Tag Archives: economics

Economics

I’ve never gotten economics. It’s one of those subjects which my simple brain isn’t designed to handle. Economists are like mystics in my mind. I mention this as a preface to what follows because you have to know where I’m coming from. Yes, I took an economics class back in college. No, I didn’t do well in it. (D+ and that was after reading the text book cover-to-cover and attending every lecture.)

I am confused by the new tax deal. Or perhaps, more accurately, I am confused by the motives behind it. From what I do understand, it extends the tax cuts put in place by Bush for another 2 years. It extends those tax cuts for everyone, regardless of how much money you make. Taxes aren’t going down for anyone, they are just not going back up to where they were. Presumably, this means that people will have more money in their paychecks than they would have if the bill was not passed.

So here are my thoughts on these economic matters:

  1. Save, spend, or…? What is it exactly that we are supposed to do with this “extra” money that we will have in 2011? I realize that we can do with it whatever we want, but certainly the federal government had something in mind. My guess is that we are supposed to spend this money and therefore further stimulate the economy. But according to the folks at CreditCards.com, the average American household carries $15,788 in credit card debt at an average interest rate of 14.35%. So wouldn’t it make sense to pay down some of that debt, as opposed to save or spent the “extra” money? Getting rid of that debt at those high interest rates could ultimately result in more money in each paycheck, since a big hunk of it wouldn’t be going to credit debt, right?
  2. Allowing the tax cuts to expire isn’t really a tax increase. I understand that politics is all about framing the issue and those supporting the new tax deal have made it clear that a vote against it is a vote for tax increases. But strictly speaking, it is not a tax increase, but merely restoring income taxes to the levels they were at prior to Bush cutting them. Do people really believe that taxes can continue to be cut without ever going up?
  3. Corporations and governments face budget cuts, why not people? If the tax bill did not pass, people’s taxes would go up next year meaning they would have less money in their paycheck than they had this year. Another way to look at this is a budget cut. Families have budgets (or should, it seems to me). Knowing ahead of time that you’ll have less money to spend in the coming year is like knowing that your budget is going to be cut, and people can (or should) plan accordingly. The problem is, I think, people don’t want to cut their spending in proportion to the money they take home. They don’t want to switch to a cheaper data plan, or cancel cable television for the year, or put off buying the new flat panel TV. In short, people don’t want to–
  4. Make sacrifices. Despite phrases like “tough economic times” and “worst economy since the great depression”, people don’t seem to want to make sacrifices in the style of living they have become accustomed to. People don’t want to make cuts in things like cable, or televisions, or iPads or new cars. People generally seem unwilling to make these sacrifices. But if you go without a vacation for the year; or if you put off buying a new car; or if you stop buying name brands for the year, those savings can add up. Sure, you make a sacrifice, but presumably, so is everyone else and the money that could have been used to maintain the tax cuts can be used for things like paying down the debt and improving government services–like education, for instance.
  5. But what about people who are already at their limit? If the tax bill didn’t pass, there would many people who wouldn’t be able to pay their bills, and have nothing left to sacrifice. They wouldn’t be able to pay their mortgage, or would have to decide between paying tuition or paying for health insurance. We need to be sure that we can help those most in need but there is no easy way to do this because even people who make a lot of money will come out of the woodwork claiming, ridiculously, that they are in need, too. Perhaps an exception could be made for people in these circumstances. The sacrifices of others would allow these people to continue at a lower tax rate while everyone else’s is returned to what it was before the Bush tax cuts. But that probably isn’t realistic. People these day seem too selfish for this kind of altruism.
  6. What’s the big deal about the middle class? If I were cynical, the only important thing about the “middle class” is that they are the largest voting base out there. That is because that almost everyone thinks of themselves as middle class. (I suspect that is why subclasses evolved in the first place, so that some people will say “lower-middle” while others say “upper-middle”.) Saying that you are going to extend tax cuts to the middle class is a political way of saying you are going to extend tax cuts to just about everyone. And everyone who gets a tax cut is therefore defined as middle-class going forward, which is right where they want to be.
  7. Is this really just some kind of accepted bribery? Okay, the real cynic in me has to ask this question. Because Americans tend to be issue voters and rarely see the big picture, is an extension of the tax cut really nothing more than a bribe for votes. “I’ll let you keep an extra $3,000 dollars in your paychecks next year, if you vote for me in 2012.” And by “me” I mean anyone who voted for the bill, Democrat, Republican, or Independent. It’s a kind of quid pro quo that is accepted at face value.

The truth is–for me–I’d be fine paying more taxes next year (I won’t say “happy”) if it meant that my little boy would have a more economically sound future–and economically sound government. Because when all is said an done, this tax bill simply defers the inevitable. The government is adding to its credit card debt and since we all make up the government (“of the people, by the people, for the people”) we will eventually have to pay that debt. And if we don’t pay it our children will, or our grandchildren, or suffer the consequences. That’s not what I want to see for my little boy, and so I would have accepted a resumption of the previous tax levels with what grace I could muster, knowing that I would be helping to close the government deficit, not increase it.

But like I said, Americans generally don’t look at the big picture. We can barely think to the next paycheck let alone the next generation.

I imagine there will be people who criticize this position as typical of one party or another. (I am a life-long Democrat, but to be honest, even I am not certain what party these economic opinions of mine represent.) But in my mind, they are the most rational opinions one can hold while looking at the big picture. People may not be willing to make sacrifices for their fellow citizens. But have we gotten to the point where we are not willing to make sacrifices for our own future–and our children’s future–either?

To rescue, or not to rescue

I have mixed feelings about the bailout of the auto industry:

  1. Taxpayers should not have to pay for auto industry mistakes, poor planning, etc.
  2. Subsidiary industries that depend on the auto industry should not have to suffer because of industry mistakes, poor planning, etc.

These two issues cause a great deal of cognitive dissonance within me, as I’m sure they do in many people following the issue. However, while I feel for the people who will be impacted by this, I cannot help that the CEOs and unions of the auto industry are trying to make a insidious connection between the issues that goes something like this:

  1. Millions of jobs will be lost if the auto industry fails
  2. The auto industry can be saved by taxpayer dollars
  3. If the taxpayer dollars are not forthcoming and the auto industry fails, it is the fault of the taxpayers

No one that I know of has said this outright, but this is the message that I am getting from the comments from the Big Three CEOs and auto union presidents. I find this kind of fear-based argument shameful, and if Congress can see through the murk, they should take this into consideration as part of their decision-making process.

I feel for the people whose jobs depend on the industry. (Although I’m skeptical of the nationalism that creeps into statements like, "the United States autoworkers are the best workers on the planet." Who makes this judgment? Maybe it’s true, but it’s certainly not true about their management.) This is why it is so hard for me to say, screw it, don’t give the auto industry another penny. Let the market sort it out. But that’s where I’m leaning, un-Democratic though it might be. If we don’t, the industry will never learn. Besides, we are resilient. And Part of me thinks this is one big bluff on the part of the auto industry.

In this Yahoo! article on the subject, there was on paragraph that caught my attention:

The bailout remains unpopular with the public. Sixty-one percent oppose providing the auto companies with billions in federal assistance, according to a CNN-Opinion Research Corp. poll released on Wednesday. Fifty-three percent said it would not help the country’s economy.

Normally, it wouldn’t occur to me to care what 53 percent of people who are probably not subject matter experts had to say about a particular subject. But I got to thinking about social networking. Maybe there is something to this 53 percent after all. Common wisdom, perhaps?

The economics of gas prices

Gas prices at my local gas station have recently dropped to $2.20/gallon. It seems as though back in August I was paying about $3.15/gallon. In that time, gas prices have dropped nearly a dollar a gallon and I am at a loss for understanding it.

Economics was never my strong suit, but I understand the basics of supply and demand, or at least I thought I did. As supply dwindles, and demand increases, price has to increase as well. As inventories loom large and demand falls off, price has to drop. Maybe I’m oversimplifying a bit.

Oil is a primary ingredient of gasoline and in summer months, the demand for oil, in the form of gasoline increases as poeple plan summer vacation. Some people drive and others fly but we are told that the demand for gasoline skyrockets during summer months. If gasoline were more scarce, I could see prices rising rather dramatically, but it seems to me that the demand for gasoline in the summer months is usually met without any kind of supply crisis. So what I don’t understand is if increased supply meets increased demand, price should remain the same, shouldn’t it?

Now that summer is over, demand for gasoline is dropping and supplies can be cut back. Prices therefore can drop with the diminishing demand until they stablize at a lower level. This seems to be what is happening now, but it still doesn’t make sense why the prices increased in the first place. People often point to the oil companies as being the ones who arbitrarily raise prices because people will pay no matter what. I was skeptical of this, but lacking a better explanation, I am beginning to wonder if there isn’t some truth to this. Other products whose price is tied to supply and demand don’t seem to fluctuate nearly as much as the price of gasoline. Take milk for example, or the price of a pound of bananas.

I’m anxious to get to the gas station to pay just abotu $2/gallon to buy gasoline. But I drive so infrequently that I can go a month or more between fillups. With the way gas prices fluctuate, gasoline could be back up over $3/gallon before I need to fill up again.