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Religion, Politics, Biology, and Economics: The Struggle of Reason with Emotion December 2, 2010 copies of this presentation can be found at www.antonydavies.org 1 Source of the Struggle Pride and prejudice Pride • Economic truths are opinion (relativism). • Inability or unwillingness to admit limitations (hubris). Prejudice • Humans who work in private industry are greedy. • Humans who work in public sector are altruistic. 2 How to Avoid the Struggle Think in terms of first principles. First principles are not derived from other truths. They are… • Either assumed to be true, or • Are so self-evident as to be beyond dispute. When thinking about economic and policy issues… • Begin at first principles, not at outcomes, or • End up espousing contradictory or inconsistent views. 3 Example: First Principles Debate: We must help the poor by imposing a minimum wage. We must help employers by removing the minimum wage. Debate: The rights to life and property are natural rights. The rights to life and property are not natural rights. 4 First Principles The rights to life and property are natural rights. Others may not take your life. Others may not prevent you from using your property. Others may not prevent you from selling your labor. Others may not prevent you from paying for labor. We should not have a minimum wage. 5 Unintended Consequences If it is true that: the rights to life and property are natural rights, then government policies that are inconsistent with this truth will yield unintended consequences. Bad things will happen that we didn’t intend to happen. 6 Unintended Consequences • Requiring car makers to install airbags and seatbelts has little effect on traffic fatalities. • Requiring small children traveling in airplanes to be in car seats increases child travel fatalities. • Requiring ethanol in gasoline is bad for the environment. • Promoting electric vehicles makes us more dependent on foreign countries. • Banning the trade in ivory reduces elephant populations. • Raising the minimum wage reduces the income of the poor. 7 Elephant Population Banned Ivory Trade 1989 1994 Mozambique 17,000 1,495 Somalia 2,000 130 Zimbabwe 52,000 81,855 Botswana 20,000 80,174 Did not Ban Ivory Trade Source: McPherson, M.A. and M.L. Nieswiadomy, 2000. African Elephants: The Effect of Property Rights and Political Stability. Contemporary Economic Policy. 8 What are the first principles? 9 First Principle of Catholic Social Thought Human Dignity People are created in God’s image and likeness. 10 Derived Principles of Catholic Social Thought Human Dignity People are created in God’s image and likeness. Solidarity People have the responsibility to help each other live in a manner consonant with human dignity. Common Good People have the responsibility to pursue conditions that allow others to share in and respond to human dignity more fully and more easily. Subsidiarity Responsibilities that lesser and subordinate organizations can accomplish should not be assigned to greater and higher associations. 11 First Principles of Classical Liberalism Self-Ownership People own their own lives. Human Motivation People are self-interested and have differing preferences. Human Condition People are volitional and capable of rational thought. Human Limitations People are neither omnipotent nor omniscient. Equality Principles apply to all people equally. 12 CST Subsumes Classical Liberalism Human Dignity People are created in God’s image and likeness. Solidarity People have the responsibility to help each other live in a manner consonant with human dignity. Common Good People have the responsibility to pursue conditions that allow others to share in and respond to human dignity more fully and more easily. Subsidiarity Responsibilities that lesser and subordinate organizations can accomplish should not be assigned to greater and higher associations. Self-Ownership People own their own lives. Human Motivation People are self-interested and have differing preferences. Human Condition People are volitional and capable of rational thought. Human Limitations People are neither omnipotent nor omniscient. Equality Principles apply to all people equally. 13 Guide to the Relationship of Church and State Human Dignity People are created in God’s image and likeness. Solidarity People have the responsibility to help each other live in a manner consonant with human dignity. Common Good People have the responsibility to pursue conditions that allow others to share in and respond to human dignity more fully and more easily. Subsidiarity Responsibilities that lesser and subordinate organizations can accomplish should not be assigned to greater and higher associations. How we should exercise our free wills. Limits on our free wills. Self-Ownership People own their own lives. Human Motivation People are self-interested and have differing preferences. Human Condition People are volitional and capable of rational thought. Human Limitations People are neither omnipotent nor omniscient. Equality Principles apply to all people equally. 14 Failure to begin with first principles can lead to false assumptions. Markets-As-Exploitation Assumption Markets lead to a centralization of political and economic power, decreased competition, and the concentration of wealth. Markets-As-Empowerment Assumption Markets lead to a decentralization of political and economic power, increased competition, and the dissemination of wealth. 15 Globalization and Income Market-As-Exploitation Claim • Globalization results in a transfer of income from the less wealthy to the more wealthy countries. 16 $40,000 Greater per-capita trade is associated with greater per-capita income. $35,000 Per-capita Trade (US$) $30,000 R2 = 0.56 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 Per-capita Income (US$) Source: International Financial Statistics, International Monetary Fund, December 2001 17 Globalization and Income Market-As-Exploitation Claim • Globalization results in a transfer of income from the less wealthy to the more wealthy countries. Reality • Globalization results higher incomes for rich and for poor countries. 18 Globalization and Exploitation Market-As-Exploitation Claim • Globalization results in an increased exploitation. 19 Per-capita Trade (US$, logarithmic scale) $100,000 GDI measures quality of life (longevity, education, literacy, income) for women relative to men. $10,000 Greater per-capita trade is associated with R2 = 0.80 greater gender equality. $1,000 $100 $10 $1 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender adjusted HDI) Source: International Financial Statistics, International Monetary Fund, December 2001, and Human Development Report, United Nations Development Programme, 2002 20 $100,000 Per-capita Trade (US$, logarithmic scale) Greater per-capita trade is associated with reduced child labor. $10,000 $1,000 R2 = 0.54 $100 $10 $1 0 10 20 30 40 50 Children 10 to 14 in the Labor Force (as % of age group) Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 21 Per-capita Trade (US$, logarithmic scale) $10,000 $1,000 $100 $10 Even among middle-lower and lower income countries, greater per-capita trade is associated with reduced child labor. $1 0 10 20 30 40 50 60 Children 10 to 14 in the Labor Force (as % of age group) Source: International Financial Statistics, International Monetary Fund, December 2001, and World Development Indicators, World Bank, 2002 22 Globalization and Exploitation Market-As-Exploitation Claim • Globalization results in an increased exploitation. Reality • Globalization results in higher gender equality and reduced child labor. 23 Globalization and Unemployment Market-As-Exploitation Claim • Globalization results in increased unemployment and lower wages. 24 January 1975 to June 2006 12% Greater per-capita trade is associated with reduced unemployment. Unemployment Rate 10% 8% 6% 4% 2% 0% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% Trade (imports plus exports) as % of GDP Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 25 January 1975 to June 2006 Average Real Hourly Earnings (2000$) $15.00 Greater per-capita trade is associated with increased real wages. $14.50 $14.00 $13.50 $13.00 $12.50 $12.00 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% Trade (imports plus exports) as % of GDP Source: Bureau of Labor Statistics, and Bureau of Economic Analysis 26 Globalization and Unemployment Market-As-Exploitation Claim • Globalization results in increased unemployment and lower wages. Reality • Globalization results in reduced unemployment and higher wages. 27 Markets and the Income Gap Market-As-Exploitation Claim • As markets grow, the rich get richer while the poor get poorer. 28 % of Households in Each Income Bracket (2006$) Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. 29 % of Households in Each Income Bracket (2006$) Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. 30 % of Households in Each Income Bracket (2006$) Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. 31 Markets and the Income Gap Market-As-Exploitation Claim • As markets grow, the rich get richer while the poor get poorer. Reality • As markets grow, the rich get richer and the poor get richer. 32 Markets, Wages, and the Poor Market-As-Exploitation Claim • Minimum wage (or “living wage”) protects the working poor. 33 College Education (1978-2008) 4.0% 3.5% Unemployment Rate 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Source: Statistical Abstract of the United States, and Bureau of Labor Statistics 34 HS Education (1978-2008) 12.0% Unemployment Rate 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Source: Statistical Abstract of the United States, and Bureau of Labor Statistics 35 Less than HS Education (1978-2008) 20.0% 18.0% Unemployment Rate 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 Minimum Wage as Fraction of Average Hourly Wage Source: Statistical Abstract of the United States, and Bureau of Labor Statistics 36 Markets, Wages, and the Poor Market-As-Exploitation Claim • Minimum wage (or “living wage”) protects the working poor. Reality • Minimum wage (or “living wage”) hurts the lesser educated and the lesser skilled. 37 Conventional Wisdom versus the Data In addition to reasoning from flawed premises, many people simply believe things that are untrue. 38 Conventional Wisdom The Federal government has a deficit problem. 39 $1,600 The Federal deficit has been rising at three times the rate of inflation. $1,400 $1,200 Federal Deficit (billions 2009$) $1,000 $800 $600 $400 $200 -$200 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 $0 -$400 -$600 Source: Bureau of Economic Analysis 40 $12,000 Although Federal revenues per person have been growing faster than inflation, Federal spending per person has been rising faster than that. Federal Deficit per Person (2009$) $10,000 Federal spending per person (2009$) $8,000 $6,000 Federal revenue per person (2009$) $4,000 $2,000 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 $0 Source: Bureau of Economic Analysis 41 Conventional Wisdom The Federal government has a deficit problem. Data The Federal government has a spending problem. 42 Conventional Wisdom The government needs to raise taxes to balance the budget. 43 90% 75% 60% 45% 30% 15% Since 1969, the top income tax bracket has ranged from a high of 77% to a low of 28%. 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 0% Top Marginal Income Tax Rate Source: Bureau of Labor Statistics, National Taxpayers Union 44 80% 70% 60% 50% 40% 30% 20% 10% But, over that same period, Federal tax revenue has averaged a constant 18% of GDP (plus/minus 2.3%). Federal Tax Revenue as % of GDP 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 1973 1971 1969 0% Top Marginal Income Tax Rate Source: Bureau of Labor Statistics, National Taxpayers Union 45 Conventional Wisdom The government needs to raise taxes to balance the budget. Data Regardless of tax rates, the government collects tax revenue that is a fixed 18% of GDP. 46 Conventional Wisdom We need stimulus spending to jump-start the economy. 47 A 1% increase in the size of the Federal government reduces per-capita GDP by $4,000 (in 2008 dollars). Source: U.S. Census Bureau 48 Conventional Wisdom We need stimulus spending to jump-start the economy. Data Stimulus spending causes the economy to contract. 49 Conventional Wisdom Corporations spend a lot of money lobbying Congress. 50 Millions Top Donors to Political Candidates and Parties (1989-2009) $600 $500 Labor unions have given twice as much money to politicians as the Telecommunications, Insurance, Tobacco, Pharmaceuticals, and Real Estate industries combined. $400 $300 $200 $100 $0 Source: www.opensecrets.org 51 Millions Top Donors to Political Candidates and Parties (1989-2009) $600 $500 Labor unions and lawyers give more than 90% of their donations to Democrats. $400 $300 The investment, telecommunications, insurance, and real estate industries split their donations evenly between the two parties. $200 Tobacco, pharmaceuticals, and oil give 75% of their donations to Republicans. $100 $0 Donations to Democrats Donations to Republicans Source: www.opensecrets.org 52 Conventional Wisdom Corporations spend a lot of money lobbying Congress. Data Labor unions significantly outspend corporations. 53 Conventional Wisdom Something is wrong about the rising cost of health care. 54 400.0 350.0 The price of medical care has increased 350% since 1980 versus 135% for other consumer prices. 300.0 250.0 200.0 150.0 100.0 50.0 Price of Medical Care 2006 2003 2004 2005 2001 2002 1998 1999 2000 1996 1997 1993 1994 1995 1991 1992 1988 1989 1990 1986 1987 1983 1984 1985 1981 1982 1980 0.0 Consumer Prices Excluding Medical Care Source: Bureau of Labor Statistics (www.economy.com) 55 Millions 2.9 2.7 2.5 If we had the same mortality rates today that we had in 1960, 400,000 more people would die each year. These 400,000 lives (annually) is what the higher cost of health care buys. 2.3 400,000 lives saved annually 2.1 1.9 1.7 Actual Deaths in the Current Year 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 1960 1.5 Deaths at the 1960 Mortality Rate Source: Derived from Statistical Abstract of the United States, and the Bureau of Economic Analysis. 56 Conventional Wisdom Something is wrong about the rising cost of health care. Data The rising cost of health care is the price we pay for living ever longer lives. 57 Conventional Wisdom Many people are uninsured. 58 Uninsured (15% of the population) Insured Source: Bureau of Labor Statistics, Census Bureau 59 Uninsured (12% of the population) Medicaid or SCHIP Eligible Claim to be Uninsured but Aren't Insured Source: Bureau of Labor Statistics, Census Bureau 60 Uninsured Less Than 4 Months 18 to 34 and Childless Uninsured (4% of the population) Medicaid or SCHIP Eligible Claim to be Uninsured but Aren't If we count one-third of this group, the uninsured are between 6% and 8% of the population depending on whether or not we count this group. Insured Source: Bureau of Labor Statistics, Census Bureau 61 Conventional Wisdom Many people are uninsured. Data Some people are uninsured, but not nearly as many as people claim. 62 How to Think Constructively • When thinking about economic policy, start from first principles and let the principles guide you to conclusions. • Avoid making assumptions about “the way the world works”. • Avoid accepting statement of facts without recourse to data. 63 Religion, Politics, Biology, and Economics: The Struggle of Reason with Emotion December 2, 2010 copies of this presentation can be found at www.antonydavies.org 64