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Gifts for all occasions in the Galleria! The "What is the Deal?" Deal-of-the-Week: Best sellers at The Sharper Image February 13, 2005 Economics and Politics By Jan A. Larson At the most basic level, economics is analogous to water. Water always flows downhill and settles in the lowest possible location. That makes perfect sense and, in fact, if water did anything else, we would all be shocked and amazed. Similarly, the simplest economic transactions produce outcomes that are so obvious that we should be shocked and amazed at any other result. Unfortunately the basic simplicity of economics is not only lost on many Americans, but on many American politicians as well. If you had the choice to buy two identical loaves of bread, one priced at $10 and the other at $2, which would you buy? Similarly, if you had the choice of taking a job that paid $20 per hour or an identical job that paid $10 per hour, which would you choose? Which would you choose if the $20 per hour job was baking bread for the company that sold it for $15 per loaf? Just as a pebble tossed into a pond causes ripples on the opposite shore, economic questions can never be fully answered until the "ripple" effects are considered. Economic questions cannot be answered in isolation of their secondary effects. In the above bread example, every rational person would buy the $2 loaf of bread and take the $20 per hour job unless he or she considered that the company isn't going to sell very much, if any bread, at $10 per loaf and, if they don't sell bread, they aren't going to have any money to pay employees. In other words, trying to sell $10 loaves of bread and pay bakers $20 per hour doesn't make economic sense in this economic climate. Politicians take advantage of the economic naivete of the general public. The Democrats complain that tax cuts "cost too much" without considering the effects that those tax cuts have on the overall economy. The President (and others) say that illegal immigrants do the work that Americans "won't do." There is ample evidence that tax cuts enacted during the President's first term have resulted in significant economic growth, have increased tax revenues and, despite the rhetoric of the presidential campaign, there was net increase in jobs during the past four years, despite 9/11 and recession With U. S. unemployment standing at 5.2% (compared to double-digit unemployment in many European countries) the ripple effects of the tax cuts have more than overcome the apparent cost. In the truest sense of the word, the President's tax cuts were an "investment" in America. When it comes to the economic benefits of outsourcing and the employment of illegal immigrants (which is, in effect, "outsourcing" within the U. S. borders), there is a lot of misinformation, hyperbole and spin. Yes, illegal immigrants might do the jobs that Americans won't do, but it isn't that Americans just won't do those jobs; it is that they won't do those jobs at the wages offered to illegals. If any lawn service company was offering lawn-mowing jobs for $100 per hour, I seriously doubt they would have any problems finding plenty of Americans willing to do the work. The question is whether anyone would be willing to pay to have their lawn mowed at those rates? The discussion of the President's proposal to allow young workers to set aside a portion of their Social Security taxes in personal accounts is fraught with economic misinformation. Recently, opponents have claimed that the President's plan will cut benefits. Well, yes it will. It will cut the guaranteed benefits in exchange for the privilege of investing in a personal account. The point of the personal account is to relieve the government's obligation to future generations while offering those generations the opportunity to retire with much more than Social Security could promise in the first place. The minimum wage debate is a prime example of how the economic ripple effect is rarely considered. If $7 per hour were good, why not $100 per hour? Then everyone would be rich (and could more easily be the target of the class warriors). Unfortunately, it doesn't work like that. Prices would rise, low-wage workers would lose their jobs, employers would have further incentive to hire illegals and American products would be less competitive overseas. Much of the political wrangling in Washington is over issues that have economic ramifications. The basics of the economics are generally not that difficult to understand, but the effects are always much broader than either proponents or opponents will convey, much like the ripples in a pond. When considering economic issues, one must ask who stands to reap the benefits, who must pay the costs and does the benefit justify the cost? When politicians talk about costs, they're not talking about benefits. When they talk about benefits, they don't discuss costs. The immutable laws of economics, however, dictate that there must be costs for every benefit and the more the public understands the relationship, the less politicians are able to get away with economic spinning issues for political gain. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. To submit an article to "What is the Deal?" click here. To subscribe to the "What is the Deal?" mailing list and receive early notification when a new column is available, click here. The Pie of Knowledge will never, ever divulge email addresses to any third party for any reason unless so ordered by a court of law. 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