Capital - the manufactured economic resources

In its broadest sense, capital is anything that increases productivity. Capital allows workers to produce more output with an hour of labor. Economists divide capital into four categories: physical capital, human capital, technology, and financial capital.

Physical capital is anything tangible and man-made that makes workers more productive. Examples of physical capital are computers, cars, pencils, microwave ovens, factories, and machinery. For example, a postal worker delivering mail to houses that are far apart can do it more efficiently with a truck rather than walking. In an hour of time, the mailman with a vehicle could deliver to more homes than the postal worker on foot.

Education and training also make most workers more productive. Human capital is the education, skills, and training that workers acquire that make them more productive. For example, skilled workers can construct more framing for a new building in an hour of time than the same number of unskilled workers. Similarly, a professionally trained nurse may be able to assist more patients in an hour at a hospital emergency room than someone without that education.

Technology is the knowledge and methodology of means of production. For example, sweaters can be knitted by hand or by factory machines. And the machines can be operated by people or controlled by computers. At a give point in time, some countries may have access to technologies, such as computer-controlled machinery, that are not available in other parts of the world. The adoption of new technologies often leads to an increase in productivity.

Financial capital is the money or other financial assets used to purchase the physical capital, human capital, and technology that make workers more productive. When a business considers increasing its physical capital, for example by buying machinery or building a new factory, it may not have enough money to pay for the entire purchase. Consequently, a business may need to raise financial capital in order to purchase physical capital. For relatively small purchases of physical capital, businesses may be able to use retained earnings as the source of financial capital. Retained earnings are the portion of a company’s profits that are not distributed to the owners of the business. For relatively large purchases of physical capital, businesses may borrow financial capital. The most common example of this is a business loan from a commercial bank. Corporations have two other options for raising financial capital, however. Corporations can issue corporate bonds, in which they borrow money directly from the public without using commercial banks as financial intermediaries. A bond is a financial asset that represents a loan from the purchaser of the bond to the issuer of the bond. Purchasers of bonds are lending money to the issuers of the bonds. Corporations also can raise financial capital by selling additional shares of stock. A stock is a financial asset that represents a share of ownership of a corporation. The owners of stock are called stockholders. A dividend is the share of corporate profit that is distributed to each stockholder.

The word capital is often used to refer to human capital, physical capital, technology, or financial capital. The correct meaning of the word is determined by the context of its usage.

Special Types of Labor in Business

The business world is divided into several functional areas, such as entrepreneurship, management, marketing, finance, and accounting. Entrepreneurship is the invention of new products, the improvement of existing products, or the delivery of products in better or more efficient ways. Management is the allocation of economic resources. Marketing is the process of informing society about products in an attempt to convince potential consumers to purchase them. Finance is the management of money, credit, and other financial assets.Accounting is the preparation and inspection of financial reports. Each of these functional areas of business has a special type of labor associated with it.

An entrepreneur is someone who invents a new product that satisfies a want or need of society, improves an existing product, or provides a product in a better or more efficient way. One way to become wealthy is to become a successful entrepreneur. Mark Cuban, the owner of the National Basketball Association’s Dallas Mavericks, acquired his wealth by being a successful entrepreneur. Cuban co-founded Broadcast.com, which provided streaming multimedia on the Internet, in 1995. The Internet company Yahoo! Inc. purchased Broadcast.com in 1999 for $5.7 billion. Successful entrepreneurs are usually highly motivated, creative leaders with some specialized knowledge that can be used to help satisfy the wants or needs of society.

A manager is someone who allocates economic resources. Successful managers are efficient in their use of labor, capital, and natural resources. Economic efficiency occurs when a society obtains the largest possible amount of output from a given set of resources. Skillful management is a key component of successful businesses. Examples of the importance of management are provided by professional sports. The head coach of a baseball team is called the manager and the major league baseball executives in charge of hiring players are called general managers. Four men have even been elected to Baseball’s Hall of Fame based solely on their achievements as general managers: Ed Barrow, Larry MacPhail, Branch Rickey, and George Weiss.

A marketer is someone who promotes the purchase or sale of a product. The marketing process includes the conception, pricing, promotion, and distribution of ideas, goods, and services. These are often referred to as the marketing mix or the four Ps of marketing: product (conception), price, promotion, and place (distribution). Businesses paid an average of $2.4 million for a 30 second commercial during the 2005 Super Bowl. The willingness of some firms to pay such large sums for advertising indicates the importance of marketing to the success of businesses.

A financier is someone who engages in large-scale financial affairs. A financier is sometimes called a capitalist if he or she invests in a business by providing it with significant money or other financial assets. It is not uncommon for people who develop new products to lack the financial resources to market their ideas. Financiers may provide these entrepreneurs with the financial capital to develop and market their products in return for a share of the revenues or profits from future sales.

An accountant is someone who prepares and inspects the tax reports and other financial records of individuals or businesses. Financiers and other business executives rely on accountants to provide an accurate portrayal of the financial condition of a company. Accountants also assist individuals in the preparation of personal financial reports, such as income tax returns for federal, state, and local governments.

Labor - the human economic resources

Economic resources are the things people use to attempt to satisfy their needs and wants. They can be divided into three categories: labor, capital, and natural resources.


Labor – the human economic resources

Labor is human effort, both physical and mental. People use their time and effort to produce things that are useful to themselves or others. Examples of labor are teachers, bankers, construction workers, steelworkers, plumbers, entrepreneurs, and managers.

Economists use various terms to describe different types of labor. A white-collar workertypically performs work that does not involve manual labor, is paid an annual salary instead of hourly wages, and is expected to dress with some formality. Examples of white-collar workers are business executives, stockbrokers, insurance salespeople, bankers, and lawyers. The origin of the expression is that men in these professions traditionally wear a white dress shirt, suit, and tie to work. White-collar workers are often associated with the service sector, which is the area of the economy that does not result in the production of a tangible commodity. A tangible commodity is a product that can be touched or held, such as an apple, a sweater, or a house.

A blue-collar worker typically performs work that involves manual labor, is paid hourly wages, and dresses in clothes that may become heavily soiled. Examples of blue-collar workers are automobile mechanics, garbage collectors, and construction workers. The origin of the expression is that men in these professions often wear a uniform with a blue shirt. Blue-collared workers are often associated with the manufacturing sector, which is the area of the economy that produces tangible commodities.

The Rust Belt is the heavily industrialized area of the upper Midwestern U.S. that contains older factories, many of which are closed. Manufacturing jobs in industries such as automobiles, steel, and coal mining used to be a significant source of employment in Michigan, Indiana, Ohio and Pennsylvania. Over the last few decades, Americans have increasingly preferred to buy manufactured products from cheaper foreign producers.

It is normal for there to be changes in the types of industries that are the most successful in a particular economy. Silicon Valley is a region southeast of San Francisco, California, which is known for its computer and other high-technology industries. These American industries flourished in the 1990s, but have faced increasing foreign competition in recent years.

There is a relationship between education, skills, training, and productivity. Productivity is the amount of output that can be produced in an hour of a worker’s time. Increases in education, skills, and training are usually associated with increases in productivity. As people become more productive, businesses are usually willing to pay them more. To illustrate this concept, consider two salespeople. If one person sells $50,000 worth of a company’s products per year while another person generates $1 million of sales per year, who is more deserving of higher pay? Salespeople are usually paid a commission, which means they are paid based on the value of their sales. Consequently, companies usually pay salespeople more when they generate more sales.

This relationship between education and productivity also explains why most students attend college. As people become better educated, they tend to become more productive. More productive people tend to earn higher incomes. Consequently the most frequently cited reason for attending college is to enable people to obtain a better, higher-paying job than would occur in the absence of the education.

Education, skills, and training are sometimes referred to as human capital.

Economic Resources

Economic Resources

Economic resources are the things people use to attempt to satisfy their needs and wants. They can be divided into three categories: labor, capital, and natural resources.


Labor – the human economic resources

Labor is human effort, both physical and mental. People use their time and effort to produce things that are useful to themselves or others. Examples of labor are teachers, bankers, construction workers, steelworkers, plumbers, entrepreneurs, and managers.

Economists use various terms to describe different types of labor. A white-collar workertypically performs work that does not involve manual labor, is paid an annual salary instead of hourly wages, and is expected to dress with some formality. Examples of white-collar workers are business executives, stockbrokers, insurance salespeople, bankers, and lawyers. The origin of the expression is that men in these professions traditionally wear a white dress shirt, suit, and tie to work. White-collar workers are often associated with the service sector, which is the area of the economy that does not result in the production of a tangible commodity. A tangible commodity is a product that can be touched or held, such as an apple, a sweater, or a house.

A blue-collar worker typically performs work that involves manual labor, is paid hourly wages, and dresses in clothes that may become heavily soiled. Examples of blue-collar workers are automobile mechanics, garbage collectors, and construction workers. The origin of the expression is that men in these professions often wear a uniform with a blue shirt. Blue-collared workers are often associated with the manufacturing sector, which is the area of the economy that produces tangible commodities.

The Rust Belt is the heavily industrialized area of the upper Midwestern U.S. that contains older factories, many of which are closed. Manufacturing jobs in industries such as automobiles, steel, and coal mining used to be a significant source of employment in Michigan, Indiana, Ohio and Pennsylvania. Over the last few decades, Americans have increasingly preferred to buy manufactured products from cheaper foreign producers.

It is normal for there to be changes in the types of industries that are the most successful in a particular economy. Silicon Valley is a region southeast of San Francisco, California, which is known for its computer and other high-technology industries. These American industries flourished in the 1990s, but have faced increasing foreign competition in recent years.

There is a relationship between education, skills, training, and productivity. Productivity is the amount of output that can be produced in an hour of a worker’s time. Increases in education, skills, and training are usually associated with increases in productivity. As people become more productive, businesses are usually willing to pay them more. To illustrate this concept, consider two salespeople. If one person sells $50,000 worth of a company’s products per year while another person generates $1 million of sales per year, who is more deserving of higher pay? Salespeople are usually paid a commission, which means they are paid based on the value of their sales. Consequently, companies usually pay salespeople more when they generate more sales.

This relationship between education and productivity also explains why most students attend college. As people become better educated, they tend to become more productive. More productive people tend to earn higher incomes. Consequently the most frequently cited reason for attending college is to enable people to obtain a better, higher-paying job than would occur in the absence of the education.

Education, skills, and training are sometimes referred to as human capital.

Special Types of Labor in Business

The business world is divided into several functional areas, such as entrepreneurship, management, marketing, finance, and accounting. Entrepreneurship is the invention of new products, the improvement of existing products, or the delivery of products in better or more efficient ways. Management is the allocation of economic resources. Marketing is the process of informing society about products in an attempt to convince potential consumers to purchase them. Finance is the management of money, credit, and other financial assets.Accounting is the preparation and inspection of financial reports. Each of these functional areas of business has a special type of labor associated with it.

An entrepreneur is someone who invents a new product that satisfies a want or need of society, improves an existing product, or provides a product in a better or more efficient way. One way to become wealthy is to become a successful entrepreneur. Mark Cuban, the owner of the National Basketball Association’s Dallas Mavericks, acquired his wealth by being a successful entrepreneur. Cuban co-founded Broadcast.com, which provided streaming multimedia on the Internet, in 1995. The Internet company Yahoo! Inc. purchased Broadcast.com in 1999 for $5.7 billion. Successful entrepreneurs are usually highly motivated, creative leaders with some specialized knowledge that can be used to help satisfy the wants or needs of society.

A manager is someone who allocates economic resources. Successful managers are efficient in their use of labor, capital, and natural resources. Economic efficiency occurs when a society obtains the largest possible amount of output from a given set of resources. Skillful management is a key component of successful businesses. Examples of the importance of management are provided by professional sports. The head coach of a baseball team is called the manager and the major league baseball executives in charge of hiring players are called general managers. Four men have even been elected to Baseball’s Hall of Fame based solely on their achievements as general managers: Ed Barrow, Larry MacPhail, Branch Rickey, and George Weiss.

A marketer is someone who promotes the purchase or sale of a product. The marketing process includes the conception, pricing, promotion, and distribution of ideas, goods, and services. These are often referred to as the marketing mix or the four Ps of marketing: product (conception), price, promotion, and place (distribution). Businesses paid an average of $2.4 million for a 30 second commercial during the 2005 Super Bowl. The willingness of some firms to pay such large sums for advertising indicates the importance of marketing to the success of businesses.

A financier is someone who engages in large-scale financial affairs. A financier is sometimes called a capitalist if he or she invests in a business by providing it with significant money or other financial assets. It is not uncommon for people who develop new products to lack the financial resources to market their ideas. Financiers may provide these entrepreneurs with the financial capital to develop and market their products in return for a share of the revenues or profits from future sales.

An accountant is someone who prepares and inspects the tax reports and other financial records of individuals or businesses. Financiers and other business executives rely on accountants to provide an accurate portrayal of the financial condition of a company. Accountants also assist individuals in the preparation of personal financial reports, such as income tax returns for federal, state, and local governments.


Capital – the manufactured economic resources

In its broadest sense, capital is anything that increases productivity. Capital allows workers to produce more output with an hour of labor. Economists divide capital into four categories: physical capital, human capital, technology, and financial capital.

Physical capital is anything tangible and man-made that makes workers more productive. Examples of physical capital are computers, cars, pencils, microwave ovens, factories, and machinery. For example, a postal worker delivering mail to houses that are far apart can do it more efficiently with a truck rather than walking. In an hour of time, the mailman with a vehicle could deliver to more homes than the postal worker on foot.

Education and training also make most workers more productive. Human capital is the education, skills, and training that workers acquire that make them more productive. For example, skilled workers can construct more framing for a new building in an hour of time than the same number of unskilled workers. Similarly, a professionally trained nurse may be able to assist more patients in an hour at a hospital emergency room than someone without that education.

Technology is the knowledge and methodology of means of production. For example, sweaters can be knitted by hand or by factory machines. And the machines can be operated by people or controlled by computers. At a give point in time, some countries may have access to technologies, such as computer-controlled machinery, that are not available in other parts of the world. The adoption of new technologies often leads to an increase in productivity.

Financial capital is the money or other financial assets used to purchase the physical capital, human capital, and technology that make workers more productive. When a business considers increasing its physical capital, for example by buying machinery or building a new factory, it may not have enough money to pay for the entire purchase. Consequently, a business may need to raise financial capital in order to purchase physical capital. For relatively small purchases of physical capital, businesses may be able to use retained earnings as the source of financial capital. Retained earnings are the portion of a company’s profits that are not distributed to the owners of the business. For relatively large purchases of physical capital, businesses may borrow financial capital. The most common example of this is a business loan from a commercial bank. Corporations have two other options for raising financial capital, however. Corporations can issue corporate bonds, in which they borrow money directly from the public without using commercial banks as financial intermediaries. A bond is a financial asset that represents a loan from the purchaser of the bond to the issuer of the bond. Purchasers of bonds are lending money to the issuers of the bonds. Corporations also can raise financial capital by selling additional shares of stock. A stock is a financial asset that represents a share of ownership of a corporation. The owners of stock are called stockholders. A dividend is the share of corporate profit that is distributed to each stockholder.

The word capital is often used to refer to human capital, physical capital, technology, or financial capital. The correct meaning of the word is determined by the context of its usage.


Natural Resources – the natural economic resources

A natural resource is anything provided by nature that can be used to satisfy human needs and wants. Economists sometimes refer to natural resources as land. However, as a category of economic resources, land also includes anything nature provides in the air or water, on land, or under the earth. Examples of natural resources are soil, water, trees, minerals, animals, sunlight, and air.

Some natural resources are renewable and others are nonrenewable. A renewable resourceis capable of being replaced in a relatively short period of time. Examples of renewable natural resources are the sun, wind, forests, fish, oxygen, and fresh water. A nonrenewable resourceeither cannot be replaced or its replacement requires an extremely long period of time. Examples of nonrenewable natural resources are minerals and fossil fuels, such as oil, coal, and natural gas.[i]

It is possible for renewable resources to become nonrenewable if they are mismanaged by society. Plants and animals become nonrenewable if they are allowed to become extinct. Forests can become nonrenewable if they are clear-cut. Fresh air and water can become nonrenewable if they are damaged by pollution. Soil can become nonrenewable if society uses damaging agricultural practices. Many societies ask the government to help protect renewable resources from becoming nonrenewable.

What is Economics?

Do you have everything you want? Most people can think of many things they want and do not have. Are any of the following items on your wish list?
a car
a house
a large-screen television
a laptop computer
an Apple iPhone
more jewelry
more clothes
more shoes

Even if you have some of these items, you might want newer, bigger, or better ones.

Why don’t you have all of these things?

The answer is probably because they cost too much. If a large-screen plasma television cost a nickel, then you would probably have one. If a new car cost a dime, then you would probably have one. If your dream house cost a dollar, then you would probably have it.

Why do some things cost so much? How are prices determined? Are expensive things more valuable than inexpensive things? To help answer these questions, consider air. Air is tremendously valuable to people. Without a constant supply of air, all mammals, including humans, die. So air is extremely valuable. Yet how much do people pay for air? If they are anywhere close to the surface of the earth, the answer is probably nothing. Air is so abundant on the surface of the earth that people just inhale to consume as much of it as they want. When people leave the earth’s surface, however, air becomes more expensive. Scuba divers, for example, pay dive shops to fill scuba tanks with compressed air for use while swimming under water for extended periods of time. So prices have very little to do with value. If they did, air would be extremely expensive because people cannot live without air.

Prices are determined by the relative scarcity or abundance of an item in relation to its desirability. An item is abundant if it is widely available. An item is scarce if it is not widely available. However, relative scarcity or abundance alone is not sufficient to explain why things are expensive. Lithiophilite is a scarce phosphate mineral. Yet, it does not have many practical uses. So people are not paying millions of dollars to fill their yards with lithiophilite.

In real estate markets, waterfront property is generally more expensive than similar property away from the beach, river, or lake. Part of the explanation for these differences is relative scarcity and abundance. There is not as much waterfront property as there is property without access to water. The other part of the explanation is that waterfront property is generally more desirable than other properties.

How does society decide who lives in houses on the beach and who lives elsewhere? What determines who drives new luxury sports cars and who drives jalopies? Who wears the latest clothing fashions and who wears hand-me-down clothes?

Economics is the study of how scarce resources are allocated to satisfy seemingly unlimited needs and wants.

No matter how many material possessions people have, it seems they always want more. People’s needs and wants are seemingly unlimited. The things that can be used to satisfy human needs and wants are limited, however. The earth and all its resources are finite. Thus, the economizing problem is that people’s needs and wants are seemingly unlimited, yet the resources they can use to satisfy those needs and wants are limited.

Consequently, society must make choices about what things will be produced, how they will be made, who will produce them, and who will consume them.

What is Economics? - Learning Objectives

After studying the portion of this blog devoted to the macroeconomic policy goal of economic growth, you should be able to:

· define economics.
· explain the economizing problem.
· define economic resources.
· list the three types of economic resources and give examples of each.
· define labor.
· define and explain the relationships between blue-collar workers and white-collar workers, the Rust Belt, and Silicon Valley.
· define a tangible commodity.
· define productivity.
· define and explain the functional areas of business (entrepreneurship, management, marketing, finance, and accounting).
· define and explain the special types of labor used in business (entrepreneur, manager, marketer, financier, capitalist, and accountant).
· provide at least one example of a successful entrepreneur.
· list and explain the marketing mix (the four P’s of marketing).
· define capital and explain the difference between physical capital, human capital, technology, and financial capital.
· explain the difference between stocks and bonds.
· explain the difference between retained earnings and dividends.
· define natural resources and explain the difference between those that are renewable and non-renewable.
· list the three types of economic systems and give examples of each.
· define and explain the difference between a household and a business firm.
· define a black market.
· explain the difference between efficiency and equity.
· explain the difference between traditional conservatives and traditional liberals.
· explain the difference between macroeconomics and microeconomics.
· explain the difference between products, goods, and services.
· explain the limitations of economics as a field of study
· explain the difference between positive and normative analysis.
· explain why it is important to study economics.

What is Economics? - Topics

Economics is the study of how scare products and resources are allocated to satisfy seemingly unlimited needs and wants. The core concept in economics is that scarcity requires that choices be made.

Click on the hyperlinks below to go to a portion of the blog devoted to that topic:

What is Economics? - Learning Objectives
What is Economics?
Economic Resources
Labor - the human economic resources
Special Types of Labor in Business
Capital - the manufactured economic resources
Natural Resources - economic resources provided by nature
Economic Systems
Economic Efficiency and Equity
Macro versus Micro
Limitations of Economics as a Field of Study
Positive and Normative Analysis
Why Study Economics?
Important Definitions
Questions for Further Study

Is the Fair Tax really fair?

In the January 29, 2008 MSN article "Is the Fair Tax really fair?," Jeff Schnepper says "Some tax-system critics, including GOP candidate Mike Huckabee, want to get rid of income taxes and payroll taxes and replace them with a national sales tax. Here are the plan's pros and cons."

Let's be fair. Our current tax code is a disgrace. It often makes no sense. It's tough on taxpayers trying to fill out their returns. It penalizes some people who should not be penalized.

Some people hate it so much that they want to get rid of it.

That's what Republican presidential candidate Mike Huckabee wants to do. The former Arkansas governor wants to junk personal and corporate income taxes and federal payroll taxes and replace them with a national sales tax called the Fair Tax.

I should note that the idea isn't actually Huckabee's. It comes from Atlanta radio talk-show host Neal Boortz, U.S. Rep. John Linder, R-Ga., and the Americans for Fair Taxation. The group is chaired by Leo Linbeck, who runs a big Houston construction company and is prominent in Republican circles in Texas.

How the Fair Tax would work

We now have an income tax -- a tax on what the courts have called an accession to wealth, clearly realized, over which you have dominion. Generate the income, and you're taxed immediately. It really doesn't matter what you do with the income. Unless it's exempt by statute, such as employer-provided health insurance premiums, or under the Constitution, like municipal-bond interest, it's part of your taxable base.

Our income tax system is also progressive. At certain break points, you pay a higher marginal rate on additional income. The more money you make, the greater the percentage you pay on additional income. For 2008, a married couple pays 10% on the first $16,050 in taxable income. But the couple pays 35% on all taxable income in excess of $357,700.

The Fair Tax is a whole different game. Instead of taxing income, this tax would hit consumption. Its proponents want to substitute what's often described as a flat 23% national sales tax on nearly all goods and services. But that 23% figure is a mirage. You'd actually pay 30% at the cash register, according to the proponents' Web site.

Think of it as a tax on your buying power. Fair Tax proponents say income taxes now make up about 23% of the cost of goods sold. Take away that tax and the cost of a $100 good, they say, would drop to $77. The Fair Tax would collect that $23 discount as a straight sales tax, which works out to 30% added to the price of goods and services. State and city taxes could be added on top of that.

The Fair Tax would include a complicated rebate system to shield the poor. According to Huckabee, "All of us would get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line." By "us," he means you, me, Bill Gates and Oprah Winfrey.

What the Fair Tax might do for the economy

Would the Fair Tax make for a better economy? The Huckabee team says yes, and here are the arguments:

* Retail prices could fall. Fair Tax supporters say 20% of all prices today represent the hidden income and payroll taxes embedded in the price of everything we buy.

* Eliminating corporate income taxes and capital-gains taxes would make the United States a more desirable place to do business. Cut transaction costs, and you encourage more people to get into the game.

* There would be reduced losses of tax revenue from the underground economy.

*Illegal immigrants, many of whom do not report income or pay taxes, would be forced to pay their share of the Fair Tax. So would the 40 million foreign tourists who visit the U.S. each year.

*Social Security and Medicare taxes could be eliminated. These regressive taxes are probably the largest tax burdens on lower-income taxpayers. The Social Security Administration will get 6.2% of all wages and salaries up to $102,000 in 2008. Medicare gets an additional 1.45% from all wages and salaries.

*The Fair Tax would minimize the congressional tinkering and behavioral manipulation that permeates our current tax code. Special benefit provisions and lobbyist-generated deductions and exclusions would be gone.

*Substituting the Fair Tax could mean that the Internal Revenue Service could be disbanded. (That might sell the deal.)

Savers and investors would win big

The biggest winners under the Huckabee plan would be most savers and investors. A consumption tax gives savers something like an unlimited-deductible individual retirement account. There would be no tax hit until the dollars were actually spent. While the money was saved or invested, it would grow fully tax-free.

Financial companies would get an enormous windfall. Most of their expenses are payroll-related, and, relatively speaking, they spend little on goods and services. Much of their profit is generated by investments. That wouldn't be taxed until spent.

Investors should also gain by the increased value of shares in companies that they bought or owned. That's because of the elimination of both corporate income and payroll taxes.

And the wealthy, who now pay 35% on their marginal income, would rejoice at a big tax break down to 30% of their consumption expenditures. In other words, a round of golf at Pebble Beach would cost them, but merely collecting dividends would not.

What's not to like about the Huckabee plan

The opponents have strong arguments of their own. Here's a rundown:

*How much must pretax prices go down before you're comfortable paying an additional 30% on your home purchase, kid's tuition and doctor appointments? Increasing the cost of buying a home by 30% would not stimulate the housing market. On a house currently selling for $200,000, a 30% tax means you have to borrow $60,000 more just to get in the door. That doesn't make a lot of sense.

*Arguments that the Fair Tax would eliminate the underground economy are less than persuasive. Add a 30% federal hit to a 6% state sales tax, and you have created a golden opportunity for smuggling. Look at what happened to cigarettes when states increased their prices with higher sales taxes. They're now marketed out of the trunks of cars. Those cheating on their income taxes would cheat on their sales taxes. Just substitute the term "black market" for underground economy.

*The idea that the Fair Tax would eliminate complexity in the tax code also fails to recognize reality. Special interests would almost certainly hire lobbyists to propose exemptions for such things as home purchases, medical services and education. I spent some time in Washington, D.C., and I never met a lawmaker who wanted to run for re-election on the platform of hitting housing, medical services and education with a 30% tax.

*The poor would get little from the Fair Tax because they really don't pay income taxes under our current system. For 2008, if you're married with one child under 17, you have no tax on your first $31,400 in income. The Fair Tax can't beat a zero tax liability. Any real savings would come from the elimination of Social Security and Medicare taxes.

*Bush administration economists have projected that the Fair Tax would actually increase taxes for those making more than $30,000 and less than $200,000. That's because a flat 30% rate on their gross consumption would suck more dollars than a graduated rate on taxable income, after deductions, exemptions and the like. Taxpayers in that range would lose the benefit of the 10%, 15%, 25% and 28% rates on their taxable income.

*Transition rules -- the rules that would apply as one shuttered income taxes and started up the Fair Tax -- would cause chaos. Consider your Roth IRA account. You've already paid income taxes on those dollars. You wouldn't be happy when you spent the money and had to pay a tax again.

*Somebody would have to enforce the sales tax law or it would have no teeth. So, in practical effect, the plan would not eliminate the IRS. The plan would just convert its function from income-tax compliance to sales-tax compliance. Some agency would have to step in.

*Would the national sales tax be enough to raise as much revenue as our current system? Yes, if the rate was high enough, no if it wasn't. I'd bet everything I have that the rate wouldn't remain fixed.

The biggest losers: Municipal bond holders

A subgroup of the wealthy -- those who escape income tax under the current system by investing in federal-tax-free municipal bonds -- would be big losers here. Under the Fair Tax, current tax-free dollars would be hit when they were spent. That would decrease the attractiveness of such investments and potentially increase their cost.

Higher interest rates for state and local projects would result in increased costs for schools, bridges and jails that are normally financed with tax-exempt bonds. Or it might mean higher state and local income and real-estate taxes to cover those costs.

Home values -- and people who work in the real-estate industry -- would suffer. So would those who sell high-priced goods. Cars, appliances and high-ticket items like, say, Tiffany jewelry, could immediately become 30% more expensive. Would the corporate income and payroll tax savings be enough to offset this addition cost? It's arguable, and economists disagree. Personally, I have my doubts.

My biggest fear is the inability of Congress, no matter which party is in control, to control spending.

We raise more tax money today than ever before in our history. The problem is that we increase spending faster than we increase tax revenues. We may end up with both an income tax and a national sales tax. Wouldn't that be a kick in your wallet?

Part I: Introduction to Economics

Part I of this blog is an introduction to economics.  It covers topics useful to the further study of both macroeconomics and microeconomics.

What is Economics?

Outline of Topics (detailed)

Part I: Introduction to Economics

A. What is Economics?

What determines prices?
Prices have little to do with value
Prices are based on relative scarcity and desirability

Unlimited Needs and Wants

Economic Products
Goods
Services

Economic Resources
Labor
Blue collar workers
White Collar workers
Special Types of Labor used in Business
Accountants
Entrepreneurs
Financiers
Capitalists
Managers
Marketers
International Business Specialists
Green collar workers
Capital
Physical Capital
Human Capital
Technology
Financial Capital
Natural Resources
Renewable
Nonrenewable
Fossil fuels

Macro vs. Micro

Positive vs. Normative Analysis

Limitations of Economics as a Field of Study

B. Economic Perspectives
Tradeoffs
Costs
Opportunity costs
Sunk costs
Incentives always matter
Trade can make everyone better off

C. Simple Economic Models
Circular Flow Diagram
Household and Business Firms
Adding Government
Adding International Trade
Production Possibilities Frontier
Constant Opportunity Costs
Increasing Opportunity Costs
A Change in Resources
A Change in Technology
Illustrating Unemployment
Illustrating the Benefits of Specialization and Trade
D. Supply and Demand Analysis
Demand
Supply
Equilibrium
Prince Controls
Price Floors
Minimum Wage Laws
Price Ceilings
Rent Controls
Changes in Demand
Decrease in Demand
Oprah vs. Texas Cattlemen´s Association
Increase in Demand
Medical Benefits of Wine and Grape Juice
Oprah´s Book Club
Changes in Supply
Decrease in Supply
Hurricanes
Orange Juice
Petroleum
OPEC
Increase in Supply
Bovine Growth Hormone (BGH)
Changes in Supply and Demand
Increase in Supply and Increase in Demand
Increase in Supply and Decrease in Demand
Decrease in Supply and Increase in Demand
Decrease in Supply and Decrease in Demand

E. Personal Investments
Are Credit Card Companies the Crack Dealers of the Financial World?
Unscrupulous practices
Video:

Compound Interest: the Importance of Starting to Save Early

Types of Investments
Transactions Money
Bank accounts
Short Term Savings
Certificates of Deposit (CDs)
Money market mutual funds
Long Term Savings
Bond mutual funds
Stock mutual funds
Blue chip
Aggressive growth
Real Estate
Collectibles

Investments in the News:
Dow Jones Industrial Average
S&P 500
NASDAQ

Investing Strategies
Payroll Deduction
Diversification
Dollar Cost Averaging
Mutual Funds: Special Insight or dumb luck?


Part II: Macroeconomic Policy

A. Macroeconomic Policy Goals
a. Economic Growth
i. Importance
1. Historical Perspective
2. Geographical Perspective
ii. Measurement
1. GDP
2. GDP per capita
3. Real GDP
4. Real GDP per capita
5. Limitations of these measurements
a. Standard-of-living vs. Quality-of-life
iii. Alternative Theories of Economic Growth
1. Supply-side economics

b. Low Unemployment
i. Importance
1. Effect on Economic Growth
2. Well-being of the unemployed
3. Well-being of the employed
a. Taxes to support the unemployed
b. Crime and unemployment
ii. Measurement
1. Unemployment rate
2. Labor force participation rate
3. Limitations of this measurement
a. Discouraged workers
b. Underemployment
c. Inaccurate data and deceptive answers

c. Low Inflation
i. Importance
1. Effect of Economic Growth
2. Effect on Economic Efficiency
3. Redistribution of Income
ii. Measurement
1. Price indices
a. Consumer Price Index (CPI)
b. Producer Price Index (PPI)
c. GDP Deflator
2. Limitations of these Measurements

B. Macroeconomic Policy Tools
a. Monetary Policy
i. What is Money?
ii. How Monetary Policy Affects the Economy
1. Expansionary Monetary Policy
2. Contractionary Monetary Policy
iii. The Federal Reserve System
1. Structure of the Fed
a. Twelve Regional Federal Reserve Banks
b. Board of Governors
c. Federal Open Market Committee (FOMC)
2. Functions of the Fed
3. Monetary Policy Tools
a. Required reserve ratio
b. Federal funds rate
c. Open market operations
i. Open market purchases (of government securities)
ii. Open market sales (of government securities)


b. Fiscal Policy
i. Taxation
ii. Government Spending


Part III: Contemporary Economic Issues

A. Political Economy
a. Conservative Republicans
i. Taxation
ii. Government Spending
iii. Gay Marriage
iv. Immigration
v. Abortion
b. Libertarians
c. Liberal Democrats

B. Economics and Religion
a. Christianity
b. Judaism
c. Muslim

Outline of Topics (brief)

I: Introduction to Economics

     A: What is Economics?

     B: Economic Perspectives

     C: Simple Economic Models

     D: Supply and Demand Analysis

     E: Personal Investments

II.  Macroeconomic Policy

     A.  Macroeconomic Policy Goals

          1. Economic Growth

          2. Low Unemployment

          3. Low Inflation

     B.  Macroeconomic Policy Tools  

          1. Monetary Policy

               a. What is Money?

               b. Federal Reserve System

               c. Monetary Policy Tools

                    i. Required Reserve Ratio

                    ii. Federal Funds Rate

                    iii. Open Market Operations

          2. Fiscal Policy

               a. Taxation

               b. Government Spending

               c. Budget Deficits and Public Debt

See also "Outline of Topics (detailed)".

The Fifty Percent League

Andrea Canning's December 23, 2007 article Exclusive Club Has One Rule: Just Give explains how the "Fifty Percent League Donates Lots of Cash To Charities":

Americans set a new record for generosity last year. We gave a total of nearly $300 billion. But few of us could match the generosity of Richard Semmler.

Semmler is a 61-year-old math professor at Northern Virginia Community College. He's also a maintenance man, and a book editor. His hard work earns him more than $100,000 per year, but he lives very modestly.

Even with three jobs, Semmler lives in a tiny apartment. He's not working so hard to get more  he's working to give more. Semmler has donated nearly $1 million  between 50 percent and 60 percent of his income each year  to six charities, and his money helps to feed the homeless and build houses for families in need.

Semmler's not just writing checks  he's getting his hands dirty, building those homes with Habitat for Humanity, and handing out food in soup kitchens.

"I prefer to live in a small apartment. I prefer to drive an old car," he said. "I get a lot of satisfaction out of that. I get a chance to see my dollars at work.

"For me, it's a personal satisfaction in seeing the house built, but more important, it's personal satisfaction in seeing a family that truly needs this," said Semmler.

Semmler belongs to a very exclusive club that anyone can join. It's called the Fifty Percent League. Members give away at least half their income to charity. Not all of the donors have big incomes. One woman earned just $16,000 dollars last year, and gave half of it away to help newly arrived immigrants.

The group is made up of about 100 people and growing. Collectively, they have given away more than $1 billion over the past decade, donating to all kinds of charities, from cleaning up the environment to cleaning up the inner cities.

The Fifty Percent League was the brainchild of Chris and Anne Ellinger, who decided to give half their money away when they came into an inheritance.

"I remember feeling anxious beforehand  are we going to regret this afterward?" Chris recalled. "I look back on it as one of the best decisions we ever made.''

Even actress Angelina Jolie reportedly gives away a third of every film paycheck she receives. This weekend, she's supporting a children's health program in New Orleans.

But you don't need a film star's income to make a difference. The Ellingers say you don't have to give until it hurts.

"We're definitely not saying people should be giving at 50 percent. We're just saying figure out what is your true potential," said Anne. Her husband Chris added, "We encourage people to start making a financial plan, and figuring out what are they going to need, and look at what's left over.

"Just about everybody said it was one of the most joyful acts of their lives."

"What's an issue that you care most about, and what difference do you want to make," Anne said.

Millionaire David Ludlow is a fifty-percenter, who funds an after-school program in Boston's inner city. "This has made me a truly happy man, being able to do this. It's been magnificent. It's totally turned my life around," Ludlow said.

And can money buy happiness? "Yes, yes it can," Ludlow laughed.

Semmler believes the effort is all worth it. "There are a few personal sacrifices, it means very few vacations, and it means working many extra part-time jobs to make this all happen."

The Baby Boom Generation

The Baby Boom Generation refers to people born between 1946 and 1964. In 2000, Baby Boomers ranged in age from 36 to 54. They appear in the graph above as the widest part of the age distribution:

Historical Effective Federal Tax Rates: 1979 to 2005

Historical Effective Federal Tax Rates: 1979 to 2005

December 2007

The following tables update the series of historical effective tax rates estimated by the Congressional Budget Office (CBO) by providing values for an additional calendar year—2005.1 The tables show effective tax rates for the four largest sources of federal revenues—individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes—as well as the total effective rate for the four taxes combined. The tables also present average pretax and after-tax household income; counts of households; and shares of taxes, income, and households for each fifth (quintile) of the income distribution and for the top percentiles of households.

FactCheck.org

FactCheck.org is:

a a nonpartisan, nonprofit "consumer advocate" for voters that aims to reduce the level of deception and confusion in U.S. politics. We monitor the factual accuracy of what is said by major U.S. political players in the form of TV ads, debates, speeches, interviews and news releases. Our goal is to apply the best practices of both journalism and scholarship, and to increase public knowledge and understanding.

FactCheck.org is a project of the Annenberg Public Policy Center of the University of Pennsylvania. The APPC was established by publisher and philanthropist Walter Annenberg in 1994 to create a community of scholars within the University of Pennsylvania that would address public policy issues at the local, state and federal levels.

The APPC accepts NO funding from business corporations, labor unions, political parties, lobbying organizations or individuals. It is funded primarily by the Annenberg Foundation.