A Lesson in Economic Analysis from the Minimum Wage Debate

economic_analysis

A Lesson in Economic Analysis from the Minimum Wage DebateBy Ken Zahringer

Supporters of government interventions like minimum wages often pretend the economy is far less complex than it really is, and then conjure up a statistic as evidence of success. Careful analysis reveals another story, however.

Read more here:: Mises Blog

The Tax Deterrence, Part 1

taxation

Taxes are a necessary thing in the existence of a society that strives to be a community of individuals, working towards the common goal of an increased standard of living, through an increase in economic production. In this effort to increase the standard of living, there are some things that are the responsibility of the collective and not of individuals. These responsibilities include things like the paving of roads, providing the security achieved by employing a police staff or a military, and other goods and services that benefit the community as a whole.

Now, I have heard wild accusations against those conservative economists that believe in limited government stating that these people don’t believe in government at all or think that there should be no taxes levied at all. These ignorant claims come from those who have a political edge to gain. All economists, even those from the conservative/Austrian school of thought, believe some form of taxation is necessary, for the same reasons I have previously stated. The push-back on taxation focuses on the over-taxation of income for programs and projects that not only are unnecessary, but also are contrary to the outcomes that these projects and programs claim to support. While this article is not intended to be political in any way, I wanted to get this out of the way, lest someone claim that I am anti-taxation. Some taxes are necessary, but most are not.

In this 3-part article, I will focus on three things that are affected negatively by taxation. The first one is wealth, and the fact that it is destroyed by taxation.

Wealth Destroyed by Taxation
When taxes are collected from people who have the means to pay it, obviously they have less money to their name after paying these taxes. In other words, their overall wealth has decreased. Wealth is somewhat of a subjective word and can be used to describe different levels of economic success by different people. Nonetheless, whether we are talking about a person that has a modest savings or a person that is a multi-millionaire, each person enjoys a certain kind of “wealth”. If we take the strict definition as a “measure of the value of all of the assets of worth owned by a person, community, company or country” (source: Investopedia) then we see how this word can be subjective. And when any taxation destroys some level of wealth, over-taxation destroys more of wealth. It destroys wealth that is rightfully earned by an individual. It destroys wealth that in many cases creates jobs, gets spent in the economy, but otherwise is taken and used many times inefficiently by government entities that have no incentive to use the money wisely.

Wealth is what people have left over after the spend all of their resources to live their lives. What people do and don’t do with that wealth can have a huge impact on the economy. An individual will most likely use their wealth to buy things, which is a benefit. Entrepreneurs will most likely spend money and may even provide wages to someone in order to help their business become or stay successful. Companies will likely expand their business in the form off capital expenditures, essentially spending money to increase the efficiency and value of their resources (machines, employees, etc). Entrepreneurs and companies (and individuals at times) are all performing these activities in order to build more wealth. And when taxes are collected from these people, inherent in that is the reduction of wealth from those who rightfully earned that wealth. The over-taxation of wealth is both destructive and burdensome.

In the next part, we will look at the burden of income tax on individuals and business.

The Danger of Price Control

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Price control is something that may sound like great idea on the surface. Why not set prices on essential products and services (gas, food, electricity, etc.) at a level that is “affordable” to the average consumer? As with many naive ideas, there come some fundamental problems. And this idea is no different.

In a free market, prices are determined by the market activities (the functioning components of the market activities are price, supply and demand). In the basic idea of supply and demand, companies try to set the price of a particular product that they are selling at an amount that will cause consumers to buy the product at the same rate of production. If the price of the product is set too high (a price higher than the consumer is willing to part way with their money acquire the product), then fewer consumers will buy the product, leaving a surplus of products not sold. If the price is set too low, then more consumers will be willing to buy the product than is able to be supplied, and thus causing a shortage.

Companies selling products are always trying to set the price on their product at an amount where supply and demand are equal. In other words, companies want to produce the exact amount of products that consumers will buy, no more, no less. That makes sense, doesn’t it? But we know, in reality that hardly ever happens. In theory, if a company could know at exactly what price to sell their product in order to attract consumers to buy the exact amount of their product that they produced (supplied), then there would be no need for companies to have any overstock or any other surplus goods held in inventory. This is the concept of supply and demand equilibrium. Embedded into the price that is being considered is the amount of profit that the producer of the product will make for each item sold.





Now, when one of the functioning components of the market, by law and legislation, are not able to operate freely (meaning, freely able to be affected by market activities), the other components will be affected. Again, the three fundamental components or factors are price, supply and demand. And when you affect one third of the equation, things will change drastically…and change quickly. When supply is artificially constrained (i.e. government legislation demands that only a certain amount of a particular good can be available to the market), then price is affected (artificially made to increase). For example, when the countries that we import oil from (to produce gasoline) put caps on the amount of oil they will supply to the world, the price of that oil will increase, assuming no change in demand for that oil. That makes sense, right? Because there are a lot of companies in the world that want and need that oil to produce the gasoline to satisfy their particular set of consumers that desire to fill their vehicles up with gasoline (and in this example, the supply of that oil is limited). These companies are willing to pay more for that oil because there are other companies trying to buy the same, limited amount that is being supplied. But, they can only pay an increased amount up at a certain point. They cannot pay just any amount. They can only pay an amount up to the point that it ceases to become cost-effective.

That brings us to another side of the coin. When governments artificially constrain prices, we get a similar affect. When prices, by law and legislation, are fixed at a certain amount, the product being sold does not magically become cheaper to produce. No, in fact, it will at the very least be more expensive to produce. And maybe the product will become even impossible to produce in the long run, because the amount of money that is required to produce the good (labor, materials, etc.) may exceed the amount that the company is allowed, by law and legislation, to charge a consumer to buy (price). At that point in time, there is no reason or incentive for the company to continue to produce a product that they will only lose money on. And eventually, if nothing changes in terms of the control on the price, the product will become unavailable because companies will have no reason (or incentive), by means of a profit, to produce it.

We see this phenomenon in many facets of life, when governments have tried to control the price of a good or service in the private sector of business, only to see either the quality dwindle or the quantity disappear. We see it in rent controlled housing, where the quality of the housing deteriorates. Again, if the landlord can only charge a certain amount of rent, by law or legislation, it limits the amount of resources he can spend to maintain the property, given all of the other operating expenses involved in leasing the apartments (wages to property manager, property taxes, etc). We have also seen the effects of price control in the medical industry, where governments have capped the price on certain medicines, only to make the medicine eventually unavailable because the manufacturers cannot afford to produce the medicine at the controlled price, and still make a profit.

As we look at the idea of price control, we see that there are many unintended consequences. More specifically, we eventually see the complete opposite effect of the intended outcome. While the outcome of price control is to provide goods and services to consumers that would otherwise not be able to afford them, if the price is allowed to be controlled for too long, those very goods will eventually be unavailable altogether because they would cease being produced.

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