Tags: new york times | economic | literacy | fake news

New York Times' Lack of Economic Literacy Produces 'Fake News'

New York Times' Lack of Economic Literacy Produces 'Fake News'
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Monday, 10 June 2019 05:50 PM Current | Bio | Archive

For the second time in a month, the New York Times showed a lack of understanding of basic economic and business principles, in an article published on June 7. This article was the lead story on the business page, “How tariffs may raise this sweater’s price.”

The lack of knowledge resulted in conclusions that are simply not incorrect. President Trump would call this fake news. The Times did the same thing on May 8 with the story, “Decade in the red: Trump Tax figures show over a $1 billion losses.” That story showed a lack of knowledge of basic accounting principles.

In the May 8 piece, the Times somehow obtained a copy of Trump’s tax information for 1985 to 1994. Those tax documents showed losses totaling over $1 billion. The Times claimed that those losses show Trump was a poor businessperson. He was however able to build an extensive collection of high income producing properties worldwide. He was able to do that because he always had a positive cash flow.

Anyone with any accounting knowledge knows the difference.

Suppose a businessperson buys or builds a factory for $100,000. She uses capital from after-tax income. The IRS says they will allow that person to recover her $100,000 investment over say a 25-year period at $4,000 per year by taking an annual depreciation expense.

Without paying any new taxes on the recovered capital, the funds come from the profits that the factory generates.

Now suppose the factory generates $3,000 in before tax profit the first year. With no depreciation expense, their total tax bill could be as much as $1,400, leaving them just $1,600 cash flow. But with the $4,000 depreciation expense, the income would be negative (a loss), so the businessperson pays no taxes.

As a result, the cash flow is $3,000 instead of $1,600. As anyone with basic knowledge of accounting or finance knows, cash flow is different than taxable income. And cash flow determines success which is why Trump was so successful. His losses minimized or eliminated his tax liability while he had positive cash flows.

The June 7 article is equally lacking. This time the Times is lacking in the understanding of basic economics and even some basic business principles. The conclusion of the article is that if Trump imposes another round of tariffs, a sweater manufacturer could see an $11 tariff (the current tariff is $2) placed on sweaters made in China. The NTY concludes this will result in a $24 increase in the price of the sweater.

While the rest of the economically literate world debates about how much of the $11 tariff will be passed on to the consumer, this article concludes that not only will all $11 of the tariff be passed onto the consumer, the tariff will allow the sweater retailer to raise the price by $24.

This fake news, uninformed story concludes that an $11 tariff will result in a $24 increase in price. The article reaches the same conclusion about men’s pants. There the Times concludes that a $6 tariff will raise the price $16. And women’s slacks where a $4 tariff will raise prices $11.

The article tries to explain their position. They even cite a young clothing company that verifies these numbers. I certainly hope the clothing company checks with their accountant, or finance person or marketing person, before they start following this doomed to fail logic.

Basically they say that the sweater currently retails for $100. Of that total $44 is the cost of the sweater to manufacture in China. Add in the current $2 tariff and the total cost is $46. Since they sell for $100, they have a gross profit of $54 or 54% of the price.

The article says that the clothing company will set the price of the sweater so that they maintain the 54% profit margin. That would result in the price increasing to $124.

What they did not consider was how the market responds to that price increase. In fact, it is the response in the market that will determine how much of the new tariff is passed onto consumers.

Suppose there are similar sweaters in the market selling for $110 or $115. Currently the consumers view this company’s $100 sweater as a better value. But maybe the other companies’ sweaters are not made in China. Maybe their price is not affected by the tariffs.

If the clothing company tries to raise the price from $100 to $124 they will likely lose considerable sales to their competitors. In fact if they raise the price to $115, they may lose sales. Even if they raise the price to $110 they may lose sales.

The market might force them to be priced below the competition, so maybe they can only raise the price to $106. That means they were able to pass along only $6 of the increased tariff.

Economists would say that it is the elasticity of market demand that will determine how much of the tariff is passed along to the consumer. Knowledgeable businesspeople would know that increasing tariffs tend to squeeze profit margins. Marketing experts know that if your customer has the perception that yours is a $100 sweater, raising that perception to $124 or $120 or even $110 will be extremely difficult

Once again, it appears that the Times doesn’t look knowledgeably or objectively at policies suggested by the president. They reach inaccurate conclusions which the president terms as fake news.

In this case, it looks like he is right.

Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

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DrMichaelBuslerPhD
For the second time in a month, the New York Times showed a lack of understanding of basic economic and business principles, in an article published on June 7. This article was the lead story on the business page, “How tariffs may raise this sweater’s price.”
new york times, economic, literacy, fake news
966
2019-50-10
Monday, 10 June 2019 05:50 PM
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