Joanna
Grant Lee wrote:
>[A sharp jab from the right. Would the economists among us like to comment?]
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>Low Taxes Do What? by Thomas Sowell
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>The high cost of economic illiteracy.
>
>Thomas Sowell is a senior fellow at the Hoover Institution.Some years ago,
>the distinguished international-trade economist Jagdish Bhagwati was
>visiting Cornell University, giving a lecture to graduate students during
>the day and debating Ralph Nader on free trade that evening. During his
>lecture, Professor Bhagwati asked how many of the graduate students would be
>attending that evening’s debate. Not one hand went up.
>
>Amazed, he asked why. The answer was that the economics students considered
>it to be a waste of time. The kind of silly stuff that Ralph Nader was
>saying had been refuted by economists ages ago. The net result was that the
>audience for the debate consisted of people largely illiterate in economics,
>and they cheered for Nader.
>
>Professor Bhagwati was exceptional among leading economists in understanding
>the need to confront gross misconceptions of economics in the general
>public, including the so-called educated public. Nobel laureates Milton
>Friedman and Gary Becker are other such exceptions in addressing a wider
>general audience, rather than confining what they say to technical analysis
>addressed to fellow economists and their students. By and large, the
>economics profession fails to educate the public on the basics, while
>devoting much time and effort to narrower and even esoteric research.
>The net result is that fallacies flourish in discussions of economic policy
>issues, while the refutations of those fallacies lie dormant in old books
>and academic journals gathering dust on library shelves. As former House
>majority leader Dick Armey—an economist by trade—put it: “Demagoguery beats
>data in making public policy.”
>
>Sometimes the fallacies are based on something as simple as a failure to
>define terms accurately. Everyone has heard the claim that a high-wage
>country like the United States loses jobs to low-wage countries when there
>is free trade. When the North American Free Trade Agreement went into effect
> a decade ago, there were dire predictions of “a giant sucking sound” as
>American jobs were drawn away, to Mexico especially.
>
>In reality, the number of jobs in the United States increased by millions
>after NAFTA went into effect and the unemployment rate fell to low levels
>not seen in years. Behind the radically wrong predictions was a simple
>confusion between wage rates and labor costs. Wage rates per unit of time
>are not the same as labor costs per unit of output. When workers are paid
>twice as much per hour and produce three times as much per hour, the labor
>costs per unit of output are lower. That is why high-wage countries have
>been exporting to low-wage countries for centuries. An international study
>found the average productivity of workers in the modern sector of the Indian
>economy to be 15 percent of that of American workers.
>
>In other words, if you paid the average Indian worker one-fifth of what you
>paid the average American worker, it would cost you more to get the job done
>in India.
>
>In particular industries, such as computer software, Indian workers are more
>comparable, which is why there is so much outsourcing of computer work to
>India. But virtually every country has a comparative advantage in something,
>whether it is a high-wage country or a low-wage country.
>
>Those who complain loudly about how many jobs have been “exported” to other
>countries because of international free trade totally ignore all the jobs
>that have been imported to the American economy because of that same free
>trade. Siemens alone employs tens of thousands of American workers, and
>Toyota has already produced its ten millionth car in the United States.
>Management guru Peter Drucker has said that this country imports far more
>jobs than it exports, and no one has contradicted him. Indeed, those who are
>loudest in denouncing the exporting of jobs totally ignore the importing of
>jobs.
>
>Free international trade produces both the benefits of increased
>productivity and the adjustment problems that all other forms of increased
>productivity produce—namely, job losses in the less competitive firms and
>industries. The typewriter industry was devastated by the rise of the
>computer, as the horse and buggy industry was devastated by the rise of the
>automobile. Histories of the industrial revolution lament the plight of the
>hand-loom weavers when power looms were introduced.
>
>International trade has no monopoly on economic illiteracy. One of the
>apparently invincible fallacies of our times is the belief that President
>Ronald Reagan’s tax cuts caused the federal budget deficits of the 1980s. In
>reality, the federal government collected more tax revenue in every year of
>the Reagan administration than had ever been collected in any year of any
>previous administration. But there is no amount of money that Congress
>cannot outspend. Here again, the confusion is due to a simple failure to
>define terms.
>
>What Reagan’s “tax cuts for the rich” actually cut were the tax rates per
>dollar of income. Out of rising incomes, the country as a whole—including
>the rich—paid more total taxes than ever before.
>
>At the state and local levels, this confusion of tax rates and tax revenues
>has led some local politicians to see higher tax rates as the answer to
>budget problems, even though higher tax rates can drive businesses out of
>the city or state, with adverse effects on the total amount of tax revenues
>collected.
>
>Price controls are another area where very elementary economics is all that
>is needed to show what the consequences are: shortages, quality
>deterioration, and black markets. It has happened repeatedly in countries
>around the world, over a period of centuries. Yet politicians keep selling
>the idea of price controls and voters keeping buying it.
>
>Many economic issues are complex, but sometimes a single fact will tell you
>all you need to know. When you know that central planners in the Soviet
>Union had to set 24 million prices—and keep adjusting them, relative to one
>another, as conditions changed—you realize that central planning did not
>just happen to fail. It had no chance of succeeding from the outset. It is a
>wholly different ball game when hundreds of millions of people individually
>keep track of the relatively few prices they need to know for their own
>decision making in a market economy.
>
>Simple stuff like this is not very exciting for economists, and there is no
>payoff in one’s professional career for clarifying such things for the
>general public. The only reason to do it is that it very much needs to be
>done—especially during an election year.
>
>http://www-hoover.stanford.edu/publications/digest/042/sowell.html
>
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