10 Dec 2014

Every Citizen Must Know Basic Economics

Economics, Health Legislation, Police 13 Comments

Near the end of his treatise on economics, Ludwig von Mises wrote:

There is no means by which anyone can evade his personal responsibility. Whoever neglects to examine to the best of his abilities all the problems involved voluntarily surrenders his birthright to a self-appointed elite of supermen. In such vital matters blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination. As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake.

Very few are capable of contributing any consequential idea to the body of economic thought. But all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty.

Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen. (Mises, Human Action, pp. 874-875)

The most obvious illustration of Mises’ wisdom was the recent fiasco over Jonathan Gruber’s remarks about the Affordable Care Act (aka ObamaCare). In particular, Gruber referred to the deliberate “exploitation of the lack of economic understanding of the American voter” regarding (what economists call) tax incidence.

Gruber’s point was that removing the tax deductibility of health insurance premiums was economically comparable to imposing a surtax of 40% on so-called Cadillac insurance plans. Because the surtax will be levied on the health insurance companies, it met with less resistance than a policy of eliminating the tax code’s favorable treatment of employer-provided health plans. Yet to repeat, these policies are similar in their impact once the dust settles.

In an intro economics class, the professor would probably illustrate this distinction between the legal and economic incidence of a tax using a sales tax. For example, if the government imposes a $1/pack tax on cigarettes, does it matter whether the consumer pays the tax at the register, or if the store owner pays the tax? The answer is, it’s a wash. If you gave me a blackboard and some colored chalk, I could draw some nice graphs to show you, but intuitively: If the government slaps the tax on consumers, their demand for (legal) cigarettes goes down. Thus the pre-tax market price of a pack of cigarettes goes down; let’s say it drops by 20 cents. Thus, even though the consumer pays $1 on top to the government, on net the consumer is only paying 80 cents more per pack, while the store owner actually nets 20 cents less per pack. Therefore, for every $1 that the government gets in revenue from the sale of a pack of cigarettes, the smoker effectively pays 80 cents while the store owner pays 20 cents. (I’m just stopping the analysis at the store owner level; we could trace it to the wholesaler etc.)

But if the government instead levies the tax directly on the store owner, then the supply of cigarettes goes down, such that the market price of a pack rises by 80 cents. So for every $1 that the store owner sends the government per pack of cigarettes sold, the consumer ultimately pays 80 cents while the store owner really is only out 20 cents compared to the original scenario.

Thus, levying the tax on the customer versus the store owner is irrelevant; it is the relative elasticities of supply and demand in cigarettes that determines who bears the true burden of the new tax.

This type of reasoning applies not just to explicit taxes, but also to other ways in which the government imposes harms on sellers. For example, economist Steve Landsburg argues that to the extent that NYPD harassment of black market sellers is anticipated, it will drive up the price of illegal goods (like untaxed cigarettes) and allow sellers in this market to earn a higher income as a form of hazard pay. Thus the actions of the NYPD don’t affect just the recipients of the physical harm, but their customers and (possibly) workers in other industries who see an influx of competitors. Even something that seems to be about a non-economic issue (police brutality) also has economic implications worth noting.

Citizens can only understand the implications of various State policies if they first learn basic economics. Fortunately, this is very easy to do with all of the free online books, videos, and articles put out by such places as the Mises Institute, the Foundation for Economic Education, the Independent Institute, and the Fraser Institute, to name just four (for whom I do work, full disclosure).

13 Responses to “Every Citizen Must Know Basic Economics”

  1. Tel says:

    I’ve been trying to explain to people that the new Basal III system is basically a way to force citizens to buy government bonds that they don’t want.

    Remember those old advertisements reminding people of their patriotic duty to buy war bonds? Well now the government doesn’t bother asking people, it just Gruber’s them instead. The bank after all is the custodian of your money, and it provides the service of helping you discover quality investment opportunities. If you think government bonds are bad value, and you wouldn’t buy them yourself with your own money, then you certainly don’t want the bank buying these bonds on your behalf using your money.

    Yes, there are some differences, but only small differences… however many people strangely think it makes perfect sense for the bank to be buying investments that none of the individual bank customers would want to own.

  2. Lee Waaks says:

    It seems that for many, basic econ includes Keynesianism. How is the poor, beleaguered citizen to decide should he become aware of the controversies?

    • Dave says:

      Lee – you ‘decide’ by learning to think for yourself. When you recognize BS in a theory, you might want to look elsewhere. The problem is that they are all theories, and have to ignore some of the variables. Bit in real life we are all affected by all the variables, so NO theory is 100% right.

      • Lee Waaks says:

        Dave– We can never do anything but think for ourselves but we do often need help. But the average citizen doesn’t want to spend time wading through economic controversies. It’s very time consuming and, for most, horrifically boring. Maybe Mises meant the intelligent, politically conscious laymen among the middle-classes like the folks who lurk on this blog. 🙂

        • skylien says:

          “it concerns everyone and belongs to all. It is the main and proper study of every citizen.”


        • Blake says:

          The very reason we have a representative government is to free us of having to toil over every decision, so we can go about our own business. The people we hire to do that work for us are supposed to be working with all their effort and intellect in our best interests, and should only consult us for our views on the main points of the issues they’re discussing.
          When I need a doctor’s advice, must I go to medical school before I can trust his choice of treatment? Certainly not!
          This is why “morality DOES matter,” to mock the claims of Clinton supporters during his trial who claimed that his morality was irrelevant as long as he performed the job.
          We must rely on good people to do our work in government, and as John Adams stated, our government was “designed for a moral and a religious people. It is wholly inadequate for any other.”
          Consequently, we must prosecute harshly any who violate that sacred public trust.

    • skylien says:

      Mises doesn’t say people just have to learn by heart what he is saying himself without questioning it. He says people have to study economics themselves in general, which means they should think for themselves and should not blindly accept what a Keynesian or Austrian tell them what’s good and what is not, that is all.

      Whatever they make out of this is their thing.

  3. Benjamin Cole says:

    if we understand economics, why is it that health care in federal facilities, staffed by federal employees, paid for by taxpayers for the benefit of former federal employees, always gets a free pass? I just described the VA.
    This commie healthcare program is specifically exempted from cuts in various GOP proposals….

    Our vets deserve the best–commiecare.

  4. Delphin says:

    Since Murphy explained it in two paragraphs, I would like to see one of Gruber’s defenders here explain why Gruber, a professor at an expensive and selective university, could not have explained it in three. And if Gruber could have explained it, but decided instead to exploit the misunderstanding he has chosen to not dispel, why we shouldn’t consider him a base huckster?

    • Blake says:

      We SHOULD. He should be tried for fraud, and because his guilt is a foregone conclusion due to his arrogant braggadocio, he should be locked away to send a message to the next jackwad who wants to screw over the American public.

  5. John Frederic Kosanke says:

    Demand divided by Supply equals Price.

    Widespread knowledge of this simple formula would alleviate public support for every political program from price control to prohibition.

  6. whodoneit says:

    I believe the “pre-tax market price” elasticity because of demand is an invalid theory. Does a retailer in state A that adjoins State B —who pay the same price for their merchandise—reduce his price because State A has a sales tax while State B has no sales tax ? If so, merchants in State A has less profit than merchants in State B. If a merchant cannot charge a reasonable profit margin on his merchandise—independent of a mandatory fee paid to the state (extortion), he will devote his shelf space to other merchandise.

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