Well, on the one hand, it is priceless. But from an economic point of view, a life is only worth about $4,000,000. Of that, $2,000,000 is the person’s worth to himself, and any others he provides for. The other $2,000,000 is the person’s worth to the rest of the economy. How much the rest of the economy benefits from his life’s labor. These figures are very rough, the mean, and of course vary greatly from person to person.
But how do we figure? First, we figure a person is only worth to an economy what he contributes to society. So we figure from a labor force of 150 Million we have a GDP of 14 Trillion. Round that to make the annual contribution to the economy per worker an even $100,000. Times say 40 years labor, about the number of years we suppose the average worker to work in a lifetime. $4,000,000. About half of that goes to the worker, about half to the rest of the economy. That’s the mean. The median worker only gets about$1.4M, but the median worker also probably contributes less than $4M. But what about the people who don’t contribute to the GDP? Well, here we’re counting them the same. Perhaps we shouldn’t. After all, someone who is compensated more than he contributes to society has a negative value to society. But we can also figure not all contributions to an economy show up in the GDP.
This has important ramifications. Such a heartless calculation actually suggests important ways individuals, and society, benefit. It means, for instance, that it is beneficial to individuals if we don’t spend too much saving a life. For instance, we wouldn’t want to spend $1 Trillion to save one life. Everyone else would be that much poorer. The economy would be out $999,996,000,000. That’s just dollars, but the equivalent in lives (valued at $4,000,000) is 249,999. It is 499,999 lives if we take the value a life is worth to the rest of the economy. We would be trading that many lives for one life. This is a bad deal for an economy. If it did this too much, it would literally kill itself.
What about pain and suffering? People are not just economic mechanisms. They have feelings. They feel pain. Can we put a dollar value on that? Sure. Let’s say $1 Trillion on a person’s feelings. Would we want to spend $1 Trillion on a person’s life? We just went through that calculation, and the point is the same. It would overvalue that life, and be a bad deal for the rest of the economy, which is to say, everyone else. It wouldn’t be fair. You can spend $1 Trillion to save one life, but you can’t spend $1 Trillion per person on everybody else, to save their lives. In fact, it works out you can only spend less than $100,000 per year per person. On average.
We can look at it this way: The economy exists to save, and is essentially saving, everybody’s lives, all the time. We’re all on life support. And since the average each worker contributes is less than $100,000 per year, that is all we can spend, on average, per person, per year.
This shows that it is important not to overvalue life. A society which takes excess precautions against the loss of life is the poorer for it. In a sense, it is literally killing more people to prevent the loss of fewer.
Hospitals already often use a rule of thumb. Their guideline is, (often) for spending up to $100,000 per year of life extension. This is equal to our total annual contribution to the economy per worker. For instance, consider extending the life of an elderly person. On the one hand, society typically does not gain any benefit. On the other, the elderly person has already contributed his share to society, and in a sense has earned this consideration, as a kind of savings. And it provides an incentive for people to keep working. But the figure of $100,000 per year is probably too high, considering the limits of the current health care system’s ability to supply health care, and the high rents already collected from it, and contributes to the high costs of medicine today. The rents imply that the benefits to the patient are far less than the $100,000 expended, so the actual value of life is lower than the nominal one. Indeed, if we consider the rent to be 40% of the system, that is, 40% is ‘wasted’ compared to the health care systems of other advanced economies, then the actual value of a person-year is $60,000. This suggests an economic value of $2.4M for a life, lower than our calculated value of $4M.
One interesting, if perverse, example of the extreme is the California death penalty, reinstituted in 1978, which has cost $308M per person (13) executed. Indeed, its total cost $4B, is a substantial share of the California deficit. We can make this calculation: $308M divided by $4M is the total destruction of the lifetime production of 77 people. In this case, the state is effectively killing (the productive capacity of) more people than the criminal ever did. From another perspective, the annual cost of $184M is equal to the total annual contribution of 1840 workers to the economy, almost twice as many as are actually on death row. The work of 1840 workers, wasted.
The EPA, now, gives a figure of $7.9 Million for the value of one life, almost twice the total economic value we calculated, or 4 times the net value of a life to the economy. http://thenewamerican.com/tech-mainmenu-30/environment/6013-epa-reevaluates-the-value-of-human-life
Not a very good trade off. Of course, there is also quality of life. Clean air is better than polluted air, even if the polluted air doesn’t kill you.
Regulations impose costs on producers. By not permitting the externalization of costs, (pollution of one sort or another for the EPA) which by the EPA’s calculations, would cause an increase in death (and disease,) things cost more to produce, and these costs are passed on to consumers. But it also results in less of those things being produced, and since resources are consumed in all production, less being consumed. So in the case of environmental regulations, other benefits accrue than just the saving of lives. Resources are conserved, other things which might be expensive to remedy are reduced. Such things might be considered to be included when the value of a life is overestimated.
Undervaluing life has its own costs. Negative externalities, excess pollution, is encouraged. Overproduction of stuff is encouraged. (This could be an argument for undervaluing life, where increasing the amount of stuff is equated to economic progress!) There are more accidents, as insufficient precautions are taken. There is loss of life and quality of life.
Note, when an economy is poorer, the capitalization per person, and what depends on it, the individual’s ability to contribute to society, thus the value of life, is less. Kenya for instance has a GDP per capita of $1600, $66B/41M but a labor force of 18M, so the average economic contribution per worker is about $3700, times 40 years or about $150K over a lifetime, (average life expectancy about 60, but do they have retirement?) so that is the mean economic value of a life, there.
Back to the US:
A child, on the other hand, has the potential to contribute $4,000,000 to society. But society has not yet invested in him. In fact, (our) society, on the average will invest somewhere around $350,000 in raising a child to adulthood, not counting the opportunity cost of parenting. Most of this cost is born by the family, so does not subtract from the $2,000,000 net contribution. A six year old, for instance, has about $70,000 invested in him, by his family: $60,000 direct costs, and $10,000 or so for his first year of schooling, which one way or another is borne by taxes. Now families are not the only ones to pay these taxes, so there is some subsidy of education by the rest of society. This omits cost- the opportunity cost to the self for his education, when, instead of capitalizing in himself, he could be doing something else.
In fact, it could be argued that the only real loss to society is this investment, and not the inferred profits society takes from his labor. And this investment is all society should be insured against. (This argument is also carried out in: http://en.wikipedia.org/wiki/Value_of_life )
Of course, the actual capitalization may be more or less than that figure, depending on the efficiency of parenting and the educational system, and the social system of the community. Much of the cost of the educational system now seems to be going to rent, judging from the reported decline in results. So the actual capitalization is less.
Further consideration indicates that the health care system may be considered part of the capitalization of individuals. Consider a child who needs a $50,000 surgery to survive and be productive. He is capitalized, by age 20, to $400,000, and so similarly for all medicine. Currently about $2.4T total health care expenditure per year, or $8K per person per year. This ups the capitalization for our six year old to about $120K. (There seems to be some double counting here, unless the family is fully covered from other, social, sources. One might also consider the fact that, except for young children, the expenditure on health up to middle age is probably less than $8K per year, and higher than $8K afterward.) Anyway, the capital investment per person would be $600K ($8K x 75years) + $350K or essentially $1M invested by society in each person, over their lifetime. On an annual basis about $13 K per year per person..
Other considerations enter in. For instance the average life is that of a 38 year old, round off to 40 year old. He has cost $670K capitalization by society, and produced about $2M. Net contribution $1.33M to society. Should we make this the average economic value of a life?
Suppose we were to nuke a city of 1M people. Which would be the loss to society?
Well, the fixed assets would be $180B ($54T/300M x 1M.) But the total loss of human capital would be about $670K x 1M = $670B. So the total is $850B (Compare this calculation with: http://anamecon.blogspot.com/2010/03/nuclear-equivalent-to-war-on-terror.html)
Here we are just counting what we have invested in the city, rather than the loss of any potential gains we had hoped to obtain from it. Just by the way, The wars in Afghanistan and Iraq have cost $1.2T since 2001, the equivalent, in terms of capital investment, of a city of 1.4M people, or larger than San Antonio, the 7th largest city in the US. Estimates of the total costs of the War on Terror run to $4T, but a figure of $2.4T (http://www.homelandsecurityresearch.com/2008/05/cost-of-war-on-terror/) places the cost at slightly more than Chicago, 3rd largest city in US. (If we were just counting physical structure, no loss of life, it would be almost 5 times the city of Chicago, more than the entire state of Illinois, leveled. This is equivalent to the 28 million houses of my earlier post.) Annualized, we are nuking the equivalent, inhabitants included, of Newark, NJ (pop 277K), or Greensboro, NC, (pop 270K) every year. 40 Years of the War on Drugs has cost about $1T, or by this calculation a city almost 1.2M population, or about the size of Dallas, the 9th largest city in the US. (If it helps with the imagination, you can imagine slightly larger cities just depopulated, since the actual physical destruction of buildings, homes and factories just adds on about a quarter of the value of destruction.)
One thing we see is that the value of a life depends on the calculation we are performing with it.
There is an implied social/moral choice in undervaluing or overvaluing a life. When you overvalue a life, you are sacrificing society for the individual. When you undervalue a life, you are sacrificing the individual for society. But sometimes society pays, anyway, when many individuals are sacrificed.
But of course, society is just made up of individuals. Or, individuals make up society.
Wednesday, July 27, 2011
Tuesday, June 28, 2011
Zero Interest and the Greek Problem
One way of looking at the problem of zero interest rate is that lenders have a lot of money to lend, but no one to lend it to, as borrowers have a lot of debt, on which they are already paying a high interest. Big supply, low demand. This is the expected end state of the lend-borrow cycle. It is a stable state, which can only be changed by sufficient disturbance. Even the massive borrowing of the government is not enough to disturb it, so the amount of money lenders are holding must be even larger. The only way to get off this state is to eliminate the debt, so the lenders can go back to lending the money to the borrowers. Note, this does not require the lenders to give up their actual money, just their claims on the borrowers.
If we suppose the borrower has nothing, then the only actual loss to the lender is the claim on the future income stream of the borrower.
If we look at Greece under austerity, its income stream will be negative for the foreseeable future. Thus, the Germans, unless they propose to buy up Greece, will do themselves a favor by forgiving the Greek debt. Lending more will only result in larger default down the road. So they will also do themselves a favor by refusing to lend the Greeks any more money, but here the problem is the producer-consumer problem: The Greeks are a net consumer of German production, and thus stimulate the German economy (at the expense of their own. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html ) Without the borrowed money, the Greeks won't be able to continue consuming German production.
However, because of fractional reserve banking, Greek debt is collateral for other money. People borrowed to lend. And others borrowed to lend. That is, Greek debt is money, to its holders, and acts like money. If it disappears, those who borrowed to lend to Greece will have no collateral. The bottom line is forgiving the debt would result in a contraction of the money supply. Because the loans are highly leveraged, that is capital requirements are low, the contraction is likely to be disproportionate to the actual default. This would put additional deflationary pressures on other countries of the Euro periphery, and would also make it more difficult for these countries to pay their debts.
Refusing to lend the Greeks any more money will force the Greeks to pay their taxes, which they seem to be unwilling to do, and/or contract their public sector.
Of course, this does not address the other basic problem, which is there is too much money at the top of the economic pyramid. Since this leads to a contraction of demand in the rest of the economy for real production, there are no profitable real investments for this money to make. The financial sectors of the various nations are simply too big to be supported by the real economies. For US, see: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html )
Thus a large contraction of money at the top might be economically therapeutic. (And with less money to lend, interest rates might well go up, though this itself might stimulate inflation. Hmm...) However, the government should just guarantee the money of the depositors, (ie taxpayers and consumers,) rather than the banks, which need a shaking out anyway. Indeed, guaranteeing the banks just aggravates the problem.
If we suppose the borrower has nothing, then the only actual loss to the lender is the claim on the future income stream of the borrower.
If we look at Greece under austerity, its income stream will be negative for the foreseeable future. Thus, the Germans, unless they propose to buy up Greece, will do themselves a favor by forgiving the Greek debt. Lending more will only result in larger default down the road. So they will also do themselves a favor by refusing to lend the Greeks any more money, but here the problem is the producer-consumer problem: The Greeks are a net consumer of German production, and thus stimulate the German economy (at the expense of their own. See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html ) Without the borrowed money, the Greeks won't be able to continue consuming German production.
However, because of fractional reserve banking, Greek debt is collateral for other money. People borrowed to lend. And others borrowed to lend. That is, Greek debt is money, to its holders, and acts like money. If it disappears, those who borrowed to lend to Greece will have no collateral. The bottom line is forgiving the debt would result in a contraction of the money supply. Because the loans are highly leveraged, that is capital requirements are low, the contraction is likely to be disproportionate to the actual default. This would put additional deflationary pressures on other countries of the Euro periphery, and would also make it more difficult for these countries to pay their debts.
Refusing to lend the Greeks any more money will force the Greeks to pay their taxes, which they seem to be unwilling to do, and/or contract their public sector.
Of course, this does not address the other basic problem, which is there is too much money at the top of the economic pyramid. Since this leads to a contraction of demand in the rest of the economy for real production, there are no profitable real investments for this money to make. The financial sectors of the various nations are simply too big to be supported by the real economies. For US, see: http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html )
Thus a large contraction of money at the top might be economically therapeutic. (And with less money to lend, interest rates might well go up, though this itself might stimulate inflation. Hmm...) However, the government should just guarantee the money of the depositors, (ie taxpayers and consumers,) rather than the banks, which need a shaking out anyway. Indeed, guaranteeing the banks just aggravates the problem.
Tuesday, May 31, 2011
Needs of Society
Society has its needs. Indeed, a society must meet these needs, before it can do things like protect itself and its members. In a viable society, its institutions must each produce more that they cost society. That is they each must produce more than they consume.
If the worker costs more than the value of what he produces, there is no point for the capitalist to hire him. Only if he is worth more to the capitalist than his cost, is it worth the capitalist employing him. It can be said that a worker must produce more than he consumes.
Just as the capitalist must take his profit from the worker, so must society take its profit from the capitalist. Only when the capitalist allows society to take its profit from him, is it worthwhile for the society to have him around. That is the capitalist entity must produce more than it consumes.
The capitalist may do this two ways. He may pay his employees enough that they can contribute to the tax base, that is, that society may take its profits off the employees, or he may allow society to take the taxes directly out of his own profits.
Society must take these profits, since otherwise it will fail. One way society does this is to have a strong enough government to take its profit from its producers. That is the government must be able to collect enough in taxes to sustain itself. If its government fails to do this, that society will fail.
Now one can say that since what a capitalist does is make and build, taxes, and a government, are unnecessary. But what is necessary is the commons, those goods and services which government secures, and often provides. The common welfare, the common capital, is what taxes support. A wealthy society seems to need a large commons, and seems to need a large and strong government to maintain it.
We think we have a strong government. It is not. It is weak. It cannot collect enough in taxes to support itself, and maintain the services and infrastructure(capital) it provides. It cannot convince its people, or its wealthy, that they should pay their taxes. It must borrow, a sign of weakness. Also, it is corrupt. It is captive to many special interests. This is a sign of weakness. It wastes its resources on things that are not needed, that may of themselves be wasteful. And it fails to do needed things. It fails to protect and preserve its commons. It fails to preserve and protect its tax base.
The people borrow to purchase things from foreign countries, things the producers of the country do not make for its people. Society cannot produce enough to exchange for the goods and services it imports. Also a sign of weakness, and of either sloth or misapplied effort.
There are those who do not want a strong government, or at least do not want to pay for one. They think that they will be able to wage war with a weak government. They think they will be able to defend their country with a weak government. They think they will be able to defend their industry with a weak government. They think they will be able to secure and maintain their wealth with a weak government, and a small commons.
They of course do not think of it these terms They merely resent the fact that society must take its profit from them, and therefore they take steps to avoid this. They try to minimize the amount they pay labor, so the government cannot collect sufficient tax from labor to maintain itself, and having corrupted the government, they manipulate the system so that they do not have to pay the necessary taxes out of their own profits. Since these taxes are both inevitable and essential to the maintenance of any society, and a fair amount of taxes for a modern society, they work the destruction of their own society.
From the point of view of society, of course, those who demand more than they contribute, and at no matter what scale, who refuse to let society take its profit off of themselves, are worse than useless.
This is all according to the principle that it is better to produce than consume. A society whose members produce and give to society more than they consume will become unimaginably wealthy, while a society whose members consume more than they produce will consume its capital, and become poor.
The wealthy set the pace. They lead both by deed and example. A society whose wealthy elevate consumption over production, who refuse to let society take its profit off of them and instead insist of taking their profits off of society, is not viable, and will destroy itself. It will consume its capital and become poor, its institutions collapsing.
Leaders are leaders not because of what they take, but because of what they give.
If the worker costs more than the value of what he produces, there is no point for the capitalist to hire him. Only if he is worth more to the capitalist than his cost, is it worth the capitalist employing him. It can be said that a worker must produce more than he consumes.
Just as the capitalist must take his profit from the worker, so must society take its profit from the capitalist. Only when the capitalist allows society to take its profit from him, is it worthwhile for the society to have him around. That is the capitalist entity must produce more than it consumes.
The capitalist may do this two ways. He may pay his employees enough that they can contribute to the tax base, that is, that society may take its profits off the employees, or he may allow society to take the taxes directly out of his own profits.
Society must take these profits, since otherwise it will fail. One way society does this is to have a strong enough government to take its profit from its producers. That is the government must be able to collect enough in taxes to sustain itself. If its government fails to do this, that society will fail.
Now one can say that since what a capitalist does is make and build, taxes, and a government, are unnecessary. But what is necessary is the commons, those goods and services which government secures, and often provides. The common welfare, the common capital, is what taxes support. A wealthy society seems to need a large commons, and seems to need a large and strong government to maintain it.
We think we have a strong government. It is not. It is weak. It cannot collect enough in taxes to support itself, and maintain the services and infrastructure(capital) it provides. It cannot convince its people, or its wealthy, that they should pay their taxes. It must borrow, a sign of weakness. Also, it is corrupt. It is captive to many special interests. This is a sign of weakness. It wastes its resources on things that are not needed, that may of themselves be wasteful. And it fails to do needed things. It fails to protect and preserve its commons. It fails to preserve and protect its tax base.
The people borrow to purchase things from foreign countries, things the producers of the country do not make for its people. Society cannot produce enough to exchange for the goods and services it imports. Also a sign of weakness, and of either sloth or misapplied effort.
There are those who do not want a strong government, or at least do not want to pay for one. They think that they will be able to wage war with a weak government. They think they will be able to defend their country with a weak government. They think they will be able to defend their industry with a weak government. They think they will be able to secure and maintain their wealth with a weak government, and a small commons.
They of course do not think of it these terms They merely resent the fact that society must take its profit from them, and therefore they take steps to avoid this. They try to minimize the amount they pay labor, so the government cannot collect sufficient tax from labor to maintain itself, and having corrupted the government, they manipulate the system so that they do not have to pay the necessary taxes out of their own profits. Since these taxes are both inevitable and essential to the maintenance of any society, and a fair amount of taxes for a modern society, they work the destruction of their own society.
From the point of view of society, of course, those who demand more than they contribute, and at no matter what scale, who refuse to let society take its profit off of themselves, are worse than useless.
This is all according to the principle that it is better to produce than consume. A society whose members produce and give to society more than they consume will become unimaginably wealthy, while a society whose members consume more than they produce will consume its capital, and become poor.
The wealthy set the pace. They lead both by deed and example. A society whose wealthy elevate consumption over production, who refuse to let society take its profit off of them and instead insist of taking their profits off of society, is not viable, and will destroy itself. It will consume its capital and become poor, its institutions collapsing.
Leaders are leaders not because of what they take, but because of what they give.
Tuesday, April 26, 2011
Links on the rich, taxes, education 11-04-26
Here are some links:
http://www.altweeklies.com/aan/9-things-the-rich-dont-want-you-to-know-about-taxes/Story?oid=3971382
Progressive taxes are unfair?
http://crookedtimber.org/2011/04/25/the-flip-side-of-noble-lie-side-economics/#more-19786
James Kroeger's comments offer an interesting argument: The rich are no richer even though they're richer. Because they're richer they drive the price of everything rich people like up, so there's no real gain in it for them. He argues therefore, that a (proper) progressive system, without loopholes, doesn't change the actual purchasing power of anybody. I don't think it is quite true, because the flip side of the argument is the poor are no poorer even though they're poorer. Because they're poorer the price of everything they need goes down, so there's no real loss to them. Mmm... Something else is going on... Still, worth the read.
This is a review of Hacker and Pierson’s book “Winner-Take-All Politics”
http://www.economist.com/blogs/democracyinamerica/2010/09/hacker_and_pierson_inequality
Here’s a fun little tax toy, but not to be taken too seriously, as nobody who makes $10 Million pays 36.3% of his income on taxes. (As we have shown elsewhere, http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html the rich pay on average about 17%.)
http://www.wheredidmytaxdollarsgo.com/
This is a piece on the financial problems besetting the nation’s public universities, particularly discussing the University of California.
http://realignmentproject.wordpress.com/2009/07/23/the-balance-wheel-of-social-machinery-universal-public-higher-education/
Part of the problem here, which I mentioned somewhere else, is the equalization of factor prices due to free trade, which eventually propagates throughout an entire economy. However, those sectors of an economy more exposed to international competition ‘equalize’ faster, most labor in particular. This implies that those sectors more insulated from international competition rise relative to the exposed sectors. (The exposed sectors are, in real terms, declining. Since this does not appear so much nominally to be the case, a great deal must be accounted for by hidden inflation. We should not be surprised then, at the steady increase in gasoline prices.) This accounts for part of the relative rise in costs of public education in particular, and government in general, as the tax base is eroded by declining wages, which are converging to the wages of developing countries, like China.
How economists can consider this a good thing entirely escapes me. Well, not entirely. This also accounts for part of the relative rise in health care costs. It also helps account for some of the housing bubble, the price collapse due to lack of demand due to decreased earnings by labor.
http://www.altweeklies.com/aan/9-things-the-rich-dont-want-you-to-know-about-taxes/Story?oid=3971382
Progressive taxes are unfair?
http://crookedtimber.org/2011/04/25/the-flip-side-of-noble-lie-side-economics/#more-19786
James Kroeger's comments offer an interesting argument: The rich are no richer even though they're richer. Because they're richer they drive the price of everything rich people like up, so there's no real gain in it for them. He argues therefore, that a (proper) progressive system, without loopholes, doesn't change the actual purchasing power of anybody. I don't think it is quite true, because the flip side of the argument is the poor are no poorer even though they're poorer. Because they're poorer the price of everything they need goes down, so there's no real loss to them. Mmm... Something else is going on... Still, worth the read.
This is a review of Hacker and Pierson’s book “Winner-Take-All Politics”
http://www.economist.com/blogs/democracyinamerica/2010/09/hacker_and_pierson_inequality
Here’s a fun little tax toy, but not to be taken too seriously, as nobody who makes $10 Million pays 36.3% of his income on taxes. (As we have shown elsewhere, http://anamecon.blogspot.com/2010/10/what-income-of-top-1-means-to-rest-of.html the rich pay on average about 17%.)
http://www.wheredidmytaxdollarsgo.com/
This is a piece on the financial problems besetting the nation’s public universities, particularly discussing the University of California.
http://realignmentproject.wordpress.com/2009/07/23/the-balance-wheel-of-social-machinery-universal-public-higher-education/
Part of the problem here, which I mentioned somewhere else, is the equalization of factor prices due to free trade, which eventually propagates throughout an entire economy. However, those sectors of an economy more exposed to international competition ‘equalize’ faster, most labor in particular. This implies that those sectors more insulated from international competition rise relative to the exposed sectors. (The exposed sectors are, in real terms, declining. Since this does not appear so much nominally to be the case, a great deal must be accounted for by hidden inflation. We should not be surprised then, at the steady increase in gasoline prices.) This accounts for part of the relative rise in costs of public education in particular, and government in general, as the tax base is eroded by declining wages, which are converging to the wages of developing countries, like China.
How economists can consider this a good thing entirely escapes me. Well, not entirely. This also accounts for part of the relative rise in health care costs. It also helps account for some of the housing bubble, the price collapse due to lack of demand due to decreased earnings by labor.
Saturday, April 23, 2011
Who Really Pays Taxes
Steven Landsburg, at "thebigquestions.com" considers the issue of Mr. Robert Kendrick, who, though wealthy, does nothing but drive and park his four cars. Can Mr. Kendrick be taxed? Steven Landsburg says no. Many others say yes.
____________
Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't produce any, so nobody is really any better off. Good.
More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.
Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.
Above xposted to:
http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/#more-5896
To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.
From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.
So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.
Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.
--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.
A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---
____________
Mr. Landsburg is drawing a distinction between the nominal and the real. They are too often confused. Nominally, Mr. Kendrick can be taxed, and nominally everyone else is better off. However, Mr. Kendrick cannot be taxed of real resources, because he basically doesn't produce any, so nobody is really any better off. Good.
More generally, (really) only production can be taxed: All taxation is a transfer of production, goods and services, to the government. Consumption cannot (really) be taxed, since it is still a transfer of what is produced away from the consumer and to the government, which then consumes. Consumption can only nominally be taxed. For example, were we to tax Mr. Kendrick to such degree as to change his behavior, on the whole, there would still be no net improvement in the economy. Any real improvement in the rest of the world would be less than Mr. Kendrick's loss.
Further, (really) only consumption, demand, can be subsidized: All subsidy is a transfer of demand, that is, consumption of goods and services, from one producer to another, through the instrumentality of the government. Due to handling expenses, the subsidy is always less than corresponding tax, that is, on the whole, an economy is always, in the present, worse off for a subsidy. This is not to say a nominal subsidy need be useless. For example, when the subsidy goes to develop infrastructure, that is future production, an economy may be better off in the future.
Above xposted to:
http://www.thebigquestions.com/2011/04/18/the-man-who-cant-be-taxed/#more-5896
To continue: An economy is a transfer of production to consumption, of producer to consumer. However, producers are also consumers, and must get back a certain percentage of their real production in order to survive and expand. The various mechanisms of an economy may prevent producers retaining this percentage, in which case, a nominal subsidy may be necessary to compensate. This combination of processes is, however, less efficient than just letting producers retain sufficient resources on their own account. For instance, labor, particularly low wage labor, is increasingly coming under subsidy, as eg earned income tax credit, and in the future, ‘universal health care.’ It is more efficient simply to arrange that they are paid more. However, this seems to be politically infeasible.
From the above, it should be clear that the real, or essential, tax base is much smaller than the nominal, or apparent, tax base. This is because most labor, and most industry are involved in activities which are essentially non-productive, in the most basic sense. The financial services sector, for instance, cannot really be taxed, because it produces nothing real. Government employees, for instance, cannot really be taxed. Neither can Calvin Klein or Brad Pitt. Or your neighborhood plumber. Unless the government directly uses their services, their production, and is not buying these services, the government is merely transferring other, more basic production, away from them and to itself. They are not part of its real tax base, however much a part of its nominal tax base they may be. The government, for instance, cannot really tax the military industrial complex. It can, and must, tax those industries whose production goes into sustaining that complex. The production of steel and coal and electricity can be taxed, but the production of a jet fighter engine cannot be. The engine is instead really paid for by the steel and coal and electricity and labor, and whatever else goes into it, that the government had collected as real tax. This is clear because what ever nominal taxes are charged to the jet engine will merely be added to the (nominal) bill the government pays for it.
So, are you really taxed, that is do you directly contribute to your government, or are you just nominally taxed, and your welfare reduced somewhat by the transfer of demand, and thus resources, away from you? Probably (mostly, if not all) the latter.
Thus your complaint is not that the government takes too much from you, since it takes nothing. It is merely that it does not allow you to keep for yourself as much of what others have produced as you would like.
--- Further consideration has led me to the conclusion that real assets can be taxed, since all real assets have previously been 'produced.' Thus, taxes on Mr. Kendrick's nominal wealth, which represents a demand on real wealth, would represent a real transfer of wealth from Mr. Kendrick to the government. However, Mr. Landsburg's point that the government spending this would leave everyone else a little worse off is still correct. But so too if Mr. Kendrick had just taken the money and spent it himself.
A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will. ---
Monday, April 4, 2011
What is your citizenship worth?
What is your citizenship worth? A monetary value can be put on it. Is it still positive? Is it still worth something positive? Or has it become a burden? It is supposed to be a blessing.
Consider the negative value added to it by the national debt. At about $10Trillion or so, or about $33,000 for every man, woman and child, about $60,000 for every worker. And climbing. Taxes also take away from the value of citizenship, but with taxes, we buy things, and the value of these things adds to the value of citizenship. So add to that the benefits provided by society. Schools, highways, rule of law, etc. What should be a very significant net positive. Hard to put exact figures on them. Perhaps willingness to pay. Plus a premium. When you think about it, schools, law enforcenment, and many other public goods supported by our taxes, really are a bargain.
But in any case, citizenship is worth less than it was before, for most of us:
But not for some:
Not exactly the 'shining city on a hill' mentioned by Ronald Reagan. Not exactly an example for others to follow, either. With increasing debt, budget cuts to education and so forth, loss of rights in the workplace, etc, the value of citizenship seems to be decreasing. What will happen if, or when, the value turns negative, the bribes for obedience are no longer enough, and propaganda can no longer hide the fact that citizenship in the United States has, for many, becomes an increasingly onerous burden? Will they sell their citizenship to the highest bidder, by which I mean the rights citizenship confers? Piecemeal, perhaps? Or will the people organize, and reestablish a new citizenship, under new terms?
Saturday, March 26, 2011
Free Trade, Welfare and Debt
We revisit the issue of free trade, using the more traditional diagram. Compare to:
http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html
See the first diagram, “Welfare Under Autarky.”
Regard the diagram first as a single good. Later we can consider it a sort of average of all goods traded by that country. Look first at the basic axes, Price and Quantity. The price of a good goes up as you go up the Price axis. The quantity of a good goes up as you go from left to right on the quantity axis. Any point X is the number of goods at that particular price. We put point X as that little bump on the S curve. Nothing happens here, because with that many of our particular good around, and at that price, nobody wants to buy that particular good. There’s more than people want, so they don’t have to pay that price, because there is someone around who will want to get rid of what they have for less.
To begin with, we have just the traditional Supply S and Demand D curves. The Supply curve goes up from left to right, because as price rises, producers are willing to produce and supply more. The Demand curve goes down, because as the price goes up, consumers are willing to buy less. Where they meet is the equilibrium point e. That is where price and quantity of goods offered for sale equals the price and quantity of goods demanded. Note that all goods are sold at the same price, P, irregardless of the cost of producing them. The cost is a point on the Supply curve. Naturally, when it costs more to produce goods than that price P, as at point X, they are not produced in the first place. Well, except when they are subsidized.
The pink triangle is what is known as the producer’s surplus. A producer at point Y along the Supply curve is willing to produce at that price. That is his break even point. But the equilibrium price is P, at which all goods like his sell, so the pink above is all gravy to him. His surplus. To a person at Y’ further up the curve, the break even price is higher, he has more expenses, but the price he gets is still the equilibrium price P, so he has a smaller surplus. He make less profit. Less gravy.
The pink triangle is the surplus of all producers along the S curve. Their profits, if you will.
The green triangle is called the consumer’s surplus. It is the difference between what the buyer at Z, say, is willing to pay, and the price P he has to pay. So that green below is his gravy. His surplus. The person at Z’ further down the D curve, is willing to pay is less, but he still only has to pay P. But his benefit is less. So the green triangle is the surplus of all consumers along the D curve.
It is just your basic supply and demand diagram. But, this diagram also describes the situation of a country isolated from other countries and without trade of any sort. That is why it is labeled “Welfare under Autarky,”. Its supply and demand are entirely contained in the country itself. It is called a Welfare diagram because the green and pink triangles describe the benefits that consumers and producers receive when buying and selling goods.
Now while the triangles are important what is really important is the box P x Q, outlined by the yellow hatching. The price of all the goods sold P, times the quantity of all those goods Q, is the total money spent by all the consumers, the total expenditures. That is the total cost to consumers. But that box P x Q, is also the total revenue received by the producers for those goods, price times the number of all the goods sold. They are equal, which is as it should be, because, in an isolated country, all the producers are the consumers, and all the consumers are the producers. They are the same people. Now some consume more and produce less, and others produce more and consume less, but on the average, everybody produces and consumes the same amount. Which is one way of looking at the situation. The other way is to say that the total consumption and the total production are equal. Everything consumed must first be produced. Everything produced must eventually be consumed. By the same people, the population of the country under discussion. This is the condition under autarky.
We will come back to those boxes later.
Now we open up the country to trade. Free trade. We start with the next diagram, “Welfare under Free Trade World Price Less than under Autarky,”
with equilibrium point where the supply and demand curve come together, at the point e. Under free trade, the country is exposed to the world supply of goods, which is much larger than the country’s supply on its own. In fact the world supply is such that, at price P’, any amount of goods can be bought. We can by 1 at price P’, we can buy 1000 at price P’, we can buy a million. On the world market. So the quantity we can buy is independent of P’, so the line, the world Supply curve big S, is horizontal at P’. This is called an infinitely elastic supply curve. So here the world price is less than the equilibrium price under autarky. Now, because consumers can buy goods cheaper, at the world price P’, they buy more, quantity Q’, so a new equilibrium point e’ is established where the world supply curve big S and the Demand curve D intersect. (The demand curve does not change. Demand does not change when the price goes down. The quantity demanded does.)
Because consumers can buy goods cheaper, at the world price, their surplus, their benefits, increase, to the larger triangle consisting of the regions A,C,D, and E. They may or may not be expending more, but they are certainly buying more goods, because they are cheaper. The producer surplus, however has shrunk to the new smaller, region B. This is because they no longer can sell goods at more than the world price, that is more than P’. Also, because of this, those producers which can no longer break even at P’ are driven out of business, so domestic producers can only produce Q” of goods, and still make money.
Now the good news is that total welfare, the total covered in color, is increased. The consumer surplus increased by C+D+E, while the producer surplus only decreased by C Total welfare has increased by the quantity D + E. This is the benefit of free trade.
Unfortunately, remember those boxes we talked about? They are now different. Total expenditures by consumers is now the new price P’ times the total quantity consumed, Q’, ( green and green and red hatched edges)while total revenue earned by the producers is only P’ times Q”, (red and green and red hatched edges)the total price times the quantity produced. But remember, producers and consumers, they are the same. Producers are consumers, on the average, and in total. That is, they are now spending more than they are earning, and the difference, (Q’-Q”) x P’, now goes to the trading partner. That is, their welfare increased, but they are buying more, and producing less. They are dis-saving. They are running a deficit.
There is a moral to this: Free trade can be used as an excuse for sloth.
Running a deficit is unsustainable. What is the remedy? Well, first, let’s look at the other situation: See the next diagram: “Welfare under Free Trade World Price Greater than under Autarky.”
Well, when the world price is greater than the price under autarky, the price is driven up for domestic consumers, too. They have to pay the world price, too, P' or domestic producers will just produce and sell to the foreign market. It also means that domestic producers produce more, so a new equilibrium price is established at e’. Once again we see that net welfare has increased over the autarky case. This time it’s the producer surplus that is increased C + D + E, while the consumer surplus is only decreased by C, for a net gain of welfare D + E.
Now lets look at the boxes: (They’re not hatched. You’ll have to follow them yourself.): The expense of consumption has gone from P x Q to P’ x Q” This may or may not be a reduction in expenditures, but certainly the quantity consumed has decreased. Meanwhile, the income, the revenue from production has gone up from P x Q to P’ x Q’. The difference, P’ x (Q’ – Q”), outlined in red, is income greater than expenditures. It is net income. And note that entire difference is what is earned from trade, from foreigners. Of course, the area below the Supply curve is basically expenses, so what is saved is only the triangle above it. Which seems to be a different, and lesser quantity, from what is dis-saved in the other figure, but this merits further analysis. Elsewhere.
Anyway, compare the two figures. One diagram describes the importer, the other the exporter, in the same trades. In both figures welfare is enhanced. In one, it is consumer surplus, in the other producer surplus. So total welfare is enhanced. But it is enhanced at the expense of one party going into debt to the other! But this is no difference than exchange between households. In fact, the diagrams can describe the exchange between two households. It doesn't have to be countries. It can be any two economic entities. But this is a bad joke, because the situation is unsustainable. The first party must pay off the other eventually, and then the diagrams reverse. Of course, that requires behavioral changes on the part of both parties. The consumer must become the producer, but the producer must also become the consumer, if he ever allows himself to be paid back. Or he can just buy up the other's capital and become rich. At the expense of his fellow man. There is more to this. There is a very real moral issue to one man working harder so as to make the other his slave. But note we have returned to the producer-consumer problem.
http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html
See the first diagram, “Welfare Under Autarky.”
Regard the diagram first as a single good. Later we can consider it a sort of average of all goods traded by that country. Look first at the basic axes, Price and Quantity. The price of a good goes up as you go up the Price axis. The quantity of a good goes up as you go from left to right on the quantity axis. Any point X is the number of goods at that particular price. We put point X as that little bump on the S curve. Nothing happens here, because with that many of our particular good around, and at that price, nobody wants to buy that particular good. There’s more than people want, so they don’t have to pay that price, because there is someone around who will want to get rid of what they have for less.
To begin with, we have just the traditional Supply S and Demand D curves. The Supply curve goes up from left to right, because as price rises, producers are willing to produce and supply more. The Demand curve goes down, because as the price goes up, consumers are willing to buy less. Where they meet is the equilibrium point e. That is where price and quantity of goods offered for sale equals the price and quantity of goods demanded. Note that all goods are sold at the same price, P, irregardless of the cost of producing them. The cost is a point on the Supply curve. Naturally, when it costs more to produce goods than that price P, as at point X, they are not produced in the first place. Well, except when they are subsidized.
The pink triangle is what is known as the producer’s surplus. A producer at point Y along the Supply curve is willing to produce at that price. That is his break even point. But the equilibrium price is P, at which all goods like his sell, so the pink above is all gravy to him. His surplus. To a person at Y’ further up the curve, the break even price is higher, he has more expenses, but the price he gets is still the equilibrium price P, so he has a smaller surplus. He make less profit. Less gravy.
The pink triangle is the surplus of all producers along the S curve. Their profits, if you will.
The green triangle is called the consumer’s surplus. It is the difference between what the buyer at Z, say, is willing to pay, and the price P he has to pay. So that green below is his gravy. His surplus. The person at Z’ further down the D curve, is willing to pay is less, but he still only has to pay P. But his benefit is less. So the green triangle is the surplus of all consumers along the D curve.
It is just your basic supply and demand diagram. But, this diagram also describes the situation of a country isolated from other countries and without trade of any sort. That is why it is labeled “Welfare under Autarky,”. Its supply and demand are entirely contained in the country itself. It is called a Welfare diagram because the green and pink triangles describe the benefits that consumers and producers receive when buying and selling goods.
Now while the triangles are important what is really important is the box P x Q, outlined by the yellow hatching. The price of all the goods sold P, times the quantity of all those goods Q, is the total money spent by all the consumers, the total expenditures. That is the total cost to consumers. But that box P x Q, is also the total revenue received by the producers for those goods, price times the number of all the goods sold. They are equal, which is as it should be, because, in an isolated country, all the producers are the consumers, and all the consumers are the producers. They are the same people. Now some consume more and produce less, and others produce more and consume less, but on the average, everybody produces and consumes the same amount. Which is one way of looking at the situation. The other way is to say that the total consumption and the total production are equal. Everything consumed must first be produced. Everything produced must eventually be consumed. By the same people, the population of the country under discussion. This is the condition under autarky.
We will come back to those boxes later.
Now we open up the country to trade. Free trade. We start with the next diagram, “Welfare under Free Trade World Price Less than under Autarky,”
with equilibrium point where the supply and demand curve come together, at the point e. Under free trade, the country is exposed to the world supply of goods, which is much larger than the country’s supply on its own. In fact the world supply is such that, at price P’, any amount of goods can be bought. We can by 1 at price P’, we can buy 1000 at price P’, we can buy a million. On the world market. So the quantity we can buy is independent of P’, so the line, the world Supply curve big S, is horizontal at P’. This is called an infinitely elastic supply curve. So here the world price is less than the equilibrium price under autarky. Now, because consumers can buy goods cheaper, at the world price P’, they buy more, quantity Q’, so a new equilibrium point e’ is established where the world supply curve big S and the Demand curve D intersect. (The demand curve does not change. Demand does not change when the price goes down. The quantity demanded does.)
Because consumers can buy goods cheaper, at the world price, their surplus, their benefits, increase, to the larger triangle consisting of the regions A,C,D, and E. They may or may not be expending more, but they are certainly buying more goods, because they are cheaper. The producer surplus, however has shrunk to the new smaller, region B. This is because they no longer can sell goods at more than the world price, that is more than P’. Also, because of this, those producers which can no longer break even at P’ are driven out of business, so domestic producers can only produce Q” of goods, and still make money.
Now the good news is that total welfare, the total covered in color, is increased. The consumer surplus increased by C+D+E, while the producer surplus only decreased by C Total welfare has increased by the quantity D + E. This is the benefit of free trade.
Unfortunately, remember those boxes we talked about? They are now different. Total expenditures by consumers is now the new price P’ times the total quantity consumed, Q’, ( green and green and red hatched edges)while total revenue earned by the producers is only P’ times Q”, (red and green and red hatched edges)the total price times the quantity produced. But remember, producers and consumers, they are the same. Producers are consumers, on the average, and in total. That is, they are now spending more than they are earning, and the difference, (Q’-Q”) x P’, now goes to the trading partner. That is, their welfare increased, but they are buying more, and producing less. They are dis-saving. They are running a deficit.
There is a moral to this: Free trade can be used as an excuse for sloth.
Running a deficit is unsustainable. What is the remedy? Well, first, let’s look at the other situation: See the next diagram: “Welfare under Free Trade World Price Greater than under Autarky.”
Well, when the world price is greater than the price under autarky, the price is driven up for domestic consumers, too. They have to pay the world price, too, P' or domestic producers will just produce and sell to the foreign market. It also means that domestic producers produce more, so a new equilibrium price is established at e’. Once again we see that net welfare has increased over the autarky case. This time it’s the producer surplus that is increased C + D + E, while the consumer surplus is only decreased by C, for a net gain of welfare D + E.
Now lets look at the boxes: (They’re not hatched. You’ll have to follow them yourself.): The expense of consumption has gone from P x Q to P’ x Q” This may or may not be a reduction in expenditures, but certainly the quantity consumed has decreased. Meanwhile, the income, the revenue from production has gone up from P x Q to P’ x Q’. The difference, P’ x (Q’ – Q”), outlined in red, is income greater than expenditures. It is net income. And note that entire difference is what is earned from trade, from foreigners. Of course, the area below the Supply curve is basically expenses, so what is saved is only the triangle above it. Which seems to be a different, and lesser quantity, from what is dis-saved in the other figure, but this merits further analysis. Elsewhere.
Anyway, compare the two figures. One diagram describes the importer, the other the exporter, in the same trades. In both figures welfare is enhanced. In one, it is consumer surplus, in the other producer surplus. So total welfare is enhanced. But it is enhanced at the expense of one party going into debt to the other! But this is no difference than exchange between households. In fact, the diagrams can describe the exchange between two households. It doesn't have to be countries. It can be any two economic entities. But this is a bad joke, because the situation is unsustainable. The first party must pay off the other eventually, and then the diagrams reverse. Of course, that requires behavioral changes on the part of both parties. The consumer must become the producer, but the producer must also become the consumer, if he ever allows himself to be paid back. Or he can just buy up the other's capital and become rich. At the expense of his fellow man. There is more to this. There is a very real moral issue to one man working harder so as to make the other his slave. But note we have returned to the producer-consumer problem.
http://anamecon.blogspot.com/2010/05/greek-debt-and-producer-consumer.html
To be continued.
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