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George H. Blackford, Ph.D.

 Economist at Large

 Email: george(at)rwEconomics.com

 

It ain't what you don't know that gets you into trouble.

Itís what you know for sure that just ain't so.
Attributed to Mark Twain (among others)

 

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Penney Wise and Pound Foolish

George H. Blackford © 7/20/2013

In trying to understand the economic system it is difficult for most people to keep the numbers in perspective since the numbers are astronomical at times, and are truly mystifying to those of us who have never had to worry about a million dollars let alone a billion or a trillion.  The importance of perspective in looking at economic numbers can be seen by examining the story underlying a headline that recently (4/4/13) appeared in Bloomberg News, Millionaires Got $80 Million in Jobless Aid in Recession.  According to the author, Frank Bass:

The $80 million represents less than 0.01 percent of this yearís $845 billion projected deficit. Yet the unemployment aid to millionaire households underscores the lack of means-testing in some federal aid programs . . ..  The aid also is a reminder of the difficulty of reining in spending.  

The fact is that, since unemployment benefits are taxable income, some 35% of that $80 million was recouped in income taxes on those benefits, only $52 million was kept by the millionaire recipients, and that $52 million is not only less than 0.01% of the $845 billion projected deficit (52/845,000 = 0.0000615), it is less than 0.002% of the $3,537 billion federal budget in 2012 (52/3,537,000 = 0.0000147). 

In addition, it is a mistake to think we can reduce the budget by even this piddling amount by converting our unemployment insurance program into a means-tested welfare program since this ignores the added cost of the increased bureaucracy it would take to investigate the income status of the millions of beneficiaries in this program.  By simply making unemployment benefits available to all who pay into the system, irrespective of income, those bureaucratic costs are avoided, and the efficiency with which payments can be made to the unemployed is increased dramatically.

But the real absurdity here is the delusion that this $52 million has something to do with the $845 billion projected deficit or the difficulty of reining in spending in a $3,537 billion budget: What is the point in wasting time and energy discussing the fate of $52 million within the context of an $845 billion deficit and a $3,537 billion budget?  That's like worrying about $52 when your total expenses are $3,537,000 and you are $845,000 in the hole. 

Even if we could reduce the deficit $52 million a day by concerning ourselves with this sort of nonsense it would take 44.5 years to solve a $845 billion deficit problem in this way (845,000 / 52 / 365.25 = 44.4901).  This is the epitome of what it means to be penny wise and pound foolish, and this kind of foolishness arises from a failure to keep the numbers in perspective.  

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