Ever since I’ve been studying economics, one of the most important, recurring precepts is to keep things simple.
“As you may have already, and will no doubt see in the future,” I tell my students regularly, “there’s much in real life (politics) that mucks things up.”
That said, if my students voted for a bonus class at the end of the semester, where they asked me to elaborate on the government’s effect on the economy, it would go something like this …
When you pay taxes, a couple explicit things happen, and a couple implicit ones don’t.
Every dollar the state takes is one less you have to spend on a good or service someone else worked to create. It’s one less dollar of income for that person or entity. Consequently, she is one step closer to laying off an employee, or going out of business altogether.
Or, it is one less dollar you can invest in yourself. It could have been learning to paint or play guitar, or going back to school. Furthermore, it’s one less dollar you have to invest in your own idea for a new product or improvement thereon.
It could be someone else’s idea to which you’re one less dollar able to pledge. It could be as simple as your kid’s pet grooming venture, or as big as a Fortune 500 company.
It’s one less vote of confidence in an enterprise that has created such value for society that additional employees are needed. It’s a little less business for that machinery company that produces the capital needed to help the booming company’s employees satisfy customers.
In the end, it’s one less dollar of a return for you. Instead, that dollar finds a couple different dead-ends.
First, it might go toward enlisting the assistance of a tax specialist to ensure you don’t run afoul of the Internal Revenue Service (IRS). For many of us, this can cost more than $100.
As importantly, it’s an hour or more not spent with your kids, on hobbies, or more industrious endeavors.
And that’s just for us on the demand side.
I also emphasize to my students that the supply side is of at least equal importance to market equilibrium. Even though just a handful of us exist there (excluding the labor we supply), it demands the same respect.
These folks spend more time and/or money complying with tax authorities. That is many less dollars that could be spent improving their business, hiring additional help, etc.
It’s many less dollars they could donate to a scholarship fund, or fewer hours they could spend serving on a school board.
Instead, all these resources are vacuumed into the black hole of government, where wealth and productivity go to die.
There are good people who work in government and the tax compliance industry. But their talents are wasted serving a public bureaucracy not subject to two phenomena that make the private sector hum while generating prosperity: competition and a profit motive.
Instead, they’re tasked with turning what’s left of the eroded wealth back out into society, where it deadens, continuously, much of what it comes into contact with. Individual or entity, doesn’t matter.
If an enterprise could survive in a competitive environment, it wouldn’t seek any government largesse. Domestically, we see this in the postal delivery industry, and when activists become convinced of the superiority of renewable sources of energy.
It’s a cruel irony that their subsidies come courtesy of the taxes paid by their private competitors. It’s poetic justice when the latter prevail anyway, particularly when aided indirectly by activists’ policy preferences in other areas.
It manifests itself on the international stage when legacy firms cling to the good ole days at the expense of innovation. Consumers indirectly subsidize this complacency by paying prices that are artificially inflated by tariffs on more efficient competitors.
In an increasingly free and interconnected world, they invoke national security, like the steel and aluminum industries. Or, they appeal to base, red-meat instincts like “Buy American,” nevermind the damage done to larger domestic companies that use such resources as inputs.
If this welfare sounds like an unfair advantage, that’s because it is. All the favored companies need to do is stay in good with their political benefactors so they continue to tilt the scales.
This incentivizes organizational dependency just the same as it does for individuals.
One “bold” proposal that made the rounds during the presidential campaign for example, especially among democrats, is financial relief for child care. Some proposed an outright universal entitlement.
If this were to go directly to parents, say in the form of beefing up the child care tax credit, they would certainly be able to pay more. It would not be long however, before preschools would raise their prices in order to balance the market.
If public options, to borrow a phrase, opened their doors, current operators would be increasingly likely to close theirs, undercut by artificial price ceilings.
Throw in social justice warriors’ drive for above-market wages, likely unionization, and Uncle Sam’s deceptively deep pockets, and you have another line item putting pressure on the fiscal budget.
Distorted price signals and artificial demand, one way or another, eat away at our earnings. Contrary to what some folks may hope, no law can be passed to prevent any of this.
My students are not that much older than my teenage daughters. Most of their life has come with rules via parental guidance. No doubt some may wonder why a law can’t simply be created to deal with market shortcomings, real or perceived.
When I ask “how do/did you like being restricted by those rules yourself,” they pause for a bit. It’s as desirable to be subjected to them as adults as it was when minors. Only in later years, there is collateral and financial damage that comes with them.
This is when it’s especially important that they put themselves in the shoes of suppliers. As youngsters, and sometimes consumers, we don’t feel the brunt of regulation as much.
Imagine though, getting a creative spark one day. You discover an idea for something that seems quite useful, or it simply satisfies you in some way.
It snowballs from there by delighting your friends and family, some of whom might say “you should try to sell that and make a mint!”
Now all you need to do is make sure that no more than 25% of your home is used for this venture. Also, no non-residents can be enlisted to help you, paid or not.
At any rate, you can’t make food or fix furniture at home for pay. No music lessons of two or more students, either.
You’d also need a license if you want to sell your creation on the move.
It might be advisable, and is often suggested, to employ the assistance of an attorney to navigate these, and other requirements.
These are a handful of examples at just a local level. Beyond that, and fifty states across the country, there are almost 90,000 pages and over 3,000 rules at the federal level by which Americans must abide.
More than simply the monetary and labor costs of compliance, redirected from productive to non-productive purposes, regulations tug at the fabric of the community.
When a business has to hire help at a rate in excess of the skill set required, a degree of anxiety is introduced into the equation. That employee may very well work out. Or, they may not, at which point the costly turnover process begins.
This only hastens the inexorable drive toward automation.
There’s the burden of responsibility shifted from the employee to the employer when the latter must divert potential pay for the former to unemployment taxes. This in turn incentivizes the employee to more frivolous consumption at the expense of diligent savings put aside for a rainy day.
To a degree, the employer assumes a paternalistic role as the employee shrinks back toward dependency, as when it is compelled to offer health insurance in the absence of a freer, more flexible market.
We forgo the most organic way to weigh on a member of the community if we believe he/she is erring in their business practices; hitting their bottom line by depriving them of patronage.
Instead, businesses are caught in a triangular firing squad of onerous regulations, potential lawsuits and bad press. No wonder so few take the dive to start one.
If elitists in academia, the media and government were truly interested in lifting people up, their best course of action would be to set their models, and hence their egos embedded within, aside.
In lieu of that, they could at least give a comprehensive picture with the measurements they cite.
I caution my students that, when they read the news, oftentimes there is a gauge in the shadows that is at least as important as the one in the spotlight. The labor force participation rate (LFP), and foreign direct investment (FDI) immediately come to mind.
The headline unemployment (UE) rate is the sexy figure that gets all the attention. However, a 5% UE when only 60% of able-bodied adults are in the labor force means 43% of the populace still isn’t working.
That 5% UE with a 70% LFP means only a third of people are inactive.
As to the latter, the trade deficit (TD), to the extent one exists, is nearly always cast in a negative light. Nevermind that it signals heightened purchasing power, necessarily the result of economic growth (one of the reliable ways to decrease a TD incidentally, is a recession).
Part of the reason for that growth is the level of FDI, the counterbalance to the TD. It reflects the fact that investors, domestic as well as foreign, see the U.S. as a most desirable place for their financial capital.
If politicians’ scare tactics about the TD work on you, the best way to remedy it is to save more and consume less. Otherwise, enjoy the inexpensive toys that accrue to your work effort.
Leonhardt is certainly correct when he says “the economy’s performance stems from millions of decisions made every day by businesses and consumers, many of which have little relation to government policy.”
That’s why we can’t ascribe too much to one person’s actions, even a president. That said, what a president does, or says, isn’t totally without effect.
Perhaps no area is more indicative of his or her utterances than the kind of dollar they want. Reagan and Clinton proved as much. They wanted a stable, even strong dollar, and they got one. As a result, those were the last times we saw authentic economic growth.
And they came from different political parties.
Attaining genuine prosperity really isn’t all that complicated. It’s an easy story to tell to my daughters and students. Adults would do well to declutter the white noise of politics and keep things simple when attempting to surmise which policies are desirable, and which ones are not.