The Cost of “Bernie Care”

September 25, 2017 Leave a comment

Senator Bernie Sanders has expressed support for and formally introduced a plan for a health insurance system to be run by the federal government which has been called “Bernie Care” in some media outlets.  A number of other Democratic politicians have also expressed support for this idea. This is quite likely to be the Democratic Party response to the problems with Obamacare. Indeed Barack Obama expressed his own support for this national health insurance program before his first election as President (I saw the videotape of his statements at that time) but he claimed the country was not yet ready for such a health insurance program. What would such a program cost? The Urban Institute has published a study to answer this question. Read more…

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Tax-Income Ratios in G7 Countries

September 13, 2017 Leave a comment

In a previous post, I provided data on the ratio of tax receipts to GDP in the U.S. It was shown that the U.S. ratio fluctuated around 20 percent of GDP since 1960. Here I provide data on the remaining G7 countries (Canada, France, Germany, Italy, Japan, and the United Kingdom) which illustrates how different the U.S. is from many European economies. Below is a graph of the data drawn from the OECD (the Organization for Economic Co-operation and Development) covering 1995 to 2015.

The graph shows that tax-income ratios are much higher in the six G7 countries than they are

in the U.S. In 1995, the tax shares ranged from a low of 27 percent in Japan to a high of 43 percent in France. By 2015,  the tax shares range from 32 percent in Japan to 48 percent in France. In short, none of the six countries has a tax share as low as the U.S.

The Entitlements Crisis

The aging of the U.S. population is increasing the transfer payments made by the U.S. government and the obvious question is how the U.S. will finance these payments. It is unlikely that this can be done by borrowing (it is doubtful that the U.S. can borrow trillions of dollars each year) so this suggests that the tax-income ratios in Europe are what may be imposed in the U.S. as the entitlements crisis unfolds. This is what is meant by the charge that many politicians want to turn the U.S. into a European welfare state. What remains to be seen is if the U.S. taxpayers will agree to such a historically large increase in the tax-income ratio in the U.S.

Cognitive Dissonance

August 28, 2017 Leave a comment

The media recently reported the firing of a Google employee who wrote a document expressing his views on the political correctness that, he believed, permeates the work environment at Google. I began thinking about the political correctness that I see which, among other things, maintains the position that men and women are the same intellectually. This view about gender differences seems to me to be an example of cognitive dissonance, a definition of which from Wikipedia is given below.

In the field of psychology, cognitive dissonance is the mental discomfort (psychological stress) experienced by a person who simultaneously holds two or more contradictory beliefs, ideas, or values.

So cognitive dissonance refers to the possibility that people hold logically inconsistent positions. Here is why political correctness reveals cognitive dissonance.

The Economist, a well-known news magazine, published an article some years ago reporting the results of a brain study directed by a female physician at Stanford University. The study was designed to measure brain function. Specifically, the work attempted to measure the differences, if any, between men and women in processing verbal information. Interestingly, the director of the study was advised by colleagues, some of whom were no doubt male, that she should not conduct this study since the results from it could offend people. But the project was done anyway despite these cautionary comments. The results of the study were that women process verbal information much more efficiently than men. This may not be the final word on the subject. There may be other research which subsequently challenged these findings but imagine for the moment that this result is correct because it has survived replication efforts. Note what this finding could explain. Read more…

The U.S. Tax-Income Ratio

August 17, 2017 1 comment

I recently saw a news report about federal government tax receipts and I began to wonder what trends, if any, have been present in the public’s support of government as measured by its tax payments. Most media reports that I have seen focus on the dollar amounts of federal government tax revenue but it is more informative to include state and local governments as well so that we can get a more accurate measure of public tax payments to the government.

But rather than looking at tax payments in dollars, it is more useful to look at tax shares of our incomes. The economy grows over time and so it is more informative to see what fraction of our incomes are paid to the government so that we can adjust for the size of the economy as it changes through time. For this post, I will use Gross Domestic Product (GDP) as a measure of our incomes and I will use Federal plus State and Local receipts to capture the revenues of all sorts that flow to the government. All of the data was drawn from the St. Louis Federal Reserve Bank FRED database which is freely available to the public. The data is annual and it covers 1929 through 2016. Read more…

The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

Preference Revelation

February 27, 2017 2 comments

The late Paul A. Samuelson was the first Nobel laureate in economics and is widely regarded to be the most outstanding American economist to date. He wrote many papers that had a profound influence on the thinking of economists but he wrote one paper that, to me, is a great tool for all of us, not just economists. The paper is entitled “Consumption Theory in Terms of Revealed Preference” and, in a nutshell, here is what it says. If you want to know what another person is up to, watch what they do because you can, from their actions, infer their motives or preferences. Below is an example of how useful it can be to observe people’s actions when matched against what they say. Read more…

Categories: Education, Uncategorized

Minimum Wages: A Survey of the Evidence

January 3, 2017 4 comments

With the new year, minimum wages are rising in many cities and states, including Michigan where I live. I have written before on this subject (a link is given below) but I ran across a nice article containing a very readable summary of the evidence on this subject. It is a nice read for non-economists because it has no equations (gasp!) and it is not very long but it does provide an accessible summary statement of the empirical scientific evidence on the effects of the minimum wage. But I have another motive in providing this summary of the evidence.

The nature of scientific inquiry is that not all studies on a subject produce the same answer. As a result, more than one study is necessary because, as the evidence emerges, hopefully a consensus forms about the problem that is being studied. So undoubtedly there are studies suggesting that there is no connection between smoking and cancer but it seems quite likely that the preponderance of the evidence, and the highest quality work, reveals a link between smoking and cancer. I once saw Barack Obama “cherry-pick” evidence, citing one particular study indicating that minimum wages do not cause unemployment. But one study isn’t important; the entire literature is and here is a summary of what that literature shows.

An extensive survey by Neumark and Wascher (2007) concluded that nearly two-thirds of the more than 100 newer minimum wage studies, and 85% of the most convincing ones, found consistent evidence of job loss effects on low-skilled workers.

This statement is taken directly from the article linked above. The Neumark and Wascher (2007) article is a scholarly study providing a more thorough analysis of the evidence.

The good news for an economist like me is that what we tell students in Econ 101 is correct: minimum wages cause unemployment. Some workers gain and some lose and the tragedy of the policy is that it harms those in our society who are the least-able to deal with a job loss and the loss of skill-accumulation that goes along with working. Namely, the policy harms people at the low end of the income distribution. This is just another example, in a long list of examples, of how a government can harm some of its citizens while the politicians, implementing the policy, claim that it helps those citizens. As long as the public is unaware of the evidence, politicians can get away with this destructive behavior.

Previous Post on Minimum Wages: minimum-wages-to-rise-in-2013

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