1. Immigration causes Unemployment.
- Immigrants increase the supply of labour but they also increase aggregate demand in the Economy. This means that they buy more goods and create additional demand in the economy. They provide labour supply and increase labour demand.
- If immigration caused unemployment why did America not have high unemployment during times of mass immigration? Because the immigrants created as many jobs as they took.
- Often immigrants take jobs that native workers just don’t want to do. – You won’t see big multinationals cueing up to stop immigration.
- Furthermore, immigrants tend to be of working age. Therefore they tend to contribute more tax than receive in benefits. Without immigration, US demographics would have a larger % of dependent old people.
2. House Prices in London will keep rising because of a shortage of supply.
- War does create more output, but only in some industries related to war. Arms manufacturers do very well out of the war. But the total output of the economy doesn’t increase instead there is a change in economic priorities. Resources are diverted from peaceful industries to industries for creating the mechanisms of war. This is similar to the broken window fallacy.
If a butcher's window is smashed, the window repairer sees new work. He gains more income. But, the broken window hasn't increased economic welfare. It just means the butcher has to spend money repairing a window rather than investing in a bigger premise.
- Increase in government spending for wars create either taxes and or higher debt payments. This is a burden on current and future taxpayers. Note The UK is still paying off debt from second world war.
- Ronald Reagan’s economic advisers told him something along the lines of “cut taxes” and you can increase total tax income. This theory is based on the laffer curve which states that if taxes are 100% people won’t work. Therefore if you cut taxes more people work and you can increase tax revenue. This is based on the Laffer Curve.
- The problem is that this may work if you cut taxes from 95% to 90%. But when you cut income tax from 25% to 23% it doesn’t make any difference.
- Some people want a target income of say £20,000. Thus if taxes fall they can earn the same by working less. Empirical evidence suggests there is little if any supply-side incentive for cutting US or UK tax rates.
- The instinctive reaction of politicians is that if one country places a tariff barrier on our exports, we should respond by doing the same. However economic theory suggests that placing a tariff barrier on imports leads to a loss of economic welfare. It is better to not retaliate.
- Retaliation may help one small domestic industry, but it causes costs to all consumers in the form of higher prices. There is a net welfare loss, that is not recovered by some domestic industries gaining benefit.
6. Tax Cuts will boost the Economy
- Another justification given for cutting income tax is that it will increase aggregate demand and hence increase economic growth. However this is not always true because:
- If you cut income tax for high-income earners, they are likely to save a high % of their extra disposable income. Their marginal propensity to consume is low.
- If you cut income tax the government has to either cut government spending or borrow. If the government has to borrow from the private sector then they will have less income to spend causing a decline in private sector spending. This is called crowding out.
- (Although there are certain times when a government deficit can boost AD - like in a recession.)
This is the argument that new technology causes job losses. In the nineteenth century, it referred to workers who smashed new spinning machines - fearing jobs would be lost. We now look back and think they are mistaken. But, at the same time, we fear the modern equivalent of new technology (automation) will lead to job losses. But, the principle is the same. If a new technology does cause some jobs to become redundant - new types of jobs will be created. See: The Luddite Fallacy