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Fletcher: Fallacies of the election year

August 28, 2012
Stephen Fletcher , The Alpena News

It's that time of political conventions and hyperbole, when all topics will be expanded beyond logical boundaries and people will say just about anything. The shackles of truth will be thrown out the window.

There are some notions you should be warned about.

First, there is the theory that government makes "investments." In simple economic jargon, this idea of government making investments is wrong. Government can tax the private sector and spend money, but, in economics, that expenditure is considered an expense against the economy. It's oxymoronic to call an expense an investment. Government money comes entirely from the private sector unless the government just prints more money. All of government's cost is an expense to the total economy.

A second fallacy is the idea that an increase in taxes will create more jobs. In economics, "saving equals investment." If taxes are increased, then the amount of money in the private sector available for savings is diminished. Let's say a really wealthy guy like Donald Trump spends 30 percent of his income on airplanes, yachts, homes, clothes, and everyday living. This means he has 70 percent of his income that is saved and thus, available for investment. Savings equals investment unless you put the actual cash in Mason Jars and bury it. Even money in a non-interest bearing checking account counts as "savings" because the bank invests the money.

If government taxes Trump, then the potential investment of his 70 percent savings is diminished by the amount of the tax. The amount government collected and spent is just expense, as nothing was created.

In economics, investments equals private sector jobs. Instead of taxing Donald's 70 percent, had he invested the majority of it, then jobs would have been created by it. By taxing the rich, government actually reduces the money available for investment, and thus reduces the possibility of jobs created.

Government doesn't make it easy.

If new laws that increase employer expenses, like Family Medical Leave, are passed for companies with 50 employees or more, then folks will simply close and form new companies under 50. When you see a corporate operation with a number of small, unaffiliated subsidiaries, you are probably seeing a corporate structure that avoids regulations.

What's always ignored in political thinking is that folks will adapt to save money.

As prices go down, demand goes up. For example, when gas prices increased many families said they were going to stick closer to home this summer. They conserved their vacation budget because gas prices for the family chariot rose too high.

It's the same for labor. More folks get hired if the wage scale is less. This is the reason that minimum wage increases actually reduce total employment.

If taxes increase, then savings for investment goes down. The result is fewer jobs.

The last fallacy involves "kicking the can down the road." The lack of leadership in government impacts taxes and financial planning of corporations. A simple decision like dividend payments are, in some instances, up in the air until after the fall election. Will the capital gains rate and the tax on dividends remain the same, or will it change? Both are at 15 percent right now but one candidate wants them to stay in that neighborhood while the other wishes them to rise by about 250 percent.

So what am I doing? I'm waiting until after the election to see when or if our company should have a dividend paid. Planning has been very difficult for companies in this climate of no action in government.

And, where there is uncertainty concerning government policy means uncertainty as well in job creation.

This is the time in the election cycle where a good understanding of economics can help cut through the fog of mis-statement. Beware! Truth and understanding are at a premium just now!



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