Today, class, we shall attempt to explain to the liberal mind how taxation, regulation, unionization, and entitlements (such as Obamacare) stagnate the economy, diminish market share for American industry, enhance foreign profit margins, discourage domestic investment, and increase unemployment. To accomplish this we are going to set up a hypothetical set of businesses, a basic chain of distribution, and some basic initial assumptions. First consider an American company that manufactures widgets. We will call them Widgets Inc. They require 2x4s to make the widgets which they get from Lumber Inc., and Lumber Inc. requires raw materials (logs) which they get from Loggers Inc. Additionally, we have Foreign Inc. that also manufactures widgets and begins with the exact same parameters as Widgets Inc. except that Foreign Inc. is located in a foreign country we will call “Foreignavia”. Both Widgets Inc. and Foreign Inc. sell their widgets to “Phantom-Mart” in the United States for distribution to the American consumer. We will also assume that the quality of the widgets produced by each company is the same and each year 1,000 widgets are sold by Phantom-Mart. We will also assume that one log produces one set of 2x4s which in turn produces one widget. Let’s toss out some economic givens: Loggers Inc. has the following factors: $1.00 on logs, $1.00 on labor, and $1.00 profit for a selling price of $3.00 per log Lumber Inc. has the following: $3.00 on materials (logs), $2.00 on labor, and $1.50 profit for a selling price per bundle of 2x4s of $6.50 Widgets Inc. has the following: $6.50 on materials (2x4s), $3.00 on labor, and $2.00 profit for a selling price of $11.50 Foreign Inc. has the exact same parameters as Widgets Inc. except that it costs them $1.00 to transport their widgets from Foreignovia to the United States so they have a selling price of $12.50 Phantom Mart has the following: $1.50 for labor and $2.00 profit, meaning they sell widgets to the consumer at a price of $15.00 for widgets from Widgets Inc. and $16.00 for widgets from Foreign Inc. We will calculate market share as the percentage differential in price between the two so since Widgets Inc. sells at a price that is 6% lower than Foreign Inc. we will assign a starting market share of 56% - 44% in favor of Widgets Inc. We will also assume that a factory can produce 100 widgets per year so Widgets Inc. requires six factories to meet the consumer demand of 560 widgets and Foreign Inc requires five factories to meet the consumer demand of 440 widgets a year. Now that we have that established, let’s start taxing. The government imposes a 10% tax on production and manufacturing. Now one might think that this will raise the price of the $15.00 American widget to merely $16.50. But that’s not the case at all. It must be applied across the entire chain of distribution. Neither can a company simply add 10% to their selling price in order to maintain their profit. Loggers Inc. for a $3.00 price per log must add more than just $0.30 to their cost because at a new selling price of $3.30 the 10% tax is $0.33 translating into a profit of only $0.97 per log instead of the $1.00 they had pre-tax. So in order to maintain their $1.00 of profit they must raise the price to $3.33 representing an 11% increase. This is then passed on to Lumber Inc. who now has to pay $3.33 per log increasing their pre-tax price per bundle of 2x4s to $6.83 but again they now have a tax to pay as well which initially would be $0.68. Again however they cannot simply add $0.68 to their price as it would reduce their profit. They actually must raise the price $0.76 to cover their tax and the increased cost of logs. Their final selling price is now $7.59 which represents a 17% increase in against their initial price of $6.50. This will continue to Widgets Inc. who in the same way will now be forced to charge $13.99 per widget. We will assume that the tax does not apply to sales so Phantom Mart will not get taxed but they must now pay $13.99 for an American widget as opposed to the pre-tax price of $11.50 which means they must sell the American widget for $17.49 instead of the pre-tax price of $15.00 and vs. the Foreign Inc. widget which remains at $16.00. The 10% manufacturing tax has resulted in a final increase of nearly 17% for the American consumer. But Foreign Inc. does not just sit back and do nothing. They realize they can increase their price and realize a greater profit and still sell at a lower price than their American competitor. So they split the difference and raise their prices from $12.50 to $13.25. With the new selling prices in mind when we calculate production for the next year Foreign Inc. now gains a 54% - 46% market share advantage (a ten percent swing) and they are realizing a 38% increase in profit. This means that out of the 1,000 widgets to be sold next year Widget Inc. will only sell 460. They have six plants that produce 100 widgets each but with only a demand for 460 they are forced to close one plant or they will be overproducing and lose their profitability. Foreign Inc. on the other hand now needs to produce 540 widgets and as such they must build a new plant to accommodate the increased demand. This means American workers just got laid off, they will be requiring fewer 2x4s from Lumber Inc, who will in turn be requiring fewer logs from Logging Inc. Now here is an important point. Even if we now eliminate that tax the selling price for Widgets Inc. will not revert to its original price of $11.50. This is because over time people become accustomed to paying the higher price and if that tax is eliminated Widgets Inc. will merely split the difference and lower their price to $12.75. They realize greater profits and the consumer still thinks they are getting a good deal with a lower price. The longer a tax is in place the greater this effect. So once you assess a tax, the damage is done. Prices will never revert to their original pre-tax price. Now let’s regulate! Environmentalists are pissed at Logging Inc because they are destroying the habitat of the Northwestern Checkered Sloth, and they are demanding that action be taken to clean up the carbon emissions coming from the factories at Lumber Inc. and Widgets Inc. Government imposes emissions standards that increase the cost of production at Lumber Inc. and Widgets Inc. by $0.75 and declares part of Logging Inc’s forests as federally protected. This forces Logging Inc to go into areas that are more difficult to access and further away to provide logs. The additional cost is $0.50 per log. So where Logging Inc was producing logs at $1.00 a pop they now pay $1.50 to produce the same thing. This increases not only their base selling price but the amount of tax they must pay as well since that is calculated as a percentage. Their selling price now goes from $3.33 per log to $3.89 per log. Lumber Inc. now pays that higher price for raw materials, has to deal with their own regulations, and the increased tax burden and they have to raise prices from $7.59 to $9.04. Same thing with Widgets Inc who must raise their price from $13.99 to $16.43 and now Phantom Mart must sell American widgets for $19.93 compared to their pre-regulatory price of $17.49. Again, Foreign Inc sees an opportunity and raises their prices by half of the difference to $14.84. Foreign Inc has now seen their profit margin grow 117% compared to their original price while the American companies have seen no increase in profit. The price for consumers has risen 22% even for the cheaper foreign widget that has done nothing to demand an increase in sales price. Again we must recalculate market share and we find that Foreign Inc now has a 58% - 42% advantage. With this and the rate of production per plant there is no need to build or shut down plants although Widgets Inc will certainly be forced to suspend operations for part of the year. More workers are laid off, less 2x4s required from Lumber Inc, less logs required from Logging Inc. Now let’s apply Obamacare! Obamacare we will say will cost an additional 15% against labor. You know what’s coming by now. The price of logs jumps from $3.89 to $4.06. The price of 2x4s from $9.04 to $9.57. The price of widgets from $16.43 to $17.52. But this time Phantom Mart gets hit too because they have employees as well they must provide for and so the selling price for an American widget jumps from $19.93 to $21.25 (a 6.6% increase) but the foreign widget only jumps from $18.34 to $18.57 (a 1.2% increase). This time Foreign Inc does nothing to their prices. They decide they are going to go for the market share and squeeze Widgets Inc. and by doing so they grab a 64% - 36% market share advantage. This means Foreign Inc will have to produce 640 widgets when they only have the capacity to produce 500. They must build two new plants. Widgets Inc. now only has a demand for 360 widgets but they have the capacity to produce 500. They must close another plant. Now about this time along come Billy Bob. Billy Bob is a manager at Phantom Mart and he’s saved some cash and he wants to invest. Well he could invest in the American Widgets Inc. but over the last couple years they have shown a market share decrease of 20% and they have not shown any increase in profitability. Foreign Inc on the other hand has shown a market share increase of 20% and profitability has increased 117% meaning a trend of a strong return on investment. Who do you think Billy Bob is going to invest in? This means American money generated through goods and services is now going to help Foreign Inc to build their two new plants. Now let’s unionize! The workers unite across the board and strike a deal for an initial 10% increase in wages and a mandatory 5% increase every year. I will skip to the bottom line because by now you are surely getting the point. In the first year American widgets increase to $22.11 while foreign widgets increase to $18.72. At this point Foreign Inc makes a bold move. They slash their profit margin back to the original level and start selling again at $12.50 because they know that within six years American Widgets Inc. will be forced to charge double the price of their own product enabling them to grab a full 100% market share and driving their American competitors out of business. This is not lost on Widgets Inc and they realize they have only one choice that will keep their company from a total collapse. They are forced to close all their plants and move to Foreignovia where they can compete with Foreign Inc. at an even level. Of course this means they are no longer buying 2x4s from Lumber Inc and in turn Logging Inc gets slaughtered as well. The result is that we have taxed, regulated, Obamacared, and unionized our American business to the point that it simply cannot compete while foreign profits and employment have increased. Because of the closure of all these plants due to a decreased market share American workers are out of a job, unemployment has skyrocketed, and the economy has ground to screeching halt. Thankfully though, the Northwestern Checkered Sloth is happy as a pig in shit. At this point, liberals, environmentalists, and union workers start scratching their heads wondering where all the jobs have gone and their solution is “raise taxes and increase union influence”. And they wonder why we are where we are. Class dismissed.