• JS Mill's support of redistribution from taxation in the AFA

    John Stuart Mill on Affordable Health Care

    Jul 17 • Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Health Care, Households, Labor, Regulation • 151 Views

    A child prodigy, 19th century economist John Stuart Mill said in his Autobiography that, “I have no remembrance of the time when I began Greek; I have been told that it was when I was three years old. My earliest recollection on the subject…being lists of common Greek words…and I faintly remember going through Aesop’s Fables, the first Greek book which I read. I learnt no Latin until my eighth year…I also read, in 1813,…the first six dialogues…of Plato.” Mill tells readers that he did not understand Plato’s Sixth Dialogue, “But my father, in all his teaching, demanded of me not only the utmost that I could do, but much that I could by no possibility have done.”

    Mill became an economist who was torn between the merits of the market system and the precepts of utilitarianism. He believed demand, supply and unfettered markets generated efficiency. Also though, he sought a society in which happiness for every individual was maximized.

    And that takes us to Mill’s (probable) ideas about taxation and the Affordable Care Act.

    John Stuart Mill was the first economist to separate production and distribution. A society’s production, he believed, was subject to certain immutable laws which we could not change and the market would manage. Distribution, though, was a different story. Hearkening back to his utilitarian predilections, he said that you and I could decide who got what by redistributing incomes through taxes. All society needs to do is collect taxes from those who have more and then let those with less benefit from someone else’s earnings through a government provided good or service.

    Separating production and distribution, JS Mill said redistribution from taxation was okay.

    John Stuart Mill (1806-1873)

    Hearing that the Affordable Care Act was a step toward making health care accessible to everyone, Mill no doubt would have been comfortable with the new taxes it created. On January 1, 2013, a new 3.8% Net Investment Income Tax went into effect. Applying primarily to the more affluent, the tax targeted investment income over a certain threshold. At the same time, an additional Medicare tax of .9% again impacted those with higher incomes because of its minimum income level of $250,000 for married couples who file jointly and slightly lower threshold for others.

    Our bottom line: Taxation is redistribution. Its basic dilemma is deciding when the size of redistribution starts to adversely affect production incentives.

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  • Thomas Sargent and Cutting the deficit

    John Maynard Keynes and the Generational Impact of Entitlements

    Jul 16 • Economic Debates, Economic History, Economic Thinkers, Government, Health Care, Labor, Macroeconomic Measurement • 154 Views

    Before seeing how we are benefiting unequally from entitlement programs like Social Security and Medicare, let’s start with some history.

    During 1934, with unemployment high and production low, British economist John Maynard Keynes was reported to have crumpled up a pile of towels rather than just one after washing his hands in a U.S. restaurant. His goal he said (if this really happened and no one is sure) was to create more jobs.

    More than businesses though, Keynes (1883-1946) believed that a contracting economy needed the job creation that government could provide through deficit financing. Government spending would then multiply as it passed from hand to hand. Just pay a worker, he or she spends that income, the recipient then spends it, businesses have to expand and an inflated total (called the multiplier) of spending enters the GDP.

    Implementing a Keynesian approach during the 1930s Great Depression, government passed Social Security and unemployment legislation. Called a government safety net, they were supposed to provide income minimums to the jobless and people over 65 who qualified.

    30 years later, Lyndon Johnson said to Wilbur Mills, the Chairman of the House Ways and Means Committee, “I’ve just been looking through the polls here, and I’ve got only a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you, Wilbur. How about letting Medicare get to the House floor?” Mills said yes and, in 1965, federally subsidized medical care for people 65 and over became the law of the land.

    Then, during the Great Recession (December 2007 to June 2009), President Obama perpetuated a Keynesian approach and an increase in entitlement spending through the American Recovery and Reinvestment Act of 2009, the $787 billion bailout program that ballooned to $840 billion in 2011.

    Today, almost 80 years since entitlements began with Social Security, we can look at their potential impact on the following generational groups:

     

    Fiscal Policy and Generations

    The Greatest Generation, the Silent Generation and the Baby Boomers could benefit most from entitlement legislation:

    Fiscal Policy and the Generations

     

    Our bottom line: A Keynesian philosophy that employs massive government spending to end a recession has also helped entitlement programs to grow and unequally impact generations.

     

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  • David Ricardo Comparative Advantage

    What Would David Ricardo Say About Your Sneakers?

    Jul 15 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Fashion, Government, Innovation, Labor, Thinking Economically • 219 Views

    While the uniforms, boots and other items worn by the military are supposed to be 100% “Made in the USA,” exceptions are okay if we cannot make what they need. Athletic shoes became one of those exceptions when the Defense Department said it was okay to buy sneakers from foreign manufacturers, .

    Reading about imported sneakers, I started thinking about David Ricardo. But first some background.

    Shoe manufacturing is a textbook example of a shrinking industry. During the 1940s, the industry provided 260,000 domestic jobs, in 1997, 40,000, and now, 14,000. Meanwhile, imported shoes compose 98% of the US market.

    The reasons? It is not worth it for shoelace and eyelet makers to locate here if they do not have a large enough market. As for cost, making shoeboxes is 5 times more expensive here than in China. Ultimately though (below), making sneakers in the USA costs 25% to 35% more than in Asia because it is a labor-intensive task.

    Comparative advantage and sneaker manufacture

    From: WSJ

     

    As you might expect, manufacturers of US made sneakers claim a host of benefits. They start with the flexibility and turnaround time that proximity creates. The New Balance CEO claims that his US plants are twice as productive as his Asian plants. A Tennessee shoe entrepreneur questions the wisdom of shipping $1 billion in US cow and horse hides to China that will return here as $12 billion in leather goods.

    Our story ends, though, with the Defense Department having reconsidered. Just this April, after years of protests from shoemakers in Maine, Massachusetts and Michigan, the Defense Department said they would permit service men and women to purchase US made sneakers. The shoes just have to meet the military’s standards for “cost and durability.”

    Our bottom line: The economist who first explained comparative advantage, David Ricardo (1772-1823) said each nation should make whatever involves the lower opportunity cost. Because we are all doing what we do best, productivity is optimized through specialization and trade. Paying less, consumers (including the Department of Defense) have more money to allocate elsewhere.

    I wonder if it is possible for the US to have a comparative advantage in sneaker manufacture.

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  • Adam Smith, laissez-faire and traffic lights

    Adam Smith and Traffic Lights

    Jul 14 • Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Health Care, Households, Labor, Lifestyle, Thinking Economically • 156 Views

    Located 30 miles from Cape Cod, Massachusetts, the island of Nantucket has no traffic lights. Instead, drivers respond to stop signs, rotaries, and courtesy. More often than not, if a pedestrian, a walker, or a biker needs to cross the street, cars stop. When someone is making a left turn or leaving a parking lot on a busy street, cars stop. As they accept the right-of-way, drivers usually smile and street crossers wave thank you.

    Nantucket’s lack of traffic lights started me thinking about Adam Smith.

    Economic thinker (there were no economists in 1776) Adam Smith suggested that less government was better than more government. Smith believed that human nature was so diverse and policy consequences so unpredictable that no one could possibly know what was best for everyone. All too often, when mandated by government, incentives become distorted.

    Where are we going? Just some thoughts about benevolent behavior that results from a less government.

    In his first major book, The Theory of Moral Sentiments (1759), Adam Smith sought to describe a just society. Building from his first book, in The Wealth of Nations (1776), he then brought order and insight to the seemingly chaotic market system that was spreading through Europe.

    In both books, Smith displayed why the path to a just society started with profit-seeking individuals. He perceived that the orderliness and honesty that business required would spillover into a more virtuous society that is dependent on the interaction of consumers and businesses in markets rather than government.

    And that returns me to traffic lights. i wonder if we need to be careful about government taking over “beneficient” acts. Is a society (and an island) more virtuous when individuals have the opportunity to enjoy doing good?

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  • College Graduation and human capital

    Chart of the Week: To Which Job Will Your College Major Take You?

    Jul 13 • Demand, Supply, and Markets, Economic Growth, Education, Labor • 199 Views

    Our Sunday chart of the week

    Just some human capital facts today…

    Showing the proportion of people from a college major that go to a certain kind of job, the following graphics connect college majors with employment groups. The original interactive graphics are from the Census Bureau.

    Computer, mathematics and statistics majors (STEM: Science, Technology, Engineering, Math):

     

    College majors and employment groups

     

    Engineering majors:

    College and employment

    Physical sciences majors:

    Human capital college majors and jobs

     

    Biological, environmental and agricultural sciences:

    jobs and majors

    Physical Sciences:

    college major and jobs physical science

    Psychology:

    college and jobs opportunities

    Social Sciences:

    Human Capital College majors social sciences.jpg.

    Multidisciplinary studies:

    Human capital jobs and multidisciplinary studies

     

     

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