John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributed the following column.
What will happen if we increase taxes? Should my students study harder? How hard should we work to make sure everyone has health insurance? Just one wafer-thin mint?
In economics, and in life, the answer is often – it depends. Often, the answer depends on current conditions. Economists call this marginal analysis.
In the movie The Meaning of Life, Monty Python offers a graphic illustration. After gorging on a huge meal, a bloated diner is offered an after dinner mint. He declines saying he is stuffed. The waiter insists: “Just one wafer-thin mint.” Eventually the diner gives in. The waiter force-feeds the mint on a spoon. The diner explodes. He loses his lunch. Everyone else in the restaurant loses their appetite.
So-called fiscal conservatives try to force-feed us the myth that raising marginal tax rates will hurt the economy. During the 2010 Senate campaign, Scott Brown invoked President Kennedy to promote lower taxes.
President Kennedy reduced the top marginal tax rate from 91 to 77 percent. President Obama increased the rate just a little from 35 to 39.6 percent. Tax rates are now about where they were under President Clinton. A Congressional Research Service study supports analysis that at current rates we could raise taxes on high-income earners even further with no ill effect to the economy. Marginal analysis shows that Scott Brown was no JFK.
To introduce marginal analysis to my students I ask, “How much would your grades benefit from studying one more hour?” The answer is, it depends. If they are not studying at all, one hour will help A LOT. If they are already studying hard, it may only help a little. If they are already burning the candle at both ends, one more hour of study may hurt their grades. Students need to be reminded about the value of sleep.
Ninety seven percent of Massachusetts residents now have health insurance. Is that good enough? Should we really work hard to squeeze in another one or two or three percent?
The answer is yes, we should. Many of the people left uninsured are truly on the margin. Without insurance, they are not getting preventative care. Without insurance, they are relying on expensive emergency room care. Others are staying out of the insurance pool and driving up rates for the rest of us. Marginal analysis says 100 percent is much healthier than 97 percent.
Another example I offer students is to ask, “How much is one more year of College worth to you?” A college education is expensive. Paying tuition for your freshman or sophomore year can be a hard decision. You have years to go. For students entering their senior year, it is an easier choice. Just one more year and they have a degree. Marginal analysis explains why students are much less likely to drop out after their junior year.
Child development experts agree that early education is essential. Starting just one year earlier can make a huge difference in a young child’s life. Something to consider as Head Start loses funding due to sequestration.
The Town of Chelmsford has gained relief from Chapter 40B. The state has approved an affordable housing project in town. They certified the Town of Chelmsford Affordable Housing Plan. The town now has control over the comprehensive permit process. Is that good enough? (For disclosure, I served on the committee that produced the Town of Chelmsford Affordable Housing Plan and I now sit on the town’s Housing Advisory Board.)
The affordable units produced only give the town control for one year. Chelmsford will not control its own destiny as long as the town is below the state-mandated 10 percent of housing units designated as affordable. Affordable units currently in the pipeline will not eliminate the need. A recent study commissioned by the town found that one-third of Chelmsford households make less than $35,000. Almost half of Chelmsford renters have housing expenses that are considered unaffordable. Marginal analysis says temporary control is not good enough.
How much would 75 cents mean to you? Probably A LOT if you are making the minimum wage.
How much are students willing to pay for pizza? Two dollars may seem like a good deal for the first slice of pepperoni, maybe a second. After the third, fourth, or eighth slice they will no longer be willing to pay $2.00 (the marginal utility from an additional slice may hit diminishing returns quickly after viewing the “Just one wafer-thin mint” video).
If inflation increased by one percentage point would it be a problem? At current rates, less than 2 percent, a little more inflation might actually be good. If inflation were to get up to 4 or 5 percent, then one more percentage point would be worrisome – marginal analysis.
What if inequality continues to get worse? Income inequality has been rising for four decades, but the overall economy has done ok. In the 1950s and 60s we had a very equal society and the economy was very healthy. Therefore, as inequality increased we still did ok. Now we have inequality at extremes not seen since just before the Great Depression. If inequality continues to get worse, we may go over the social cliff.
Malcolm Gladwell’s The Tipping Point: How Little Things Can Make a Big Difference – a best seller based on marginal analysis. The straw that broke the camel’s back – the proverbial marginal analysis. Employ some marginal thinking when considering economic impact, public policy, and everyday life.