[Imagine] a local and successful bottled water company located in the Dominican Republic has been serving Haiti, its neighbor, for many years. Although it was unaffected by the recent earthquake, it decided to double the price of its water following the earthquake in order to capitalize on the tremendous emergency demand for bottled water in the absence of safe municipal water and the fact that its overseas competitors all had trouble getting their water to the area.
The ethics of the company's decision the company would have to have applied in making its decision...
Utilitarianism assesses the consequences of actions and the effect they have on all parties involved. The ethical way to behave in a given situation is to maximize social welfare by producing the greatest overall good after calculating the costs and benefits of the action. The Haitians receiving overpriced water will suffer more from the lack of free choice than the bottled water company will benefit from the extra money. The company, doubling the price of water, acted unethically.
Deontology assesses the action itself without considering its consequences. Ethics are marked by universal principles that set absolute rules for right behavior. By means of categorical imperatives, moral behavior is guided by overriding rights and duties that exhibit people’s respect for the intrinsic value of others. It is ethical for people to use each other as a means to achieve their own purpose only if the actions done are mutually beneficial to all parties involved. It is unethical, however, to use others only as a means to accomplishing their own purposes with no mutual benefit attached. The company, doubling the price of water being sold to earthquake survivors, removed the free will, an ethical value, of one of the parties, thereby acting unethically.
Virtue ethics assesses the potential of human beings and how they can cultivate their good habits. People develop their virtues by being exposed to valued moral behavior in their communities. As virtue ethics is a matter of moral characteristics ingrained within a community, and the maximization of profit is a virtue encouraged by all enterprises, a group that forms a community, doubling the price of water sold to victims of the earthquake is an ethical way to act.
The company, making the decision to increase the price of water sold to the Haitian victims, must have applied the theory of virtue ethics. Doubling the price would be considered unethical according to the theories of utilitarianism, as it causes more harm than good. It would be unethical according to the theory of deontology, as it is never acceptable to use people in ways that are not mutually beneficial. According to the theory of virtue ethics, however, the company would be acting ethically, as doubling the price to increase profit when demand is so inelastic is a moral characteristic ingrained within the community.
Friday, February 19, 2010
Sunday, January 10, 2010
The Laffer Curve
This post is a response to the comment on the last post.
First of all: thank you for posting. I love reading comments and learning new things!
It is important to objectively analyze whether the source quoted is reliable or whether it is biased in any way.
The CATO Institute’s mission, according to its own website, is “to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.” Keep in mind that the institute has chosen the principles before analyzing the data.
Notice how the institute is funded and ask yourself if they may have a bias or a conflict of interest. CATO, once again according to its own website, “receives approximately 75 percent of its funding from individuals, with lesser amounts coming from foundations, corporations, and the sale of publications.” Ask yourself, does the institution truly have a purely objective view when stating assumptions?
Last comment about the source itself: CATO labels itself as a libertarian group. Keep in mind that the members of this group are strong believers of the famous phrase “starve the beast,” referring to the government.
Now, on to explaining the Laffer curve:
A government that taxes its citizens at 0 percent will have revenue of 0. People work hard to make money when they receive the full fruit of their labor. As the tax rate increases, people will work harder in order to achieve the same level of income, despite giving some of it away to the government to be used to supply public goods. If that government, however, taxes the citizens at 100 percent, its revenue would once again be 0, as nobody would work. The mystery of the Laffer curve is: what is the inflection point on the graph at which taxing cuts into the people’s incentive to work?
(There was a picture of the graph here. I am having difficulties uploading it, but you might want to look it up on google images)
Hang on through this complicated part; it gets simpler.
Here is what advocates of the Laffer curve believe:
The budget deficit is a function of government spending and taxes. An increase in the budget deficit will increase output. Thus, to reduce the deficit, government spending can be increased or taxes can be cut, increasing output. A tax cut can, according to the Laffer curve, stimulate output and raise revenues. An increase in government spending can increase output, causing taxes to increase. An increase in government spending will thus raise taxes and pay for itself. Spending may actually increase output so much that it increases revenue by more than the increase in government spending.
Now, it is important to assess whether this theory is supported by real world evidence.
Economists argue about the location of the inflection point on the Laffer curve. Conservatives typically (not all, of course) believe that incentives to work less are already being created at a very low tax rate. Liberals typically (also, not all) believe that a much higher tax rate is necessary in order to cut incentives of people to work.
Interestingly enough, Daniel Mitchell cites two tax reductions - one in the 1960s and one in the 1980s. Although his analogy is not apt, it is interesting to note one point. In the 1960s, when the tax rate was 91%, there was still high economic growth! For some reason, possibly war and post war efforts and therefore the Laffer curve may possibly have been inapplicable, people worked hard despite the overwhelmingly high taxes in light of this specific environment. In the 1980s, tax rates were lower, but still at 71%. Once again, it seems as though this did not work against the incentive to work hard. Now, the United States worries whether a higher rate than 30% will cut into people’s incentives to work hard. It is, of course, possible that it will; but it seems unlikely.
One point that we should remember when looking at the data is that economics does not happen in a lab “ceteris paribus,” with all else equal. We do not have a control group and we cannot control other factors. We may, therefore, not know which bad policy is responsible for an economic slump - it could be tax cuts or it could be protectionist measures. According to Charles P. Kindleberger, the prominent developer of the Hegemonic Stability Theory and the author of The World in Depression, the United States adopted protectionist measures in the 1920s, leading the world into the Great Depression.
The inflection point on the Laffer curve may also be different for groups with different economic standings and is, of course, affected by all available information. When I say “all available information,” I refer to the knowledge of what our taxes are paying for, how much we are each going to benefit from them, propagandas, and much more. Propaganda may come from political parties, religious leaders, or any group one may associates himself or herself with. Maybe, if conservatives convince the country that a tax that will pay for universal health care does cut into incentives, it actually will. Maybe, if the pope announced that we should be benevolent and consider this tax as charity, it will not dissuade people from working. Maybe, if liberals convince the people that they will all benefit from such a system, the inflection point would shift to a higher tax rate.
(I saw Paul Krugman, the Nobel Prize economist, several weeks ago at a conference in Baruch College. I asked him at the end of his speech the very same question. He answered: of course the Laffer curve exists, but we are nowhere near the point at which people will stop working.)
Here is a website that may interest you: http://www.cbpp.org/cms/?fa=view&id=692
Also, fun fact - It was in November 1974 that Dr. Laffer, then a young economist, drew a curve on a napkin during a conversation in a Washington bar, linking average tax rates to total tax revenue. That crude drawing soon came to be known as "The Laffer Curve," and it was quickly embraced by right-of-center economists and think tanks. For more information - http://www.pranaygupte.com/article.php?index=288
First of all: thank you for posting. I love reading comments and learning new things!
It is important to objectively analyze whether the source quoted is reliable or whether it is biased in any way.
The CATO Institute’s mission, according to its own website, is “to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.” Keep in mind that the institute has chosen the principles before analyzing the data.
Notice how the institute is funded and ask yourself if they may have a bias or a conflict of interest. CATO, once again according to its own website, “receives approximately 75 percent of its funding from individuals, with lesser amounts coming from foundations, corporations, and the sale of publications.” Ask yourself, does the institution truly have a purely objective view when stating assumptions?
Last comment about the source itself: CATO labels itself as a libertarian group. Keep in mind that the members of this group are strong believers of the famous phrase “starve the beast,” referring to the government.
Now, on to explaining the Laffer curve:
A government that taxes its citizens at 0 percent will have revenue of 0. People work hard to make money when they receive the full fruit of their labor. As the tax rate increases, people will work harder in order to achieve the same level of income, despite giving some of it away to the government to be used to supply public goods. If that government, however, taxes the citizens at 100 percent, its revenue would once again be 0, as nobody would work. The mystery of the Laffer curve is: what is the inflection point on the graph at which taxing cuts into the people’s incentive to work?
(There was a picture of the graph here. I am having difficulties uploading it, but you might want to look it up on google images)
Hang on through this complicated part; it gets simpler.
Here is what advocates of the Laffer curve believe:
The budget deficit is a function of government spending and taxes. An increase in the budget deficit will increase output. Thus, to reduce the deficit, government spending can be increased or taxes can be cut, increasing output. A tax cut can, according to the Laffer curve, stimulate output and raise revenues. An increase in government spending can increase output, causing taxes to increase. An increase in government spending will thus raise taxes and pay for itself. Spending may actually increase output so much that it increases revenue by more than the increase in government spending.
Now, it is important to assess whether this theory is supported by real world evidence.
Economists argue about the location of the inflection point on the Laffer curve. Conservatives typically (not all, of course) believe that incentives to work less are already being created at a very low tax rate. Liberals typically (also, not all) believe that a much higher tax rate is necessary in order to cut incentives of people to work.
Interestingly enough, Daniel Mitchell cites two tax reductions - one in the 1960s and one in the 1980s. Although his analogy is not apt, it is interesting to note one point. In the 1960s, when the tax rate was 91%, there was still high economic growth! For some reason, possibly war and post war efforts and therefore the Laffer curve may possibly have been inapplicable, people worked hard despite the overwhelmingly high taxes in light of this specific environment. In the 1980s, tax rates were lower, but still at 71%. Once again, it seems as though this did not work against the incentive to work hard. Now, the United States worries whether a higher rate than 30% will cut into people’s incentives to work hard. It is, of course, possible that it will; but it seems unlikely.
One point that we should remember when looking at the data is that economics does not happen in a lab “ceteris paribus,” with all else equal. We do not have a control group and we cannot control other factors. We may, therefore, not know which bad policy is responsible for an economic slump - it could be tax cuts or it could be protectionist measures. According to Charles P. Kindleberger, the prominent developer of the Hegemonic Stability Theory and the author of The World in Depression, the United States adopted protectionist measures in the 1920s, leading the world into the Great Depression.
The inflection point on the Laffer curve may also be different for groups with different economic standings and is, of course, affected by all available information. When I say “all available information,” I refer to the knowledge of what our taxes are paying for, how much we are each going to benefit from them, propagandas, and much more. Propaganda may come from political parties, religious leaders, or any group one may associates himself or herself with. Maybe, if conservatives convince the country that a tax that will pay for universal health care does cut into incentives, it actually will. Maybe, if the pope announced that we should be benevolent and consider this tax as charity, it will not dissuade people from working. Maybe, if liberals convince the people that they will all benefit from such a system, the inflection point would shift to a higher tax rate.
(I saw Paul Krugman, the Nobel Prize economist, several weeks ago at a conference in Baruch College. I asked him at the end of his speech the very same question. He answered: of course the Laffer curve exists, but we are nowhere near the point at which people will stop working.)
Here is a website that may interest you: http://www.cbpp.org/cms/?fa=view&id=692
Also, fun fact - It was in November 1974 that Dr. Laffer, then a young economist, drew a curve on a napkin during a conversation in a Washington bar, linking average tax rates to total tax revenue. That crude drawing soon came to be known as "The Laffer Curve," and it was quickly embraced by right-of-center economists and think tanks. For more information - http://www.pranaygupte.com/article.php?index=288
Thursday, December 24, 2009
A look back
To understand this post, you must first read this article, written by Daniel Mitchell on February 5, 2002. It article was written at a time when former president George Bush was planning to cut taxes, temporarily.
I decided to write about this because it may help to see fallacies in different arguments. The country is once again facing a “stimulus” and “debt” problem and a "tax" dilemma. As history often repeats itself, it may be constructive to look at the past.
http://www.nytimes.com/2002/02/05/opinion/cutting-taxes-faster-would-help-everyone.html
To begin with, the conclusion of the article: the pro-growth tax cuts should be made permanent and take effect immediately. Mitchell believes that lower taxes would increase the incentives to work, save, and invest, thus providing a significant stimulus to the economy. He specifies that cutting progressive taxes is not only economically sound, but it is actually fairer than a flat tax. According to Mitchell, critics want the tax burden to be shared progressively, emphasizing fairness. Supporters of the tax cuts support disproportionate tax reductions in favor of the wealthiest as this fosters more growth in the economy.
Before agreeing or disagreeing with the writer (which I am not planning to do), it is always important to look at the logic of the arguments and the language used.
First, be wary of bias language. Mitchell wrote that “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money”. Notice the bias. Critics do not complain; critics criticize.
Second, be wary of ambiguous language. Mitchell wrote that “these rates will provide a significant stimulus”. Notice the ambiguity. How large does the stimulus have to be in order to be considered significant?
Third, watch out for false dilemmas. Tax cuts, such as rebate checks, do not really boost growth by putting some fixed amount of money into the pockets of consumers. This money comes out of another section of the budget. Only tax cuts that make saving and investing more attractive, such as lower income taxes, will have measurable impact. Mitchell presents this dilemma as if there were no other choices and ignores the fact that rebate checks may lead to more consumption than other chapters of the budget.
Fourth, make sure analogies and comparisons are accurate. This one is not. The 1960s’ tax cut corresponded to the necessary end of the burden of war efforts and occurred at a time of economic prosperity. While the incentive to work may be reduced with tax rates of 91%, it cannot be compared to tax rates at 30%. In the 1980s, the drop was of a dramatic magnitude (71% to 28%) that can never be replicated, implemented by a charismatic leader in peaceful times. Former President George W Bush was operating in the midst of wartime with a concerned population and could only implement a small tax cut.
Finally, the greatest fallacy in the article: Mitchell equivocates (uses ambiguous terms to hedge the issue). “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money, but upper-income taxpayers actually wound up paying a greater share of the tax burden during those decades, in part because lower rates reduced the incentive to hide, shelter and underreport income.” Mitchell points out that, historically, when “the rich” get tax cuts, they end up paying more money and a greater percentage of the national tax burden. In other words even though their tax rate goes down they end up earning more money and paying more taxes in absolute terms. The writer is trying to imply that the money will “trickle down,” proving the truth of supply side economics. If, however, the money did trickle down, income disparity would have decreased. It hasn’t. The reason the rich pay a greater share of the burden is because the tax cuts have allowed them to receive a greater share of the income. Critics argued that the rich keep too much of their own money and Mitchell refuted by stating that the upper-income taxpayers pay a greater share of the tax burden. He not only avoids the accusation that “tax cuts are for the rich.” He actually refutes himself by equivocating!
I decided to write about this because it may help to see fallacies in different arguments. The country is once again facing a “stimulus” and “debt” problem and a "tax" dilemma. As history often repeats itself, it may be constructive to look at the past.
http://www.nytimes.com/2002/02/05/opinion/cutting-taxes-faster-would-help-everyone.html
To begin with, the conclusion of the article: the pro-growth tax cuts should be made permanent and take effect immediately. Mitchell believes that lower taxes would increase the incentives to work, save, and invest, thus providing a significant stimulus to the economy. He specifies that cutting progressive taxes is not only economically sound, but it is actually fairer than a flat tax. According to Mitchell, critics want the tax burden to be shared progressively, emphasizing fairness. Supporters of the tax cuts support disproportionate tax reductions in favor of the wealthiest as this fosters more growth in the economy.
Before agreeing or disagreeing with the writer (which I am not planning to do), it is always important to look at the logic of the arguments and the language used.
First, be wary of bias language. Mitchell wrote that “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money”. Notice the bias. Critics do not complain; critics criticize.
Second, be wary of ambiguous language. Mitchell wrote that “these rates will provide a significant stimulus”. Notice the ambiguity. How large does the stimulus have to be in order to be considered significant?
Third, watch out for false dilemmas. Tax cuts, such as rebate checks, do not really boost growth by putting some fixed amount of money into the pockets of consumers. This money comes out of another section of the budget. Only tax cuts that make saving and investing more attractive, such as lower income taxes, will have measurable impact. Mitchell presents this dilemma as if there were no other choices and ignores the fact that rebate checks may lead to more consumption than other chapters of the budget.
Fourth, make sure analogies and comparisons are accurate. This one is not. The 1960s’ tax cut corresponded to the necessary end of the burden of war efforts and occurred at a time of economic prosperity. While the incentive to work may be reduced with tax rates of 91%, it cannot be compared to tax rates at 30%. In the 1980s, the drop was of a dramatic magnitude (71% to 28%) that can never be replicated, implemented by a charismatic leader in peaceful times. Former President George W Bush was operating in the midst of wartime with a concerned population and could only implement a small tax cut.
Finally, the greatest fallacy in the article: Mitchell equivocates (uses ambiguous terms to hedge the issue). “Critics in those decades complained that rate cuts would allow the rich to keep too much of their money, but upper-income taxpayers actually wound up paying a greater share of the tax burden during those decades, in part because lower rates reduced the incentive to hide, shelter and underreport income.” Mitchell points out that, historically, when “the rich” get tax cuts, they end up paying more money and a greater percentage of the national tax burden. In other words even though their tax rate goes down they end up earning more money and paying more taxes in absolute terms. The writer is trying to imply that the money will “trickle down,” proving the truth of supply side economics. If, however, the money did trickle down, income disparity would have decreased. It hasn’t. The reason the rich pay a greater share of the burden is because the tax cuts have allowed them to receive a greater share of the income. Critics argued that the rich keep too much of their own money and Mitchell refuted by stating that the upper-income taxpayers pay a greater share of the tax burden. He not only avoids the accusation that “tax cuts are for the rich.” He actually refutes himself by equivocating!
Friday, November 13, 2009
1989 Berlin Wall and End of Communism - 2009 Wall Street and end of Capitalism…?
In 1989, the wheel of history span fast and the Berlin Wall fell, thus transforming Europe and introducing Eastern Europe to the values of freedom and the alleged benefits of capitalism. At the time, politicians from all parties agreed and concluded that all dictatorships would soon crumble in the face of the great Democratic ideals. The American values of openness, economic liberalism, and democracy were on the verge of being adopted around the world in a one-size-fits-all package. Some parts of Europe were wary of the end of a bipolar world and the rise of a unipolar America. Hurbert Védrine, a former French foreign minister who worked for President François Mitterrand, seemed to foresee that “it’s the prologue of an opera with a cymbal crash, the prologue of 15 to 20 years of Western arrogance.” While Europe was considering the various alternatives for a Post- Cold War world, America was rejoicing in the obvious failure of communism. The new single-value unipolar power felt history supported what America had always believed, that capitalism is the best economic system. 20 years after the fall of the Berlin Wall, in the midst of a great economic crisis, some Americans still have an unshaken faith in capitalism believing it is the best system of all. The paradox begs the question: what exactly constitutes a failure? Americans, so quick to determine that communism failed, are very hesitant about the sweeping changes being made to their capitalistic economic system, even in the midst of the great 2009 crisis. The assertiveness of Americans about the virtues of capitalism has quickly tempered now that they face a potential “failure” of their own system. Is American-style capitalism, the one both parties agreed would prevail over all others, still considered the ideal economic system? Isn’t 2009 the celebration of its failure?
The ultimate goals of liberalism and communism are the same: to do what is best for the people. For this common purpose, two political ideologies assign different values to equality and to freedom, as both cannot be maximized together. The difference between the two political systems is the weight each one attributes to the conflicting values. Liberalism is a political economic system that maximizes individual liberty, political and economic, at all costs. It favors a limited government role in society and economic activity, emphasizing personal freedom over social equality. The final goal of the liberal ideology is to achieve a greater scope and promise of human activity and prosperity. Communism is a political economic system that maximizes economic and political equality as an end result at all costs. It emphasizes limited personal freedom and a strong state order to achieve social equality, rejecting the idea that personal freedom can lead to greater prosperity, as it will be monopolized by few. Interestingly, communists hold that in the inevitable struggle over economic resources, a small group will come to dominate the market and the state, using its wealth to control and exploit society as a whole. In the book Essentials of Comparative Politics, Patrick H. O’Neils describes the communist view of liberal democracy as “‘bourgeois democracy’ - of the rich, by the rich, and for the rich.”
Commemorating the 20th anniversary of the fall of the Berlin Wall, many wonder what caused the failure of communism. According to the Time Magazine, conservatives and liberals agreed that a main cause is “the utter hopelessness of communism as an economic system.” Both, however, are surprised to learn that the second most important cause was “the spirit of freedom in individual people.” The third main consensus cause is the Western policy of containment, a policy that limits the expansion and influence of a different ideology. The policy begs the question: if communism was bound to fail because of its inherent flaws in economic policies and individual freedom, why did Ronald Reagan need to escalate the military? Why did the United States need to increase its debt to fight a system that was doomed to fail anyway?
Failure is defined as nonperformance of what is requested or expected. As we commemorate the fall of a faulty system, let us take a moment to ponder - are the original values of capitalism, emphasizing a high degree of personal freedom over social equality, achieving what they were expected to? You may argue that failure is incorporated in the capitalist boom-and-bust system because the market will regain equilibrium in the long run. But as John M. Keynes said: “in the long run, we are all dead.” As the final goal of liberalism is to achieve a greater scope and promise of human activity and prosperity, let’s try to reflect on the success of these goals. Has the system succeeded? These questions are crucial today especially because of two main debates in the political arena. In the area of foreign affairs, when the United States is occupying several countries in order to promote ideas of democracy and capitalism, maybe we should consider the possibility that other countries attribute different values to freedom and equality. Maybe they have other ways of achieving greater prosperity, as the very concept of freedom, is culturally relative. The United States may need to take a step back and ask itself- are we so sure we are universally right? In the area of domestic affairs, as we debate government bailouts and follow the heath care debate, we may need to be reminded that we all have the same intentions - we want the good of the American public. Are we succeeding? Seeing the unemployment rate increase to 10.2%, New York Times columnist Bob Herbert points out that, “The perception now is that Wall Street is doing just fine while working people, whose taxes financed the bailouts, are walking the plank to economic oblivion.” Passing the financial district while celebrating the Yankees’ World Series championships, the crowd burst into a chant “Wall Street sucks! Wall Street sucks!” Is this where the prominent system of capitalism, leaning on the values of freedom and prosperity, has brought us? Freedom of what? Prosperity for whom?
The ultimate goals of liberalism and communism are the same: to do what is best for the people. For this common purpose, two political ideologies assign different values to equality and to freedom, as both cannot be maximized together. The difference between the two political systems is the weight each one attributes to the conflicting values. Liberalism is a political economic system that maximizes individual liberty, political and economic, at all costs. It favors a limited government role in society and economic activity, emphasizing personal freedom over social equality. The final goal of the liberal ideology is to achieve a greater scope and promise of human activity and prosperity. Communism is a political economic system that maximizes economic and political equality as an end result at all costs. It emphasizes limited personal freedom and a strong state order to achieve social equality, rejecting the idea that personal freedom can lead to greater prosperity, as it will be monopolized by few. Interestingly, communists hold that in the inevitable struggle over economic resources, a small group will come to dominate the market and the state, using its wealth to control and exploit society as a whole. In the book Essentials of Comparative Politics, Patrick H. O’Neils describes the communist view of liberal democracy as “‘bourgeois democracy’ - of the rich, by the rich, and for the rich.”
Commemorating the 20th anniversary of the fall of the Berlin Wall, many wonder what caused the failure of communism. According to the Time Magazine, conservatives and liberals agreed that a main cause is “the utter hopelessness of communism as an economic system.” Both, however, are surprised to learn that the second most important cause was “the spirit of freedom in individual people.” The third main consensus cause is the Western policy of containment, a policy that limits the expansion and influence of a different ideology. The policy begs the question: if communism was bound to fail because of its inherent flaws in economic policies and individual freedom, why did Ronald Reagan need to escalate the military? Why did the United States need to increase its debt to fight a system that was doomed to fail anyway?
Failure is defined as nonperformance of what is requested or expected. As we commemorate the fall of a faulty system, let us take a moment to ponder - are the original values of capitalism, emphasizing a high degree of personal freedom over social equality, achieving what they were expected to? You may argue that failure is incorporated in the capitalist boom-and-bust system because the market will regain equilibrium in the long run. But as John M. Keynes said: “in the long run, we are all dead.” As the final goal of liberalism is to achieve a greater scope and promise of human activity and prosperity, let’s try to reflect on the success of these goals. Has the system succeeded? These questions are crucial today especially because of two main debates in the political arena. In the area of foreign affairs, when the United States is occupying several countries in order to promote ideas of democracy and capitalism, maybe we should consider the possibility that other countries attribute different values to freedom and equality. Maybe they have other ways of achieving greater prosperity, as the very concept of freedom, is culturally relative. The United States may need to take a step back and ask itself- are we so sure we are universally right? In the area of domestic affairs, as we debate government bailouts and follow the heath care debate, we may need to be reminded that we all have the same intentions - we want the good of the American public. Are we succeeding? Seeing the unemployment rate increase to 10.2%, New York Times columnist Bob Herbert points out that, “The perception now is that Wall Street is doing just fine while working people, whose taxes financed the bailouts, are walking the plank to economic oblivion.” Passing the financial district while celebrating the Yankees’ World Series championships, the crowd burst into a chant “Wall Street sucks! Wall Street sucks!” Is this where the prominent system of capitalism, leaning on the values of freedom and prosperity, has brought us? Freedom of what? Prosperity for whom?
Sunday, November 1, 2009
Is the Road to Recovery Unethical?
The recession is often blamed on the general culture of reckless spending Americans have increasingly developed over the past twenty years. As luxuries became necessities and illiquid assets became spending money, banks began to lend money to high risk borrowers at low interest rates. Everyone began to feel wealthy, thus cultivating the culture of wild consumption. The burst of the housing bubble brought reality to the forefront and yesterday’s irresponsible spenders began to understand the virtues of savings…and that is the nation’s newest problem!
As the economy faced a downturn, we began to save money rather than spend it. We feared the recession may plague our homes and the circulation of money came to a quick halt. This reaction, although rational, only pulled the recession to an even lower point. In order to pull the economy out of its bearish downturn, money must begin to move again, meaning you, dear reader, must forget about the good behavior of saving and begin to spend again. Stimulus plans and tax cuts are made to stuff the American pockets with fresh dollars to spend, thus stimulating the economy. In other words, to pull the nation out of this bust, the lavish spending that was only just criticized is being promoted. In the short run, only if you fellow Americans fall back into this consumer culture, will you save our economy. Ironic, isn’t it? Every serious economist will tell you: the goal, for the common good, is therefore to encourage reckless spending. The long term goal, on the other hand, is the exact opposite. In order to prevent this type of disastrous recession from occurring again, Americans must be taught to make educated and rational decisions when deciding whether to spend or save money. They ask us to learn from Japanese and Swiss consumers: spend only in proportion to what you can realistically afford! If people begin spending sensibly, the boom and bust cycle may be less volatile and more stable, soothing the disasters that recessions can cause. There is an obvious contradiction between the short term goal of pushing people into lavish spending to stimulate the economy and the long term goal of teaching people to spend only sensibly.
Ironically, Adam Smith in his grave is re-writing some basic economic concepts of free trade: he used to believe that if each consumer makes rational choices considering only his or her self interest, the community as a whole will benefit. In his book The Wealth of Nations, Adam Smith gave the famous example: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Smith, often described as the father of capitalism, believed that if everyone in society acted out of self-love the community will profit. The butcher does not sell you meat to feed you, but rather out of desire to make money; the baker does not sell pastries for your pleasure, but rather for his profit. In his new post mortem vision Adam Smith believes that sometimes what is good for the individual is actually bad for the community. In times of recessions as well individuals act selfishly out of concern, and cut down on their spending, thereby increasing their personal supply of cash. As all individuals in the community make this rational and self-interested decision, the community as a whole suffers from a lack of consumer spending. In other words says our dear Adam Smith that the interests of the individuals hereby collide with the interests of the entire community.
So, when we stand to open to holiday shopping season the government is switching gears: please dear consumer, for the next three months, forget the new year’s resolution of being responsible and thrifty and pull the economy out of its ditch!!
As the economy faced a downturn, we began to save money rather than spend it. We feared the recession may plague our homes and the circulation of money came to a quick halt. This reaction, although rational, only pulled the recession to an even lower point. In order to pull the economy out of its bearish downturn, money must begin to move again, meaning you, dear reader, must forget about the good behavior of saving and begin to spend again. Stimulus plans and tax cuts are made to stuff the American pockets with fresh dollars to spend, thus stimulating the economy. In other words, to pull the nation out of this bust, the lavish spending that was only just criticized is being promoted. In the short run, only if you fellow Americans fall back into this consumer culture, will you save our economy. Ironic, isn’t it? Every serious economist will tell you: the goal, for the common good, is therefore to encourage reckless spending. The long term goal, on the other hand, is the exact opposite. In order to prevent this type of disastrous recession from occurring again, Americans must be taught to make educated and rational decisions when deciding whether to spend or save money. They ask us to learn from Japanese and Swiss consumers: spend only in proportion to what you can realistically afford! If people begin spending sensibly, the boom and bust cycle may be less volatile and more stable, soothing the disasters that recessions can cause. There is an obvious contradiction between the short term goal of pushing people into lavish spending to stimulate the economy and the long term goal of teaching people to spend only sensibly.
Ironically, Adam Smith in his grave is re-writing some basic economic concepts of free trade: he used to believe that if each consumer makes rational choices considering only his or her self interest, the community as a whole will benefit. In his book The Wealth of Nations, Adam Smith gave the famous example: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” Smith, often described as the father of capitalism, believed that if everyone in society acted out of self-love the community will profit. The butcher does not sell you meat to feed you, but rather out of desire to make money; the baker does not sell pastries for your pleasure, but rather for his profit. In his new post mortem vision Adam Smith believes that sometimes what is good for the individual is actually bad for the community. In times of recessions as well individuals act selfishly out of concern, and cut down on their spending, thereby increasing their personal supply of cash. As all individuals in the community make this rational and self-interested decision, the community as a whole suffers from a lack of consumer spending. In other words says our dear Adam Smith that the interests of the individuals hereby collide with the interests of the entire community.
So, when we stand to open to holiday shopping season the government is switching gears: please dear consumer, for the next three months, forget the new year’s resolution of being responsible and thrifty and pull the economy out of its ditch!!
Oil Speculation
The Rational-Choice Model, often used by political scientists, states that in order to understand a decision such as regulating speculations, it is important to scrutinize the decision-makers. Federal officials have a very vulnerable career, balancing the noble goal of making good public policy and ensuring their own “job stability”. To accomplish the first goal, however, the officials must be certain to build up power and influence and be certain to be re-elected. The government, senators, and house representatives may make choices that may have negative short-term effects but may get them re-elected. It is therefore our duty, as United States constituents, to take long-term effects of the decisions into consideration when assessing whether these policies serve us well. By considering these outcomes and sharing our views with our local representatives on Capitol Hill and national representative in the White House, we may be able to reconcile the short-term and long-term conflicts. In order to decide whether there should be regulation in place reigning in oil speculation or not, responsible citizens must decide what the short-term consequences of speculation regulation may be, what the long-term effects may be, and what are the factors influencing the decision-makers.
The oil market functions based, in part, on the forces of supply and demand, as all other markets do. The equilibrium price and quantity as set by actual users of oil maximizes producers’ profits while maximizing consumers’ utility. If the price is above the level at which the demand is equal to the production of oil, there is an excess supply. Although buying a futures contract does not directly reduce the supply of oil to consumers, it is possible that speculators, i.e. buyers and sellers who will never take actual delivery of the commodity drive up prices of oil directly. They may encourage producers and other players to store oil rather than to make it available for use. Because the oil market is not based solely on the forces of supply and demand of oil users but speculators play a role in raising and dropping the prices, the oil market is extremely unstable. Oil speculators drive prices up and down, rather than stabilize commodities prices over the long-run. Oil producers, trying to maximize their profits by increasing the value of the company through speculators, claim that “speculators play a crucial role in the futures market by providing liquidity to hedgers (WSJ)”. The Wall Street Journal article “Oil Speculators Under Fire,” by Alistair MacDonald, Guy Chazan and Carolyn Cui makes a basic assumption that market speculators are driving up prices of oil. Certain Senators blamed speculators for high prices of commodities and, according to the Wall Street Journal, “political momentum is building to stop them.” The Commodity Futures Trading Commissions, seemingly believing that oil speculators drive gas prices up despite the low demand, is considering tougher regulation of oil-futures markets.
It is possible, however, that oil speculators may not be entirely responsible for the rising oil prices. New York Times op-ed columnist Paul Krugman believes that “growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.” Some economists perceive the sudden legislative momentum as an attempt to distract the public from “the real issue”: although oil prices may fluctuate in the coming years, the long-term trend is sloping upward and regulating futures markets is not going to bring back the days of cheap oil. The public must adjust to the higher oil prices, and the government may help them do so by helping develop alternative-energy technologies.
The question “should oil market speculators be allowed to drive up prices of oil, regardless of current supply and demand” may be answered fiscally and economically or environmentally and socially. In order to answer this question, we will assume that speculators are driving up gas prices. Economically, it is certain that these speculations are creating an excess demand which may in turn be causing inefficiencies in the oil market. Speculations, considering this approach only, should be regulated. However, the social aspect of this matter must be taken into the decision-making process. Allowing speculators to drive up oil prices may decrease oil demand even further. This may have a long-term positive effect on our society as it may increase the demand and production of fuel-efficient cars and add to the importance of finding alternative-energy technologies. From an environmental prospective, the rising prices, whether the credit or the blame for them is given to speculators or to developing economies, may be saving the planet. Regulating oil speculation so that oil markets more accurately reflect free-market conditions may solve the short-term problem of high gas prices, but it would prolong the long-term environmental problem. Energy traders admit their concern in the Wall Street Journal, stating that “regulation could stunt trade, increase costs in the marketplace and potentially scare away some players from the oil-drilling business.” Although this may be a concern for energy traders and oil companies seeking to protect their profits, it should relieve the responsible United States citizens. We may, finally, be forced to reform our economic system in order to preserve our planet.
http://online.wsj.com/article/SB124700398437207969.html
The oil market functions based, in part, on the forces of supply and demand, as all other markets do. The equilibrium price and quantity as set by actual users of oil maximizes producers’ profits while maximizing consumers’ utility. If the price is above the level at which the demand is equal to the production of oil, there is an excess supply. Although buying a futures contract does not directly reduce the supply of oil to consumers, it is possible that speculators, i.e. buyers and sellers who will never take actual delivery of the commodity drive up prices of oil directly. They may encourage producers and other players to store oil rather than to make it available for use. Because the oil market is not based solely on the forces of supply and demand of oil users but speculators play a role in raising and dropping the prices, the oil market is extremely unstable. Oil speculators drive prices up and down, rather than stabilize commodities prices over the long-run. Oil producers, trying to maximize their profits by increasing the value of the company through speculators, claim that “speculators play a crucial role in the futures market by providing liquidity to hedgers (WSJ)”. The Wall Street Journal article “Oil Speculators Under Fire,” by Alistair MacDonald, Guy Chazan and Carolyn Cui makes a basic assumption that market speculators are driving up prices of oil. Certain Senators blamed speculators for high prices of commodities and, according to the Wall Street Journal, “political momentum is building to stop them.” The Commodity Futures Trading Commissions, seemingly believing that oil speculators drive gas prices up despite the low demand, is considering tougher regulation of oil-futures markets.
It is possible, however, that oil speculators may not be entirely responsible for the rising oil prices. New York Times op-ed columnist Paul Krugman believes that “growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.” Some economists perceive the sudden legislative momentum as an attempt to distract the public from “the real issue”: although oil prices may fluctuate in the coming years, the long-term trend is sloping upward and regulating futures markets is not going to bring back the days of cheap oil. The public must adjust to the higher oil prices, and the government may help them do so by helping develop alternative-energy technologies.
The question “should oil market speculators be allowed to drive up prices of oil, regardless of current supply and demand” may be answered fiscally and economically or environmentally and socially. In order to answer this question, we will assume that speculators are driving up gas prices. Economically, it is certain that these speculations are creating an excess demand which may in turn be causing inefficiencies in the oil market. Speculations, considering this approach only, should be regulated. However, the social aspect of this matter must be taken into the decision-making process. Allowing speculators to drive up oil prices may decrease oil demand even further. This may have a long-term positive effect on our society as it may increase the demand and production of fuel-efficient cars and add to the importance of finding alternative-energy technologies. From an environmental prospective, the rising prices, whether the credit or the blame for them is given to speculators or to developing economies, may be saving the planet. Regulating oil speculation so that oil markets more accurately reflect free-market conditions may solve the short-term problem of high gas prices, but it would prolong the long-term environmental problem. Energy traders admit their concern in the Wall Street Journal, stating that “regulation could stunt trade, increase costs in the marketplace and potentially scare away some players from the oil-drilling business.” Although this may be a concern for energy traders and oil companies seeking to protect their profits, it should relieve the responsible United States citizens. We may, finally, be forced to reform our economic system in order to preserve our planet.
http://online.wsj.com/article/SB124700398437207969.html
WELCOME!
Arguments are an important part of life, especially in Democratic countries.
Democracies are usually defined as "the rule of the majority" or "a government for the people, by the people." This definition grants the citizens much power! Every citizen is said to have the ability to influence public policies!
It seems to me, that if this power is granted to you by the social contract, you have a responsibility to use it. In order to use it well, however, you must make educated decisions, and therefore get informed before having an opinion.
During this recent crisis and the even more recent health care debate, arguments were and still are being "thrown" without, it seems, much thought. Maybe we, as "rulers" of this country, need to think critically about different points before coming to a conclusion. Listening to the other party is crucial when thinking critically, especially since we all want the same - what's best for our country.
It is also important, I think, to be able to change your mind. Part of critical thinking is the ability to adjust your opinion when the "other side" brings a convincing argument. Being called a "flip-flopper" should not be considered an insult. On the contrary, a "flip-flopper" is someone who can adjust their position when they hear a convincing argument! (too much of anything is never good, of course. and so being "too much of a flip-flopper" and being influenced by all is not positive either.)
This blog is only meant to help think about different issues with several perspectives. If you have something constructive to add, or you disagree with something I have written, please comment! It would help me gain a new perspective as well!!
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