Suppose that every day, ten men go out for dinner and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (The poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men ate at the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." Meals for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free.
But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat his meal. So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too It's unfair that he got ten times more than I!" "That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!" "Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for the meal, so the nine sat down and had dinner without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.
Props to Brett Boothe for showing me this example. I figured I would post it since he has been absent trying to make it in the working world. Enjoy.
I have a few comments that I would like to share on this issue, but I wanted to get it up so that some certain people could have a video to watch at staff time!
Say you stumbled upon a lot of money.. say 14 million dollars. What would you do with it? Suppose you want to make a return on your investment, what qualities in the market or in companies would you look for? Would you invest in a company that looked like this: The company is ZBB Energy. They are on the cutting edge or green energy technology manufacturing batteries and equipment to store in energy for cars and wind turbines. Sounds great so far! But, when you look at their filings with the SEC, they have been hemorrhaging money since going public. They lost $4.9 million in fiscal 2008 and $5.5 million in fiscal 2009, also $6.9 million in first 9 months of this year! It explained it had a "cumulative deficit" of $44.1 million and informed shareholders that it "anticipates incurring continuing losses." Its CEO was just asked to step down and has a new 72,000 square foot facility that is operating at 10% capacity.
The 14 million dollar question: would you invest your 14 million into this company?
You would have to be crazy!! But, guess who found it worthy?? The Federal Government. The Obama Administration actually announced the awarding of the money at their plant as a part of the 2.3 B package to promote clean energy calling it "pointing the country to a brighter economic future."
Terrific.
Exhibit B
Often pointed to as a huge success story of the Stimulus package, the Cash for Clunkers program was a case study in itself on why government doesn't work. The program took $3 Billion in taxpayers money and gave tax rebates for people who traded in their old "clunker" car for a newer, more green car. The Central Planners (Fed Government) thought it would be a great way to clean up the environment and stimulate auto sales. But, the effects of planners intervening in a free market to help are far worse than I originally thought. As Reagan once said, "the 9 most terrifying words in the English language is : 'I'm from the government and I am here help."
Here is the auto sales index over the past year. The spike is obviously from the quick and artificial demand. Over 600,000 plus sold and the central planners declared victory! Then, the consequences and details came. Pesky details. Simple arithmetic shows that each transaction cost the taxpayers $24,000. We could have just bought them new cars with the money we devoted to the cascade of government bureaucrats and paperwork to administer this farce. Now, we are entering the real consequences. Edmunds is reporting that used cars are on average 10% more expensive this year than at this point last year and over 30% more expensive for SUVs. Each buyer this summer paid an average of $1,800 more for used vehicles than at this point last year. The problem with "central planning" is that their was a real market for the cars that the Obama administration sent packing. Who looks for used cars?? People on a budget, who cannot afford to buy new. By destroying a quarter’s worth of trade-ins in three weeks and permanently taking them off the market, the Obama administration has forced an artificial inflation by supply restriction.
They subsidized new car sales that would have occurred anyway and in the process, might as well have shredded $3 Billion dollars in our faces. Sound a lot like the homebuyer's credit that the planners love. Ironically, the graph is shockingly similar to the one above. The people most hurt by this act of planning is the working class folks, who could least afford to.
Terrific. At least my air is less dirty.
Exhibit C
This is Medicaid Chief Actuary in 2008 reported these numbers:
Year (pre-PPACA)
2010
2011
2012
2013
2014
2015
2016
2017
Covered lives (millions)
40
39
39
38
35
34
35
35
Federal expenditures ($bn)
$392.6
$424.0
$457.4
$494.0
$533.3
$576.4
$623.0
$673.7
Federal share
$223.5
$241.3
$260.3
$281.1
$303.5
$328.0
$354.5
$383.4
State share
$169.1
$182.7
$197.1
$212.9
$229.8
$248.4
$268.5
$290.3
Cost per covered life
$9,815
$10,872
$11,728
$13,000
$15,237
$16,953
$17,800
$19,249
Growth rate
10.8%
7.9%
10.8%
17.2%
11.3%
5.0%
8.1%
We see that at best, it costs the government $10,000 per covered person in Medicaid, 19,000 in 2017!That is certainly more than regular health inflation. Why? Government planners are ignorant of market forces. What is the average health care plan cost per year? Massachusetts has the highest health care costs (and most gov. intervention), with the average cost being $4,400 in 2009. Government run insurance costs 2x as much as the average plan in the market. Not only that, but we spend 2x as much per person and get substantially worse care. And, Obamacare expands this awesome program by 50%? Should work out well.
In the end the government hurts the people it is most intending to help. We would be better off, cutting each Medicaid person a check and align their plans with real medical inflation than the black hole of inflation of a government program and let the market solve these problems. I want to abandon government solutions to problems not because people in need are unimportant, but because they are crucially important. 2x the cost for less quality.
Terrific. Only in government.
The Thesis
The government is generally ignorant of market forces and often creates a series of unintended consequences with the fruits of your own labors.
The Principle
The key insight of Adam Smith's Wealth of Nations is so simple: if an exchange between two parties is voluntary, then it will not take place until both parties believe they will benefit from it. The majority of economic fallacies derive from the believe that their is a fixed pie and that one party can only gain at the expense of another. As Reagan said in his UNREAL speech above, "people can't see a fat man standing next to a skinny man and not assume that the fat one got that way by taking advantage of the skinny one."The free market is a market of voluntary cooperation. Prices in the market emerge from these voluntary transactions between buyers and sellers can coordinate the activity of millions of people, each seeking his own interest, in such a way that makes everyone better off.
Capitalism means that no one is subject to arbitrary coercion by others. It requires people to be allowed to retain the resources they earn and create. Protection of ownership and property lies at the heart of a capitalist economy. Ownership means not only that people are entitled to the fruits of their labor, but they are free to use their resources without asking authorities first. The alternative is for the government to be entitled to our labors and then to decide what types of behaviors to encourage. The question is does government know what we want and consider important in our lives better than we do ourselves?
This is not to say that any one person in the market will be smarter than a bureaucrat, but it does mean that market participants (business owners and consumers) are in direct touch with their own particular corner of the market, thus responding to price fluctuations, and have direct feedback on supply and demand. Central planners can never collect all the information in all the given fields, nor are their nearly as motivated to be guided by it. Even if one person in the market is no smarter than a bureaucrat, a million people working together certainly are!
Example: if the government directs all resources to a certain kind of collective farming and it fails, the whole of society will be affected and, in the worst case, starve. If, instead, one group of people attempts the same type of farming, they alone will suffer the adverse effects and fails, then surpluses elsewhere in the market will mean no starvation. The risks of experimentation should be limited so society as a whole is not jeopardized by a few peoples mistakes. Oh trust me... they will make mistakes. But who should be making them? Individuals or government bureaucrats?
Conclusion
I know this is a long post, but it is worth it. Because.. "the more the plans fail, the more the planners plan." We need to be informed. The battle raging today is about is not just about tax rates, government spending, or your health, but it is about who should be making decisions... government planners or individuals. Looking at Exhibit A, B, and C.. I will take individuals every time.
After some prodding from my good friend Blake, I am making my much anticipated return to the blog.
After pretty much dominating everything the Mississippi State business school could throw my way, I'm now looking for new challenges in the business world. With 6 years of college experience under my belt and my recent induction into the Mississippi State Hall of Fame, I'm pretty pumped about earning a paycheck and sending off my fair share to Uncle Sam. Been looking forward to getting soaked with taxes for years now, the day has finally come and I can’t hardly contain my excitement. Hopefully next year I will get to pay even more. Got my fingers crossed on that one though.
Don’t won’t to get sidetracked on taxation though. So, down to business. It would seem that now that I have a job I would have a perspective on taxation and the use of MY money to fund bailouts and stimulus, or maybe I would give my opinion on immigration or gay marriage or the building of mosque, but I’m gonna stray from the norm for now and save the serious stuff for a later date. Today I want to touch on a hypothetical just for fun. Since we have adopted Friedman Friday, the ideals of good ole Milton have flooded this blog. So in honor of Milt, and due to the time of year, I want to do something a little different. So without further ado, my hypothetical:
What would happen to the NFL if Milton Friedman was the commissioner????
First off, the NFL as is, is very socialistic in nature. Milton would not go for this and would change that immediately. Day one on the job, the draft would be eliminated. No longer will the worst team get the benefit of drafting first. In Friedman’s world, if you fail to perform, you don’t get a bailout. If you fail for long enough, you won’t be able to compete, and sorry Detroit, but you might not be fielding a team the year after losing every game. And if Matthew Stafford wants to stick around Georgia and play for the Falcons after college, more power to him. Milton’s league won’t ship you off to the dreadful Lions just because you proved to be the best college quarterback in 2008. Instead, every NFL eligible football player would have the opportunity to throw his name into the free agency market, not the draft. From there, the NFL ready college studs could bid there services to the highest bidder, or head to the team of his choice for whatever price that team is willing to pay. Eli Manning doesn’t have to force a smile while holding a Chargers jersey after being drafted when everybody knows he doesn’t want to be there. He shouldn’t have to be there. Friedman would make the NFL a free market, kinda like….. every other occupation in America. I wonder how it would work if the worst performing hospitals each year got the first pick in the next years Rookie Doctor Draft. Sorry, Brett Jeter, we know you excelled in Med School during your four years and since you’re the best in this year’s class, the Detroit Inner City Drug Rehab Clinic has selected you first overall because they earned the right to you because they were downright awful last year. Good luck. Day one, Milton gets rid of the draft.
Day two, the league minimum salary is out. Friedman’s not a fan of a minimum wage. Sorry Jim Sorgi.
Day Three, now that the draft has been eliminated and league minimum is gone, Ole Milt needs to address the salary cap. It would take him all of three seconds to scratch that hurdle for teams. If the Cowboys want to spend a cool billion on players, go right ahead. Might not be a good investment, but it’s not the job of Commissioner Friedman to tell teams how to spend their money. However, when Jerry Jones spends a billion on players and his new stadium only has 72 fans in attendance for games because hes got to charge $7,894 per ticket, Milton and the rest of the league won’t be there to bail him out of bankruptcy.
Day four, Milton would lay out the role of the commissioner. It would go something as follows: He will make a schedule and assign home and visitors, however, if the visitors would like to buy the rights to be the home team, that’s fine if the teams can agree to terms. He will also define a playoff structure. He will be the enforcer to ensure that all contracts between teams, players, coaches, managers, and water boys are upheld. Pretty laissez-faire.
Day five through twenty, Friedman will deal with the Players Union. That might take a little while but I feel confident Milton will make them understand his free market ideals. Guys like Vince Young might struggle with economic principles though.
Day 21, Milton will handle the exit of the Chiefs, Dolphins, Raiders, and Lions who can’t compete in the NFL and can’t survive now that the league won’t prop them up and promote their failures by giving them top draft picks after awful seasons.
Day 22, when the Jets realize that they have a legitimate shot at being a contender this year but just need a little more cash to bring in another key player or two, they are more than welcome to go public and have an Initial Public Offering and sell their stock on the NYSE to raise that cash. If they want to issue bonds to raise cash so that they can afford Darrelle Revis, maybe their fans will give them a favorable interest rate.
Hmmmm, Ole Milt would shake it up a little bit. Would be interesting to see how the league would shape up if it was treated as a free market system and Friedman was in charge.
I wonder what would happen if Obama was the NFL commissioner?
This is an interesting point that Dr. Friedman brings up, especially when thinking about the morality of the death tax. We should be considering the whimsical idea of fairness and equality in a free society. Here is the thesis:
"The inheritance of talent is no different from an ethical point of view from the inheritance of other forms of property.. Yet many people resent the one, but not the other." Milton Friedman at 1:24.
Another item of note: the introduction of the famous Thomas Sowell at the end of the video destroying Dr. Piven. Enjoy.
"Americans are so enamored of equality that they would rather be equal in slavery than unequal in freedom." Alexis de Tocqueville.
I have nothing against firefighters, teachers, and policemen--they are vital. But, bailouts for the state governments to pay workers do not encourage states to change behavior or be self-reliant. Since 1995, state payrolls have risen on average 16 percent along side a Federal Stimulus that injected enormous resources to shore up these oversized payrolls. I personally watched the State of Mississippi cut resources to Higher Ed., mental health, and a plethora of other services. Numerous other states have made cuts to balance budgets and some have surpluses!
"Why should we the taxpayers from 46 states, like MS who cut budgets and made hard decisions, pay for the extravagances of Illinois, California, Michigan, and New York?
If Gov. Christie in NJ closed a 11 B budget deficit without raising taxes, State leadership can develop better budget priorities... if they are forced to. Direct bailouts do no such thing.
Treasury Secretary Tim Giethner: "But there is no credible argument to be made that the purpose of government is to borrow from future generations of Americans to finance an extension of tax cuts for the top 2 percent."
So.. there is not a credible argument to let people keep their own money they have rightfully earned, but there is a credible argument to push for more stimulus spending on what government bureaucrats deem best? What is this? Amateur hour?
If it isn't broke, don't fix it. If it is, then throw money at it. This article makes me yearn for a true executive in office. No, I Double Dog Dare You
Shockingly, President Obama's "open hand" extended to Iran's Ahmadinejad on nuclear talks produced no results over 18 months. But, he is trying again. As Winston Churchill once said leading up to WWII, "We are entering a Period of Consequences." I am afraid there will be real consequences to being soft on policy to Iran. But, hey! lets keep trying.
Missed Story on Prop 8: The President I think it is unfortunate that Judge Walker ruled essentially that I was a bigot for opposing gay marriage. What is interesting is that our President holds the same views as I do. This ruling puts his position in the spotlight.
Conflict of Visions: Michelle Obama vs. David Cameron Normally, this stuff doesn't bother me too much. But, as much as the Administration decries business leaders and greed, I just do not get this. I applaud the PM.
