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.


Piracy is Progressive Taxation, and Other Thoughts on the Evolution of Online Distribution

For all of these creative artists, most laboring in obscurity, being well-enough known to be pirated would be a crowning achievement. Piracy is a kind of progressive taxation, which may shave a few percentage points off the sales of well-known artists (and I say “may” because even that point is not proven), in exchange for massive benefits to the far greater number for whom exposure may lead to increased revenues.

Piracy is Progressive Taxation, and Other Thoughts on the Evolution of Online Distribution


Experts warn that heavy debt threatens American economy

More than two centuries ago, Benjamin Franklin warned: “He that goes aborrowing, goes asorrowing.” Now, a laugh-til-you-cry commercial portrays a man with a beautiful home and car declaring: “I’m in debt up to my eyeballs. I can barely pay my finance charges. Somebody help me.”

The epidemic of American indebtedness runs from home to government to global marketplace. To examine it, let’s start at home.

Americans used to save, but no longer. Back in the 1950s, a generation of Americans who had survived the Depression and Second World War saved roughly 8% of their income. The savings rate rose and fell slightly over the decades — it went as high as 11% and as low as 7% during the “greed is good” 1980s — but now those days are only a memory.

In the charge-everything start of the new millennium, savings have plummeted: to just 1.8% last year, below 1% since January and at zero in the latest estimate from the Bureau of Economic Analysis.

Experts warn that heavy debt threatens American economy


A distinction our state doesn’t need

It’s not news the local convention bureau will likely start bragging about.

But a national online magazine has decided to bestow on our state a pretty significant distinction.

In July, The Black Commentator ranked Wisconsin No. 1 among “The Ten Worst Places to Be Black” in America.

“Wisconsin leads the nation in the percentage of its black inhabitants under lock and key. Just over four percent of black Wisconsin, including the very old and the very young of both sexes, are behind bars,” according to The Black Commentator.

A distinction our state doesn’t need


Former First Lady Moved to New Location Away From Cameras, Microphones

Just days after former First Lady Barbara Bush made widely publicized remarks about people made homeless by Hurricane Katrina, the White House said today that Mrs. Bush had been moved to “a new location away from television cameras and microphones.”

Mrs. Bush, who in talking about Katrina refugees said that “This is working very well for them” and that many of them “were underprivileged anyway,” was transported to a facility where she will have plenty of food and water but no more media appearances, the White House confirmed.

Former First Lady Moved to New Location Away From Cameras, Microphones


Bush’s tax cuts undermined by basic principles

His [George W. Bush’s] policy thus rests implicitly on the premise that if business owners could afford to hire additional workers, they would. But whether owners can afford to hire is not the issue. What matters is whether hiring will increase their profits.

The basic hiring criterion, found in every introductory textbook – including those written by the president’s own economic advisers – is straightforward: If the output of additional workers can be sold for at least enough to cover their salaries, they should be hired; otherwise not. The after-tax personal incomes of business owners are irrelevant for hiring decisions….

Had the dollars required to finance the president’s tax cuts been used in other ways, they would have made a real difference. Larger tax cuts for middle- and low-income families, for example, would have stimulated immediate new spending because the savings rates for most of these families are low. Their additional spending would have been largely for products made by domestic businesses, and that, in turn, would have led to increased employment.

Economists from both sides of the political aisle argued from the beginning that tax cuts for the wealthy made no sense as a policy for stimulating new jobs. Experience has proved them right.

Bush’s tax cuts undermined by basic principles


Public to discuss jail expansion

Planning to continue to voice opposition to the construction project is a coalition of eight groups known as the SAFER Racine Partnership, which includes the Racine Taxpayer Association, the Racine Branch of the NAACP and the Racine Interfaith Coalition, among others.

The SAFER coalition argues that Racine County has failed to use the best practices in criminal justice to reduce the jail population and, in turn, jail costs.

Kenneth Hall of SAFER said that while the eastern half of the Racine County community had scrutinized the Racine Unified School Board’s plan to spend an additional $6.45 million to save school programs, a similar debate is not being encouraged on a $17.3 million jail project.

“Schools are closing, fire stations are closing – every other part of government is being cut or going through a tough analysis of what it’s doing,” Hall said. “If we’re going to talk about jail expansion, we need to be doing the same kind of analysis with jail operations and the criminal justice system.”

Public to discuss jail expansion