1 Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at .

1

Conventional Wisdom versus The Data

October 29, 2011

copies of this presentation can be found atwww.antonydavies.org

The Game

Select what price to charge.

Lower price sell more units.

Higher price sell fewer units.

The Game

Goal: Make the most profit possible.

Profit = Revenue – Cost

Price per unit x Units sold $1 x Units sold

Price per Unit Units Sold$1 100$2 95$3 90$4 85$5 80$6 75$7 70$8 65$9 60

$10 55$11 50$12 45$13 40$14 35$15 30

Example

Suppose you charge $3 per unit.

How many units will you sell?90

What is your revenue?

($3) (90) = $270

What is your cost?

($1) (90) = $90

What is your profit?

$270 – $90 = $180


$10 55$11 50$12 45$13 40$14 35$15 30

Example

Suppose you charge $15 per unit.

How many units will you sell?

30


($15) (30) = $450

What is your cost?

($1) (30) = $30

What is your profit?

$450 – $30 = $420

Example

Suppose you charge$3 per unit.

Profit = $180

Suppose you charge$15 per unit.

Profit = $420

Of these, $15 is the better price to charge.

Round 1

Choose the price you will charge for your product.

Every unit you sell costs you $1 to produce.

Profit = Price x Units Sold – $1 x Units Sold


$10 55$11 50$12 45$13 40$14 35$15 30

Price per Unit Units Sold Revenue Cost Profit$1 100 $100 $100 $0$2 95 $190 $95 $95$3 90 $270 $90 $180$4 85 $340 $85 $255$5 80 $400 $80 $320$6 75 $450 $75 $375$7 70 $490 $70 $420$8 65 $520 $65 $455$9 60 $540 $60 $480

$10 55 $550 $55 $495$11 50 $550 $50 $500$12 45 $540 $45 $495$13 40 $520 $40 $480$14 35 $490 $35 $455$15 30 $450 $30 $420

Round 1

Round 2: Tax the Consumers

In this round, consumers will pay an additional $4 per unit tax.

You choose a price.

The consumers pay that price per unit to you plus they pay another $4 per unit to the government.


$10 55$11 50$12 45$13 40$14 35$15 30

Round 2

In this round, consumers will pay an additional $4 per unit tax.

If you charge $3, how many units will consumers buy?

70

What is your profit?$210 – $70 = $140

You charge $3.

Consumers pay $3 + $4 = $7.

Consumers buy 70 units.


($3) (70) = $210

What is your cost?

($1) (70) = $70

Round 2


The consumer pays your price plus another $4 to the government.




$10 55$11 50$12 45$13 40$14 35$15 30

Price per Unit Units Sold Revenue Cost Profit$1 80 $80 $80 $0$2 75 $150 $75 $75$3 70 $210 $70 $140$4 65 $260 $65 $195$5 60 $300 $60 $240$6 55 $330 $55 $275$7 50 $350 $50 $300$8 45 $360 $45 $315$9 40 $360 $40 $320

$10 35 $350 $35 $315$11 30 $330 $30 $300

Round 2: Tax the Consumers

Round 3: Tax the Firms

In this round, firms will pay a $4 per unit tax for every unit they sell.

The price consumers pay is the price you charge.


$10 55$11 50$12 45$13 40$14 35$15 30

Round 3

In this round, firms will pay a $4 per unit tax.

Your cost per unit is now $1 (for the unit) plus another $4 (for the tax).

If you charge $3, how many units will consumers buy?

90

What is your profit?$270 – $450 = –$180


($3) (90) = $270

What is your cost?

($1 + $4) (90) = $450

Round 3



In addition, you pay the government $4 for each unit you produce.



$10 55$11 50$12 45$13 40$14 35$15 30

Price per Unit Units Sold Revenue Cost Profit$1 100 $100 $500 ($400)$2 95 $190 $475 ($285)$3 90 $270 $450 ($180)$4 85 $340 $425 ($85)$5 80 $400 $400 $0$6 75 $450 $375 $75$7 70 $490 $350 $140$8 65 $520 $325 $195$9 60 $540 $300 $240

$10 55 $550 $275 $275$11 50 $550 $250 $300$12 45 $540 $225 $315$13 40 $520 $200 $320$14 35 $490 $175 $315$15 30 $450 $150 $300

Round 3: Tax the Firms

No Tax Tax Consumers $4 Tax Firms $4Retail Price $11 $9 $13

Price Consumer Pays $11 $13 $13Price Firm Receives $11 $9 $9

Units Sold 50 40 40Tax Revenue $0 $160 $160

Results

In round 3, the government taxed the firms $4.

Won’t firms just pass the tax on to consumers?




Results

End result: Firms pay $2 of the tax, and consumers pay $2 of the tax.

Retail price up by $2

Consumers pay $2 more

Firms receive $2 less

Results

In round 2, the government taxed the consumers $4.

Won’t consumers be forced to pay the full $4 tax?







Results

End result: Firms pay $2 of the tax, and consumers pay $2 of the tax.

Retail price down by $2

Consumers pay $2 more

Firms receive $2 less




Results

Lesson #1: The government has no control over who ultimately pays a tax.

(even when the firm is a monopoly)




Results

When there was no tax, consumers bought 50 units.

A $4 per unit tax should generate $4 x 50 = $200 in tax revenue.




Results

Instead of raising $200 in tax revenue, the government only raises $160.

Results

Lesson #2: The government determines the tax rate, not the tax revenue.

(regardless of whom it taxes)




Lesson #1: The government has no control over who ultimately pays a tax.

Lesson #2: The government determines the tax rate, not the tax revenue.

26

Conventional Wisdom #1

The government is financially sound.

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Data sources: US Department of the Treasury, CIA World Factbook

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Millions, Billions, Trillions

(blah, blah, blah)

$10,000

A stack of $100 bills, ½ inch high.

$1 million

100 packets of $10,000.

$100 million

$100 million fits on a standard pallet.

$1 billion

$1 trillion

About twice the amount of money the U.S. government spends on interest on the national debt in one year.

$14 trillion

The value of all goods and services produced in the United States in one year.Also, the U.S. national debt (as of 2010).

Total Federal debt and obligations (as of 2010).

$65 trillion

46


The government has a debt problem.

47

Data source: Bureau of Economic Analysis

The Federal government collects about $2.3 trillion in taxes per year

(all tax revenues combined).

The average U.S. household earns about $50,000 per year.

48

$2.3 trillion $50,000

49

Federal tax revenues = $2.3 trillion

Federal spending = $3.8 trillion

Federal debt = $14.6 trillion

Income = $50,000

Spending = $84,000

Debt = $330,000

Debt

Deficit

DeficitDeficit

Deficit

50

51



deficit

What causes deficit?

52

Perhaps we have a revenue problem.

Debt

Deficit

DeficitDeficit

Deficit

Revenue Spending

Revenue Spending

Revenue Spending

SpendingRevenue

?

?

?

?

53

54

revenue



deficit

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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2010

Billi

ons

Federal Revenue

Federal revenue has risen 6.9% per year (on average).

Data source: US Department of the Treasury

55

Not fair. Prices have been rising over time.

56

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

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Billi

ons

Federal Revenue Federal Revenue (adjusted for inflation)

Federal revenue has risen 3.3% faster than inflation per year (on average).


57

Not fair. The population has been growing over time.

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$8,000

$9,000

$10,000

$0

$500

$1,000

$1,500

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$2,500

$3,000

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2010

Billi

ons

Federal Revenue Federal Revenue (adjusted for inflation) Federal Revenue (adjusted for inflation, per capita)

Federal revenue per person has risen 2.2% faster than inflation per year (on average).


59

Tax revenue may be rising,

but it isn’t rising fast enough.

To raise more tax revenue, we need to raise tax rates!

60

61


Raising tax rates increases tax revenue.

0%

10%

20%

30%

40%

50%

60%

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80%

90%

100%

1954

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2008

Federal Revenue as a % of GDP

21%13%

Data sources: Internal Revenue Service, Bureau of the Census

62

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

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1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

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1990

1992

1994

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21%13%


63

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

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1960

1962

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1968

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1972

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1978

1980

1982

1984

1986

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

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1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

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1998

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2006

2008


13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

1958

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1962

1964

1966

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1970

1972

1974

1976

1978

1980

1982

1984

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21%13%


64

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

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1996

1998

2000

2002

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2006

2008


18%


65

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

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1960

1962

1964

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1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

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2006

2008

Top Federal Marginal Income Tax Rate


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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008



17%

67

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1954

1956

1958

1960

1962

1964

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1968

1970

1972

1974

1976

1978

1980

1982

1984

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2008


17%

18%


68

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

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1990

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1996

1998

2000

2002

2004

2006

2008

Average Marginal Income Tax Rate

16%

Data sources: Internal Revenue Service, Bureau of the Census, Barro and Redlick (2009)

70

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1960

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1974

1976

1978

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2008

Average Marginal Income Tax Rate

18%

16%

Data sources: Internal Revenue Service, Bureau of the Census, Barro and Redlick (2009)

71

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1954

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1980

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2008

Capital Gains Tax Rate


72

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1954

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17%


73

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1954

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1978

1980

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2004

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2008


17%

18%


74

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Average Effective Corporate Tax Rate


75

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005


17%


76

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005


17%

18%


77

If revenue is a fixed 18% of GDP, then the debt problem must really be a spending problem.

Debt

Deficit

DeficitDeficit

Deficit

Revenue Spending

Revenue Spending

Revenue Spending

Revenue Spending

78

79

revenue



deficit

spending

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Annu

al C

ost p

er P

erso

n

Average Price Level

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis

The average price level has risen 700% since 1954.

80

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Annu

al C

ost p

er P

erso

n

Average Price Level Cost of Federal Government

Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis


The per-person cost of the Federal government has risen 3,000% since 1954.

81

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Annu

al C

ost p

er P

erso

n

Average Price Level Health Care Cost of Federal Government

Data sources: Bureau of Labor Statistics, Bureau of the Census

By comparison, the cost of health care has only risen 2,000% since 1954.

The per-person cost of the Federal government has risen 3,000% since 1954.


82

Fine!

Government spending is rising, but it’s because of wars, NASA, subsidies to oil companies, [fill in your

favorite evil]…

83

84

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Federal Spending Federal Revenue

Billi

ons

Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget

2011 Federal Budget

Entitlements

Net Interest

Other Mandatory

Defense

Everything Else

Mandatory Spending

Discretnary Spending

Social Security, Medicare, Medicaid

Food stamps, unemployment, child nutrition and tax credits, supplemental security for disabled, student loans

Departments of Agriculture, Commerce, Education, Energy, HHS, HUD, Interior, Justice, Labor, State, Transportation, Treasury, Veteran Affairs, plus independent agencies, plus Legislative branch, plus Judicial branch, etc.

85

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Federal Spending Federal Revenue

Billi

ons

Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget

2011 Federal Budget

Entitlements

Net Interest

Other Mandatory

Defense

Everything Else

Eliminating all discretionary spending would still leave a $230 billion deficit.

GDP grows!

Reconsider revenue

We only get 18% of GDP in revenue, so let’s stimulate GDP!

Spend more!

=

86

18% x


Government spending stimulates the economy.

87

TARP = $356 b.

Stimulus = $578 b.

Federal Reserve = $1,500 b.

Financial Initiatives = $366 b.

Housing Initiatives = $130 b.

Data source: money.cnn.com/news/storysupplement/economy/bailouttracker/

Total (net) stimulus = $3 trillion

88

Unemployment Rate: 6%7%8%9%10%

89

Total (net) stimulus = $3 trillion

Historically, how has the economy reacted to stimulus spending?

90

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-6% -4% -2% 0% 2% 4% 6%

RGD

P pe

r Cap

ita G

row

th

Change in Federal Outlays as % of GDP

Stimulus Spending and Economic Growth

If stimulus spending worked, we should see a relationship like this.

91

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-6% -4% -2% 0% 2% 4% 6%

RGD

P pe

r Cap

ita G

row

th


Data source: Bureau of Economic Analysis, National Income and Product Accounts

Increased government spending does not appear to increase economic activity.

Stimulus Spending and Economic Growth (1954.1 to 2011.1)

92

Maybe stimulus spending doesn’t have an immediate effect. What is the effect over time?

93

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-6% -4% -2% 0% 2% 4% 6%

RGD

P pe

r Cap

ita G

row

th 1

Yea

r Lat

er



Increased government spending does not appear to increase economic activity one year in the future.


94

Maybe stimulus spending’s effects are cumulative. What is the cumulative effect?

95

-2%

-1%

-1%

0%

1%

1%

2%

2%

3%

-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0%

RGD

P pe

r Cap

ita G

row

th (4

QM

A)

Change in Federal Outlays as % of GDP (4Q Moving Average)


Increased government spending appears to have a negative cumulative effect over 4 quarters.


96

97

We have to do something! The rich are getting richer and the poor are getting poorer!

98


The rich get richer while the poor get poorer.

0%

5%

10%

15%

20%

25%

30%

Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000

1970 1980 1990 2000 2009

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.

99

Incomes are in 2009 dollars.

U.S. Households According to Income

0%

5%

10%

15%

20%

25%

30%

Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000

1970 1980 1990 2000 2009


100



0%

5%

10%

15%

20%

25%

30%

Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000

1970 1980 1990 2000 2009


101



0%

5%

10%

15%

20%

25%

30%

Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000

1970 1980 1990 2000 2009


102



0%

5%

10%

15%

20%

25%

30%

Under $15,000 $15,000 - $25,000 $25,000 - $35,000 $35,000 - $50,000 $50,000 - $75,000 $75,000 - $100,000 Over $100,000

1970 1980 1990 2000 2009


103



104

wtf?

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678.

3.8%

46.6%

3.4%

49.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Lowest Quintile Highest Quintile

Frac

tion

of T

otal

Inco

me

Rece

ived

by

Each

Fift

h

2000 2007

The rich get richer and the poor get poorer.

105

Richest QuintilePoorest Quintile

7.1

65.7

6.9

66.8

0

10

20

30

40

50

60

70

Lowest Quintile Highest Quintile

Aver

age

Age

2000 2010

Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9.

The old get older and the young get younger.

106

Oldest QuintileYoungest Quintile

Source: Pew Economic Mobility Project

107

108


Trade exploits and impoverishes the poor for the benefit of the rich.

109

R2 = 0.56

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Per-capita Income (US$)

Per

-cap

ita

Tra

de

(US

$)

Greater per-capita trade is associated with greater per-capita income.

Data source: International Monetary Fund

110

R2 = 0.80

$1

$10

$100

$1,000

$10,000

$100,000

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender adjusted HDI)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)GDI measures quality of life (longevity, education, literacy, income) for women relative to men.

Greater per-capita trade is associated with greater gender equality.

Data sources: International Monetary Fund and United Nations Development Programme

111

R2 = 0.54

$1

$10

$100

$1,000

$10,000

$100,000

0 10 20 30 40 50

Children 10 to 14 in the Labor Force (as % of age group)

Per

-cap

ita

Tra

de

(US

$, l

og

arit

hm

ic s

cale

)

Greater per-capita trade is associated with reduced child labor.

Data sources: International Monetary Fund and World Bank

112

$1

$10

$100

$1,000

$10,000

0 10 20 30 40 50 60

Children 10 to 14 in the Labor Force (as % of age group)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le)

Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor.

Data sources: International Monetary Fund and World Bank

113


Trade costs American jobs.

114

January 1975 to June 2006

0%

2%

4%

6%

8%

10%

12%

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Un

emp

loym

ent

Rat

e

Greater per-capita trade is associated with reduced unemployment.

Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

115

January 1975 to June 2006

$12.00

$12.50

$13.00

$13.50

$14.00

$14.50

$15.00

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Av

era

ge

Re

al H

ou

rly

Ea

rnin

gs

(2

00

0$

)

Greater per-capita trade is associated with increased real wages.

Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis

116


The minimum wage helps minimum wage workers.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46

Une

mpl

oym

ent R

ate

Minimum Wage as Fraction of Average Hourly Wage

College Education (1978-2008)

Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics

117

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46

Une

mpl

oym

ent R

ate


HS Education (1978-2008)


118

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46

Une

mpl

oym

ent R

ate


Less than HS Education (1978-2008)


119

120

Data Pwns Conventional Wisdom

The government has no control over who ultimately pays a tax.

The government sets the tax rate, not the tax revenue.

Raising tax rates does not increase the government’s share of the economic pie.

The government has a spending problem.

Stimulus spending doesn’t stimulate.

121

Data Pwns Conventional Wisdom

The poor are getting richer.

Trade empowers and enriches people (even poor people).

Trade creates more jobs than it destroys.

Minimum wage increases unemployment among the less educated.

122

Conventional Wisdom versus The Data

October 29, 2011

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