| August 09, 2012 Throughout the past half-century of decline in our ability to educate ourselves as a people, we Americans apparently hold one thing most sacred: We must preserve our ability to lie to ourselves about the economy.
The media do it splendidly, reporting only what serves their political ideology. Thus when the recession of 1992 was clearly over well before the election, the media kept pounding us with stories of how people were suffering from the Bush recession. The result was that Clinton got credit for a recovery that already began before he was elected.
In fact, whenever a Republican is running for reelection as president, the media relentlessly portray even good economies as bad, reminding us how much richer the rich are than the poor, and how the Republicans keep trying to lower the taxes on the rich.
But this year, when the economy stinks but a Democrat is up for reelection, the media aren't giving us the endless sob stories about suffering jobless people, making sure we don't forget for a moment that the economy is bad. Instead, we are told that things are just about to get better, and they aren't all that bad, and if they are it's really Bush's fault (the other Bush this time).
And it's all hokum.
Yet we believe what we're told (or forget what we're not reminded of) because we are deeply ignorant about how the economy works.
We get the idea that the economy is enormously complex and therefore we can't understand it at all.
Well, the economy is enormously complex, which is why attempts by governments to manage an economy always, always, always fail.
It is simply impossible for a team of experts (let alone politicians) to absorb enough correct information in order to make all the millions of decisions that make an economy work.
But just because a national economy (or, for that matter, a city's economy) is too complex to be managed doesn't mean that the laws and principles of economics are too complex for ordinary people to understand.
On the contrary the laws of economics are actually rather simple, and there aren't all that many of them.
They have been demonstrated and proven over and over throughout human history. Even before money existed, even before free markets existed, the laws and principles of economics existed, and worked with good and bad effects.
They're clear. They're simple.
Yet economists are constantly making wrong predictions about the economy. If the laws are so simple, why can't they do a better job? And if they do such a lousy job, why should we regular people bother even trying to learn about economics?
Because it's like the weather. The laws governing weather are actually quite simple. Meteorologists absolutely understand now how the weather works. Why it rains here and not there; how dangerous storms arise, grow, fade; what conditions make it snow, or sleet, or hail.
After the fact, it's always easy for meteorologists to describe exactly what happened.
But beforehand, it's impossible to predict, consistently and accurately, what the weather will be at any particular place at a certain time of day.
That's because there are literally trillions of variables and they can't all be known in advance, though likelihoods can be predicted. These two air masses, one colder than the other, are approaching. They will meet ... somewhere. Wherever and whenever it happens, there will be violent storms. But the where and when are, quite literally, unknowable in advance.
That's the way it is in the economy. The fundamental laws are known. But because the economy is affected by no, because it consists of the decisions of every single person who has anything to buy or sell or trade, it is impossible for anyone to predict, in advance, exactly how these decisions will combine on any particular day or week or month or year.
Yet we can say with certainty that when governments try to control prices by keeping them up, it stifles the economy. When governments try to protect the jobs of people in one industry by using tariffs or other price supports, the whole economy suffers far more than that one industry benefits.
These are laws. The results of such decisions are known in advance. Yet governments keep making the same stupid blunders because the benefit to the politician ("I saved your jobs!" "I made the rich pay their fair share!" "I fought against inflation!" "I kept management from exploiting workers!") is immediate, and by the time the cost of their disastrous mistakes comes due, they're already out of office, or in a higher office, and because Americans are so ignorant of the laws of economics, they can always lie to us and convince us that it's Not Their Fault.
That's why I'm telling everyone that it should be illegal to vote in the upcoming election unless you have read Thomas Sowell's book Basic Economics: A Common Sense Guide to the Economy.
If the economic future of a nation has ever depended on the outcome of a particular election, it's this nation, this year.
We have a president and an administration and a Democratic Senate that is either ignorant of economics, or so ideologically driven that they don't care what happens to the economy as long as they enact their agenda, or so cynical that they'll say whatever it takes to get voters to vote for them.
But if the electorate had read Sowell's book and applied its principles, it would be impossible to say idiotic things like "We will not raise taxes on the middle class we'll only raise taxes on the rich." Or the even dumber, "The disparity between the top earners and the bottom earners is widening, and that's not fair!"
If you've read Basic Economics, you'll know that income taxes barely touch the truly rich, because their money doesn't come as "earned income." It comes as dividends and capital gains, which are not taxed the same way.
Meanwhile, the lowest earners pay no taxes at all, and the truly poor (a tiny fraction of that number) aren't earning any money, they're receiving welfare.
So all the payers of income taxes, from top to bottom, are the middle class. If you raise anybody's income taxes, you're raising taxes on the middle class.
What Sowell points out is that the top and bottom earners are not "classes" at all they're the same people at different stages of their lives.
Most of the people in the bottom 20 percent income bracket are in that bottom bracket only temporarily. They consist of:
Young people getting their first jobs, which pay little because they have few skills and little experience, and so their labor has less value.
Experienced people temporarily out of work.
People in seasonal or cyclical industries who are temporarily underemployed.
People dislocated by shifts in industry, whose old jobs are gone and who have not yet moved to other jobs in other industries.
Students doing part-time work to pay for an education.
The vast majority of the people who are bottom earners don't stay in that category for more than a year or two. And even while they're there, most of them aren't suffering as much as the politicians would have us think.
The students are living in student housing; the young, low-paid workers are sharing expenses with roommates; or they're living with their parents or other family members and pay little for living expenses.
Meanwhile, the top earners are mostly people who have put in years of labor in their chosen career, and are now earning the highest income they'll ever earn in their lives. They got to that position, not by exploiting other people, but by working and learning and making good decisions and, yes, being lucky by not losing their health or not having their business destroyed by competitors.
But they're getting older, and without any punitive taxes they'll move out of the work force soon enough death, old age or the desire for retirement take care of that.
Statistically, there will always be a top 20 percent (or 5 percent, or 1 percent) of earners. There will always be a bottom 20 percent, too. But they are not the same people. The vast majority of people begin at the bottom and, over the course of their working life, move upward.
Furthermore, where they end up is usually the product of their own decisions. Those who go into high-paying professions will here's a shock get more income during their peak earning years than those who chose to go into lower-paying professions.
Those who succeeded in riskier professions will receive the rewards that come from guessing right about risk. (Those who failed are, of course, in lower income brackets.) But those who didn't want those risks chose to follow safer careers and, as a result, their peak earnings will never rise as high.
There are also the people who have chosen to devote their earning years to taking drugs or drinking, and naturally they do not reach the same peak earnings as those who chose to control those appetites.
But all those choices were freely made. By and large, people are where the normal vicissitudes of life put them, or where they chose to be by their own free will.
The exceptions are, of course, people who suffered unpredictable physical traumas or health crises, or people who were bad at their jobs, or people whose businesses lost while competitors won. But we really do have a safety net for people physically unable to continue working. And people whose jobs simply disappeared, or who are bad at the work they originally chose, are free to rebound from these events or discoveries by going back to school or changing careers.
I've seen dozens of my friends do exactly that. When the typesetting industry pretty much disappeared with the advent of computer publishing software, one typesetter I know went back to school and became an optometrist. He did go through a period in which his income definitely plummeted but shed no tears. He moved right back out of that bottom 20 percent.
Yet we still persist in acting as if it actually means something when a politician talks about "raising taxes on the rich while leaving the middle class alone." What they are really doing is confiscating the earnings of people who are finally getting the rewards of many years of hard work.
Or that ever-popular lie that raising taxes on "the rich" will increase revenues.
Because it's a distinction that, in our ignorance of basic economics, we often forget: Raising tax rates does not necessarily raise tax revenues.
Let's take a clear historical example. When the stock market collapsed in 1929, the jobless rate soared. But the economy quickly recovered joblessness was back down nearly to pre-crash levels within a year or so.
However, during the time of panic about the stock market crash and the unemployment that resulted, the protectionists in Congress, in order to "protect American jobs," created steep tariffs on over 20,000 different kinds of imported goods.
Tariffs are taxes on foreign goods brought into the country. Those who voted for the Smoot-Hawley tariff could say, "We are increasing government revenue and saving American jobs at the same time."
But because the laws of economics cannot be tricked or fooled any more than gravity or the laws of motion, the real result was the Great Depression, which was not the result of the stock market crash that recession was nearly over.
As Sowell so clearly points out, if you raise tariffs on imported steel, you might very well save 5,000 jobs in the steel industry. But now all the industries that use steel have to pay higher prices for steel, which means they cannot make their goods at a cost low enough to compete against foreign rivals that are able to buy that cheaper foreign steel.
So saving the 5,000 jobs in the steel industry will cost 20,000 jobs in other industries. Yes, the politicians "saved" the steel industry, but they wrecked far more jobs in the economy as a whole.
The Smoot-Hawley tariff raised the cost of living for everybody. Because Americans of the time had to pay higher prices (as a percentage of income) for everything, they bought fewer things; that means that businesses sold less and less, and therefore they had to lay off more and more workers.
Laid-off workers bought even less. And more businesses failed or cut back on their labor force, and for the next 10 years America suffered the worst unemployment in its history largely or entirely as a result of government actions that were supposed to save jobs.
There are those who will claim that Sowell's book is just "conservative free-market ideology." But that's like claiming that gravity is just a matter of ideology. It's true that most people believe fervently in gravity, whether they understand it at all.
But if we had a group that believed gravity was fundamentally unfair, that it's wrong for people who step off cliffs or out of high windows to get mashed on the ground below, their strong beliefs wouldn't change anything. Fairness has nothing to do with it it's simply how the world works.
And if somebody writes a book refuting their anti-gravity arguments, the writer of that book is not an "ideologue" because not just some but all the evidence supports his views.
That's nearly the situation with Sowell's Basic Economics: He readily agrees that the motives of many people who have tried to "fix" the problems with various economies might have been noble or humanitarian, but that doesn't change the way the laws of supply and demand work.
However, one thing that Sowell's book is not is "pro-business." The laws of economics are not pro-business. In fact, businessmen hate the laws of economics because those laws don't "care" whether any particular business has a profit or a loss. Losses benefit an economy exactly as much as profits do.
That's because the job of markets in an economy is to allocate scarce resources that have alternative uses. I emphasized that phrase because Sowell repeats it about two hundred times in the book. It's the gravity of economics the inescapable underlying principle.
Let's say a company buys a scarce resource steel and then makes a car with it. The car they make has to sell for $35,000 in order for them to repay all their costs and make a small profit but other sellers make cars of that class that are good enough for most buyers at only $30,000.
Maybe the more expensive car has features that make some buyers think the car is worth $35,000 to them. But there are few enough of them that the carmaker loses the economies of scale and has to raise the price to $40,000. At that price, there are even fewer buyers ... and pretty soon the company either cuts costs (removing features or improving methods), does a better job of making their extras seem like necessities (advertising) or goes out of business.
For that company, it's a life-and-death matter. But for the economy as a whole, for the entire nation, it makes no difference whatsoever whether the company goes out of business or stays in business.
Because if they go out of business, the steel they were buying will be sold to somebody else, and will be made into something else; or nobody will buy it, and so the cost of steel will go down for everybody, so all the prices will fall.
What about the jobs of the people who worked for that company?
They will find other jobs, depending on the skills they have to offer. Their labor, too, is a scarce resource that has alternative uses. Individually, they may take a real financial loss for a while but the economy as a whole may rise while their fortunes are, temporarily, falling.
Politicians and reporters love to concentrate on the people who are hurt by the failure or relocation of a company or an industry, but they never grasp (or choose not to mention) that the result of that company's or industry's collapse or relocation is lower prices for everybody else.
It's good to be humane, and we are: Whereas in the 1800s, people caught up in such losses could literally starve to death, we now have a safety net of welfare and unemployment benefits. In essence, we put a tax on the whole economy to make sure that families caught up in the losses of the free market do not actually die during the time of transition.
That's a good thing. But we mustn't forget that unemployment and welfare are a constant drain and drag on the whole economy. That doesn't mean we shouldn't do them it just means that we should recognize that just because some safety net is worth the cost we all pay doesn't mean that more safety net will be worth its cost.
Basic Economics makes this all crystal clear. In fact, in pursuit of clarity, Sowell sometimes becomes a bit repetitive the same examples pop up again and again, sometimes with almost identical wording. But a bit of repetition doesn't hurt anybody.
The title of the book is clever and ironic once you've read the book. In advance, though, it can sound like a textbook. Well, it could be a textbook for the very best high school or college class you ever had.
Sowell doesn't start with the history of economics. He quotes economists all the way through from Adam Smith to Karl Marx (who, it turns out, really did understand many of the laws of economics, though his followers didn't). But he doesn't give you a history of economics until the very end of the book.
Instead, he plunges right in with real-world examples, making the principles absolutely clear to anyone who's paying attention. I listened to this book as a download from Audible.com. Yes, I listened there were no diagrams, no charts, no statistics, no math.
Sowell is a brilliant thinker and a brilliant writer. He is perfectly capable of writing dense scholarly books with exhaustive sourcing he deserves the high esteem in which real scholars and scientists hold him, because he is rigorous, honest and goes where the evidence leads.
With Basic Economics, however, Sowell knows he is writing, not to scholars, but to us the woefully uneducated public. He knows we're being lied to all the time especially in election years. He is telling us the truth so that we become politician-proof and media-proof. We'll recognize the lies when we hear them; we'll question the sob stories and mock the fake outrage over nonexistent "unfairness."
Does this mean that Sowell is right on every point? No I have a deep disagreement with one of his fundamental value-premises. He takes the right of property as a sort of divine gift, never to be questioned. The truth is that property is a social convention. It is an extremely useful convention, born of the territorial imperative but extended to moveable property.
We can even call it a law: People will not spend the time and effort to do good work unless they have a reasonable expectation that society as a whole will protect their ownership of the fruit of their labor.
But the right of property is not absolute. When the rules of the game are set up so that certain people are rewarded far beyond the perceived value of their work, then it's not immoral for society to reevaluate the rules. Sowell, committed as he is to the benefits of free markets which are vast, make no mistake seems reluctant to concede that communities may decide to put limits on the "right" to property in order to protect against the most brutal and the most unbalanced results of free markets.
Sowell does concede the necessity for a nation to tax everyone in order to maintain a national defense to prevent others from seizing or destroying the national economy. But he seems skeptical of almost any other attempt by governments to infringe on the rights of property to ameliorate the situation of all.
His skepticism is wise and right such attempts invariably have unintended consequences.
But there are situations child labor laws, basic safety regulations, protection for trade unions where he is simply wrong when he asserts that markets do a better job than governments in handling these issues.
The truth is that while government is often wrong about where it places the fence, it is not wrong, evil, stupid or ineffective to build fences around the free market for the good of the whole.
The evil comes from the fact that once you put regulatory power in the hands of government, those regulations will always be shifted again and again to benefit the few at the expense of the many.
So while the economy was brutal back in the days when government intervened on the side of business against labor unions, labor unions today are often counterproductive destroyers of the very companies that provide their jobs.
Sowell's views are a powerful corrective to excesses in areas like child labor laws (do we really need to ban adult-size teenagers from the job market, where they might learn a work ethic?) and minimum wages (why should young workers who live with their parents, or immigrants who accept lower living standards than most Americans because they're better than their home country, be priced out of the market?) but we do know what happens when there are no regulations in these areas, and that's the one area where Sowell seems to ignore or dismiss history.
Markets don't care, just as gravity doesn't care. But communities must care. Sowell himself eloquently explains that families don't function like markets we spend enormous resources on protecting, providing for and educating young unproductive barbarians called "children," and then they grow up and leave, often having contributed nothing, ever, to the family economy, except whatever value you place on their bright smiles (or rolling eyes).
Yet these families are far more important to most of us than anything we get from the economy. Indeed, the primary motive for many or most people to put up with the risks and cruelties of the marketplace is to benefit their very uneconomic families.
It is not wrong for us to wish our national economy to be a little more family-like and a little less market-like. Sowell is right that we can easily go way too far in the familyish direction, so that the economic pie shrinks drastically, to the detriment of all.
But we can also go too far in the direction of letting the markets have their way. Because the economy also depends on the allegiance and the hope of its citizens, who are not mere producers and consumers, but are human beings.
We must feel good about the economy as well as benefit from it. So while growth is good, and we all benefit from it, we benefit most when we protect society's weakest members for only then can we take pride and pleasure in our prosperity. Good people cannot bear an economic system that destroys some, to the benefit of others.
That's why a safety net is worth the cost it allows the best people to fully commit to the economy.
So as we watch the Mitt vs. Barack battle, and decide between them, it's too easy to think our guy is all good, and their guy is all evil.
Right now, Obama has clearly gone too far, and intends to go farther, in the direction of killing the economy for the sake of ineffective feel-good measures. But that does not mean Obama and his supporters are either stupid or evil.
On the contrary, we would hate hate hate living in a nation with absolutely no fences around the free market. I know we would, because we did live in that nation, and we hated it, and that's why we passed those regulatory laws in the first place.
One could read Sowell and come away with the impression that there should be no fences. I think he himself would immediately deny that he advocated any such course. But because he is clearly arguing against socialism against the left he sometimes overstates his case, and leaves their case nearly unspoken.
It's about balance. It's time for the fence to be moved back but not torn down. We need to elect grownups who will protect the right of property but also protect our sense of community as family, where the weak are still protected.
Isn't that what Obamacare was all about? The desire not to let people suffer unfairly? The fact is that markets do a better job of providing health care to most than any government can possibly do, and in a market-driven health care system, we get far better care for everyone. That is true.
But it is also true that letting the market be the absolute arbiter of who gets health care and who doesn't would be unbearable to our conscience, to our sense of ourselves as a people, as a community.
That one reservation does not change the fact that it is impossible to make even the smallest intelligent decision about the future course of America if we do not understand the laws and principles of economics so clearly and effectively explained in Basic Economics.
Even if you already agree with everything Paul Ryan (the smartest man in Congress since Patrick Moynihan died) is proposing, I urge you to read Basic Economics so that you will know why he's right and you will be better able to explain it to your friends.
Of course, it will be almost impossible for you to vote for Obama or any Democrat running for Congress if you read Basic Economics, because the Democratic Party has been wholly captured by demagogues, who use the vocabulary of victimization and compassion for the private gain of a few small groups, at the expense of us all.
But Republicans, as a group, are no better they just use different demagoguery. That's why I urge everyone, left and right and middle, to read Basic Economics so that as we make our decisions as a nation, as a community, we will actually know what we're talking about.
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