Our Leaders Can’t Pass Economics 101

As with most Americans, I have been extremely disappointed with the political leadership in the country for some time.  The sad part is, while each side blames each other, they are both equally to blame.  Since this is a finance blog, I’m not going to cover every issue, but as the title says, how can we expect our leaders to lead us out of an economic mess if they can’t even pass (or maybe remember, or maybe selectively remember the parts they like) Economics 101.

Economics 101

This is what a basic Economics 101 class covers:

• Interactions between consumers (you and I) and producers (factories) that determine pricing and the distribution of outputs (which includes goods and the wages paid
• This is Supply and Demand 101.  People pay more for scarce goods, and less for abundant goods.  Suppliers determine their pricing based on this.  Wages are similar – more workers for a job means lower wages.  Have a special skill, you will probably make more.
• How gains from specialization and exchange (i.e. trade), whether domestic or internationally, exceeds any losses by significant amounts
• This is all about trade.  Basically, free trade is good for the entire population.  Not to say that specific individuals or groups won’t be harmed in the short run, but over the long term, specialization and trade will be beneficial as the price of goods will come down.
• How the decisions by consumers, producers, and the government determine domestic and global prosperity
• This highlights the impacts of taxes and tariffs on the prices of goods.  The idea is that the higher the price, the less consumers will buy it.  So, you can artificially inflate a price by taxing it.  You can make trade less favorable by putting up tariffs.  Tariffs are designed to protect the home industries that could be harmed by trade, but they do cause higher prices for others.
• How efficiently or equitably economic issues are resolved through markets or government policies (i.e. which is better, the market, government policies, or a combination of both – based on specific issues like fisheries, global warming, etc.)
• Most Economics 101 classes highlight the three above principles in action using current events.  I will do that below!

Where Our Politicians Get It Right and Wrong

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  Photo Credit: Gage Skidmore

  Bachman

• Right:
• Lowering Corporate Tax Rate to 9%: Passes #3.  A lower tax rate encourages economic growth.
• Eliminate Capital Gains Tax: Passes #3.  A lower tax rate encourages economic growth.
• Repealing Dodd-Frank (Consumer Protection Act): Passes #1.  Consumers need to make a choice when interacting with the free market.  While some rules need to be applied to “fruad” type issues, generally consumers need to make informed financial decisions.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• $2.00 Gas by Drilling in U.S.: Fails #1.  Even with U.S. oil reserves being drilled, and less importation of oil, gas will still raise in price over time.  It is important to remember that oil is a scarce resource, and it will get scarcer over time.  As such, the price will rise.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
• Repealing Alternative Minimum Tax: Good and bad.  Less taxes are generally a good thing.  However, the AMT is designed to catch people who don’t earn income, but receive income from investments.  Not having the tax creates an un-equal tax base, which is difficult to assess.
• Cut Federal Spending 25%: This is generally a good thing, because less spending means less taxes, which mean more efficient economics.  However, Bachman doesn’t provide any points on what she wants to cut, so it is a tough call.
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  Photo Credit: Gage Skidmore

  Gingrich

• Right:
• Lowering Corporate Tax Rate to 12.5%: Passes #3.  A lower tax rate encourages economic growth.
• Eliminate Capital Gains Tax: Passes #3.  A lower tax rate encourages economic growth.
• Repealing Dodd-Frank (Consumer Protection Act): Passes #1.  Consumers need to make a choice when interacting with the free market.  While some rules need to be applied to “fruad” type issues, generally consumers need to make informed financial decisions.
• Balanced Budget: Passes #1.  A balanced budget that includes future entitlement reform should encourage economic growth.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
• Repealing Alternative Minimum Tax: Good and bad.  Less taxes are generally a good thing.  However, the AMT is designed to catch people who don’t earn income, but receive income from investments.  Not having the tax creates an un-equal tax base, which is difficult to assess.
• Allow deductions for mortgage interest and charitable contributions: Both of these fail #1 by creating an artificial lift in the market for these.  It encourages abnormal mortgage borrowing, as well as contribution giving.  However, by ending these, it could cause havoc in these markets, which may not be beneficial to the economy at this point.
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  Photo Credit: Gage Skidmore

  Huntsman

• Right:
• Lowering Corporate Tax Rate to 25%: Passes #3.  A lower tax rate encourages economic growth, but this is tied for the highest of all candidates.
• Eliminate Capital Gains Tax: Passes #3.  A lower tax rate encourages economic growth.
• Balanced Budget: Passes #1.  A balanced budget that includes future entitlement reform should encourage economic growth.
• Eliminates all deductions and tax credits: Passes #1.  As close to a equal tax as possible should encourage economic growth by not distorting any individual markets.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
• Repealing Alternative Minimum Tax: Good and bad.  Less taxes are generally a good thing.  However, the AMT is designed to catch people who don’t earn income, but receive income from investments.  Not having the tax creates an un-equal tax base, which is difficult to assess.
• Paul
  

  Photo Credit: Gage Skidmore

• Right:
• Lowering Corporate Tax Rate to 15%: Passes #3.  A lower tax rate encourages economic growth.
• Eliminate Capital Gains Tax: Passes #3.  A lower tax rate encourages economic growth.
• 0% Tax on Corporate Profits Overseas: Passes #3.  Not taxing foreign profits brought home will encourage more money to be spent in the US.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• Immediately Cutting Federal Agencies: Potential Negative Impact to #1.  While less government spending is a good thing because of less taxes, there are a lot of things that these Federal Agencies do that private, market-driven, companies couldn’t do because it wouldn’t be profitable.  However, there are good solutions that could be worked into this if done correctly, but as it stands, his plan fails.
• Additional tax credits for education, energy, and healthcare: Fails #1.  This would continue to make the markets in these sectors perform abnormally, by inflating costs due to offsetting tax credits.  Reforms in these markets need to address the entitlement and government interaction already creating high prices.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
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  Photo Credit: Gage Skidmore

  Perry

• Right:
• Lowering Corporate Tax Rate to 20%: Passes #3.  A lower tax rate encourages economic growth.
• Eliminate Capital Gains Tax: Passes #3.  A lower tax rate encourages economic growth.
• Capping Federal Spending: Passes #3.  By capping federal spending at a certain level, you can encourage economic growth through market stability and tax stability.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• Eliminate the Federal Reserve: Negatively Impacts #1 and #3.  The Federal Reserve, while having its critics, has helped the country through recessions since it was created.  Its primary job is to facilitate growth by balancing producers and consumers, and avoid shocks like the great depression.  However, the Federal Reserve can’t change governmental policies that led us here, so in that respect, it has done well.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
• Repealing Alternative Minimum Tax: Good and bad.  Less taxes are generally a good thing.  However, the AMT is designed to catch people who don’t earn income, but receive income from investments.  Not having the tax creates an un-equal tax base, which is difficult to assess.
• Allow deductions for mortgage interest and charitable contributions: Both of these fail #1 by creating an artificial lift in the market for these.  It encourages abnormal mortgage borrowing, as well as contribution giving.  However, by ending these, it could cause havoc in these markets, which may not be beneficial to the economy at this point.
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  Photo Credit: Gage Skidmore

  Romney

• Right:
• Lowering Corporate Tax Rate to 25%: Passes #3.  A lower tax rate encourages economic growth, but this is tied for the highest of all candidates.
• Eliminate Capital Gains Tax for taxpayers under $200,000: Passes #3.  A lower tax rate encourages economic growth, but the only plan that sets limits.
• Amend SOX (Accounting Reform): Passes #1.  Romney is the only candidate that wants to keep SOX, but amend it to make it less onerous and costly for small and mid-sized business.  This keeps the regulation to allow transparency, but reduces costs.
• Cutting costs through eliminating subsidies: Passes #3.  Subsidies artificially inflate markets, and as such, negatively impact economic activity in the long run.  By eliminating subsidies, you can improve overall economic growth.
• Romney is the only candidate that has not mentioned anything blatantly wrong about economics and the economy.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
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  Photo Credit: Gage Skidmore

  Santorum

• Right:
• Lowering Corporate Tax Rate to 17.5%: Passes #3.  A lower tax rate encourages economic growth.
• Lower Capital Gains Tax to 12%: Passes #3.  A lower tax rate encourages economic growth.
• Balanced Budget or No Pay: Passes #4.  It creates an economic incentive for Congress to do its job, which is a good example of how economics can be used to coerce.
• Wrong:
• Repealing SOX (Accounting Reform): Negatively Impacts #1.  While costly to business, SOX provides transparency of companies in the marketplace and requires strict accounting standards to be followed.  This encourages equal competition between all parts of the economy.
• Tough Call:
• Repealing ObamaCare (Mandated Health Care): This is a tough call because #3 says government involvement is generally bad.  So mandating all individuals have health care can distort the market.  However, since the costs of the uninsured receiving medical care is passed on to the paying consumers, it can be viewed as necessary to prevent that from occurring (and that is #4 – good use of policy to solve equity issues).
• Allow deductions for mortgage interest and charitable contributions: Both of these fail #1 by creating an artificial lift in the market for these.  It encourages abnormal mortgage borrowing, as well as contribution giving.  However, by ending these, it could cause havoc in these markets, which may not be beneficial to the economy at this point.
• Obama
• Right:
• Lower Certain Capital Gains Tax Rates to 0%: Passes #3.  A lower tax rate encourages economic growth.
• Spending for Infrastructure: Passes #3.  Government is the builder of infrastructure, and those projects do create jobs.  The only questionable part is that the revenue for this comes from taxes, which do negatively impact economic growth.
• Reducing Farm Subsidies: Passes #1.  Farm subsidies change the agriculture market in a negative way.  Let the market decide the price for crops, and have farmers making decisions based on supply and demand.
• Increase fees to offset true costs: Passes #1.  The government should not overcharge or undercharge for services it renders.  These include aviation security, postal service, and other services.  Pass these costs on to the true users, and make the market pay for, or find a better solution.
• Program Integrity: Passes #4.  Enforcement is an important part of all programs, and it has been lack.  Stepping up enforcement of program compliance will save the government money in the long run.
• Wrong:
• New Jobs Tax Credit: Negatively Impacts #1.  A tax credit will create an artificial market.  Employers will or will not create jobs when they are needed automatically, and the incentive will become more of a bonus than an incentive.
• Continued Long-Term Unemployment Benefits: Negatively Impacts #1.  The length of the current unemployment benefits creates an inefficient labor market which is negatively impacting overall unemployment.  There is no economic incentive for the unemployed to seek work, so they are not.  Shorter, more need based unemployment benefits would be a better solution.
• Tough Call:
• Expand Nationwide Rural Internet Service: Questionable on #3.  While government spending on infrastructure is generally a good thing, if there is no demand for the project, or it cannot be supported in the future, it may not be a worthwhile expenditure.
• Tax Reform: Questionable on #3.  While lower taxes under Obama’s plan is generally a good thing, it does increase on some individuals, and many credits and deductions will still remain, which creates inefficiencies.  These can make the program go either way.

The Bottom Line of Political Economics

The bottom line of political economics is this: politicians make their money by being employed as politicians.  Thus, they need to stay elected, and will promote themselves as supporters of policies their constituents want.  These policies may or may not be economically sound policies, as you can see above.

However, what is telling is that many politicians get things right economically, but there are a lot of tough calls that could go either way.  Some sound great in speeches, but the actual legislation screws things up.  Some policies are just not sexy, but could really be beneficial to the economy overall.

Readers, what are your thoughts on politics and economics?  What if the politicians that made economic decisions had to have advanced degrees in economics?