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Category Archive: Public Finance

  1. Brave New World (of Debt) | Life of Debt Episode 1

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    17 trillion is usually a number reserved for distances in outer space, water in the ocean, or sand in the desert. But it’s also how much this next generation is in the hole for as they become adults. Thanks to our parents and the officials they’ve elected, America is $17 trillion in debt. Despite the way the federal government has dealt with this issue, debt is not theoretical. It’s real, it’s owed, and can take on a life of its own. Watch debt (and its sidekick debt collectors) interrupt birth, love, sleep, and more.  This is “Life of Debt.”

    Don’t forget about:

    Episode 2

    Episode 3

  2. Frank Underwood’s Top 3 Lessons for the Voting Public | House of Cards Review

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    Netflix recently debuted season two of its original series House of Cards. Some have suggested the show reflects a deeply cynical view of politics, but Prof. Steve Horwitz argues that it is an unromantic and realistic portrayal of how the incentives politicians have in the United States can give rise to the same kind of behaviors Congressman Frank Underwood exemplifies. Prof. Horwitz also describes three lessons viewers of House of Cards can gain from the show.

    1. As a general principle, we should be very skeptical of politicians.
    2. House of Cards shows the constant backroom trading of favors among politicians, their staffers, special interests, and the occasional member of the public.
    3. Politics attracts those who are especially skilled at public relations, favor trading, and power plays, not necessarily those who best serve the public interest.

    It is important to remember that politicians are just normal people seeking their own personal self-interest over anything else. If we do not have a limited government designed to keep selfish motives in check, Frank Underwood–style politics will rule the day. If we want to keep ruthless and power-hungry people from ruling our country, we need to change the incentives politicians have and reduce their power. Prof. Horwitz says, “We need a more limited government without the possibility of dealing with these kinds of special favors.” How realistic do you think the political portrait in House of Cards is? What, if anything, do you think should be done to change the political system in the United States today?

  3. What Is Free Banking, and Why Should I Care?

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    What would happen if we didn’t have a central bank? Prof. Lawrence H. White explains that private banks would be able to circulate money by issuing notes and checks redeemable for coin. Trustworthy banks would make arrangements to accept each other’s notes and checks. Banks would have better incentives than the federal government to ensure their currency retained its value, because if it didn’t, people would bank elsewhere. By contrast, central banks controlled by the government are able to devalue currency as they see fit and can even quit redeeming notes for coins of real value if they want to do so. It sounds like social-science fiction, but there are numerous real-world examples in history of successful free-banking systems. In fact, central banks arose largely because governments wanted an institution willing and able to lend them money with easy terms, not because of any problem with the free-banking system. Free markets offer the most efficient system for allocating goods and services, and money is no exception. As failures among central banking systems mount, it is time to reconsider the alternative of free banking.

  4. How Raising Taxes Will Not Balance the Budget: More Evidence

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    In an effort to help fix the deficit, many have advocated increasing taxes on America’s highest earners. The question becomes: is this a good way of increasing the amount of money that the government takes in? According to Professor Antony Davies, when the government raises taxes on top earners, the federal government actually collects less money per person, and when it decreases the government collects more.

    There are exceptions to this trend, however. Changes in the marginal tax rate for the average American appear to have no consistent effect on revenues collected. Increases in Social Security and Medicare taxes tend to increase the amount of money collected per person. With the proper use of deductions, exemptions, offsets, and credits, and by delaying or changing the form of one’s compensation, federal income taxes, capital gains taxes, and many other taxes can be at least partially avoided. In contrast, Social Security and Medicare taxes are subject to far fewer loopholes and are much more difficult to avoid.

    So how can the government collect more tax revenue? Prof. Davies says that the key is a simplification of America’s notoriously complex tax code. A simpler tax code would make it more difficult for people to avoid taxes and would lead people to spend less time trying to avoid them. Prof. Davies argues, “The less time and money we spend trying to work around a complex tax code, the more time and money we will have available to put to more productive uses.”

  5. What Can We Cut to Balance the Budget?

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    In 2011, federal government spending significantly outweighed revenue. While the federal government spent $3.8 trillion, it collected only $2.2 trillion from various taxes, licenses, and fees. Professor Antony Davies breaks federal spending into five basic components. He further divides it into mandatory spending, which is an amount of spending automatically built into every budget by law, and discretionary spending, which must be approved by Congress every year.

    Mandatory spending includes spending on entitlements—that is, on Social Security, Medicare, and Medicaid—net interest, and other things, such as food stamps, student loans, unemployment benefits and more. While many advocates of social welfare programs complain that economists look primarily to Social Security and Medicare for budget cuts, it’s clear why they do. Professor Davies shows that even if the government eliminated everything government does with the exception of social programs and the interest on the debt, we still wouldn’t be able to balance the budget.

    Over the next decade, the U.S. government will face difficult choices. Weighing specific cuts is not enough, because there are no specific cuts that will enable government to balance the budget. Professor Davies says, “Nothing less than a redesign will solve this problem.” That redesign, he says, should begin by determining what the proper role of government is.

  6. Does Stimulus Spending Work?

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    After the housing bubble burst, both the Bush and Obama administrations turned to stimulus spending in an effort to improve U.S. economic growth. Stimulus spending is often justified by the thought that it is the government

  7. How Cronyism Is Hurting the Economy

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    The United States economy suffers from corporatism and cronyism, which occurs when businesses collude with government to obtain special benefits. The Occupy Wall Street movement has decried this rampant cronyism, but what is the best solution? Professor Jason Brennan contends that while it may seem like the solution is to allow government more power to control and police the economy, this “solution” may actually be causing the problem.

    He argues that giving government the power to control and regulate the economy benefits the rich and well connected for two reasons:

    1. The power to “regulate the economy” is really the same thing as the power to distribute favors. For example, many of the regulations we have today were influenced by and sometimes even partially written by one or more of the corporations.
    2. Regulations actually hurt small businesses more than big businesses. It costs a lot of time and money to comply with regulations, making it difficult for small businesses to enter heavily regulated markets.

    According to Brennan, less government power means corporations have less power to compete for, fewer privileges to seek, fewer subsidies to enjoy, and no agencies to capture.

    Read More: Beyond Bailouts: What Is Cronyism?

  8. Would Taxing the Rich Fix the Deficit?

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    In 2009, the government’s budget deficit was $1.5 trillion. Many have suggested raising taxes on the richest Americans to help offset the budget shortfall. Economics professor Antony Davies uses data to assess whether taxing the rich could possibly make up the difference.

    First, Professor Davies shows that the richest 5 percent of Americans already pay a tax rate almost three times higher than the average tax rate of the remaining 95 percent. It’s hard to argue that the richest aren’t paying a fair share of taxes. Aside from that, for the richest Americans to shoulder the deficit, we would have to raise their effective tax rate to 88 percent. At 88 percent, a family earning $300,000 each year has only $36,000 after taxes—less than the average American earns.

    Professor Davies shows other scenarios that would be necessary to pay the $1.5 trillion difference between government revenue and government spending. Realistically, taxing the rich is not going to be able to solve this problem. “The budget deficit is so large that there simply aren’t enough rich people to tax to raise enough to balance the budget,” Professor Davies says. It is time to start working on legitimate solutions, like cutting spending.In 2009, the government’s budget deficit was $1.5 trillion. Many have suggested raising taxes on the richest Americans to help offset the budget shortfall. Economics professor Antony Davies uses data to assess whether taxing the rich could possibly make up the difference.

    First, Professor Davies shows that the richest 5 percent of Americans already pay a tax rate almost three times higher than the average tax rate of the remaining 95 percent. It’s hard to argue that the richest aren’t paying a fair share of taxes. Aside from that, for the richest Americans to shoulder the deficit, we would have to raise their effective tax rate to 88 percent. At 88 percent, a family earning $300,000 each year has only $36,000 after taxes—less than the average American earns.

    Professor Davies shows other scenarios that would be necessary to pay the $1.5 trillion difference between government revenue and government spending. Realistically, taxing the rich is not going to be able to solve this problem. “The budget deficit is so large that there simply aren’t enough rich people to tax to raise enough to balance the budget,” Professor Davies says. It is time to start working on legitimate solutions, like cutting spending.

    Source

  9. Are Low Interest Rates Good?

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    The cost of borrowing money is at a record low. Low interest rates and cheap credit encourage people to spend more, and to save less. Is this good or bad?

    Many argue that we need low interest rates to encourage spending. But low interest rates don’t actually encourage people to spend more money. Low interest rates simply encourage people to spend more money now, and less in the future. The opposite is true for high interest rates.

    So what interest rate is best overall? Professor Davies says the best interest rate is the one that comes about naturally, without government intervention. Individuals know better than the Federal Reserve how and when to spend their money. Decisions on whether to consume more or save more is best left to individuals, not government officials.

  10. Social Security vs. Private Retirement

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    A large part of your Social Security taxes goes towards a forced savings plan intended to provide Americans with money for retirement. Economics professor Antony Davies looks at the Social Security system, and discusses alternatives that may provide Americans with more retirement money and more financial security.

    To evaluate the merits of Social Security, Professor Davies examines how much average Americans will earn in social security benefits relative to how much they will contribute. As it turns out, social security is a very poor option: the average worker will earn an annual return of only 1.2% percent on his social security taxes.

    Imagine, however, if workers weren’t required to pay into social security. If a worker took the money that would have gone to social security taxes and invested it in the stock market himself, he could expect to earn a lot more; upwards of $500,000 dollars more.

    According to Davies, phasing out Social Security would enable government to honor its obligations to current retirees, shut down a program that costs half a trillion dollars each year, and allow Americans to transition to a system that would provide more safety and a better return on investment.