Part 2: Monetary policy and Trump’s Tariff debacle

Before you start reading this post you should go to part 1 if you aren’t familiar with supply/demand curve and “dead weight loss”. 

In the first part of this post, I will be discussing Trump’s tariff debacle. It is a little misleading but enacting tariffs can only end in a debacle. In today’s world, we have globalization and free trade around the world. The world is much too interconnected to put protectionists policies in place is like moving backwards. I want to re-highlight these points even though I mentioned them in my other tariffs post here.  In the second part of this post, I will go over one or maybe two common monetary policies utilized by the Federal Reserve (Central Bank). The policies will be in relation to tariffs because they have to do with the actual money supply. I won’t go too far into detail, lets get right to Trump.

Globalization and Free Trade are the New Norm:

If you haven’t read the tariff post linked above then here is a brief recap about globalization and free trade. Globalization is spread of goods, people and cultures all over the world. In today’s world, if you look at how the internet let’s people access information instantly, and how you can literally go anywhere by plane, boat or car. This is globalization. The exchanging of information with people from all over world, it has us more interconnected than anytime in human history!

This connection has lead multiple free trade agreements. There are many more pending. My point is that Trump cannot possibly ignore this. Trump’s problem is, as I see it, he is thinking like the US is his business. So in order to get his business (USA) ahead he wants to cut off the competitors by pricing them out. However, there is a YUGE problem! The problem is that consumer markets are now worldwide. The USA has a population of only 320 million out of 7 billion people in the world! Clearly, the US is lucrative market but its not the only one!

Protectionism: Moving the Economy backwards:

This is painfully simple to explain. The US used to be a protectionist economy from its birth in 1776 to about 1913. The federal government collect the majority of its income from tariffs on imports and exports. In 1913, the federal income tax  started raking in more than tariffs. It has ever since. After the world wars, the world started to rapidly globalize. The US lead the way. Now the US is in a tedious position with countries like China chopping at the bit to take first place. The point is that if the US wants to go back to pre-1913, before we were considered the world’s number one economy then we should enact tariffs. Speaking of China, that brings me to my next point.

Trump will eventually lose the trade war with China:

Recently I was able to acquire membership to the Wall Street Journal. (I got connections, kidding) I came across an article that caught my eye. Let me preface it with this: Trump has already approved 50 billion dollars worth of tariffs on Chinese goods. Now Trump is threatening to raise it to 100 billion dollars worth. The Chinese have responded that they will fight back if he does it. Here is the link to the article, its called Trump Weighs Tariffs on $100 Billion More of Chinese Goods by Bob Davis. (I believe they allow a few free reads if you haven’t gotten a subscription) Davis goes into detail about the possible effects of the tariffs. He also writes about Trump’s possible plans to protect industries like agriculture. I would encourage everyone to read since it gives a decent background on the situation.

My point here is that Trump cannot win against China. The Chinese hold a ton of our debt. In other words, they buy American dollar backed government bonds. (China also cheats on its exchange rate by basing it off these debt bonds) China holds leverage because of the holding of American debt and they import more to us than we export to them. Trump will lose because China doesn’t need US goods. The US is more dependent on China. Now you can how monetary policy plays a role in the contexts of tariffs and the economy.

Exchange Rate

One of the most important aspects that any government can control is the exchange rate. The exchange rate or currency exchange rate is the value of one currency in relation to another. For example: 1 US dollar is equal to .81 Euro. Currency exchanges can done in every currency. One of the ways that the exchange rate help with Trump’s trade war is through making our money more valuable or less valuable. Unfortunately, its a great tactic because it can backfire. In a circumstance, where Trump decides to have the US Treasury take money out of the money supply or circulation. A common used is called deflation. Which refers to increase of purchasing power of money.  This usually helps everyone because less money is worth more. However, in regard to China, it would probably strengthen the Chinese position.

make the dollar worth less, it would help devalue the debt held by the Chinese. Trump would simply tell the US Treasury to print more money. However, the drawback is that it would cost more to pay back debt. It would also decrease the buying power affecting nearly everyone except the super rich. Its also called Inflation which is my next topic.

Inflation

Inflation is often seen as a bad word. Its often used to describe the fall of prices and purchasing power. There is some controversy about how its calculating using CPI or Consumer Price Index, which is explained here. Now the important thing about inflation is that it can have serious consequences.  One consequence I mentioned was decreased purchasing power. Purchasing power is very important especially everyday people like me and you. Many of my anti-minimum wage arguments on center on this exact principle. Having money be worth less means that you have work harder to make more to buy less. For example, inflation might bring your regular grocery bill from 100 dollars  a week to 150 dollars a week even if the prices of food remain about the same. The reason is because each dollar may lose 10 cents in value. (The math is a little complex)

What does inflation mean for Trump’s trade war? There is good and bad news. The good news is that Trump could try to deflate the value of the Chinese held US debt. The consequences would be as mentioned above. This method would disallow the Chinese to sell off the debt without losing value. The bad news is that even if the Chinese are forced to keep it, America would have a harder time paying it back. Trump also has to be careful not to print too much money.  The problems that arise can be dangerous for the domestic economy. Money circulation works in a supply and demand curve. If the value of money is too high or too valuable than one can print more bills to help lower it. This is rarely a problem, except when considering exchange rates, imports and exports. If the value of money is too low than one could take money of the supply to help increase its value. So really its a supply/ value curve.

To conclude: Trump’s Trade War is not easily winnable. He obviously has some tools to work with. I also read recently that he is rethinking the Transpacific Trade partnership or TPP. I think its interesting because if the countries currently in the agreement allow Trump re-join and set the rules for trade than it will the US control over trade especially in regard to China. The TPP is a trade agreement that actually just regulates trade in certain industries. Trump withdrew because of global warming clauses and “unfair” regulations.

I can write more on TPP soon because I find it interesting. Also a Syrian Bombing post is coming soon.

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Lesson on Economics: Protectionist vs. Free Trade

I know. I know. I know what your probably saying to yourself. “Not another economics lesson, you nerd!” “Haven’t you already covered everything economics?” Thank you, I am a nerd and also yes I’m thorough in my coverage of topics. I promise I’ll try to not to drone on for 2000 words this time. I need to explain something that President Trump has recently brought up as a potential policy. I don’t think people really understand how import and export tariffs work.

On the surface, in simplest terms a tariff doesn’t sound like a bad thing. A tariff is a tax on a imported or exported good. A tariff can increase of the price of a foreign good to make the domestic goods more “competitive”. Now I put that quotes because the reality is quite different. I think most people would say that there seems to be nothing wrong that. History would even agree that tariffs are a commonly used tool by governments to help guide trading between nations. Here is the problem.

Tariffs are antiquated. The US government used tariffs from its inception thanks to Alexander Hamilton’s brilliant mind to about 1913. After 1913 and in the 105 years since tariffs have fallen out of favor as economic tool. This isn’t to say that no country uses them but the US government only takes about 1-2 percent of its income from tariffs today. Before 1913, the tariff brought in nearly 90 percent of the governments income at its peak.

Economists agree that tariffs hurt an economy. I’ll get to why after I explain that globalization and free trade have changed the world economy. Globalization is the free movement of people, cultural and products. The world is more accessible than ever, with cheap flights to almost anywhere in the world. The internet has an untold wealth of information that was never available til about 25 years ago. We live in a world where everyone is connected. There are multiple free trade agreements between countries that allow a flow of goods and services between them. Free Trade encourages competition in the market. It allows every participant country’s economy to benefit.

Meanwhile, Protectionist economies or countries that use tariffs extensively are actually hinder. The simple explanation through some graphs and pictures. E-tariffntrade2

This graph is basically a supply and demand curve with some with other lines. (Charts reads likes this: As supply goes up, Demand goes down OR As demand goes up, supply goes down). The bold line is the price of goods before the tariff on imports, its label WS. The line above that labeled WS+ Tariff is price of imports after the tariff.  The implication is obvious: A tariff will increase price of an imported good. Here is another chart to show the impact of this:

taxes

This particular chart shows the “Dead weight” or loss of value. This chart reads like this: As quantity goes up, the price goes down.  You can see the supplier has to pay the tariff and therefore it increase the cost to the customer. The loss of value is where the maker increases the price of their product to cover the cost of the tariff. The money is lost because the supplier has to either stick with that supplier or go to another one which obvious wasn’t cheaper before the tariff.

Here’s an example:

Before Tariff:

Company A: Product cost: 25 dollars

Foreign Supplier 1: Material cost: 5 dollars

Domestic Supplier 2 Material cost: 13 dollars

After Tariff:

Company A: Product cost: $25+ $10 tariff = $35

Foreign Supplier 1: Material Cost: $5 + $10 tariff = 15 dollars

Domestic Supplier 2: Material Cost: 13 dollars (No added Tariff)

You can see the dead weight  or loss value. The tariff raises the price of the foreign competitor’s material cost artificially. The extra 10 dollars that it cost to buy from that foreign supplier is lost. This is because the domestic supplier’s cost is 13 dollars compared to the foreign supplier’s 5 dollars before tax. The loss of value is 8 dollars. Therefore the Company A has to raise it prices because its cost have increased.

I’ll put a picture in the preview that help explain even more. (Credit to marketbusinessnews.com)

My conclusion is basically that protectionist policies don’t benefit an economy in the long run. The government is once again interfering in the market where it doesn’t need to be. As usual, the best solution to fix the problem with tariffs is to not have any. We have to take the government out of the market that includes all varies regulations that just raise prices and don’t involve health and safety.

President Trump should tread carefully because the long term implications will be worse than the short term benefits. I think that because of globalization, free trade is the new way to do business. Although the US has historically been a protectionist country, the future is going the exact opposite way. The world economy has undergone globalization and free trade is the new normal.

Thanks for reading, if you are still awake feel free to check out:

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Relevant articles on Tariffs,  Historical Tariffs, Economics Part 1, Part 2, Part 3

Tragedy of the Commons: Problem with Collective Policies

Have you ever heard of Tragedy of the Commons? Sound familiar? Tragedy of commons is typically associated with fishing. If fisherman go out to a popular fishing spot and catch fish at a rate that is more than fish reproduce, then that would be a tragedy of commons. Garrett Hardin came up with theory originally and applied it to biology or nature. There are many examples, but the basic principle is that demand overwhelms supply.  Just in case you fell asleep in Economics 101 or you happen to be Bernie Sanders then here is a little reminder of how supply and demand work:

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I want to talk about tragedy of the commons in the terms of political policies and platforms. It’s a topic that is hotly contested among Libertarians and conservatives. On the other hand, Liberals tend to completely ignore it. Its this ignorance of the tragedy of commons that might explain why collectivist policies that liberals tend to advocate are just really bad. Liberals and even Conservatives both tend to argue for MORE government regulation in the face of a tragedy of the commons issue. (I’ll try to keep it relatively brief, one or two examples, I have a lot to say)

Let’s take on healthcare for example, is a tragedy of the commons. Liberals advocate for a universal healthcare system. This system would in theory depend on the taxpayer (theft) money to help cover the costs of healthcare. However, this policy would extremely expensive due to the increased costs to private health providers. Also the service given by providers would be slower due to a heavy volume and probably less staff. Healthcare is a complex issue but a tragedy of commons exists in both the taxation for it and the availability of quick medical care by providers. For example, in Canada, they have universal healthcare and experience longer wait times, sometimes for very important life saving procedures. In some cases they come to the US for faster care.

In short, universal healthcare is a collectivist policy pushed by liberals that creates many tragedy of the commons. Unfortunately the conservatives are not much better backing single payer with a government agency running the show. Less tragedy of the commons here, but still not the best option. The solution for a tragedy of the commons is deregulation in most cases, concerning government policies. In nature, like the fishing spot, the solution would be to have fisherman stop fishing in that particular spot until there were sufficient fish. I want to clarify what I mean by collectivist. Collectivist is a term usually meaning something is done in or by a group.

My second example is one of the hottest issues because of a vote coming up, Net Neutrality. Naturally my position is repeal because Net Neutrality isn’t consumer protections, its just dealing with bandwidth and if companies can block or censor stuff. From what I’ve read the new rules after repeal will be that the companies will have to report whatever they throttle, block, censor to the FCC who will make it public. I also see no problem with Netflix and Amazon and Hulu having to pay more for bandwidth. They use a lot of it, its only fair. Naturally that will be passed to the customer. However, the good news of repeal is that companies will offer different packages specifically geared toward streaming services. Unlike now, where you get all one price and it might be good or bad.

The tragedy of the commons in Net Neutrality stems from the issue of bandwidth. There is only so much bandwidth that these companies can generate without losing money. Its interesting because if you look at bandwidth in a vacuum, it really highlights the problem. Watch: Let’s say Comcast and Verizon both offer 300 mbps of bandwidth under current Net Neutrality for an average price of 150 dollars. (Making up random numbers here). Let’s repeal those rules and see how prices and amount of bandwidth change. Under Net Neutrality, both companies would have similar prices and the max amount of bandwidth would be at 300, but of course you can pay less to get less. The problem with this is that the companies aren’t really competing. There’s very little variation because the going rate for bandwidth is 150 dollars for 300 mpbs. Everyone can gets to use that bandwidth to watch Netflix and play fortnite as much as they want. The companies might be struggling to keep all this bandwidth up with only 150 dollars per customer because their own business costs are going up.

If we repeal Net Neutrality, now Comcast charges $100 for 200 mpbs,  $200 for 300 mpbs and lets say $300 for 400 mpbs. Unheard of right? Well, Verizon charges $75 for 150 mpbs, $150 for 250 mpbs, $275 for 300 mpbs, $350 for 420 mpbs. Now you can see the competition as each company tries attract more customers. They may even offer a lower bandwidth but you get extreme streaming capabilities for an extra 100 bucks. Either way, the competition will naturally drive down prices. When supply goes up, demand goes down. In order to create demand you need to supply, but you also need to create an interest in your product and attractiveness or marketing.

The solution to the tragedy of the commons for nearly every aspect of Net Neutrality is deregulation. Let the consumers decide which companies will succeed and fail. Another positive aspect of net neutrality being repealed is that it will allow startups and other smaller companies to get into the market of internet.

I believe that through my two examples I have shown why some collectivists policies are broken due to the tragedy of the commons. I believe that the solution to tragedy of the commons is deregulation which means getting government out of our lives. This solution is the basis for the whole libertarian philosophy. If society is a tragedy of the commons then as libertarians we are for the deregulation and privatization of pretty much everything. Everything is harder in a large group. Its similar to when you ask your friends where they want to eat. Everyone has different opinion. Or when you ask your friends when they want to go out. Everyone is busy and has no time. Collectivism requires group-think and group decision making. Its not the most effective. Tragedy of the commons also tends to tread on the rights of the individual.

The rights of individual are the most important aspect in a free society. As Thomas Jefferson once wrote:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness”

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Hiatus Break: NFL Protests and Tax Reform

I have previous written about the original NFL protest by Colin Kaepernick. This post basically tells Kaepernick to put his money where his mouth is. He did exactly that. Now the protest has spread around the league. President Trump has tweeted, spoke and commented on the protest on multiple occasions. In apparent backlash, NFL ratings are down pretty significantly. The owners and players are seemingly at odds. (I’ll get into this more) I won’t just be talking about the NFL protest in this post. I also want to touch on tax reform which is currently the hot issue in Congress. I hold an extreme belief about taxes. I mean extreme by that its a position that isn’t possible in today’s circumstances. However, it doesn’t mean its not achievable eventually through some means. I will lay out my own set of tax reforms in the second part of this post.

I have been an NFL fan my whole life. Quite literally since I was in second grade I remember watching the Jets. I remember wearing Jets jerseys (I still have them). I absolutely love football. Although I never played in an organized manner. If I was athletically gifted I would be a Quarterback in the NFL. Generally I’m one of those people who doesn’t care to mix politics with anything but politics. So when Kaepernick started his protest I wasn’t that happy. Its not that I don’t care about the issues he is protesting or that I dislike him. Its just I watch football to watch football. I don’t care about the political leanings of the players or owners or coaches. Aside from that, they all get paid handsomely (Players) or are extremely wealthy to begin with (owners).

The problem with the protest now is that its gotten way out of control. At first it wasn’t too crazy. The craziest comes from a unlikely source in President Trump. Now Trump himself isn’t shy about creating controversy or saying incredibly inflammatory things. However, the President of the United States typically doesn’t pour gas on a fire like he did with the NFL protests. I basically have two issues here and the main issue is Trump’s position on this. Trump wants the owners and NFL to force the players to stand for the anthem. I think that many conservative thinking people probably agree. They think its disrespectful to the flag and the military. Which I don’t fully disagree.

However, the constitution has a bill of rights. In that bill of rights there is a first amendment. The first amendment is the freedom of speech. Over the years the Supreme Court has ruled that speech isn’t just talking, it can also cover symbolic speech and others. In this regard I have disagree with Trump, he or the government can’t make a law forcing them to stand. Its the players right to protest and there is nothing that Trump or the government can do. However, the NFL could do something like fire the players. But they won’t do that. Let me tell you why they won’t: Backlash would very bad for the NFL probably twice or three times as bad it is now. However, the NFL could force players to stand, its not a violation of first amendment rights. The reason is because the players represent the NFL as brand and the NFL has right to protect its brand from being unnecessarily tarnished especially by its own employees. The NFL also has a collective bargaining agreement which apparently does state that players must stand. If its true, then its over because the players agreed to that agreement and therefore would have to follow it or be fired.

In my opinion, I think that players should stand because of the ratings and money. I mean they are only affecting their own livelihood. If the owners still feeling the pinch then so will they. In the end, its better if they stand and try to protest in a different way or become an activist and use all those millions to do something about the problem. I don’t think anyone can deny that police oppression is real. However, I think the solution lies within criminal justice reform. I won’t get into this because I’m not an expert and I didn’t do any research yet. However, look out for future posts.

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Tax reform is one of my favorite topics to discuss. Its because they are a lot of solutions to a problem that seems to never go away. I think one thing that is always missing from the tax reform debate is spending reform. You might say that’s a totally different reform! But actually taxes are based projected government spending.  For example: the government spends approximately 600 to 700 billion dollars on the military each year. In order to cover that they need to raise that in taxes.

Generally the federal government’s budget is anywhere from 2 to 4 trillion dollars. It is supposed to be a certain percent of GDP or gross domestic product. (I have a post dedicated to this subject of GDP) So my ideal tax reform in a perfect world would zero taxes. You may have heard taxation is theft. If you haven’t then its pretty plain what that means. Yes the government is stealing from us. This is a very extreme way to view taxation but its not as crazy as you think.

Originally the US government didn’t really collect taxes. In fact, the US government taxed products and used tariffs up until about 1913. So our government was able to run entirely without any income tax. Income tax is now the largest category of revenue of the US government. Its also the worst way to fund the government. Income tax really sucks. There will never a true, fair way to split up the weight of paying it. Its awful. However, there is no way the government could survive with 20 trillion dollars of debt and absolutely no tax income. That insane.

My proposal is essentially this get rid of the current tax format. Install a universal basic income (See this post). Then install a flat tax starting around 15 percent. No more brackets. No more loopholes. My plan does a lot of things but the two main things is that it cuts spending and will eventually lower taxes! So with basic income it would cut out most of social welfare programs and replace it with a government check to everyone over 18 and not a criminal. This saves approximately 200 million dollars a year. Each year for about 10 years you fix or pay off the debt. Plus the 15 percent over ten years would generate enough income to really pay off the debt and run the country. After ten years you lower the tax rate to 10 percent for another 10 to 15 years. Essentially the goal is to make the government so lean that it won’t need tax money. Its definitely possible over time.

This a simplified version which I think is good start. The details and actual numbers would have to be worked out by someone in a math oriented field. I can only hope that this tax plan eventually happens. Its not a popular one because usually conservative politicians advocate flat taxes. Basic income isn’t too popular either because it sounds a little crazy. But I feel like the two very different approaches really balance each other out. Also you can’t possibly say a flat tax isn’t fair. Its fair by nature. Also it still ensures that the poor pay less and the rich pay more. Which is why I don’t understand why people don’t like it. I guess they would rather get fleeced by the current system.

Thank you for reading! Have a awesome day!

 

 

 

Tariffs: America’s Oldest Tax Plan Revisited

In history class, I distinctly remember talking about tariffs. It’s usually something you learn about first especially in American history. The American revolutionaries were unhappy with the tariffs being put on their exports by the British. This is what the revolution started over to a degree. You might not remember what a tariff or tariffs are. The definition of tariff is: tax or duty to be paid on particular class of imports and exports. In other words, a tariff is a tax on imported or exported goods. Every country typically imports and exports goods and services. The goods that are typically exported are those in surplus in that country. The goods that are imported are those which are either cheaper or not in supply in that country. Tariffs have been long a part of the American economy. Tariffs have even long been a part of the government.

In the post, I’m going to first review why tariffs were such an integral part of our nation’s history. Then I want to discuss how we went from a tariff based revenue system to the current system of income tax. After that I want to put forward an idea that seems to have been lost in time. The tariff in the United States was after the revolution used to fund the government. Almost as the sole source of income. Alexander Hamilton had designed the whole system. He set up and got funding for a series of lighthouses and inspection clerks up and down the Atlantic coast. There clerks were to inspect all incoming and outgoing goods. They also had to determine the tariff on each item. They were called Customs Officers. Hamilton became the Secretary of the Treasury and further install his government revenue engine on the back of the Tariff act of 1789. The act is simply explained in its first section:

“Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise:” — Section 1; Tariff Act of 1789

The tariff is essentially an indirect tax on goods coming and going out of the country. Hamilton saw the huge war debt from the revolution and knew that the US government had no source of income. There was no income tax or anything like that. (Wouldn’t come til 1912, I’ll explain later) So Hamilton being the genius he was, decided to convince President Washington to take out a loan and install the customs system (Tariff Act). He argued in one of many papers that America need to build credit. If you have a credit card or student loans like me then you know that building credit is paying off your debt. Hamilton’s system allowed the US government build credit, in fact one of the best credit ratings in the world for many years. Not everyone was on board with the plan. People like Thomas Jefferson and James Madison. However, they couldn’t stop Hamilton’s plan because war debt was owed to France and other creditors. The US didn’t have many options at that time.

So tariffs were the main source of income from 1789 to about 1911. The US government added liquor taxes, postage taxes, corporate taxes, tobacco taxes and the Panama canal as other sources of revenue. In 1912, tariffs made up about 20 percent of the income of the government. In 1913, the government passed a law that changed the source of US government forever. The law called the Revenue Act of 1913 or the Underwood Act was passed to impose an income tax and lower tariff rates from 40 to 25 percent. This marked the end of tariffs making up a significant portion of US government income. This act was possible by the newly passed 16th amendment. (For another post, the 16th allows for income tax under the direct taxation requirements in the constitution, which was previously ruled unconstitutional by the Supreme Court) Since 1913, our tariff income has only been about 1 percent of revenue. This figure is according to this website here, it also breaks down the tariff income based on type of good. All in all, 2013 saw about 30 billion dollars of income. This is compared to 311 million in 1912. In 2016 dollars, that tariff income would be about 7 billion. Obviously, since the early 1900s the conditions of the economy and our government budget has exploded.

You might be asking yourself but isn’t 7 billion dollars in 2016 or 2017 (Happy New Year) like chump change for the US government whose budget is around 2 or 3 trillion dollars. My answer would be yes. However, if you look at these numbers in terms of percentage and scale then you can imagine a viable tariff system for 2017. Remember tariffs made up 20 percent of the 1912 budget. Now tariffs make up 1.7 percent approximately in 2013. So lets say for argument that our budget under President Trump is 3 trillion. Trump decides in order to cut taxes he needs to increase revenues. (In some alternate logical world) So Trump orders an increase on tariffs. His cabinet comes up with about 600 billion in tariffs or about 20 percent of the budget. I think that 600 billion dollars is a pretty nice chunk of change. Imagine what that could pay for? Social Security? War? Food Stamps? But what would those tariffs look like?

Obviously to understand the role of tariffs, you need have an understanding of the global economy. I think its obvious that the world is complex. A significant part of an economy is trade. The trade between two countries or more is essential because it allows scarce resources to be spread. It also widens the markets for such goods. Its been in the news a lot lately about all the trade agreements. These agreements in a basic way remove the barriers and allow trade to flow freely. One of those barriers can be tariffs. There are two types of tariffs. Import tariffs are a tax on goods that imported from other countries. Import tariffs are often seen as protective to a country economy. This was the primary tariff beginning in 1789 because it (artificially) protected the US economy. Export tariffs are a tax on goods being exported to other countries. Export tariffs are typically seen as way to limit the exports of a certain good. For example, if oil became very scarce then the US might want to put a high export tariff to help curb the sale of oil abroad and keep here in the US.  (An export tariff would increase the price of oil outside the US)

I believe that introducing a new tax plan including tariffs might be beneficial to the US. I think you have to carefully consider what to put tariffs on and what kind of tariffs. But its definitely a source revenue that is not used as it once was. Now we rely on income tax so heavily, its crushing many Americans. Its a liberal fallacy to think that you can tax your way out of poverty. Its an irony. Taxes create more poverty than eliminate. I think I need to do another post on the subject of trade because this post is merely just one part of it. I need to do some further research before I offer any specifics on what a tariff revenue might look like. So I will leave this post as to be continued, my next post will try to figure out how to successfully incorporate tariffs into a free trade world.

Thanks for reading!

 

On the Basis of Democracy: John Locke, Part 2.

Welcome to Part 2 of on the Basis of Democracy with John Locke. If you missed Part 1, you should read that first. The purpose of this blog post is to simply figured out the origins of Democracy and how it works within our American democracy. In Part 1, I went over some of the ideas of democracy from Aristotle. Political theory is a pretty easy theory to follow because each political philosopher usually builds off philosopher’s of time past. Therefore, the more ancient political scholarship you understand, the more modern/current political thoughts you can understand. In Part 2, we will be discussing John Locke and his ideas on democracy.

Who is John Locke? He is an english born political philosopher. Born in the early 1600s. He was influenced by Aristotle. Locke has a deep range of writings. He is often considered to be one of the fathers of the enlightenment. Similar to part 1, I won’t give a full biography but go to straight to Locke’s ideas about democracy. Starting from his first writing and going forward, Locke’s main premise is the consent of the governed. In his first writing called “Fundamental Constitutions of Carolina”.  In this piece, Locke and his mentor, wrote a constitution meant for the Providence of Carolina in England. It was never adopted. However, the ideas that he mentioned became the basis of political philosophy going forward.

The most influential of Locke’s writings came in his Two Treatises of Government. Instead of trying to paraphrase his great words, I will just show you. Then I will explain how the founding fathers use Locke’s ideas especially in the Declaration of Independence. Here is just a few excerpts of Locke’s Two Treatises of Government:

Sect. 95. MEN being, as has been said, by nature, all free, equal, and independent, no one can be put out of this estate, and subjected to the political power of another, without his own consent. The only way whereby any one divests himself of his natural liberty, and puts on the bonds of civil society, is by agreeing with other men to join and unite into a community for their comfortable, safe, and peaceable living one amongst another, in a secure enjoyment of their properties, and a greater security against any, that are not of it. This any number of men may do, because it injures not the freedom of the rest; they are left as they were in the liberty of the state of nature. When any number of men have so consented to make one community or government, they are thereby presently incorporated, and make one body politic, wherein the majority have a right to act and conclude the rest.

Sect. 96. For when any number of men have, by the consent of every individual, made a community, they have thereby made that community one body, with a power to act as one body, which is only by the will and determination of the majority: for that which acts any community, being only the consent of the individuals of it, and it being necessary to that which is one body to move one way; it is necessary the body should move that way whither the greater force carries it, which is the consent of the majority: or else it is impossible it should act or continue one body, one community, which the consent of every individual that united into it, agreed that it should; and so every one is bound by that consent to be concluded by the majority. And therefore we see, that in assemblies, impowered to act by positive laws, where no number is set by that positive law which impowers them, the act of the majority passes for the act of the whole, and of course determines, as having, by the law of nature and reason, the power of the whole.

If you want to read more of Locke: Click here.

Locke’s main point is that the governed hold the power of the government. Locke believes that a government cannot operate without the consent of the government. This is a basis of democracy. The reason why Locke believes that the consent of the governed is so important is because of the freedom or liberty that it offers. If the government is ruled by the people it can prevent tyrants and better rule the people. Locke is also coming from a monarchy in England and in a time when the dark ages we’re not that far off. In the dark ages, it was a small oligarchy who wealthy that ruled over the poor and working class who had no say. Locke’s ideas are perhaps best expressed in Thomas Jefferson’s document.

Thomas Jefferson was a philosopher in his own right. Jefferson also understood that Locke’s philosophy fit perfectly with the American cause for revolution. If you didn’t pay attention in history class then you want to know to that one of the rallying cries was “no taxation no representation”. The American people were clamoring for representation in the British parliament. The unilateral rule of the British Monarchy over the American colony was directly what John Locke was trying to get at. In the Declaration of Independence, Thomas Jefferson took a page for Locke and wrote this:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Thomas Jefferson essentially took Locke’s words and used it as a justification for the revolution of the American people. Locke’s vision for democracy did not just end with Jefferson but kept going. Locke’s idea that the consent of governed is needed in democracy still holds true today. Unfortunately, in today’s America we have gotten lazy. We seem to have ignored the fact that our democracy is supposed represent the people. Many people blame our representatives. We should look at the majority of governed who don’t vote. I think in a very indirect way, Locke is also advocating for participation in government. I feel that political participation has gone down as politics has become more polarizing.

We can blame Trump. We can blame Hillary. We blame our politicans. However, I think that democracy in the words of Locke lies with “the consent of the governed.” I think to wrap up this series, I want to just conclude a few major considerations for the basis of democracy. One basis that Aristotle outlined is the authority over aduits. In other words, Aristotle thought that the people should hold purse strings and keep the government accountable. Aristotle gave us a second basis that is the foundation of our judicial system. The right to a fair trial with a jury of your peers. Locke gives us the basis of the consent of the governed. The theory that democracy should always be run by the people and for the people. The majority of people should have the power to control the government. This means everyone must vote. Everyone must participate. These are the three main bases of democracy as written by Aristotle and John Locke.

This will be end of this series for now. I may continue it with different philosophers at another time. Below you will find my sources especially for the quoted stuff. Thank you for reading!

Citations:

https://www.johnlocke.org/about-john-locke/who-is-john-locke/

http://www.gutenberg.org/files/7370/7370-h/7370-h.htm

http://www.ushistory.org/declaration/document/

 

 

 

Economic Series Part 3: What is Gross Domestic Product?

Welcome to the third part of my economic series. This final part will explain what GDP is and why it is so often used as politicians go to economic figure of success or failure. Gross Domestic Product or GDP as I will call it by the acronym, is an economic indicator. It measures a very specific part of the economy in any given country. If you have not read parts ONE and TWO of this economic series I strongly suggest that you do. My first two parts of the series describe the arguments for and against minimum wage in part one. In part two, I  go over the basics of government budget and taxation. It’s important to recognize that economics is a very complex subject and many topics involved having an understanding of other topics. In this case, I think that GDP is definitely the most advanced of all the topics that I have covered thus far. In order to properly discuss GDP and the politics that usually surround it, I feel its necessary to explain how it come to be and what it involves.

The book that has inspired me to write on this topic and my primary source of information is called GDP: A Brief but Affectionate History by Diane Coyle. Coyle’s book gives a full rundown of everything GDP. I would strongly recommend it because this post won’t even cover 1/4 of what she does in this book. Coyle gives a simple word breakdown of GDP. Gross meaning not deducted as opposed to net (Her example was like net weight of a cereal box, it’s only the weight of the cereal without the packaging) Product meaning stuff made, and Domestic is simply at home.(Page 7) GDP is much more complex than the three simple words that make up its name. The history and founding of GDP begins at the start of World War II. However, the idea goes back throughout the ages.

One of the many controversies over GDP that still exist today was first explored by one of the greatest economic scholars to ever write. Adam Smith wrote the Wealth of Nations. In his book, he went over some relevent facts of GDP. His point to paraphrase is this: The manufacturer that produces something with their labor creates value and adds it to the economy. The person who employs many menial servants grows poor while the person who employs many manufacturers grows rich. The point here being that Smith sees the production of goods as adding value to an economy. He sees the services of a servant or a service in general adds nothing. GDP has often not included services because it’s too hard to measure the true output of a teacher. Also the word “Product” in GDP lends itself to the production of goods not services. (Page 10)

GDP’s history comes out of collection of statistical data and economists. Colin Clark calculated the expenditures and national income of the United Kingdom. Clark based his work on a publication by Alfred Marshall who wrote Principals of Economics before the Great Depression. Franklin Roosevelt encourage more research and work on the national income and expenditures during the Great Depression. This led to Simon Kuznets to work with the National Bureau of Economic Research, which earned him a nobel prize. One of things that Kuznets brought up is an important facet of GDP. Kuznets thought that he was working to measure welfare rather than just output. GDP is often used to measure the welfare of any given country. However, because like I said previously, GDP is typically measured by the output of an economic. The problem of welfare and GDP is one of modern criticisms of GDP. Coyle dedicates two chapters to the subject of GDP and welfare. (Page 12-14)

I want to focus more on the particulars of GDP and how it’s calculated. Coyle covers this topic quite well. I want to save welfare and GDP for another post because it’s too much for this post. Coyle goes over the three different ways to measure and calculate GDP. She gives a two charts. One chart shows how these calculations are done. Since I don’t have the chart, I will just describe each way. The first way is a Value Added production. Value Added production adds up the Gross Output. The gross output is the all the sales made in an economy. The gross output excludes the inventory because it’s counted by the next category of intermediate inputs. Which stuff like staffing, inventory, and other things that businesses pay money for to make their business work. Finally you get to a number that tells you how much value added each industry in an economy.

The second way to calculate GDP is through Income (by type) approach. This approach uses a set of different incomes and expenditures to make final figure of Total Domestic Incomes earned. There are rental income, profits and proprietors’ income, Taxes on production and imports, Less: Subsidies, Interest and miscellaneous payments, and depreciation. These are the categories of the Income (by type) approach. The third way to calculate GDP is through Final Demand (or Expenditures) approach. This approach uses the sum of these categories to make up the final sales of domestic product to purchasers. The categories are the consumption of final goods and services by households; Investment in plant, equipment, and software; Government expenditures on good and services; and net exports of goods and services (export-import). No matter how you calculate GDP, the measurement always is trying measure how much an economy produces and what kind of income the country who benefits from it makes. (Page 25-26)

The most popular and most used method in modern times is the Expenditures approach. Coyle also goes over the equation along with an awesome chart. The equation simply is GDP= C+I+G+(X-M). The letters stand for Consumer Spending plus Investment plus government spending plus exports less imports. (Trade deficit/surplus). Coyle also tries to show some problems with the GDP equation which is mostly that GDP is not so simple. The categories have multiple sub-categories. There is a lot of gray area. The numbers can be shaky. However, in the end GDP is the most reliable measurement of economy. Coyle mentions other indicators which can help round out the welfare aspect and government impact. The awesome chart I was referring is a two circles. On the left side there is the word “Individuals” and on the right side there is “Business”. The top of the circles, have two words. On the bottom circle it says Expenditures, and on the top circle it says Goods and Services. In the lower two circles, the top one says Income and the bottom says Labor. (page 26-27)

The story is that Individuals and Businesses interact in two different ways. The circles represent the different ways. The bigger circle with Labor and Goods and Services basically shows that Individuals supply the labor for business. The Business supplies the good and services. This is basic economics, it shows a supply/demand for labor and good and services.  The smaller circle with Expenditures and Income show that Businesses supply the Individual with income and the Individual supplies the business with Expenditures. The vice-versa is also true. Businesses make income on the Individual’s expenditures. This is a simple economics lesson that can help you understand GDP. (Page 27)

GDP is an important facet of economic measurement of any given country. As Coyle notes in later chapters which this post won’t cover, that GDP is not accurate in second and third world countries because of faulty accounting and statistics. She also covers a great deal of debate over whether welfare should be measured by GDP or not. These are more complex questions than I really want to go. I think the point of this post is to say that GDP is important to understand. GDP is not a true measure of welfare. It’s the statistical measure of economic input and output. As an example, GDP measures the number of phones that Apple sells after the release of the Iphone 7. It doesn’t take into account the welfare of the people who buy those phones. GDP is also a political tool especially when it comes to arguing over the economy.

Moving away from Coyle’s book in some ways, I want to briefly discuss why politicians like to use GDP. I think that much of the political controversy surrounding the use of GDP comes from the myths of GDP. Many people don’t realize the history of GDP. The misunderstanding of what GDP represents. Many politicans including present candidates for President seem to think that GDP shows how well the economy doing or more often how bad it’s doing. However, the reality is that GDP can fluctuate just based on how you calculate it. One increase or decrease in any given category there could be a 1-2 percent fluctuation. Another important myth to dispel is that government spending actually helps GDP. The debate that surrounds government spending and its effect on the economy is prevalent.

This is where I want to end this post and this series for now. My last words is that government spending doesn’t necessary make for the best economic move. The problem with government spending is that the government is NOT a business. Government makes their money from taxpayers. Its mandatory, you can’t just not pay taxes. It also makes a problem with counting the statistics for GDP. The government doesn’t have a real income with the exception taxes. This means that when the government tries to invest in anything it only represents an expenditure. If you recall the chart, the point of an economy is a cycle of labor into good and services that make income provided by expenditures. One example, that I know the best is that of the spending on the military. Military spending has often been one of the biggest items on US government budget. The national debt is nearly 20 trillion dollars. Some scholars have estimated that 16 trillion of that was spent during the cold war on military research and wars. The way that the DOD (Department of Defense) and the government have gone about spending this money is the problem. The military contracts assigned to military contractors during these years were given without little scrutiny. Many of the biggest contractors were able to contracts with no competition. The contracts included very little accountability or responsiblity especially in regards to money spent.

The point being is that GDP has actually suffered since the Cold War. This mainly due to stagnant economy. I mentioned that GDP doesn’t measure services which now is the most prominent feature of our economy. The reckless spending and bad fiscal policy by the government has given us some unfortunate consequences. GDP will always be controversial because of its complexity. I believe that its important to understand how GDP works. If you understand economics and GDP then you can understand that fallacy that politicians try to push on us. For me, this topic is fairly new but I wanted to try to introduce a little bit of the controversy and facts of economics and GDP.

Thanks you for reading! Have a great day!

 

Citation:

Coyle, Diane. GDP: A Brief but Affectionate History. Prinction University Press, 2014.