Financial Health of the Government

1. Financial Health of the Government

2. Much valuable discussion fails to occur because of pride and prejudice.

3. Prejudice • Humans who work in the private sector are greedy. • Humans who work in the public sector are altruistic.

4. Truth • The same humans with the same strengths, failings, and desires occupy both sectors.

5. Pride • Economic truths are opinion.

6. Truth • The whole point of economic theory is to describe the real world. • Disconnects arise not from a failure of economics but from a lack of understanding of what economics is telling us.

7. Pride • Inability or unwillingness to admit limitations.

8. Truth • It is impossible for an economy to provide everything that everyone wants. • Corollary: A majority vote does not bestow magical powers to circumvent limitations.

9. What is the point of this lecture? Data and logic pwn pride and prejudice.

10. The Players and the Goals • In this experiment, each team controls a firm that sells to a group of consumers. • Firms select what price to charge. • Lower price means consumers purchase more units. • Higher price means consumers purchase fewer units.

11. (Price per unit) (Units sold) The Players and the Goals Goal: Make the most profit possible. Profit = Revenue – Cost ($1) (Units sold)

12. Example You will see a demand schedule like the one to the right. The chart shows the number of units you will sell depending on what price you decide to charge. You must choose what price to charge for your product so as to maximize your profit.

13. Example Suppose you charge $10.00 per unit. How many units will you sell? 750 What is your revenue? ($10) (750) = $7,500 What is your cost? ($1) (750) = $750 What is your profit? $7,500 – $750 = $6,750

14. Example Suppose you charge $20.00 per unit. How many units will you sell? 550 What is your revenue? ($20) (550) = $11,000 What is your cost? ($1) (550) = $550 What is your profit? $11,000 – $550 = $10,450

15. Example Suppose you charge $10.00 per unit. Profit = $6,750 Of these, $20.00 is the better price to charge. Suppose you charge $20.00 per unit. Profit = $10,450

16. Round 1 Choose the price you will charge for your product. Every unit you sell costs you $1 to produce.

17. Round 1

18. Round 2: Tax the Consumers In this round, consumers will pay an additional $5 per unit tax. You choose a price. The consumers pay that price per unit to you plus they pay another $5 per unit to the government.

19. Round 2 In this round, consumers will pay an additional $5 per unit tax. You charge $7. If you charge $7, how many units will consumers buy? 710 Consumers pay $7 + $5 = $12. What is your revenue? ($7) (710) = $4970 What is your cost? ($1) (710) = $710 Consumers buy 710 units. What is your profit? ($7)(710) – ($1)(710) = $4260

20. Round 2 Choose the price you will charge for your product. The consumer pays your price plus another $5 to the government. Every unit you sell costs you $1 to produce.

21. Round 2: Tax the Consumers

22. Round 3: Tax the Producers In this round, producers will pay a $5 per unit tax for every unit they sell. The price consumers pay is the price you charge.

23. Round 3 In this round, producers will pay a $5 per unit tax. Your cost per unit is now $1 (for the unit) plus another $5 (for the tax). If you charge $7, how many units will consumers buy? 810 What is your profit? ($7 )(810) – ($1)(101) – ($5)(101) = $5,064

24. 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 $5 for each unit you produce.

25. Round 3: Tax the Producers

26. Results In round 3, the government taxed the producers $5. Won’t producers just pass the tax on to consumers?

27. Results Producers pass part of the tax ($3.50) on to consumers but pay the remainder of the tax ($1.50) out of their profits.

28. Results In round 2, the government taxed the consumers $5. Won’t consumers be forced to pay the full $5 tax?

29. Results Producers pay part of the tax ($1.50) out of their profits and leave consumers to pay the remainder of the tax ($3.50).

30. Results Lesson #1: The government has no control over who ultimately pays a tax. (even when the producer is a monopolist)

31. Results When there was no tax, consumers bought 64 units. A $5 per unit tax should generate ($5)(64) = $320 in tax revenue.

32. Results Instead of raising $320 in tax revenue, the government only raises $250.

33. Results Lesson #2: The government determines the tax rate, not the tax revenue. (regardless of whom it taxes)

34. 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.

35. What is “the debt”? Debt held by the public $9.7 trillion Intergovernmental debt $4.6 trillion Total debt outstanding $14.3 trillion Unfunded obligations Social Security $15 trillion Medicare $35 trillion Total unfunded obligations $50 trillion Total debt and unfunded obligations $64 trillion

36. Data sources: US Department of the Treasury, CIA World Factbook

37. Data sources: US Department of the Treasury, CIA World Factbook

38. Data sources: US Department of the Treasury, CIA World Factbook

39. Data sources: US Department of the Treasury, CIA World Factbook

40. Data sources: US Department of the Treasury, CIA World Factbook

41. Data sources: US Department of the Treasury, CIA World Factbook

42. Data sources: US Department of the Treasury, CIA World Factbook

43. Data sources: US Department of the Treasury, CIA World Factbook

44. Data sources: US Department of the Treasury, CIA World Factbook

45. Interest payments on $65 trillion = $1.9 trillion 2010 Federal revenue = $2.3 trillion Data sources: US Department of the Treasury, CIA World Factbook

46. Millions, Billions, Trillions (blah, blah, blah)

47. $100

48. $10,000 A stack of $100 bills, ½ inch high.

49. $1 million 100 packets of $10,000.

50. $100 million $100 million fits on a standard pallet.