Economic Matters

It’s the name. Like so many things in economics a name is used for effect or response rather than understanding. The “FairTax” is nothing more than a tax on consumption. In other words this is a sales tax. So the debate is not one of fair or not fair, it’s about allocation and distribution. A tax on consumption will be sure to alter consumer spending behavior thereby changing the allocation and distribution of goods and services. I’m making an assumption that a final proposal will incorporate some taxation on services currently not taxed. There is nothing fair about the “FairTax” unless we make it so!

Any reasonable person can find many faults with the current tax system. There’s the paperwork, enforcement, the IRS, loopholes for some, and on and on. So, why not try the darn thing? It takes years for most of us to except and incorporate the current tax system into our lives as working adults. We still don’t understand it just from the language we speak. I hear people speak of not paying any taxes, because they happen to be getting a refund. We know that a refund is simply a return of mandated interest free loan (i.e. the difference between what you owed and what you paid) to the government.

To make a long story short it’s all in the math. The sales tax will be a fair tax if it does not increase the amount of taxes most would be paying under the prevailing system given little change in patterns of consumption.

This is what I would do. I would start by determining typical consumption patterns for current IRS income brackets. Then we can use the Consumer Price Index and some math to play with various tax rates. When we come up with numbers that have us revenue neutral plus 5% (i.e. to be used exclusively to pay down the countries debt) we present this to the voters as a constitutional amendment to abolish the IRS forever.

“It’s the economy stupid” is on my mind right now. Those words were made famous in a presidential debate not that many years ago, and an election was essentially one on the issue. Here we are again. We are in an “economic mess” as some would say. What didn’t we learn or do to prevent us from slip sliding away into an economic abyss? Is it necessary that our economy goes through cycles of bad times?

While those are the questions, it’s important to understand that the basic structure of our economy hasn’t changed. Our Gross Domestic product (GDP), the measure of how much we output in dollars terms has only changed significantly in one area over the past 40 years. That one area is “net exports”. In other words we haven’t changed our propensity to spend (i.e. consumption), but the stuff we spend our dollars on have been produced in countries other than our own. This trend has grown as our companies have not only moved production to other countries, but there’s been a growing trend of foreign purchases of some of these very companies. Some voices say, “What’s wrong with this?” My voice says explain the benefits of foreign takeover of American companies and increased negative trade imbalances to the American people, if you dare! Once you do that, then I’ll tell you, “What’s wrong with this?”

We are in an “election season” now and the language of economics falls consistently from the lips of any politician vying to be your next leader. In recent days all the politicians have jumped on the “change bandwagon” as a result of Senator Obama’s surprising win in the Iowa caucuses. If change is the new banner what changes in economics are on the horizon and how will they have an affect on you? Has each answered your questions on position and plans relative to economic issues? Could any of them sit with you and explain economics? We’ll discuss the politics of economics very soon, but first let’s discuss some basic ideas regarding economics.

One of the first statements or questions that I pose to my students is, “What does Love have to do with it?” Of course, I get the typical response as some break into that familiar melody, while a number of others reflect upon past romantic experiences with a resounding “Nothing!” It is a light hearted introduction to the world of economics, but an immensely important and serious one from my perspective. You’ll have to stick around awhile to understand this one.

Rather than suggest a number of economic “laws”, theories and the like, I pose a series of questions building toward a better understanding of how individuals and institutions participate in obtaining and providing goods and services. My view of the “economizing problem” and the classic view you’ll find in every mainstream economic textbook diverge in dramatic fashion.

Typically, instructors are supposed to begin a discussion of the “economizing problem” with the concept of scarcity, requiring subsequent development of formal and informal means of allocation and distribution of scarce resources. This discussion is based on a generally accepted definition of economics. A discussion quickly followed by the “law of supply” and “the law of demand”. These concepts are important and observable phenomenon without doubt. However, I do make a departure from the sanctity of these laws. I’ll present my definition of economics after we’ve developed some other thoughts.

Heretical or blasphemous my words would seem to most economists writing today. So, I begin with a simple notion or question: What is really scarce? When I pose this question I quickly get long lists of scarce stuff from the class. In today’s world “oil” tops the list and the list goes on and on. With prices increasing more than 200% in just a few years you’d think the world has become a dramatically different place. Is the supply that much less? Or is it that demand is that much more? Maybe you’re more concerned about the price of the iPhone? Why did the price drop $200 in just a few months? What is determining the price of “stuff”? Is it scarcity? If you are wondering what I’m thinking on the issue of scarcity you’ll have to wait. I want to know what you think first!