Archive for the ‘economics’ Category

Gender Pay Gap Facts   Leave a comment

I’m a woman who does not believe the myth of the gender pay gap. Why? Because I work in a female-dominated sector of the economy where every male I know who works in the same profession gets paid less than I do. Furthermore, I work FOR another sector of the economy that is traditionally male-dominated, so I have observed the wage disparity between the men and the women in that profession and can easily see the underlying reasons for it.

Critics of markets claim that American women only make a percentage of what men make and insist that this is evidence that markets discriminate against woman. Back in the 1970s, women (as an aggregate) made about 65% of what men (as an aggregate) made. Now the figure is said to be about 80%, but recent studies show “the gap” is much narrower than that.

How does that work? Well, I alluded to it. The 80% number is comparing aggregate figures — all male workers compared to all female workers. The 80% number does not compare men and women with the exact same skills, experience and employment preferences. Instead, it refers to the ratio of female to male wages among full-time workers, across all kinds of jobs and regardless of skills and preferences of the workers. It’s not an apples-to-apples comparison of men and women doing the same work.

So the claim that women get paid 80% of what men do for the same work is not just a myth … it’s really a lie.

 

The second myth involved here is that the missing 20% represents discrimination by employers. It’s not supported by the facts, which are discoverable through an apples-to-apples comparison of men and women in the workforce.

 

That’s what economic studies of “the gap” attempt to do – hold everything else constant and compare employees who are as similar as possible and who are in very similar jobs, except for gender. If such studies cannot explain a gap by skills and experience, then economists treat that as due to discrimination, pending further studies. The consensus of those studies has been that the clear majority of “the gap” is explained by skills, experience and job preferences.

 

I said “clear majority” of the gender wage gap is explained by factors other than discrimination. That doesn’t mean ALL of it is explained by other factors. There’s still about 3-5% of the 20% gap that cannot presently be accounted for by economic differences, so might possibly be due to discrimination.

Yeah, that was some precise language, because myths live in imprecision.

What this means is that discrimination might exist in labor markets. Economic studies show that most of the 80% figure is mythical and can be explained by factors other than discrimination, but a portion of the gap is not explained by economic factors, so could be attributable to discrimination … at this time, using existing studies.

 

 

But what about other forms of sexism? If employers mostly don’t discriminate based on gender by paying equally qualified men and women differently, isn’t it possible that other forms of discrimination are affecting pay differentials by gender? Maybe the differences in men’s and women’s skills and knowledge are due to sexism before they reach other labor market … sexism in education and socialization. Perhaps girls are told from a very young age that we’re not good at math and science, which discourage girls from majoring in professions that result in earning higher salaries and this contributes to the 80% figure.

Yes, that’s entirely possible, but why do we seek to punish employers for sexism engendered by parents and schools? If sexism pushes women into lower paying fields, that doesn’t mean that they are necessarily being paid less than men for the same work at the same experience level in that field. What’s causing their lower wages is sexism in places other than the markets.

Defenders of markets can legitimately argue that markets usually don’t discriminate by gender, but that sexism exists elsewhere and might indirectly affect economic outcomes by gender.

Feminists will often balk at “gap” explanations that involve the different “preferences” that men and women have. It is true that women are more likely to work part-time than men and that they are less likely to work overtime when they work full-time. While there are some women who do not follow these patterns, women who prefer to spend more time with family or work in less risky occupations, will make lower incomes over the course of their careers.

Feminists argue that such “preferences” really aren’t preferences because they are the result of socialization. Women, they will claim, don’t really “choose” to work less or select less risky jobs, so much as they are forced into gender roles by social patterns. Yeah, okay, but again, why are we punishing employers for patterns that are set in childhood?

 

There’s no reason to deny that socialization might matter. Agreeing with that claim doesn’t imply an obligation by government or employers, because the problem largely isn’t with employers or in labor markets. If we think that socialization is a problem, and that the world would be a better and more free place if women felt more empowered to enter the math and science majors and earn a better living as a result, we can work to change the culture in ways that address these concerns. The same could be said of persuading men to devote more time to child raising and other forms of household production. If we believe that, then working through voluntary processes and institutions of civil society to reduce sexism seems like a better system than trying to force change through government policies designed to punish employers as if they are the cause and not the recipients of the issues we’re trying to address.

 

 

Posted April 20, 2017 by aurorawatcherak in economics, Uncategorized

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An Affordable Health Insurance   1 comment

Amid rising hmedical insurance costs and the debate over reforming/replacing the ACA, it’s easy to miss that an alternative already exists and needs to be protected in any health care reform plan. As Obamacare has driven up the cost of insurance premiums, a growing number of consumers and employers have turned toward high-deductible health plans (HDHPs), often known as “catastrophic health insurance.”

Image result for image of the american health care billThese plans feature lower-than-average premiums in exchange for higher-than-average deductibles, and many on the market today are paired with tax-advantaged health savings accounts (HSAs).

This is as opposed to some small group and individual market policies where you pay high premiums, but you also have a high deductible as a cost-savings means.

Brad and I used to have one of these in the individual market before I accepted a job with medical insurance that covers the family … for a price. There were no attached Health Savings Accounts available in those days and we only satisfied the deductible when we had our daughter through midwife delivery. Prenatal and labor and delivery just topped over the deductible and because we had chosen a low-cost (and much healthier option for childbirth) the insurance company reimbursed the entire bill … a nice baby-warming gift.

We looked into it when Obamacare drove up my family premiums by more than 50% over two years, but we couldn’t find one that covered our family … only individuals. I’ve heard that’s changed, but we don’t need the coverage currently.

Under a high-deductible health plan, you pay for all your medical expenses, except for qualified preventive care (which the ACA made mandatory), up to the annual deductible. After that, some plans pay 100 percent of your covered medical expenses. Others initially pay a share of your medical bills (maybe 80 percent) before paying 100 percent when you reach an out-of-pocket maximum.

TRelated imagehese plans are sometimes referred to as catastrophic health insurance plans, but the name is not exactly accurate. Under health care reform, the plans must cover 100 percent of preventive care, even before you pay the deductible. Additionally, many of the plans cover a full range of health care services – not just hospital and emergency medical costs you might associate with catastrophic care. So, if you’re someone with a chronic disorder, you still might use health insurance coverage for regular doctors’ visits after the deductible is satisfied.

But how do you pay for the medical care you need before the deductible is satisfied? Often the HDHP is paired with a tax-advantaged Health Savings Account. HSA-qualified, high-deductible health plans have been covered by federal law since 2004. These plans are coupled with a health savings account that lets you set aside pre-tax money to use for medical care today. In recent years, these plans have been reformed to allow them to roll over from year to year and now you can even pass them to your heirs.

Consumers shopping for affordable individual health insurance were the first to gravitate toward HSA-eligible plans, followed by small employers, but larger businesses are now looking at them as well. In the latest data, nearly 17.4 million Americans were covered by “health savings account/high-deductible health plans” in 2014, which was a 12 percent increase over 2013. Since 2011, HSA plans have grown on average 15 percent annually.

Currently, not all high-deductible health plans can be paired with an HSA. To qualify for HDHP status in 2016, the plan must have a deductible of at least $1,300 for an individual and $2,600 for a family. Out-of-pocket maximums can be no more than $6,550 for an individual and $13,100 for a family. My former small-group employer has employees paying $1000 a month for an “ordinary” insurance plan that has similar parameters, so they wouldn’t be losing much with an HDHP.

You can contribute up to $3,350 per year in pre-tax dollars to an HSA as an individual or up to $6,750 as a family. You can save an additional $1,000 in the account if you’re 55 or older.

The money in the account grows tax-free, and in some cases companies that service the accounts provide investment options, such as mutual funds to promote further savings growth.

When you withdraw the funds, you don’t have to pay taxes so long as the withdrawals you take are for qualified medical expenses, such as the HDHP’s deductible or medical costs not covered under the plan, including dental and vision care. You can even save for long-term care not covered by Medicare.

An HSA account is portable. Even if you switch to a different type of health plan or change employers, the money is still yours to spend on health care.

They’re a no-brainer for the young and healthy, but Rick believes they’re well-suited for all age- and health groups. There are currently 20 million active HSA accounts in the US, but expansion plans could increase the number significantly.

“I believe everyone should be in charge of their own health care decisions. These plans mean that consumers care how much medical care costs. It incentivizes them to make informed decisions. Last year, my son chose to forego expensive surgery in favor of physical therapy to correct an orthopedic injury. He’s back doing stupid athletic things in less time than the recovery from surgery would have been. He’s less likely to hurt himself in the future because he’s learned a great deal about body mechanics. If he’d been covered by “full-coverage” insurance, he would have been less conscious of the costs and asked fewer questions about the alternatives. Yes, he cost a surgeon a lot of money, but that money went to a physical therapist, a gym membership, and whatever investments his HSA is attached to. Yes, Lela, I read “The Broken Window” by Bastiat when you suggested it and I can apply it.” Rick (a doctor)

Rick supports the government funding HSA’s for lower-income people, paired with a HDHP, as an alternative to the one-size-fits-all (but it doesn’t) current medical insurance scheme. It would save the government money in the long run and it would force people to pay attention to their own medical care decisions and by the time someone turned 18 and was responsible for their own health care, they’d have plenty of money in the account to act as a cushion for any future medical expenses.

Come on, GOP! Go Free Market!   3 comments

Lela’s preferred free-market plan for medical care policy would be no plan whatsoever. I’m offended that anyone thinks they need to tell me how to take care of myself. I’m able to make those decisions for myself. Government, get out of the way and let the market work. Free individuals can negotiate among themselves for lower and better coverage and care.

Rick’s preferred free-market plan for medical care policy would include sliding-fee medical clinics that would operate under charitable auspices. We forget that fraternal organizations used to contract with doctors to provide their members with medical care for a low monthly fee and that churches used to operate hospitals. Contrary to revisionist history, these systems and institutions were well-run and responsible for a rapid increase in the overall health and lift expectancy of Americans. That was all before the American Medical Association got involved in deciding who could become a doctor or open a clinic, using the force of government to create a virtual monopoly.

Image result for image of the american health care billRick was stunned when he wrote that. We believe he just became a libertarian … except he supports government-funding for those sliding-fee clinics, so he’s not quite there yet.

The fact is that it’s really scary that so much of the country believes we must have a federal top-down strategy to manage a huge chunk of the American economy. That’s the main problem. We don’t need a federal plan for health care now any more than we needed in the 1990s or the 1950s. Yet Republicans have allowed liberals to frame the entire debate in anti-market terms.

The Freedom Caucus stood up and said these things and Pesident Trump, who is a progressive who in the past said he favored liberty-and-choice-destroying universal health care, pulled the bill. He hinted that they would keep the Amercian Health Care Act on the shelf until Obamacare implodes (likely toward the end of this year) and then dust it off then. That’s the wrong approach!

The AHCA falls far short of a free-market solution. It’s certainly not a repeal of Obamacare. It’s a half measure that tries to fix the unfixable with tiny doses of deregulation that essentially do very little to impact the core of the ACA. The AHCA’s the “tweak” on the rudder of the Titanic headed toward the iceberg that did nothing to keep the behemoth from hitting it and eventually sinking.

Trump suggested a three-phase rollout, but there were no details for the other two phases, so they might as well not exist because the Republicans will lose the Senate and possibly the House in 2018 if things continue the way that they are headed. Obamacare has too many flaws to ever be fixed and pretending otherwise is not going to get us anywhere.

We’ve seen what the Democratic Party plans for health care (and not insurance, but actual care). They would channel us all into Bureau of Indian Affairs-like services that see our mortality rate drop to British levels (dead people are much lower drain on government than living ones). The Democrats oppose opening up insurance markets across state lines because …. Who knows why because it doesn’t make any sense. Opening up auto insurance across statelines did wonders for improving competition and controlling premiums. Thirty years later, my monthly premiums are just now about what they were before the market was opened up. And Alaska has different coverage than, say, New Hampshire, so no, that’s not a problem either … except maybe in the minds of people who think government-run medical care is the answer to the medical insurance crisis in this country. If that’s the only choice you’re willing to accept, all other alternatives look wrong.

The Democrats don’t want to look at access to actual medical care, insurance costs or the continued growth of the welfare state. They seek to constrain markets to create monopolies that can be controlled by a federal regulatory regime. When that fails, because it ignores economic reality, they will insist upon passing single-payer.

“When I was working in France, I had opportunity to do some visitation in England and Germany and look behind the scenes of their medical care systems. When I developed appendicitis, I dosed myself with pain killers and antibiotics and caught a jet to the United States rather than go under the knife of any of my colleagues in Europe. They’re nice people; some of them were very well trained by European standards and they mean well, but I do not recommend any single-payer or universal medical system in the world. All of the ones I’ve seen are inadequate for anyone I love who has any illness requiring high-skilled treatment.” Rick (speaking as a doctor)

Potential Victories:

  • Halting federal funding of unPlanned Parenthood, the nation’s largest abortion mill
  • Offering states more flexibility in the operation of their Medicaid programs.
  • Expanding health savings accounts
  • Getting rid of the individual mandate
  • Opening insurance across state lines
  • Repealing Obamacare’s taxes

Pressure from conservative groups made the American Health Care Act, as presently conceived, a non-starter. That’s a good thing. The Affordable Care Act would have been a lot worse if it hadn’t been for the moderate Democrats who just couldn’t stomach its more socialist aspects. Democrats did not, despite prevailing mythology, compromise with the GOP in 2009. The GOP managed to pass some amendments, but they were all technical in nature – commas and spelling repair. The Democrats were forced to compromise with their own moderates.It only takes a few senators to hold an entire party’s golden goose hostage.

This time around, the GOP was confronted by the conservative Republicans of the Freedom Caucus, who rightly pointed out that the people did not sweep the GOP into office in order to “tweak” Obamacare. They voted for the GOP because the GOP promised to REPEAL Obamacare.

No federal entitlement has been repealed, replaced or even significantly modified after its passage, but this is the fight that caused Republicans to win majority control in 32 states, hundreds of seats in the House and Senate, and that nicely shaped office in the White House. So Republicans need to take a good hard look at where they stand right now. If they don’t have the strength of character to back of full repeal of Obamacare, then they were elected on a lie. Surely someone among them has a better idea than either the AHCA or the ACA.

Republicans, please recognize that you were put into the position that you’re in right now by people who want to get rid of Obamacare. You shouldn’t allow yourselves to be intimidated by Democratic rhetoric that you’re going to kill Grandma and expose “the children” to the winter winds. We know they’re full of gas. They tried to convince the American people that Obamacare would be a political and economic success story even as the American voters argued that it wouldn’t be. Reality has shown the Democrats were phenomenally wrong and that the American people understand economics better than the elites. The voters who put you in office are not going to fall for a lecture about how unpopular a repeal bill will be. Feel free to pass a bill that incorporates the principles many GOP voters say they believe in.

 

REALLY! They’re behind you and even libertarians like Lela and doctors like Rick will cheer you on.

Secretary Tom Price   Leave a comment

I am not a Trump supporter, but he’s done some really good things as president, namely putting reformers into some key cabinet positions … though he is screwing up with his replacement for Labor Secretary.

Tom Price, a Georga orthopedic surgeon and Congressman, actually managed to survive the confirmation process to become Health and Human Services secretary. It signals that President Trump is serious about undertaking major efforts to repeal and replace Obamacare, along with other entitlement reforms. But we also need to look at Price’s Empowering Patients First Act to see whether Price really understands what are we doing. While I’m at it, I want to look at the other Republican offerings for repealing/replacing Obamacare.

We don’t have cable TV, so lately I’ve been listening to a variety of cable news programs while I work out at the gym. The other day was CNN day. After three different pundits said the “Republicans have no serious replacement for the ACA” I decided it was time to get serious about looking at the proposed alternatives. I’m running my analysis by my cousin who is a world-class research doctor who has opposed Obamacare since it was Hillarycare. Because opposing Obamacare is career-risky for doctors who aren’t private practitioners, he’s allowing me to make his observations under my blog, which protects his career a bit.

Price’s nomination also illustrates why those efforts face a difficult road to passage and enactment.

As news of the Price appointment leaked out late on Monday evening, reporters spent much of their time breathlessly analyzing Dr. Price’s health-care legislation—H.R. 2300, the Empowering Patients First Act—for clues as to what it might mean for the replace effort. However, Price’s bill may be more noteworthy for what it does not include than what it does:

  • There is no premium support plan for Medicare reform;
  • It doesn’t reform Medicaid—whether by block grants or per capita caps; and
  • It doesn’t offer any spending reductions to fund the refundable portion of tax credits Price proposes as an alternative to Obamacare’s insurance subsidies.

In other words, despite releasing a 243-page health-care bill, Price, along with his Republican colleagues in Congress, hasn’t translated into legislative specifics his policy positions on many, if not most, of the important health-care issues the Republican Congress will face next year. For instance:

  • How should a premium support system under Medicare be structured? Should payments to seniors be based upon the average plan bid, the lowest plan bid, or another formula? How quickly should those payments rise in future years?
  • How quickly should Medicaid block grants, or per capita caps, rise in future years?
  • Should an Obamacare repeal-and-replace plan rely on pre-Obamacare levels of taxes and spending, or should it redirect existing Obamacare spending in a different direction?

Price’s legislation does not shed much light on these and other critically important questions that Congress will need to undertake next year.

Budget Gimmicks and Magic Asterisks

As chairman of the House Budget Committee, Price earlier this year released a budget blueprint that did include some ideas for entitlement reform. However, that document included only about four pages of proposals on Medicare, Medicaid, and Obamacare—some of which focused more on making the case against Obamacare than outlining the specifics of a Republican alternative. Even though the Republican budget document said it repeals Obamacare, that’s not exactly true. The budget, like those issued by House Speaker Paul Ryan when he was Budget Committee chairman, assumes Obamacare’s higher levels of taxes and lower levels of Medicare spending to achieve balance within the decade. Either the budget doesn’t repeal all of Obamacare, or it assumes that Congress, after repealing Obamacare, would go back and re-enact equivalent levels of tax increases and Medicare spending reductions.

 Price’s Empowering Patients First Act, which proposes a new refundable tax credit, includes only one idea to pay for that credit—a cap on the tax deductibility of employer-sponsored health coverage. Although administered through the tax code, refundable credits are considered government spending. Washington basically writes “refund” checks to individuals and families with no income tax liability.

Basically, the chairman of the House Budget Committee proposed raising taxes (the cap on deducting employer-sponsored health coverage) to pay for new spending (the refundable portion of the tax credit/insurance subsidy).

I don’t think Price is an evil guy who is pretending to reform federal health insurance policy. He’s trying to avoid many of the political minefields omnipresent in health policy. That deliberate soft-shoe allowed his Senate confirmation to go through.

 

Price will now have enormous power over the regulatory process, but we have to recognize that Congress has a truly heavy lift to repeal Obamacare in reality. Yes, it is vitally important to get rid of Obamacare — not just economically, because of the future deficits or taxes it will require, but also for liberty, because this represents the chains of economic slavery that will limit our individual choices going forward.

 

Posted March 2, 2017 by aurorawatcherak in economics

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Why Government Spending Matters More than the Size of the Deficit   Leave a comment

Budget deficits are often in the media spotlight. The budget deficit is defined as the difference between what the government spends and what the government collects. When the government spends more than it collects, a budget deficit exists. When the government collects more than it spends, a budget surplus emerges.

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The conventional view is that one can show that budget deficits reduce national saving. National saving is typically defined as the sum of private saving (the after-tax income that households save rather than consume) and public saving. When the government runs a budget deficit, public saving is negative, which reduces national saving below private saving.

By generating surpluses, so it would appear, the government creates real wealth, thereby strengthening the economy’s fundamentals. This argument would be correct if government activities were of a wealth-generating nature.

Government Spending Doesn’t Create Wealth

This is, however, not the case. Government activities are confined to the redistribution of real wealth from wealth generators to wealth consumers. Government activities result in taking wealth from one person and channeling it to another.

Various impressive projects that the government undertakes also fall into the category of wealth redistribution. The fact that the private sector didn’t undertake these projects indicates that they are low on the priority list of consumers.

Given the state of the pool of real wealth the implementation of these projects will undermine the well-being of individuals since they will be introduced at the expense of projects that are higher on the priority list of consumers.

Image result for image of negative influence of government spending

Let us assume that the government decides to build a pyramid that most people regard as low priority. The people who will be employed on this project must be given access to various goods and services to sustain their life and well-beings.

Since the government is not a wealth producer it would have to impose taxes on wealth producers (those individuals who produce goods and services in accordance with consumers’ most important priorities) in order to support the building of a pyramid.

Whenever wealth producers exchange their products with each other, the exchange is voluntary. Every producer exchanges goods in his possession for goods that he believes will raise his living standard.

The crux therefore is that the exchange or the trade must be free and thus reflective of individual’s priorities. Government taxes are, however, of a coercive nature: they force producers to part with their wealth in exchange for an unwanted pyramid. This implies that producers are forced to exchange more for less, and obviously this impairs their well-being.

The more that pyramid-building that is undertaken by the government the more real wealth is taken away from wealth producers. We can thus infer that the level of tax,  i.e. real wealth, taken from the private sector is directly determined by the size of government activities.

Observe that by being a wealth consumer, the government cannot contribute to savings and to the pool of real wealth. Moreover, if government activities could have generated wealth then they would have been self-funded and would not have required any support from other wealth generators. If this were otherwise then the issue of taxes would never arise.

The Effects of Surpluses on Inflation and the Money Supply

The essence of our previous analysis is not altered by the introduction of money. In the money economy the government will tax (take money from wealth generators) and disburse the received money to various individuals that are employed directly or indirectly by the government.

This money will give these individuals access to the pool of real wealth that is the total stock of goods and services. Government-employed individuals are now able to exchange the taxed money for various goods and services that are required to improve their lives.

Image result for image of negative influence of government spending

What then is the meaning of a budget surplus in a money economy? It basically means that the government’s inflow of money exceeds its expenditure of money. The budget surplus here is just a monetary surplus. The emergence of a surplus produces the same effect as any tight monetary policy.

On this Ludwig von Mises wrote,

Now, restriction of government expenditure may be certainly a good thing. But it does not provide the  funds a government needs for a later expansion of its expenditure. An individual may conduct his affairs in this way. He may accumulate savings when his income is high and spend them later when his income drops. But it is different with a nation or all nations together. The treasury may hoard a part of the lavish revenue from taxes, which flows into the public exchequer as a result of the boom. As far and as long as it withholds these funds from circulation, its policy is really deflationary and contra-cyclical and may to this extent weaken the boom created by credit expansion. But when these funds are spent again, they alter the money relation and create a cash-induced tendency toward a drop in the monetary unit’s purchasing power. By no means can these funds provide the capital goods required for the execution of the shelved public works.1

Government Spending — Not Surpluses and Deficits — Is What Matters Most

Thinking that government spending is a wealth generator in itself, some will argue that the proper response to a government surplus shows there is no need to reduce spending, and that taxes should simply be reduced. But, a budget surplus — i.e. a monetary surplus — does not “make room” for lower taxes. Only if real government outlays are curtailed (i.e. only when the government cuts the number of pyramids it plans to build) can tax effectively be lowered. Lower government outlays imply that wealth generators will now have a larger portion of the pool of real wealth at their disposal.

On the other hand, if government outlays continue to increase, notwithstanding budget surpluses, no effective tax reduction is possible; the share of the pool of real wealth at the disposal of wealth producers will diminish.

For example, if government outlays are $3 trillion and the government revenue is $2 trillion then the government will have a deficit of $1 trillion. Since government outlays have to be funded this means that the government would have to secure some other sources of funding such as borrowing, printing money or new forms of taxes. The government will employ all sorts of means to obtain resources from wealth generators to support its activities.

What matters here is that government outlays are $3 trillion, not that the deficit is $1 trillion. For instance, if government revenue on account of higher taxes were $3 trillion then we would have a balanced budget. But would this alter the fact that the government still takes $3 trillion of resources from wealth generators?

We Must Build Wealth Before We Can Spend It

The critics of a smaller government will react that the private sector cannot be trusted to build up and enhance the nation’s infrastructure. For instance, the US urgently requires the building and upgrading of bridges and roads.

There is no doubt that this is the case. However, can Americans afford the improvement of the infrastructure? The arbiter here should be the free market where individuals, by buying or abstaining from buying, decide on the type of infrastructure that is going to emerge.

If the size of the pool of real wealth is not adequate to afford better infrastructure then time is needed to accumulate real wealth to be able to secure better infrastructure. The build-up of the pool of real wealth cannot be made faster by raising government outlays. As we have seen, an increase in government spending will only weaken the pool of real wealth.

The government can force various non-market chosen projects. The government, however, cannot make these projects viable. As time goes by the burden that these projects will impose on the economy through higher ongoing levels of taxes is going to undermine the well-being of individuals and will make these projects even more of a burden.

Spending Reductions Must Come With Tax Cuts

What about the lowering of taxes on businesses – surely this will give a boost to capital investment and strengthen the process of real wealth formation? This is what President Trump is being rumored to be considering. As long as this lowering of taxes is not matched by a reduction in government spending this will encourage a misallocation of capital.

The emerging budget deficit is going to be funded either by borrowings or by monetary pumping. Obviously, this amounts to the diversion of real wealth from wealth generating activities to non-wealth generating activities. Various capital projects that emerge on the back of such government policy are likely to be the equivalent of useless pyramids.

We have seen that one of the ways of securing the necessary funds by the government is by means of borrowing. But how can this be?

A borrower must be a wealth generator in order to be able to repay the principal loan plus interest. This is, however, not the case as far as the government is concerned, for government is not a wealth generator – it only consumes wealth.

So how then can the government as a borrower, producing no real wealth, ever repay its debt? The only way it can do this is by borrowing again from the same lender – the wealth-generating private sector. It amounts to a process whereby government borrows from you in order to repay you.

We can conclude that the only meaningful contribution the government can make to the pool of real wealth, and hence people’s living standards, is by focusing on a reduction in real outlays – not whether there is a surplus or a deficit. This in turn means the government must remove itself from business activities and permit wealth generators to get on with the business of wealth generation.

Source: Why Government Spending Matters More than the Size of the Deficit

Posted February 25, 2017 by aurorawatcherak in economics

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The Broken Window | Frederic Bastiat   1 comment

Another great connection to my series on Economics in One Lesson.

This is Bastiat’s actual essay dealing with a certain economic fallacy that remains with us today.

 

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—“It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Image result for image of a shattered windowNow, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.”

Remember that there are not two persons only, but three concerned in the little scene which I have submitted.

What will you say, Monsieur Industriel—what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionally by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying—What would become of the glaziers, if nobody ever broke windows?

Source: The Broken Window | Frederic Bastiat

Posted February 17, 2017 by aurorawatcherak in economics

Tagged with , , , ,

Economics in One Lesson Review   Leave a comment

Henry HazlittEconomics in One Lesson was recommended reading in my Econ 101 class in college and because it was short, I actually did skim it. I’m not sure how much I learned from that cursory glance with 20-year-old eyes, but when I reread it a few years ago, I kept feeling as though the book could have been written yesterday. You could insert today’s headlines into Hazlitt’s pages. I think everyone should read it. Fortunately, thanks to the Foundation of Economic Education, you don’t even need to spend money to read it.

I’ve given you a sampling of what Hazlitt wrote, but you can read the entire book in an afternoon or a couple of nights. It’s only 200 pages. The clear writing provides simple examples that refute many of the myths perpetrated by politicians and self-interest groups. Hazlitt’s clear insights are relentlessly applied until he erodes the myths promoted by pundits, politicians and economists alike.

One chapter is devoted to public works. Keep in mind that the following was written more than 60 years ago:

There is no more persistent and influential faith in the world today than the faith in government spending. Everywhere government spending is presented as a panacea for all our economic ills. Is private industry partially stagnant? We can fix it all by government spending. Is there unemployment? That is obviously due to ‘insufficient private purchase power.’ The remedy is obvious. All that is necessary is for the government to spend enough to make up the ‘deficiency.’

Vast amounts of economic literature is based on this fallacy. As so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other.

Hazlitt goes on to clearly show the fallacies underpinning the thinking. We tend to look at things in isolation instead of as a whole, and, as Hazlitt concludes his book, seeing them in the whole is the goal of economic science.

I can’t recommend this book highly enough. No one who reads it will ever think about economic policy analysis in the same way again.

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