Monthly Archives: November 2011

Time Preference A Day After Thanksgiving

I can’t connect Thanksgiving and economics quite as easily as Gary North can without copying others’ ideas so I’m going to stretch this one 🙂

Time itself is a scarce good that must be economized — that is, an individual must choose to act with his highest values respective of the amount of time it takes to act. All other things equal, any good will be preferred sooner rather than later. This is the universal fact of time preference.

Immediate counter-examples may be brought up: some people prefer ice cream during the summer over ice cream in the winter. Since it is November right now, doesn’t that invalidate time preference? After all, I would prefer the good, in this case, ice cream, later (during summer) rather than sooner (during winter).

This type of argument confuses the concept of a “good” with its physical properties. The good, ice cream during summer, is actually a different good than the good, ice cream during winter. In this case, ice cream over summer has so much more value over ice cream over winter that a person will choose to wait till summer rather than having it sooner or immediately.We can think about this differently by replacing the word “good” with the word “satisfaction”. A person will prefer to have any given satisfaction sooner rather than later. In this case, the satisfactions are different; hence, they are not the same good.

Another example that may be brought up is preferring to wait until next year’s Thanksgiving rather than celebrating it today, the day after Thanksgiving (this example works much better with birthdays but bare with me). If I had to choose, I wouldn’t pick to celebrate Thanksgiving two days in a row and then be “forced”(obviously we could celebrate two days in a row and still celebrate next year’s Thanksgiving but we are assuming one or the other must be picked) to skip the next year’s Thanksgiving. I would rather celebrate Thanksgiving on the actual day rather than having it sooner.

This argument also confuses the concept of a good, but it also confuses the concept of timing with the concept of time preference (we can apply this to the previous argument as well). The timing of Thanksgiving plays a role in how much it is valued: a person generally will value any holiday on its actual date (its timing) rather than celebrating it sometime earlier on a different date. Time preference still holds in that, if a person could truly have the good Thanksgiving (with its timing on Thanksgiving) sooner rather than later, he would, but it is impossible.

As we can see, time preference is not a concept that can be denied (much like the “fact” of heterogeneous subjective values during exchange). However, instead we may compare different levels of time preference: low time preference versus high time preference. Just like subjective values, we cannot put a number on time preference: for example, we cannot say that Mary has 7 time preference and Bill has 5.4 time preference. However, we can say Bill has a low time preference and Mary has a high time preference and we can compare their time preferences by saying Bill’s time preference is lower. So if Bill was willing to wait a day to receive satisfaction from eating an apple, whereas Mary was only willing to wait 10 minutes to receive the same satisfaction from eating an apple, we could say Bill has a lower time preference than Mary.

Note: There is an inherent problem in comparing time preferences because we do not know if Bill and Mary have equal satisfactions or if their satisfactions received from eating the apples are different so it would be truly difficult to compare their time preferences. We have ignored this problem for simplification purposes.

Also if anyone is interested in learning praxeology, you can check out praxgirl on YouTube.

It may be tough to follow and completely comprehend each lesson in one watching, so if you have to watch it multiple times to understand some of the concepts, don’t be frustrated. For more serious learners of economics, I would recommend buying a copy of Man, Economy, and State with Power and Market by Murray N. Rothbard. (there are free pdf and audio links in that link as well).

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Why Herman Cain’s 9-9-9 Plan is Actually 9-9-9-9-9

Ask Herman Cain a question about economics and you’re bound to get an answer containing the phrase “9-9-9”.

Or various forms of “I don’t know” but I think that’s mainly for foreign policy and sexual harassment allegations.

Unfortunately for Herman Cain, 9-9-9 is actually a complete lie. Nevermind the fact Cain likes to deny that relatively poor people will have to pay much more in taxes than before if his tax code is actually revenue neutral, but there are actually two more 9’s in his plan that he conveniently forgets to mention. The first is unique to Herman Cain, and the second is a tax all politicians like to overlook.

Peter Schiff exposes the 4th 9 by pointing out Cain’s “plan eliminates the deductibility of wages and salaries from corporate income.” The effect this produces is a brand new 9% payroll tax. To explain this more clearly, Cain’s plan eliminates the entire tax code and replaces it with a 9% personal income tax, 9% sales tax, and 9% corporate tax. However, by eliminating the deductability of wages and salaries from corporate income, an additional 9% payroll tax is created, because corporations will essentially pass on this tax to the wages of wage earners.

For example, take our current payroll taxes for Social Security and Medicare. A common belief is that the employee pays half of these payroll taxes and the employer pays the other half. But the actual truth is that 100% comes out of the employee’s income. The half that the employer pays also simply comes out of the employee’s wage because the employer will now pay the employee a lower wage to make up for the fact that he/she now needs to pay a payroll tax. The same effect is produced by eliminating the deductability of wages/salaries from the corporate income tax (corporations will lower wages by whatever amount they have to pay in additional taxes because of the elimination of wage deductability).

As for the 5th 9:

Notice Ron Paul and Rick Santorum (probably because of Paul’s reaction) snickering when Cain gives his answer. I think it would be safe to say we would have an additional 9% inflation tax if Cain was in office. Greenspan blew up two of the biggest bubbles in our history, the dotcom bubble and the housing bubble. Actually, 9% is probably an understatement, I think it’d be more responsible to call it something like 9-9-9-9-20 (perhaps still understating).

More on the Minimum Wage and Obama’s attempted Christmas tree tax

I should think if I make a post on the minimum wage, I should acknowledge the most common argument for it. It’s not that the minimum wage can’t raise wages, but rather that it generally can’t do so without causing unemployment.

In a free and open market, wages tend toward the workers’ respective MRPs (what they contribute). If a worker’s wage is less than their MRP, that means their employer is receiving a profit; these profits invite more firms in until the profits are non-existent. Therefore profits tend toward zero while wages tend toward MRP.

Obviously though, there is a possibility that a worker’s wage will be lower than their MRP. If the government institutes a minimum wage of 7 dollars, for example, there are people whose wages can be raised, perhaps if they’re earning $6.50 while being able to produce $7.50. Meanwhile though, all workers unable to produce $7.00 will be unemployed.

The problem with the minimum wage is that, in addition to unemploying these specific workers, is that it will reduce the previously mentioned tendency of wages tending toward MRP. This is because the minimum wage is a harmful regulation. Businesses will be unable to hire specific people that would help contribute to a successful business. By mandating that employers must pay all employees a certain amount, certain employees will be not be hire-able. New businesses will have tougher start-ups, and therefore the tendency for wages to equal MRP will be diminished. I call this the interventionist paradox. An imposition of the minimum wage is created (supposedly) to raise wages, but ends up causing unemployment and lower wages.

Anyway, found this hilarious post over at the EPJ about the Agricultural Department trying to institute a 15-cent charge on Christmas trees. Apparently the reason for the tax is to run a ““program of promotion, research, evaluation, and information designed to strengthen the Christmas tree industry’s position in the marketplace; maintain and expend existing markets for Christmas trees; and to carry out programs, plans, and projects designed to provide maximum benefits to the Christmas tree industry” (7 CFR 1214.46(n)).  And the program of “information” is to include efforts to “enhance the image of Christmas trees and the Christmas tree industry in the United States””. It’s apparently now being delayed, but it’s hilarious nevertheless.