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David McDonald

David McDonald

David is a 19-year-old Canadian student currently attending the University of Guelph. He currently studies Public Management and economics with hopes of one day becoming an accomplished journalist. David enjoys reporting on global events and actively try to make a difference in the world.
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David McDonald

David McDonald, Founder and Owner of The Global Millennial

 

 

Welcome to The Global Millennial. My name is David McDonald, I am the founder and owner of The Global Millennial; a think-tank for global economic discussion. Our goal is to bring educated, relevant, and unique perspectives on global affairs through the form of articles and video. Our writers span all areas of the globe, and vary greatly in age and expertise. Some of our writers are university students, while others are accomplished professors and economists. Together, we aim to promote a more educated future by providing a greater knowledge around the studies of economics and political science.

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Democracy Meets Socialism

Hafsah

Writer. A Caffeine dependent life-form. Original Hopeful Rational Inquisitive IngeniousPhotographer Sailor Philosopher Happy. Serial Chips and Salsa Eater.Curious and ambitious. In-between sofa cushions.

Democracy: Giving power to the masses. It was a doomed sick love story right from the start. We’ve all heard the story of how Democracy grew up and met socialism. Democracy and socialism had a child called communism. To put this into perspective, democracy is giving power to the masses. Democracy is a fundamental part of societies today, but what happens when democracy fails and meets socialism. Communism has been viewed as a disaster, but what if communism a popular belief is coming back revolutionized and better than ever before. What if a new type of democracy is evolving? I call it the communist democracy.

Who is Karl Marx?

To understand Marxism it’s  imperative to understand the time and era in which Karl Marx was born. He was born in 1818, it was the beginning of the world as we see it today.

The French revolution had occurred  30 years back and cries of  ‘Liberty’ ‘Equality’ and ‘Freedom’ was still fresh. It was also the time of Industrial Revolution and capitalism had just replaced feudalism. Marx was influenced by the idea of French Revolution. His growth was marked by rapid industrialization and capitalism had become a dominant economic system in Europe. He also saw the horrific condition in which workers lived. Marx saw them toiling for more than 12 hours a day but still managing to earn just enough to sustain themselves. He observed that capitalism had benefited only few section of society and came to conclusion that though the French revolution hadoverthrown feudalismm but capitalism had not been able to fulfill the promise of equality and freedom.He saw society being divided into haves and haves not.It was master and slaves (slavery system) after that lord and serf (feudalism) and now bourgeoisie and proletariat.

Because of his radical idea, he was thrown from Germany and subsequently from many countries until he got asylum in England. He worked as a reporter for New York Tribune and covered American Civil War publishing many articles. He immersed himself in studying all the important economic and political philosophers before him like Adam Smith, David Ricardo, James Mill etc. Marxism emphasized on one thing which his predecessors missed i.e  LABOUR.
Now coming to Marxism which is fundamentally based on principles of class struggle, historical materialism, dialectical materialism, alienation and theory of surplus value.

Karl Marx – Revolutionary or Evolutionary?

If you look around you. The masses of people are stuck in this cycle of poverty they can’t get out of. I guess capitalism was a victim of it’s own success. Karl Marx would be turning in his grave if he found out what was going on around the world today.  Karl Marx was left wing and extremely communist. He found a model that was revolutionary and the popular despised idea of communism is a popular belief coming back to societies and is now seen as the way forward. Let me introduce you to UK politics. There’s two main parties – The Labour Party (which has gone extremely left wing under Corbyn) and The Conservative Party (which is currently right wing under Theresa May). Then there’s the other parties like The Green Party  and The liberal democrats (whose recent leaked manifesto stated that they would fund the UK economy by legalizing marijuana, but that’s a story for another day)

Corbyn’s Socilaist Manifesto

Jeremy Corbyn. A man in UK politics who is evolutionary. Revolutionary. Extraordinary. A man true to his word. A man who is very much a Marxist. Details of a draft version of Labour’s pitch to the country have leaked, with Jeremy Corbyn’s party hoping to make manifesto commitments to part-nationalise some public utilities and to make funds available for social care. His manifesto was leaked and it was found:

  1. Respect the Brexit referendum result and give a meaningful vote on any deal to parliament. EU citizens living in the UK would have their rights guaranteed unilaterally. Theresa May’s Brexit white paper would be replaced with a plan that aims to retain the benefits of the customs union and single market.
  2. Bring parts of the energy industry into public ownership and introduce a local, socially owned energy firm in every area. Also introduce an “immediate emergency price cap” to make sure dual fuel bills stay below £1,000 a year.
  3. Nationalize the railways.
  4. Phase out tuition fees.
  5. Make more funds available for childcare and social care.
  6. Retain the Trident nuclear deterrent. A sentence from earlier drafts saying that a prime minister should be “extremely cautious” about using a weapon that would kill “millions of innocent civilians” has been removed.
  7. Place “peace, universal rights and international law” at the heart of foreign policy, while committing to spend 2% of GDP on defense, as required by Nato.
  8. Make zero-hours contracts illegal.
  9. Build 100,000 new council houses per year.
  10. Complete HS2 from London to Birmingham, Leeds, Manchester, and Scotland.
  11. Borrow £250bn to invest in infrastructure but stick to the fiscal credibility rule to balance day-to-day spending. Also, raise taxes for people earning more than £80,000 and reverse corporation and inheritance-tax cuts.
  12. Insulate homes of disabled veterans for free.
  13. Extend the right to abortion to Northern Ireland.
  14. Oppose a second Scottish referendum.
  15. Lower the voting age to 16.
  16. Employ 1,000 more border guards.
  17. Recognise the benefit that immigrants have brought but introduce fair rules and reasonable management, working with employers that need to recruit from abroad but deterring exploitation.
     

Money. Money. Money?

But the question we find ourselves asking is just exactly where is Corbyn going to get all this money to fund this beautiful disaster? Many countries like Germany now run a budget surplus. They’ve done pretty well compared to the aftermath of the world wars.

Germany became the first member the euro-zone to sell 10-year government bonds at a negative yield—which is to say, investors paid for the privilege of lending Berlin money for an entire decade. If someone were to purchase and hold these bonds to maturity, they would get back less cash than they originally invested.

This is not how bond markets work when all is well and fine in the world. In sane times, lenders are supposed to get paid. But government bond yields have been plummeting all around the globe, as nervous investors have looked for relatively safe places to put their money in what feels like an uncertain economic moment (when bond prices rise, the interest they pay stays the same, so their yields fall). Citi recently reported that about one third of all developed nation debt is offering negative yields. Amazingly, yields on Switzerland’s 50-year bonds recently fell below zero. The key point about Wednesday’s news is that Germany auctioned off this debt off itself. Most data we see on bond yields reflect the price on the secondary market—they’re for old debt that investors buy and sell between one another. This time, the German government is borrowing itself, and for nothing.
 Germany is not the first country to pull off this particular party trick. Switzerland sold negative-yielding 10-year bonds in 2015. Japan also did it this year. Meanwhile, Germany and other European countries have previously sold off shorter-term debt at negative yields.

Democracy and socialism

Democratic socialists believe that both the economy and society should be run democratically—to meet public needs, not to make profits for a few. To achieve a more just society, many structures of our government and economy must be radically transformed through greater economic and social democracy so that ordinary Americans can participate in the many decisions that affect our lives.

Democracy and socialism go hand in hand. All over the world, wherever the idea of democracy has taken root, the vision of socialism has taken root as well—everywhere but in the United Kingdom. Because of this, many false ideas about socialism have developed in the UK.

Does Democratic Socialism mean that the government runs everything?

Democratic socialists do not want to create an all-powerful government bureaucracy. But we do not want big corporate bureaucracies to control our society either. Rather, we believe that social and economic decisions should be made by those whom they most affect.

Today, corporate executives who answer only to themselves and a few wealthy stockholders make basic economic decisions affecting millions of people. Resources are used to make money for capitalists rather than to meet human needs. We believe that the workers and consumers who are affected by economic institutions should own and control them.

Democratic socialists have long rejected the belief that the whole economy should be centrally planned. While we believe that democratic planning can shape major social investments like mass transit, housing, and energy, market mechanisms are needed to determine the demand for many consumer goods.

Hasn’t socialism been discredited by the collapse of Communism in the USSR and Eastern Europe?

Socialists have been among the harshest critics of authoritarian Communist states. Just because their bureaucratic elites called them “socialist” did not make it so; they also called their regimes “democratic.” Democratic socialists always opposed the ruling party-states of those societies, just as we oppose the ruling classes of capitalist societies. We applaud the democratic revolutions that have transformed the former Communist bloc. However, the improvement of people’s lives requires real democracy without ethnic rivalries and/or new forms of authoritarianism. Democratic socialists will continue to play a key role in that struggle throughout the world.

Won’t socialism be impractical because people will lose their incentive to work?

We don’t agree with the capitalist assumption that starvation or greed are the only reasons people work. People enjoy their work if it is meaningful and enhances their lives. They work out of a sense of responsibility to their community and society. Although a long-term goal of socialism is to eliminate all but the most enjoyable kinds of labor, we recognize that unappealing jobs will long remain.

These tasks would be spread among as many people as possible rather than distributed on the basis of class, race, ethnicity, or gender, as they are under capitalism. And this undesirable work should be among the best, not the least, rewarded work within the economy. For now, the burden should be placed on the employer to make work desirable by raising wages, offering benefits and improving the work environment. In short, we believe that a combination of social, economic, and moral incentives will motivate people to work.

Just what do you think?

Japan’s Debt problem and how to solve it

Lakshya Narula
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Lakshya Narula

Lakshya Narula is just another 22 years old engineer turned economics student trying to make a dent in the economics community. He is currently pursuing Ceramic Engineering from IIT(BHU), Varanasi, a self-taught student of economics and a regular writer on Quora who wants to pursue a career in economics.
Lakshya Narula
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Japan’s central government is more than 1,000,000,000,000,000 Yen in debt ($11 Trillion), which is about 245% of its GDP (Gross Domestic Product) and over $80,000 per capita. There’s little chance of it ever being paid back and things can get a whole lot worse if right policies at the right time are not implemented.

Let us see how government accumulates debt in the first place.

Each year, the government receives money from the households and corporations in the form of taxes and other revenues. It then spends in the economy on public services and other commitments. If the government has to spend more than what is collected from the nation, it has to borrow the difference. It does this by issuing debt securities called IOUs or government bonds.

A government bond is a piece of paper which says that government is borrowing some money from you and will pay you the fixed interest rate, called yield of the bond, for the whole period the bond is issued.

The investors (people who have money and can lend it to the government for that long time) buy those bonds and government receives the money. Now the government can spend more on services than the revenue collected and the investors are paid their interest rates.

The difference between the amount the government receives and the amount it spends on services (generally greater than it receives) is called the fiscal deficit of a nation/country/government.

But when the outstanding debt gets too large, investors start to worry that the government won’t give back their money (called the principal amount). Since now the investor has given a lot of money, the next time he wants to lend, he will ask the government for a higher interest rate than previous because he knows that government needs the money (demand is high) and so the price will be high (the interest rate is the price of borrowing money).

This is where the Central Bank comes in. The Central Banks lower the interest rate, which means that it prints money and buys those bonds from the investors so that investors do not increase the interest rate. So, it’s a win-win situation for both; the government and the investors.

Sounds great? Well, there’s a catch. Over time, continual interest rate suppression and printing money develop an inescapable trap.

Let’s see how it works.

Now, the government has an added expense of giving money equivalent to the interest rates (yields) every year to the bondholders in addition to public services and other projects it spends on. Considering a fixed government revenue, some part of the revenue collected by the government now goes to the interest payments of the investors and the amount to be spent in the economy decreases by that much.

Over time, even if the interest rates are constant, the debt pie gets bigger and bigger and there will come a time when all the revenue generated will go into the interest payments of defaults.

How does Japan’s debt fit in this scenario?

Everything is same, just that now, the investors are the population of Japan, who have invested/saved their money with their government. So, all the debt which Japan has is now the public debt.

The interest rate right now is about 1% and debt is 24.5 times the collected revenue, this means that 24.5% of the total collected revenue is used just for paying back the interests. Foreign investors will insist on increasing the interest rate because they can see that Japan is a total mess and can default anytime in long run, so the interest rates will rise and there will come a time when the interest rate would be around 4.3% (keeping debt and revenue fixed), the whole revenue would be used for giving the interest payments and there’d be no option for Japan then to default.

Problems and solutions –

The main problem in Japan is its decreasing population and increasing aged people. More and more people are retiring and they will now ask the government to give back their money which they have saved with them. When this happens, the government has no other option than to issue more debt. Since the people of Japan are not investing anymore (no growth and aged population), Japan has to look out for foreign investors who can invest at the same or a lesser interest rate, which seems next to impossible.

japan population

It is advised by analysts to increase the retirement age, start pension funds after the age of 65 or above.

Forget analysts, when I told my mother about this (I wanted to revise and I told her in a layman’s language), she said the same thing, increase the retirement age. She also suggested that people should come forward and do something in this regard because after all, it’s all their money.

The other problem is of increasing unemployment due to a lower population and lesser young professionals, hence decrease in production and GDP. For this, the immigration laws should be relaxed so that more people are employed, hence more production.

“Womenomics” is a word being used which means raising the female employment rate from 68 percent to 73 percent by 2020. The government has required corporations to increase the appointment of women to management positions. The government argues that raising women’s wages and status in the labor market will also increase fertility rates, pointing to countries like Sweden and Denmark that have both higher female employment and higher fertility.

There is a term called Debt to GDP ratio in economics, which aims to measure the level of debt in an economy to their GDP.

Even if in some fantasy world, Japan is able to maintain the level of debt and tries to increase its GDP by growing the economy, it can’t do so. This is because of many policies which restrict the foreign trade (most of the economy of Japan relies on exports to other countries), and people are getting aged, so reduced spending. If they try to increase the taxes, then also it will affect the economy and they tried this in 2016 when they increased the consumption tax to 8% from 5% but they didn’t keep in mind the simple demand rule that if price increases, people reduced the spending, so that policy backfired.

Also, from the past 20 years, Japan’s growth is almost constant, so the numerator (debt) is getting bigger and denominator (almost constant), so the situation is getting worse.

William W. Grimes, a Professor of International Relations and Political Science at Boston University, and a Research Associate for the National Asia Research Program says –

It is not possible to simultaneously reduce the current level of public debt without creating a serious recession, if at all. Japan’s central government is currently running fiscal deficits in the neighbourhood of 8% of its GDP. It is just not feasible to cut deficits by that much in a short timeframe—even the disastrous Hashimoto fiscal consolidation efforts of 1997 did not go that far. Even if the Japanese government did somehow manage to stop the growth of debt (the numerator of the debt-GDP ratio) quickly, the shrinking of the GDP (the denominator) would mean that the ratio would not level off.

What are your thoughts on Japan’s current economic situation?

How the United States justice system is flawed

Hafsah

Writer. A Caffeine dependent life-form. Original Hopeful Rational Inquisitive IngeniousPhotographer Sailor Philosopher Happy. Serial Chips and Salsa Eater.Curious and ambitious. In-between sofa cushions.

Justice. The truth, however, is that the court system is flawed in just about every way imaginable. The courts are in the practice of handing out punishments – not justice – which generally work to oppress our country’s racial minority and impoverished people. Law and the legal system is supposed to evolve with the times. Are we stuck in the medieval times?

How is the system flawed?

  • The UK VS the USA:  In the UK, the prosecution (The prosecution is the legal party responsible for presenting the case in a criminal trial against an individual accused of breaking the law) cannot threaten the suspect and give them more aggressive charges if the person does not plead guilty of a crime but wants to go on trial to prove innocence.  In America, however, this is just standard practice. The idea behind our justice system is that everyone gets his or her day in court, but that is rarely how things play out anymore. In many instances, maintaining your innocence is considered a dumb move because the potential punishment is so hefty. In most cases, people plead guilty and take a lesser punishment regardless of their culpability because the risks of losing at trial is far too risky. How is that justice?
  • Unfair arrests: In the U.S., African Americans are six times and Latinos are 3 times more likely to be incarcerated than their white counterparts. Before you blame it all on behavior, police seem to disproportionately target certain people for arrests. Despite similar drug usage rates, black people are four times more likely to be arrested on marijuana charges. Moreover, punishments are not allocated equally. On average, judges sentence black convicts to 20% more jail time than white people who committed the same crime. How do you help convince a country that black and brown people are dangerous criminals? By disproportionately locking them up more often and longer to reinforce the idea that they are criminals.
  • Prisons are a business: Why does the U.S. have the world’s highest incarceration rate? As usual in this country, follow the money for the answer. Over the years, prisons have gone from a state-run entity to a private enterprise. Since maximizing profits for this industry requires stuffing as many bodies into the jails as possible, that means the demand for new inmates is always high. We can’t expect justice to be served when rich people have a financial interest in seeing more people locked up.
  • Plea deals?: Those who can’t afford a defense are supposed to be afforded a public defender attorney, but that is not always provided. There are documented cases of people being offered an immediate plea “deal” if they agree to not request council. The poor lawyers who agree to serve as public defenders are underpaid and overworked, and often lack the time and resources to adequately mount an effective case against the state’s prosecution. A great new HBO documentary, Gideon’s Army, portrays just how unviable the system is for everyone involved.
  • Justice is dead: With pressure from the state to obtain convictions, prosecutors are forced to play a game where being on the winning side is more important than being on the right side. Somewhere in this process, the idea of finding justice is lost. Prosecutors should be tasked with presenting a fair case, not attempt to win at any cost, particularly when “winning” may mean a potentially innocent person’s freedom is at stake.
  • A judges conscience: Think legislators are the only elected officials whose positions have been compromised by the Citizens United decision and the subsequent need to appeal to campaign donors? Think again: state judges (who decide 95% of the country’s court cases) are subject to the same warped system. 38 states require its top judges to run for office, and since voters generally knows little about its judicial candidates, the winner is usually the person who spends the most to get his or her (usually his) name out there. This leaves judges beholden to their private interest campaign financiers, which has unsurprisingly led to a surge of decisions in favor of corporations rather than individuals.

The Innocence Project

Every single man, woman and child in this country could easily be accused, tried and condemned in a “circumstantial evidence” case. As a result they could spend a lifetime attempting to prove their innocence. I call it the monster of deception. These laws are designed to prosecute guilty people. The law assumes that once a defendant is found guilty by a judge and jury in a circumstantial evidence case that its job is entirely finished. It is also designed to disallow any defendant a meaningful appeal of his or her guilty verdict. Circumstantial evidence laws assume that all doubts of innocence are erased once a person has been tried and convicted. Lawmakers created this monster in the hope of keeping the guilty behind bars. But what if you are innocent?

After 14 years on Florida’s death row, Frank Lee Smith died of cancer in January 2000, before he was exonerated of rape and murder. The DNA results not only cleared Smith of the crime, but also identified the true perpetrator, Eddie Lee Mosley.  According to the Innocence Project, 311 people in U.S. history, 18 of whom were sentenced to the death penalty, have been freed after DNA evidence proved them innocent. The average DNA exoneree has served 13.6 years behind bars.  So are prisons really corporations that need to change?

Holmes, a renowned investigator of crime, once remarked, “Circumstantial evidence is a very tricky thing. It may seem to point very straight to one thing, but if you shift your own point of view a little, you may find it pointing in an equally uncompromising manner to something entirely different.”

Circumstantial evidence

Circumstantial evidence is not direct evidence from a witness who saw or heard something. It is not a cut and dried fact. There is no DNA or real eyewitness testimony to help prove guilt or innocence in a case. Instead circumstantial evidence is indirect evidence that gives prosecutors leeway to actually invent allegations. These allegations are manufactured to attempt to persuade a jury that the defendant is guilty. The prosecutor can imply that something happened, but he or she cannot directly prove that it happened. It is a chain of events or facts (usually manufactured in a clever prosecutor’s mind) designed to help a jury determine the innocence or guilt of the accused.

Circumstantial evidence is generally admissible in court unless the connection between the fact and the inference is too weak to help in deciding the case. Prosecutors are well schooled in the deceit and lack of conscience their job involves. Many convictions for various crimes rest solely on circumstantial evidence.

What if you are innocent of the charges but the jury finds that you are guilty despite this fact? The real question is how can you prove your innocence? History shows that circumstantial evidence cases get very complex because of the webs of deceit spun by a wily prosecutor determined to sway a jury his or her way to gain a conviction. This has a devastating impact on the middle class and the poor who cannot afford adequate legal counsel. As the case becomes more complex the cost of defending yourself against a false allegation grows impossibly expensive. Would you like to spend your life savings trying to defend yourself against a false allegation? That’s assuming you have a large savings account.

The Supreme Court ruling: K.T. Thomas and R.P Sethi

The Supreme Court ruled that that in a number of cases where direct evidence is scanty that circumstantial evidence plays an important role. Justices K.T. Thomas and R.P Sethi ruled during a criminal murder case appeal that circumstantial evidence, furnished by the prosecution, can be used to convict, provided that the evidence is so complete that it leaves no doubt about the guilt of the accused. The judges ruled that the circumstances relied upon by the prosecution must be clearly established. The truth of the matter is that most of the allegations against a person in a circumstantial evidence case is never clearly established.

This ruling appears biased in favor of the prosecution. It is clearly unfair to someone who is innocent and whose conviction rests solely on a collection of cleverly crafted circumstantial evidence. The false allegations from the Prosecutor can come from his or her own personal need to gain a conviction. Furthermore, the laws are written in such a way to keep anyone convicted on circumstantial evidence from actually receiving an appeal. Any appeals that may be filed by an innocent person are basically futile because the Supreme Court constantly rules against them. As a result of this the innocent person in prison could be denied the right to a new trial. The laws that currently protect a circumstantial evidence conviction can and does impede true justice.

If I am innocent how can I prove that I am not guilty beyond a reasonable doubt? The answer is that you cannot. Your entire future depends on the decision that twelve people will have to make. They do not know anything about you except what they have read in the newspapers or heard on the news. Prosecutors use the press to help win their cases. Are juries fallible? The answer is, of course they are. Human beings from all walks of life are subjected to serving on a jury. Twelve people who do not know you decide the course of your life forever.

The facts are that a jury doesn’t really know if a defendant actually committed a crime. In many cases, the prosecution doesn’t even know. Mainly because of media pressure which in turn causes public outcry; these cases become equivalent to a circus act. The police and prosecuting attorneys fall under pressure because it is a part of their jobs to ensure that someone pays for a crime committed. A mean-spirited and contentious prosecutor can allege that any number of things happened and they use any means available to them to gain a conviction. What is inherently frustrating about a circumstantial evidence case is that it has the legal ability to convince a jury that an innocent defendant is guilty.

The jury has a legal obligation to carefully examine the evidence presented to it. The first question should be, Is the fact possible? If so, are there any circumstances that could render it impossible? If the facts are impossible then the jury should find the defendant innocent or guilty based on what they conclusively know. What we do know is that the real truth rarely comes out in a courtroom.

Often the defendant’s rights are greatly compromised by the way different states place limitations on their rights of disclosure. Most states do not allow disclosure in a criminal case. This can impede true justice because if a defendant had disclosure rights they would have the right to depose any witnesses who plan to testify against him or her. This would allow the defendant to collaborate more meaningfully with their attorneys and this could greatly help an innocent defendant prove his or her innocence. In most states, a person bringing a civil suit in a car accident, for example, has more discovery rights than a person who may face the death penalty or a long period of incarceration.

Discovery rights should be allowed in all criminal cases. If an innocent person could have the equal rights of discovery in a criminal case, it would eliminate any surprises the defendant may face in the courtroom. By limiting the defendant’s rights of discovery, it proves that most states actually value monetary case settlements over criminal cases that involve our most basic rights under the Constitution. These are the rights to pursue life and to have our liberty. The case eventually ends up in the hands of twelve people who have to decide who has presented the best argument for the innocence or guilt of the defendant. They deliberate by asking the questions: Who presented the best argument? Was it the defense or the prosecution?

Jurors are not legal experts. Jurors come from varied backgrounds and from all walks of life. They are human beings who can make mistakes. But the question begs asking, if jurors are not allowed to vote their consciences, how can they possibly pass judgment on another human being who may be innocent? The jury selection process needs improvement as well. Prosecutors and attorneys intentionally rule out anyone who has had any contact with the legal system. They want jurors who are uninformed and who will believe the tales invented by the prosecution. The truth is that most jurors lack the ability to decide the case based on factual evidence.

As children we are taught that the USA haS the best legal system in the world. It has some flaws, but it is the best in the world. I no longer believe that true justice exists. If the system is the best in the world, why are we sending innocent people to prison? And if an innocent person is convicted, why are we denying them the right to appeal their sentences? I vote to abolish the practice of allowing the legal system to ruin our lives by continuing to incarcerate the innocent. A new approach needs to be made and fast too.

Source: Lectic Law Library (http://www.lectlaw.com/)

The Hidden Benefits Of Taxation

David McDonald

David McDonald

David is a 19-year-old Canadian student currently attending the University of Guelph. He currently studies Public Management and economics with hopes of one day becoming an accomplished journalist. David enjoys reporting on global events and actively try to make a difference in the world.
David McDonald

Sunday, May 7th 2017

Article By: Charles St. Pierre

                             

A large tax wedge can lead to a dramatic increase in economic efficiency. The market share of ‘deadweight loss’ produced by a tax wedge consists of inefficient producers and indifferent consumers.  The high costs in resources involved in production of the relatively small quantity of ‘deadweight loss benefits’ can be much more efficiently applied elsewhere in an economy.  Because of this increase in efficiency, we find a substantial government sector and its services may be maintained with very little net cost to a society without cost.

Historically, taxes have been considered to be a burden on the productive capacity of an economy.  Many of us have at least little bit of a feeling that they’d be better off without them.  Even critical services such as police and fire protection are suspect expenditures to some. Spending tax money on infrastructure, like roads, public water supplies, in some countries health care and retirement, some claim to be an imposition on their liberty.  Some say all taxation is theft. We will not arguer these philosophical points, we will merely argue that an economy, a society, is materially better off with taxes, almost irrespective of what those taxes are spent on.  This is because some of the most important benefits of taxes are not in what they provide, but in how they can shape an economy. Here they can provide a massive increase in economic efficiency, a much higher amount of goods and services for a given amount of resources consumed.

Let us look the standard Econ 101 supply and demand diagram of a free market, and see what happens when we impose a tax.  We will look at the market for that commodity familiar to economics students everywhere: Widgets. Sure, it could be  a market in anything, but most markets have unique characteristics, and we want to talk generalities.  So we’ll use widgets.

 
 
taxes supply and demand
 
 

In a supply and demand diagram for the market of widgets, the quantity of  widgets bought and sold is plotted against the price.  The more money is offered for widgets, the more producers are willing and able to make, so the supply curve slopes upward.  The demand curve slopes downward because the higher the price for widgets, the fewer widgets consumers are willing to buy.  Where they come together  (at the equilibrium point e)  is that price where consumers are willing to buy as many widgets as producers are willing to make and sell.

The green and blue triangles are the benefits (welfare) society gets from widget production. The benefits are divided between the producers and the consumers.  The blue is what the producer gains from producing widgets.  This includes his profits. The green is the net benefits consumers get from using their widgets. Not all consumers derive the same benefits.  Some need their widgets more.  Some may just have more fun with them.

The price is the market price, and is the same for all producers and consumers.  The quantity of widgets produced, and the price they are sold at on the market, are determined from where the supply and demand curves come together.  (At e.) Looking at the diagram, we see the widget producers on the left are able produce at a lower cost than producers on the right, so they are able to make higher profits.  They get more benefits than the less efficient, more marginal producers.  Similarly, the consumers on the left get more benefit from the use of the widgets they buy. This is shown by their willingness to pay a higher price along the demand curve.  The difference between what they are willing to pay for widgets and what they actually have to pay is the net benefit they derive from what they are buying.

To the right of the equilibrium point, the cost to producers for making widgets is greater than consumers are willing to pay for widgets.  The cost of production per widget goes up, but with more widgets produced than consumers are willing to pay so high a price for, the price goes down.  So producers don’t make more than quantity Q  widgets, because consumers won’t buy more than Q at that price. 

So what  happens when we put a tax on widgets?  Here we put a production tax T on every widget.  This results in a price difference between P’, the price consumers pay, and  P*, the price producers collect, on every widget produced. This is called a tax wedge.  It effectively increases the cost of production for widgets.  So it shifts the supply curve up by that amount, as shown in the following diagram.

 
 
market with taxes
 
 

Since the  price P’ paid by consumers is higher, they don’t want to buy as many widgets as before. Instead of wanting to buy Q widgets at price P, at the higher price P’ they only want to by Q’ widgets.  Meanwhile, at the quantity Q’ of widgets that consumers want to buy, producers can only receive P*.  The difference between the prices P’ – P*, times the quantity Q’ produced and sold, is the revenue received by the government.  So we have three regions of benefits, Producer Welfare and Consumer Welfare are both reduced. 

Much of this welfare lost by consumers and producers goes instead as Government Welfare.  For their loss in taxes, consumers and producers gain the benefit of government services. The remainder is the region of deferred welfare, benefits which society does not receive, because the tax makes the production of more than Q’ widgets unprofitable to producers, and too expensive for consumers. So the combined benefits to society with the tax are less than the benefits which accrue to society without the tax.

However, this region of lost benefits, the region of so called ‘deadweight loss due to taxes,’ consists of benefits which are both costly to produce, and therefore of low benefit to producers, and of low benefit to consumers, because the remaining consumers in the market are unwilling to pay much more than what the market price would be without taxation.  In fact, with taxation, they are unwilling to pay the price for widgets at all.  They just don’t want widgets that badly. The resources spent in producing these small benefits, now, could be more efficiently spent elsewhere in the economy, as we show in the next diagram.

 
 
how taxation can create economic efficiency
 
 

Here, in Market W,  S’ is the new Supply curve brought about with the increase in costs imposed on widget producers from taxation.  The marginal benefits (green striped triangles) otherwise attained by marginal producers at higher cost are forgone, the resources which would have been spent to obtain those marginal benefits are instead available, and here allocated, to be expended more efficiently in Market T of the economy, the market for thingbobs,.  Market T can be similarly taxed, the resources applied still elsewhere in the economy. Eventually, of course, the entire economy is made more efficient, as a portion of the otherwise inefficiently used resources in other markets are distributed to other markets, are some even eventually returned to more efficient use in the markets for widgets and thingbobs.  

Now the freed resources are not actually re-allocated by government.  Private enterprises, rather than trying to inefficiently compete in an unprofitable market, simply choose to place their resources in other markets where they can be used more efficiently.  One can argue, of course, that they should do this anyway.  But it is simply the fact that every market has marginal and inefficient producers, trying to make a dollar.  The tax provides them with additional incentive to enter markets where their use of resources will be more socially efficient, where for lesser cost they provide greater welfare.

To be sure, the difference is harvested by the government. And if we examine the diagram with two markets, we see that the net benefits to the private sector are smaller, with the tax, by about the welfare society would gain from the inefficient producers.  The diagrams are generic, and results will vary. 

However, in the example sketched, with a tax wedge in place transforming the inefficient producers in one market into efficient producers in another, for the same cost, society gains government welfare in amount about 4 times the total welfare provided by the inefficient producers. (The direct gains in government welfare from taxing widgets replaces some of the welfare society would gain if the market in widgets were untaxed. So, for the cost of expensively produced widgets, we gain efficiently produced thingbobs, and a total of government services of value more or less equal to the value of the combined social value of the production of both widgets and thingbobs.    .

Under judicious taxation, as a result of this increase in efficiency in the use of resources, most of the services of government can be provided for for free.  That is, resources which would be applied in some inefficient productive process, and so largely wasted, may be applied more efficiently in providing economically useful government services. And many of the services provided by government, by eliminating many of the costs of transaction and overhead that producers would otherwise bear, also act to increase the efficiency of the private productive economy. 

Inadequate taxation, and the necessary reduction in economically useful services purchased with these taxes, far from increasing the competitiveness of an economy, decreases it, and nations with an inadequate public sector are at a competitive disadvantage with respect to foreign producers in countries with more robust public sectors. Further, even with the light tax burden, the citizens of countries with small public sectors are less provided for, and are a greater burden to the industry of that country, than countries with a larger government service sector. 

In the example illustrated by the diagram, without taxation the total social welfare is about twice the cost of resources expended. (  The size of the green plus the blue triangles compared to the pink triangle in the first diagram.) With the tax wedge as illustrated, the total social welfare is almost 4 times the real cost to producers.  (The size of the solid green and blue regions in both markets of the previous diagram compared to the solid pink regions.)

Although we have drawn the diagram for two particular and identically composed markets, it is apparent that for a wide variety of supply and demand diagrams, and thus, for a wide variety of economic sectors, the application of a tax wedge will result in a large increase in economic efficiency.

By implication, the opportunity costs of the small amount of marginal benefits forgone are huge. The benefits forgone would be obtained by essentially wasting resources in producing them, and are a small fraction of the benefits produced by allocating these resources more efficiently.  Indeed, we may expect this improvement to be even better than it initially appears, since we would expect the most marginal producers to be those most eager to externalize their costs in order to remain competitive.  Pressure to externalize costs is thus also reduced on the more efficient producers. The economic results from failing to apply a tax wedge in a market are, apparently without exception, far inferior

The very pejorative “deadweight loss,” has been used by those ideologically opposed to government intervention in an economy as a justification for their position. However, they, and the economics profession as a whole, have totally over-looked the high opportunity costs involved in the creation of these marginal benefits.  Taking these costs into consideration inverts the conclusion:  The gain in freed resources, in almost any reasonable scenario, far outweighs any gain involved in wastefully spending these resources for these relatively small benefits.  Indeed, in the scale of economic activity, these resources are much more wisely spent elsewhere.  And the tax wedge causes this to happen.  Far from being a burden, taxation in a market, and at what is traditionally considered a rather high level of taxation, can yield much closer to optimal economic results. .

I leave it to those ideologically opposed to government intervention to find exceptions to the tax wedge increasing efficiency. I do observe that the apparent requirement for monotonicity in the supply and demand curves would seem to make finding these exceptions difficult. 

One interesting argument, though, which remains, is the argument from liberty.  This argument would seem to suggest that the wanton destruction of scarce resources is, somehow, ‘liberating.’ And indeed, acquiring the ability to squander society’s resources seems to be one of the primary motives for becoming wealthy, and indeed the ability, and under capitalism the right, to squander society’s resources is the very defining characteristic of wealth. And this would seem, for example, to be the argument against higher gasoline taxes in the United States. The case shown here is that a higher gasoline tax, even with money spent (more efficiently) on public transit, would free up resources for everyone, as the European experience seems to show.  To be sure, there would be less joyriding, and tickets to NASCAR events might become more expensive.

There does remain the issue of determining the balance between efficiency and quantity of production in any particular market required for the proper functioning of an economy.  Considerations of scale indicate that, contrary to what is shown in the diagrams, the first unit of anything is seldom the most efficiently produced.  Rather, there is an optimum scale of production, that which minimizes the average cost, (This ignores issues of demand, and thus actual profit.) and we must consider this to be true for an entire economy as well as for a particular production process.  While with this consideration the improvement in economic efficiency would not be as great, it must still be expected to be impressive.

Also, it should be easier to tax economic wants as opposed to economic needs.  (Although see problem three, below.) A more efficient economy, however, needs less to sustain its function and so has relatively more resources available for the servicing of wants. 

 “Deadweight loss” is also found in other market situations.  Regulated markets, markets with price controls, and markets restricted by private actions such as monopoly formation and oligopoly usually also involve deadweight loss. Increases in efficiency should also be expected in these situations, so It would seem that these other situations also, at the least, need to be re-examined.

 
 
 

Now direct consumer benefits per se are also much less under taxation, the same as under monopoly, and the producer surplus is also much less. However, the government spreads much of its income widely. It is, in its way, both a consumer and a producer. It re-distributes consumption, and capitalizes production, both directly, through capital investments, and indirectly, through subsidy of production, and creation and maintenance of infrastructure. And all of its expenditure, purported to be for the public benefit, does, one way or another, enrich the diverse sectors of the economy.

One problem with the tax wedge, however, because it favors the more efficient producers, it also favors the economic drift toward concentration of ownership, and the creation of oligopolies and eventually monopolies.  We will address this issue here shortly.

Narrowly held monopolies cannot be expected to spread their profits.  Neither can monopolists be expected to spend their profits to provide services which increase the efficiency of the larger economy.   Monopolies once formed, and where not widely owned, further to aggravate the natural tendency of economies to concentrate wealth and power, a concentration which leads to economic instability and collapse. This is especially so because the power concentrated in monopolies tends to translate into political power.  And the monopolist must be expected to use this power to further his power, and mitigate the impact of a tax wedge on his revenue. 

A second problem is that producers which escape taxation will eventually displace those producers which are subject to taxation. The result will be a reduction in both taxes collected and in economic efficiency.  This problem must be considered especially acute in open economies, where tax paying domestic producers can be expected to be displaced by non-taxpaying (and these producers which can often be less efficient) foreign ones The interesting implication here is that, while a nation’s economy may be producing less and consuming more, as an increased share of what is consumed is imported, (much of what is considered production actually either enables consumption, or is a form of consumption,) that economy need not be any better off for this increase in consumption.  Because of the decrease in economic efficiency, fewer consumables will be efficiently used, and more of this consumption will be squandered.  A country running a deficit is essentially externalizing costs, and these costs may in reality be greater to the country than if the country were to internalize them.

A third problem is, of course, the politics of taxation.  Nobody likes to be taxed, and the powerful, more than others, are capable of avoiding it. (This also bears on the second problem.) This first suggests that the markets which serve the wealthy will be the least efficient, even though these are the markets where an economy can most easily bear the loss of marginal producers.  (Marginal producers may be needed in the production of an economy’s necessities.)  And this further suggests that a disproportionate share of an economy will be dedicated to servicing the wealthy, even at the expenses of the necessities of that economy, such as maintenance of infrastructure.  For instance, a recent study has shown that in the United States today, essentially no policies are enacted by the government which are not also approved by the wealthy elite.  An implication of this is that the tax burden upon this elite can only be expected to diminish, and thus that the burden of taxation on the rest of economy and the population can only increase.

One final note.  As an economy increases in efficiency, it inherently becomes less stable, and more vulnerable to collapse. An efficient economy becomes dependent on its efficiency in order to be productive enough to sustain itself.  The greater the efficiency, the greater its dependence.  A reduction in efficiency will result in a reduction of production, perhaps sufficient enough that that economy can no longer sustain itself. 

A particular consideration regarding improvements in efficiency brought about by regulation and a tax wedge, where a wedge and/or regulation is already established, is that removing or even merely reducing these factors will result in a reduction of that efficiency, and a resulting reduction in the productive capacity of that economy.  That economy may no longer be able to sustain itself. With a critical reduction in production, cascades may result, and the possibility of sectoral and even general collapse.  Great care, therefore, should be exercised in the reduction of the size of tax wedges, or the elimination or alteration of any significant regulation. 

Given the tightly coupled world economy, the efficiency of production of any  major economy is a concern for all other nations.