Tradeoffs Define Economics

Economics is the study of how people allocate scarce resources. Wants are unlimited, but resources are scarce, so people must make choices.

There are many possible resource choices, but money is the easiest to see.

When you go to the grocery store and find they charge $1.50 for a soft green pepper. You might decide to pass on that trade because you value the $1.50 more than the soft green pepper. All tradeoffs are two-sided – cost and benefit. If cost exceeds benefit, we choose to pass. When benefit exceeds cost, we might buy more and store it.

We do this so instinctively that we often miss the process.

When it goes wrong

It can go wrong in two ways.

  1. You cannot clearly understand the benefit you will receive from your tradeoff.
  2. You do not know the cost of what you must give up to get the benefit.
  3. There are costs you have not considered that will appear later.

If we don’t pay attention, we can be easily misled. We might know how much gas costs near home and how much it costs across town, and you could make a reasonable decision. If you never check the price in other places or don’t understand gas quality, you might pay too much for what you get. There might be future costs, like lower gas mileage or engine damage.

If we put off the purchase because we have not found a good enough tradeoff, we could see the value of our money shrink. That’s what inflation is about.

The clearest example of confused values

Part 1. Do you have any idea what you get for your income and sales taxes? Of course, you don’t. No one does, and that includes the ones spending it. If you earned $80,000 last year, you paid about $15,000 in income taxes plus HST of about $4,000 on what you keep.

What else did you spend $19,000 on? I’ll bet you know exactly what you got for your money there. Government spending is impossible to know. Worse, you have no idea whether some or all of the programs have future costs that will add to your burden in the coming years.

Part 2 Does the government intend to reduce their spending and by so doing, control inflation? If they want to run a borrow and spend regime, your inflating costs will increase faster than your after-tax income. Keep in mind that there are hundreds of hidden taxes. HST and income taxes are visible. Did you know the government gets at least 70 cents from the price of a litre of fuel in one way or another? Insurance premiums cost 2% tax in Ontario, plus HST on group and casualty insurance. Tobacco and alcohol taxes are not trivial. Pay attention.

The governments influence how much your money is worth. Remember when gas was $1.00 a litre? At $1.75, the government has reduced the value of your money by more than 40%. Food is not far behind. Is the government helping your income to keep pace? You are in a 30% tax bracket, so to get 10% more spending power, you will need a raise of nearly 15%. Are you likely to see that? No, you are not.

What if?

Suppose the government provided truthful information about what you get for your money. Would that put you in a position that helped you decide how to vote?

Actually not, Much of what they spend on includes things you would not choose. Things you do like are things some others would not like. There is no clear advantage to knowing because you also have to know the attitudes of the others, and there is no way to assess that.

So what’s the advantage? Easy. If governments are required to provide information about the value of their programs, the programs will become better. As it is now, we don’t know what the programs cost to create and administer. I have not seen a recent guess, but twenty years ago, the guess was it cost $1.68 to deliver $1.00 of value to the citizens. That might be very good or very bad. I can’t tell. Anything that makes it visible would help the vote choice.

Do they provide the expected rate of cost increase? NO! Do they estimate the potential secondary effects and their costs? They call them unintended consequences, which is not entirely accurate. Unintended and unknowable consequences are not the same thing. What are the costs directly related to the Covid lockdown? Any thoughtful observer knew they would exist. Even yet, there is no effort to address those costs. Did you know the life expectancy of Americans has decreased by more than 2 years compared to 2019? The change is not due to Covid deaths. Most of those people were too old to have much effect. Not enough years are lost when you die at 87 instead of 92. It’s younger people. A teenage suicide costs at least 60 years of potential life. Overdose deaths are not so uncommon.

Think it through. How much of the costs of what government does must they make obscure? I once asked a friend who happened to be a minister in the federal government about something hard to assess but likely very costly in the long run. After some investigation, he answered, “They don’t know, and they don’t want to find out.”

I’ll bet that would apply to more than one line item in their budget.

The bit to take away.

You run your life based on known tradeoff decisions. The largest single share of your income is given to the government, yet we have no idea how to evaluate the tradeoff of their programs for your money.

You cannot plan effectively unless you know the costs now and in the future, the value of those to yourself and others, and the value of the money you will use to pay.

Be alert.

Help me, please. Please subscribe. If you have found this article helpful, forward it to others.

I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at

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