Economics Research at ConceptualMath.org

American discussion in economics contains many popular myths that are easy to disprove with evidence. WE need much more fact-checking. But even more so, we need to identify the many blind-spots and wishful thinking errors that make up our beliefs. Mathematical reasoning may help us identify these blind-spots and rethink what is meant by a healthy functioning economy. This site offers some of those evaluations. We introduce them below.

Draft: July 2014

 

Part 1: Rethinking & Evaluating

We must recognize our need to reevaluate what we value and how we measure what we value. Money is not wealth, yet we persistently use money in our attempts to measure wealth. In doing so, we make very predictable errors based on our desire to make those measures have more meaning than they possibly can. This leads to cheating, doctoring the numbers.

But the errors can take on more basic forms. Sometimes people just don't understand the numbers. Sometimes people overlook hidden information in the measure. Sometimes people overlook the critical changes in the trend. These basic oversights can even become the basis of popular arguments during elections.

Even harder to identify is our desire for the world to fit into simple one-dimensional linear relationships. This desire causes errors in our understanding of economic reports, including employment reports, income reports, and issues related to taxes and costs, and the limits that stress places on wealth. Probably the most interesting errors result from the underlying assumption that people make rational well informed decisions, even while we fully know that we don't.

Part 2: Overlooked Externalities

Denial of externalities has become big business in America. Yet, with a little mathematical reasoning, we can see that the actions of individuals add up and those consequences will have hidden consequences. Anyone concerned about the deficit should be able to recognize externalities are a form of deficit. A common misconception is that capitalism guarantees mutually beneficial exchange thus preventing the Tragedy of the Commons. But in actuality zero-sum profits are common in the American economy. Much of the zero-sum gains which are embedded within productive exchange result from overlooked externalities, unintended consequences that will function within any economic system. Even Adam Smith noted that capitalists will chose to profit off of these externalities. Thus it becomes pertinent to develop a system to estimate the costs of the externalities that exists within our exchanges.
Denial of externalities has become big business in America. Yet, with a little mathematical reasoning, we can see that the actions of individuals add up and those consequences will have hidden consequences. Anyone concerned about the deficit should be able to recognize externalities are a form of deficit.

Part 3: Income, Employment, & Wealth

Americans are too willing to believe theories that contradict empirical data, make one dimensional linear assumptions, and read too much into numbers. We forget that money is not wealth. Before reading the numbers we should understand our starting assumptions. Engineers would recognize that a healthy economy would probably look like a band pass filter. We should all recognize that the means by which we gain money has many dimensions. So does our spending. CPI measures fail to track the cost of living. We need to be aware of these dimensions to have rational discussions about wealth, poverty, income, employment, and economic policies.
We believe that GDP should rise. But GDP didn't rise fastest when we expected. Even as GDP rose our share declined. Our standard of living did not rise. We see this in the income data. Nearly all the gain went to the top 1%. We have shifted to a trickle-up economy. Some believe that minimum wage can solve this problem. But there might be a better way.


Employment has risen, but not when we believed it would. Instead we failed to identify investment bubbles even when they were clearly evident. (We misinterpret seasonal trends.) The rise in employment and GDP came at a great cost to workers. The current recession (2008 - 2012) is actually consistent with the longer term trends.
All of this reminds us of our need to check facts, think deeper, and be less gullible when pundits make claims about the economy.

 

 

Part 4: Taxes and Tax Policy

In popular tax discussion we have seen a lot of obfuscation, much of it intentional. The terms taxes, tax rate, tax burden, and tax share have been interchanged haphazardly. Taxes are measured in real dollars - how much did you actually pay? Tax rate is a comparison of your taxes to your income, regardless of how the taxes were actually assessed. Tax burden is the opportunity cost of your taxes - what did you have to give up to pay your taxes? Tax share is the portion of the taxes paid by a particular cohort. The mixing of the terms has been used to hide the fact that the middle class pay the highest tax rate and the highest tax burden, even while our children (the deficit) will pay the highest actual tax and tax share. By ignoring the deficit, many sources have incorrectly identified the rich (the 1%) as paying the highest share of the taxes.
This raises both questions of fairness and impact. What is fair? Many people rush to promote the claim that a consumption tax would be fair, or that a flat tax would be fair. They've even marketed the consumption tax under the arbitrary name "Fair Tax" without ever actually evaluating the fairness of a consumption tax. When we ask about fairness we typically ask about tax burden. By this measure neither the consumption tax nor the flat tax are fair. Ultimately, we have to ask, how will each alternative change taxes?
A popular theory states that taxes suppress the economy. Those making the claim never resort to empirical evidence. Since we have history we can check the empirical evidence. History shows us that growth has tended to be higher when taxes on the rich were higher - the exact opposite of the popular theory! This is also the exact opposite of the leading policies of the last 12 years. If we analyze the relationship between taxes and opportunity costs this actually surprising correlation actually makes sense.

Part 5: The Federal Budget and Deficit

We hear a lot of theories about the federal deficit problem. They all need to be fact-checked. A good starting point would be to look at the changes that occurred under each president, during the recent recession, or to break the budget up with pie graphs. Those are only starting points.
It would be even more accurate to normalize the budget reports either to GDP or to inflation and population. When we adjust to GDP we find that, as of 2001, revenues much lower than normal. Tax cuts are the major contributor to the deficit! But spending is up. Most the rise occurred under the watch of George W. Bush. We must still remember, the real tax rate is the spending rate. The deficit is just another tax charged to our children.

 

Summation:

We need much better fact-checking and reasoning. Few of our popular economic theories are consistent with empirical evidence. This appears to result from the theories themselves having huge blind-spots and being based on wishful thinking. This site hopes to encourage all to improve their reasoning.

 

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