Archive | June 2014

When economists hand you a lemon, make lemonade

lemonade

What is the average person to make of all of this corporate tax cut talk coming from politicians and economists? Does it result in increased employment, increased investment, and where’s the promised productivity increases?

To try and make sense of it all, imagine you are back in a grade school home economics lesson – a case study with a character from the board game Clue, a kid from the Life cereal commercials, and a helpful neighbour from a national Canadian chain store: 

Professor Plum wants to teach his young son the economics of business. So he set Mikey (he likes it!) up with a lemonade stand on his front lawn. Dad will supply all the lemons, ice, glasses, hand juicer, and his sister agrees to squeeze the lemons. Here’s the deal: for every ten glasses of lemonade Mikey sells, he has to pay his younger sister Sally two, and Dad gets three in taxes, leaving five. 

Plum notices on his cycle to work another young man by himself who has a similar operation, but with an electric juicer. This rings a bell – an abrupt right turn and off to Walmart he rides, and places the new juicer in his front carrier for the return trip. He will rent the juicer back to Mikey – and teach him that elusive concept of how to increase productivity.  

First off, he offers it to Mikey for three glasses of lemonade profits. Mikey does the quick math. “For every ten sold, I now make five. If I rent the juicer it will cost me three. No more need for Sally, so I save two. But overall I’m down one. Nope. No deal” Mikey exclaims. All is going to plan. 

Lesson two. To induce Mikey to use the juicer (Sally has tennis lessons coming up) Plum cuts Mikey’s taxes to one from three– two more in Mikey’s cash box so he can now afford to rent the juicer. On his way to work he points to the electric juicer on the porch, and instructs Mikey to leave the money in the jar -three for rent and one for tax, leaving Mikey with six, and Sally off to play with her friends. 

When he gets home that evening (after a busy day of marking exams and commenting on twitter), he is shocked to find Sally still behind the lemonade stand and Mikey greeting him with a big smile on his face. The electric juicer sits unused in its box.

“You were trying to teach me a lesson in economics, weren’t you Dad?” “Well yes son, I was. So, why didn’t you rent my electric juicer?” “Because I finally figured out you were trying to trick me” Mikey exclaimed. “I did the math. Let me show you.” He places ten empty glasses in the centre of the table. “Before when I sold ten glasses of lemonade – I paid Sally wages” (he moves two to the left) “and you tax”(he moves three to the right, leaving five in the middle). He then gathers all ten glasses back into the centre. “Now, you cut my taxes” (he moves one toward Professor Plum) leaving nine. “I can either pay Sally two, or pay you three to rent the juicer. I’ll stick with Sally- leaving me seven. I’m ahead by two. Thanks Dad!”

Neighbour Bill, reminiscent of that Canadian Tire guy with all the gadgets, whispers to a dejected Professor Plum as he enters the front door, juicer in hand  “You should have told him the tax cut was conditional on the use of the juicer. By the way, my daughter Kim will be available to fill in when Sally is at camp – she has a bit of a crush on Mikey”.

Professor Plum, shaken, not stirred, raises his head and mutters: “Quit trolling me Bill!”

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