Conventional Wisdom versus The Data
October 29, 2011
copies of this presentation can be found at
www.antonydavies.org
1
The Game
Select what price to charge.
Lower price  sell more units.
Higher price  sell fewer units.
The Game
Goal: Make the most profit possible.
Profit = Revenue – Cost
Price per unit x Units sold
$1 x Units sold
Example
Suppose you charge $3 per unit.
How many units will you sell?
90
What is your revenue?
($3) (90) = $270
What is your cost?
($1) (90) = $90
What is your profit?
$270 – $90 = $180
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Example
Suppose you charge $15 per unit.
How many units will you sell?
30
What is your revenue?
($15) (30) = $450
What is your cost?
($1) (30) = $30
What is your profit?
$450 – $30 = $420
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Example
Suppose you charge
$3 per unit.
Profit = $180
Suppose you charge
$15 per unit.
Profit = $420
Of these, $15 is the
better price to charge.
Round 1
Choose the price you will charge for your
product.
Every unit you sell costs you $1 to produce.
Profit = Price x Units Sold – $1 x Units Sold
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Round 1
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Revenue
$100
$190
$270
$340
$400
$450
$490
$520
$540
$550
$550
$540
$520
$490
$450
Cost
$100
$95
$90
$85
$80
$75
$70
$65
$60
$55
$50
$45
$40
$35
$30
Profit
$0
$95
$180
$255
$320
$375
$420
$455
$480
$495
$500
$495
$480
$455
$420
Round 2: Tax the Consumers
In this round, consumers will pay an additional $4 per unit tax.
You choose a price.
The consumers pay that price per unit to you plus they pay another
$4 per unit to the government.
Round 2
In this round, consumers will pay an
additional $4 per unit tax.
If you charge $3, how many units will
consumers buy?
70
What is your revenue?
($3) (70) = $210
What is your cost?
($1) (70) = $70
What is your profit?
$210 – $70 = $140
Price per Unit
Units Sold
$1
100
You charge
$3.
$2
95
$3
90
$4
85
Consumers
$5 pay $3 + $4 = $7.
80
$6
75
$7
70
$8
65
$9
60
$10
55
Consumers
buy 70 units.
$11
50
$12
45
$13
40
$14
35
$15
30
Round 2
Choose the price you will charge for your
product.
The consumer pays your price plus another $4
to the government.
Every unit you sell costs you $1 to produce.
Profit = Price x Units Sold – $1 x Units Sold
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Round 2: Tax the Consumers
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
Units Sold
80
75
70
65
60
55
50
45
40
35
30
Revenue
$80
$150
$210
$260
$300
$330
$350
$360
$360
$350
$330
Cost
$80
$75
$70
$65
$60
$55
$50
$45
$40
$35
$30
Profit
$0
$75
$140
$195
$240
$275
$300
$315
$320
$315
$300
Round 3: Tax the Firms
In this round, firms will pay a $4 per unit tax for every unit they sell.
The price consumers pay is the price you charge.
Round 3
In this round, firms will pay a $4 per unit tax.
Your cost per unit is now $1 (for the unit)
plus another $4 (for the tax).
If you charge $3, how many units will
consumers buy?
90
What is your revenue?
($3) (90) = $270
What is your cost?
($1 + $4) (90) = $450
What is your profit?
$270 – $450 = –$180
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Round 3
Choose the price you will charge for your
product.
Every unit you sell costs you $1 to produce.
In addition, you pay the government $4 for
each unit you produce.
Profit = Price x Units Sold – $5 x Units Sold
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Round 3: Tax the Firms
Price per Unit
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
$12
$13
$14
$15
Units Sold
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
Revenue
$100
$190
$270
$340
$400
$450
$490
$520
$540
$550
$550
$540
$520
$490
$450
Cost
$500
$475
$450
$425
$400
$375
$350
$325
$300
$275
$250
$225
$200
$175
$150
Profit
($400)
($285)
($180)
($85)
$0
$75
$140
$195
$240
$275
$300
$315
$320
$315
$300
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
In round 3, the government taxed the firms $4.
Won’t firms just pass the tax on to consumers?
Results
Retail Price
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Retail price up by $2
Price Consumer Pays
Price Firm Receives
$11
$11
Consumers pay $2 more
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Firms receive $2 less
End result: Firms pay $2 of the tax, and consumers pay
$2 of the tax.
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
In round 2, the government taxed the consumers $4.
Won’t consumers be forced to pay the full $4 tax?
Results
Retail Price
No Tax
Tax Consumers $4
$11 Retail price $9
Tax Firms $4
$13
down by $2
Price Consumer Pays
Price Firm Receives
Units Sold
Tax Revenue
Consumers pay $2 more
$11
$11
$13
$9
$13
$9
50
$0
40
$160
40
$160
Firms receive $2 less
End result: Firms pay $2 of the tax, and consumers pay
$2 of the tax.
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
Lesson #1: The government has no control over who ultimately
pays a tax.
(even when the firm is a monopoly)
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
When there was no tax, consumers bought 50 units.
A $4 per unit tax should generate $4 x 50 = $200 in tax revenue.
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
Instead of raising $200 in tax revenue, the government
only raises $160.
Results
No Tax
$11
Tax Consumers $4
$9
Tax Firms $4
$13
Price Consumer Pays
Price Firm Receives
$11
$11
$13
$9
$13
$9
Units Sold
Tax Revenue
50
$0
40
$160
40
$160
Retail Price
Lesson #2: The government determines the tax rate, not the tax
revenue.
(regardless of whom it taxes)
Lesson #1: The government has no control over who ultimately
pays a tax.
Lesson #2: The government determines the tax rate, not the tax
revenue.
Conventional Wisdom #1
The government is financially sound.
26
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Data sources: US Department of the Treasury, CIA World Factbook
27
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Data sources: US Department of the Treasury, CIA World Factbook
28
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
29
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
30
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
31
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
32
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$35
$30
$25
$20
$15
$10
$5
$0
Data sources: US Department of the Treasury, CIA World Factbook
33
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$70
$60
$50
$40
$30
$20
$10
$0
Data sources: US Department of the Treasury, CIA World Factbook
34
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$70
$60
$50
$40
$30
$20
$10
$0
Data sources: US Department of the Treasury, CIA World Factbook
35
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$70
$60
$50
$40
$30
$20
$10
$0
Data sources: US Department of the Treasury, CIA World Factbook
36
Millions, Billions, Trillions
(blah, blah, blah)
$100
$10,000
A stack of $100 bills, ½ inch high.
$1 million
100 packets of $10,000.
$100 million
$100 million fits on a standard pallet.
$1 billion
$1 trillion
About twice the amount of money the U.S. government spends on interest on
the national debt in one year.
$14 trillion
The value of all goods and services produced in the United States in one year.
Also, the U.S. national debt (as of 2010).
$65 trillion
Total Federal debt and obligations (as of 2010).
Conventional Wisdom #2
The government has a debt problem.
46
The Federal government collects
about $2.3 trillion in taxes per year
(all tax revenues combined).
The average U.S. household
earns about $50,000 per year.
Data source: Bureau of Economic Analysis
47
$2.3 trillion
$50,000
48
Federal tax revenues = $2.3 trillion
Income = $50,000
Federal spending = $3.8 trillion
Spending = $84,000
Federal debt = $14.6 trillion
Debt = $330,000
49
Deficit
Deficit
Deficit
Deficit
Debt
50
Conventional Wisdom #2
The government has a debt problem.
51
What causes deficit?
52
Perhaps we have a revenue problem.
?
Revenue
?
Revenue
Spending
?
Spending
Revenue
Deficit
Spending
Deficit
Deficit
Deficit
?
Revenue
Spending
Debt
53
Conventional Wisdom #2
The government has a debt problem.
54
Federal revenue has risen 6.9% per year (on average).
$2,500
$2,000
$1,500
$1,000
$500
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
$0
1954
Billions
$3,000
Federal Revenue
Data source: US Department of the Treasury
55
Not fair. Prices have been rising over time.
56
Federal revenue has risen 3.3% faster than
inflation per year (on average).
$2,500
$2,000
$1,500
$1,000
$500
Federal Revenue
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
$0
1954
Billions
$3,000
Federal Revenue (adjusted for inflation)
Data source: US Department of the Treasury
57
Not fair. The population has been growing over time.
58
$10,000
Federal revenue per person has risen 2.2% faster
than inflation per year (on average).
$9,000
$2,500
$8,000
$7,000
$2,000
$6,000
$1,500
$5,000
$4,000
$1,000
$3,000
$2,000
$500
$1,000
$0
Federal Revenue
Federal Revenue (adjusted for inflation)
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
$0
1954
Billions
$3,000
Federal Revenue (adjusted for inflation, per capita)
Data source: US Department of the Treasury
59
Tax revenue may be rising,
but it isn’t rising fast enough.
To raise more tax revenue, we need to raise tax rates!
60
Conventional Wisdom #3
Raising tax rates increases tax revenue.
61
100%
90%
21%
13%
80%
70%
60%
50%
40%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Federal Revenue as a % of GDP
Data sources: Internal Revenue Service, Bureau of the Census
62
100%
90%
21%
13%
13%
80%
70%
60%
50%
40%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Federal Revenue as a % of GDP
Data sources: Internal Revenue Service, Bureau of the Census
63
100%
90%
21%
13%
80%
70%
60%
50%
40%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Federal Revenue as a % of GDP
Data sources: Internal Revenue Service, Bureau of the Census
64
100%
90%
80%
18%
70%
60%
50%
40%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Federal Revenue as a % of GDP
Data sources: Internal Revenue Service, Bureau of the Census
65
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Federal Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
66
100%
90%
80%
70%
60%
50%
40%
17%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Federal Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
67
100%
90%
80%
70%
18%
60%
50%
40%
17%
30%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Federal Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
68
69
45%
40%
35%
30%
25%
20%
16%
15%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0%
Average Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census, Barro and Redlick (2009)
70
45%
40%
35%
30%
25%
18%
20%
16%
15%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
0%
Average Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census, Barro and Redlick (2009)
71
45%
40%
35%
30%
25%
20%
15%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Capital Gains Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
72
45%
17%
40%
35%
30%
25%
20%
15%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Capital Gains Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
73
45%
17%
40%
35%
30%
25%
20%
15%
18%
10%
5%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Capital Gains Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
74
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
0%
Average Effective Corporate Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
75
50%
45%
17%
40%
35%
30%
25%
20%
15%
10%
5%
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
0%
Average Effective Corporate Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
76
50%
45%
17%
40%
35%
30%
25%
20%
15%
18%
10%
5%
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
0%
Average Effective Corporate Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
77
If revenue is a fixed 18% of GDP, then the debt problem
must really be a spending problem.
Revenue
Revenue
Spending
Spending
Revenue
Deficit
Deficit
Deficit
Deficit
Revenue
Spending
Spending
Debt
78
Conventional Wisdom #2
The government has a debt problem.
79
$12,000
The average price level has
risen 700% since 1954.
Annual Cost per Person
$10,000
$8,000
$6,000
$4,000
$2,000
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
$0
Average Price Level
Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis
80
$12,000
The average price level has
risen 700% since 1954.
Annual Cost per Person
$10,000
The per-person cost of the Federal
government has risen 3,000% since 1954.
$8,000
$6,000
$4,000
$2,000
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
$0
Average Price Level
Cost of Federal Government
Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis
81
$12,000
Annual Cost per Person
$10,000
The average price level has
risen 700% since 1954.
The per-person cost of the Federal
government has risen 3,000% since 1954.
$8,000
$6,000
By comparison, the cost of health care
has only risen 2,000% since 1954.
$4,000
$2,000
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
$0
Average Price Level
Health Care
Cost of Federal Government
Data sources: Bureau of Labor Statistics, Bureau of the Census
82
Fine!
Government spending is rising, but it’s because of wars,
NASA, subsidies to oil companies, [fill in your favorite evil]…
83
Billions
2011 Federal Budget
$4,000
$3,500
$3,000
Discretnary
Spending
Everything
Else
Defense
$2,500
Food stamps, unemployment, child nutrition and tax
credits, supplemental security for disabled, student loans
Other
Mandatory
$2,000
Net Interest
$1,500
$1,000
Departments of Agriculture, Commerce, Education, Energy,
HHS, HUD, Interior, Justice, Labor, State, Transportation,
Treasury, Veteran Affairs, plus independent agencies, plus
Legislative branch, plus Judicial branch, etc.
Mandatory
Spending
Entitlements
Social Security,
Medicare, Medicaid
$500
$0
Federal Spending
Federal Revenue
Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget
84
Billions
2011 Federal Budget
$4,000
$3,500
$3,000
Everything
Else
Defense
$2,500
$2,000
$1,500
$1,000
Eliminating all
discretionary
spending
would still
leave a $230
billion deficit.
Other
Mandatory
Net Interest
Entitlements
$500
$0
Federal Spending
Federal Revenue
Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget
85
Reconsider revenue
We only get 18% of GDP in revenue, so let’s stimulate GDP!
Spend more!
GDP grows!
18% x
=

86
Conventional Wisdom #4
Government spending stimulates the economy.
87
Federal Reserve =
$1,500 b.
TARP = $356 b.
Financial Initiatives =
$366 b.
Total (net) stimulus = $3 trillion
Housing Initiatives =
$130 b.
Stimulus = $578 b.
Data source: money.cnn.com/news/storysupplement/economy/bailouttracker/
88
Total (net) stimulus = $3 trillion
Unemployment Rate: 10%
6%
8%
9%
7%
89
Historically, how has the economy reacted to stimulus
spending?
90
Stimulus Spending and Economic Growth
4%
RGDP per Capita Growth
If stimulus spending
worked, we should see a
relationship like this.
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
-4%
Change in Federal Outlays as % of GDP
91
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
4%
RGDP per Capita Growth
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
Increased government spending does not
appear to increase economic activity.
-4%
Change in Federal Outlays as % of GDP
Data source: Bureau of Economic Analysis, National Income and Product Accounts
92
Maybe stimulus spending doesn’t have an immediate
effect. What is the effect over time?
93
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
RGDP per Capita Growth 1 Year Later
4%
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
Increased government spending does
not appear to increase economic
activity one year in the future.
-4%
Change in Federal Outlays as % of GDP
Data source: Bureau of Economic Analysis, National Income and Product Accounts
94
Maybe stimulus spending’s effects are cumulative. What
is the cumulative effect?
95
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
3%
Increased government spending
appears to have a negative
cumulative effect over 4 quarters.
RGDP per Capita Growth (4QMA)
2%
-1.0%
2%
1%
1%
-0.5%
0%
0.0%
-1%
0.5%
1.0%
1.5%
2.0%
-1%
-2%
Change in Federal Outlays as % of GDP (4Q Moving Average)
Data source: Bureau of Economic Analysis, National Income and Product Accounts
96
We have to do something! The rich are getting richer and
the poor are getting poorer!
97
Conventional Wisdom #5
The rich get richer while the poor get poorer.
98
U.S. Households According to Income
30%
25%
20%
15%
10%
5%
0%
Under $15,000
$15,000 - $25,000
Incomes are in 2009 dollars.
$25,000 - $35,000
1970
$35,000 - $50,000
1980
1990
2000
$50,000 - $75,000
$75,000 - $100,000
Over $100,000
2009
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.
99
U.S. Households According to Income
30%
25%
20%
15%
10%
5%
0%
Under $15,000
$15,000 - $25,000
Incomes are in 2009 dollars.
$25,000 - $35,000
1970
$35,000 - $50,000
1980
1990
2000
$50,000 - $75,000
$75,000 - $100,000
Over $100,000
2009
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.
100
U.S. Households According to Income
30%
25%
20%
15%
10%
5%
0%
Under $15,000
$15,000 - $25,000
Incomes are in 2009 dollars.
$25,000 - $35,000
1970
$35,000 - $50,000
1980
1990
2000
$50,000 - $75,000
$75,000 - $100,000
Over $100,000
2009
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.
101
U.S. Households According to Income
30%
25%
20%
15%
10%
5%
0%
Under $15,000
$15,000 - $25,000
Incomes are in 2009 dollars.
$25,000 - $35,000
1970
$35,000 - $50,000
1980
1990
2000
$50,000 - $75,000
$75,000 - $100,000
Over $100,000
2009
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.
102
U.S. Households According to Income
30%
25%
20%
15%
10%
5%
0%
Under $15,000
$15,000 - $25,000
Incomes are in 2009 dollars.
$25,000 - $35,000
1970
$35,000 - $50,000
1980
1990
2000
$50,000 - $75,000
$75,000 - $100,000
Over $100,000
2009
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 1995-2012.
103
wtf?
104
Fraction of Total Income Received by Each Fifth
50%
45%
46.6%
The rich get richer and
the poor get poorer.
49.7%
40%
35%
30%
25%
20%
15%
10%
5%
3.8%
3.4%
0%
Poorest
Quintile
Lowest Quintile
Highest
Richest Quintile
Quintile
2000
2007
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678.
105
70
60
65.7
The old get older and
the young get younger.
66.8
Average Age
50
40
30
20
10
7.1
6.9
0
Youngest
Quintile
Lowest Quintile
Highest
Quintile
Oldest Quintile
2000
2010
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9.
106
Source: Pew Economic Mobility Project
107
Conventional Wisdom #6
Trade exploits and impoverishes the poor for the benefit
of the rich.
108
$40,000
Greater per-capita trade is associated with greater per-capita income.
$35,000
Per-capita Trade (US$)
$30,000
R2 = 0.56
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Data source: International Monetary Fund
109
Per-capita Trade (US$, logarithmic scale)
$100,000
GDI measures quality of life (longevity,
education, literacy, income) for women
relative to men.
$10,000
Greater per-capita trade is associated
with
R2 = 0.80
greater gender equality.
$1,000
$100
$10
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Data sources: International Monetary Fund and United Nations Development Programme
110
$100,000
Per-capita Trade (US$, logarithmic scale)
Greater per-capita trade is associated with reduced child labor.
$10,000
$1,000
R2 = 0.54
$100
$10
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Data sources: International Monetary Fund and World Bank
111
Per-capita Trade (US$, logarithmic scale)
$10,000
$1,000
$100
$10
Even among middle-lower and lower income countries, greater per-capita
trade is associated with reduced child labor.
$1
0
10
20
30
40
50
60
Children 10 to 14 in the Labor Force (as % of age group)
Data sources: International Monetary Fund and World Bank
112
Conventional Wisdom #7
Trade costs American jobs.
113
January 1975 to June 2006
12%
Greater per-capita trade is associated with reduced unemployment.
Unemployment Rate
10%
8%
6%
4%
2%
0%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis
114
January 1975 to June 2006
Average Real Hourly Earnings (2000$)
$15.00
Greater per-capita trade is associated with increased real wages.
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis
115
Conventional Wisdom #8
The minimum wage helps minimum wage workers.
116
College Education (1978-2008)
4.0%
3.5%
Unemployment Rate
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
Minimum Wage as Fraction of Average Hourly Wage
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
117
HS Education (1978-2008)
12.0%
Unemployment Rate
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
Minimum Wage as Fraction of Average Hourly Wage
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
118
Less than HS Education (1978-2008)
20.0%
18.0%
Unemployment Rate
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
0.46
Minimum Wage as Fraction of Average Hourly Wage
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
119
Data Pwns Conventional Wisdom
The government has no control over who ultimately pays a tax.
The government sets the tax rate, not the tax revenue.
Raising tax rates does not increase the government’s share of
the economic pie.
The government has a spending problem.
Stimulus spending doesn’t stimulate.
120
Data Pwns Conventional Wisdom
The poor are getting richer.
Trade empowers and enriches people (even poor people).
Trade creates more jobs than it destroys.
Minimum wage increases unemployment among the less
educated.
121
Conventional Wisdom versus The Data
October 29, 2011
copies of this presentation can be found at
www.antonydavies.org
122