Writings

Economics for Righties!

I recently came across Quick Hitts thanks to a promo on Skepticality. Overall, I think that Quick Hitts is a great podcast, however after listening to the 2 “for Lefties” episodes [1, 2], something bothered me. That something is that Lefties clearly do not have a monopoly on economic misunderstanding – there’s more than enough of that to go around! In that vein, I present:

Economics for Righties!

Supply-side economics, also known as “trickle-down economics” by President Reagan, “voodoo economics” by President George Bush the First, and simply as “economics” by President George W. Bush, is the theory that if we give tax breaks that primarily benefit the wealthy, that they will use this money in a way that will grow the overall economy and help everyone.

This sure sounds nice, doesn’t it. Unfortunately, the real world just doesn’t work that way.

A businessman with any economic sense knows that the only reason to add an extra dollar to his company is if he can make a profit on that dollar. How much money he has sitting in his personal bank account has absolutely no bearing on the answer to that question. In fact, a smart businessman won’t invest extra money in his business if he could make more on it just by investing in an index fund.

If you want to encourage business growth, all you need to do is lower the interest rates on business loans. Now, the decision on whether to grow the business is not “will this money I’m investing make more than an index fund?,” but instead “will this money I’m investing make more than the interest rate that I’m borrowing it at?”

So, if personal finances don’t enter into a business’s investment decisions, then maybe supply-side economics works because if you give the rich tax cuts, they’ll go buy new yachts and help create jobs at the local yacht manufacturer? Unfortunately, this argument doesn’t work either because the rich spend a very small fraction of their wealth compared to the poor. If we want to increase consumer spending, we should give those tax breaks to the poor, who spend almost all of their money on consumer goods anyway.

If Righties want to give tax breaks to the rich because they think the rich pay too high of a tax rate and they want to make the tax flatter, or just because the rich helped them win that last election, then they should at least have the decency to say so and not try to pass their tax cuts off as something that they’re not.

In the episode Social Security for Lefties, Dave discussed how Social Security is a very poorly-run retirement plan, and could even be described as a Ponzi scheme.

So, what exactly is a Ponzi scheme? According to Wikipedia,

“A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business…. The high returns that a Ponzi scheme advertises require an ever-increasing flow of money from investors in order to keep the scheme going.”

Does that sound like Social Security to you? When I think of Social Security, I definitely don’t think of “abnormally high returns on your investment.”

So, what exactly is Social Security? We already know that it is not a retirement plan, because if you die before you retire, you don’t get any benefits. So what is it then?

Well, with Social Security, you have a system where a group of people pay regular premiums and when a certain situation occurs, they get a pay-out, if that situation never occurs, they get nothing. You know what? That sounds like an insurance plan to me! In fact, that’s just what Social Security is – it is an insurance plan which pays out in case you become too old to work or you become disabled and cannot work.

That all sounds like a pretty good idea, right? However, just like everything else run by the government, social security is a very, very poorly-run insurance plan. The government has made it way too easy to qualify for benefits which is why it is having financial problems right now.

So, remember “Social Security is not a terrible retirement plan, it’s a terrible insurance plan!” Let’s just be clear what it is that we’re trying to fix.

If this podcast taught you just a little bit you didn’t know before, or helped you understand a different point of view, congratulations, you’ve been Smartenized! [For those of you who didn’t go listen to the relevant Quick Hitts podcasts before reading this page, this sentance is how Dave Hitt ends every Quick Hitts episode.]

If you would like to contact me, please visit my website at mwaddell.com.

If you would like to contact Dave, you can contact him at davehitt.com.

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