters to a different location and arranging for and employing tax loopholes. The funds available from excess profits can and have also been used for political agendas, including lobbying and promoting gerrymandering.
Moreover, the excess profits provide the firms with the funds to push for consumption, consumption and more consumption. We are constantly bombarded by ads and Robo calls often designed to encourage us to buy products we have no interest in. In addition, the flow of new and updated products that “you must have” to stay current, places additional emphasis on consumption.
The increased consumption reduces the individual’s and the household’s surplus. Recently the New York Times reported that a Fed survey revealed that 60% of adults would struggle to find the necessary $400 in the event of an emergency, like an unexpected illness, economic hardship such as what many people are facing with Covid-19, a vehicle breaking down or damage to your house caused by a storm.
Imagine the following scenario. You are part of that 60%. You had a fall, developed a severe atypical headache or had some other trauma. You went to the emergency room at a nearby hospital . They took you in and got all your insurance information. After a wait, the emergency room doctor came in to check you out. She/he took care of the problem and sent you home with a prescription and instructions. From your perspective, everything was well taken care of.
Then came the shock. About a month later you got a bill from the doctor for $1,850. After checking you found that the hospital had been paid for the services provided. The additional $1,850 was the payment for the doctor’s services since she/he was “out of network” and therefore not covered by your insurance for their services.
From your perspective, you went to the hospital emergency room where the doctor they provided — who you had never seen previously — delivered the care. You viewed the doctor as an employee of the hospital, just like the nurse who assisted her/him. You appropriately thought that the payment for their services would be included in the hospital bill and covered by your insurance. In the end the extra $1,850 comes out of your pocket — from your surplus.
Furthermore,there are very significant consequences when companies charge high prices, especially when those prices are over and above the long-run cost of production and distribution. Under those circumstances the high price adds to the firm’s “excess profits.” Each product sold takes money out of the consumer’s hands. That expenditure reduces their disposable income. The reduced surplus makes it impossible for consumers to use that money to buy the other goods and services they may need or want.
The high prices, especially when they exceed the cost of production, push consumers towards, and perhaps into, the lower-end of the income distribution, making them worse off. Instead, that money goes into the hands of those at the upper-end of the income distribution. The net result is that it contributes to a significant disparity in income among the various segments of the population.
The bottom line is that there is a significant disparity in the amount of surplus available for individuals and households at the upper and lower-end of the income distribution. We will take a closer look at the causes and consequences of that disparity in subsequent blog posts.
For now it is important to recognize that the decision of how to spend our surplus is our personal choice. Each of those choices and its related subsequent activities has its outcomes — both the favorable and the unfavorable ones. We bear the consequences of that choice. That choice also determines the path we take and the legacy we leave behind.