Pitfalls of Economic Analysis: Review the discussion of pitfalls in economic thi
ID: 1178728 • Letter: P
Question
Pitfalls of Economic Analysis: Review the discussion of pitfalls in economic thinking in this chapter. Then identify the fallacy, or mistake in thinking, in each of the following statements:
a. Raising taxes always increases government revenues.
b. Whenever there is a recession, imports decrease. Therefore, to stop a recession, we should increase imports.
c. Raising the tariff on imported steel helps the U.S. steel industry. Therefore, the entire economy is helped.
d. Gold sells for about $1,000 per ounce. Therefore, the U.S. government could sell all the gold in Fort Knox at $1,000 per ounce and reduce the national debt.
Explanation / Answer
a. This assertion is a mistake because the secondary effects of taxes on production and the labor supply are ignored. If the tax rate were raised to 100 percent, for example, no one would want to work or produce.
b. This is the fallacy that association implies causation. It is more likely that recession causes a change in imports than the other way round.
c. This is a fallacy of composition. True, the tariff may help the steel industry. But it hurts purchasers of steel, including the automobile and construction industries. The overall effect on the economy is unclear.
This is the fallacy of composition, since attempts to sell so much gold at once would push down the price of gold.