This page was last updated on April 1, 2013.
Cutting to the chase, the key to a strong economy is to maximize effective individual liberty. If that’s intuitively obvious to you, you can save yourself some time and stop reading right here. You already know what you need to know. Otherwise, please keep reading.
Do your eyes glaze over at the mere mention of economics? If so, that’s the intent of people of any ideology who want us to leave economic decisions to them. In truth, economics is simply the study of everyday human behavior. Beware the person who asserts this or that issue is too complicated for the average citizen to understand.
Contrary to what elites (I’m talking about elitism as a frame of mind, not as a position in society.) would have us believe, we citizens don’t need economics degrees to make informed decisions as voters. We don’t need to be professional activists or have hands-on political experience. We don’t need to know about John Maynard Keynes or Milton Friedman. When someone uses terms like macroeconomic, microeconomic, elasticity, Keynesian, neo-this or neo-that, et cetera outside of a classroom, I find it’s usually to snow his audience and/or blur the discussion. Indeed, I find most people who speak of “Keynesian economics” don’t know what it means. If you hear someone speak of “high-road industrial policy capitalism,” “unreconstructed neoliberal capitalism,” et cetera, rest assured he’s trying to pull the wool over your eyes with nonsense and what amounts to gobbledygook.
Does more knowledge help? Sure, to the extent the knowledge is correct, you understand it, and apply it properly. All I’m saying is just as you don’t need to be a mechanical engineer to drive a car, you don’t need to be an economist to cast an informed vote on economic policy. If you would like to learn more about economics in everyday language with everyday examples, I recommend viewing NPR’s Free to Choose series by Milton Friedman.
You’re probably asking yourself how Sir Isaac Newton’s Third Law of Motion (For every action there is an equal and opposite reaction.) popped up in an economics discussion. It’s what you get for reading an engineer’s view of economics. A slight variation on this law is “for every action there is a reaction.” Another way to state that is, the world is not static and nothing happens in isolation. For example, government subsidies of corn-based ethanol for vehicle fuel increased corn demand and drove up food prices, both for humans and farm animals.
Did you know just about every Coca-Cola bottler in the world uses sugar to make Coca-Cola, except for U.S. bottlers? According to a recent episode of Ultimate Factories on the National Geographic Channel, U.S. bottlers use high-fructose corn syrup as the sweetener because corn subsidies and sugar import tariffs make using sugar too expensive in the U.S. When using high-fructose corn syrup isn’t an option, the sugar tariff also places other U.S. food manufacturers at a competitive disadvantage with foreign food manufacturers because the U.S. manufacturers must pay above-market prices for sugar.
Some reactions like the ones cited for ethanol, debit cards (see below in There ain’t no free lunch), and sugar can be and were easily predicted, but many others cannot because they are so far removed from the initial action by generations of reactions. It’s like the “butterfly effect.” Through generations of reactions, can a butterfly on the other side of the world flapping or not flapping its wings cause a rain shower over my house?
Unfortunately, too many so-called analyses are conducted assuming a static world. For example, if someone wants to increase tax rates, he will present an analysis assuming nothing changes except for the tax rate. That is, those hit by the new rate will not attempt to minimize the impact of the tax by making different choices. I have friends who moved from Pennsylvania because doing so reduced their tax liabilities. Pennsylvania lost my friends’ tax revenue while Ohio and West Virginia gained tax revenue. That’s just one way lower tax rates can result in more revenue than higher tax rates.
P.J. O’Rourke (an American satirist) once said, “If you think health care is expensive now, wait until you see what it costs when it’s free.”
When someone promises a “free lunch” via some government policy or program, rest assured you will more than pay for the “free lunch” elsewhere, either monetarily or via some aspect of personal liberty. An example of this is the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (H.R. 4173) of 2010. Only five Republicans voted for the bill (three in the House, two in the Senate). According to The Heritage Foundation, one of the bill’s “provisions is the so-called Durbin Amendment (a la Senator Dick Durbin [D–IL]), which directs the Federal Reserve to regulate the fees that financial institutions may charge retailers to process debit card purchases … Following a lobbying frenzy, the Fed settled on a limit of 24 cents per transaction (on average), or 45 percent less than the customary fee. Thus the cap, which takes effect on October 1, [2011] will cost banks an estimated $6.6 billion a year in revenue that they say is needed to cover indirect costs related to debit cards, such as fraud and overdraft protection.” Not surprisingly, some banks instituted a monthly fee for debit cards in attempt to make up for the lost income caused by Dodd-Frank. Quoting the same Heritage Foundation piece, “Bank of America instituted the new $5 monthly fee in anticipation of a $2 billion annual loss as a result of Durbin. Wells Fargo expects to lose $1 billion, prompting it to adopt a $3 fee for debit cards in some areas. JPMorgan Chase is also rolling out new fees, as is Citibank. As reported by the Associated Press, smaller banks are following suit: Atlanta-based SunTrust recently instituted a $5 debit card fee, while Regions Financial in Birmingham, Alabama, will begin charging a $4 fee next month. In Texas, International Bancshares has announced last week the closure of 55 branches in grocery stores and the loss of 500 jobs.” Not wanting voters to blame him for new debit card fees resulting from his own amendment, Sen. Durbin attacked Bank of America in a rant on the floor of the Senate saying, “Bank of America customers, vote with your feet, get the heck out of that bank. Find yourself a bank or credit union that won’t gouge you for $5 a month and still will give you a debit card that you can use every single day. What Bank of America has done is an outrage.” Apparently Mr. Durbin is unaware other banks have instituted or plan to institute a debit card fee.
My apologies to John Donne. We constantly hear people complain about evil businesses offshoring some or all of their jobs. (Note: Some people incorrectly refer to “outsourcing” when they really mean offshoring. Outsourcing is when one business contracts with another business to perform some functions. For example, a restaurant may contract with a janitorial business for cleaning services instead of doing the cleaning with its own employees.)
Why do businesses really offshore some jobs and/or buy foreign materials instead of domestic? Businesses have a fiduciary responsibility to their owners (including you, me, and pension funds). This is true even for not-for-profit businesses. Businesses make the decisions they must in order to survive and succeed. Otherwise, they close up shop and/or go into bankruptcy. Unlike the federal government, businesses can’t print money. Would we prefer businesses continue to operate in the U.S. until they (we shareholders) go bust? Let’s say you own and/or run a company with 1,000 domestic employees and despite your best efforts it’s about to go under. Let’s also say offshoring the jobs of 100 employees would save the other 900 jobs. What would you do? Let’s say your business uses steel to manufacture its products but can no longer compete using U.S.-produced steel. Would you put your 1,000 employees out of work instead of buying less expensive foreign steel, possibly resulting in a loss of jobs at the domestic steel supplier?
Whenever we add a tax or regulation, whether “bad” or “good” (See below in Taxes and Regulations.), we increase the cost of a good or service. In the days before relatively cheap and fast worldwide communication and transportation, it was possible for us to ignore foreign competition because we either didn’t know about a foreign product or it cost too much and/or took too long to get here. That has not been the case for decades. We have to recognize that every time we add a tax or regulation, we make it more difficult for domestic manufacturers to compete in the world market.
When someone complains about U.S. jobs going overseas, before you take him seriously find out where he stands on business taxes, regulations, a minimum/living wage, et cetera.
Please read my paper entitled “The Minimum Wage.”
Believers in this fallacy assert the destruction of property (wealth) stimulates the economy because the property must be replaced and this results in spending and jobs. For example, flying debris from a windstorm breaks a store window forcing the store owner to spend money to replace the window. Sounds great for spending and jobs, right? After all, the store owner must spend money to fix the window and results in business for a glazier. The problem is this line of thinking ignores the net loss of wealth and the alternative disposition of the dollars spent to replace the window. Had the window not broken, the store owner could have spent this money to buy a new suit from the tailor next door AND would still have his store window, all without the net destruction of wealth.
You may recall the broken-window fallacy was the thinking behind the Obama administration’s “Cash for clunkers” program in 2009. In “Cash for clunkers,” however, the destruction of functional property (The cars had to be in working order to qualify.) was intentional. In addition to the destruction of wealth, “Cash for clunkers” had at least one other predictable bad side-effect. The destruction of functional vehicles cut the supply of used cars, driving up their price and making life more difficult for low-income families that couldn’t afford a new car regardless of the subsidy.
Advocating a free market doesn’t mean there is absolutely no role for government. No one suggests there should be no civil and criminal legal environment. Free speech provides an analogy. Even the most ardent supporters of free speech agree libel and slander laws are appropriate. And what about the classic example of yelling “fire” in a crowded theater? A free market requires consumer and supplier confidence and this doesn’t happen in a lawless marketplace. We saw the effect on the marketplace of low confidence in the wake of the Adelphia, Enron, Global Crossing, et al scandals. That said, we need the minimum regulation required to achieve the desired effect. When we pass the “sweet spot,” we start getting some of the same results as a government-directed economy.
Too many believe a free market favors business over consumers. That’s not so. As economist Bruce Bartlett puts it, “The last thing most businessmen want is a free market, where they must compete, slash prices, continuously innovate, suffer narrow profit margins, and live constantly on the edge of bankruptcy. They would much rather have assured profits, monopoly positions, price supports, trade protection and the other trappings of a corporate welfare state.” What Mr. Bartlett refers to is frequently called “crony capitalism,” though “assured profits …” have nothing to do with capitalism, or at least my view of it.
No individual, government, or political party can run an economy better than a free market. Over time, a free market tends to balance supply and demand or allocate resources better than the alternatives. Note, “better” doesn’t mean everyone will do well or be happy. No approach can do that.
Though they tend not to use these words, lefties push the proposition that the economy is a “fixed pie” or a zero-sum game. The implication is one person’s (the “oppressor” in leftyspeak) success comes only at the expense of someone else (the “oppressed”). That is, Bob has a mansion and you have a hut because Bob unfairly took your slice of the pie. This position also manifests itself in complaints about the income/wealth gap between “the rich” (the “oppressors”) and the average family. This line of thinking is how some activists and politicians try to sell government redistribution of income/wealth from the hands of “a few” (the “oppressors”) to their constituents (the “oppressed”) via regressive taxation policies, subsidies, and outright handouts. Note: “Progressive tax policy” is leftyspeak for regressive tax policy. There’s more about this later in this piece.
If the U.S. economy were a fixed pie, we should be in abject poverty. Why? Our population in 1790 (our first census) was just under four million and our current population is about 312 million. That means we would have 78 times as many people sharing the pie today as in 1790.
The “law” of supply and demand is unlike many of those in engineering and physics where math and equations can accurately calculate a result. That’s because supply and demand is about human behavior when we’re presented with varying prices and product availability/demand. This means instead of being able to calculate the exact economic outcomes of policies, we can only predict tendencies.
Though there are exceptions, when the price of a product increases, consumers as a group tend to buy less of that product. We see that behavior every time the price of gasoline spikes.
When a product price drops, we buy more. Again, the price of gasoline is an example. Sometimes a price can get so low we waste the product. Depending on your location, water is an example. Where I live we have a minimum quarterly bill regardless of how much water we use up to 10,000 gallons. Since I pay the same whether I use 10 gallons or 10,000 gallons, I’ll unintentionally waste water until my usage hits the maximum covered by my minimum payment.
As I’ve written elsewhere, it’s not only important for families to pay for goods and services they consume out of their own pockets, but they must know they are doing so. You can learn more about this from an excerpt from my healthcare paper.
In trying to sell government “stimulus” spending, one of our local and national lefty leaders (a self-described Marxist I’ll call Josef) constantly tells anyone who wants to listen that vendors don’t care who pays them. Here’s the latest version, a response to a letter-to-the-editor opposing President Obama’s proposed minimum-wage increase.
“Nick, jobs are created by growth in demand for goods and services, which businesses receive in the form of buyers and purchase orders. All the other explanations are fluff.”
[RWC] Not exactly. Though leftists tend to believe differently, the purpose of a business is not to generate jobs and tax revenue and provide medical insurance. Businesses exist to generate income for the owner’s family. Jobs are generated by a business only as long as they increase the employer’s income.
“Now businesses don’t care whether the purchase orders come from government or private consumers, ie, other businesses or individuals. When the orders shrink, they lay people off. When the orders grow, they hire.”
[RWC] Not caring about the source of a PO is a nice idea, but it’s not true. Lefties want us to forget government (taxpayer) dollars come with a lot more strings attached than those from “Bob’s Market” down the street. For example, it’s unlikely “Bob’s Market” would try to force its vendors to sign project labor agreements; pay “prevailing wages;” employ only labor union members; implement set-asides based on sex, skin color, and so on; et cetera.
As for “When the orders grow, they hire,” not necessarily. The employer may opt for automation or other tools to improve employee productivity and help insulate his business from the typically high cost of labor. Though someone has to build the automation equipment, there’s no guarantee those jobs will be domestic.
A variation Josef has used is “Ask a business person which would they rather have right now, a tax cut or a purchase order? Then ask them if they would reject a purchase order from government. Then ask why some folks want to slash purchase orders from government as their rather weird approach to job creation, and you’ll see where the real immediate problem is.” Of course, choosing between a tax-rate cut and a government make-work purchase order is a false choice. I hate to be a wet blanket, but Josef doesn’t mention the source of the money needed to pay the invoice resulting from the government make-work purchase order.
“Now in a down economy, and when wages have been flat for 30 years, increased demand on any significant scale is unlikely to come from consumers. In fact, most of us are cutting back or making our purchases at Goodwill when we can.”
[RWC] “A down economy?” How can that be? Wasn’t the summer of 2010 “Recovery Summer?”
“This is where government can help. We need things for the common good--bridge repairs, road repairs, new schools, better hospitals, new clean energy startups, modernized locks and dams on our rivers, and so on.”
[RWC] This paragraph is simply a display of leftist arrogance in that lefties believe they can dispose of (invest, save, spend) your family’s paycheck(s) more wisely than your family, the ones who earned the income.
When Josef mentioned “new clean energy startups,” I’m sure he hoped readers forgot or never heard of Solyndra, A123 Systems, Ener1, and Abound Solar. These four companies eventually filed for bankruptcy after receiving hundreds of millions of dollars in grants/subsidies/loan guarantees paid for by local, state, and federal taxpayers. It appears Solyndra alone will cost federal taxpayers about $528 million and tax-credit sweeteners throw in to attract private investors could cost us a few hundred million dollars more. Adding insult to injury, A123 Systems (Red Chinese) and Ener1 (Russian) went under foreign ownership as part of their bankruptcy proceedings.
“Government rarely does these things directly. What they can do is redirect tax revenues from speculative capital to productive capital in the form of new purchase orders to get the kinds of things mentioned above accomplished.”
[RWC] I suspect there’s a reason Josef didn’t say what he meant by “redirect tax revenues.” Social programs are sacred cows to leftists so we can probably assume Josef doesn’t mean he’d “redirect tax revenues” from things like Medicaid, Medicare, Obamacare, Socialist Security, food stamps, housing, welfare, and so on. If Josef wants to take from defense spending, that’s a bit under 20% of the total budget. Likewise, non-defense “discretionary” spending is less than 20%. Besides, wouldn’t “redirect[ing] tax revenue” from these categories to other government spending be like rearranging deck chairs on the Titanic?
I’ll go out on a limb and guess “redirect tax revenues” means increasing tax revenue by increasing tax rates. Remember, lefties refer to provisions of the tax code they don’t like as “spending in the tax code” and “tax expenditures” (President Obama, 4/13/11). Here is the logical extension of this position. Whatever you get to keep from your gross income (wages, interest, dividends, pension, etc. for families; sales revenue, etc. for businesses), lefties consider a “tax expenditure.” Therefore, to “redirect tax revenues” is leftyspeak for taking more from taxpayers lefties don’t like and spending it on lefty causes.
Josef refers to “speculative capital” and “productive capital” as if they are different. This is more leftyspeak. ALL capital is speculative. Unless you have a crystal ball, no investment is a sure thing. Indeed, check a thesaurus and you’ll find “speculation” is a synonym for “investment.” By “productive,” Josef means capital directed to leftist-approved programs like the “new clean energy” debacle mentioned above. By “speculative,” Josef really means any disposition of which he does not approve. For example, Josef once wrote he’s no fan of someone “using a derivative to bet on whether the Yen goes up or down in the next hour” because he believes it “creates no new value even if you win the bet.” Investors “bet on whether [fill in the blank] goes up or down” based on experience and research indicating the specific commodity is or will be over- or undervalued. Making these bets can help get resources reallocated. As long as the investor making a bet can pay up if he loses (just like any other business agreement), these activities serve a useful purpose. In any case, it’s not government’s job to tell someone how to invest, spend, etc. his property.
So, how “productive” was the capital thrown at Solyndra, A123 Systems, Ener1, and Abound Solar?
“That’s how government and business can work together to create jobs.
“At this point, there’s only one measure in Congress that pushes this, the ‘Back-to-Work Budget’ of the Congressional Progressive Caucus. Now push our Tea Party Congressman to back it if he’s serious about job creation, or elect someone who will in 2014.”
[RWC] The “Back to Work Budget” is more or less the fiscal-year 2014 version of what the FDR administration unsuccessfully tried throughout the Great Depression. In summary, this budget increases tax rates and government spending. As for the Economic Policy Institute Policy Center (EPI) “analysis” of the CPC budget, the EPI is a leftist advocacy organization that actually helped develop the proposal it then “analyzes.”
So, how did the CPC approach work when FDR tried it 70+ years ago? Consider the following quote from Henry Morgenthau, FDR’s Treasury Secretary during the Great Depression. Testifying before the House Ways and Means Committee in May 1939, Sec. Morgenthau said, “We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises … I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot.” Further, unemployment never got below 9.9% before the U.S. entered World War II. Sound familiar?
Before proceeding, let’s address language. Politicians and political activists, especially leftist, tend to treat raising tax revenue and raising tax rates as synonyms. Sometimes the reason is ignorance, but for many it’s intentional.
From a conservative’s point of view, the sole purpose of taxes is to pay for government overhead. Though overhead is not inherently good or bad, you’ll find all businesses – both profit and nonprofit - attempt to minimize overhead consistent with business goals. For example, while all businesses must expend resources on accounting, they want to spend the minimum required to meet business and legal requirements. The same should be true for government.
Lefties, however, look at taxes differently. Josef once wrote, “The rule-of-thumb is to tax activities you want to discourage, such as unproductive gambling in derivatives, while subsidizing efforts you want to encourage, such as new green manufacturing startups.” Translation: Lefties believe a primary role of taxes is to implement leftist economic and social policies and control the population. At the time Josef wrote his comment, three “green manufacturing startups” (mentioned in “It matters who pays”) went belly-up in the preceding month, including one (Solyndra) that received $535 million (the exact figure varies over time) in federal loan guarantees and which President Obama hyped. Though he had to know about them, Josef chose not to inform his readers of these belly flops. Part of the control aspect of lefty-supported taxes and programs is collecting personal and private information. The same people who claim to be concerned about privacy when it comes to eavesdropping on communications between terrorists never express concerns about the financial full body cavity search we go through every year when we must detail every aspect of our finances for multiple levels of government (income taxes, property taxes, wage taxes, etc.). The same is true for government access to our healthcare records required by government programs like Medicaid, Medicare, Obamacare, et cetera.
Whether we tax only to pay for limited government (“good” taxes) or we tax to implement leftist economic and social policies (“bad” taxes), one thing is true. When we increase the tax rate on a good or service, customers usually buy less of that good or service. That’s because taxes increase the price we pay for goods and, as per the law of supply and demand, increasing the price reduces demand. When customers buy less of a product, the result is usually job cuts via attrition, not filling a vacant position, or outright firing. If it gets bad enough for long enough, the business may move to another municipality, state, or country where it can be successful or it may go belly-up and everyone loses his job and investment. Also remember the effect on suppliers of the business and businesses patronized by the employees.
In the previous paragraph you may have noticed I wrote, “When we increase the tax rate on a good or service, customers usually buy less of that good or service.” What if a tax rate increase is on a necessity, like food for your baby? Will you buy less baby food or will you buy less of something else, and what would that “something else” be? Naturally, the answer to this question depends on the specific circumstances of your family. For example, one possible solution would be to buy less baby food and make up the shortfall by making your own baby food. To do so would require you to buy more of what it takes to make baby food and less of something else. Another solution could be taking on an additional job, but that could result in new or increased spending on your child’s daycare.
Leftists have a Jekyll and Hyde behavior regarding the effect of taxes. When lefties want to cut consumption of a good or service, like gasoline and coal, they favor increasing tax rates on the product to make their pet energy source(s) du jour appear price competitive. You read an example of this thinking above. On the other hand, when lefties just want more tax revenue to pay for more of their programs, they claim the higher tax rate will have no effect on the target activities. Sometimes the folly of the latter position takes years to see; sometimes the damage is more immediate.
In 1990, President George H.W. “Read my lips, no new taxes.” Bush and the Democrat-majority Congress assessed a 10% luxury tax on private airplanes, pleasure boats, cars, furs, and jewelry whose price exceeded given levels. The tax rate on pleasure boats priced more than $100,000 nearly killed the U.S. pleasure boat industry. Customers (“the rich/oppressors”) either delayed their purchases or made their purchases overseas. Translation: American employees in the pleasure boat industry lost their jobs. President Clinton and the Democrat-majority Congress repealed the luxury tax on pleasure boats in 1993 after it was shown to produce no significant revenue while it killed jobs in the pleasure boat industry.
It’s 23 years later and Democrats plan to repeat history. Democrats want to lengthen the depreciation time for private business jets from five to seven years with the stated intent of increasing tax rates for “the rich.” The current depreciation schedule has been in effect since 2002 and President Obama’s so-called stimulus bill reauthorized it in 2009. The effect of lengthening the depreciation schedule will be to increase the cost of owning a private business jet. Class, what happens when we increase the price of a product? While the class-warfare-motivated attack may inconvenience “the rich/oppressors” a little, the real victims will be employees in the private jet industry and its suppliers who build, fly, fuel, maintain, supply, et cetera the jets.
In addition to the actual tax liability, we need to remember the cost of compliance. According to a 2006 Tax Foundation report, “In 2005 individuals, businesses and nonprofits will spend an estimated 6 billion hours complying with the federal income tax code, with an estimated compliance cost of over $265.1 billion. This amounts to imposing a 22-cent tax compliance surcharge for every dollar the income tax system collects. Projections show that by 2015 the compliance cost will grow to $482.7 billion.”
Except for lefties who believe there’s never a bad time to increase tax rates on the left’s targets of the day, one comment you’ll hear is raising tax rates during an economic downturn is a bad thing because it adds a drag on the economy. That’s true, but it’s also true for a growing economy. The problem is, a growing economy may be strong enough to mask the effects of tax-rate increases, like an unnoticed health problem (high blood pressure, diabetes, et cetera) for a person in otherwise good health. Sooner or later, though, all economies experience a downturn, and “bad” taxes speed up and/or make the downturn worse. They also slow the recovery from an economic downturn.
When a lefty speaks of “progressive taxation,” he’s engaging in leftyspeak. In this context, “progressive” is leftyspeak for regressive. Lefties actually believe it’s progressive to take ever-greater amounts of your paycheck as your paycheck grows. In other words, the harder/more your family works, the less you get to keep of the last dollar your family earned. That’s regressive, not progressive. As a result, from here on I’ll refer to “progressive” taxes by their true label, regressive.
A regressive tax is one where a family’s tax liability is an ever-increasing percentage of its incremental income, property value, et cetera. That is, as a family’s income or property value increases, so does the tax rate. For example, consider the case of John and Jane -- both single with neither dependents nor itemized deductions -- using IRS 1040 rules for 2002. John’s adjusted gross income (AGI) of $10,000 results in taxable income of $2,300 and a tax liability of $231, only 2.3% of John’s AGI. Jane’s AGI of $100,000 results in taxable income of $92,300 and a tax liability of $22,013, 22.0% of Jane’s AGI. Though Jane makes only 10 times as much as John, she pays over 95 times as much in taxes! In other words, your reward for working harder and longer is that the government gets a greater portion of the fruits of your labor. While this may appear to be “progressive” from the view of government, the view usually taken by leftists, it’s regressive from the view of the wage earner.
The regressive rate scheme was born out of envy in the early 1900’s. Lefties prefer us not to think someone can earn a lot of honest money through intelligence, hard work, and sometimes just fortunate circumstances. The envious view regressive schemes as a sort of “sin tax” to make up for the nefarious deeds done by “the rich/oppressors” to get their ill-gotten gains.
It’s unclear to me if leftists believe goods and services should be priced “regressively.” For example, when Jane buys a gallon of milk, should she pay 95 times as much as John because she earns more income? My gut feeling is leftists would propose regressively priced goods and services and regressive excise/sales taxes if they thought it feasible. That said, when conservatives hold affirmative action/diversity bake sales to illustrate the effect of these policies, lefties get even angrier. If you’re not familiar with these bake sales, the price paid by a customer for a cookie, cupcake, etc. varies based on his skin color, ethnicity, sex, et cetera. Here’s the cupcake pricing for a recent bake sale at UC Berkeley: Whites: $2.00, Asians: $1.50, Latinos: $1.00, Blacks: $0.75, Native American: $0.25, and an additional $0.25 off for all women.
Regressive taxes also provide leftists with a built-in argument against tax-rate cuts. Because taxpayers toward the top of the rate range pay more taxes than taxpayers with lower incomes, higher-end taxpayers tend to get more dollars back than taxpayers with the minimum rates. The result is a cry of “tax cut for the rich” by leftists. The leftist solution is to increase the relative tax-rate difference between high- and low-income taxpayers. If that happens, leftists are more likely to favor future tax-rate increases because they will affect low-income taxpayers even less than before the previous tax-rate cut. If someone proposes adjusting the higher rates to pre-tax cut levels, leftists cry “tax increases on the backs of low-income workers.”
Regressive taxes have another bad side effect; they hide the tax burden from a large percentage of potential taxpayers. For example, based on 2008 federal income tax data, the top 1% [adjusted gross income (AGI) greater than $380,000] of filers paid 38% of the total and the top 5% (AGI greater than $160,000) paid 59%. In comparison, the bottom 50% (AGI less than $33,000) paid less than 2.6% of the total. The problem with this arrangement is similar to that described in the section entitled It matters who pays.
Just as there are “good” and “bad” taxes, there are “good” and “bad” regulations. For example, a regulation to prohibit discharge of raw sewage into our waterways is good. Telling a business owner how many paid sick days he must provide employees is bad. Lefties view regulations as they do taxes. That is, lefties believe a primary role of regulations is to implement leftist economic and social policies and control the population.
The economic effects of regulations have traits similar to those of taxes. Whether “good” or “bad,” regulations tend to increase the cost of goods and services. There are some exceptions, of course, and in some cases a “good” regulation can help one business and “hurt” another. Using the example above, prohibiting the discharge of sewage into a river may hurt the sewage dumper by driving up his costs, but cut costs for downstream businesses and homeowners that must treat the polluted river water before using it. Overall, though, regulations increase the cost of goods and services.
Forgive me for the following “geek” moment. For those of you familiar with operations research, consider your experience with linear/nonlinear programming economic models. Whether you solve for least cost or maximum profit, do you do better with more constraints or fewer? For those of you unfamiliar with economic modeling, introducing constraints (regulations and taxes, for example) - whether necessary or not - always results in poorer economic performance and removing constraints always improves economic performance.
Regulations come into existence in at least two ways. The first path is via laws passed by a legislature and signed by the Governor/President. The second, and most dangerous, is via regulatory agencies to which our legislatures delegated their law-making responsibility. For example, beginning with the 2008 model year, new cars sold in Pennsylvania must meet the emissions requirements of the California Air Resources Board (CARB) and this fairly huge policy change happened without the approval of the Pennsylvania General Assembly (GA). The natural question is “how?” This action was possible because in 1970 the GA and Governor gave the Pennsylvania Environmental Quality Board (PEQB) the power to “Formulate, adopt and promulgate rules and regulations as necessary to accomplish the Department of Environmental Protection’s work.” Only four members of the 20-member PEQB are elected officials (President Pro Tempore of Senate, Senate Minority Leader, Speaker of House of Representatives, and House Minority Leader). Maybe it’s just me, but why should Pennsylvania citizens be subject to laws made by another state’s regulatory agency? In fairness, the GA and Governor can overrule the PEQB by passing laws to vacate PEQB regulations. That process, however, is completely the opposite of how the PA and U.S. constitutions describe the lawmaking process. Both constitutions describe the lawmaking process as the legislature passing a bill and the governor/president approving or vetoing the bill. Further, the PA Constitution (Article III, Section 1) says “No law shall be passed except by bill, and no bill shall be so altered or amended, on its passage through either House, as to change its original purpose.” There are good reasons both constitutions grant lawmaking authority only to the legislature. First, we don’t want unelected bureaucrats who don’t have to answer to the voters making our laws. Second, far more laws will be enacted by this process than by the process described by the PA and U.S. constitutions. That’s a reason PA and U.S. founders made the lawmaking process – including constitutional amendments – difficult.
Just as I noted previously about taxes, regulation compliance comes at a cost, and not just for businesses. According to a 2005 Small Business Administration report, “The annual cost of federal regulations in the United States increased to more than $1.1 trillion in 2004. Had every household received a bill for an equal share, each would have owed $10,172.” I don’t know how much local and state regulations add to this cost.
As for taxes, a strong, growing economy can temporarily hide the deleterious effect of bad and/or excessive regulations. Usually it’s not a lone regulation that hurts a business/industry, but the cumulative effect of many regulations issued over time. Regulations grow in number and are almost never repealed. Sooner or later, an incremental regulation becomes “the straw that breaks the camel’s back.” As I mentioned above, sooner or later all economies experience a downturn, and “bad” regulations speed up and/or make the downturn worse. Excessive regulations also slow the recovery from an economic downturn because they cut the flexibility (freedom) needed to deal with everyday and long-term challenges. After more than 200 years you’d think we had more than enough laws/regulations a long time ago, but we keep adding thousands of pages year after year.
Finally, regulations can’t protect individuals from making stupid choices. Beware the charlatan who claims a new regulation that puts more power in government hands is to protect you.
Economics drives illegal immigration. Almost no matter how little a specific U.S. job pays, it’s more than most illegal immigrants can get in their home countries.
It’s easy to understand why some businesses favor illegal immigration and/or an open border with unchecked immigration. Flooding the market with millions of uneducated/undereducated jobseekers, whether illegal or legal, depresses the price a business must pay for employees.
This situation would appear to be something the left – especially labor union management – would oppose. So why does the left favor illegal immigration and/or an open border with unchecked immigration? It makes sense, however, when you understand leftism requires discontent – whether the result of real, imagined, or manufactured situations – to survive. What better way to foment discontent than with a huge underclass? That explains the left in general, but shouldn’t labor union management oppose these things because they hurt rank-and-file union members? Nope. That’s because labor unions – especially at the state and national levels – are political-advocacy businesses first and foremost. The labor union divisions of these businesses exist simply 1) as a revenue stream for the political-advocacy portion of the business, and 2) a source of manpower for in-kind contributions to leftist candidates and causes. You can find more about this at the bottom of a previous critique.
At the very beginning of this paper I wrote, “economics is simply the study of everyday human behavior.” In your own life, if you are uncertain of your future paycheck, do you spend as usual or do you cut spending and begin to save more for what the uncertain future may bring? Businesses do the same. When businesses are unsure of what the future will bring in terms of inflation, regulations, taxes, the price of energy, the state of the economy, et cetera, they tend to cut their exposure by cutting current spending where they can and generally avoid initiating new activities.
© 2004-2013 Robert W. Cox, all rights reserved.