Wednesday, June 24, 2009

An Economics Lesson

There are many people who see taxing the Bad Old Corporations as a good thing. What with their overpaid CEO's and their profits, surely they are cash cows ripe for slaughter, right? But hold on you know how pricing occurs? Read and learn
1. A corporation is NOT ALIVE. This is important to remember because although the economic health of a corporation is measured in dollars, it cannot live or die as a human would.
2. This means that when additional penalties such as taxes, fees, government sanctions are placed on a corporation on upon a product it makes, the penalty doesn't stay within the corporation. Instead it is rolled into the final cost to the cosumer. And yes, that includes PROFIT.
3. Profits are what the corporation makes AFTER COSTS. Costs include things like raw materials to make products, energy used to make and transport products, manpower to make products, locations to make products and all the ancillary fees, insurances and liability costs. So after they make the product, package the product, ship the product-whatever is left over is profit. Now some people see profit as evil. But profit is the fuel that allows corporations to grow. Whether is building a new factory, riasing employees compensation or creating more jobs, profit is the factor that allows that to happen. When government takes profit away through taxation or over regulation, it slows down or stops the creation of more jobs, more wealth and a more stable economy.
4. Local and state governments run off of tax revenues. Taxes are collected on sales, on production and on land. If corporations do not make a profit, the tax revenues go down. If the corporations close, then the local entities lose a taxable property and the resulting revenue. In addition, if fewer products are sold, then the local governments make less. That shortfall is what we are seeing now in Dallas. Socialists would insist that the federal government keep all programs in place by making up the difference. But at some point that cannot be sustained. And slowing down corporations is what puts a wrench in the system.
5. When corporation go out of business, aside from job losses, there is also a loss of choice to the consumer. Part of the reason people oppose Walmart moving into an area is because other grocery stores move out. Lack of choice means lack of competition. Lack of competition means higher costs to consumers. If you are the only ice cream source in town, you can charge more than if there are two others in place. This is why it is not necessarily cheaper to live a bucolic life in the country. Without the competition, costs stay high.
6. Over regulation of any industry makes it unresponsive to the market. We have seen this over and over and frankly, the government control of GM is troubling because no government program comes without countless rules in place. If those rules all worked toward the simple principles of making good products at a fair price, there would be no problem. But when politicians get involved, they put pet project in place. This is what happened with American companies. The foreign companies didn't have the same culture of gratitude created by the UAW and the Congressional leadership. So they could make adjustments to allow a good car to be built for a good price. That's not to say that Americans can't build a good car-I have 16 year old Venture so I know that isn't true-it's just that interference by government costs more down the line and doesn't provide an efficient solution.
I hope that clears up some confusion and that when you listen to the bills being offered that you consider that bigger isn't always better and that people in Washington really don't care that much about people in Tupelo, Richardson or Tucumcari.


Darren said...

You're clearly just a greedy capitalist :-)

Ellen K said...

Or perhaps maybe a survivalist?