Common Sense Economics

This post highlights some of the issues discussed during Policy Pub, an event hosted by the College of Social Sciences and Public Policy. Listen to the Pub here.

The third edition of Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (St. Martin’s Press, 2016) is widely available in print and electronic versions.  As in earlier editions, the authors worked hard to make economics understandable, relatable, and relevant for everyone with special attention drawn to the reader who has had limited or no background in economics or personal finance. 

Part 1 focuses on 12 key elements of economics, including the power of incentives, gains from trade, demand and supply, the role of profit and loss, the operation of markets, and the importance of unintended secondary effects. These concepts are then used in the other three parts of the book to explain why some nations prosper while others stagnate (Part 2); the potential of productive action through government and why the political process is often dominated by interest groups, government favoritism, and unsustainable debt (Part 3); and how individuals can improve their personal financial decision-making and live a financially secure, personally rewarding life (Part 4).

Here are a few applications of those concepts and some myths I hope to destroy. 

Let’s start with corporate taxes.  A simplified formula for how corporate taxes are calculated is this: total revenue minus total cost equals profit; profit is taxed at 21% so the corporation pays that amount to the federal government.  The myth is that corporations pay taxes.  The truth is that corporations are just a tax-collecting institution.  Go back to the start of that formula.  Where does revenue come from?  People.  Revenue comes from customers who buy products and services from the corporation.  The corporation holds that revenue for a brief period then sends some of it to the federal government.  So only people pay taxes, not corporations.

Government spending creates jobs.  While that sounds good, a more accurate statement is that government spending reshuffles jobs around the economy.  Before government can spend any money it has to obtain it.  How does it do that?  There are two primary ways.  First, it can tax.  That means the government takes money from people today.  Second, it can borrow.  That means the government issues debt today, which must be paid back in some future time period.  That results in more taxes later.  Either way, it has to take something first.  So there are two moving parts to government spending:  taking and giving.  One is harmful to parts of the economy while the other is helpful.  The net effect is often zero.  One job might be created but one job might be destroyed in the process.

Trade wars are good for the economy.  It sounds patriotic and helpful to the American economy to say something like “we should limit imports so that domestic manufacturing will increase and create jobs.”  Let’s think about the consequences.  Suppose you stopped buying food from a local restaurant.  That restaurant would then have less revenue and the employees would be worse off.  Somebody might even lose a job.  Your spending is someone else’s income.  The same is true across countries.  If Americans stopped purchasing products from other countries, the employees (citizens) in those countries would have less income.  They wouldn’t be able to purchase American products.  Therefore American exports would decline.  Historical evidence clearly shows that exports and imports are directly related.  That is, they increase and decrease together.  If the US limits imports, a direct consequence would be to limit exports.  Other historical evidence clearly shows that countries that engage in more trade obtain higher incomes, higher standards of living, and grow faster than countries that trade less.

Joe Calhoun is the director of the Stavros Center for Economic Education and a co-author of “Common Sense Economics: What Everyone Should Know About Wealth and Prosperity.”

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