Teaching Taxes

Ahhhh!!! Graphs! Runaway! Yeah I know, but bear with me for a second. This isn’t meant to be a quantitative post. This is meant so that we may comprehend the scale of a problem with public perception in economics that has largely gone ignored by the members of my field for too long.

“Economics is a legitimate social science, not subjective ideology.”

I start however with the recent wave of STEM education promotion which has been truly awesome to behold and incredibly beneficial for our society. Speaking personally, I would have been far less likely to have pursued my undergraduate in engineering if I hadn’t spent all those hours as a child watching Bill Nye. In fact, that’s exactly what I told him when I met him last year. By no means to take away from this trend though, perhaps the biggest insight economically speaking from this recent political season is regarding the public’s perspective of economics.

Before we get into distinguishing right from wrong though let us at least agree on this, economics is a legitimate social science, not subjective ideology. In physics when we drop an object and it falls we acknowledge the existence of gravity. Similarly in economics there are certain known facts and relationships that have been studied and proven by economists for centuries.

Unfortunately however, this is not how economics is often viewed in the public sphere where economic principles are often based on little more than “old wives tales” and the regurgitation of political platforms. I truly believe if we were to simply wipe the slate clean and were all capable of looking at problems objectively with critical reasoning and discussing solutions based on sound economic foundations and research, politics would not have the same ugly partisan connotations that it does today. A shameless promotion for my blog there.

More to the point though, where do we start? How about with education, where we still have some work to do. At my University there are 12 different undergraduate majors which require an economics sequence or course. Many of these students will go off to find careers in business or public service leadership and very likely will come to help mold the future public mindset on economics. Because these are largely introductory type courses however, they only provide the most concise tools and philosophies possible to gain an understanding of economics.

A most prominent example is regarding taxes. The reason I present the graph above is because it visually depicts how a standard undergraduate microeconomics course would teach students about how taxes affect the market. In summary, the basic concept is that imposing a tax “hurts” both consumers and producers and reduces the amount of trade in the market.

The trouble is, this greatly oversimplifies the study of tax policy and is incredibly misleading. Unfortunately though each year thousands of students walk away from universities across this country with a bachelors or even an MPA or MBA thinking that’s all there is to it. It completely disregards the notions of cost-benefit analysis, tax incentives and disincentives, efficiency, or even how government is funded for that matter. Yes, deadweight losses do exist. Imposing a tax does theoretically affect that market interaction negatively, but to leave it at that is quite frankly dangerous.

I make sure that with every student I meet with to at least be mention the fact that in reality there are trade-offs and that the specific circumstances and surrounding research matters. Taxes can be used as a disincentive as with tobacco. There are taxes which we would consider vital to our current way of life like Social Security taxes. Some taxes can be used to help regulate against externalities such as a carbon-tax. There are plenty of exceptions when it comes to tax policy where a simple DWL analysis does not tell the entire story. If we are going to start reshaping the public perception of economics then we must start by making sure our future economic thought leaders are walking away from their education with a sound understanding of the complexities of economics, and a respect for the study as the social science that it is.

A Response to Carl Schramm’s “By Forgetting Its Proud Economic History, Syracuse Loses Its Future” Three Years Later

For those seeking to read the article and similar articles by Dr. Schramm first please see the following link: http://www.forbes.com/sites/carlschramm/2013/02/26/by-forgetting-its-proud-economic-history-syracuse-loses-its-future/#439eba577525

Downtown Syracuse NY, taken from modern day Clinton Square where the Erie Canal once ran through.

Generally I tend to focus my writing on national or international economic conditions but as a native Syracusan, Syracuse University alum, and now PhD student, I felt I had to add to this debate no matter how old. University Professor Dr. Carl Schramm has written a number of articles regarding Syracuse and city economic plans in general to which I would like to respond.

Firstly, for those who believe I am writing merely to defend Syracuse and all of its nostalgia, you will be sadly mistaken. There are a number of parasitic problems, both economic and social, that are undeniable and which must be addressed. Much of the original backlash centered around counter arguments to Dr. Schramm’s assessment of the city’s social and economic status. On the contrary, I actually happen to agree with a number of his evaluations. I also happen to agree, from a high-level perspective, that these problems must be “self owned”, and that indigenous entrepreneurial activity serves an important role in the solution set.

That being said, the political economic direction suggested and public policy philosophy offered appear chained to a flawed economic ideology made popular some 35 years ago and which remains unproven until today.

In fact, while we agree on some aspects of the problems and solutions, my primary motive for writing this article is to offer a substantially different methodology to cultivate entrepreneurial activity, and economic and political philosophy to overcome the challenges the city is currently facing.

One element of Dr. Schramm’s investigation which cannot be ignored is that Syracuse and its economy do not operate in an isolated bubble from the rest of the World. We cannot hastily conclude that any downturn is the sole result of actions taken within the community. The reason similar situations can be noticed throughout the country is because of national and international economic effects which strongly helped to catalyze this trend. While past and present local leaders were in no doubt partly responsible and will be required to take the lead on revitalizing the area, it is both unfair and misleading to suggest that the responsibility of the economic decline lies solely upon their shoulders.

In the follow up article “Syracuse Can Rise Again, But Only If The Entrepreneurs Return”  Schramm claims that “… Because of the tax and regulatory environment — and no one can avert his or her eyes to the comparative disadvantage this presents — few migrating firms will find the city attractive.” This is a very broad assertion with little to no empirical backing. Different tax structures: corporate taxes, self employment taxes, payroll taxes, real estate taxes, income taxes, etc. are likely to all affect entrepreneurial activity differently. The same can be said of regulations: environmental, infrastructure, finance, human resource, business formation, etc. Many of these factors have not been fundamentally proven to have a correlation to entrepreneurial activity let alone  be proven to be the primary motivator. If the broad claim that any regulation and any tax had an all but certain substantial negative impact then Silicon Valley, one of the highest taxed and regulated parts of the country, would not be the entrepreneurial engine that it is today.

Later in the article it is stated that “Government’s most effective role is to encourage with economic signals such as reducing local regulatory burdens (licensing, zoning and inspections), lowering property taxes, providing grace periods from labor law that might not be applicable to start-up businesses, and providing only the infrastructure that emerging businesses, not imaginary “ideal” businesses, need. Simply, “backing off” is likely a more effective strategy than trying to force economic growth according to some expert’s playbook.” When discussing the government’s economic role, let us not forget that governments are burdened with a very broad set of responsibilities and tasks. Laws, regulations, and taxes are not in themselves bad concepts by any means. In fact, theoretically they should be put in place because they contribute to the overall public good. In some instances however, the strife with government actions is surely justified.  While the results of NY’s Buffalo Billion remain to be seen, taking into account all NYS incentives received and the revised job outlook provided by Solar City, the project is set to result in ~$1.4Million/job created. This is hardly what a rational individual would consider an efficient use of tax payer funds, but by no means is the project representative of all government actions or an indication that government is inherently obstructive or nefarious.

The notion that the best that government can do is to reduce regulations, cut taxes (an implicitly cut services) and then hope for the best, today remains an unfounded fallacy made famous primarily in the 1980’s. Many will of course object to this assertion and will undoubtedly rebut with poignancy by highlighting some particular time period or location as proof of this philosophy’s legitimacy. I would like to remind readers however that while pointing to a counterexample can be enough to disprove a claim, it is not in itself enough to prove a theory or in fact prove causality. To truly prove causality is all together a different animal as any academic or researcher will attest. This requires profound insight and necessitates substantial evidence linking economic conditions to the outcome they’ve produced. Simply citing their coexistence within the same society and time period is no more a proof of causality than is linking breast cancer to traffic accidents.

In a subsequent but related article “It’s Time For City Planners To Adapt A New Model” Dr. Schramm speaks of city planners not considering the most important metrics such as: poverty ratio, city population, or the costs of public services. I very much agree with him that cities cannot create an effective strategic plan without considering their main goals, objectives and governing philosophy and it would be rash to do so. That said, Dr. Schramm provides no true underlying philosophical goals for society in his confutation of city planning strategies other than to suggest a vague notion of prosperity, by no means a well-established and objective measure.

In contrast, I offer readers the Society Success Metrics outlined in my article “GDP vs. True Societal Success” where the goals and metrics extend beyond pure economic growth to more fundamental and intrinsic objectives. Taking these measures into account, one can begin to utilize peer reviewed research, as it was intended, to guide the decisions and proposals for government to enact thus providing a substantially increased likelihood of achieving those targets.

As an example of this philosophy in action, if one were to set goals for the city’s education system, they would be wise to consider the existing research and best practices available through education journals (such as AERA) or alternative educational systems such as the Finnish National Educational System. Clearly local governments are handicapped in their authority to make decisions on this subject, but the perspective for improvement is nevertheless valid however small the potential impact may be. Before anyone jumps to any conclusions on cost by the way, in 2012 according to the National Center for Education Statistics Finland spent $9,353/student and the US spent $11,732/student, while Finland’s students are both healthier and perform better in just about every measurable way.

In relation to entrepreneurship, one policy concept which has proven to have a definitive and positive correlation to entrepreneurial activity is education. Government can be supportive of entrepreneurial activity through  entrepreneurship coaching and education programs, R&D support systems, social capital (i.e. networks),  etc.  KCSourelink in partnership with the University of Missouri has offered a “resource rail” specifically laying out various trajectories and resources available to entrepreneurs through their local community. As I have no intention of turning what is already a lengthy article into a manifesto however, I’ll keep any further explicit suggestions of pragmatism for another day.

The key takeaway here is to recognize not solely the limitations of government but the power of government as well. More so, that impact does not necessarily have to be negative or obstructive. There are proven methods and best practices which can be taken from other regions, nations, and especially from research which can be implemented and tried in Syracuse as well. If we are in fact going to try and stimulate entrepreneurial activity, does it not then follow to have a bit of an entrepreneurial mindset with our creation and trial of policy? One can never claim to have a silver bullet to success by any measure, but utilizing reasoned and proven methods appears to me a far more effective strategy than going to the casino and rolling the dice.

References:

Schramm, Carl. “Syracuse Can Rise Again, But Only If The Entrepreneurs Return.” Forbes. Forbes Magazine, 4 Mar. 2013. Web

Schramm, Carl. “By Forgetting Its Proud Economic History, Syracuse Loses Its Future.” Forbes. Forbes Magazine, 26 Feb. 2013. Web.

Schramm, Carl. “It’s Time For City Planners To Adapt A New Model.”Forbes. Forbes Magazine, 14 May 2013. Web.

KCSOURCELINK RESOURCE RAIL. Digital image. KCSource. KCSource, n.d. Web.

Cope, Jason, and Luke Pittaway. “Entrepreneurship Education A Systematic Review of the Evidence.” International Small Business Journal 25 (2007): 479-510. Web.

American Educational Research Association. AERA, n.d. Web. 08 June 2016.

“Education System.” Oph.fi/. The Finnish National Board of Education, n.d. Web. 08 June 2016.

“Gross Domestic Product per Capita and Public and Private Education Expenditures per Full-time-equivalent (FTE) Student, by Level of Education and Country: Selected Years, 2005 through 2012.” National Center for Education Statistics. NCES.ed.gov, n.d. Web.

Employment is still on the rise and it’s good for all of us

ADP recently released their jobs report for August of 2015 and it’s good news. The U.S. Economy added 190,000 total jobs last month. You can find more on the specifics by following this link:

http://www.adpemploymentreport.com/2015/August/NER/NER-August-2015.aspx

Why doe economists pay so much attention to jobs? We’ll unlike political candidates which more often do so to cater to the needs of their constituents, the truth is, jobs play an enormous role in our economy. You may have often heard the notion that “entrepreneurship is the engine of the economy.” As an entrepreneur, I’ll attest to that but putting my economist hat on, the real engine is jobs.

The concept is actually quite simple in principal. The economy is in its most basic simplified version is really just the trading, or in most cases the transfer of money, in exchange for goods and services. It doesn’t take much thought to recognize that  in order to have paying customers, customers must have money in the first place.  Any economists reading this are probably thinking to themselves “wow what a revelation!” (sarcasm) but the reality is much of the voting public tends to omit this important detail in their view of the economy, as is often reflected by the rhetoric of political candidates.

While the “supply side” vs. “demand side” economics war still wages its important for us all to remember the well founded relationship between jobs and economic prosperity. Even if you’re an entrepreneur, a CEO, medical doctor, attorney, or in some other way have established a comfortable living, at the end of the road there is always a customer, and the more money they have, the more money your company stands to make, and the more money you may receive as a result of it.

 

Driveless Cars

http://www.wired.com/2014/05/driverless-cars/

Before getting into the topic lets just set one thing straight from the beginning, I’m not an old man, in fact I’m just 24, but unlike many of my fellow Millennials I refuse to buy in to the notion that for some reason progress = software 100% of the time. In other words, the future will always entail more computer driven data, and interfaces are your finger tips or even full automation of various tasks for the sake of full automation. Yes, there are a variety of tasks where these things make complete sense, mapping for example or manufacturing in the case of automation, but there are also those where it doesn’t. Why would I want to automate playing fetch with my dog or perhaps even grocery shopping? Personally, running to the farmer’s market to buy fresh vegetables and share stories with local farmer’s is one of the joys of life, not something to from which I’d want to automate and suck out all the empathy for other humans. The extreme case for automation, I have nothing left to do, it’s all done for me so what the heck do I do all day? What if I find getting lost on a road trip a fun adventure? What if I’m one of those weird wackos out there who realizes proper nutrition and mental health exercises is more beneficial to my well being than using some fancy wrist band to calculate how many steps I took in a day? Say I’m one of the crazy ones who prefers to option of a manual gearbox to having an iPad with internet connectivity taking up the dashboard. Sure there’s a fair amount of subjectivity here, I get that, point being its important we as a society recognize this trend and really begin to question what elements are actually adding to our collective quality of life?

Ranting aside, it’s not all bad or all good, there truly is a healthy balance to be had here. Transportation in particular, is one of those elements in particular. In Wired’s article they present the scenario where individuals will essentially have their cars run errands for them. Perhaps a bit of infrastructure upgrades would need to take place before that’s a serious reality but that’s not too hard to imagine. Personally, even in this postulate future reality, I’d still do all my own errands. That’s one of the experiences in life and I cherish every experience I have the fortunate opportunity to do so. That said, many other will fee differently, so be it. I have a tough time actually imagining automated cars resulting in more overall driving though. To be frank, many American’s treat their cars like mobility scooters to begin with, Christ we have drive-thru’s in fast-food restaurants. Any errands or driving by the car would have otherwise been likely done by human operated car anyway. Surely there are exceptions here but hardly any obvious examples which would add enormous congestion or pollution. Seems more to me as rhetoric being spewed in a desperate attempt to save an industry likely to go through catastrophic change as a result of autonomous vehicles.

Nonetheless, the big question here is really less about autonomous vs. human driven vehicles, and more to do with personal vs. public transportation systems.

I’m as big a car nut as they come, I love my car. I love driving it, going on adventures, I love back roads and I love racing it in SCCA autocrosses. But, and its a very big but, just take a second to fully absorb the point being illustrated here and the magnitude of it. That bus, those bikes even, would have no problem at all moving through the town center at an expected pace. How long you think it would take you to get through that traffic jam in the center? And they aren’t even assuming a two way street!

I know you see where I’m going, clearly publish transportation systems lend themselves to be systemically more efficient the personalized transportation right? But you can’t change human behavior! Well, I’d argue differently, but as that’s a separate discussion I’ve written a separate post about it, see here.

The poin