Download Conventional Wisdom versus The Data

Conventional Wisdom versus The Data
August 22, 2011
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1
The Players and the Goals
In this experiment, each team controls a firm that sells a
product.
Firms select what price to charge.
 Lower price means consumers purchase more units.
 Higher price means consumers purchase fewer units.
The Players and the Goals
Goal: Make the most profit possible.
Profit = Revenue – Cost
(Price per unit) (Units sold)
($1) (Units sold)
Example
This is the
demand for your
product.
Choose what price
to charge so as to
maximize your
profit.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Example
Suppose you charge
$10.00 per unit.
How many units will you
sell?
86
What is your revenue?
($10) (86) = $860
What is your cost?
($1) (86) = $86
What is your profit?
$860 – $86 = $774
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Example
Suppose you charge
$20.00 per unit.
How many units will you
sell?
44
What is your revenue?
($20) (44) = $880
What is your cost?
($1) (44) = $44
What is your profit?
$880– $44 = $836
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Example
Suppose you charge
$10.00 per unit.
Profit = $774
Suppose you charge
$20.00 per unit.
Profit = $836
Of these, $20.00 is the
better price to charge.
Round 1
Choose the
price you will
charge for your
product.
Every unit you
sell costs you
$1 to produce.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Round 1
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Revenue
$68.50
$134.00
$196.50
$256.00
$312.50
$369.00
$420.00
$468.00
$513.00
$560.00
$599.50
$636.00
$676.00
$707.00
$735.00
$768.00
$790.50
$819.00
$836.00
$860.00
$882.00
$891.00
$908.50
$924.00
$925.00
$936.00
$945.00
$952.00
$957.00
$960.00
Cost
$137.00
$134.00
$131.00
$128.00
$125.00
$123.00
$120.00
$117.00
$114.00
$112.00
$109.00
$106.00
$104.00
$101.00
$98.00
$96.00
$93.00
$91.00
$88.00
$86.00
$84.00
$81.00
$79.00
$77.00
$74.00
$72.00
$70.00
$68.00
$66.00
$64.00
Profit
($68.50)
$0.00
$65.50
$128.00
$187.50
$246.00
$300.00
$351.00
$399.00
$448.00
$490.50
$530.00
$572.00
$606.00
$637.00
$672.00
$697.50
$728.00
$748.00
$774.00
$798.00
$810.00
$829.50
$847.00
$851.00
$864.00
$875.00
$884.00
$891.00
$896.00
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Revenue
$945.50
$944.00
$940.50
$935.00
$927.50
$918.00
$925.00
$912.00
$897.00
$880.00
$861.00
$840.00
$838.50
$814.00
$787.50
$782.00
$752.00
$744.00
$710.50
$700.00
$663.00
$650.00
$609.50
$594.00
$550.00
$532.00
$513.00
$464.00
$442.50
$420.00
Cost
$61.00
$59.00
$57.00
$55.00
$53.00
$51.00
$50.00
$48.00
$46.00
$44.00
$42.00
$40.00
$39.00
$37.00
$35.00
$34.00
$32.00
$31.00
$29.00
$28.00
$26.00
$25.00
$23.00
$22.00
$20.00
$19.00
$18.00
$16.00
$15.00
$14.00
Profit
$884.50
$885.00
$883.50
$880.00
$874.50
$867.00
$875.00
$864.00
$851.00
$836.00
$819.00
$800.00
$799.50
$777.00
$752.50
$748.00
$720.00
$713.00
$681.50
$672.00
$637.00
$625.00
$586.50
$572.00
$530.00
$513.00
$495.00
$448.00
$427.50
$406.00
Round 2: Tax the Consumers
In this round, consumers will pay an additional $5 per unit tax.
You choose a price. The consumers pay that price per unit to you plus
they pay another $5 per unit to the government.
Round 2
In this round,
consumers will pay
an additional $5 per
unit tax.
If you charge $7, how
many units will
consumers buy?
77
What is your revenue?
($7) (77) = $539
What is your cost?
($1) (77) = $77
What is your profit?
$539 – $77 = $462
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
Price per Unit
Quantity Sold
137
$15.50
61
134
$16.00
59
131
$16.50
57
128
$17.00
55
125
$17.50
53
123
$18.00
51
120
$18.50
50
117
$19.00
48
114
$19.50
46
You
112charge $7.
$20.00
44
109
$20.50
42
106
$21.00
40
104
$21.50
39
101
$22.00
37
98
$22.50
35
96
$23.00
34
93
$23.50
32
91
$24.00
31
88
Consumers
pay $7$24.50
+ $5 = $12. 29
86
$25.00
28
84
$25.50
26
81
$26.00
25
79
$26.50
23
77
$27.00
22
74
$27.50
20
72
$28.00
19
70
$28.50
18
Consumers
buy 77 units.
68
$29.00
16
66
$29.50
15
64
$30.00
14
Round 2
Choose the price
you will charge for
your product.
The consumer
pays your price
plus another $5 to
the government.
Every unit you sell
costs you $1 to
produce.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Round 2: Tax the Consumers
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
61
59
57
55
53
51
50
48
46
44
Revenue
$54.50
$106.00
$156.00
$202.00
$245.00
$288.00
$325.50
$364.00
$396.00
$430.00
$462.00
$486.00
$513.50
$539.00
$555.00
$576.00
$595.00
$612.00
$627.00
$640.00
$640.50
$649.00
$655.50
$660.00
$662.50
$663.00
$675.00
$672.00
$667.00
$660.00
Cost
$109.00
$106.00
$104.00
$101.00
$98.00
$96.00
$93.00
$91.00
$88.00
$86.00
$84.00
$81.00
$79.00
$77.00
$74.00
$72.00
$70.00
$68.00
$66.00
$64.00
$61.00
$59.00
$57.00
$55.00
$53.00
$51.00
$50.00
$48.00
$46.00
$44.00
Profit
($54.50)
$0.00
$52.00
$101.00
$147.00
$192.00
$232.50
$273.00
$308.00
$344.00
$378.00
$405.00
$434.50
$462.00
$481.00
$504.00
$525.00
$544.00
$561.00
$576.00
$579.50
$590.00
$598.50
$605.00
$609.50
$612.00
$625.00
$624.00
$621.00
$616.00
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
Quantity Sold
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Revenue
$651.00
$640.00
$643.50
$629.00
$612.50
$612.00
$592.00
$589.00
$565.50
$560.00
$533.00
$525.00
$494.50
$484.00
$450.00
$437.00
$423.00
$384.00
$367.50
$350.00
Cost
$42.00
$40.00
$39.00
$37.00
$35.00
$34.00
$32.00
$31.00
$29.00
$28.00
$26.00
$25.00
$23.00
$22.00
$20.00
$19.00
$18.00
$16.00
$15.00
$14.00
Profit
$609.00
$600.00
$604.50
$592.00
$577.50
$578.00
$560.00
$558.00
$536.50
$532.00
$507.00
$500.00
$471.50
$462.00
$430.00
$418.00
$405.00
$368.00
$352.50
$336.00
Round 3: Tax the Firms
In this round, firms will pay a $5 per unit tax for every unit they
sell.
The price you charge is the price consumers pay.
Round 3
In this round, firms will
pay a $5 per unit tax.
Your cost per unit is
now $1 (for the unit)
plus another $5 (for
the tax).
If you charge $9,
how many units will
consumers buy?
91
What is your revenue?
($9) (91) = $819
What is your cost?
($1) (91) + ($5)(91) =
$546
What is your profit?
$819 – $546 = $273
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Round 3
Choose the
price you will
charge for your
product.
Every unit you
sell costs you
$1 to produce.
In addition, you
pay the
government $5
for each unit
you produce.
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Round 3: Tax the Firms
Price per Unit
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
$8.50
$9.00
$9.50
$10.00
$10.50
$11.00
$11.50
$12.00
$12.50
$13.00
$13.50
$14.00
$14.50
$15.00
Quantity Sold
137
134
131
128
125
123
120
117
114
112
109
106
104
101
98
96
93
91
88
86
84
81
79
77
74
72
70
68
66
64
Revenue
$68.50
$134.00
$196.50
$256.00
$312.50
$369.00
$420.00
$468.00
$513.00
$560.00
$599.50
$636.00
$676.00
$707.00
$735.00
$768.00
$790.50
$819.00
$836.00
$860.00
$882.00
$891.00
$908.50
$924.00
$925.00
$936.00
$945.00
$952.00
$957.00
$960.00
Cost
$822.00
$804.00
$786.00
$768.00
$750.00
$738.00
$720.00
$702.00
$684.00
$672.00
$654.00
$636.00
$624.00
$606.00
$588.00
$576.00
$558.00
$546.00
$528.00
$516.00
$504.00
$486.00
$474.00
$462.00
$444.00
$432.00
$420.00
$408.00
$396.00
$384.00
Profit
($753.50)
($670.00)
($589.50)
($512.00)
($437.50)
($369.00)
($300.00)
($234.00)
($171.00)
($112.00)
($54.50)
$0.00
$52.00
$101.00
$147.00
$192.00
$232.50
$273.00
$308.00
$344.00
$378.00
$405.00
$434.50
$462.00
$481.00
$504.00
$525.00
$544.00
$561.00
$576.00
Price per Unit
$15.50
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
$19.50
$20.00
$20.50
$21.00
$21.50
$22.00
$22.50
$23.00
$23.50
$24.00
$24.50
$25.00
$25.50
$26.00
$26.50
$27.00
$27.50
$28.00
$28.50
$29.00
$29.50
$30.00
Quantity Sold
61
59
57
55
53
51
50
48
46
44
42
40
39
37
35
34
32
31
29
28
26
25
23
22
20
19
18
16
15
14
Revenue
$945.50
$944.00
$940.50
$935.00
$927.50
$918.00
$925.00
$912.00
$897.00
$880.00
$861.00
$840.00
$838.50
$814.00
$787.50
$782.00
$752.00
$744.00
$710.50
$700.00
$663.00
$650.00
$609.50
$594.00
$550.00
$532.00
$513.00
$464.00
$442.50
$420.00
Cost
$366.00
$354.00
$342.00
$330.00
$318.00
$306.00
$300.00
$288.00
$276.00
$264.00
$252.00
$240.00
$234.00
$222.00
$210.00
$204.00
$192.00
$186.00
$174.00
$168.00
$156.00
$150.00
$138.00
$132.00
$120.00
$114.00
$108.00
$96.00
$90.00
$84.00
Profit
$579.50
$590.00
$598.50
$605.00
$609.50
$612.00
$625.00
$624.00
$621.00
$616.00
$609.00
$600.00
$604.50
$592.00
$577.50
$578.00
$560.00
$558.00
$536.50
$532.00
$507.00
$500.00
$471.50
$462.00
$430.00
$418.00
$405.00
$368.00
$352.50
$336.00
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
In round 3, the government taxed the firms $5.
Won’t firms just pass the tax on to consumers?
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
Firms pass part of the tax ($3.50) on to consumers but
pay the remainder of the tax ($1.50) out of their profits.
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
In round 2, the government taxed the consumers $5.
Won’t consumers be forced to pay the full $5 tax?
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
Firms pay part of the tax ($1.50) out of their profits and
leave consumers to pay the remainder of the tax ($3.50).
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
Lesson #1: The government has no control over who ultimately
pays a tax.
(even when the firm is a monopoly)
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
When there was no tax, consumers bought 64 units.
A $5 per unit tax should generate ($5)(64) = $320 in tax revenue.
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
Instead of raising $320 in tax revenue,
the government only raises $250.
Results
Retail Price
Per Unit Tax on Consumers
Firms
Per Unit Tax on Producers
No Tax
$15.00
$0.00
$0.00
Price Consumer Pays
Firm Receives
Price Producer
Receives
$15.00
$15.00
$18.50
$13.50
$18.50
$13.50
64
$0.00
50
$250.00
50
$250.00
Units Sold
Tax Revenue
Tax Consumers Tax Producers
$13.50
$18.50
$5.00
$0.00
$0.00
$5.00
Lesson #2: The government determines the tax rate, not the tax
revenue.
(regardless of whom it taxes)
Lesson #1: The government has no control over who ultimately
pays a tax.
Lesson #2: The government determines the tax rate, not the tax
revenue.
Conventional Wisdom #1
The government is financially sound.
27
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Data sources: US Department of the Treasury, CIA World Factbook
28
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Data sources: US Department of the Treasury, CIA World Factbook
29
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$5.0
$4.5
$4.0
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
Data sources: US Department of the Treasury, CIA World Factbook
30
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
31
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
32
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$16
$14
$12
$10
$8
$6
$4
$2
$0
Data sources: US Department of the Treasury, CIA World Factbook
33
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$35
$30
$25
$20
$15
$10
$5
$0
Data sources: US Department of the Treasury, CIA World Factbook
34
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$70
$60
$50
$40
$30
$20
$10
$0
Data sources: US Department of the Treasury, CIA World Factbook
35
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
2010 Federal Revenues
Trillions
$70
$60
$50
$40
$30
$20
$10
$0
Data sources: US Department of the Treasury, CIA World Factbook
36
At current rates, the annual interest
cost from borrowing this sum is 100%
of Federal tax revenues.
$60
$50
In other words, it is mathematically
impossible for the government to
honor its debt and obligations.
$40
$30
$20
$10
Germany's GDP
Intergovernmental Debt
China's GDP
Japan's GDP
Debt Held by the Public
United States' GDP
European Union's GDP
Unfunded Social Security
Obligations
Unfunded Medicare
Obligations
Earth's GDP
Total Debt and Unfunded
Obligations
$0
2010 Federal Revenues
Trillions
$70
Data sources: US Department of the Treasury, CIA World Factbook
37
450%
1790
1795
1800
1805
1810
1815
1820
1825
1830
1835
1840
1845
1850
1855
1860
1865
1870
1875
1880
1885
1890
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Federal Debt per GDP
Federal Debt and Unfunded Obligations as a Fraction of GDP
You are here.
400%
350%
300%
250%
200%
150%
100%
50%
0%
Data source: TreasuryDirect.gov, MeasuringWorth.com
38
In perspective…
The President’s 2012 budget included a $300 million
cut in Community Development Block Grants.
The cuts will fund the government
for a total of 45 minutes.
39
Billions
$2,000
$1,500
$1,000
$500
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
1950
$0
-$500
Federal tax revenues = $2.2 trillion
Income = $50,000
Federal spending = $3.8 trillion
Spending = $86,000
Federal debt = $14.6 trillion
Debt = $330,000
40
Conventional Wisdom #1
The government is financially sound.
The Data: The Law of Mathematics Rule
The amount of money the Federal government owes or has
promised exceeds the economic output of the entire planet.
It is mathematically impossible for the government to
honor its debt and obligations (even if it raises taxes).
41
Conventional Wisdom #1
The government is financially sound.
The Data: The 10-24 Rule
The government spends $10 billion every 24 hours.
42
Conventional Wisdom #2
The government has a debt problem.
43
What causes debt?
Deficit
Deficit
Deficit
Deficit
Debt
44
Billions
$2,000
Since 1950, the government has incurred
a deficit in every year except 1951.
$1,000
Conventional Wisdom #2a
The government had budget surpluses in the Clinton years.
The Data  Not.
$500
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
$0
1950
Federal Deficit
$1,500
-$500
Data source: US Department of the Treasury (public debt outstanding)
45
Conventional Wisdom #2
The government has a debt problem.
The Data: The Source of the Problem Rule
The debt is an effect. Deficits cause the debt.
46
Conventional Wisdom #3
The government has a deficit problem.
47
What causes deficit?
48
Perhaps we have a revenue problem.
?
Revenue
?
Revenue
Spending
?
Spending
Revenue
Deficit
Spending
Deficit
Deficit
Deficit
?
Revenue
Spending
Debt
49
Conventional Wisdom #3
The government has a deficit problem.
50
Federal revenue has risen 6.9% per year (on average).
$2,500
$2,000
$1,500
$1,000
$500
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
$0
1954
Billions
$3,000
Federal Revenue
Data source: US Department of the Treasury
51
Not fair. Prices have been rising over time.
52
Federal revenue has risen 3.3% faster than
inflation per year (on average).
$2,500
$2,000
$1,500
$1,000
$500
Federal Revenue
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
$0
1954
Billions
$3,000
Federal Revenue (adjusted for inflation)
Data source: US Department of the Treasury
53
Not fair. The population has been growing over time.
54
$10,000
Federal revenue per person has risen 2.2% faster
than inflation per year (on average).
$9,000
$2,500
$8,000
$7,000
$2,000
$6,000
$1,500
$5,000
$4,000
$1,000
$3,000
$2,000
$500
$1,000
Federal Revenue
Federal Revenue (adjusted for inflation)
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
$0
1956
$0
1954
Billions
$3,000
Federal Revenue (adjusted for inflation, per capita)
Data source: US Department of the Treasury
55
Conventional Wisdom #3
The government has a deficit problem.
The Data: The Rolling in Benjamins Rule
Tax revenue per-capita rises 2% faster than inflation.
56
Tax revenue may be rising,
but it isn’t rising fast enough.
To reduce the deficit, we need to raise tax rates.
57
Conventional Wisdom #4
Raising tax rates increases tax revenue.
58
Sources of Federal Revenue (as fraction of total revenue)
50%
45.5%
Personal income and payroll
taxes comprise more than 80%
of Federal tax revenue.
Sources of Federal Revenue (average 2000-2009)
45%
40%
36.5%
35%
30%
Recall Lesson #1
The government has no control
over who ultimately pays a tax.
25%
20%
15%
10.5%
10%
5%
3.2%
1.3%
1.1%
1.9%
0%
Personal Income
Tax
Social Insurance Corporate Income
Tax
Tax
Excise Tax
Estate and Gift Tax Customs Duties
Miscellaneous
Revenue
Data source: Congressional Budget Office
59
100%
This is the top marginal income tax
rate over time.
90%
80%
What would you expect tax revenue
as a fraction of GDP to be?
70%
60%
50%
40%
30%
20%
10%
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
60
100%
Many people would expect tax
revenue to fluctuate with the tax rate.
90%
80%
70%
60%
50%
40%
30%
20%
10%
Federal Revenue as % of GDP
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Marginal Income Tax Rate
61
100%
Some might expect tax revenue to
fluctuate inversely with the tax rate.
90%
80%
70%
60%
50%
40%
30%
20%
10%
Federal Revenue as % of GDP
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Marginal Income Tax Rate
62
100%
90%
80%
70%
60%
Recall Lesson #2
The government determines the
tax rate, not the tax revenue.
50%
40%
30%
20%
Regardless of tax rates, federal revenue
has remained at 18% (± 2%) of GDP.
10%
Federal Revenue as % of GDP
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
0%
Top Marginal Income Tax Rate
Data sources: Internal Revenue Service, Bureau of the Census
63
Top Marginal Rate
30%
50%
70%
Revenue per GDP
18%
18%
17%
Effective Corporate Rate
Revenue per GDP
< 25%
18%
25% to 35%
18%
> 35%
17%
Average Marginal Rate
30% to 35%
35% to 40%
40% to 45%
Revenue per GDP
17%
18%
18%
Capital Gains Rate
< 20%
20% to 30%
> 30%
Revenue per GDP
18%
17%
18%
SS & Medicare Rate
5% to 10%
10% to 15%
> 15%
Revenue per GDP
17%
17%
18%
Data sources: Internal Revenue Service, Bureau of the Census
64
Conventional Wisdom #4
Raising tax rates increases tax revenue.
The Data: The 18% Rule
Regardless of tax rates, tax revenue is 18% of GDP.
65
If revenue is a fixed 18% of GDP, then the debt problem
must really be a spending problem.
Revenue
Revenue
Spending
Spending
Revenue
Deficit
Deficit
Deficit
Deficit
Revenue
Spending
Spending
Debt
66
$12,000
The average price level has
risen 700% since 1954.
Annual Cost per Person
$10,000
$8,000
$6,000
$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
2010
$0
Average Price Level
Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis
67
$12,000
The average price level has
risen 700% since 1954.
Annual Cost per Person
$10,000
The per-person cost of the Federal
government has risen 3,000% since 1954.
$8,000
$6,000
$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
2010
$0
Average Price Level
Cost of Federal Government
Data sources: Bureau of Labor Statistics, Bureau of Economic Analysis
68
$12,000
Annual Cost per Person
$10,000
The average price level has
risen 700% since 1954.
The per-person cost of the Federal
government has risen 3,000% since 1954.
$8,000
$6,000
By comparison, the cost of health care
has only risen 2,000% since 1954.
$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
2010
$0
Average Price Level
Health Care
Cost of Federal Government
Data sources: Bureau of Labor Statistics, Bureau of the Census
69
Conventional Wisdom #2
The government has a debt problem.
The Data: The Source of the Problem Rule
The debt is an effect. Deficits cause the debt. Spending
causes deficits. The problem is spending.
70
Whatevs.
Government spending is rising because of wars,
NASA, subsidies to oil companies, [fill in your
favorite evil]…
Cut those from the budget and we’ll be fine.
71
Billions
2011 Federal Budget
$4,000
$3,500
$3,000
Discretnary
Spending
Everything
Else
Defense
$2,500
Food stamps, unemployment, child nutrition and tax
credits, supplemental security for disabled, student loans
Other
Mandatory
$2,000
Net Interest
$1,500
$1,000
Departments of Agriculture, Commerce, Education, Energy,
HHS, HUD, Interior, Justice, Labor, State, Transportation,
Treasury, Veteran Affairs, plus independent agencies, plus
Legislative branch, plus Judicial branch, etc.
Mandatory
Spending
Entitlements
Social Security,
Medicare, Medicaid
$500
$0
Federal Spending
Federal Revenue
Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget
72
Billions
2011 Federal Budget
$4,000
$3,500
$3,000
Everything
Else
Defense
$2,500
$2,000
$1,500
$1,000
Eliminating all
discretionary
spending
would still
leave a $230
billion deficit.
Other
Mandatory
Net Interest
Entitlements
$500
$0
Federal Spending
Federal Revenue
Data source: The President’s Budget for Fiscal Year 2011, Office of Management and Budget
73
Reconsider revenue
We only get 18% of GDP in revenue, so let’s stimulate GDP!
Spend more!
GDP grows!
18% x
=

74
Conventional Wisdom #5
Government spending stimulates the economy.
75
Federal Reserve =
$1,500 b.
TARP = $356 b.
Financial Initiatives =
$366 b.
Total (net) stimulus = $3 trillion
Housing Initiatives =
$130 b.
Stimulus = $578 b.
Data source: money.cnn.com/news/storysupplement/economy/bailouttracker/
76
Total (net) stimulus = $3 trillion
Unemployment Rate: 10%
8%
6%
9%
7%
77
Historically, how has the economy reacted to stimulus
spending?
78
Stimulus Spending and Economic Growth
4%
RGDP per Capita Growth
If stimulus spending
worked, we should see a
relationship like this.
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
-4%
Change in Federal Outlays as % of GDP
79
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
4%
RGDP per Capita Growth
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
Increased government spending does not
appear to increase economic activity.
-4%
Change in Federal Outlays as % of GDP
Data source: Bureau of Economic Analysis, National Income and Product Accounts
80
Maybe stimulus spending doesn’t have an immediate
effect. What is the effect over time?
81
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
RGDP per Capita Growth 1 Year Later
4%
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
Increased government spending does
not appear to increase economic
activity one year in the future.
-4%
Change in Federal Outlays as % of GDP
Data source: Bureau of Economic Analysis, National Income and Product Accounts
82
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
RGDP per Capita Growth 2 Years Later
4%
3%
2%
1%
0%
-6%
-4%
-2%
0%
2%
4%
6%
-1%
-2%
-3%
Increased government spending does
not appear to increase economic
activity two years in the future.
-4%
Change in Federal Outlays as % of GDP
Data source: Bureau of Economic Analysis, National Income and Product Accounts
83
Maybe stimulus spending’s effects are cumulative. What
is the cumulative effect?
84
Stimulus Spending and Economic Growth (1954.1 to 2011.1)
RGDP per Capita Growth 1 Year Later
(8QMA)
2%
-0.6%
Increased government spending
appears to have a negative
cumulative effect over 8 quarters.
2%
1%
1%
-0.4%
0%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
-1%
-1%
Change in Federal Outlays as % of GDP (8Q Moving Average)
Data source: Bureau of Economic Analysis, National Income and Product Accounts
85
Conventional Wisdom #5
Government spending stimulates the economy.
Data: The Keynes-was-wrong-and-that’s-why-we-don’tteach-him-anymore Rule
On average, government spending suppresses the economy.
86
We have to do something! The rich are getting richer and
the poor are getting poorer!
87
Conventional Wisdom #6
The rich get richer while the poor get poorer.
88
Incomes are in 2006 dollars.
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
89
Incomes are in 2006 dollars.
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
90
Incomes are in 2006 dollars.
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
91
wtf?
92
Fraction of Total Income Received by Each Fifth
50%
45%
46.6%
The rich get richer and
the poor get poorer.
49.7%
40%
35%
30%
25%
20%
15%
10%
5%
3.8%
3.4%
0%
Poorest
Quintile
Lowest Quintile
Highest
Richest Quintile
Quintile
2000
2007
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678.
93
70
60
65.7
The old get older and
the young get younger.
66.8
Average Age
50
40
30
20
10
7.1
6.9
0
Youngest
Quintile
Lowest Quintile
Highest
Quintile
Oldest Quintile
2000
2010
Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9.
94
Source: Pew Economic Mobility Project
95
Conventional Wisdom #6
The rich get richer while the poor get poorer.
Data: The Poor Get Richer Rule
The rich get richer and the poor get richer (and the poor
get richer faster than the rich get richer).
96
Conventional Wisdom #7
Trade costs American jobs.
97
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
Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis
98
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
Data sources: Bureau of Labor Statistics and Bureau of Economic Analysis
99
Conventional Wisdom #7
Trade costs American jobs.
Data: The Trade is Made of Win Rule
Trade is associated with less unemployment and improved
wages.
100
Conventional Wisdom #8
The minimum wage helps minimum wage workers.
101
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
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
102
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
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
103
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
Data sources: Statistical Abstract of the United States and Bureau of Labor Statistics
104
Conventional Wisdom #8
The minimum wage helps minimum wage workers.
Data: The Stick It to the Uneducated Rule
The minimum wage causes unemployment and the effect
is most pronounced among the least educated.
105
Lesson #1
The government has no control over who ultimately pays a tax.
Lesson #2
The government determines the tax rate, not the tax revenue.
106
Advice from an Economist
The Law of Mathematics Rule
Remember the Rules
The 10-24 Rule
• Conventional wisdom is
frequently wrong. Don’t
trust it.
The Source of the Problem Rule
The Rolling in Benjamins Rule
The 18% Rule
The KWWATWWDTHA Rule
The Poor Get Richer Rule
The Trade is Made of Win Rule
The Stick It to the Uneducated Rule
• Check the facts (most
importantly, those that
people think are most
obvious).*
• Hold politicians accountable
to the facts.
*
A good source of raw data is freelunch.com
A good source of processed data is antonydavies.org
107
Conventional Wisdom versus The Data
August 22, 2011
copies of this presentation can be found at
www.antonydavies.org
108