According to the 2020 Survey of the States from the Council for Economic Education, only half of the states in the Union require their high school students to take an economics course. And it shows. For many students, the popular rhetoric of progressive agitators has filled the void left in the wake of a poor or entirely absent understanding of economics. Five examples follow.
Wealth is immoral
The notion that the love of money is the root of all evil has been oversimplified and misconstrued since Biblical times. Money is a consistent medium for transactions; sophisticated thinkers call it “a debt that society owes you.” Money is the crude yardstick society uses to measure the value of market transactions; wealth is the measure of how individuals accumulate and utilize the value they have created. Jeff Bezos started his first company in high school and later left a lucrative job in corporate finance to ride the e-commerce wave of the mid-1990s, founding a quaint online bookstore in his Seattle garage. The shipping giant Amazon has since developed delivery drones, major motion pictures, and the ill-fated “Fire Phone.” Bezos has benefited handsomely from his role in creating Amazon, but the company has provided jobs for over 950,000 workers, and services that consumers value enormously, especially through the Covid-19 pandemic. Society would be worse off in a world without Amazon. Bezos is wealthy for moral reasons: He gave the world more than it gave him.
We need to be more like Scandinavia
Many countries in northern Europe have built large welfare states, but these serve only to redistribute wealth. Scandinavian markets still operate on a capitalist foundation. The capitalist system is the easy answer to the Scandinavian mystique, but the more telling explanation is that Nordic countries prosper not as a result of a benevolent government’s ingenious social engineering, but as a result of an underlying confound. In Scandinavian Unexceptionalism, Nima Sanandaji points to Sweden, Denmark, and Norway’s sharp drops in income inequality beginning in the late 19th to mid-20th centuries. These declines in income disparity far predate any formal, entrenched social welfare networks. Sanandaji explains that the continued lack of inequality highlights a key difference between northern Europe and the United States: cultural heritage and blood ties. Shared histories and cultural origins, such as the ancient Vikings, produce homogenous values that support the development of social welfare networks. A nation benefiting from ongoing immigration shares only those familial ties seen in census records and DNA tests. The continued absorption of immigrants from across the world provides the United States with economic strength, but not the cultural homogeneity of the Scandinavian states.
Government programs avoid the excesses of private business
Incentives constitute the core of economic behavior. Private businesses and public institutions respond to well-intentioned government program incentives. For example, groups like lobbyists, large conglomerates, and other rent-seeking interests do take advantage of politicians’ appetite for financial support; cronyism really does occur. Should we fault anyone for responding to the incentives the government provides? Intentionally swaying policy, however, differs from responding to incentives. Student loan programs alter the incentives to attend college, making it easier for students to borrow money, so more students take on debt to attend school. Facing increased student purchasing power, some colleges introduced excesses by competing for students with more than education alone, advertising amenities like lazy rivers, on-campus ski resorts, and cancelling classes for a Ski-Beach Day. Responding to noble goals and public pressure, the government crafts programs that provide incentives for both private enterprise and public institutions. The unintended consequences of such programs include, for example, cronyism on the one hand and a student loan debt crisis on the other.
College should be free
In 1993 Milton Friedman lamented that he wasn’t around early enough to coin the phrase “There’s no such thing as a free lunch.” Friedman, however, did pretty well with his own, “Nobody spends somebody else’s money as carefully as his own.” The market for college education has proven this aphorism true. Ideally, students take on debt with the expectation of paying it off down the line. The median lifetime earnings for all college graduates is around $1.25 million according to The Hamilton Project. Losing only four years of work experience for a median price of just over $100,000 sounds like a solid investment. For accounting, business, computer science, engineering, and nursing majors, this holds true. The problem lies in earnings disparities between these and other degrees. The Hamilton Project found that fine arts, counseling services, and non-secondary education majors earn less than workers with an associate’s degree. A bachelor’s degree alone can, but is no longer guaranteed to, open the door to the comfortable middle-class lifestyle it once did.
With large debt loads burdening many college graduates, why shouldn’t the government entirely subsidize higher education? Consider the current ownership of student loan debt. Undergraduate loans are not the largest source of academic debt. Students from graduate and professional degree programs hold over half of all student debt, but they make up only 13.1% of the population. Regardless of location, an M.D. should be able to recoup the cost of schooling. Combined with the generous grants and scholarships most institutions supply, college is still affordable for most students. Free college would not solve a debt crisis that exists mostly due to graduate school. By pushing up demand for graduate degrees and devaluing bachelor’s degrees, demand for graduate education and the subsequent graduate debt would increase. The highly educated make up only a small, but interested and influential minority in the country. Should these relatively small – and concentrated – minority benefits come at the dispersed expense of those who paid for college on their own, have already paid off their student loans, or have no college degree?
Tax the rich
Ratified in 1913, the Constitution’s 16th Amendment allows the federal government to levy a tax on income. The federal government first implemented a progressive income tax in 1862 to offset Civil War costs and repealed it a decade later. The first tax featured two brackets collecting 3 percent of incomes between $600-10,000 and 5 percent for incomes between $10,000 and over, a significant sum for the time. The courts ruled a brief 1894 resumption of the income tax unconstitutional in 1895. Expanding federal government programs, however, needed funding, so the 16th Amendment was passed. Initially thereafter, only two tax brackets existed; the first $20,000 of income was taxed at 1 percent, while any income above $500,000 was taxed at 7 percent. In 1913, $500,000 would have the purchasing power of just under $14 million in 2021. Since 1913, tax rates have increased by orders of magnitude, yet further increases are the default for ever-growing government expenditures. Vocal progressive figures continue to call for disproportional taxation on the highest earners to bolster increasing government spending deficits.
Historically, the U.S. government has collected an average of 17 percent of GDP as tax revenue, regardless of top marginal tax rates. Using FRED data, this graph extends Antony Davies’ example to cover the post-war period. Art Laffer’s eponymous curve shows that government revenues from taxes decrease after a certain point as incentives diminish. When diminished, the government can expect to collect the same amount of total revenue they would at a lower rate. Consider the extreme: if the government levied a 100 percent income tax, workers would be billed a day’s wages for a day of labor! Though the government may redistribute that income for a similar material effect, the incentive to generate any money disappears, reducing the system’s total production. In a progressive tax system, the marginal dollar that pushes a worker into an exorbitantly taxed bracket is not worth making. “Taxing the rich” stifles incentives to increase earnings and build wealth, similar to retirees limiting their withdrawals, slowing economic mobility and hindering the objective of increasing tax revenues.
Many college students and young people are remarkably receptive to economic theory, but lack the experience with mainline economic education and research to come to sound economic conclusions on their own.