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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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slide1

Conventional Wisdom versus The Data

October 29, 2011

copies of this presentation can be found at

www.antonydavies.org

slide2

The Game

Select what price to charge.

Lower price  sell more units.

Higher price  sell fewer units.

slide3

Price per unit x Units sold

The Game

Goal: Make the most profit possible.

Profit = Revenue – Cost

$1 x Units sold

slide4

Example

Suppose you charge $3 per unit.

How many units will you sell?

90

What is your revenue?

($3) (90) = $270

What is your cost?

($1) (90) = $90

What is your profit?

$270 – $90 = $180

slide5

Example

Suppose you charge $15 per unit.

How many units will you sell?

30

What is your revenue?

($15) (30) = $450

What is your cost?

($1) (30) = $30

What is your profit?

$450 – $30 = $420

slide6

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

slide7

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

slide9

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.

slide10

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

What is your revenue?

Consumers pay $3 + $4 = $7.

($3) (70) = $210

What is your cost?

($1) (70) = $70

Consumers buy 70 units.

What is your profit?

$210 – $70 = $140

slide11

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

slide13

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.

slide14

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

What is your revenue?

($3) (90) = $270

What is your cost?

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

What is your profit?

$270 – $450 = –$180

slide15

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

slide17

Results

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

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

slide18

Results

Retail price up by $2

Consumers pay $2 more

Firms receive $2 less

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

slide19

Results

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

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

slide20

Results

Retail price down by $2

Consumers pay $2 more

Firms receive $2 less

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

slide21

Results

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

(even when the firm is a monopoly)

slide22

Results

When there was no tax, consumers bought 50 units.

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

slide23

Results

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

slide24

Results

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

(regardless of whom it taxes)

slide25

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

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

slide26

Conventional Wisdom #1

The government is financially sound.

slide39

$10,000

A stack of $100 bills, ½ inch high.

slide40

$1 million

100 packets of $10,000.

slide41

$100 million

$100 million fits on a standard pallet.

slide43

$1 trillion

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

slide44

$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).

slide45

$65 trillion

Total Federal debt and obligations (as of 2010).

slide46

Conventional Wisdom #2

The government has a debt problem.

slide47

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

slide49

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

slide50

Deficit

Deficit

Deficit

Deficit

Debt

50

slide51

Conventional Wisdom #2

The government has a debt problem.

deficit

slide53

Perhaps we have a revenue problem.

?

Revenue

Spending

?

?

Revenue

Spending

Revenue

Spending

Deficit

Deficit

Deficit

Deficit

?

Debt

Revenue

Spending

53

slide54

Conventional Wisdom #2

The government has a debt problem.

deficit

revenue

slide55

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

Data source: US Department of the Treasury

slide57

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

Data source: US Department of the Treasury

slide59

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

Data source: US Department of the Treasury

slide60

Tax revenue may be rising,

but it isn’t rising fast enough.

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

60

slide61

Conventional Wisdom #3

Raising tax rates increases tax revenue.

slide63

13%

63

slide78

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

slide79

Conventional Wisdom #2

The government has a debt problem.

deficit

revenue

spending

slide80

The average price level has risen 700% since 1954.

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

80

slide81

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

slide82

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

slide83

Fine!

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

83

slide84

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

slide85

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

slide86

Reconsider revenue

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

Spend more!

GDP grows!

= 

18% x

86

slide87

Conventional Wisdom #4

Government spending stimulates the economy.

87

slide88

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

slide89

10%

8%

Unemployment Rate:

6%

9%

7%

89

slide91

Stimulus Spending and Economic Growth

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

91

slide92

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

slide94

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

slide96

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

slide98

Conventional Wisdom #5

The rich get richer while the poor get poorer.

slide99

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.

slide100

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.

slide101

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.

slide102

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.

slide103

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.

slide105

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.

slide106

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.

slide108

Conventional Wisdom #6

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

slide109

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

Data source: International Monetary Fund

slide110

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

slide111

Greater per-capita trade is associated with reduced child labor.

Data sources: International Monetary Fund and World Bank

slide112

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

slide113

Conventional Wisdom #7

Trade costs American jobs.

slide114

Greater per-capita trade is associated with reduced unemployment.

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

slide115

Greater per-capita trade is associated with increased real wages.

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

slide116

Conventional Wisdom #8

The minimum wage helps minimum wage workers.

slide120

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.

slide121

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.

slide122

Conventional Wisdom versus The Data

October 29, 2011

copies of this presentation can be found at

www.antonydavies.org