January 12, 2008

Response to Senator Schumer's Radio Address

I try to listen to the President's and the Democrat's weekly radio address and I was particularly disappointed with Senator Schumer's address this week. In the address, he describes the currentstate of the economy "the worst shape...since the days immediately following 9/11". He also repeats much of the tired, middle class rhetoric coming from people such as Obama, Edwards, and Huckabee.

He warns of a recession and labels Bush's policies "Do-nothing". In particular, he is concerned about 4 things:

1 - "From 2000 to 2006, most Americans saw their real income actually go down."

I don't know what he bases this on, but I suspect this is in large part caused by the recession in the early part of those years. The picture he seems to be trying to paint, one of continually increasing hardship for the middle class, isn't necessarily supported by such a statistic.

2 - "The average tax relief for a millionaire under this Administration is 100 times larger than the elief for a typical middle class household."

Oh really? I'm guessing this is because the poor Senator doesn't understand math and the difference between a typical middle class household income and a millionaire income. Take for example, someone, A, who makes $100,000 a year (quite a bit more than most middle class families) at a 30% tax rate. That person would pay about $30,000 in taxes a year, and a 1% tax break would constitute $1000 in relief. Consider another person, B, who makes about $10 million a year. At $10 million a year (100 times A's income) at the same tax rate, B pays $3 million dollars (100 times A's taxes) and the SAME tax break for B would save him $100,000 a year (again 100 times A's income).

The point is, the reason the millionaire receives more relief from tax cuts is because he pays more, not because Bush likes him more. I am repeatedly annoyed that people in charge of running this country either don't understand these simple facts, or hope we are so stupid we won't see through the rhetoric.

3 - "The price of college tuition, health care and energy...have skyrocketed."


As a current college student, tuition and tuition increases are certainly a concern, but they are not over-burdening and it seems to be fairly easy to get bank loans to cover expenses if one needs to and it shouldn't be too hard to pay off after graduating, as long as one lives frugally, didn't stay in school absurdly long, and actually got a degree that is worth something (unlike an English degree, which I hear is generally good for a job under $30k). Speaking of such degree's, it seems to me that part of the cause of high tuition costs is probably high demanded driven primarily by artificially low prices (via government aid) and the conventional wisdom that a college degree is necessary to get a good job without much emphasis on the kind of degree. This leads to more people going to college (free money increases demand) and a lack of focus on degrees that are valuable in the work force (because they are "hard").

Health Care

As for health care, I agree that this is a problem. However, I think most people are ignoring two primary factors effecting the quality and cost of health care.

First, insurance, especially insurance paid for by a third-party such as an employer or government, hides the real cost of using health care from consumers. Consumers therefore feel that it is cheaper than it is, because they don't foot the bill, and decreased prices, perceived or real, increase demand, driving prices up for access to medical resources (which I understand is not a booming business in terms of growth and expansion). In other words, the lack of cost transparency leads not just more consumers to demand health care, but for individual consumers to demand more of it, which they may not really need. Because the health care industry is not growing parallel to the increase in demand, cost increases as health care becomes a more relatively scarce resource.

Second, particularly regarding pharmaceudicals, it is my understanding that the US is one of the few countries that respects drug patents. Most other countries, such as Canada with their famously cheap medicine, achieve this cheapness either via price controls or lack of patent protection, which allows a company to pay $0 on R&D to develop a drug, meaning it only has to make back the cost of production rather than the additional cost of years of R&D and additional costs of FDA approval. One might think that lives and health are worth saving at such an expense to pharmaceudicals, but if all countries did this, the investment required to find cures would become unprofitable, causing relative stagnation is pharmaceudical research. We could achieve much lower costs for a health care status quo, but health care progress would become absurdly unprofitable and therefore under-funded.

Increased nationalization of health care would solve neither of these problems. On the contrary, it would only serve to exacerbate them.


Increased energy costs are also a real problem with a more complex cause. Although much of the rising energy costs are probably due in part to increasing demand in developing countries, the control of large oil supplies by socialist (for example, Hugo Chavez) and unstable countries have also worked to cut off oil supplies. However, it is important to note that Congress, in which Schumer, and other government bodies in the US have repeatedly blocked development of our own oil reserves (ANWAR, Gulf rigs, new refineries), which could simultaneously decrease our dependence on foreign oil and increase the availability of oil in the US. What is generally being done by Congress is funding research on numerous "Green" technologies for alternative energy sources which are more expensive than oil. Additionally, at least one of these more expensive fuels (ethanol) is often required as an additive to gasoline in the name of making it more environmentally friendly, also increasing the cost. Therefore, Congress and policies Schumer probably supports have been contributors to the cost of energy in this country.

One thing a lot of people don't know is that we already have a new energy source with almost zero emmissions that could simultaneously replace most of the dirty coal and gas power plants that form the majority of our power infrastructure and dramatically reduce car emissions. This energy source is nuclear power. Unfortuantely, a lot of fear mongering and misinformation has turned many Americans against this source of energy, but rather than trying to overcome that problem, as France apparently has, the US has taken it pretty much off the table. The advocation of nuclear power by most of the Republican candidates in the New Hampshire debates was probably the high point of debate for me and I hope they continue to do so.

4 - Housing crisis

One thing Schumer forgets to mention is that part of the cause of the housing bubble and subsequent fallout was caused by the government encouraging banks to give out loans to risky people and people failure to prepare for what most people said was coming. Bailing out banks and people who took loans they couldn't afford will only reinforce the message of irresponsibility in planning for the future. Furthermore, it will hurt those who DID plan ahead and set aside money to invest in property during the perceived market downturn. Doing nothing IS the right thing to do in this case, but I seem to recollect from past weekly radio addresses that President Bush actually is planning to do something about this. What Schumer is probably complaining about here is that Bush isn't doing enough to bail people out.

Schumer's solution

The only real solution Schumer presents is increased government spending, apparently on anything:

"prominent economists believe that the best way to jumpstart is not only with tax cuts, but with stimulus spending. The President seems to focus only on tax cuts, which are important, but we need spending as well, whether it be for short-term items such as extending unemployment insurance or longer-term investments such as in clean energy and infrastructure." - Schumer

But we should not let these economists (probably Keynesian economists, who have been deluded into thinking that the government can and should flatten the market boom/bust cycle) fool us. All government funds come from one of two places, taxes (from the people) or borrowing. The thing Schumer either doesn't realize or hopes we don't realize is that private citizens and organizations can spend based on thses sources just as well as the government. Particularly in terms of the funds raised by taxation, that is money people would probably prefer to have spent themselves anyway.

Consider the economy as a set of industries. For each industry, profit (the result of spending public or private funds on that industries output [products]) signals that industry to grow (the profits are largely investing in increasing the industry to meet increased demand, increasing profit). Losses, signal an industry to shrink because it's output is higher than societies demand. Next, consider a person (A) who makes $100,000 a year. Instead of conventionally thinking about this $100,000 as what we generally consider it to be, a resource which A can use to buy things for himself, think it as 100,000 votes for product production. When A buys say, a new computer, he spends $1000 to buy himself a new computer. But he also signals 1000 votes worth of demand for the computer. The computer industry (0) receives these votes their goods, reacting to this signal that their product is in demand, expands. A continues the year like this, expending his money (votes), on other industries (0-100) according to the things he wants to consume. Other industries do not receive any funding from A and sadly decrease their output proportionally. As a model citizen, he also pays $30,000 in taxes, as he did the year before when he was helping us see through Schumer's faulty logic on tax relief. This $30,000 in taxes represents a 30% decrease in A's votes which represet his control over the economy. It also represents an increase of 30,000 votes in the governments control of the industry.

This illustration clarifies that government is not a magic entity and the fact that money controls the economy. When the government takes our money, it doesn't magically become more valuable or powerful than when we had it. All that happens is that our influence in the economy is decreased and the influence of governments (that is, beaurocrats and government officials, such as Senator Schumer) increases.

It is also important to note that saving money does not mean that it sits around and does nothing. Unless one's method of saving is hiding legal tender in the basement, saving is investing, in banks, businesses, bonds, etc. That money is then spent by someone else.

Therefore, A's $100,000 will be invested in the economy at some point during the year, and government intervention does not change this. All government intervention can do is change where that money is invested.

Notice also that Schumer juxtaposes tax cuts and government spending as two promoters of economic growth. The truth is that spending promotes economic growth in an industrial region. The difference between tax cuts and stimulus spending is who spends the money, us, or them. It is also important to note that economic growth is also dependent on industries producing what people really want. It seems to me that the best way to signal to the economy to produce according to the people's demands is to allow them the maximum control over their own money as possible.

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