1. Immigration causes Unemployment.

It is an argument often repeated. It goes something like this. “Immigrants who come over here are willing to work for lower paid jobs and thus they create unemployment for local people.”

This argument is wrong because.

• Immigrants increase the supply of labour but they also increase Aggregate Demand in the Economy. This means that they buy more goods and create additional demand in the economy. They provide labour supply and increase labour demand.
• If immigration caused unemployment why did America not have high unemployment during times of mass immigration? Because the immigrants created as many jobs as they took.
• Often immigrants take jobs that native workers just don’t want to do. – You won’t see big multinationals cueing up to stop immigration.
• Furthermore immigrants tend to be of working age. Therefore they tend to contribute more tax than receive in benefits. Without immigration US demographics would have a larger % of dependent old people.

2. House Prices in London will keep rising because of shortage of supply.

True there is a shortage of supply in big cities like London and New York. However this doesn’t mean house prices will always keep on rising. House prices can fall just like anywhere else. It just means that they will be higher on average than elsewhere in the country. Note house prices in Tokyo and Japan fell over 25% after the end of the speculative bubble in the 1980s. – American house prices have a lot further to go.

3. War is good for the Economy.

This fallacy is deeply embedded in many people’s mind. One reason is because it was felt the Second World War ended mass unemployment in US and UK.

To some extent it is true unemployment fell because of the Second World War. However war is not necessary to solve unemployment. The government could have intervened to create jobs through public work schemes.

• War does create more output, but only in some industries related to war. Arms manufacturers do very well out of war. But total output of the economy doesn’t increase instead there is a change in economic priorities. Resources are diverted from peaceful industries to industries for creating the mechanisms of war.
• Increase in government spending for wars create either taxes and or higher debt payments. This is a burden on current and future taxpayers. Note The UK is still paying off debt from second world war.

4. Tax Cuts make people work harder.

• Ronald Reagan’s economic advisers told him something along the lines of “cut taxes” and you can increase total tax income. This theory is based on the laffer curve which states that if taxes are 100% people won’t work. Therefore if you cut taxes more people work and you can increase tax revenue.
  

• The problem is that this may work if you cut taxes from 95% to 90%. But when you cut income tax from 25% to 23% it doesn’t make any difference.
• Some people want a target income of say £20,000. Thus if taxes fall they can earn the same by working less. Empirical evidence suggests there is little if any supply side incentive for cutting US or UK tax rates.

5. A Current Account deficit doesn’t matter.

Maybe this fallacy isn’t so common. But it is a common belief in the Current US administration. A current account deficit of 7% of GDP does matter. See: Does a Current Account deficit Matter?

6. Trade Wars. - Retaliation is Best

• The instinctive reaction of politicians is that if one country places a tariff barrier on our exports, we should respond by doing the same. However economic theory suggests that placing a tariff barrier on imports leads to a loss of economic welfare. It is better to not retaliate.

7. Tax Cuts will boost the Economy.

• Another justification given for cutting income tax is that it will increase Aggregate Demand and hence increase economic growth. However this is not always true because:

• If you cut income tax for high-income earners, they are likely to save a high % of their extra disposable income. Their marginal propensity to consume is low.
• If you cut income tax the government has to either cut government spending or borrow. If the government has to borrow from the private sector then they will have less income to spend causing a decline in private sector spending.
  

• This is called crowding out. (Although there are certain times when a government deficit can boost AD – like in a recession.)

See also: Ten Economic Fallacies

Labels: economics, economics explained

1. Raises Revenue for the Government. If the governments gets more tax revenue it can mean either:

• a. other taxes can fall,
• b. the government can spend more on public transport
• c. or the budget deficit can reduce.

Nobody likes new taxes, but whether money is collected from new or old taxes makes no difference to the disposable income of the tax payer.

2. Increase social efficiency. In a free market the consumption of cars are overconsumed. When driving people ignore the negative externalities of congestion and pollution. The social cost is much greater than the private cost. Therefore it makes sense for the government to charge a much higher price of driving in congested areas.

3. Congestion is Inefficient Congestion costs the UK economy over £20 billion a year in lost output and wasted time. This should be tackled.

4. Reduce pollution and global warming. Pollution from cars is a significant contributor to CO2 emissions in the UK. Road charging should encourage people to look for other forms of transport which don’t pollute as much.

5. Save Journey Time - If you earn £15 an hour, why would you not like the idea of paying £7 to get home an hour earlier? Who enjoys sitting in a traffic jam?


Arguments against Road Pricing that are no good.

1. It is an intrusion on liberty. To drive you need countless documents. When you use electricity the electric companies measure exactly how much electricity you use. When you make a telephone call the telecom company know exactly whom you ring and charge accordingly. Why should driving be any different.

2. Govt is just using it to raise money. Is that not a purpose of income tax, VAT and every other type of tax? Raising money from a new tax enables other taxes to be lowered or spending to be increased.

3. Economic output is more important than Global warming. We shouldn’t worry about the future, the most important thing is keeping taxes low for the current motorist. Read the Stern Report.

4. Increases Inequality. This is true to an extent. A road pricing charge is a higher % of tax for those on low incomes. But so is the cost of buying a car and petrol. If concern about equality of distribution is an issue the govt can alter other taxes and benefits. A tax which increases efficiency need not be stopped on equality grounds. It is always possible to compensate the effects to others.

See also:

• Economics of Negative Externalities
• Diagram of Tax on Negative Externality
• Congestion
• Electronic Road Pricing in Singapore
• Road Pricing For and Against
  

Labels: economics, Road pricing, transport