Bush Tax Cuts Rountable Discussion

             

On Thursday, October 5^th The Economics Roundtable discussed the Bush Tax Cuts. The sole SGA representative was surprised to find a complete lack of interest among economics students in student government and government spending in general.  The students in attendance were well prepared and had a lot to say.

            Those opposed to ending the cuts said such and action would raise unemployment and increase an already high tax burden on American entrepreneurs. Those for ending the cuts said increased government revenue was vital to reducing the deficit, but many among the round table thought drastic cuts to spending would be a much more effective way to cut the deficit, especially since under the status quo government expenditures are expected to keep increasing.

            This disagreement led to a discussion concerning the merits of public spending, and how effective it is at its stated goals of creating employment and alleviating poverty, among other things.  Some in attendance thought public spending was necessary to alleviate those that were needy, because otherwise the private sector would leave those unfortunate helpless.  Others at the table argued that the cold, faceless way the government “helps” people often creates dependence and a negative incentive for people to improve their own lives.  I myself made the argument that government charity discourages individuals to help poor people within their own communities because the state already takes the resources that potentially charitable people would have used to help.

            At the end of the discussion, the group returned to the question of deficits and a surprising member of those in attendance believed that reducing the national debt might be impossible.  Many of those individuals made points concerning recent actions taken by the Federal Reserve that will likely drastically increase inflation.  Everyone in attendance left the roundtable better informed on many issues, happy after hearing a great variety of views on current issues.  

How Much Infrastructure?

President Obama has recently proposed a new stimulus package as part of his initiatives to boost growth. His proposal consists of $50 billion spending on the country’s infrastructure, with roads, railways and airports being his main focus.
Opponents of this program claim that it will take years before infrastructure spending boosts the economy. They call into question the effectiveness of this effort, and whether it would become a permanent source of growth. (As it has been the case, recent stimulus packages have raised growth and made a small decrease in unemployment; but the programs, being too small and too short-lived did not last long, and changes in growth and unemployment are now fading out with it.)
Supporters, on the other hand, defend that some of the infrastructure projects could be started immediately, and that the effectiveness on this program relies on not only the immediate creation of jobs, but also in the long term modernization of transportation systems.
Acknowledging the two sides of the argument raises different questions and concerns. It is not that spending in infrastructure is a bad proposal; it’s just that it does not address the major problem that is hurting the economy: a collapse in private demand. How exactly does spending in infrastructure solve this issue?
Certainly hiring people to build roads will momentarily diminish unemployment and allow those newly hired to spend in the economy; but once the projects are finished, builders will again be left without jobs. The everlasting tradeoff between short-run and long-run solutions seems to be underestimated here.
While it is true that the depth of the labor market crisis calls for rapid solutions (or as congressional officers understand it, rapid spending on huge stimulus packages), this rapid spending leaves many questions unanswered: How much infrastructure is necessary? Is the overall value added by improving roads where there is high unemployment being maximized? Or would it be better to build roads in areas that might have relatively less unemployment, but greater demand for infrastructure? Are we really solving this and the next generation’s unemployment issues by creating jobs in construction?
It is certainly impossible for either the private or public sectors to spend effectively a large amount in a short period of time, and obtain the expected results. Good spending takes a lot of planning. By focusing on the wrong things we are in serious danger of missing the opportunity to do the right things to help the economy recover from its worst market crisis since the Great Depression.

An Interesting Take on Health Care Reform

I am still unsure as to how spending more will decrease deficits in the future. The CBO claims that the bill that it reviewed would accomplish this, so maybe I'm missing something. Anyway, let us look at this bill from another perspective. The bill is going to cost nearly one trillion dollars. How will this affect the economy?

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiuvji3MRQoGrPgbTthJswEdGvF6u10pM0hVtXPJ6Dmo-7oTxGOgh2ya3k6yrKTsKCGwMx4BgWuPEpW5BMC8Qxpz1JR2hdTpm1hseYXZdJHuDpios7WPrh5vqQ6Ledb7iNHhIzX12GAIw/s1600-h/Diminishing+Productivity+of+DEBT+(2).jpg

That link leads to a graph how how increasing debt affects GDP. As you will see, there is an inverse trend between the two, that is, an increase in debt generally leads to a decrease in GDP. Currently, the graph's trend shows that for every dollar of debt added to the economy, GDP decreases by around 45 cents.

Dr. D'Amico on Collective Bargaining and Unions

Dr. Daniel D'Amico is the author of this week's op-ed article on The Maroon. In his article "Unionizing brings mixed results," Dr. D'Amico expresses his opinion on collective bargaining and unions.

Here are the three finals paragraphs:

Collective bargaining may be a right, but that does not necessarily imply that unionization is the right thing in every case. A normative support for unions must first begin with a full accounting of both benefits and costs.

In the case at hand, high levels of unemployment might tip Sodexo's decision to decline a union contract today or decline a renewed union contract in the future - thus collective bargaining could jeopardize the long run job security of Loyola dining employees.

Lastly, students should recognize that trade offs must be made. Higher costs of production may lead to a lower quality of service.

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Capital and Labor: The Legos Of Our Economy

This is a blog post I wrote for the Pelican Institute for Public Policy, the Louisiana Think Tank:

The prosperity of a country is tied to the effective usage of its available resources, i.e. capital and labor. The amount of capital and labor in any society is limited, therefore efficient resource allocation is essential for economic growth.

Capital and labor are not homogeneous resources. Certain types of capital work best with a certain types of labor, and vice versa. We cannot force capital or labor to efficiently work in conjunction with any arbitrary resource.

Unfortunately, what the government has done through the stimulus package is to stimulate growth and production by forcing capital and labor to collaborate without taking into consideration their specific purposes and characteristics.

In a Nightly Business Report blog post Steven Horwitz explains this concept:

To see this, I borrow an analogy from the economist Peter Boettke. Stimulus proponents seem to view resources as if they were Play-Doh that could be shaped into any form desired. […] If capital and labor were like Play-Doh, then it wouldn’t matter what government spent on as the idle capital and labor would be equally productive in whatever use was demanded. Unfortunately, capital and labor are more like Legos than Play-Doh. What kids can build with Legos depends on the particular shapes and sizes of the pieces they have and whether and how those pieces can fit together. Any two hunks of Play-Doh can be combined to make a desired object. That is not true for Legos, and it’s not true for capital and labor.

Horwitz concludes that the current pattern of resource allocation should be reevaluated.

Government should not determine the economy’s resource allocation. This task should be left to markets and economic actors. Free markets may appear chaotic, but they do a better job than a centralized bureaucracy of distributing knowledge and allocating resources through competitive prices.

ESSAY CONTEST

The Loyola Economics Club invites you to participate in our Spring 2010 Essay Contest.

Topic: CAUSES OF THE CURRENT FINANCIAL CRISIS

Requirements: 1,000 - 1,500 words

Due: Monday, April 12th, 2010

First place: $1,000

Second place: $500

Submit all essays to Dr. Daniel D'Amico in Miller 325

Walmart and Whole Foods: same taste at a different price

A recent blind tasting reveals Walmart to be both price competitive and “taste competitive” in the organic and locally grown foods industry.

A chef in Austin prepared two equal meals using two sets of the same ingredients. One set of ingredients came from Walmart, the other set came from Whole Foods. Even though the ingredients were the same, the total price differed greatly: Walmart charged $126.02, Whole Foods $176.04. After the chef cooked the foods the same way and arranged them side by side on a plate, a group of local food experts tried the two versions. The verdict? Same taste!

So, why is there such a difference in price if the ingredients and their tastes are practically the same?

Steven Horwitz argues that

“It is Walmart's very size, so hated by so many progressives and conservatives, that has enabled it to be such a powerful player in the local/slow/organic food markets.”

In other words, Walmart’s average cost per unit is lower due to its size and production level.

Economy of scale seems to be the straightforward explanation. Do you think there is more behind Whole Foods’ higher prices?