Economic Logic Term Paper

Rewarding Work: How to Restore Participating and Self-Support to Free Enterprise (Harvard University Press, 197), economist Edmund Phelps offers this plan to help the working poor: apply tax credits for "qualified employers" or hire disadvantaged people for "eligible jobs." Evaluate this plan in terms of market incentives, one of the ten principles of economics, to work and current welfare programs. Is the Phelps' plan an improvement over current government policies? Discuss.

Lowering a company's tax bill will generally always be effective in causing them to invest more money in expanding which usually means more hiring. However, it is not a panacea, as the recent economic incentives have proven. As of late, firms have received a number of tax cuts but there has also been the passing of the Dodd Frank financial reform bill as well as ObamaCare, both of which (ObamaCare in particular) is clearly making employers cool to hire regular full time workers. Instead, employers are hiring part time works who work less than 30 hours a week so as to avoid mandated eligibility for benefits and/or a fine for not offering the benefits despite the 30+ hours threshold being met.

As for offering incentives specifically for disadvantaged workers, there is a difference between offering a helping hand and enabling bad behavior. An unfortunate truth of welfare, unemployment benefits and other assistance is that people will stretch out the benefits and use them as a means to active avoid finding work that is enough to pay the bills. While cat-calls may ensue at this claim, it's beyond doubt with behaviors of some workers, but certainly not all. An example would be the recent trend of people exhausting their 99 weeks of unemployment turning around and applying for Social Security Disability benefits. It begs the question why they were not already in the Social Security Disability system and whether they are applying because they actually have a disability or whether they are simply trying to extend their work holiday.

In short, the commonly held methods of incentivizing workers to work and employers to hire are not always as simple as they may seem. A better yardstick is to look at the climate that is created by the government's tone towards business and mistaking compassion for employees with encouraging bad behavior. It is impossible to find a solution that works across the board but it can also be assessed quite clearly when the incentives to hire are being outweighed by concerns about excessive taxation, excessive regulation and so forth. Allowing a free-for-all by employers including lax regulation and non-existent taxation is not a good idea but neither is actively discouraging them from hiring and then scolding them for reacting based on their increasing or potentially increasing benefit costs, labor costs or tax costs.

For incentives to work, there has to be a predictability to the proverbial playing field and that sort of foresight is clearly not present given the current threats and/or plans of more spending, higher taxes, more employer regulation/taxes, etc. The Clinton Administration raised taxes in the mid-1990's but they then stepped back and let the economy do its thing and the economy boomed in the late 1990's. It is true there was a tech bubble that burst soon thereafter, but economic growth was very strong despite the fact that the federal government's power structure, not unlike now, was split between Democrats and Republicans basically from 1994 onward. Much the same thing happened in 2003 when the Bush Tax Cuts took effect and remained the law of the land for the next five years or so until the housing market crashed. The taxes and regulation landscape was predictable and steady, so the tax cuts were effective. If what is going on now was going on then, the reaction would probably match what has been happening since 2009…growth but only in an anemic and uneven fashion. In the 2000's, unemployment topped out at 6% or so and then dived down into the sub-5% range. However, unemployment hasn't been below 7% for years now and the recession supposedly ended four years ago.

2. The availability of investment capital is critical for a market economy to grow. Explain how this investment capital is transformed into fixed capital goods, new technology, and cost reduction using new methods of production. Also, explain how interest rates impact the availability of investment capital.

Investment capital at low interest rates is essential because many firms (although certainly not all) are not able to grow without leveraging the credit markets.Any firm that sees a strong economic and return-on-investment outlook is going to freely borrow and spend money so long as they think that their spending, either in the short-term or the long-term, will exceed what they spend now.

However, if interest rates are high, this means that the cost of borrowing to do business goes up a lot and this greatly decreases the likelihood that firms will borrow unless they absolutely have to and if/when they do borrow at high rates, the consequences of bad investments and bad investment decision goes up exponentially. However, firms should generally spend money at all times for research and development, process improvement, quality management, and creation/marketing of new products because remaining at a standstill for too long can cause losses in market share and making needed all the more pressing and all the more damaging if they are done incorrectly. To use a modern example, BlackBerry use to be the king of corporate cell phone technology and even some of the consumer market as well. However, the work of Android phone-makers, Apple and even Microsoft with their Windows phones has pushed BlackBerry to the edge of obsolescence. It is to the point that even though they not-so-quietly offered themselves for sale, no one apparently offered or the price was pennies on the dollar.

In short, capital investment leads to capital goods and to improvements of the same including new products, improvement of existing products, higher-quality and higher-reliability products, products that capture and/or keep the passion and interest of the buying public and products that allow a firm to keep or even gain market share. The old adage about having to spend money to make money is true but good money cannot be thrown after bad and there has to be a return on investment that at least covers the cost of borrowing the money or the capital investing and borrowing is not worth engaging in at the end of the day. To come back to BlackBerry, if they have any hope of surviving, they're going to have to keep building on their new products and keep grinding. Their new operating system is well-reviewed and generally well-received except that the Android and Apple juggernauts have put a chokehold on market share, thus making it very hard for BlackBerry to re-establish their footing in the marketplace. If BlackBerry can keep churning out quality products at a reasonable cost and they keep their good cash flow going, they might be OK. If not, they'll probably shift to another segment of the tech goods sector or they will cease to be.

2. Your text, on page 611, lists three arguments for trade restrictions. Since economists do not favor trade restrictions, and this is a course in Managerial Economics, make the case as an economist against trade restrictions for these three items. Are there any arguments for trade restrictions that most economists would support? Discuss.

Trade restrictions fall under the same generally classification as price controls and caps. They are usually well-intentioned and well-minded in terms of what they are meant to do but the outcome is usually a big mess because toying with the forces of supply and demand usually blows up in the face of the government or agency that is engaging in the practice. For example, if the United States decided that Ferraris were too expensive and put a cap of $100,000 USD on the cost of their cars (WELL below what they usually cost), two things would probably happen. First, Ferrari would probably immediately stop selling cars in the United States and the existing inventory would vanish in a heartbeat. The reason for this is that while Ferraris do not cost what they are sold for and people are in many ways buying the "name," not the physical car itself, when they buy a Ferrari. Apple iPods are very similar. It does not cost $200-300 to make an iPod Classic but that is what they cost to the average consumer and many people gladly pay that amount and even close to that amount for a use iPod. Popular smartphones like the Samsung Galaxy series and the iPhone are no different.

However, even when speaking of non-discretionary goods like rent and gas, price controls don't work and neither do tariffs and restrictions on trade of said goods. For example, if the United States put a tariff on the oil of Saudi Arabia, what would undoubtedly happen is that Saudi Arabia would….....