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

The Game Select what price to charge. Lower price sell more units. Higher price sell fewer units.

The Game Goal: Make the most profit possible. Profit = Revenue – Cost Price per unit x Units sold $1 x Units sold

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

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

Example Suppose you charge $3 per unit. Profit = $180 Suppose you charge $15 per unit. Profit = $420 Of these, $15 is the better price to charge.

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 1

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. If you charge $3, how many units will consumers buy? 70 What is your profit? $210 – $70 = $140 You charge $3.Consumers pay $3 + $4 = $7. Consumers buy 70 units. What is your revenue? ($3) (70) = $210 What is your cost? ($1) (70) = $70

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 2: Tax the Consumers

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 What is your profit? $270 – $450 = –$180 What is your revenue? ($3) (90) = $270 What is your cost? ($1 + $4) (90) = $450

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

Round 3: Tax the Firms

Results In round 3, the government taxed the firms $4. Wont firms just pass the tax on to consumers?

Results End result:Firms pay $2 of the tax, and consumers pay $2 of the tax. Retail price up by $2 Consumers pay $2 more Firms receive $2 less

Results In round 2, the government taxed the consumers $4. Wont consumers be forced to pay the full $4 tax?

Results End result:Firms pay $2 of the tax, and consumers pay $2 of the tax. Retail price down by $2 Consumers pay $2 more Firms receive $2 less

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 #1:The government has no control over who ultimately pays a tax. Lesson #2:The government determines the tax rate, not the tax revenue.

26 Conventional Wisdom #1 The government is financially sound.

27 Data sources: US Department of the Treasury, CIA World Factbook

28 Data sources: US Department of the Treasury, CIA World Factbook

29

30 Data sources: US Department of the Treasury, CIA World Factbook

31 Data sources: US Department of the Treasury, CIA World Factbook

32 Data sources: US Department of the Treasury, CIA World Factbook

33 Data sources: US Department of the Treasury, CIA World Factbook

34 Data sources: US Department of the Treasury, CIA World Factbook

35 Data sources: US Department of the Treasury, CIA World Factbook

36 Data sources: US Department of the Treasury, CIA World Factbook

Millions, Billions, Trillions (blah, blah, blah)

$100

$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 billion

$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).

Total Federal debt and obligations (as of 2010). $65 trillion

46 Conventional Wisdom #2 The government has a debt problem.

47 Data source: Bureau of Economic Analysis 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.

48 $2.3 trillion $50,000

49 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

Debt Deficit 50

51 Conventional Wisdom #2 The government has a debt problem. deficit

What causes deficit? 52

Perhaps we have a revenue problem. Debt Deficit RevenueSpendingRevenueSpendingRevenueSpending Revenue ? ? ? ? 53

54 revenue Conventional Wisdom #2 The government has a debt problem. deficit

Federal revenue has risen 6.9% per year (on average). Data source: US Department of the Treasury 55

Not fair. Prices have been rising over time. 56

Federal revenue has risen 3.3% faster than inflation per year (on average). Data source: US Department of the Treasury 57

Not fair. The population has been growing over time. 58

Federal revenue per person has risen 2.2% faster than inflation per year (on average). Data source: US Department of the Treasury 59

Tax revenue may be rising, but it isnt rising fast enough. To raise more tax revenue, we need to raise tax rates! 60

61 Conventional Wisdom #3 Raising tax rates increases tax revenue.

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63 13%

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If revenue is a fixed 18% of GDP, then the debt problem must really be a spending problem. Debt Deficit RevenueSpendingRevenueSpendingRevenueSpending RevenueSpending 78

79 revenue Conventional Wisdom #2 The government has a debt problem. deficit spending

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis The average price level has risen 700% since

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis The average price level has risen 700% since The per-person cost of the Federal government has risen 3,000% since

Data sources: Bureau of Labor Statistics, Bureau of the Census By comparison, the cost of health care has only risen 2,000% since The per-person cost of the Federal government has risen 3,000% since The average price level has risen 700% since

Fine! Government spending is rising, but its because of wars, NASA, subsidies to oil companies, [fill in your favorite evil]… 83

84 Data source: The Presidents Budget for Fiscal Year 2011, Office of Management and Budget 2011 Federal Budget Entitlements Net Interest Other Mandatory Defense Everything Else Mandatory Spending Discretnary Spending Social Security, Medicare, Medicaid Food stamps, unemployment, child nutrition and tax credits, supplemental security for disabled, student loans 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.

85 Data source: The Presidents Budget for Fiscal Year 2011, Office of Management and Budget 2011 Federal Budget Entitlements Net Interest Other Mandatory Defense Everything Else Eliminating all discretionary spending would still leave a $230 billion deficit.

GDP grows! Reconsider revenue We only get 18% of GDP in revenue, so lets stimulate GDP! Spend more! = 86 18% x

Conventional Wisdom #4 Government spending stimulates the economy. 87

TARP = $356 b. Stimulus = $578 b. Federal Reserve = $1,500 b. Financial Initiatives = $366 b. Housing Initiatives = $130 b. Data source: money.cnn.com/news/storysupplement/economy/bailouttracker/ Total (net) stimulus = $3 trillion 88

Unemployment Rate:6% 7% 8% 9% 10% 89

Historically, how has the economy reacted to stimulus spending? 90

Stimulus Spending and Economic Growth If stimulus spending worked, we should see a relationship like this. 91

Data source: Bureau of Economic Analysis, National Income and Product Accounts Increased government spending does not appear to increase economic activity. Stimulus Spending and Economic Growth ( to ) 92

Maybe stimulus spending doesnt have an immediate effect. What is the effect over time? 93

Data source: Bureau of Economic Analysis, National Income and Product Accounts Increased government spending does not appear to increase economic activity one year in the future. Stimulus Spending and Economic Growth ( to ) 94

Maybe stimulus spendings effects are cumulative. What is the cumulative effect? 95

Data source: Bureau of Economic Analysis, National Income and Product Accounts Increased government spending appears to have a negative cumulative effect over 4 quarters. Stimulus Spending and Economic Growth ( to ) 96

97 We have to do something! The rich are getting richer and the poor are getting poorer!

98 Conventional Wisdom #5 The rich get richer while the poor get poorer.

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, Incomes are in 2009 dollars. U.S. Households According to Income

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, Incomes are in 2009 dollars. U.S. Households According to Income

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, Incomes are in 2009 dollars. U.S. Households According to Income

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, Incomes are in 2009 dollars. U.S. Households According to Income

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, Incomes are in 2009 dollars. U.S. Households According to Income

104 wtf?

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678. The rich get richer and the poor get poorer. 105 Richest Quintile Poorest Quintile

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9. The old get older and the young get younger. 106 Oldest Quintile Youngest Quintile

Source: Pew Economic Mobility Project 107

108 Conventional Wisdom #6 Trade exploits and impoverishes the poor for the benefit of the rich.

109 Greater per-capita trade is associated with greater per-capita income. Data source: International Monetary Fund

110 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

111 Greater per-capita trade is associated with reduced child labor. Data sources: International Monetary Fund and World Bank

112 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

113 Conventional Wisdom #7 Trade costs American jobs.

114 Greater per-capita trade is associated with reduced unemployment. Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

115 Greater per-capita trade is associated with increased real wages. Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

116 Conventional Wisdom #8 The minimum wage helps minimum wage workers.

Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 117

Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 118

Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics 119

120 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 governments share of the economic pie. The government has a spending problem. Stimulus spending doesnt stimulate.

121 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.

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