So far we have described 3 major pieces of the Economics Simulator; Individuals (who suffer the ups and downs of real life), Consumers (who as a quintile buy and work like people do in their quintile), and the Government (who collects taxes and makes expenditures).
As a side note, Consumers don’t pay state taxes or sales taxes. Instead, Consumers just pay lump-sum rolled up taxes. This was required because the members of each quintile are spread across all of the states in the US, making it impossible to correctly apply State taxes because each state has it’s own State taxes – some states have high Income Taxes, some states have no Income taxes. Individuals, however, resolve this issue because every Individual must reside in one State within the US. The Sales taxes and Income taxes applicable for the selected State will then be used whenever the Individual performs some economic activity, such as earn money or buy stuff.
As another side note, Consumers provide the economic framework within which Individuals operate. Consumers are built-in “Sanity Checks” for every economic run. If changes are made that affect both Individuals and Consumers at large, then the economic results should produce reasonable results for both Individuals and Consumers. For example, if a 1% increase were made to the minimum wage, a 100% increase in Consumer spending wouldn’t be expected.
In this way, the Individuals and the Consumers provide off-setting perspectives on the impacts of any changes to economic policy. Policy changes to improve the economic life of a specific Individual might not provide benefits to Consumers in general, or might improve one quintile to the detriment of another quintile.
I just realized that I’m going to have to add “Propensity to Save” to Consumers. The national confidence index, that captures how optimistic people are in general about their economic situation, reflects how people spend and save their money. In recent history, consumer savings has been in the 3% to 5% range, at times dipping negative when consumers as a whole were spending more than the earned and spending every penny and then borrowing more to spend that as well.
At the time of this writing (late 2015), the savings rate is about 6%, indicating that we as a nation are uncertain about what’s going to happen economically in the coming year(s). This increased savings has prevented the extra spending that was expected when the cost of gasoline dropped significantly in 2014-2015, and muting the expected GDP growth.
I just realized that this blog should have been titled “Sidenotes to the Economic Simulation”. Oh well, at least I got these things covered.
More in the next blog