The Macro / Micro Theory

When I attended college to earn a business degree, we were required to take micro and macroeconomics. Microeconomics would, at a basic level, deal with economic decision making at the level of the individual (person, household, business), while macroeconomics would deal with economic decision making at the larger collective level, typically a state or nation.

One point that struck me in this course of study is that at the macroeconomic (national) level, decision making dealt not with a single individual, but with the market as a whole. Decisions best for the national economy, in other words, did not base its plans on how it would impact me specifically. A plan may result in an overall rise in GDP, productivity, and employment, while at the same time causing my personal employment to end. At the macro level, such a course of action would be desirable. At the micro level - namely, me and my family - such a course of action would be painful.

It strikes me that our Constitution madates a strict separation of macro and micro decisions. Each level of government must first determine if an action impacts the vast majority of citizens in scope. If it impacts fewer than half of the citizens, it should be deferred to a more local level of government. 51% of citizens still suggests, in my opinion, that such a decision area is still better handled more locally. Perhaps the threshhold is best set at 75% or more of citizens at a given level then it is likely a candidate for consideration by the level of government (federal, state, city/county, etc) in question.

Once it is determined that a particular course of action has a wide enough impact, the second crucial test is whether it is allowable within the confines of the contract between citizens and state known as the Constitution. Thus, even if a decision has sufficient impact - even for 100% of citizens - if it is not a specifically listed area for consideration by the government then it should not be undertaken.

Let's look at a couple of examples.

The education of our children likely passes the threshhold of impact. However, the United States Constitution says nothing about education; therefore, such consideration should move to the state level and discussed there. Any coordination desired between states can be negotiated between them; there is no Constitutional basis of a federal Department of Education. And while education in a general sense does impact a large percentage of the population, the education of an individual does not. As such, we have to strongly question whether government-supplied education loans are permitted within the confines of the Constitution.

What about bailing out the automakers? While it's tough to get a count, it appears that GM and Chrysler, the automakers most troubled, employ about 175,000 people in the United States. Should we bail them out? Well, let's say that the families of those employees bring the total of impacted people up to one million, which is a rather large average family size. Would one million people impacted hit the threshhold of most? I don't think so. What about all of the suppliers providing parts and services to those companies? Perhaps five million people would be impacted? Does that rise to the threshhold of federal scope in a country of three hundred million? It does not seem so. For those impacted, though, I would suspect that the cars and parts needed to produce them is a void that will filled by Ford, Toyota, Honda, and others, and that the new capacity would need to be absorbed through the hiring of skilled auto workers. Certainly most of those would come from the recently displaced workers from GM and Chrsler, no? Those not brought into those other companies would be the executives and labor union leaders whose decisions brought about the collapse of those companies.

Note that the macro/micro distinction must also be observed in how legislation is implemented. We cannot seek to apply it at the micro level. That is, laws must be applied equally to everyone. We cannot means test based on income or net worth any more than we target (or exclude) by religion, gender, race, ethnicity... or whether one is a member of Congress. To do so is to apply a law to an individual. A crime is a crime regardless of your social or economic demographic profile, and a benefit should apply without regard to your social or economic demographic profile either. If it can't be applied to everyone, then you've failed to meet the macro test, haven't you?

And a thought on all of this: given this approach, how does a progressive income tax fit in?