• Tag Archives economics

  • Tariffs Are Awful, but the Income Tax May Be Worse

    Posted on by Azrael Comment

    Every fiber of my economic being cries out against tariffs. If they are so good, why doesn’t each state in the US have one against the products of all of the other 49? That is, Ohio could “protect” its industries against the incursions from Arizona. This is obviously silly. One of the important reasons America is so prosperous is that we have a gigantic, internal, free trade area.

    Donald Trump supports them on the ground that the McKinley administration was prosperous, and relied upon tariffs. But this is to commit the post hoc ergo propter hoc logical fallacy: that since A precedes B, A must be the cause of B. No, America did indeed become rich during this epoch, but that was in spite of tariffs, not due to their benign influence. If you are looking for a historical episode to shed light on this matter, the Smoot-Hawley Tariff of 1930 will do far better: it greatly worsened an already bad recession, plunging our economy into a deep depression.

    Our President also claims that the US is victimized by a negative balance of trade: we buy more from Canada and other countries than they purchase from us. However, I have a horrid balance of trade with McDonald’s and Wal-Mart. I acquire several hundreds of dollars’ worth of their products every year, and neither has yet seen fit to reciprocate with any of my economic services (hint, hint!). On the other hand, I have a very strong positive balance of trade with my employer, Loyola University New Orleans. They pay me a decent salary; apart from a few lunches in their cafeteria, my expenditures to them fill their coffers to a zero degree. Should anyone worry about this sort of thing? Of course not. Ditto for international trade. If Country A buys more from B than it sells to it, money will flow from the former to the latter, reducing prices in the former and raising them in the latter, until matters balance out.

    Everyone realizes the foolishness of tariffs when it comes to absolute advantage. No Canadian objects to the importation of bananas from Costa Rica. Producing this tropical product in the frozen North would be financially prohibitive (gigantic hothouses). Ditto for maple syrup in the country to the south. The only way they could produce this item would be to place maple trees in gigantic refrigerators. Ludicrous and prohibitively expensive.

    But when it comes to comparative advantage, all too many people are out to lunch insofar as the teachings of Economics 101 are concerned. They fear that other countries might be more efficient than we are; with free trade, they would produce everything, we, nothing, and we would all starve to death from massive unemployment.

    To dispel this myth, let’s consider a thought experiment. A lawyer is as good a typist as his secretary. He can produce $1,000 per day by practicing his profession. But for every such day, he needs a certain amount of typing. He can produce $200 worth each day. In two days, he can thus earn $1200 on his own. If he hires a typist, he can earn $2,000 from lawyering in two days, but must pay his secretary $200 daily for a total of $400. If he trades with her, he will come out with $2,000-$400=$1,600, an appreciable gain for him.

    So is there any economic case for tariffs, given the foregoing? Yes, paradoxically, there is—in a way, if the alternative is a tax that’s even worse.

    At the start of his second term, President Trump initially fired 6% of the employees of the Internal Revenue Service. He is now looking to end the employment of some 50% of them. Suppose he follows this up by getting rid of all of the rest of the IRS bureaucrats, eliminating the dreaded income tax, and achieving revenue neutrality with tariffs. His motto might be: “Let’s turn back the clock to 1912,” the year before this tax was implemented (when it ranged from 1% to 7%!).

    What would the benefits be thereof? First of all, there are many intelligent, productive people who work for the IRS. There are some 90,000 of them. If dismissed by their employer, they would be freed up to produce goods and services desired by the populace. Ditto for the many accountants and tax lawyers who devote all or part of their time to helping their clients wrestle with complicated IRS regulations. Further, many of us fill out our own tax forms. This takes hours, days in some cases, time that could be better spent on leisure or productivity.

    The benefit here is that it takes relatively little labor to run a tariff system. Hey, we already have tariffs in place. An increase in their level would hardly call for much more manpower, likely hardly any more at all.

    Halfway measures will avail us little. But if Mr. Trump completely eliminates the IRS and the hated income tax along with it, there may be a reasonable case for increasing tariff rates. Not to present punitive levels, though.

    To put it another way, if we accept that there has to be a government, and it therefore needs some revenue to function, this might be the least-bad option.

    Should we worry about so many people becoming unemployed? Not at all. A similar sort of thing occurred when the car replaced the horse and buggy, when the cell phone substituted for Kodak, when we switched from typewriters to computers, etc. We are all the richer for this sort of thing, and will be in this case too.

    • Walter Edward Block is an American economist and anarcho-capitalist theorist who holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is a member of the FEE Faculty Network.

    Source: Tariffs Are Awful, but the Income Tax May Be Worse


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  • Comrade Kamala? Assessing Three of Harris’s New Economic Proposals

    Posted on by Azrael Comment

    The Kamala Harris campaign is still relatively young. The current Vice President and previous US Senator from California has barely been in the race for a month. Her first concrete economic plans are being announced and, for the most part, panned by economists. Let’s examine some of these proposals, their effects, and why economists oppose them.

    1. Price Caps on Groceries

    Let’s begin with the most shocking Harris proposal—a federal ban on “price gouging” for groceries. Let’s start with the rhetoric and then get down to brass tacks. What is price gouging? It’s a term without any clear tie to economic facts.

    Historically, “price gouging” referred to price increases caused by disasters (e.g., bottled water being more expensive during hurricanes). But of course, when demand increases or supply decreases, prices do naturally rise to prevent shortages. Labeling this as “gouging” in certain circumstances is arbitrary at best.

    Furthermore, what sort of crisis are we appealing to in order to say there is price gouging? Covid still? Since the Covid pandemic ended over two years ago (even according to Fauci), that really doesn’t make sense. Is the crisis that inflation is making things unaffordable? Well, if the disaster behind this gouging is price increases, then all price increases are defined as gouging. That doesn’t make any sense either.

    To be blunt, gouging is just a word used for emotional effect. We can always pick some arbitrary benchmark of “fair” or “unfair” price increases, but that benchmark will remain arbitrary.

    Now let’s move to the brass tacks. What would this mean? The way the language is couched, this policy would amount to nothing more than a form of price control. Regardless of the particular form this ban takes, any law which penalizes a store for having prices above some point is a price control. Insofar as this policy affects prices at all, it is a price control. Insofar as it doesn’t affect prices, the policy is spurious.

    What’s the problem here? Well, when either demand increases or supply decreases (or both), the competition to buy a good increases relative to the available supply. This means that more people will be bidding for the same number of products. If prices do not rise, the products will run out, and some people who are willing to pay the current price cannot purchase the good in question because it has run out. Economists call this a shortage.

    If, instead, prices are allowed to rise, two things happen. First, higher prices cause buyers to decrease their consumption relative to lower prices. Second, higher prices incentivize producers to supply more of a product, since a higher price commands a higher revenue. These two forces work together to make sure that all potential buyers can purchase the number of goods they are willing to pay for.

    Harris’s team claims that the pandemic was used by businesses as a pretext to trick people, to increase prices more than rising costs called for, and that this is a corrective measure. So are grocery stores pulling one over on people? Not so.

    Grocery stores have tiny margins compared to other industries. Look at the data.

    If you’re unfamiliar with the term, a 1.2 percent profit margin means that for every 1 dollar of sales a grocery store makes, it keeps 1.2 cents in profit. The rest goes to pay costs. If costs were just a couple of cents per dollar higher in the grocery industry, grocery stores would take losses and start to go out of business.

    The Harris team may try to walk this back and propose a policy to help grocery stores with their costs so that they can “pass on” the savings (though that’s not exactly how it works), but as of now the wording threatens at least de facto punishment for increasing prices. Low grocery prices sound nice, but food shortages don’t.

    The bottom line is that grocery stores aren’t responsible for increasing the money supply by 40 percent over two years during the Covid policy era, which is the real driver of the price inflation we’ve experienced.

    2. A Subsidy for New Homebuyers

    Next, Harris is considering offering a $25,000 subsidy for new homebuyers. The policy has a similar ring to it. Housing is a significant part of the average American’s budget, and Harris will play well with getting young voters to turn out if she promises them $25,000 off their housing bill.

    So what’s wrong with this? Do myself and other economists hate affordable housing? Quite the contrary. Harris’s policy will hurt housing affordability for many. If someone is considering whether to rent or buy for housing, promising him $25,000 to buy is going to convince many people on the fence to buy. This wave of new buyers will increase the demand for housing, and, as a result, prices will rise.

    Not only this, but as prices rise, many landlords may decide that the new higher price tags on their rental units are worth selling for. The supply of houses for rent would tend to decrease, resulting in higher rental prices.

    So while new homebuyers might experience a slightly lower cost (net of the new price increases), everyone trying to move and buy a new home is going to face higher prices.

    The problem doesn’t end there. The government isn’t sitting on any piles of cash to hand out $25,000 subsidies. The policy will ultimately be financed by debt, and debt must be repaid (plus interest!) with future taxes. So even the first-time homebuyer may be worse off in dollar terms over the course of his life, as he pays higher future taxes for others.

    Put simply, subsidizing demand means higher prices and higher taxes. This is no gateway to affordability.

    3. Increasing the Child Tax Credit

    The last of Harris’s policies on the docket is the only one that I can think of in a positive light: increasing the child tax credit for newborns.

    I think there are good reasons to support a kind of policy like this because the current Social Security welfare system is subsidized heavily by parents. Under current US law, parents pay the bulk of the expenses of raising their children, but when those children grow up and work, their wages are used to support the retirement of everyone—so parents are indirectly supporting retirements.

    Historically, support for retired parents was directly assumed by their children. Now, the benefit of children in this facet is socialized, while the cost is privatized to parents.

    As such, I’m generally supportive of more tax credits. In theory, it tackles the twin problems of an anti-natal system combined with the looming baby bust.

    My praise for Harris for this policy proposal is qualified, however, because the numbers just don’t amount to much. The policy proposal calls for a one-time increase in the child tax credit for newborns, to $6,000. Right now, the child tax credit varies, but it hovers around $3,000 per child.

    So, as I read the proposal, this is a one-time increase of $3,000 spread out over 18 years of a child’s life. It isn’t nothing, but a couple hundred bucks a year isn’t exactly consequential either.

    Will this policy fix a looming baby bust? Probably not. While money incentives can work to increase birth rates, they tend to come with high price tags before they work. Besides, there are better ways to increase birth rates that cost a lot less money and would have a far greater impact.

    In sum, Kamala Harris’s first round of economic policies range from underwhelming to downright bad. We can only hope that, if she wins, cooler heads prevail at the policy table.

    Source: https://fee.org/articles/comrade-kamala-assessing-three-of-harriss-new-economic-proposals/


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  • How Bad Economics Chased Uber and Lyft Out of the Twin Cities

    Posted on by Azrael Comment

    The ride-hailing services Uber and Lyft announced last week that they are pulling up stakes in the Twin Cities because of a new ordinance designed to raise driver pay.

    The Minneapolis City Council voted 10–3 to override the veto of Mayor Jacob Frey, passing a policy that will raise the pay of drivers to the equivalent of $15.57 per hour.

    In response to the plan, Uber and Lyft announced that they will cease offering rides beginning May 1 throughout the entire Twin Cities, the 16th largest metro in the United States, saying operations were economically “unsustainable” under the plan.

    “We are disappointed the Council chose to ignore the data and kick Uber out of the Twin Cities, putting 10,000 people out of work and leaving many stranded,” Uber said in a statement.

    City Council supporters say they simply want drivers to earn the minimum wage, but if that’s the case, they passed the wrong ordinance. The Star Tribune reports that council members “seemed oblivious” to a recent Minnesota Department of Labor and Industry study that concluded drivers could be paid $0.49 per minute and $0.89 per mile and make the minimum wage.

    “By contrast, the plan approved by the City Council guarantees a floor of $1.40 per mile and 51 cents per minute,” the newspaper reports.

    In other words, the wage plan the council passed doesn’t appear remotely close to the minimum wage. But this ignores the larger problem: Neither the Minneapolis City Council nor the State of Minnesota should be setting the wages of Uber or Lyft drivers.

    Nobody is forcing drivers to give rides. The arrangement between ride-share companies and drivers is an entirely voluntary one. This is the beauty of gig work. It allows people flexibility and choice about how they’d like to spend their time.

    It’s all about opportunity cost. One person might wish to spend $20 to see Dune: Part Two. Others would rather spend the two hours earning money driving Uber. Others might want to see Dune but might not have $20, so they drive Uber for an hour or two while coming back from work.

    Nobody knows precisely how much money the driver will make. But that’s not what matters. What matters is that this is a voluntary arrangement that works for drivers and ride-share companies alike and also benefits customers who can utilize services at affordable prices.

    This arrangement works across countless cities in the United States, but it is now threatened in the Twin Cities because City Council members believe they know what a “just” wage is. This might sound progressive. In truth, it’s regressive.

    Wage and price controls have been failing for some 4,000 years. They appear in the Code of Hammurabi (1755–1750 BC), and that’s not even their earliest appearance. Some might be tempted to blame Marxists for importing price controls to the United States, but the truth is that they existed in North America well before Marx was born.

    In the early 17th century, Puritans in the Massachusetts Bay Colony departed from the wisdom of Thomas Aquinas, who argued in the Summa Theologiae that the “just” price of a good was the market price. Wage controls were enacted in the second year of the colony’s existence. These were followed by a ban on “excess profits.” Puritans in Connecticut passed similar policies, and all of the policies had similar adverse effects.

    “The men involved in trade in 1635 had about as little notion of what constituted the limits of state authority in the realm of economics as men have today,” Gary North argued in An Introduction to Christian Economics.

    Fortunately, the early American Christians were practical people. They learned that these policies tended to create a host of problems, including shortages, surpluses, waste, and inactivity. After people learned these lessons over a few decades, price controls would mostly fade away from America for the next 200 years, with some notable exceptions.

    Wage and price controls were resurrected with a vengeance in the 20th century, of course. And though the harms of minimum wage laws are well known by economists, and national price-control schemes failed conspicuously, modern Americans are apparently slower learners than our Puritan ancestors.

    This is particularly true of Twin Cities lawmakers. In 2022, St. Paul passed the harshest rent control law in the U.S. only to walk back and hollow out the policy to avoid a housing catastrophe.

    Minneapolis is playing a similar game with Uber wage controls. It is likely to fail just as badly, and for the same reason.

    Prices are signals that convey information to buyers and sellers about scarce resources. Instead of allowing them to work in a voluntary market, lawmakers, like Hammurabi and the Puritans, fell for the false idea that they know what a “just” wage really is.

    Source: How Bad Economics Chased Uber and Lyft Out of the Twin Cities – FEE


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