- The Washington Times - Thursday, December 22, 2011

ANALYSIS/OPINION:

It is well-known that the performance of students in U.S. public schools compares unfavorably with that of students in other countries, despite the fact that per capita spending on education in the United States is among the highest in the world. But perhaps the worst feature of public education in the U.S. is the failure to teach economic theory and principles - a failure being reflected in the tragic economic policies afflicting the U.S. economy.

For example, demagogic politicians take advantage of this failure by espousing “higher taxes for the rich,” relying on the simplistically populist assumption that higher tax rates on the rich would result in the rich paying more taxes. Under this fallacious assumption, a 100 percent tax on the income of the rich would result in extracting the greatest percentage of the rich’s income when, in fact, a basic sixth-grade economic-theory course would reveal that a 100 percent tax on high incomes would result in zero revenue extracted from the rich because the rich would then have no incentive to earn any income. Thus, economists were not surprised when, after John F. Kennedy reduced marginal tax rates on the rich from 90 percent to 70 percent, the percentage of income paid by the rich skyrocketed. Likewise, when the Reagan tax cuts took effect, the percentage of income paid by the rich rose dramatically, primarily because many complicated deductions, available only to those rich enough to hire tax experts to take advantage of them, were eliminated.

Yet the same demagogues who espouse higher taxes on the rich dogmatically decline to espouse policies that actually would increase the percentage of income paid in tax by the rich - namely policies that would eliminate costly deductions favoring the rich. Among them are the mortgage deduction, which pays the highest tax subsidies only to those rich enough to afford houses with million-dollar mortgages, while the one-third of Americans renting their homes get nothing. Half of the remainder who own homes opt not to take advantage of the deduction because they fare better with the standard deduction.

Likewise, demagogues take advantage of the failure of many voters to realize that corporate taxes are nothing more than regressive sales taxes because the cost of paying taxes, like the cost of any input such as steel, ultimately must be reflected in the price of the product produced by the corporation. As a result, job-killing corporate taxes in the United States are among the highest in the world, not least because corporate incomes are taxed twice - first at the corporate level, then again when the income is distributed in the form of dividends.

A sixth-grade economics course also would reveal that taxes on, for example, “Big Oil” are the economic equivalent of gasoline taxes reflected at the pump. Oil profits of 6 to 9 cents a gallon result in an anemic oil profit margin of 8.9 percent compared to that of electronics (14.5 percent) and beverages (19.1 percent). Few realize that 41 percent of oil profits go to pension funds and retirement accounts, including a large proportion to union pension plans, and another 43 percent goes to mutual funds and small investors.

The notion that small investors and union pensioners are not “people” is, of course, a favorite demagogic assertion that would never fly in even a basic economics course.

Populist politicians are also fond of claiming that Americans will not do the “dirty work” that illegal immigrants do. Such a claim ignores the basic economic principle of supply and demand, which reflects that as greedy corporations import and exploit illegal labor in their pursuit of profits, the supply of illegal labor pushes down the wages of unskilled workers to such low levels that legal immigrants cannot earn a living wage. No job is dirtier than trash collection or coal mining, but there is no scarcity of applicants when the wages are $35 an hour, compared to $7 an hour or less when cheap foreign labor floods the market. Nor is there any shortage of demagogues trying to justify the exploitation of cheap labor by seducing voters with the promise that they can save a few cents on their grapefruit by condoning the injustice and exploitation of cheap illegal labor.

Conservative politicians are not above mischaracterizing Keynesian theory as advocating only big-government programs as a means to expand demand, especially because John Maynard Keynes openly acknowledged that tax reduction rather than government spending also would serve as a fiscal policy expanding aggregate demand.

Public school students graduate with no knowledge of the principle of comparative advantage, which shows how free trade increases global wealth, or the Marshall-Lerner Condition, which explains why devaluation does not necessarily increase exports but rather depends on the elasticity of demand. They don’t even know why unemployment is caused by the inflexibility of wages, which, if reduced, would enable businesses to hire workers and return to full employment while increasing total output and enabling workers to increase their purchasing power even at lower wages.

Until public schools put the teaching of economics on at least an equal par with social studies and rain-forest math, politicians will continue to be elected who are pathologically determined to follow Europe down the path of permanently high unemployment and Greece toward economic catastrophe.

Robert M. Hardaway is a University of Denver law professor and author of the recently released “The Great American Housing Bubble: The Road to Collapse” (ABC-CLIO Publishers, 2011).

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