Week 15 Notes

·         Interest is a price that comes from the supply and demand process of loanable funds

·         Interest emerges from the desire to obtain more purchasing power than we have had previously

·         Interest – the price of obtaining unearned resources

·         Profit = total revenues – total costs

o   Example: Hypothetical Pizza shop

§  Total Cost: 23,000 (from savings account) + 20,000 (loan at 10% interest) = 45000

§  Annual Revenues: 85,000

o   Accounting profit:  40,000 = 85000 – 45000

§  40000 - 30,000 (What she could have been making in her other job) - 6000 (what she could have been making if renting out the space the shop will be in) – 2,300 (what should could have made if she had invested the 23,000 she used from her savings account in a fund receiving 10% interest)

o   Economic profit: 40,000 – 38,300 = 1700

·         Profits only exist in a world of uncertainty

·         Competitive advancements lowers revenues and lowers the cost of making pizza

o   Inefficient producers are forced out of the market

o   When will these prices change a lot?  When won’t they?

Week 14: Friday Blog Post

·         Father of Entreprenuership: Joseph Schumpeter (look up)

o   First of all theres a dream and a will to find a private kingdom.  Then there is a…and finally there is the joy of creating, of getting things done,

·         Barnes and Noble and Borders

o   Led to bankruptcies for small bookstores

o   It’s amazing how in 15 years, preferences in technology made Borders go out of business

·         Viktor Schreckengost

o   Has done more good for my life than anyone else we can name

o   Industrial designer

o   Invented riding lawnmower, lightweight material for tires, and also decided to put trucks on top of their engines

·         Norman Volag

o   Father of the Green Revolution (won a Nobel Prize for it)

o   New hybrid seeds which were easier to grow

o   Helped billions of people survive because the seeds helped feed billions of people

·         Health Care makes money not by keeping us sick, but by making us well!

o   In summer 1994, he lost 7 pound in 36 hours and was mad sick with what was probably food poisoning.  He had 6 pounds of liquids pumped into him, slept 18 hours, and ended up with 1250 dollars in bills.  The doctors spent great energy saving his life even though they didn’t know him, they would not have been there had they not gotten paid for working there.   

o   Conclusion: Thank God, there are people doing this stuff, even though they are doing this for money

§  Also, the biggest motivator for a person is usually money

·         Entrepreneur

o   Real costs that matter

o   Factors of production

§  Land

·         Explicit: Rent

·         Implicit: Rent

§  Labor

·         Explicit: wages

·         Implicit: wages

§  Capital

·         Explicit: Rent

·         Implicit: Rent

§  Goal: find the right mix of the above in order to capitalize the most off of the business

·         Profitability

o   = Rental rate + Appreciation Rate – Interest Cost

§  Rental rate = Annual rent / Price of good

o   Example: Rizzo’s car

§  Lease: 1 year at $12,000 a year

§  Buy: $32,000, but sell the following year for $24,000

§  Rental rate is 37%

§  You can buy the car, but you’d have to take out a loan at 10% interest rate

§  Rental Rate = Annual rent/ Price of a good + Change in asset price/price

·         From this equation, you can figure that you are 2.5% richer each year for buying the car instead of renting the car

Week 14: Critical Reading

The most interesting part of The Secretary’s “The Sumptuary Manifesto” is that it denounces George Orwell’s 1984 but literally sounds like an idea straight out of it.  An example of this is the rigid quota system enacted for clothing on page 121 and the fact that you can’t live in a “dwelling of more than 400 square feet” (reasonably close to the size of Winston’s apartment in the novel).  In both cases, the free market was considered wasteful and regulations were imposed to make it easier for the economy to work better.  However, the author is failing to consider the idea that although The Sumptuary Manifesto will supposedly help to eliminate waste in the economy, it does not deal with the fact that people demand these goods, and that overall demand is what runs the economy.  The “peerless leader” sounds more like a Stalinist-style dictator who is trying to impose his will on the people and is creating waste through these regulations.  The high penalties will probably cost the government (and the people who they will tax for revenue) in order for them to properly execute so many people, and also they are wasting oil by using it to boil criminals in.  Along with this, a larger police and military force would be required to help enforce the regulations, possibly putting greater strain on the economy as more people are put to work enforcing policies rather than producing goods or services.

                My first question concerning the manifesto is, with all do honesty, how little does this man know about basic economics?  The society in this novel would have to be heavily socialist or even communist in order for any of these reforms to theoretically work.

                My second question concerns his new rules for the future mentioned on pages 122 and 123: what would happen to those who need to have exceptions to the rules, such as athletes who need more food and factory workers whose clothes may be destroyed on a weekly basis.  Would they be left to economic ruin or would exceptions be made to make it easier for them?

                My final question is simple: what regulations, if any, does the manifesto suggest that would have short- or long-term economic benefits for all involved?  I found that the fourth demand listed on page 123, if proposed at a smaller level, could act as a good alternative for an income tax because clothing is generally an inelastic good.

                 Capitalism has been called evil by politicians, philosophers, and everyday people for hundreds of years, but it shouldn’t warrant a complete abandonment of the system.  Capitalism, it theory, is the fairest system that exists, for it gives anyone with a knowledge of the system the ability to make money and take their economic destiny into their own hands.  Regulations can sometimes make it easier for an economy to function (example: price floors on highly inelastic goods) but if overdone this can lead to a socialist/communist police state similar to the one The Secretary is somewhat calling for.

Week 14: EWOT

                We have spent this week’s class examining the positive and negative effects that taxes have on the economy, and it is clear that payroll taxes obviously hurt the workers ten times as much as it hurts the companies that supposedly pay the same as the workers.  Unfortunately, for Financial News on Yahoo News has been completely taken up with information concerning how both parties are attempting to extend the payroll tax cuts from returning to their level of 6.2%.  The GOP and Democratic plans both will decrease the payroll tax to 4% or less, giving the poor who pay the taxes more income to use on consumer goods.  Also, these cuts – if Rizzo’s statistics are to be believed- will give companies that employ low-income workers the incentive to increase their employment by up to 3% for every cut of 1% of payroll taxes. 

However, as of right now, it looks like the plan to cut the payroll taxes will fail, for each party plans on different ways of “financing the bill.”   What they fail to realize is that by cutting the taxes, the money will be spent by the poor on consumer goods within the economy, gradually returning to the states – many of whom are asking for federal bailouts with most of them struggling to balance their budgets – in the form of sales tax.  Furthermore, the cuts would increase the monetary flow, which is necessary in our service-based economy.  In conclusion, can’t the Democrats and Republicans for once just pass a plan that is economically necessary to be sent through, for no other reason than the fact that the economy, along with the lower-class people who are very likely to spend their income on consumer goods, needs it.

Week 14: Wednesday Blog Post

o   Marty Feldstein: 30% of the value of the taxes is lost through dead weight loss

§  By trying to collect $4 trillion in taxes, we destroy $1.2 trillion in production, consumption, and the economy

·         $1.2 trillion = economy of Australia

o   The IRS is costly

§  We must pay for the people who monitor the tax

·         45 cents for every dollar of tax collected goes to collecting the tax

§  Are producing no value

§  106,000 people work for IRS and produce nothing

§  Massive built-in bureaucracy that doesn’t want to leave

§  Tax code is a mess

·         Rizzo’s taxes: 51 pages for federal, 25 for state

·         Time and effort for preparing taxes: $400,000,000,000 per year in lost man-hours

·         Top 5 companies in Fortune 500 workforce combined is smaller than the people employed as tax professionals

o   Effective taxes we pay are too low, ineffective taxes are too high

§  General Electric paid -3 billion in taxes last year due to net subsidies

·         57,000 page federal income tax

·         25 professionals work to make sure they don’t pay taxes

o   Estimated impacts

§  Every dollar we raise in revenue today encourages $1.20 in spending

·         Future spending increases will need to be paid for in future taxes

o   Rizzo refuses to comment on moral case for and against income taxes

·         Legal Sales Tax (buyers)

o   Initial Equilibrium:

§  P=$3

§  Q= 3 million

o   After-tax equilibrium

§  P_buyers= $3.75

§  P_Sellers= $2.75

§  Q= 2.75 million

§  Taxes: $2.75 million

	Buyers	Sellers
Initial Price	$3.00	$3.00
New Price	$2.75	2.75
Taxes	$1.00	None
Economic burden	$0.75	$0.25

o   SO similar to the other tax, but this one is actually mean to affect the buyers

·         Payroll Tax

o   Payroll taxes are supposedly split 50-50 from workers and firms

§  Burdens both workers and firms in theory

o   Paul Krugman: All economists agree is a tax actually paid by workers.

§  The elasticity of supply and demand in the labor market is incredibly high (over 3)

·         You increase worker costs by a dollar, they will decrease workers by the equivalent of three dollars

·         You increase costs 10%, firms will fire 30% of their workers

§  15% of the 15.3% is burdened on the workers

o   2010 Rizzo taxes:

§  $6,100 in federal taxes, $4,700 in state taxes; $14,800 total

§  In sales taxes, he also paid $4,000

§  Excise taxes, he also paid $1,500

§  Property tax equivalent to $6,500

§  TOTAL OVERALL TAX: $37,800 (out of $90,000)

o   Should payroll tax reduction continue?

§  Economically speaking, yes

·         There is very little we can efficiently tax that won’t hurt the economy

o   Good to tax

§  Addictive goods

·         Cigarettes

·         Alcohol

§  Death Tax

§  Certain kinds of food

·         Bread

·         Chicken

§  Head Tax

·         Taxing the number of people who live in your family

·         Only way to avoid is to kill yourself

o   What you want to tax is something that has relatively inelastic supply and demand

o   Corporations are people

§  When you tax them, you are taxing the people who work in the firms and the shareholders

Week 14: Monday Blog Post

·         Drug Prohibition

o   Note:

§  Hidden costs exists with the tax (regulators, policemen, etc.) that are resistant to change (i.e. they don’t go away)

§  Someone always has an interest in an object being made illegal

o   Drug law enforcement arrests 1.2 million possessors annually

o   We are attempting to stop drug use, but there is still a LOT of drug use

o   Over 50% of drug arrests come from arrests other than drugs as an ancillary

o   Prohibition can actually cause more drugs

§  Producers don’t have to pay for benefits they would if they were legitimate

§  More incentive to make the drugs

o   Cocaine:

§  1980: $45 per gram

§  2011: $30 per gram

o   When drug prohibition increases, so do violent crimes in all aspects and gang violence

o   Mexico:

§  40,000 deaths in five years

·         Ten times those who have died in Iraq

§  Typical life costs $5 million

§  Which means…$200 billion in life cost

§  PAN heavily against drugs

§  PAN-elected mayors are ultra aggressive against drugs and this leads to a 20% gang violence within the next year in their city because gangs compete for new land that was made vacant by the mayor

o   Many laws that are meant to help with drug prohibition actually cause more crimes in other way

§  Ex: Three strike law in California, you have two… no one can know you commit a crime so you kill a guy who sees you commit it instead of overlooking it

·         Two-strikers  have a lower marginal cost for committing the next worst crime

o   Why did prohibitions happen?

§  Depressions and recessions

·         No one cares about the illegal substances when the economy is great

·         However, depression caused the government to want to go back to taxing liquor, which had been common before 1913 (income tax)

·         Income taxes drop in order to help the people, and then the prohibited substance becomes legal and taxed

·         Excise Tax (Bubble Gum Market)

o   Taxes are neutral, they aren’t a benefit or a cost

§  Taxes are just a transfer

§  Taxes are just hard to do

o   Governments who need money usually find additional things to tax

o   Excise tax: The legal liability for the tax is on the seller

§  I.e. the seller has to write the check for the product

§  The buyer does not have to do anything

o   Equilibrium would shift price upwards

§  Increases at the same rate as the tax

o   Example of excise tax (bubble-gum) ($1 tax to raise 3 million dollars)

o   Initial Equilibrium:

§  P=$3

§  Q= 3 million

o   After-tax equilibrium

§  P_buyers= $3.75

§  P_Sellers= $3.75

§  Q= 2.75 million

§  Taxes: $2.75 million

	Buyers	Sellers
Initial Price	$3.00	$3.00
New Price	$3.75	$3.75
Taxes	None	$1.00
Economic burden	$0.75	$0.25

o   Why didn’t the tax increase generate as much as anticipated?

o   Who pays the tax?

§  Both buyers and sellers

§  Economically, the burden of the tax is on the buyers more than the sellers

o   You have prevented people from buying the good they desire (see graph)

§  Would’ve made the world richer with the extra transactions

§  Creates dead weight loss

·         Triangle between new equilibrium quantity line between the new equilibrium price and the old price (triangle points right)