Sunday, May 23, 2010

High Prices and Fairness

High prices are often associated with greed and a lack of compassion. Companies that charge high prices are considered to be taking advantage of their customers, and unfair to those who don't get the company's service. Yet most people don't think twice about charging a high price when it comes to looking for a job.

Your salary is the price a company must pay for your time and effort, so seeking the best salary is essentially charging the highest possible price for your work. Are you greedy and uncompassionate for doing this? Are you taking advantage of your new company? Not at all — you're just taking part in the fair and widely beneficial system of competitive pricing.

High prices are considered unfair for a couple reasons:

"People who pay high prices are being exploited."

If this were true, then people who receive high salaries would be exploiting their companies. On the contrary, companies choose to pay high salaries to valuable workers just like people choose to pay high prices for valuable services. In free market competition, the price system requires a mutual agreement between buyer and seller — it doesn't get any fairer than that.

"Some people can't afford pricey services."

A service's high price shows how highly valued it is among the population. There are many people who can afford a pricey service but do not value it highly enough to purchase it, which means that the scarce service is left for those who value it the most. Along these lines, your job search matches you with the company that values you the highest among all companies that could have afforded to pay your new salary.

But what about the people who legitimately cannot afford a needed service? For one, these people are greatly benefited by private charity.1 In addition, the price system will help them in two ways. First, a service's high price signals other businesses to start providing that service in order to profit from its high price. The increased supply will drive down the price so that more people can afford the service. Second, the high price encourages hard work and saving, enough of which will allow anyone to eventually get the service.

With ample competition, the price system is fair because both sides have to agree, and helpful in sending resources where they are most valued.

1. The United States is the most charitable nation in the world.

Sunday, May 16, 2010

The Trillion-Dollar Bill, Part II

People who have dug themselves out of serious debt have done so by drastically changing their spending habits, making difficult decisions about which beneficial goods and services to sacrifice for the sake of financial freedom. Similarly, paying off our $12.8 trillion national debt will require a significant reduction in government spending. The only alternative is for the government to pay down the debt with increased tax revenue, but this approach is unreliable.

The government cannot guarantee consistently higher tax revenue — they can only control the tax rates. This is because tax revenue is the tax rate multiplied by the pool of taxable money, and that pool shrinks when the tax rate increases. For example, if the government were to raise everyone's income tax rate to 100%, nearly everyone would stop working, which would leave the government with barely any income tax revenue. In a free society where people act to avoid taxation, raising tax rates even slightly can lower tax revenue; however, lowering tax rates can also lower tax revenue if there isn't enough additional taxable activity. A complex society of millions of individuals acting in their own changing self-interests makes it very difficult to predict how tax revenue will change as a result of tax rate adjustments. As a result, relying on significantly increased tax revenue to pay down the debt isn't a very sound approach.

Even if the government were able to generate consistently higher tax revenue, politicians would be inclined to spend the additional money on popular, vote-getting services rather than using it to pay down the debt. If you were a politician looking to get reelected, and you had a pile of new money to play with, would you use it to make a dent in the debt problem that seems abstract to the voters? Or would you rather stage a press conference announcing a brand-new benefit that you are giving to the electorate? The natural incentives of politicians make it highly unlikely that increased tax revenue would be consistently used to tackle the debt.

Instead of seeking increased tax revenue, our government should find ways to significantly reduce spending without pulling the rug out from under the people who rely on that spending. Congressman Paul Ryan's Roadmap for America's Future is a plan to do just that — gradually reforming unsustainable government programs while adding simple new measures to force these programs to control their spending.

One aspect of Congressman Ryan's plan is to reform Medicare and Medicaid, which together account for 22% of the federal budget (more than national defense) and are the main contributors to projected deficits in the years ahead.1 A major problem with these programs today is that doctors are reimbursed by the government for any medical care given to Medicare/Medicaid recipients, and the government's poor track record of properly reimbursing doctors has resulted in over half of doctors choosing not to see Medicare/Medicaid patients. The lack of available doctors has forced many recipients to go to the emergency room even for basic care, resulting in heavily inflated costs to the federal government. Congressman Ryan's plan would replace the government reimbursement system by giving recipients health-related expense accounts to cover the costs of medical care. Doctors would no longer avoid Medicare/Medicaid patients, and more available doctors would mean lower emergency room costs. In addition, ownership of the financing would force recipients to economize their health-related expenses instead of having recipients ignore medical costs altogether.

With our national debt projected to double over the next decade,2 we need leaders with the foresight and fortitude to reign in runaway spending.

1. The Budget Committee Republicans. A Roadmap for America's Future.
2. The Congressional Budget Office's analysis of President Obama's 2011 budget indicates that our national debt will increase by $12.8 trillion over the next ten years.

Sunday, May 2, 2010

The Trillion-Dollar Bill, Part I

Our national debt is $12.8 trillion. It's hard to comprehend how much money this is, and we rarely consider how this massive debt impacts our personal lives.

The following comparisons help to reveal the magnitude of our debt:

Trillions are way more than millions. Consider that a million seconds is under 12 days, but a trillion seconds is over 30,000 years.

Imagine the combined annual salary of all professional athletes. It would take 1200 years' worth of that salary to pay off our national debt.1

The government will add $1.5 trillion to our national debt this year, which translates to adding $3 million of debt every minute...

National debt grows when the federal government borrows money. Government money comes either from borrowing, printing, or taxing, so any borrowed money must be returned by printing or taxing. Printing money is perhaps the worst possible form of taxation,2 so the best method for returning borrowed money is direct taxation. This means that our national debt is really the amount of money that taxpayers owe.

The taxpayers who pay back the money our government has borrowed are unlikely to even benefit from that borrowed money. To see this, consider that the larger our national debt becomes, the longer it will take to pay it off. A longer period of time between borrowing and taxpayer repayment makes it less likely that the borrowed money was spent in a way that will help the eventual taxpayer. As a result, our gigantic national debt leaves us with a heavy tax burden without giving us much in return.

Our $12.8 trillion debt also means that our government is now spending $400 billion every year on interest. Interest is the cost of borrowing money, so $400 billion is the yearly cost of having such a large debt. Without this debt, those billions of dollars could be used to pay for our current needs! For instance, $400 billion a year is enough to provide private health insurance for all uninsured Americans.3

The costly consequences of our national debt are often unseen, but that doesn't make the debt any less detrimental to us and future generations. My next post will discuss the important process of digging out of debt.

1. This year's combined payroll for all professional football, basketball, baseball, and hockey teams is $9.8 billion.
2. Henry Hazlitt. Economics In One Lesson, pg. 161: "Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay."
3. The average cost of individual health insurance is $4824 a year. Assuming that there are 46 million uninsured Americans, it would cost $222 billion a year to provide insurance for all uninsured Americans.