Economists Do It With Models

Bar Stool Economics…

November 18th, 2008 · 15 CommentsBehavioral Econ · Just For Fun · Uncategorized

A friend sent this to me, and I figured it was entertaining enough to warrant posting:

Suppose that every day, ten men go out for beer 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.

The ten men drank in the bar 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 beer by \$20. Drinks 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 drink 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 drink his beer. So, the bar 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 paid \$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 drinks, so the nine sat down and had beers 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, boys and girls , 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 drinking overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

Now this is clearly an oversimplification, but I think that the story illustrates a couple of relevant points. First, it is important to remember that people do have the ability to take their money and run if taxes get too high. Granted, this works better when avoiding local taxes as opposed to federal ones (since it’s easier to move to another state than it is to move to another country), but we see it happen all the time. (Either that or a lot of corporations REALLY love Delaware’s ambience.) Even if people don’t move, higher taxes for wealthy individuals increase the incentive for them to structure their income and assets so as to minimize the taxes that they pay, so a tax hike is not a clear win.

Second, the story illustrates the principle that people often focus on the relative magnitude of changes rather than the relative magnitudes of the resulting levels. Above, the people were arguing over how to split the refund without ever stopping to think about the level that each of them started at. This is likely because the people were accustomed to the status quo and had implicitly designated it as fair, and thus the new proposal amounts to a deviation from fairness. See how the framing of a policy can be so important?

15 responses so far ↓

• 1 Eddie // Mar 6, 2009 at 10:55 pm

This is an interesting little allegory. However, the tax structure isn’t that cut and dry. Rich people can take their marbles and leave, but who will continue to help create their wealth?

• 2 Churlish // Mar 10, 2009 at 11:13 am

If their wealth (earned from their labor, capital, and entrpreneurship) is merely going to be taxed away and redistributed to those who DON’T earn it, what incentive do they have to keep producing? Read Atlas Shrugged by Ayn Rand … I don’t agree with everything in her philosophy, but her indictment of socialism and mob mentality is dead-on.

• 3 econgirl // Mar 10, 2009 at 11:58 am

I am quite familiar with the works of Ms. Rand…*looks at large print copy of The Fountainhead on bookshelf*, and I certainly think that she makes some valid points. That said, I think that the negative impact on production and entrepreneurship tends to be a little overstated since people work and achieve for a number of reasons other than the fact that they get to put money in their pockets. This is not to say that they are being selfless, it just means that intangibles such as power, social status, etc. serve to provide additional incentives to succeed that can’t (easily) be taxed away.

• 4 MicroGlyphics // Mar 11, 2009 at 7:06 am

Ayn rand was an intellectual with an interesting if not over-simplified perspective on life. Atlas Shrugged has to be one of the worst written works to be considered a Classic. Believe me, you would not want to live in Ms. Rand’s world, as your so-called freedoms would be trumped but those “above” you who take liberties at the expense of others.

In the post “Bar Stool Economics…,” there is no labour function. This is entirely a consumption model. It doesn’t say anything about the efforts made to earn the beer money. It also doesn’t deal with fundamental necessities (or at least rights), so it is a case of setting up a flimsy straw man argument and tearing it down.

• 5 econboy // Mar 11, 2009 at 8:01 am

Actually, the richest man will only leave if he won’t be beaten up more at any of the other bars in town. Or he might stay in the bar because it’s the “best damn bar on the block.” The story in this article assumes that the richest man acts rationally while the poorer men act irrationally. Namely, they agree to the payment system and then dislike the outcome. This assumes that the poorer drinkers either A) couldn’t predict the outcome when choosing the payment method, or B) purposely chose a payment system they didn’t like.

The poorer 9 act irrationally. No problem, human psychology is frought with inconsistencies and irrational decision making. So why is the richest man the only one who would act sanely? Why is his wealth granting him the clarity of mind to act rationally? Isn’t he human? Do the poorer 9 act irrationally because they are poor?

In reality the Rich guy is just as likely to act irrationally as the poorer 9 guys. He just might come back to the bar every night and take his lumps each time. Why? Because whatever he is doing to make him the richest man in the room is still making him the wealthiest man in the room. Being wealthy is still more preferable to not being wealthy, even if you pay the most for your beers and are loathed for it.

So this story is not allegorical to reality in 2 ways the rich are just as likely to act irrationally as the poor and the wealthy like to keep doing whatever is making them wealthy regardless of the tax implications.

As long as the tax system doesn’t force me to bring home the same amount of money no matter what I do, I will have an incentive to earn more. I would rather pay 90% tax on \$10 million dollars of income than 10% tax on \$30,000 of income. Why? Because I still get to keep\$1 million dollars. I may not like it but if all the other bars are the same then I will still get the same beer that I have grown accustomed to.

• 6 Dave // Mar 15, 2009 at 8:04 pm

If Ayn Rand had valid points, she wouldn’t have had to create narcissistic fantasy worlds to make them in. =D

• 7 LL Cool A // Mar 17, 2009 at 3:20 pm

On an aside from the actual text of this, Dr David R. Kamerschen did NOT pen this piece and nobody really knows who did.

• 8 Jeff // Apr 10, 2009 at 3:00 am

-econboy

“The poorer 9 act irrationally. No problem, human psychology is fraught with inconsistencies and irrational decision making. So why is the richest man the only one who would act sanely? Why is his wealth granting him the clarity of mind to act rationally? Isn’t he human? Do the poorer 9 act irrationally because they are poor?

In reality the Rich guy is just as likely to act irrationally as the poorer 9 guys….

….So this story is not allegorical to reality in 2 ways the rich are just as likely to act irrationally as the poor and the wealthy like to keep doing whatever is making them wealthy regardless of the tax implications.”

It’s not the rich man’s wealth that makes him more rational than the rest, it is BECAUSE he is more rational (intelligent, creative, and hard working) that he has more wealth than the others. The rich guy is LESS likely to behave irrationally. We know this because (assuming he created his own wealth) he IS wealthy.

It continues to amaze me that anybody still takes the Keynesian economists seriously. They seem to believe that educated intellectuals are the only smart people on the planet. That everyone else is of slightly above average intelligence at best, and that any moron can run a successful business. I’ll put my raw “understanding” of economics up against a Keynesian PhD’s “knowledge” of economics any day.

“As long as the tax system doesn’t force me to bring home the same amount of money no matter what I do, I will have an incentive to earn more. I would rather pay 90% tax on \$10 million dollars of income than 10% tax on \$30,000 of income. Why? Because I still get to keep\$1 million dollars. I may not like it but if all the other bars are the same then I will still get the same beer that I have grown accustomed to.”

Wrong. Everyone, especially the rich, puts up with taxation because of a misguided sense of “patriotism,” and because disobeying the government’s tax “laws” means financial ruin, and time in prison.

• 9 Steven Duerringer // Apr 10, 2009 at 10:17 am

“Wrong. Everyone, especially the rich, puts up with taxation because of a misguided sense of “patriotism,” and because disobeying the government’s tax “laws” means financial ruin, and time in prison.”

This is absolutely ridiculous and is the kind of misguided thinking that forgets the history of this species and the complete interdependence of our economy on our government. Business prevails here because at every step of every transaction made, the government acts positively to ensure smooth operations, enforcement of contracts, the stability of infrastructure necessary for business operations, etc.

• 10 Jeff // Apr 10, 2009 at 1:19 pm

– Steven Duerringer

“…..complete interdependence of our economy on our government. Business prevails here because at every step of every transaction made, the government acts positively to ensure smooth operations, enforcement of contracts, the stability of infrastructure necessary for business operations, etc.”

Why?
Explain how government is necessary to the functioning of an economy.
To avoid the “roads” debate, I will grant to you infrastructure – a small level of taxation for the maintenance of roads, railways, ports, etc..
Contracts are easily, and often, handled by the private sector. Standards organizations are more than sufficient to handle quality and safety concerns. And, since I know you’ll bring up monopolies and working conditions, show me a genuine monopoly that didn’t use the threat of force, or the power of government to achieve and maintain that monopoly. Working conditions always improve as the economy, and the society matures.
Just because government has always been there, doesn’t mean that it was necessary.
Our government has done a lot of great things, but it’s control of the economy is not one of them.
Without government, fractional reserve lending, and the massive secondary credit market would have never existed – for just one example of how the government has “helped” the economy.

All societies, and their markets, mature and become more civilized over time. Just because there is almost always a government of some sort there to take the credit, doesn’t mean that government was necessary.

• 11 Stephen Meister // Apr 12, 2009 at 9:19 am

THE PATH TO HELL IS PAVED WITH GOOD INTENTIONS
Posted by sbm@msf-law.com on Wednesday, April 08, 2009 12:00:00 AM

And that’s where we are headed—if we follow Barack Obama’s lead. Let’s take a big step back and see if we can put the current economic crisis in long term historical perspective. Except for the recent past, mankind has endured a consistently miserable existence, barely better than our animal counterparts. We froze in the winters, suffered through blistering heat in the summers, were poorly clothed and sheltered, endured great famines, starvation, poor to non-existent sanitation, plagues and a panoply of horrific epidemics and diseases, all during a meager life expectancy of 20 to 30 years. Today, despite the current economic crisis, our greatest in more than a half century, the life expectancy of the average American is nearly 80 years, and by and large, we are still well fed, well clothed, well sheltered, and enjoy quality medical care and sanitary conditions. What great force delivered us from countless millennia of misery?

The dramatic betterment of our lives did not come about gradually over the millennia, but rather in relatively rapid bursts traceable principally to two developments of great importance in human history—agriculture and free market capitalism. Agriculture began to emerge about 10,000 years ago, ending our nomadic ways and enabling us to congregate in permanent clusters of humanity—our future cites. While our lot then improved substantially, the really big change would not occur for another ten millennia, when free market capitalism took hold as an outgrowth of the Industrial Revolution of the late 18th and 19th centuries. Under free market capitalism, the per capita gross domestic product of the Western World increased exponentially during the twentieth century.

My grandfather walked 900 miles out of the Ukraine under cover of darkness in order to board a freighter bound for the United States, where he thought the “streets were paved with gold,” only to find that in order to sustain himself—there was no welfare back then—he would have to take a job manacling himself to a horse’s yoke and pulling, together with a fellow Russian immigrant, an otherwise horsedrawn cart from Manhattan’s lower eastside over the Brooklyn Bridge loaded with goods on summer days too hot for the horse. Less than a century later, my daughter must choose between a \$4 Moca Latte and \$3 Moca Chino at the local Starbucks a few blocks from the condo she shares with her roommate while attending a \$50,000 per year University. What happened? Where would my daughter be today had my grandfather not walked out of the Ukraine at night? Did the Earth’s natural resources magically multiply from some mysterious cosmic event in the last century?

The answer of course is free market capitalism—not religion, not philosophy, not even science, and most notably, not socialism or communism. Through the private ownership of the factors of production, coupled with the incentives to productivity inherent in a free market system, we have prospered like never before in human history. Our miserable existence came to an abrupt end in the twentieth century, when for the first time in history, we were blessed with a cornucopia of goods and services, quality medical care, sanitation, shelter, heat, air conditioning, personal computers, the internet, modern conveniences, and a plethora of labor saving devices. We drive big powerful air conditioned cars and fly in magnificently engineered jet powered aircraft, each whisking passengers from place to place in living room comfort, while in some parts of the world not yet touched by free market capitalism, mules, camels and horses are still the chief means of transportation of both humans and cargo. The vast majority of Americans today, even during this economic crisis, live better, cleaner, longer, higher quality lives than the feudal lords of medieval England, let alone their medieval working class counterparts.

Despite the stunning betterment of our day to day lives brought about by free market capitalism, many of us—most notably liberal democrats—complain endlessly and chronically about its failures and shortcomings. And those who don’t complain are branded as selfish and unfeeling by those who do. The debate about free market capitalism’s failures consumes us—most recently, that debate resulted in the election of the most powerful leader of the free world, the 44th president of the United States, Barack Obama.

Peering through the lens offered by this historical perspective, then, let us look a bit more deeply at why we complain so much about the system that delivered us from hell on earth. Stripped down to its core, the plaintive cries of capitalism’s critics boil down to simply this—free market capitalism results in an unfair concentration of society’s wealth in a fortunate few. Ironically, this is the same criticism the oppressed peasantry of medieval times leveled at feudalism, only now the fortunate few are far more numerous, their ranks change constantly and their wealth is based on their own industry and hard work, not on a presumed birthright. These critics say that the concentration of wealth in a fortunate few is fundamentally wrong—despite that it is predicated on their own labors and not a birthright— and that that wrong can and must be righted by taking money from the “rich” and giving it to the poor. This they say can be achieved through federal tax policy. We hear statements from our own President — the leader of the greatest capitalist society in the world — like “it’s time to spread the wealth.”

But here’s the rub. And it’s a whopper. The entire free market capitalist system is based on incentive—the opportunity to turn a profit. Or said in the most raw political terms, capitalism is based on the opportunity each individual economic participant has to accumulate more than a per capita share of the aggregate goods and services produced by the society of which such individual is a member. Like it or not, the vast transformative power of capitalism stems from its very ability to yield a disproportionate concentration of wealth in a fortunate few. Indeed it is precisely that chance — the chance to “make it” — that forces many of us out of bed every day, that drives many of us to labor, innovate and most importantly take risk; and those labors, innovations and risk takings are the very actions which bring about our collective good fortune. Thus, through hard work and brilliant risk taking (investing) over a lifetime, Warren Buffet has accumulated many billions of dollars of wealth, which he is now privileged to spend on himself, others he selects, or give away as he sees fit—but not as Mr. Obama or Nancy Pelosi see fit.

Take away or dilute that incentive, and we on the whole would be inclined to work less, be less industrious, thereby producing less goods and services, which ultimately yields a lower standard of living for all. Is it really such a price to pay for deliverance from the misery in which we lived for countless millennia that an industrious few have a bit more of the collective pie, when in so doing, we are all swept along into an enormously enhanced standard of living? Free market capitalism has replaced starvation with obesity as the number one killer of human beings. What do you think a starving medieval peasant magically transported to modern times would say to our conundrum—obesity instead of starvation – but some have more than others?

A quick look at our patent laws is instructive. Our patent laws work to stop free market competition to protect the inventor. So if a leading drug company tomorrow announces it has just discovered the cure for cancer, that company can apply for and get a patent protecting its “ownership” of the new wonder drug. That patent has one purpose—to enable the patent owner to prevent other drug companies from making and dispensing the wonder drug. The patent therefore will reduce the wonder drug’s availability and slow its distribution. Countless numbers will die as a result. Yet the patent laws remain on the books. Why? Because we know that absent those special incentives—permitting an even greater concentration of wealth than otherwise inheres in a capitalist system—we could never expect drug companies to fund the billions of dollars in research and development necessary to find cures to the world’s worst diseases. If, after the cure for cancer was found, President Obama and Congress were to suspend the patent laws as a humanitarian measure, how many future cures and wonder drugs do you think would be discovered? What is better for mankind long term, enforcing the patent laws or repealing them?

Let’s take a moment to revisit some of the redistributionist efforts of the past. Welfare —what did it accomplish? Slavery robbed the black man of his freedom; welfare robbed him of his dignity. What he (and welfare’s other recipients) needed was a job, an opportunity for an honest day’s work, not a hand out. The welfare state, as our former democratic President Bill Clinton realized, was a resounding failure. How about the unionization of the auto makers? The UAW, in an effort to “spread the wealth,” turned our three big automakers, once the pride of American industry, into a combination private unemployment insurance fund and HMO—with automotive sidelines. Loaded down with such impossible burdens, these once great manufacturers were turned into uncompetitive companies doomed to failure. Business is war—and they have lost the war. More recently, we saw the results of a great government sponsored push for mortgages for all—according to Fannie Mae and Freddie Mac, every man deserved to own his own home, never mind if he had saved a down payment or had sufficient income to repay the loan. Lending money to persons incapable of repaying those borrowings created billions in toxic assets, bankrupted our financial system and led to the current crisis. Redistribution simply does not work. It inevitably leads to widespread economic failure. Our system is based on hard work and merit—any effort to undermine that economic meritocracy results in more pain for everyone in the long run.

So, one might ask, if capitalism is so wonderful, and its foundational principles so clear, how did we come to corrupt it so? That fascinating question brings us to the political arena—the intersection of economic theory and individual agendas. The political pendulum has a well demonstrated tendency to swing wildly to one direction and then the other. Not that long ago, we had no income tax in the United States. When it was first enacted in 1913, it met swift and strong legal challenges but our courts validated the tax. Then the tax was a mere 1% of income. In 1964, the highest marginal federal rate was mind-blowing 91%, exclusive of state and local taxes! Can you imagine a more punishing tax—a greater swing of the pendulum? Then, the pendulum swung back in the direction of smaller government and lower taxes under President Reagan’s leadership, and we all prospered greatly as a result. Most recently, having a suffered an economic downturn during the last few months of the Bush Administration—due almost entirely to unsound redistributionist policies and market interventions—the pendulum is now swinging once again back to perilous socialist heights.

But something is now different. More than the mere swinging of the political pendulum is at work now. Where once, there were great ideological debates held in person, now, with cable television, the internet and bloated campaign coffers, our elected officials run political rock star competitions. Our presidential elections more closely resemble American Idol contests, than they do the presidential elections of yesteryear. In consequence our current crop of politicians more closely resemble celebrities than they do true leaders. They sell magazines with cover photos rather than argue in favor of sound ideologies. The field of politics, where once it attracted career military men and philosophical leaders, now frequently draws showmen suffering sometimes severe narcissistic tendencies. Consider the psychotic and self destructive behaviors of Governors Blagojevich and Spitzer. Congress is full of tax cheats, philanderers, and bribe taking influence peddlers. As Mark Twain once quipped, “America is a nation without a distinct criminal class…with the possible exception of Congress.”

Such a system produced a president who did not hesitate to play the fear card in the middle of a downward fear driven spiral because it meant advancing his own agenda. Such a system also produced Nancy Pelosi, who, when defending a grossly irresponsible pork laden and bloated social spending bill she authored in the middle of a severe economic crisis, did not bother to defend her actions by reasoned argument but rather simply proclaimed “we won!” (so why shouldn’t my bill be full of pork). That such a thought would even bubble to the surface of the Ms. Pelosi’s brain—let alone that she would have the temerity to say it out loud—is symptomatic of a tragic breakdown of our political system. The system is so popularized and “celebrity-centric” that President Obama was able to make his most vocal critics trusted cabinet members—Hillary Clinton and Joe Biden—politicians who, when running against Mr. Obama for the democratic nomination, did not hesitate to point out his complete lack of experience, calling to attention that he was an Illinois State Senator a mere four years ago. Nor did Mr. Obama hesitate to nominate a tax cheat as Treasury Secretary, or a well known Washington influence peddler and tax cheat as Secretary of Health and Human Services in the face of his push for a “new era of responsibility.” These egregious hypocrisies would never have been tolerated years ago, before the “celebritization” of our politicians, who are now packaged and marketed by their Madison Avenue handlers and judged by their rhetorical skills and not whether they stand behind their—or for that matter any—principles.

To compound these deficiencies, our now firmly entrenched progressive system of taxation, ineluctably leads to startlingly mercenary campaign tactics bearing no relation whatever to sound fiscal policy. In our one man one vote democratic republic, how difficult is it to convince the bottom 51% of taxpayers to vote for a politician who promises to decrease their share of the national tax burden? As it now stands, before any Obama revisions, the bottom 50% of taxpayers, pay a jaw dropping 3% of the national tax burden while the top 10% of taxpayers pay over 70% of the national tax burden. As an election strategy in a one man one vote democracy, guarantying the bottom 50% of the taxpayers you will decrease their paltry 3% share of the burden even further—if not give them money outright—while increasing the 97% share paid by the top 50% of taxpayers, is simply unbeatable. Ironically, the adoption of a progressive system of taxation in a one man one vote democratic republic leads to exactly the sort of “taxation without representation” that gave rise to the Boston Tea Party and ultimately the American Revolution, as the top taxpayers are simply to few in number to compete with the numbers of votes the bottom taxpayers can offer an ambitious and unprincipled politician.

Imagine just for a moment, how our elections would change, if we voted for our elected officials the way corporate America votes for directors—not one man one vote, but one share one vote, where voting power is based on “skin in the game.” Imagine an election where, when a voter threw the lever, a secure connection with an IRS mainframe were established, and one vote was cast for every dollar of tax the voter paid in the preceding tax year. For voters who received net tax rebates (i.e., disguised welfare), votes would be cast for the opposite candidate. Do you think election campaign strategies would change much?

Let’s take a look at some of President Obama’s former campaign and current slogans, through the lens offered by this admittedly cynical view of our political system:

“Change”—Translation: superficially, no more Bush; more deeply, the rich have too much, the poor too little. I will “Change” that by taxing the rich and giving to the poor. Vote for me.

It is “Our” time—Translation: it is no longer “Their” time. Who are “They”? Why the “rich” of course. It is no longer “Their” time because I am going to take from the “rich” and give to you the poor. Hence it is now “Our” time.

“A New Era of Responsibility”—Translation: I got the spending bill passed, never mind how grossly irresponsible that was, and so now it is time to talk about responsibility, which means soaking the “rich” to make ends meet.

Now let’s take a quick look at our current economic crisis. Few would argue with the proposition that it began with two related contagions: the bursting of the nationwide housing bubble and the subprime mortgage crisis. These two contagions were each caused by ill-advised government intervention in the free markets. The housing bubble was caused by Greenspan’s years of cheap and easy money policies following the dot com bust; the subprime mortgage crisis was caused by government sponsored home ownership programs where anyone with a pulse was deemed “entitled” to own a home. By the close of 2008, the worldwide financial crisis, coupled with crashing stock and home prices, spawned a paralyzing fear, which engulfed the world. Business activity worldwide began to fall off in all sectors at an alarming rate never before witnessed by any of us save those who were born before the Great Depression. We were caught in a self perpetuating and vicious graveyard spiral—negative economic news spawned more fear, and more fear spawned more and worse real negative economic news. Where once I could sell three shares of Citigroup and buy a business suit with the proceeds, now those proceeds pay for one of my daughter’s lattes.

The recently passed \$787 billion spending bill presumes to create 3.5 million jobs. Putting aside the fact that we are now dealing with an indivisible \$67 trillion annual global economy where less than a trillion dollars is a mere rounding error, even if the spending bill did create the advertised 3.5 million jobs, that comes to a cost of about \$450,000 per permanent job, assuming half of the jobs created are temporary infrastructure jobs. If the average job created pays \$35,000 per year, it will take 13 years to earn back the costs of creating the jobs without giving any effect to the time value of money. After giving effect to the time value of money, it will take a quantum century to earn back the money the jobs cost us to create. That’s if the 3.5 million jobs are created and assuming many are permanent, both unlikely assumptions.

And how is Obama going to pay for all of this wonderful stimulus? Why by soaking the “rich”—the industrious folks who worked hard to build small businesses and employ others. But what about Hauser’s Law? He’s the San Francisco economist who, in 1993, made a rather remarkable observation. He observed that although federal marginal tax rates ranged from a low of 28% to a high of 91% between 1950 and 2007, the revenues collected by the Treasury always ended up at exactly 19.5% of gross domestic product. Capital migrates away from tax heavy jurisdictions to tax light jurisdictions, and the jobs follow the capital. This seemingly remarkable observation is really just a corollary of my opening premise: reduce the incentive in a free market capitalist system and you lose gross domestic product—the capital, productivity and jobs move to other more tax friendly jurisdictions (or the capital gets pulled out of circulation as risks are averted not taken). That, or parts of the economy go underground altogether when the taxes get too punishing. In all events, raising taxes in the current environment is economic suicide. In short, the spending bill will likely achieve few of the jobs sought to be created, but we will have to pay for all the spending just the same. And the tax raises Obama plans in order to pay for the futile spending will only serve to extend our recession for years and years, as it robs our system of vital incentive and forces the export of capital and jobs to more tax friendly jurisdictions.

To make matters worse still, the futile spending will have an even more dear cost. Although Obama touted him during the campaign as if he were slated to become one of Obama’s cabinet members, the Oracle of Omaha, famed investor Warren Buffet, recently observed in a letter to the Berkshire Hathaway stockholders, that the stimulus bill is likely to cause “an onslaught of inflation.” And that’s when the real misery starts again. Try double digit unemployment rates coupled with 20% mortgage rates. Today will look like a walk in the park.

Fortunately, the folly of Obama’s policies were almost immediately recognized by Wall Street. The stock market has dropped a stunning 30% since Obama’s election, and roughly 20% since his inauguration. It dropped a whopping 332 points the very day of his inauguration. One has to travel back in history more than a century to find a President who has done worse in his first six weeks in office.

In sum, we now enjoy a greater level of general widespread prosperity than ever before enjoyed by mankind, thanks to free market capitalism. Our banking system collapsed in large measure due to ill advised government interventions in the free market—not ineffective government regulation of the free market—in the form of government sponsored home mortgage programs and an overly aggressive long term cheap and easy money policy implemented by the Federal Reserve Board. These foolhardy government interventions were made possible by a hopelessly corrupted political system where sound ideas and economic theory no longer matter, only magazine sales, popularity with the media and of course pork, earmarks, bribes and influence peddling. Liberal democrats, now led by Obama, blamed a straw man—Bush and failed government regulation—for the severe market disturbances caused not by under-regulation of the free markets but by over intervention in the free markets. Coupled with the one man one vote system the envy of democracies worldwide, it was easy for Mr. Obama to pursue an agenda of “Change” and “Our Time”—promising the bottom half of the taxpayers lower taxes or money in hand (despite their already infinitesimal 3% share of the national tax burden). The result—a pointless and futile spending bill, adding catastrophically to our deficit and national debt, and not likely to add any meaningful number of sustainable jobs, which can only be created by private business. This pork laden social spending bill, euphemistically called a stimulus package, would be more aptly named the “No Child Left Unharmed Act” as it mortgages our children’s futures. To boot, the tax increases Obama is now seeking to pay for his pointless social spending will rob our economy of the crucial incentives forming the bedrock of our capitalist system so necessary to recovery at this critical point in time. In short, these ill-considered actions will delay recovery for years, mortgage our children’s future, and bring on ferocious and painful inflation.

President Obama, his head spinning with the unquestioned adulation of his followers, considers himself another Lincoln. Ironically, where Lincoln was the Great Emancipator, history, I believe, will judge Obama the Great Enslaver, as his actions will work to reduce all hard working Americans (and their children)—not just the “rich”— to indentured servants shackled for decades to the repayment of a staggering national debt of Obama’s creation. Mr. Obama would do well to put down Lincoln one night and pick up a copy of John Locke, the great 17th century English philosopher who declared: “Every man has a title to the product of his honest industry.” Mr. Locke raised this point as part of the crusade against the corrupt feudal lords of his time, but it seems to bear remarkable relevance to the lords of today – corrupt politicians – celebrities who consider it their privilege to take the product of a man’s labors.

Capitalism offers some great ironies—where people are freely permitted to act in their self interests everyone prospers; when they are stopped from doing so, everyone suffers. Liberal democrats have yet to grasp this simple but undeniable two sided irony; and ironically, their failure to grasp it has spawned yet another irony—businesses and the consumer are not enemies, they are allies. Businesses war with one another in an effort to woo the consumer. They destroy one another to win over the consumer. In so doing they create cheaper, better products—and jobs. Government, in a wrong-headed attempt to reign in a perceived enemy of the people—business—when the perceived enemy is really an ally—has itself become the enemy of the people. Government, the creator of nothing, and grown to behemoth proportions strictly through parasitism—has become a scarecrow to businesses. Businesses are shutting down or leaving the country due to the enormously hostile, over-regulated, over-taxed and over-unionized business environment present in America. And the leaders of that government—our elected officials—have thus replaced the tithe-collecting barons of feudal times as our oppressors.

The good news, if there is any, is that we always have the political pendulum. Once Obama’s ill advised policies are seen for the failures they are doomed to become—a process which seems to be unfolding right now—there will be nowhere for him or the liberal democrats to run and hide. President Reagan’s admonition “government is not the solution to our problem—government is the problem” will once again reign supreme. And then, our capital gain tax rates, business tax rates, and income tax rates will be lowered and we will able to rebuild our great Nation by honest hard work. So while the path to hell may be paved with good intentions, the route to heaven, ironically, as Ayn Rand observed, follows the selfish acts of individuals which, under capitalism, result in a greater collective good.

Stephen B. Meister

• 12 Jeff Bailey // Apr 13, 2009 at 11:03 am

I didn’t take the time yet to read the last comment, but those attacking the original post are forgeting what the lovely lady wrote in explanation. The principle illustrated by example is simplified to show a point. The point is most prudent when dealing with situations that allow easier mobility, such as between states as Jodi stated. It is also easiest for higher-income individuals to move as well as businesses.

It doesn’t matter much if you’re raising production tax or consumption taxes. In the end ,higher income individuals and businesses are the one’s most closely watching their finances ,and the one’s with best information and ability to manage their finances. They are going to be looking at their overall and marginal costs, which includes the tax and regulations burdens placed on them by government. I’d wonder if the one’s attacking the example, and who are refusing to see the practical application of it, understand what it means to manage money and taxes?

And, to continue, the general goal of liberals, democrats, and federal elected officials in general is to take as much from the higher income and business populations as they can to give to the lower income population. It’s a Robin Hood syndrome suffered by those groups of people. A liberal minded person would quickly say there is no problem with that, but is there? The goal of those groups of elected officials is to take as much as they can without driving the higher income and buisnesses off. They do this so they can maximize their own gain and ability to collect taxes and distrubute appropriations in a way to garners their votes. To be more clear, I said give to the poor, but they don’t redistribute it all to the poor – what they give to the poor is only a public relations distraction so that they may also give it to their friends and pet projects.

So yes, some goes to the poor, I’m sure everyone would agree we’re all worried about the needy who cannot help themselves above all else. But is it morally ok to try to take as much from people just because you can? Is their any morality or justice in coercive ‘charity’ for the name of vote buying? I think not. The bottom line is government should provide the basics – regulation of market failures, not to the point of government failure as is America’s current situation (we’d be better of with the market failures if the government is going to constantly overstep); provide national defense; provide interstates and other necessary infrastructure; and only at the lower levels of governments, assist non-government entities and private charity in taking care of the truly poor and the truly needy (in other words, things like the expansion of SCHIP, state’s children health insurance program, need to be scrapped!

That’s just my opinion, and that’s just the way it is….

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