How to Lie with One Number

On the Trump Tax Cut

Yesterday I read a meme on Facebook (so it must be true), that stated "253,020 Michigan Families Paid More in Taxes Last Year Due to Trump's Tax Scam".  The organization that put out that meme made the mistake of stating referencing the source:  the Institute on Taxation and Economic Policy.  Thanks to the help of a friend I was able to track down the figures and to say the least the meme was misleading.

It is true that 253,020 taxpayers paid more in 2018 that in the year before.  It is also true that 4.026 million taxpayers in Michigan paid less; an additional 536,500 paid the same amount.  Also, despite arguments to the contrary it appears that the Trump tax cut did not adversely impact working class families.  People in the 80 to 95 percent income bracket - roughly $111,000 to $218,000 -  were most likely to see a tax increase.  Thirty percent of the top one percent - incomes above about $517,000 -  received a tax cut, but 36 percent saw a tax increase.  In the state of Michigan, the re-distributive aspects of the tax cut appear to be overstated.

How to Interpret Data Correctly

The first question to ask yourself when you are given one number is to ask "compared to what".  In the example above the question is how many is 253,020 compared to the total number of taxpayers in the state.  In this case, its about 5 percent, conversely more than 86 percent received a tax cut.  A single number never gives you the whole story.  Percentages and per capita data usually give a more accurate picture than a single raw number.  While disappointing, it is also helpful to determine whether or not the source of the number has an agenda.  In the above case it was a partisan organization.

To finish I would like to plug a book, written by Hans Rosling, a Swedish biostatistician. The title is Factfulness:  Ten Reasons We're Wrong About the World - and Why Things are Better Than You Think.  It covers how to interpret data and why most of our underlying assumptions, especially about the developing world, are wrong.  It's actually a pretty easy read and will change the way you gather and interpret information.  It also shows that we tend to be dumber than chimpanzees.




 

Fake News is real and what you can do about it

The Issue

A couple of weeks ago my Facebook feed was filled with two stories that were at best dishonest.  The The first dealt with a Dutch teenager with severe depression who wanted to die.  The story was that Dutch authorities approved her euthanasia.  The second dealt with allegations of animal cruelty at a large dairy farm in Indiana.  The initial reaction of those posting these stories was outrage, which as become the default response in this country.

In the case of the Dutch teenager, it is true that she wanted to die and did apply for euthanasia.  However, her application was denied.  The Dutch authorities did not help her die.  A good source of accurate information can be found here.  https://www.usatoday.com/story/news/nation/2019/06/05/noa-pothoven-media-got-dutch-teens-euthanasia-death-wrong-rape-right-to-die/1355269001/

It did not help that many "reliable" sources got this story wrong.

The Indiana dairy story outlines cases of animal abuse.  What is lost in this story is the fact that the employees were fired as soon as the these cases were brought to the attention of management, and that the organization who collected the film had an agenda that would insure that the farm would be shown in the worst possible light.  In fact the organization did not inform management that the abuse was taking place, other employees informed management and those committing the abuse were terminated.  Abusing animals is not the policy of the dairy, and in fact animal abuse reduces farm profitability because it increases costs and reduces productivity of the animals.

What You Can Do

First think before you post or share.  If a story seems to be too extreme to be true it probably is.  Second, look for additional collaboration.  This is getting increasingly difficult as news sources increasingly reference each other without doing their own investigation.  Nonetheless, there are websites that engage in fact checking and are good resources for debunking fake news.  Third, an emotional response to a story is seldom helpful.  Social media does not give a person license to act as judge and jury on each an every story.

Finally, give people the benefit of the doubt.  If a person, institution, or firm is accused of something it deserves the opportunity to explain its side of the story.

One of the finest theological exposition of the Ten Commandments can be found in Luther's small catechism.  His question and response to the commandment on lying is well worth remembering.  

Thou shalt not bear false witness against thy neighbor.

What does this mean?--Answer.
We should fear and love God that we may not deceitfully belie, betray, slander, or defame our neighbor, but defend him, [think and] speak well of him, and put the best construction on everything.

Isn't that what we would want if we were accused of anything?

Why a 5 Percent Tariff on Mexican Products Doesn't Matter

This is the last of a series of posts on Trade.  Warning:  Contains Math.

Recently there has been a great deal of discussion about a 5 percent tariff on Mexican goods.  This blog will explain why this would not have made any difference in the U.S. and would have only made a minor difference in Mexico.  However, a 25 percent tariff, which has been considered could have a major impact on the Mexican economy, and encourage the thing the administration is trying to stop, illegal immigration.

A Numerical Example

Let's say you are in the market for a VW Jetta that is assembled in Mexico.  Furthermore let's say the price of the Jetta is 380,000 pesos and the exchange rate is 19 pesos to the dollar.  The price of the Jetta is 380,000/19 or $20,000.  If the exchange rate does not change, a 5 percent tariff would raise the price to $21,000 (20,000+(20,000*.05)) if VW passed on the entire cost of the tariff to the consumer.  Since this is unlikely, let's say VW eats 25 percent of the tariff so the price to the U.S. consumer is $20,750.  This appears to be the mindset of those who supported and opposed the tariff.  This analysis is simplistic and wrong.

Changes in exchange rates blunt the impact of tariffs.  There are few countries that have the power to completely manage the value of their currencies and conduct independent monetary policy and Mexico is not one of them.  The day the possible tariff was announced the value of the peso fell by about 3.5 percent.  When the President announced the tariffs would not go into effect, the value of the peso rose by 2.0 percent.

It is well within the realm of possibility the value of the peso would have declined by the full 5 percent if the tariff was instituted.  If that had happened, the value of the dollar would have increased to 19.95 pesos to the dollar.  The price of the Jetta in U.S. dollars would then decline to 380,000/19.95 or $19,048 and the price with the tariff would be (19,048+(19,048*.05) or $20,000, which is the same price as the price without the tariff at the original exchange rate.  Since the price to U.S. consumers is unchanged, VW would have a strong incentive to pass the full impact of the tariff on to U.S. consumers.

To summarize, a small tariff would have no impact on U.S. consumers.  Mexican consumers would be slightly less wealthy compared to U.S. consumers and as a result might slightly cut back on their consumption of U.S. goods even without enacting a counter tariff.  In a floating exchange rate system a tariff could have the impact of actually reducing exports without having any impact on imports.

The Impact of a Large Tariff

It has been proposed that unless Mexico controls emigration a 25 percent tariff should be imposed.  This would have a much bigger impact on Mexico.  A major tariff could lead to a run on the peso, which could dramatically reduce wealth and consumption in Mexico perhaps leading to a recession.  A recession would increase the unemployment rate in Mexico which could lead to increased emigration to the U.S.

In short, a small tariff has no impact on the U.S. economy and a large tariff could lead to the one thing the administration is trying to stop, increased illegal immigration.

The Economic Benefits of Trade

My last post dealt with the arguments for trade restrictions.  While there are reasons to restrict trade, for the most part they are not compelling and the benefits of trade outweigh those of protectionism.  This post will briefly outline some of the reasons for freer trade.  This should not be considered a complete list.

One frustration in discussing trade is that proponents of trade assert that there are no losers; and opponents of trade assert there are no winners.  Neither is the case.

It Promotes Efficiency

Competition between firms in different countries will have tendency to keep prices low and encourage methods to either reduce costs, or enhance product attributes preferred by consumers.  Consumers, especially of those of imported goods, are a major beneficiary of freer trade.  

Firms that are exporters are also beneficiaries of freer trade.  These firms and industries tend to be more efficient than other firms.  Whether protectionists realize it or not trade barriers promote the interest of less competitive firms and industries at the expense of more efficient firms and industries.  In so doing it reduces the incentive of less efficient firms to innovate.  Often efforts to restrict trade are little more than efforts of special interests to protect their profits and incomes.  This does help explain why trade barriers are often politically popular.

It Promotes Equity

A common argument against globalization is that it promotes income inequality.  This is exactly wrong.  Global competition promotes equity by reducing firms' ability to charge excessively high prices.  By definition the number of firms in a open global market is greater than those in a closed national market.  The number of global monopolies is extremely small.  Enhanced global competition improves the buying power of consumer incomes, and increases the number of choices consumers have. 

However, it does reduce the incomes and profits of  firms who face foreign competition, as well as workers who work in these industries. However, it also curbs the incentive to move workers and assets into more efficient sectors of the economy.

It Promotes Peace

While efficiency and equity are important the fact that free trade promotes peace is probably more important.  This especially true for the U.S., a nation with a comparatively small trade sector, and a extremely large military and international affairs sector.  

Realizing that trade barriers such as the Smoot-Hawley tariff were contributing factors to World War II, a series of institutions were created in the aftermath of that war.  Of particular importance was the creation of the World Bank, the International Monetary Fund, and especially the General Agreement on Tariffs and Trade (GATT) which has evolved into the World Trade Organization (WTO).  These institutions have allowed countries to negotiate lower trade barriers over time, promoted economic development, and increased foreign investment in different countries including the U.S..  This has aided in global economic integration and the confluence of interests.  It has only been with the recent rise in economic nationalism that the world has become a somewhat less safe place.

Arguments for Protectionism

This is the first of a series of posts on trade.  The first post outlines some of the reasons for protectionism.  The next one will outline why most of the reasons for protectionism are not valid, coupled with economic reasons for free trade.  The third post will provide non-economic reasons to promote free trade.  The last post will provide some individual case studies.

Rationale 1:  Mercantilism

Briefly stated the goal of mercantilism is to maximize trade surpluses.  Mercantilism was the dominant line of trade policy from the development of the nation state to the middle of the 19th Century.  Policies were designed to promote exports and limit imports.  It is closely tied to the gold standard, trade surpluses led to the accumulation of gold which could be used to fund government activities including wars.  Mercantilism is also related to imperialism in that European countries looked to their colonies as a source of raw materials and as a market to their higher valued finished goods.

While mercantilism is not popular with economists, it has a certain intuitive appeal for the general public and policymakers.  It could be argued that the Chinese Belt and Road Initiative is a mercantilist policy designed to strengthen China's trade position relative to countries in Southwest Asia and Africa.

Rationale 2:  Export Unemployment (Beggar thy Neighbor)

Another rationale for protectionism is to reduce domestic unemployment.  The idea is that by raising tariffs you protect your domestic workforce from unemployment.  This is a reason why the Smoot-Hawley Tariff was passed in 1930.  It is also one of the major concepts behind the current U.S. trade policy.  

The primary shortcoming to the policy is that other countries will retaliate.  This is what happened in the 1930s which helped contribute to World War II.  Unlike the 1930s, countries have retaliated to recent U.S. tariffs in a less aggressive manner.

Rationale 3:  Infant Industry

The argument was popular in the northern U.S. during the first few decades of the nation's existence, as well as Germany during the mid to late 19th Century.  Developing countries need protection from more developed countries with established industries who may be able to take advantage of economies of scale.  

The infant industry argument has been used by the U.S. as well as developing countries.  In Latin America, South and East Asia, and Africa well into the 1980s, under the name of import substitution.

Rationale 4:  National Security

A nation has a vested interest to protect technologies that are important to maintain national security.  This has become more important since the advent of the atomic bomb.  It is also a key source of disagreement between the U.S. and China and to a lesser extent between the U.S. and North Korea, and the U.S. and Iran.  

Issues surrounding protecting a firm's intellectual property in certain key industries can also be an aspect of using protectionism to preserve national security.  Unlike other reasons to erect trade barriers, national security is a valid rationale, but care must be used to make sure that national security is not being used as a excuse to promote the desires of special interests.

Rationale 5:  Dumping

Another proper use of trade barriers is to prevent dumping; selling of goods below the cost of production in foreign markets.  In the worst case this can be used to eliminate competition and eventually raise prices after the competition is destroyed.  

The biggest issue facing dumping cases is determining the cost of production.  A difficulty that is compounded when changes in exchange rates are considered.