Econ Rap

An economics rap by Professor Daniel Hamermesh:

It’s all about the Law of Supply and Demand,
Prices are set by the Invisible Hand.

A floor that’s put on your product’s price
Is something the consumer will find not nice.

If you raise your price when demand’s elastic,
Your revenue will drop and you’ll go ballistic.

Get the same extra utiles for each extra dollar,
The maximum utility is sure to follow.

Produce where price equals marginal cost
If you don’t you’ll find that your profits are lost.

Always think about cost, opportunity,
If not, you’ll find you’re hurting your community.

Think margin, think margin.

Monopolists set MR to marginal cost
The result is that consumer surplus is lost

Make sure your strategies are subgame perfect
Plan your strategic interactions without any defect.

Tax the inelastic, or you’ll be hurtin’
Because you’ve created a large excess burden.

With positive externalities it’s always wise,
To encourage more production — subsidize.

A tariff or a quota helps a few producers,
But consumers will always be the big losers.

Sometimes you gotta choose efficiency or fairness,
Ya need more than econs, ya need political awareness.

Think margin, think margin.

Sexual Economics: Sex as Female Resource

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Fixed Costs vs. Variable Costs

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Government vs. Efficiency

Tad DeHaven of the Cato Institute reports on the US Postal Service’s so-called “Intelligent” Mail program.

In 2003, the U.S. Postal Service initiated the Intelligent Mail program, which would integrate thirty different barcode systems used by commercial mailers into a single system. Ideally, the new barcode system would improve efficiency, reduce costs, and improve timeliness of delivery. However, a new report from the Government Accountability Office details numerous problems with the program’s implementation that are all-too-common in government:

Delays. The entire program was supposed to have been deployed by January 2009. Now it’s being done in phases, with the second phase completed by the end of November. Key components of the program have been “deferred,” including performance measurement capabilities required by law. Greater automation of the business mail verification process, which was one of the key justifications for the program, has also been left out.

Cost Overruns. To incorporate all the components as originally planned, the USPS will need to spend more money on a third phase. However, the GAO says that program managers aren’t sure money will be made available given the USPS’s poor financial condition. The GAO also found that program managers didn’t include all the costs associated with the program, and they therefore “lack an accurate total cost estimate.”

Poor Performance. The first phase is already being plagued by operational problems. As of June 2009, 73 issues had been identified by mailers and the USPS.

Mismanagement. The GAO sensibly recommended that the USPS define the program’s core requirements and use them as a basis for developing reliable cost estimates. But in a prime example of bureaucratic chutzpah, the USPS responded: “Any attempt to define the ‘entire program’ and the cost associated is a waste of funding and resources.”

Fraud. There is no evidence of fraud yet, but the GAO notes that “a conflict of interest exists because the prime contractor for the development of the program also manages program management office activities.”

Which of these problems is common among private companies? Certainly among successful private firms they are absolutely unheard of. The core problem is that government has no incentive to be efficient. Whereas the quest for efficiency is pursued with an almost religious fervor by private industry.

That private industry is more efficient – and thus more profitable – is seldom argued, even by capitalism’s harshest critics. What is hotly contested is the worthiness of pursuing profits. I would remind every detractor of capitalism that if a person does not profit (earn more than he consumes) he will not progress, in fact he will barely survive. The profiteers of capitalism are all that keeps humanity fed, and the profit motive is the only force capable of maintaining human progress (albeit a slow progress) when the crushing weight of government control is attempting to drag humanity down into stagnation and, ultimately, destruction.

Death Tax Fact Sheet

The Heritage Foundation has published a fact sheet on the death tax.

Tax Increase Likely

Current Policy: Congressional policy on the death tax has been to phase it out and then abolish it for close to a decade now.The 2001 tax cut began an eight-year phase out of the death tax. It lowered the rate from 55% in 2000 to 45% this year and increased the untaxed portion of estates from $1 million to $3.5 million. In 2010, it completely abolishes the death tax.

Back to Life: The death tax only expires for one year, however. It comes back to life in 2011 at a 55% rate and $1 million exemption.

Policy Change: Some in Congress do not want to see the death tax go away. They are offering bills that would extend the death tax at its current rate and exemption level either for next year or permanently. Other approaches extend the tax permanently at 35% with a $5 million exemption.

Tax Increase: Extending the death tax for one year or permanently at either 35% or 45% is a steep tax increase, since current policy is to abolish it completely.

Economic Drag

Punishes Hard Work : The death tax discourages saving and investing, undermines job creation, suppresses productivity and wage growth, contradicts the central promise of American life–wealth creation–and hurts those who have their savings tied up in land and other hard-to-sell assets.

Jobs Destroyer: The death tax is a drag to the economy because it is a tax on capital, the fuel of economic growth. Recent estimates show that full repeal of the tax would create 1.5 million jobs.

Slams Family-owned Businesses: Family-owned businesses are often asset-rich but cash-poor. They have equipment, real estate, and inventory that makes them appear valuable on paper. But they have comparatively little cash on hand. When a family member dies, the death tax is an enormous burden on them. Many have to sell their assets, or in some cases the entire business, to pay the tax. Or they must divert the precious cash flow they need to grow the business over many years to pay the tab.

Little Protection: Often the only protection family-owned businesses have from the death tax are expensive life insurance policies. The premiums they pay for them are a boon to insurance companies but siphon off the cash these businesses need to grow and create jobs.

Time to Kill the Death Tax

High Cost: The death tax is a drag on the economy and raises only 1% of all federal revenue. Estimates show it costs the economy more in lost growth than it raises in revenue.

Permanent Repeal: Congress should stick with current policy and permanently repeal the death tax once and for all. Abolition of this harmful tax will help spur economic recovery, put unemployed Americans back to work, and increase the long-term growth potential of the economy.

Restore the American Dream: Most importantly, repeal of the death tax would restore the American Dream that if you work hard and live a virtuous life, you can pass the fruits of your labor to succeeding generations of your family without fear that the government will take it away from them.

With its damaging effects on economic growth and its gross abrogations of individual rights, the death tax is probably one of the more insidious elements of the tax code – which is saying quite a lot.

Ben Bernanke: Firefighter or Arsonist?

Ben Bernanke is crediting the Federal Reserve for lessening the impact of the financial “crisis”. Here are some excerpts from his recent Washington Post op-ed:

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

Alex Epstein of the Voices for Reason blog gives a very critical response:

Thus, the Fed is a financial firefighter that simply needs more resources to put out fires set by financial arsonists in the free market—and Bernanke is Financial Firefighter in Chief.

Hardly.

The Fed is the arsonist. The Fed has command-and-control powers to dictate the money supply and baseline interest rates in our economy—fundamental factors shaping market decisions about where to invest money. As Yaron Brook explains in his thorough course on the financial crisis, the Fed’s artificially low interest rates (under the regime of Alan Greenspan and deputy Ben Bernanke) were the primary cause of the housing bubble, which combined with other government-induced phenomena (such as Fannie Mae and Freddie Mac) effectively paid people to make reckless investments in real estate. Brook explains how similar factors were at work in the dot-com boom.

In other words, the problem is not that government policies and institutions didn’t do enough to stop the fire, it is that they poured the gasoline and lit the matches.

Virginia Property Rights: Up in Smoke

Tonight at midnight, Virginia’s new smoking ban will take effect. Granted, 27 other states have similar smoking bans, but Virginia is unique in that its history is intertwined with tobacco and the state has benefited greatly from the tobacco industry.

Beyond that, however, is the fact that this is a gross violation of property rights. What possible justification could the government have for banning smoking on a person’s private property? The fact that property is used for a business instead of a residence makes no difference. A person pays for his property by sacrificing his time (i.e. his life) and, as such, he has the right to dispose of his property as he sees fit.

A smoking ban is no different from laws prohibiting sodomy. In the past, anti-sodomy laws were enacted because the majority of the population disapproved of the homosexual lifestyle. Now, the majority disapproves of smoking, so smoking is banned. I would welcome anyone to give me a justification for banning smoking in private establishments. And please bear in mind that a customer enters a business by his own free will. He is free to avoid any establishment that allows smoking.

This is nothing but pure democracy, rule by consensus, rule by the majority, rule by the mob, and – ultimately – rule by force. What does it matter if I am subject to the whim of one tyrant or a thousand?

Tax Deductions for Puppies?

Earlier this year, Rep. Thaddeus McCotter (R-MI) introduced the “Humanity and Pets Partnered Through the Years” (HAPPY) Act, which would allow up to $3,500 in tax deductions for pet expenses. Joseph Henchman of the Tax Foundation lists some reasons why the HAPPY Act is bad tax policy:

“Everyone else is getting favors so I should get some” is at the core of all bad fiscal policies.

People shouldn’t get pets just because the tax code encourages them to do so. In fact, such people would probably be the worst pet owners. I’d hate to see loving pet owners become dependent on the government for their pet care.

Politicians should use the tax code to raise revenue, not to shape people’s behavior in ways they think is nice. If you want to cut taxes, cut taxes. But this type of targeted tax break is precisely the thing that mucks up the tax code and adds complexity and uncertainty. (Check out the mocked-up Individual Pet Tax Return (Form W-K9) for some insight as to why.)

I don’t want the IRS spending its time scrutinizing whether that my purchase of a new can of Fancy Feast or new chew toy or new fish tank castle “qualifies” for the deduction, as MSN noted. The deduction will end up being so broad it bankrupts the government or (more likely) so narrow that it will be useless.

A federal government program for pet expenses would never fly, yet this bill would achieve the same thing via a less-scrutinized tax deduction.

The deduction for children was wildly abused before the IRS required Social Security numbers for each dependent; the year after it was required, 7 million children “disappeared.” Preventing fraud in declaring pets would be extremely difficult to administer.

Kathy at Blogging For Michigan also noted that people can deduct expenses for their own medical care only if those costs exceed 7.5% of adjusted gross income, so the bill would give your pet’s medical bills better tax treatment than your own.

The HAPPY Act ultimately suffers from the same failure as most of the tax code. Citizens should not be taxed based on their life choices. Government is, essentially, a service rendered to the citizens of a nation. Those citizens should only pay for the services they use – nothing more and nothing less.

The GOP Purity Test: An Intellectual Failure

Realizing their party is in disarray and searching desperately for a way to offer value to voters, some members of the GOP are attempting to institute what pundits are calling a “purity test”. Hopeful Republican candidates will have to pass this purity test in order to receive support from the GOP. Were I a Republican, I would support this type of measure. The DNC certainly has its principles defined and is fighting hard for them. Granted, those principles are abhorrent as they stem from a collectivist ideology, but they are defined principles nonetheless (though, like all collectivists, Democrats rarely expound on the specifics of those principles). Unfortunately for Republicans, the GOP has not defined any principles whatsoever. The purity test is barely more than a cheap PR stunt. In addition to falling short of an improvement in the GOP’s strength, the purity test actually represents a step backwards. Let’s examine it further.

THEREFORE BE IT RESOLVED, that the Republican National Committee identifies ten (10) key public policy positions for the 2010 election cycle, which the Republican National Committee expects its public officials and candidates to support:

(1) We support smaller government, smaller national debt, lower deficits and lower taxes by opposing bills like Obama’s “stimulus” bill;

Supporting “smaller government” and “lower taxes” makes no principled statement. “Smaller” and “lower” are merely relative measurements. “Smaller government” compared to the Soviet Union? We already have that (though, quite possibly, not for long). “Lower taxes” compared to Europe? Hardly an accomplishment. A statement of principles would have been “We support the smallest government and lowest taxes possible to provide for the protection of individual rights.” To make matters worse, the GOP mentions a specific politician (President Obama) and specific legislation (the stimulus bill). If someone asked me my name, I would not answer with “I am not Fred”. What does it matter what I am not? A person or idea is never defined as a negative, as a negative cannot be proved. To base one’s identity on a negative is intellectual suicide.

(2) We support market-based health care reform and oppose Obama-style government run healthcare;

This statement faces the same problems as the statement above. The GOP is defining itself through a negative and failing to define any core principles. “Market-based” is not enough. The market must be held completely sacrosanct and freedom must be the rule, not the exception.

(3) We support market-based energy reforms by opposing cap and trade legislation;

Again, legislation is attacked rather than principles defended. This test will be outdated in a matter of months.

(4) We support workers’ right to secret ballot by opposing card check;

Much of the same, attacking specific issues rather than defining principles. This, however, falls far shorter of what is right than the second and third resolutions. The GOP should take a firm stance against unions and any other deadly obstacles to business. Why must corporations fear subjective anti-trust law while workers enjoy government-protected collusion in order to artificially raise labor prices, thereby destroying entire firms (GM and Chrysler being the primary examples)?

(5) We support legal immigration and assimilation into American society by opposing amnesty for illegal immigrants;

While I certainly support a liberal immigration policy and oppose amnesty for those who have broken our laws, Republicans frequently portray a high degree of ignorance in regards to this issue. Immigration policy should be liberalized, coupled with the dismantling of our welfare state. Furthermore, it should be recognized that immigration policy and border security are distinct issues.

(6) We support victory in Iraq and Afghanistan by supporting military-recommended troop surges;

(7) We support containment of Iran and North Korea, particularly effective action to eliminate their nuclear weapons threat;

As noted above, it is a mistake to focus on specific issues. A coherent policy on national defense should be defined. Preferably, this policy would be non-interventionist in nature, while obligating the U.S. government to counter any threat to American citizens with extreme prejudice. It should also be made clear that U.S. soldiers are also U.S. citizens and are to be valued over civilians of other countries.

(8) We support retention of the Defense of Marriage Act;

Not only is this wildly inconsistent with the first resolution, it is so out of line with the our founding principles that I consider it criminal. There is absolutely nothing within the bounds of reason that provide for government authority to decide who a person can marry. That this is even an issue in the United States is something to be ashamed of.

(9) We support protecting the lives of vulnerable persons by opposing health care rationing and denial of health care and government funding of abortion; and

Health care rationing would not be a problem in a completely private health care system. I would assume that “denial of health care” is referring to a host of “right to die” issues which are far too nuanced for this post. A private health care system would make the issue of government-funded abortions irrelevant.

(10) We support the right to keep and bear arms by opposing government restrictions on gun ownership;

This is fairly simple and I can’t find much fault with it. But I would note that no reason is given as to why the 2nd Amendment  is to be so fiercely protected. True, it’s part of the U.S. Constitution – but so was the 3/5ths Compromise, and I don’t see anyone fighting to bring that back. The right to keep and bear arms is a natural consequence of an individual’s right to his/her life. The right to your life naturally includes the right to defend your life. As governments have historically been the most serious threat to human life, and governments keep and bear arms, it follows that individuals should keep and bear arms as well

The absence of principles in this purity test is a symptom of the intellectual void in the GOP. Until Republican candidates can offer voters a value, instead of simply being non-Democrat or anti-Obama, they will continue their slow descent into nothingness. I only hope that a third party will gain enough support to challenge the rampant collectivist ideology in today’s politics.

Stupid Tax Reform

The Associated Press reports on Michigan state Rep. Alma Wheeler Smith’s proposal to restructure her state’s tax code in order to raise $6.5 billion. Here are some of the highlights:

– Extend the sales tax to services and reduce the overall tax rate from 6 percent to 5.5 percent.

– Eliminate the 22 percent surcharge on the Michigan Business Tax.

– Replace the state’s 4.35 percent flat income tax rate with a graduated income tax rate of 4 percent for individuals making zero to $45,000, 7 percent for individuals making $45,000 to $60,000 and 9.75 percent for individuals making more than $60,000 (income brackets would be doubled for joint filers). Some of the tax would be offset for those who itemize deductions on their federal income tax forms.

– Eliminate $3 billion in business tax exemptions.

– Create a new income tax credit that would cover all tuition paid to state universities, community colleges and vocational schools. The credit also would apply to preschool costs.

– Set aside $500 million from the elimination of the business tax exemptions for public education, erasing all the cuts made this fall.

The three glaring points include the elimination of business tax exemptions (which will raise the effective tax rate for businesses), creation of a more progressive tax system (which will punish production), and guarantee of free education for Ameircan citizens.

Any rise in taxes for business is of course a terrible idea for multiple reasons. The first is that the less income a business has, the less money it has to spend on new jobs and capital investments (i.e. those things that would increase the quality of life for Michigan residents). The second is that it will provide incentive for businesses to relocate to other, lower-taxing states and discourage new businesses from forming in Michigan.

Apart from undermining individual liberty, a progressive tax system punishes production and discourages economic growth by discouraging capital investment. Call it supply-side or trickle down economics if you’d like, but a slanderous name does not render these basic economic principles false.

Finally, education is a scarce good. There are not enough facilities, teachers, etc. to provide every single person with a college degree. Granted, this may (and hopefully will) change over time, but the supply of education would – in a free market – gradually adjust with increasing demand as quality of life improves and more consumers can afford it. But with a price ceiling effectively set at $0, there will be shortages in the supply of education because of the artificially low demand. This is econ 101 – price ceilings create shortages. A tax credit for education means that an individual will be able to deduct the entire cost of education from his final tax liability, rendering the cost of education $0 by the time all is said and done. And none of the above reasons against free education even touches on the questions “by what right?” and “at whose expense?” (Ayn Rand, Capitalism: The Unknown Ideal)

Michigan, by no stretch of the imagination, has a fantastic record when it comes to its tax code. But this proposal goes so far that “stupid”may be the only appropriate description.