Download Five basic skills - California State University, Long Beach

Understanding Data
Do most employees work for small or
large companies?
Who do Americans work for?
# of employees
% of all firms
under 10
10-99
100-499
500-2499
2500 and above
51.80%
15.70%
1.20%
0.20%
0.04%
What we know from that slide
• The majority of firms have fewer than 10
employees.
• Very few firms employ one hundred or more
employees.
What we don’t know from that slide
• How many workers work for firms in each
category?
• What percentage of all employees work for
firms in each category?
A hypothetical example (100 firms with
1000 employees)
# of
firms
60
25
14
1
100
each
employs
3
10
25
220
total
employment
180 (3 x 60)
250 (25 x 10)
350 (14 x 25)
220 (1 x 220)
1000
% of total
employment
18% (180/1000)
25% (250/1000)
35% (250/1000)
22% (220/1000)
100%
Who do Americans work for?
# of employees
in firm
% of all firms
under 10
10-99
100-499
500-2499
2500 and above
51.80%
15.70%
1.20%
0.20%
0.04%
% of all
employees
11.0%
25.3%
14.6%
11.8%
37.2%
If you use the amount of money a state spends
as a policy variable you need to divide this by
either the state’s population or gross state
product. Thus, you need to adjust for the fact
that some states are larger and wealthier than
other states. You need to think through
whether it is better to adjust for population or
wealth. Depending upon your measure, it
may be preferable to adjust for both.
If you use a tax rate (e.g., state tax per pack of
cigarettes) would you need to adjust for state
wealth and/or population?
How to Think about the Deficit - 1
How would you measure the federal deficit?
While the example is the federal deficit, state
budget shortfalls could be approached in
similar fashion.
How to Think about the Deficit - 2
Should we think about the deficit in “absolute”
or “relative” terms?
For example, would you rather be $5 in debt and
have $10 or be $20 in debt and have $100?
Thus, is the “critical factor” the absolute amount
of the debt or the debt in relation to your
ability to pay it off?
How to Think about the Deficit - 3
The next slide will show you the federal deficit in
current dollars (i.e., not adjusting for
inflation), constant dollars (i.e., adjusting for
inflation) and as a percentage of the economy
(i.e., as a percentage of the Gross Domestic
Product) over time.
How to Think about the Deficit - 4
Year Current
1943
54.6
1963
4.8
1983 207.8
2003 377.6
2009 1,412.7
Constant Percentage of GDP
531.7
30.3%
30.1
.8%
385.3
6.0%
402.8
3.4%
1,279.6
9.9%
So, how large is the federal deficit?
(Dollar amounts are in billions – in 2009 the
deficit is 1.279 trillion dollars)
How to Think about the Deficit - 5
The deficit increases during recessions. Why?
Would you actually want the federal
government to reduce it’s deficit during a
recession?
Should the deficit be considered from a “shortterm” or “long-term” perspective? Thus, if
the cost of reducing the current federal deficit
causes higher unemployment and reduces
future earnings (e.g., through less education)
is short-term deficit reduction advisable?
How to Think about the Federal
Debt
Federal Debt (i.e., total of the annual deficits) as
a percentage of GDP:
1945 – 106.2%
1981 - 25.8%
1987 - 41.0% (no recession but tax cuts)
2000 – 34.7% (Clinton raised taxes)
2006 – 36.5%
2010 - 62.2%
Tax Cuts, Wars and Recessions increase the debt
Government Debt as a Percentage of a
Nation’s Economy
Nation
Canada
Germany
Britain
Netherlands
U.S.
Norway
2010 - Govt. Debt
as a Percent of GDP
84.0%
78.8%
76.5%
64.6%
58.9%
47.7%
Paying Off the National
Debt/Reducing the Deficit
We could sell off federal land and possessions
(e.g., the national parks, military hardware,
federal lands/buildings, bridges, roads, etc).
Would this make our nation stronger or more
prosperous? Similarly, should the state of
California sell off assets to balance the
budget?
Are Federal Revenues Increasing?
Are Federal Revenues “too high”?
Federal Revenues (taxes, fees, social
Year
insurance) as a percentage of GDP
1943
13.3
1963
17.8
1983
17.5
2003
16.2
2009
14.8
Federal revenue as a percentage of GDP are
LOWER today than in any year since 1966.
Thinking About Data - 1
Bush: Pollution is lower today than when I
became president.
Kerry: Pollution would have been lower if
President Bush had done nothing instead of
what he did.
Four Options: 1 – Bush right/Kerry wrong; 2 –
Kerry right/Bush wrong; 3 – both right; 4- both
wrong
Thinking About Data - 2
Answer #3 is correct (i.e., they’re both right).
But how can both statements be true?
It is useful to distinguish between a:
TREND
LEVEL
RATE
Thinking About Data - 3
Some argue that income taxes fall much too
heavily on the wealthy. For example, in
California, the wealthiest 10% of the taxpayers
pay approximately 75% of the state income
tax. While true, this argument is misleading
for what two reasons?
Thinking About Data - 4
1 – It’s the percentage of income paid in a tax
and not the percentage of a tax that a
particular income group pays that is the
important consideration – thus, if California’s
state income tax was only to raise $1 and
Steven Spielberg paid that $1 he would have
borne 100% of the state income tax burden –
however, $1 would be virtually 0% of his
income; 2 – Excludes all taxes other than the
income tax
Thinking About Data - 5
In political campaigns state spending is often an
important topic. One often hears candidates
for state office talking about “runaway” state
spending. If we are going to compare
spending by the State of California over time,
what adjustments do we need to make?
Thinking About Data - 6
1 – population
2 – inflation
Adjusting for population growth and inflation, to
maintain the same level of service in 2009
that the state of California provided in 1999
state spending would have had to increase by
53%. Over the 1999-2009 period spending by
the State of California only increased by 29%.
Thinking Through Relationships - 1
What is suppose to be the relationship between
a person’s level of wine consumption and their
health?
Thinking Through Relationships - 2
Possible Relationships:
1 – no association – the amount of wine you
drink is unrelated to your health
2 – positive – the greater the amount of wine
you drink the more healthy you become
3 – negative – the greater the amount of wine
you drink the less healthy you become
Thinking Through Relationships - 3
How could we find an association between wine
drinking and health if, in fact, none existed?
Putting Skills Together - 4
It might be that wine consumption is related to
other factors which affect a person’s health.
For example, wine drinkers may eat healthier
diets, exercise more and be slimmer than nonwine drinkers. Even if we removed the effect
of each of these other factors (i.e., two people
had the same diet, weight, etc. but one drank
a glass of wine per day and the other did not)
there might be “limits.” Thus, a glass of wine
might be helpful but not a bottle of wine.
Thinking Through Relationships - 5
Statement: “High taxes discourage people from
working and reduce economic growth”
Questions: 1 – Growth for whom? The person
paying the taxes or for the nation as a whole?
2 – Can you think of a way that the opposite
could be true (i.e., higher taxes = higher
growth)?
Thinking Through Relationships - 6
Increasing the taxes on the rich may cause them
to work less hard. However, if this money is
redistributed to poorer people for productive
purposes (e.g., education, training, day care,
etc.) the reduced income of very high income
individuals can be more than offset by the
increased earnings of those whom the
money/services were redistributed to. Thus,
higher taxes can lead to greater growth for the
economy as a whole.
Putting Skills Together - 1
Question: How successful a candidate was
President Obama in 2008?
Putting Skills Together - 2
Easy Answers: Very successful because: (1) he
was elected President; (2) he won the popular
vote 52.9% to 45.7%; and (3) he won the
electoral vote 365 to 173.
What’s missing/wrong with each of the three
answers above?
Putting Skills Together - 3
Omitting scandal, what factors should effect a
presidential election?
Putting Skills Together - 4
• Political science research tells us that
presidential election results are mainly
influenced by the economy and war.
• How should we measure economic
performance? How should we measure war?
Putting Skills Together - 5
The next slide shows the predictions for the
incumbent party presidential candidate in
each election based on the change in real
disposable income (i.e., personal income after
adjusting for inflation and taxes) and fatalities
in war. Which party was the incumbent party
in 2008?
Putting Skills Together - 6
65
Bread and Peace Voting in US Presidential Elections 1952-2008
60
1972
55
1956
1964
1984
1988
1996
50
2008
1992
1952
40
45
1976
1968
1980
2000
2004
1960
-2
-1
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16
Real income growth and military fatalities combined
Combination of real growth and fatalities weights each variable by its estimated coefficient.
Estimated fatalities effects: -0.7% 2008, -7.6% 1968, -9.9% 1952; negligible in 1964, 1976, 2004.
Source: www.douglas-hibbs.com
Putting Skills Together - 7
Now, how successful was Obama?
Putting Skills Together - 8
In terms of the presidency, the Republican Party
was the incumbent party in 2008. Since
McCain received a greater percentage of the
popular vote than he should have based on
the economy and the wars, Obama wasn’t
that successful of a candidate. Thus, while
Obama won, he didn’t receive as greater a
share of the popular vote as he should have
given the economic and military situation.
Putting Skills Together - 9
The Estate Tax: As a result of the 2001 Bush Tax
Cuts, by 2009 the value of estates exempt
from taxation had risen to $3.5 million for
individuals and $7.0 million for couples. The
tax rate above this threshold was 45%. Thus,
if an individual inherited $4.0 million dollars
they would pay $225,000 in taxes (i.e., nothing
on the first $3.5 million and 45% of the
remaining $500,000).
Putting Skills Together - 10
In 2009, only the richest ¼ of 1% of estates paid
any estate tax (i.e., 99.75% of estates were too
low to be subject to the tax). Under these
rules only 50 small farms or businesses in the
entire nation were subject to the estate tax.
Virtually all Republican Congressmen and
Senators want estates to be entirely tax free.
They compromised with President Obama and
got the thresholds raised from $3.5 to $5.0
million for individuals and from $7.0 to $10.0
million for couples.
Putting Skills Together - 11
By comparison to the estate tax system in effect
prior to the 2001 Bush Tax Cuts, the current
estate tax system costs approximately $68
billion dollars per year in lost revenue. Think
of what this means in terms of people who
will now lose medical care (i.e., Medicaid some will die as a result), students who will
never go to college, workers who will not be
retrained, working class people who will lose
public transportation services all to pay for
this tax cut for the extremely wealthy.
Putting Skills Together - 12
One of the main purposes of the “skills”
component of this course is to equip you to
think through policies such as the estate tax.
Here are some questions worth considering.
Does reducing, or eliminating, the estate tax
reward merit or luck? Since the estate in
question was typically “built” by someone
other than the person inheriting the money
and the family you are born into is entirely a
matter of luck, it would seem like “luck,” not
“merit” is being rewarded.
Putting Skills Together - 13
Additionally, don’t the program cutbacks
necessitated by the lost revenue from estate
relief reduce the ability of people to be
“meritorious” (e.g., reduce government
spending on education, job training, public
transportation to work, etc.)?
If you believe in inheritances, what is your policy
goal? Is it maximizing the number of people
who inherit money or maximizing the amount
of money inherited? These are potentially
conflicting goals.
Putting Skills Together - 14
Let’s reason this out. During the pre-2001
period (i.e., before the Bush Tax Cuts), only
about the richest 2% of estates were subject
to the estate tax. Now, this is less than ¼ of
1% of estates. Even if an estate was subject to
tax, those inheriting would still inherit a very
large sum of money (i.e., the estate tax would
reduce, not eliminate their inheritance).
However, every year many inheritances are
either greatly reduced, or eliminated. If the
estate tax isn’t the reason, what is?
Putting Skills Together - 15
ANSWER: The “end of life” medical expenses of
the person who you would inherit from. For
example, let’s say your father was going to
“leave you” a home valued at $400,000. If he
was diagnosed with Alzheimer’s disease 7
years before death and had to live in a nursing
home, the costs could easily wipe out your
entire $400,000 inheritance. Unlike most all
wealthy democracies, the U.S. government
does NOT provide money for long-term care
beyond about 3 months.
Putting Skills Together - 16
The following is almost certainly “true”: a significantly
GREATER NUMBER of people would inherit money if
we taxed wealthy estates much higher (and had
higher tax rates in general) and if the Medicare
program provided long-term care coverage, than by
having either a small, or no, estate tax but not having
governmentally provided long-term care insurance.
On the other hand, due to the many millions of
dollars inherited by a few individuals the TOTAL
AMOUNT OF MONEY inherited could be greater
under minimal estate taxes.
Putting Skills Together - 17
For example, the total amount of money
inherited would be greater if one person
inherited $100 million dollars than if 1,000
people each inherited $50,000. If you believe
in inheritances, which is your goal: maximizing
the number of inheritances or maximizing the
total amount of money inherited?
Putting Skills Together – Medical
Research - 1
If you think that you can avoid healthy living
because by the time you would get a serious
disease there will be a cure, let me explain
why this is likely to be a SERIOUS mistake!
There are two reasons that advancement in
medical treatment for such serious diseases as
pancreatic cancer (only 3% survive 5 years) is
VERY slow: (1) it’s difficult; (2) economic
incentives DON’T sufficiently prioritize finding
a cure.
Medical Research - 2
While the scientific difficulties in finding cures
for diseases is outside the scope of this
course, the policy implications of economic
incentives are very central to the goals of this
course.
In order to understand this process we need
what economists refer to as “Expected Value.”
Medical Research - 3
The “Expected Value” is the probability of an
event occurring times the benefit from the
occurrence of that event. Thus, if you have a
10% chance of winning a $500 prize, the
expected value is $50 (.10 x $500 = $50).
The probability of finding a “cure” for a disease
is typically MUCH LOWER than for finding a
minor improvement in treatment. Look at this
from the standpoint of a pharmaceutical
company.
Medical Research - 4
If a pharmaceutical company can demonstrate that a
new drug makes a minor improvement in health
outcomes (e.g., not curing but extending the life of
colon cancer patients by an average of 3 months), it
can get a patent and charge a price similar to what it
could charge for a cure. So, if the financial payoff is
similar, but the probability of developing a drug
which is a minor improvement is much higher than
developing a cure, the financial incentive is to
develop drugs that offer small gains over potential
“cures.” This is also why government funded
research is essential: it isn’t driven by a profit motive.