1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/8491/americas-economic-myths/

America’s Economic Myths

September 10, 2008 by

Mainstream economists and so-called experts have filled the minds of most Americans with many economic myths that are constantly reinforced by the media and repeated on the streets. These myths are erroneous at best, writes David Saied, sometimes based on half truths. The majority of them are just false. We will examine the most common ones and proceed to explain the reality behind these myths. FULL ARTICLE

{ 36 comments }

rtr September 10, 2008 at 10:02 am

“Importing” and “Exporting” are as vacuous and nonsensical a concept as a “Trade Deficit”. As soon as you start using words like “buy”, “sell”, “import”, “export”, you start wandering off the path of clear and correct economic analysis, if not committing broken windows fallacies.

Nothing is *just* bought. Nothing is *just* sold. There is absolutely no such thing as a trade deficit. Everything which is bought is simultaneously sold. Everything which is sold is simultaneously bought. Thus, the correct term is to call such exchange action “trade”. And no deficit whatsoever emerges from moving things from one person to another person, from one place to another place. Everything which exists before the trade exists after the trade.

That trade only occurs because that which is received is valued more than that which is given away in exchange, which is an increase in subjective value economic wealth for *both* sides. So the same goods exist, and economic wealth is increased. There is no deficit from trade.

N. Joseph Potts September 10, 2008 at 11:09 am

“Most people produce far more than they consume?”
THERE’s a strange notion. MANY people (including me) produce nothing. The illusion that inspired the original statement arises from the correct impression that employees over the long term produce marginal revenue that exceeds the marginal costs their employment creates for their employers. In the short run there remain PLENTY of employees who fail to do this. They either get fired, their employers go bankrupt, or they work for a government (which huge numbers do).
The remark would be better if made concerning “workers” rather than “people.” As for the “far,” that would seem to be mere hyperbole.

michael September 10, 2008 at 12:01 pm

The author is nothing if not doctrinaire in his explanation-of-everything.

1. “Most, if not all, of the higher price of oil can be explained by the expansion of the money supply or the debasement of the dollar. The foreign producers are not at fault; our national central bank is the culprit.”

Easily checked. If we correct rising fuel prices by subtracting the dollar’s erosion, we still find the prices rising in terms of Euros, yen, etc. Do the research and this will jump right out at you.

The reason is simple supply and demand. When prices went above $4 gas consumption went down. And prices subsided to their current $3.50 or so. Now, as of yesterday, the Sheiks of OPEC have decided they need to hold prices above $100 a barrel, so they will be curtailing production.

Should this result in pump prices again going above $4 we will have performed the experiment… and found that prices are set primarily by the laws of supply and demand. The relative strengths of the world’s currencies will have played only a supporting role.

2. “If the money supply were to remain constant, then an increase in the price of one good, such as oil, would cause a decrease in the price of other goods.”

Let’s take our noses out of our textbooks for an hour, and go downtown to take a look at the actual marketplace. (a) Oil and gas prices rise. (b) The cost of producing food rises as a result, being dependent on oil and gas inputs like fertilizer, pesticides and the cost of running farm equipment. (c) The cost of moving food to market also rises. Conclusion: food prices follow fuel prices.

In fact demand for food goes up, as biofuels enter the market. Even if nonfood crops are grown, they are generally planted at the expense of land formerly used for growing food. So costs rise doubly fast.

Further, the cost of every commodity that needs to move from producer to outlet increases, in line with increased fuel costs. That is, every product sold in any store, when priced in any currency, grows more dear.

Find some way to decrease the money supply and you will just add to this basic reality the advent of a worldwide depression. Making money more scarce will not increase the supply of fuel.

IMHO, of course. Let the opinions begin!

fundamentalist September 10, 2008 at 1:28 pm

Excellent start on myths. Unfortunately, you would have to write an encyclopedia to get them all in. Here are some of my favorite myths:

1. Rich people are so wealthy that if we just took their money away and distributed it evenly the rest of us would be wealthy.

2. Society (not entrepreneurs) produces wealth so society must distribute it.

3. Wealth is limited and one person cannot get wealthier except by taking from another.

4. Society determines the moral character of people so that capitalism makes them greedy and socialism makes them altruistic.

fundamentalist September 10, 2008 at 1:36 pm

Michael: “If we correct rising fuel prices by subtracting the dollar’s erosion, we still find the prices rising in terms of Euros, yen, etc.”

The euro and yen have been inflated, too, so the rise in oil in terms of those currencies that is not accounted for with dollar inflation can be attributed to euro and yen inflation.

Michael: “The reason is simple supply and demand.”

Oil is down 30% from its peak. Has the supply/demand equation changed 30%?

Michael: “(a) Oil and gas prices rise. (b) The cost of producing food rises as a result, being dependent on oil and gas inputs like fertilizer, pesticides and the cost of running farm equipment. (c) The cost of moving food to market also rises. Conclusion: food prices follow fuel prices.”

That’s an example of a spurious correlation, like saying that the rooster crowing causes the sun to rise. Just as knowledge of astronomy corrects that error, so knowledge of economics corrects your spurious correlation. The price of oil accounts for just 60% of the cost of gasoline and deisel. Fuel costs are only about have the total of transportation costs, the remaining costs being wages and depreciation. The transportion costs included in the retail price of any product are very small, often around 1-3%. There is no way that rising oil prices could cause the price inflation across the board that we have witnessed recently. Even Keynesian economists recognize that all prices cannot go up at the same time if the money supply does not grow.

Michael: “Making money more scarce will not increase the supply of fuel.”

No. But it would reduce the price.

Wren September 10, 2008 at 2:07 pm

In response to michael

The price of oil is determined by many things. I don’t think it is as simple as saying “inflationdidit” but inflation does play a big part.

Food can be (read: is) affected by higher oil prices, but higher oil prices in and of themselves do not cause a general rise in prices–only inflation does. (What’s happening is, higher oil prices cause the supply of food to reduce; lower supply of food will lead to higher prices for food if the supply is less than quantity demanded. Simple supply & demand economics). So yes, the price oil and food can go up, but other goods’ prices will tend to go down if we had a static money supply (neither net deflation or inflation). That’s not what has happened. We have indeed had net inflation so far.

And no one is suggesting artificial deflation here.

Anyway, onto the article. I agree that those are all myths but I don’t agree entirely of David Saied’s explantions of why they’re all myths, but that’s just for nitpicky reasons.

I can’t believe that many libertarians, especially of the monetarist variety, spout myth #10, so much that they even endorse central banks now. I find it ridiculous.

Wren September 10, 2008 at 2:11 pm

Edit: I meant to say the last myth, which is myth #6, not #10 (there is no 10 hehe)

Jacob Steelman September 10, 2008 at 3:03 pm

While it is true that central bankers are primarily responsible for the large run up in oil and commodity prices other government actions also have some significant part to play in this run up as well. Some component of the price run up must reflect the tremendous demand created by China and India as well as governments around the world that subsidize retail prices of petrol (gasoline) – that is the governments of those countries have created a somewhat artificial demand for oil since these are not practicing laissez faire countries. Another component of the price must reflect the restriction of production by the government oil cartel of OPEC. You hear no concern expressed here for the citizens of the world by these government monopolists. Another component of the price must reflect the risk of supply caused by the war in Iraq, threat of war with Iran, internal wars in Nigeria and the constant turmoil and threats of war in the Middle East, all caused by governments not the demand of private individuals. From time to time there is a run up and subsequent drop resulting from the risk of supply disruption in oil producing regions due to hurricanes, etc. Another component of the price is the restriction of supply resulting from government laws and regulations prohibiting exploration and production on private and public lands such as environmental laws, spacing restrictions in oil fields, bans on exploration and production in Alaska and offshore as well as on private property. And don’t forget the large government imposed taxes that companies must attempt to recoup (to pay the government) from the sale of oil based products. While governments (including government sponsored central banks) in the United States and around the world are responsible for driving up the price of oil resulting in the high price of gasoline and products produced from oil individual consumers bring down the price of oil when they drastically reduce their demand for oil based products such as gasoline, jet fuel, etc. There are trillions of barrels of oil yet to be produced from conventional sources onshore and offshore, from tar sands in Canada, the United States and Australia as well from oil shale in the United States and Australia not to mention natural gas which is in abundance around the world as well.

SeismicMike September 10, 2008 at 3:34 pm

So, was Pres. Bush’s tax prebate just an uneccesary increase in the money supply that encouraged spending over savings?

Also, what about the proposed FairTax?

Just asking for your thoughts.

michael September 10, 2008 at 3:49 pm

Hi, fundy. Your four myths are just silly. Is it that in order to win an argument you must posit some impossibly idiotic straw man? None of those positions come close to anything a real person would ever say.

However you offer that the Euro and the yen have inflated too. Okay, let’s measure the cost of gasoline against constant dollars:

http://zfacts.com/p/35.html

It would appear to follow the laws of supply and demand.

“Oil is down 30% from its peak. Has the supply/demand equation changed 30%?”

Short term gyrations. The markets all tend to swing during volatile periods before settling down. They are not always rational. But I’ll make a million dollar bet with you, that we will never in our lifetimes see gas prices return to the level of 2000 ($2/gallon).

And just as a knowledge of astronomy delivers us from thinking the rooster’s crow causes the sun to rise, a knowledge of ecology tells us the amount of money in circulation does not affect the rising cost (in constant dollars, again) of food.

We have a finite amount of arable land; in fact the total under plow is shrinking, due to long-term drought patterns, soil degradation and the increasing share given over to urban sprawl. Second, we have an increasing population in absolute numbers. Third, we have an increasingly affluent world population, able to afford not only more food but more meat (an utterly profligate use of ag resources). All that points toward a serious mismatch between approaching demand and any predictable supply. The earth isn’t growing larger.

Okay, how about increasing productivity per acre? Sorry. That all depends on a limitless supply of fossil fuel-based inputs. Productivity will rise for a bit longer, then start falling.

By casting the argument in constant dollars we eliminate the argument from economic dogma. Go ahead and google price trends in commodities like wheat, corn, rice and cotton. They look just like the trend for gasoline. You can readily see where we’re heading.

fundamentalist September 10, 2008 at 4:22 pm

Michael: “None of those positions come close to anything a real person would ever say.”

All you’re saying is that you’re not widely read and have a small circle of friends.

Michael: “Short term gyrations.”

That’s not supply/demand.

Michael: “But I’ll make a million dollar bet with you, that we will never in our lifetimes see gas prices return to the level of 2000 ($2/gallon).”

I agree, but it doesn’t have anything to do with supply/demand. For gas prices to fall to $2/gallon the Feds would have to cause huge deflation.

Michael: “Go ahead and google price trends in commodities like wheat, corn, rice and cotton. They look just like the trend for gasoline. You can readily see where we’re heading.”

So I guess you think ecology explains everything and economics nothing. I’ll stick with economics, which teaches that the prices of food, metals, oil, real estate, and just about everything else cannot rise at the same time without huge increases in the money supply.

michael September 10, 2008 at 4:35 pm

Two “seismic” questions:

“So, was Pres. Bush’s tax prebate just an uneccesary increase in the money supply that encouraged spending over savings?”

Politicians of every stripe spend our money with great abandon, while competing with one another to lower our taxes to nil. What’s the inevitable result of such policies? A nine and a half trillion dollar debt. I agree with everyone here that this approach to fiscal irresponsibility is fatally foolish, and that we’ll all end up paying the price.

“Also, what about the proposed FairTax?”

A PR man’s name for a flat tax. This would cut tax burdens for the richest people down to one-third, while tripling federal taxes for the rest of us. Fair? Depends on who’s talking. If you’re making less than a million a year you’re losing, big time.

Naturally the FairTax site hides this behind unrealistic projections of revenue requirements. Otherwise they’d have no fans.

michael September 10, 2008 at 5:24 pm

Fundy– Your latest comments encapsulate everything I find annoying about the “logic” I commonly see on sites like this. For you, everything has one simple answer. Nothing can be complex, or multifactorial… ever.

By such logic, if I admit that investment plays any role whatsoever in faciltating our consumer economy, such an admission must necessarily disprove any role played by consumer buying power. Hence there is no need ever for employees to be well compensated; all the proceeds must go to those who invest the excess portion of their incomes.

When in fact both are functions of a healthy economy. And far from there being a balance, we are currently so tipped in favor of investment that periodically the system must purge itself of trillions of dollars in excess investment value. As happened in 2002 and is now happening once again. Such moneys would have been more wisely invested in employee incomes.

Likewise, my mention that there can be such a thing as short term gyrations in the markets must disprove, for you, the basic facts of supply and demand.

“So I guess you think ecology explains everything and economics nothing. I’ll stick with economics, which teaches that the prices of food, metals, oil, real estate, and just about everything else cannot rise at the same time without huge increases in the money supply.”

In fact it is very possible for prices in supply-sensitive categories to rise, while the amount of money in the hands of most Americans stays the same. What levels the scales is the fact that is these recessions we just buy less. And as a direct result we have fewer jobs.

You’d be well served to stay clear of such all-or-nothing thinking.

Finally, do such people really exist that come up with stupid statements such as your four myths? (Example: Rich people are so wealthy that if we just took their money away and distributed it evenly the rest of us would be wealthy.) Yes– but only on the pages of sites like this.

Take this challenge. Find a page where someone is actually advocating such ridiculous ideas. I don’t think you can do it.

joe September 11, 2008 at 2:03 am

michael, you dont understand the Austrian business cycle theory. what you call purging of investment is really the collapse of a bubble which would not have happened had money not been injected into the money supply. this is called malinvestment, not investment. print money -> malinvestment due to customers and businesses spending money because they “feel” wealthier but actually arent -> collapse, prices adjust back to normal levels, malinvestment is wiped out.

all of the myths that fundamentalist mentions are advocated implicitly.

do you really think politicans compete to lower taxes? if this is true, wouldnt taxes get lower and lower over time instead of what we actually see, which is higher and higher?

fundamentalist September 11, 2008 at 8:10 am

Michael: “Nothing can be complex, or multifactorial… ever.”

The answers would be simple, for you too, if you understood economics. All you do is regurgitate what you read in the popular media, most of which is wrong and contradictory. I had an economics professor many years ago that told us to ignore everything we read in the popular press on economics and half of what we read in the financial press. Bastiat pointed out the reason over a century ago: bad economists focus on the short term and immediate effects of events. There are very few good economists in the country at any time.

Michael: “In fact it is very possible for prices in supply-sensitive categories to rise, while the amount of money in the hands of most Americans stays the same. What levels the scales is the fact that is these recessions we just buy less. And as a direct result we have fewer jobs.”

If you look at the CPI index, you’ll find that prices are rising across the board. Some prices are falling, usually manufactured goods, but most prices are rising. The CPI index could not rise unless rising prices overcame the effects of falling prices. Last month we had the largest increase in the CPI in about 5 years, after oil and gas prices had already fallen signficantly. That jump was largely due to the so-called stimulus package. By the way, the money supply is not “the amount of money in the hands of most Americans.” It’s a technical measure of the amount of currency and checking account deposits in the country. And the recession is not caused by consumers spending less; consumers spending less is the recession. The recession is caused by large numbers of businesses failing.

michael September 11, 2008 at 1:36 pm

Joe gives us some good ones:

1. “michael, you dont understand the Austrian business cycle theory. what you call purging of investment is really the collapse of a bubble which would not have happened had money not been injected into the money supply. this is called malinvestment, not investment. print money -> malinvestment due to customers and businesses spending money because they “feel” wealthier but actually arent -> collapse, prices adjust back to normal levels, malinvestment is wiped out.”

I do understand that theory. And to a degree I admit it. I just don’t think that all by itself it forms the alpha and the omega of all conceivable economic activity. Hence, in the thinking of those imprisoned in this dogma, I am a heretic.

Easy money policies have certainly contributed to each of the bubbles I cited. But aside from them we have public policies that are skewed toward the right in the extreme. That is, the rights of investors are protected inordinately, at the expense of the rights of labor, of consumers and of ordinary citizens. The result is that money, intended and best used as an instrument of circulation, is short-cycled up to the top of the economy. There is no recirculating flow back to the bottom.

Thus the majority of Americans are starved for any funds other than those readily borrowed, in the form of abundantly available consumer credit. So consumption periodically suffers. And when purchasing power is stifled, factories have to furlough production. That means laying off employees and foregoing dividends. No one wins.

What happens to all the money that doesn’t reach the floor? It disappears at the top. Every few years, everyone loses. And we will remain in that failed mode until the system is changed.

2. “all of the myths that fundamentalist mentions are advocated implicitly.”

If I don’t advocate them, or anything like them, and the community of people who think as I do don’t advocate them either, who is left to advocate them?

I repudiate them, as do all thinking people.

3. “do you really think politicans compete to lower taxes? if this is true, wouldnt taxes get lower and lower over time instead of what we actually see, which is higher and higher?”

No, taxes are getting lower and lower. Federal taxes are lower now than they were in 2000, certainly. And they were lower then than they were back in 1980. And they were lower then than they were in 1950.

Show me some data on your taxes getting “higher and higher”. The only ones that are are local sales taxes– because without them there’s nothing left to fund basic services. And these shouldn’t bother you, as they are the most regressive of taxes. :)

Blake Gunnels September 11, 2008 at 4:12 pm

“A PR man’s name for a flat tax. This would cut tax burdens for the richest people down to one-third, while tripling federal taxes for the rest of us. Fair? Depends on who’s talking. If you’re making less than a million a year you’re losing, big time.”

Seismic,
Don’t pay any attention to Michael’s evaluation of the Fairtax. Its bunk. It doesn’t sound like he knows the first thing about the Fairtax.

Do you like filing taxes? Neither do I. You want do it any more under the Fairtax. Do you want the IRS to stay out of your paycheck? Under the Fairtax, they’re gone.

The Fairtax is a national retail sales tax that imposes a 23% inclusive sales tax on the purchase of new products, goods, and services. So, it is a tax on what you choose to spend, rather than on what you earn. If you only spend 75% of your income in a year, the remaining 25% of your income is yours to keep tax free.

The Fairtax is revenue neutral, which means that it will at least bring in as much revenue to the government as the current income tax does.

There is also a prebate which makes the Fairtax the most progressive tax reform proposal out there. The prebate is monthly (p)reimbursement for taxes we pay on basic necessities of life. This essentially untaxes the poor. A family of four would get a check for about $500 at the beginning of every month.

The Fairtax will bring jobs back home, increase the economy to unheard of proportions, tax illegal aliens and the underground economy, simplify the tax system, and get rid of the IRS and more. That all sounds pretty good to me.

One thing I failed to mention already is that it will not just be an additional 23% on everything you buy as critics will have you believe. It will actually be about a 1% increase on things you buy. This is because, once the Fairtax is enacted, the cost of goods and services will begin to fall. This is due to the fact that the embedded costs of taxes in everything we buy will be removed. Once you replace federal income, payroll, personal, gift, estate, capital gains, alternative minimum, Social Security/Medicare, self-employment, and corporate taxes with the Fairtax, all of the costs associated with tax compliance are removed from all products. This will lower prices somewhere around 22%. So, you get all of the benefits of the Fairtax while only paying a price increase of 1%. Where do I sign? Let’s make this happen.

Curio September 12, 2008 at 11:39 am

Wow. I admire much of the logic and well thought out arguments I see on this site, but am disappointed to see a fair tax proponent here.

michael September 12, 2008 at 11:57 am

Blake– Thanks for a thoughtful response. I hadn’t even thought about the FairTax in a number of years– since it was last declared DOA. But the concept is worth a second look. I’ll be checking out the assertion that a national sales tax of 23% could ever be revenue neutral. And just to make sure, I’ll be looking for analyses beyond what can be found on the FairTax web site.

Here’s my problem with it. This proposition is being made because it shifts the federal tax burden. So the first thing anyone should be looking for is who it’s shifting the burden away from… and who it’s shifting it to.

The people getting a break– and I’ll wager that includes you and nearly everyone else logging in here– are those whose income exceeds their purchases. That excess, by definition, becomes investment income.

The people being asked to carry the burden are those who are spending every cent they earn. In fact, the people upon whose shoulders it falls the hardest are those spending more than they earn. And there are quite a few of those, considering that the average American family was carrying $9,000 in household debt four years ago, a figure that has only gone up since. These are the losers under your “revenue neutral” system.

If you look at the trends, our economy is already lopsided in favor of the fortunate (those with incomes exceeding their outgo). Demographics are very easy to find that illustrate an increasing concentration of wealth at the top, with the lower four and a half quintiles steadily losing ground over the decades. So IMO a restructuring of the tax system that exacerbates this trend is a bad idea for nearly all of us, and only of benefit for the very few.

Re your specifics, it would in fact simplify the tax system. However it would not eliminate the IRS. There would still have to be an actuarial apparatus sizable enough to track all purchses of goods and services in the United States. This job would be more or less exactly as large as the job of the current IRS.

It might or might not bring an excessive tax burden onto the shoulders of the underclass– migrant workers (or “illegals”) and casual labor (the “underground economy”). By and large, these people owe no taxes under current law because even if they were to report income, it’s generally so low it would fall below the current taxable line.

Under your “prebate” plan a family of four making $26,000 (the hinge point) would gain an additional $6,000. And they would have a tax burden (assuming 100% of their income gets spent) of $6,000. Those below that line would gain some advantage. However there is a glitch.

Under the existing plan, undocumented workers now pay a premium in federal taxes. They have taxes withheld from their pay by their employers. But, as they must file under fake SS numbers, they can’t file returns to get a refund (to which most would be entitled). Instead the funds (as I recall, around twelve billion each year) go into a “mismatch” fund and become general revenues.

Under the new plan such people could not file for their prebate– unless Congress issues a dispensation giving them legal status as guest workers. So the net result is just that they will now be paying out five bucks for every four dollar purchase.

You may be happy to see them put under an additional burden, I don’t know. For me it seems unfair that people with no legal rights, whose labors are required by our society and who bring home a typical six or eight bucks an hour, should have an additional burden of payment. The real reason we have this army of illegals is because their employers won’t let politicians have it any other way. Thus the issue is becoming a perpetual political football, with the only actions being taken being punitive.

Finally, I can see no way the FairTax can either “bring jobs back home” or “increase the economy to unheard of proportions”. We already have such vast seas of investment funds that we can see their real effect: they create new forms of speculation that have a tendency to periodically crash and burn. They cannot create new jobs because they cannot equalize American wages with those of the third world. The Vietnamese, for example, have access to untold billions in investment funds… from the Chinese, who got them from us in the form of earnings. So they are putting up state of the art manufacturing plant, in a nation where wages are far below even Chinese levels.

Is this really the trick that’s going to be bringing America back? Giving even more money to the rich? I feel like I’m getting trickled down upon.

Finally, your last paragraph is pure pipe dream. You’re telling me we can remove all the embedded taxes in the purchases we make, pay only one percent in a national sales tax, and it will be revenue neutral? This doesn’t pass the smell test. Local governments are barely able to pay our cops, teachers and firemen with a 6-8 percent sales tax, plus funds from the state income tax. And we’re going to run the US government plus our perpetual war on terror for only one percent? Give me a break.

michael September 12, 2008 at 12:15 pm

Note to all: I’m really sorry to be taking up so much bandwidth here… but I see a serious problem in the FairTax.

Blake points out that each family of four gets a prebate on their taxes of $6,000 a year. So I’m guessing that means each person in the country would be getting something like $1,500.

Problem: there are 300 million of us. So, crunching the numbers, this means that the USG has to pay out an additional 1500 x 300 million, or $450 billion in the form of monthly checks. Has this been figured into the operating budget?

“Revenue neutral” means only doing as well as we’re doing now. So adding this payout would raise our current budget deficit of $263 billion (approx. projection) to $713 billion. I may not have a PhD in economics, but I don’t see this move as being our panacea.

Blake September 12, 2008 at 12:26 pm

Michael et al,
The Fairtax is revenue neutral including the prebate. It will cover the prebate and run the government as is, including funding social security, without increasing the deficit one penny. In fact, the growth of the economy due to the Fairtax will help to reduce the deficit.

Blake Gunnels September 12, 2008 at 12:33 pm

Curio,
Is there some reason Fairtax proponents cannot have a voice on this site? There are at least two Fairtax opponents here. Shouldn’t both sides be heard?

michael September 12, 2008 at 1:03 pm

Guys, I am really embarrassed to be taking up so much of your time. But this thread has led me to some info I think will be of great interest to each one of you.

I got to thinking about the numbers. And first, I discovered a discrepancy between the projections for the federal budget deficit we’re normally given. For one thing, they don’t seem to count the money we take out of the Social Security Trust Fund– which is real money that will have to be paid back to everyone who intends to be an SS recipient some day.

So instead I took the amount of the increase in the total federal deficit, over the last 365 days. That number is $711.75 billion, and is an exact accounting of how much more we actually spent than we took in.

Next, I took the amount we actually took in. I couldn’t easily find it for 2007, but the total federal revenues for 2006 amount to $2,407 billion.

http://www.cbo.gov/ftpdocs/81xx/doc8116/05-18-TaxRevenues.pdf

Then I added the new expense for the FairTax prebate, which in my last post came to $450 billion.

Crunching all those numbers, the total funding requirement for the federal government to keep up current expenditures and to actually fund them from revenues is $3,569 billion (3-1/2 trillion each year).

Naturally we shouldn’t tax corporations, they just pass it along to us. So let’s divide that burden among the total population, 300 million men, women and children.

Whirr, ka-chung! Each one of us, each year, will have to pay the federal government sales taxes amounting to $11, 896 (and 66 cents). For an average family of four that would be $47,585. Unless, of course, federal spending increases.

Blake: Note that this is the funding requirement not to reduce the deficit, but just to pay out the prebate and not keep the deficit from getting any bigger.

Gentlemen: to your calculators!

Kalagi September 12, 2008 at 9:49 pm

The statement “Importing a product does not mean you “depend” on it.” is not correct. If i go to the supermarket to buy “water” which, lets say, isnt abundantly available, and i would die of thirst without it, then , technically , i “depend” on water from supermarket.
In such a case, i would definately be fooling myself to say, the supermarket depends upon my purchasing of water. So is it with oil.

gene berman September 13, 2008 at 11:54 am

Kalagi:

A better picture of the situation is that you and the supermarket are interdependent: it is an entirely symmetrical arrangement unless either is in a monopoly position. You need the water and buy in that supermarket because you like it, it’s cheaper, it’s closer (making it cheaper), or for some other reason prefer it to other water sources. But they need your business also. Without it (and that of others like you), they would earn less–might even fail. Happens all the time.

This is actually the situation with almost everything except those things in which a free market is prevented–either by the government or by an apparent lack of enough customers to justify someone going into the business. But, every day, hundreds of entrepreneurs–all over the country–”buck” the odds and offer something new–even if it’s only another pizza joint.

Alex September 13, 2008 at 12:58 pm

RTR: Since no one commented on your remark, you may have lost interest. However, here goes.

The words “deficits” and “surpluses” with respect to foreign trade, government spending and other things are defined terms resulting from an arithmetic subtraction. If the subtraction results in a negative, we say there is a deficit, etc., etc. This is simply accounting and does not (or, at least, should not) denote “bad,” “good,” or otherwise.

When you criticize a term like “trade deficit,” you take the word “deficit” to mean something bad or undesirable, something that people probably think should be eliminated.

Sometimes deficits are good and sometimes deficits have bad connotations. An equity deficit on a corporate balance sheet means some losses will likely occur for the creditors of the company. That’s not good. The trade activities that were creditor financed were expected, of course, to benefit all parties to the trades, but it turned out differently than expected.

A government that is allowed to run up large expenditures, year after year in excess of current taxation, leaves a potentially undesirable debt for future taxpayers who may not have benefitted at all from the original expenditures.

Similarly, large government spending in excess of revenues can increase the exchange value of the currency and result in import consumption being much in excess of export revenue. Such accumulated excesses can mean future export surpluses and consumption being less than it otherwise would have been if the import excesses had not occurred. This is not particularly nice for those who suffer such lower consumption due to irresponsible behavior of previous governments.

Kalagi September 15, 2008 at 1:17 am

Gene:

I understand your argument of interdependence. I think, in most arguments which discuss that market forces would take care of the situation by themselves, the time frame in which such a change would happen is not rigorously argued upon.
I cannot wait for more than half a day without water. Countries cannot wait for a few months without energy(oil). It seems to me that such trade, between essential commodities, cannot be termed inter-dependent or symmetrical. A classical argument, though.

Ben Nguyen September 15, 2008 at 1:53 am

The idea behind getting off of foreign oil is not so much the price, but rather that they (u.s.a) have no control over it… if Hugo Chavez cuts oil off to the U.S., then america is quickly in a world of hurt.. Unlike food, the U.S. doesn’t have the physical resources to prevent this.. it can only avoid this situation by transitioning (10 years min) to an alternative energy source. I think the author misses the point, or is playing with semantics.

fundamentalist September 15, 2008 at 8:12 am

Gene: “A better picture of the situation is that you and the supermarket are interdependent: it is an entirely symmetrical arrangement unless either is in a monopoly position.”

You’re exactly right. In a technical sense, we depend upon imported oil. But the main reason opponents of free trade chose the word “dependent” is that they wanted to associate our use of oil with drug use. It’s not the literal meaning of “dependent” that they’re after, but the emotive content of the word. In their minds, we’re addicted to oil just as a junky is addicted to heroine. They used that imagery to promote the idea of economic self-sufficiency.

As every liberal economist since Adam Smith has pointed out, the division of labor (specialization) creates wealth and at the same time forces us to depend on others for most things we need. But it’s a good kind of dependence, the kind that creates civilization. The baker depends on the cobbler for shoes, and the cobbler depends on the baker for bread. It’s the kind of dependence that generates cooperation.

Our dependence on foreign oil is a good thing because we can’t produce enough of it by ourselves to maintain our standard of living. At the same time, oil producers depend on sales to us in order to import food and manufactured goods for their citizens. Such trade builds strong communities.

Ben: “… if Hugo Chavez cuts oil off to the U.S., then america is quickly in a world of hurt..”

Not necessarily. We have already switched to other suppliers because of Chavez’s actions. But if Chavez cut off all oil to the US, he would still have to sell it to someone somewhere because he needs the revenue to keep his socialist economy afloat. The oil market is like a huge pool. If Chavez continues to add to the pool, we can always buy from someone else. For example, if Chavez sold to China rather than US, China would free up the same amount of oil that it used to buy from another country and the US could buy that oil.

Chris September 18, 2008 at 3:37 pm

Mr. Saied,

Great job on a very well written article. You’ve changed my way of thinking on several of the topics you’ve covered, while reinforcing my opinions on the rest.

A dang nice change from the mainstream media’s simplistic, and often sensationalistic, coverage of a topic that seems beyond most viewers to care to find out more about. Good use of Joe Cabdriver language without trying to dumb anything down.

Thanks again,
-C

Baltimore Estate Planning June 23, 2010 at 1:30 am

It’s interesting to read such a sober, compelling critique of an economic system that often seems so difficult to grasp. A nation’s economy is a complex arrangement of wealth and resources, but when you consider that individual economy and it’s effect on the dozens of other independent economies, the possibilities seem endless (as evidenced by the wide range of opinions in the comments).

Alex September 9, 2010 at 8:54 am

The Fed injecting money into the money supply is not the only case of “money out of thin air.” Creating money out of thin air also happens at the local level at your friendly neighborhood bank when you get a mortgage or car loan. Your local bank does not pull money from their vaults or reserves when they loan you money. They just type in numbers into the computer and viola, new money was just created.

The reserve ratio creates the limit, not of how much of their reserves they can loan out, but how many times their reserve amount their reserve amount they can loan out, often 9:1. If they have a billion dollars in reserve, they can generally loan out not 900 million, but 9 BILLION! Of course this monopoly money will (usually) get paid back and vanish, but the interest doesn’t vanish. But if the interest is pulled from the general economy, where is it created? It’s created the same way, from a bank loan. But since the economy is composed of nothing but principle, there isn’t enough money in the economy for everyone to pay off both principle and interest. This results in defaults and foreclosure and it forces the fed to inject new money out of thin air. This is why we have inflation. It’s not just the fed. The fed has to inject money because of what they allow banks at the local level to do: make interest off of legally sanctioned counterfeit money.

zjs April 20, 2011 at 12:21 am

A rise in oil prices is inflationary. You made the assumption that oil is just a good, however, there is more going on than that. Oil is also a factor of production in almost all goods produced. That means firms marginal costs will rise and firms will have to increase prices.

Charlie Steffens April 21, 2011 at 12:08 am

Please clarify on the idea that ‘savings is more important than consumption when it comes to economic growth’. I agree that investment stimulates growth but savings seems to be an improper term. Many people save money without investing, causing investment and furthermore production to be halted. In fact, if everyone saved all their money instead of spending or investing then we would very well have an economic crisis on our hands.

Chet April 29, 2011 at 8:23 pm

tits

best heart rate monitor watch July 24, 2011 at 12:29 am

I hardly leave behind comments on blogs unless if I recognize the blog owner. But it seems that I observe your blog to be very interesting and feels i must leave a comment. hehe.

Comments on this entry are closed.

Previous post:

Next post: