Week 9 - Economic Freedom and Human Flourishing

Day 1 - Getting Started

Would Americans be better off if they bought less from foreigners? Would employment in the United States be greater if the government imposed higher trade barriers to restrict imports?
We need to be less dependent, but if scarce resources can be developed more efficiently in another country, we might need to buy more from foreigners. But we need to be sure that we are purchasing these items from countries that treat their employees fairly. (no slave labor)
Considering what you already understand about specialization of labor, comparative advantage and trade, evaluate the following statement and explain why you either agree or disagree with it. “Cheap goods from China are destroying the American economy. If we are going to reduce the unemployment rate and maintain our living standard, we must stop the Chinese from selling goods at such low prices in the United States. If I am elected, I will fight hard for a 50 percent tariff that will save American jobs for American workers.”
I disagree. Some things may be cheaper to produce in China than in America. And the consumer benefits from low prices. Also, if people want and can afford products made in America that are typically made in China, they are free to do so. With a tariff, you are raising prices and forcing Americans to buy something from somewhere for a higher price.

Day 2 - Paying Their Fair Share?

Let's Talk Taxes
1. What is the “marginal tax rate”?
The "marginal tax rate" "is the share of additional income that is taxed away at any given income level" (84).
2. What are three reasons high marginal tax rates will reduce output [productivity] and income?
The three reasons why high marginal tax rates will reduce output and income are as follows: 1. High "marginal tax rates discourage work effort and reduce the productivity of labor...When people are not allowed to keep much of what they earn, they tend not to earn very much" (85). Many "younger people who have not already made costly investments in specialized training will be discouraged from doing so by high marginal tax rates. Thus, some of the negative effects of high tax rates on work effort will be felt in the form of reduced productivity for many years in the future" (85). Furthermore, high "tax rates will...cause some people to shift to activities in which they are less productive because they do not have to pay taxes on them" (86). 2. High "marginal tax rates will reduce both the level and efficiency of capital formation. High tax rates repel foreign investment and cause domestic investors to search for investment projects abroad where both taxes and production costs are lower than at home...Domestic investors will also turn to projects that shelter current income from taxation, and away from projects with a higher rate of return but fewer tax-avoidance benefits" (86). 3. High "marginal tax rates encourage individuals to consume tax-deductible goods in place of nondeductible goods, even though the nondeductible goods may be more desirable. When purchases are tax deductible, individuals who purchase them do not bear their full cost, because the expenditure reduces the taxes they would otherwise pay. When marginal tax rates are high, tax-deductible expenditures become relatively cheap" (86). This means that high "marginal rates artificially reduce the personal cost, but not the cost to society, of items that are tax deductible or that can be taken as a business expense...Waste and inefficiency are byproducts of high marginal tax rates and the perverse incentives they generate" (87).
3. How do tax shelters contribute to reducing the level of capital formation?
Tax shelters contribute to reducing the level of capital formation by causing "domestic investors to search for investment projects abroad where both taxes and production costs are lower than at home. This reduces investment and the availability of productive equipment, which provides the fuel for economic growth" (86). Furthermore, tax shelters contribute to reducing the level of capital formation by causing domestic "investors [to] turn to projects that shelter current income from taxation, and away from projects with a higher rate of return but fewer tax-avoidance benefits" (86). Scarce "capital is wasted, and resources are channeled away from their most productive uses" (86).
4. What followed each of the three major tax rate reductions in the 1920s, 1960s and 1980s?
Strong "and lengthy expansions in real output" (87) followed each of the three major tax rate reductions in the 1920s, 1960s, and 1980s.
5. What was the result of the tax rate increase under the Hoover administration and the Democratic Congress during the Great Depression?
The tax rate increase under the Hoover administration and the Democratic Congress during the Great Depression led to the reduction in "the after-tax income of households and the incentive to earn, consume, save, and invest. The results were catastrophic. In 1932, real output fell by 13 percent, the largest single-year decline during the Great Depression era. Unemployment rose from 15.9 percent in 1931 to 23.6 percent in 1932" (88).
6. What fact discredits Myth # 5: “Tax cuts simply pad the pockets of the rich without helping a weak economy?”
The fact is that smart "tax cuts encourage work, savings, and investment to help stimulate economic growth that benefits people across the board" (2). While some "argue hat cutting taxes and tax rates doesn't help a weak economy and might even make it worse by increasing deficits" (2), the truth is that this "ignores the way in which people at all income levels benefit when the overall economy grows---which happens when taxes are cut and people have more money in their pockets. As we have seen, government spending does not increase income; it merely diverts income from some people to others" (2).
7. What is the difference between a “proportional tax” and a “progressive tax”?
An example of a "proportional tax" is "the proposed flat tax. With a flat tax...someone earning $40,000 might pay $4,000 in tax and someone earning $80,000 would pay $8,000 in tax. Each faces a 10 percent tax rate" (2). On the other hand, "a progressive tax system, such as the system we have in the United States, imposes higher and higher tax rates on people that have higher incomes. So the individual earning $80,000 might pay $16,000 in tax---a 20 percent rate---while those earning less pay taxes at a lower rate" (2).
8. What must public officials do in order to put the country back on the road to sustained prosperity?
In order to put the country back on the road to sustained prosperity, public officials must "pay attention to the lessons of history and common sense, avoid short-term "stimulus" gimmicks, and instead enact reality-based economic reforms" (4).

Economy Hits Home: Economic Growth Pt. 2 by Jay Richards

Day 3 - Free Trade

The Role of Freedom in Prosperity
9. What are the three major reasons international trade makes it possible for each of the trading partners to produce and consume more goods and services than would otherwise be possible?
The three major reasons are as follows: 1. The "people of each nation benefit if they can acquire a product or service through trade more cheaply than they can produce it domestically. Resource endowments differ substantially across countries. Goods that are costly to produce in one country may be economical to produce in another" (90). Therefore, trade "will permit each of the trading partners to use more of their resources to produce and sell things they do well rather than having them tied up producing things at a high cost. As a result of this specialization and trade, total output increases and people in each country are able to achieve a higher standard of living than would otherwise be attainable" (90). 2. International "trade allows domestic producers and consumers to benefit from the economies of scale typical of many large operations. This point is particularly important for small countries. With international trade, domestic producers can operate on a larger scale and therefore achieve lower per-unit costs than would be possible if they were solely dependent on their domestic market" (90). Also, international trade "allows domestic consumers to benefit by purchasing from large-scale producers abroad" (91). 3. International "trade promotes competition in domestic markets and allows consumers to purchase a wider variety of goods at lower prices. Competition from abroad keeps domestic producers on their toes. It forces them to improve the quality of their products and keep costs down" (91). Simultaneously, "the variety of goods available from abroad provides consumers with a much greater array of choices than would be available without international trade" (91).
10. Explain why domestic firms engaging in international trade will often be able to achieve lower per unit costs than if they produced only for the domestic market?
Domestic firms engaging in international trade will often be able to achieve lower per-unit costs than if they produced only for the domestic market for multiple reasons. First of all, the international market for any given product is usually much larger than the domestic market for that product. This means that domestic firms simply have more potential customers when they sell their products internationally. Second of all, when domestic firms have a larger market, they have a reason to produce more units of their product. The more units they produce, the better they are able to take advantage of economies of scale and large-scale production, thereby lowering the cost of each unit of product. A cheaper product is usually more appealing to consumers, so the firm will likely attract more customers.
11. How does competition from abroad affect domestic producers and consumers?
Competition from abroad affects domestic producers by keeping them "on their toes. It forces them to improve the quality of their products and keep costs down" (91). Competition from abroad affects domestic consumers by providing them "with a much greater array of choices than would be available without international trade" (91).
12. Define the terms “tariff” and “quota” and “exchange rate controls,” and explain how they affect trade.
Tariffs are "taxes on imported goods" (91), quotas are "limits on the amount imported" (91), and exchange rate controls are the artificial "holding down [of] the value of the domestic currency to discourage imports and encourage exports" (91). (Note: The exchange rate is the "domestic price of one unit of foreign currency" (240).) Tariffs, quotas, and exchange rate controls "increase transaction costs and reduce the gains from exchange" (91). They "are like a military blockade that a nation imposes on its own people. Just as a blockade imposed by an enemy will harm a nation, imposing a blockade in the form of trade restrictions also harms the nation (91).
13. If the United States imposes higher tariffs, more restrictive quotas, and other trade restrictions on imports, how will the volume of U.S. exports be affected?
If the United States imposes higher tariffs, more restrictive quotas, and other trade restrictions on imports, the United States is "limiting the ability of foreigners to sell in the United States" (92). This means that the United States is "simultaneously reducing foreigners' ability to buy from Americans. Our imports provide people in other countries with the purchasing power they need to buy our exports. If foreigners sell less to Americans, they will have fewer of the dollars required to buy from Americans" (92). Therefore, "import restrictions will indirectly reduce exports. Output and employment in export industries will decline" (92).
14. What misundertsanding is responsible for the view that U.S. workers cannot compete with foreigners who sometimes make as little as $2 or $3 per day?
There are actually two misunderstandings that are responsible: the misunderstanding of "the source of high wages and [the misunderstanding of] the law of comparative advantage" (93). Regarding the first, workers "in the United States are well-educated, possess a high skill level, and work with large amounts of capital equipment. These factors contribute to their high productivity, which is the source of their high wages. In low-wage countries like Mexico and China, wages are low precisely because productivity is low" (93). Regarding the second, each "country will always have some things that it does relatively better than others. Both high- and low-wage countries will benefit when they can focus on using more of their resources pursuing productive activities that they do comparatively well" (93-94). Therefore, if "a high-wage country can import a product from foreign producers at a lower cost than it can be produced domestically, importing it makes sense...Trade will make it possible for workers in both high- and low-wage countries to produce a larger output than would otherwise be possible. In turn, the higher level of productivity will lead to higher wages for both" (94).
15. What has made it possible for the world to produce a larger output, achieve a higher level of consumption, increase per capita income, and help nearly a billion people move out of extreme poverty?
The thing that has made it possible for the world to produce a larger output, achieve a higher level of consumption, increase per capita income, and help nearly a billion people move out of extreme poverty is the "growth of international trade" (95).

Day 4 - The Importance of Institutions and Policies

Markets, Freedom, and the EFW Index
16. What is the Economic Freedom of the World (EFW) Index, what does it measure, and what can it determine?
The Economic Freedom of the World (EFW) Index is the result of "the Fraser Institute of Vancouver, Canada [beginning] work on a special project designed to develop a cross-country measure of economic freedom" (99). The project began in "the mid-1980s" (99) and several "leading scholars, including Nobel Laureates Milton Friedman, Gary Becker, and Douglass North, participated in the endeavor" (99). The Index is now "published by a worldwide network of eighty institutions" (99), it "incorporates forty-two separate components" (99), and it "provides ratings for approximately one hundred countries throughout the 1980-2013 period" (99). The EFW Index "measures the extent to which a country's institutions and policies are consistent with economic freedom---that is, with personal choice, private ownership, voluntary exchange, and competitive markets" (99). The EFW Index can determine if "these institutional and policy really do affect economic performance" (100) and if "countries with persistently high EFW ratings...do much better than those with persistently low ratings" (100).
17. What must a country do in order achieve a high EFW rating?
In order to "achieve a high EFW rating, a country must provide secure protection of privately owned property, evenhanded enforcement of contracts, and a stable monetary environment. It also must keep taxes low, refrain from creating barriers to both domestic and international trade, and rely more fully on markets rather than government expenditures and regulations to allocate goods and resources" (100).
18. What accounts for the impressive rates of economic growth in China and India during the 1980s and 1990s?
The adoption of "policies more consistent with economic freedom" (102) in China and India accounts for the impressive rates of economic growth in those countries during the 1980s and 1990s.
19. According to Dwight Lee, what is the "trade-off" with wealth and freedom? a. Greater wealth most often results in less freedom. b. Greater freedom results in less wealth. c. There is no tradeoff; they reinforce each other in market. d. Political policies that reduce freedom end up increasing wealth.
The answer is (c): There is no tradeoff; they reinforce each other in the market.
20. What does a productive economy require and why is it important?
A productive economy "requires the use of information that is dispersed throughout the population, and that information cannot be used without individual freedom. Destroy freedom and you destroy the information flows that are the essence of market economies" (2). The information is important because markets "work their magic by allowing people to communicate the benefits they realize from the efforts of others and the costs of their efforts to benefit others. Ultimately, all benefits and costs are subjective, depending on people’s preferences and circumstances, which only they can accurately evaluate...And since they are subjective, people can accurately communicate costs and benefits to one another only by having the freedom to enter into, or exit, different markets as they see fit, and to buy and sell at any mutually agreeable price" (2).

Markets and Freedom by Dwight Lee

Day 5 - Clearing the Path to Flourishing

Labor, Service and Stewardship

Day 6 - Critical Thinking Assignment

Economic Freedom of the World