c


„p The Fallacy of Composition

•p 6eople mistakenly think that what applies to the part applies to the whole.1

•p The fallacy of composition ignores interactions between individuals.2

•p hen you make one business richer you have to make another business

poorer. The individual is saved, but the county is not made richer.2

„p Jutput and Demand

•p There is a fear that we will produce more output than the economy can

absorb.3

•p This fear is groundless because national income and national output are

the same.4

•p ¦f people hold on to their money there will be less income for the

producer, which means he will produce less and the consumer will

consume less.4

„p ½easuring National Jutput

•p ë country¶s total wealth includes anything it has ever produced.5

•p ¦ts income or national output includes everything produced during that

year.5

•p D6 (ross Domestic 6roduct) includes everything that is produced

within that country.5

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 •p N6 (ross National 6roduct) is everything that has produced by that

country¶s people.6

•p There is a difference between the ¬
 of real income and its accumulated


of wealth.6

•p ë country can live beyond its flow of real income by surviving on its

durable assets even if its durable assets decline in value.6-7

•p The national wealth is made up of the goods and services that can be

bought with the money a country has. ¦t is not just the amount of money

that a country has. hen adding up the national wealth keep inflation in

mind because prices change.7

„p The Composition of Jutput

•p ¦t is important to keep in mind that output changes through time, cars and

houses have more amenities than they used to have.7

„p Comparisons over Time

•p Common goods that are increasing in price are counted in a country¶s

D6.8

•p oods that are decreasing in price are not counted when considering the

cost of living.8

•p 6eople¶s real wages (wages adjusted for the cost of living8) are decreasing

when the index is biased upward.9

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 •p Œecause the consumer price index is biased upward by a percentage point,

the inflation rate is one point too high. That means the average ëmerican

family makes more money than is reported.10

•p This means that when the media said that wage rates were declining the

ëmerican was worth more.10

•p ëlso, while wage rates have been declining; fringe benefits have been

increasing.10

„p ¦nternational Comparisons

•p ¦t¶s difficult to compare two countries that have very different outputs.10

•p ëlso, a countries output is affected by the average age of its citizens.10

•p The usual way of comparing two countries is by the money value of their

output.11

•p ¦t is important not to measure by an official exchange rate, but to measure

by the purchasing power of a country.11

•p ënother complication is that some countries sell everything through the

marketplace, while other countries sell products through the government at

a lower price.12

•p The national output is measured at how much the product costs, but in an

economy where the government produces a good the value is

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 exaggerated13because it cost too much for the government to sell the

product through the market.14

•p The countries with largest D6s are the countries with the largest

output.14

•p The countries with the countries with the largest D6 per capita are the

countries that are richest when the wealth is divided among the people.15

„p utatistical Trends

•p The media interprets trends in their favor. The truth is that their statistic is

true because of the year they chose.15-16

•p ës more economic activity is conducted in the marketplace it is harder to

differentiate real economic growth and a shift of economic activity to the

marketplace.17

•p ¦n Third orld countries that rise in income and are able to afford better

nutrition, more poor people will survive and the average income may go

down even though everyone increases in income.17-18




 




„p The first effect is always seen.

„p The effects after the first effect are always unseen.

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„p ë bad economist always looks at a good immediate consequence even if the after

effects are terrible.

„p ë good economist will allow a bad first effect to occur because he knows the

effects after the first effect will be good.

„p The sweeter the first effect, the harsher the consequences.

   

„p hen James Œ.¶s son breaks a window the glazier receives 5 francs, which is

seen.

„p ºou also have to take into account what is unseen, the shopkeeper loses money he

could have spend supporting another business.

„p Therefore, the sum total of national labor is not affected by whether the window is

broken or not.





„p The advantages of the tax and the benefits to the providers are seen.

„p The disadvantages of the tax and the injuries to the providers are unseen.

„p hatever the official spends in excess comes from the taxpayer.

„p The service that is performed for the taxpayer should equal another service that
could have been performed for the same price.

„p The tax shouldn¶t just benefit the officer and his family.

 


„p £very public works project should benefit the taxpayer who pays for the project.

„p orkers should not just build and repair so they can have work.
 „p £veryone is taxed for the labor he puts into the project.

„p The reward for the labor should be found in the usefulness of the project.19

c


„p The government has four different ways of taking money from the people: taxes,

bonds, government goods and services, and sales of government assets.20

„p upending is used for current items20 (you pay with taxes), and future items (you

pay with bonds).21

„p ¦f the government spends exactly what it receives in tax revenues the budget is

balanced. ¦f it spends over what it receives it is in a deficit. ¦f it spends under it is

in a surplus. hat it has not paid in taxes is its national debt, the amount it

owes.21

„p Taxation

•p The government can collect more tax revenue at a lower tax rate.22

„p The ¦ncidence of Taxation

•p The incidence of taxation falls on the poor when the rich are able to escape

it through wealthy lawyers.23

•p hen poor people pay more taxes it is called a regressive tax. hen the

opposite occurs it is a progressive tax.23

„p *ocal Taxation

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 •p ¦nstead of raising the tax rates which lowers the chances of reelection.

*ocal officials will declare a modest to lower income community as

blighted and replace it with shopping malls or casinos, which generate

more tax revenue.24

•p The £uropeans have a ³value added´ tax24, which taxes every part of

production. This is less visible than a sales tax and therefore generates

more revenue.25




„p The government debt becomes higher as population, national income25, and

inflation increases.26

„p ¦f someone inherits a bond he inherits the debt of the bond and the wealth it pay it

off. However, if the bond is sold, than the younger generation is issued a new

bond and the debt is liquidated as so far as the older generation is concerned.27

„p New bonds are sold when the old ones are paid off. uo, the national debt never

goes away it just cycles through the economy.28

„p Œonds take a toll on the economy because they take funds out of the private

sector.28

„p hen the national debt reaches a certain size investor begin to worry about

whether they¶ll have to raise interest rates. Raising interest rates can affect other

interest rates rising, which can lower aggregate demand.29

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„p hen the government provides goods and services there is no incentive to stop

the losses. 6eople pay the same for a good or service, but their taxes are raised.30

„p oods and services can also be priced above costs. uurplus funds may be

allocated to where they¶re not most needed.31-32

! 



„p hen the economy is in a recession tax revenues go down, while government

spending goes up. hen the government is in an economic boom tax revenues go

up, while government spending goes down. These are called ³automatic

stabilizers´ because they don¶t require any government administration.33

„p ëll money that is spent is respent. ½oney is taken from taxpayers33 and spent

somewhere else. The only way there will be an increase in spending is if the

government spends more than the people.34

„p Costs vs. £xpenditures

•p uometimes monetary costs of a policy are very high but the costs of not

doing it are even higher. The costs to the economy are higher than the

costs to the government.34

„p Œenefits vs. Net Œenefits

•p uometimes the cost of an item is greater than it¶s benefit and consumers

will only consume it at a lower price.35 The government might then offer it
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 at a lower price but subsidize the consumer for the remaining dollars that

would make it the higher price and the cost of the government program.36

" 
 



„p The government has many obligations from redeeming bonds to paying

unemployment compensation.37

„p The problem with government pensions is that the money comes from the

premiums of working people. ëlso unlike private insurance companies there is no

investment made.38


#$
  
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„p The reat Depression has brought out the myth that capitalism is wrong and that

only government intervention fixed our economy.39

„p ë ½odern Fairy Tale

„p hat made people hate capitalism is that Hoover didn¶t do anything to fix

our economy, but when FDR came and the government intervened, the

economy recovered.39



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„p Central 6lanners fail at ½onetary 6olicy

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 •p Ënlike what many believe borrowing money to buy stocks was not the

cause of the stock market collapse, in fact it was more expensive to

borrow money.40

•p £conomists also believe that inflation drove interest rates down and made

millions of people suddenly not want to invest in the stock market.

£conomists believe that monetary policy was not this reckless.40

•p The central bank was responsible for the contraction of the money

supply.40



&%

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„p There is a myth that says that the free market self-destructed, but it was

government policy that prolonged the depression.41

„p ³The reatest upending ëdministration in all of History´

•p Hoover did not give up all control of the economy, which is commonly

believed.

•p The umoot-Hawley Tariff raised the price on almost all commodities.41

„p ºou Tax ½e, ¦ Tax ºou

•p ith the Ë.u. putting a tariff on their products, foreign companies stopped

buying ëmerican goods.42

„p Free ½arkets or Free *unches

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 •p ënother mistake Hoover made was keeping artificially high, while prices

were dropping. This led many to many workers42 becoming

unemployed.43

•p Hoover gave billions of dollars to farmers whose markets were being

wiped out because of the tariffs.43

•p Hoover imposed taxes on bank checks, and raised the discount rate, which

cut back bank deposits.44

•p Then, Hoover imposed the largest tax increase ëmerica had seen outside

of wartime.43



& '%


„p FDR promised to cut spending and have less government intervention, but that is

not what he delivered.43

„p ³Nothing to Fear but Fear ¦tself´

•p The first thing FDR did was devalue the dollar.44

„p New Dealing from the Œottom of the Deck

•p FDR held a bank holiday for 9 days and afterward 2,000 banks never

opened again.45

•p Congress gave the president the power to change the price of gold. He

raised it to 21¢ because 21¢ was his lucky number.46

•p Then FDR decided to remove the gold standard, which led to limitless

currency.46
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 •p FDR arbitrarily decided to end prohibition.46

•p ¦n the first year of the new deal, FDR decided to spend 7 billion more than

the country had in revenues.46

•p FDR passed the minimum wage laws, which allowed many people to

become unemployed, and passed uocial uecurity which now needs to be

privatized or it will need to be raised to an astronomical price.47

•p FDR passed the ëgricultural ëdjustment ëct, which put a tax on

agricultural processors and destroyed crops and killed livestock.47

„p Œlue £agles, Red Ducks

•p FDR then passed the National ¦ndustrial Recovery ëct.47

•p Ënder the NRë, the government regulated prices and terms of sale.47

•p The cost of doing business rose by 40%; production suffered and didn¶t

rise to where it had been before the law.48

„p The ëlphabet Commissars

•p FDR put in place many tax increases. ët the end of 10 years, the top

income tax rate was 90%48.

•p The Cë and 6ë produced a lot of useless jobs that created wasteful

spending that were counterproductive and politically motivated.49

„p uigns of *ife

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 •p From 1935-36 the uupreme Court outlawed many acts and programs of

FDR. 50

•p The economy got better and then went into a slump again.50



& 
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„p hat caused the second crash was the passage of the National *abor Relations

ëct in 1935, or the ³agner ëct.´50

„p The ³agner ëct´ took disputes from the courts of law and brought them into a

Federal ëgency.51

„p The ëgency sympathized with Ënions, which perverted the law.51

„p £mployers were not allowed to resist unions.51

„p The unions held strikes, seized plants, and spread violence.51

„p 6roductivity went down and many people became unemployed.51

„p ën Ënfriendly Climate for Œusiness

•p FDR hated businessmen; he did everything he could to take wealth from

the high-income earners.51

•p FDR tried to push up tax rates to 100% for incomes over $25,000;

Congress rescinded this order.52

•p FDR also tried to appoint new judges for anyone over 70. This plan also

failed in Congress.52

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 „p ½oney and banking provide the incentive to produce goods and services.53

„p ½oney in and of itself is not wealth-it¶s how wealth is produced and distributed

that¶s important.53

 * #$

„p hat is traded, as money, is determined on what both parties are willing to

exchange.54

„p ½oney only facilitates wealth; it is not wealth.55

„p hen a monetary policy is corrupt people lose wealth because bartering is how

people exchange goods and services.55

„p ¦nflation

•p hen the money supply in a country rises, goods and services become

more expensive.56

•p old is used to back up goods because there is a limited supply of it, and

the government can¶t print limitless amounts of money.57

•p overnments would rather increase inflation than increase taxes.58

•p ë country¶s increase in money supply must come with an increase in

output.59

„p Deflation

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 •p hen the supply of money decreases, it becomes increasingly harder to

pay mortgages or debts.60

•p Deflation becomes worse when people hold onto their money.61

•p During the reat Depression the Federal Reserve decreased the money

supply (raising inflation) when it should have decreased the money supply

by lowering inflation.62

The Œanking uystem

„p The banking system allows people to spend money deposited by millions of

others people.63

„p Fractional Reserve Œanking

•p FRŒ is based on the idea that all the depositors will not want to get their

money at the same time. The banks keep a fraction of the money in their

vaults and lend the rest.64

•p The liquidity of an asset is determined by how quickly it can be turned to

cash losing the least value.65

•p The FD¦C was created to insure people who lost their money so they

wouldn¶t all run65 to the bank at the same time and cause the bank to fail.66

•p The Federal Reserve uystem controls the money supply in the economy by

setting the bank interest rate.66

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 •p 6eople fear the chairman of the Federal Reserve so he/she learns to speak

in guarded tones.

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! 


„p New Classical economists believe wages and prices are flexible. New Keynesian

economists believe that wages and prices are ³sticky´ and that you cannot simply

lower prices to balance supply and demand. This is why they believe involuntary

unemployment exists and monetary policy is important.

„p ½enu costs are the costs a firm has to pay to adjust to the new prices. ën example

is printiong new menus.

„p uome economists believe that because menu costs are so small they don¶t help

explain recessions. Jthers say that though they are small they have large effects

on the economy.

„p 6roponents of this idea believe that a change in the price for one firm benefits or

harms other firms and affects the average price level.

 
   



„p hen firms set prices, they stagger them. This makes the overall price change

slowly; individual prices change more often then overall prices.

„p The problem with staggered price increases is that no firm wants to be the first to

lose business because of a substantial increase in price.

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„p ¦n an economy each firm depends on the other to cut price when they do if the

don¶t the firm that made the cut will lose money.

!  $


 „p New Keynesian economists believe that lower wages reduce the efficiency of

workers.

„p ¦f a worker¶s wages are high, they are less likely to quit the job.

„p ¦f the firm pays its workers well the best workers are unlikely to leave.

„p ith higher wages a worker is less likely to shirk off.67

,
 

„p ½y opinion of FDR didn¶t change after the speech. ë lot of what he said ¦ had

read in the article ³reat ½yths of the reat Depression´ by *aurence . Reed.

Œefore ¦ had read that article ¦ thought he was a great guy partly because there is a

monument towards him in ashington D.C. and ¦ assumed that he got ëmerica

out of the reat Depression.

„p ëfter reading the article and listening to him speak ¦ agree that the ëëë was

wrong. ¦ more strongly agree with that after hearing that we had to import food

because we were restricting crop production that much. He also convinced me by

talking about how we were paying high taxes for people not producing. ¦t reminds

me of renting, taxes going to support special interest groups lobbying in D.C.

„p ¦ was especially moved by him saying that in the 6ë the jobs would only go to

Democrats who would vote for him to run another term and put in place or keep

the same destructive programs that kept this country in the reat Depression.68

pppppppppppppppppppppppppppppppppppppppppppppppppppppppp
pN. regory ½ankiw, ³New Keynesian £conomics,´ The Concise £ncyclopedia of

£conomics *ibrary of £conomics and *iberty (2008)

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