Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at

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Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at www.antonydavies.org. The Game Select what price to charge . Lower price  sell more units . Higher price  sell fewer units. Price per unit x Units sold. The Game

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Conventional Wisdom versus The Data

October 29, 2011

copies of this presentation can be found at

www.antonydavies.org

The Game

Select what price to charge.

Lower price  sell more units.

Higher price  sell fewer units.

Price per unit x Units sold

The Game

Goal: Make the most profit possible.

Profit = Revenue – Cost

\$1 x Units sold

Example

Suppose you charge \$3 per unit.

How many units will you sell?

90

(\$3) (90) = \$270

(\$1) (90) = \$90

\$270 – \$90 = \$180

Example

Suppose you charge \$15 per unit.

How many units will you sell?

30

(\$15) (30) = \$450

(\$1) (30) = \$30

\$450 – \$30 = \$420

Example

Suppose you charge

\$3 per unit.

Profit = \$180

Of these, \$15 is the better price to charge.

Suppose you charge

\$15 per unit.

Profit = \$420

Round 1

Choose the price you will charge for your product.

Every unit you sell costs you \$1 to produce.

Profit = Price x Units Sold – \$1 x Units Sold

Round 2: Tax the Consumers

In this round, consumers will pay an additional\$4 per unit tax.

You choose a price.

The consumers pay that price per unit to you plus they pay another \$4 per unit to the government.

Round 2

In this round, consumers will pay an additional\$4 per unit tax.

You charge \$3.

If you charge \$3, how many units will consumers buy?

70

Consumers pay \$3 + \$4 = \$7.

(\$3) (70) = \$210

(\$1) (70) = \$70

\$210 – \$70 = \$140

Round 2

Choose the price you will charge for your product.

The consumer pays your price plus another \$4 to the government.

Every unit you sell costs you \$1 to produce.

Profit = Price x Units Sold – \$1 x Units Sold

Round 3: Tax the Firms

In this round, firms will pay a \$4 per unit tax for every unit they sell.

The price consumers pay is the price you charge.

Round 3

In this round, firms will pay a \$4 per unit tax.

Your cost per unit is now \$1 (for the unit) plus another \$4 (for the tax).

If you charge \$3, how many units will consumers buy?

90

(\$3) (90) = \$270

(\$1 + \$4) (90) = \$450

\$270 – \$450 = –\$180

Round 3

Choose the price you will charge for your product.

Every unit you sell costs you \$1 to produce.

In addition, you pay the government \$4 for each unit you produce.

Profit = Price x Units Sold – \$5 x Units Sold

Results

In round 3, the government taxed the firms \$4.

Won’t firms just pass the tax on to consumers?

Results

Retail price up by \$2

Consumers pay \$2 more

End result: Firms pay \$2 of the tax, and consumers pay \$2 of the tax.

Results

In round 2, the government taxed the consumers \$4.

Won’t consumers be forced to pay the full \$4 tax?

Results

Retail price down by \$2

Consumers pay \$2 more

End result: Firms pay \$2 of the tax, and consumers pay \$2 of the tax.

Results

Lesson #1: The government has no control over who ultimately pays a tax.

(even when the firm is a monopoly)

Results

When there was no tax, consumers bought 50 units.

A \$4 per unit tax should generate \$4 x 50 = \$200 in tax revenue.

Results

Instead of raising \$200 in tax revenue, the government only raises \$160.

Results

Lesson #2: The government determines the tax rate, not the tax revenue.

(regardless of whom it taxes)

Lesson #2: The government determines the tax rate, not the tax revenue.

Conventional Wisdom #1

The government is financially sound.

\$10,000

A stack of \$100 bills, ½ inch high.

\$1 million

100 packets of \$10,000.

\$100 million

\$100 million fits on a standard pallet.

\$1 trillion

About twice the amount of money the U.S. government spends on interest on the national debt in one year.

\$14 trillion

The value of all goods and services produced in the United States in one year.

Also, the U.S. national debt (as of 2010).

\$65 trillion

Total Federal debt and obligations (as of 2010).

Conventional Wisdom #2

The government has a debt problem.

The Federal government collects about \$2.3 trillion in taxes per year (all tax revenues combined).

The average U.S. household earns about \$50,000 per year.

Data source: Bureau of Economic Analysis

Federal tax revenues = \$2.3 trillion

Federal spending = \$3.8 trillion

Federal debt = \$14.6 trillion

Income = \$50,000

Spending = \$84,000

Debt = \$330,000

Deficit

Deficit

Deficit

Deficit

Debt

50

Conventional Wisdom #2

The government has a debt problem.

deficit

Perhaps we have a revenue problem.

?

Revenue

Spending

?

?

Revenue

Spending

Revenue

Spending

Deficit

Deficit

Deficit

Deficit

?

Debt

Revenue

Spending

53

Conventional Wisdom #2

The government has a debt problem.

deficit

revenue

Federal revenue has risen 6.9% per year (on average).

Data source: US Department of the Treasury

Federal revenue has risen 3.3% faster than inflation per year (on average).

Data source: US Department of the Treasury

Federal revenue per person has risen 2.2% faster than inflation per year (on average).

Data source: US Department of the Treasury

Tax revenue may be rising,

but it isn’t rising fast enough.

To raise more tax revenue, we need to raise tax rates!

60

Conventional Wisdom #3

Raising tax rates increases tax revenue.

13%

63

If revenue is a fixed 18% of GDP, then the debt problem must really be a spending problem.

Revenue

Spending

Revenue

Spending

Revenue

Spending

Deficit

Deficit

Deficit

Deficit

Debt

Revenue

Spending

78

Conventional Wisdom #2

The government has a debt problem.

deficit

revenue

spending

The average price level has risen 700% since 1954.

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis

80

The average price level has risen 700% since 1954.

The per-person cost of the Federal government has risen 3,000% since 1954.

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis

81

The average price level has risen 700% since 1954.

The per-person cost of the Federal government has risen 3,000% since 1954.

By comparison, the cost of health care has only risen 2,000% since 1954.

Data sources: Bureau of Labor Statistics, Bureau of the Census

82

Fine!

Government spending is rising, but it’s because of wars, NASA, subsidies to oil companies, [fill in your favorite evil]…

83

2011 Federal Budget

Everything Else

Discretnary Spending

Defense

Food stamps, unemployment, child nutrition and tax credits, supplemental security for disabled, student loans

Other Mandatory

Net Interest

Mandatory Spending

Entitlements

Departments of Agriculture, Commerce, Education, Energy, HHS, HUD, Interior, Justice, Labor, State, Transportation, Treasury, Veteran Affairs, plus independent agencies, plus Legislative branch, plus Judicial branch, etc.

Social Security, Medicare, Medicaid

Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget

2011 Federal Budget

Everything Else

Defense

Eliminating all discretionary spending would still leave a \$230 billion deficit.

Other Mandatory

Net Interest

Entitlements

Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget

Reconsider revenue

We only get 18% of GDP in revenue, so let’s stimulate GDP!

Spend more!

GDP grows!

= 

18% x

86

Conventional Wisdom #4

Government spending stimulates the economy.

87

Federal Reserve = \$1,500 b.

TARP = \$356 b.

Financial Initiatives = \$366 b.

Total (net) stimulus = \$3 trillion

Housing Initiatives = \$130 b.

Stimulus = \$578 b.

Data source: money.cnn.com/news/storysupplement/economy/bailouttracker/

88

10%

8%

Unemployment Rate:

6%

9%

7%

89

Stimulus Spending and Economic Growth

If stimulus spending worked, we should see a relationship like this.

91

Stimulus Spending and Economic Growth (1954.1 to 2011.1)

Increased government spending does not appear to increase economic activity.

Data source: Bureau of Economic Analysis, National Income and Product Accounts

92

Stimulus Spending and Economic Growth (1954.1 to 2011.1)

Increased government spending does not appear to increase economic activity one year in the future.

Data source: Bureau of Economic Analysis, National Income and Product Accounts

94

Stimulus Spending and Economic Growth (1954.1 to 2011.1)

Increased government spending appears to have a negative cumulative effect over 4 quarters.

Data source: Bureau of Economic Analysis, National Income and Product Accounts

96

Conventional Wisdom #5

The rich get richer while the poor get poorer.

U.S. Households According to Income

Incomes are in 2009 dollars.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

U.S. Households According to Income

Incomes are in 2009 dollars.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

U.S. Households According to Income

Incomes are in 2009 dollars.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

U.S. Households According to Income

Incomes are in 2009 dollars.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

U.S. Households According to Income

Incomes are in 2009 dollars.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

The rich get richer and the poor get poorer.

Poorest Quintile

Richest Quintile

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678.

The old get older and the young get younger.

Youngest Quintile

Oldest Quintile

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9.

Conventional Wisdom #6

Trade exploits and impoverishes the poor for the benefit of the rich.

Greater per-capita trade is associated with greater per-capita income.

Data source: International Monetary Fund

GDI measures quality of life (longevity, education, literacy, income) for women relative to men.

Greater per-capita trade is associated with greater gender equality.

Data sources: International Monetary Fund and United Nations Development Programme

Data sources: International Monetary Fund and World Bank

Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor.

Data sources: International Monetary Fund and World Bank

Conventional Wisdom #7

Greater per-capita trade is associated with reduced unemployment.

Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

Conventional Wisdom #8

The minimum wage helps minimum wage workers.

Data Pwns Conventional Wisdom

The government has no control over who ultimately pays a tax.

The government sets the tax rate, not the tax revenue.

Raising tax rates does not increase the government’s share of the economic pie.

The government has a spending problem.

Stimulus spending doesn’t stimulate.

Data Pwns Conventional Wisdom

The poor are getting richer.

Trade empowers and enriches people (even poor people).

Trade creates more jobs than it destroys.

Minimum wage increases unemployment among the less educated.

Conventional Wisdom versus The Data

October 29, 2011

copies of this presentation can be found at

www.antonydavies.org