THOMAS SOWELL 20

This essay will be just a synopsis, with an occasional comment by me, of a 2006 book by Thomas Sowell titled Ever Wonder Why? which in turn is a collections of articles he wrote in the past three or four years. Dr. Sowell is a septuagenarian national treasure. He is arguably the foremost living economist and social commentator in the country since Nobel laureate Milton Friedman died last year. If you had any doubt on that score it should be dispelled after you read this essay, but if you still are not sure then I suggest you read some of the many books he has written in the past 30 years.

A current mantra is that we “need” immigrants, legal or illegal, to do the work Americans will not do. What we “need” depends on what it costs and what we are willing to pay. A billionaire might “need” a private jet, but families once did not “need” electricity.

Leaving price out of the considerations is probably the source of more fallacies in economics than any other misconception. At current wages for low-level jobs and current levels of welfare, there are indeed many jobs that Americans will not take. The fact that immigrants, especially illegal immigrants, take those jobs is the very reason that wage levels will not rise enough to attract American workers.

This is elementary supply and demand. Yet we continue to hear about the “need” for immigrants to do jobs that Americans will not do – even though these are all jobs that generations of Americans have done before mass illegal immigration became a way of life in this country.

Economists tend to be unpopular because they remind people that everything has a cost – there is no free lunch. People know this, it just that they do not like to be reminded of it. Britain’s skyrocketing medical costs of taking care of things that people would never spend their own money on forces cutbacks and delays in more urgently needed medical treatments. One woman’s cancer operation was postponed so many times by the British health service that by the time the system could take her the cancer was inoperable and she died.

Economists could have told anyone in advance that making things “free” causes excessive use by some, leaving others with more urgent needs unsatisfied. Rent control, for example, has led to more housing being occupied by some, who would not have paid the market price for as large an apartment as they live in, while others can not find any housing in the city they can afford and have to live far away and commute to work.

There is no such thing as clean air; there is only air with varying degrees of impurities, varying amounts which can be removed at varying costs. Removing the kinds of particulates and gases that choke our lungs or otherwise threaten our health is usually not that expensive. However science is increasingly becoming capable of detecting and removing even more impurities with ever more insignificant consequences. Who is going to resist calls to “save the environment”? Only an economist is likely to ask, “Save it from what or from whom and at what cost?” Lunches don’t get free just because you do not see the price on the menu and economists don’t get popular by reminding people of that.

If you ask most people about the cost of medical care they will tell you how much they have to pay for a visit to their doctor’s office or their prescription drugs. These are not the cost of medical care – these are the prices paid. The difference between prices and costs is not just a fine distinction made by economists. Prices are what pay for costs and if they do not pay enough to cover the costs then supply will decline in quantity or quality or both. The average medical student graduates with a dept of about $100,000. The cost per doctor of running an office is more than $100 per hour. The average cost of developing a new pharmaceutical drug is circa $800,000,000. These are among the costs of medical care. All of the existing efforts to control the rising expense of medical care whether by government, insurance companies, or HMO’s are about holding down the amount of money they have to pay but, not about reducing the real costs.

Many of the politicians, as well as their constituents, who are in favor of imposing price controls on prescription drugs or importing Canadian price controls by importing American medicines from Canada, have not the slightest interest in curtailing frivolous lawsuits against doctors, hospitals, or drug companies which are enormous costs. If the bureaucratic hassles that doctors have to go through make their huge investment in time and money going to medical school not worthwhile then a shortage of qualified doctors will eventuate. Britain, which has had government medical care for more than ½ a century, has to import doctors from Third World countries where medical school standards are lower. As long as the numbers of medical doctors does not decline, politicians think the important thing is there is no diminution in supply. Patients will find out to their detriment what a decline in quality means.

For years we have been hearing about a water shortage in the western United States. To most people that might suggest there is just not enough water for all of the people in those states. To an economist this word has an entirely different meaning. They ask if there is a shortage then why doesn’t the price rise? If it did, some people would demand less and others would supply more until supply and demand balanced. Put differently, a shortage is a sign that the price is being kept artificially lower than it would be if supply and demand were allowed to operate freely. That is precisely why there is a water shortage in the western states.

When media or political liberals express alarm about the national debt they reflectively call for increased taxation. They do not even think about, never mind call for, a reduction in government spending. We are endlessly reminded that the national debt has reached record levels during the Bush administration. That enables the liberal media to advocate raising taxes. Since we have a larger population and larger income than ever before, it should come as no surprise that we have a larger national debt. But what does it mean? If a billionaire has a larger personal debt than someone with a net worth of a few thousands of dollars is that cause for concern? Debt means nothing unless you compare it to your income or wealth. How does our current national debt compare with to our national income? As a percentage of national income our privately held national debt is lower than it was a decade ago during the Clinton administration when liberals did not seem at all panicked as they are today. What “tax cuts” cut is the tax rate. Tax revenues can rise, fall, or stay the same. Everything depends on what happens to income.

Tax revenues rose after the Kennedy tax cuts of the 1960’s and the Reagan tax cuts of the 1980’s because incomes rose. Likewise incomes are rising during the Bush administration today.

India is now exporting wheat while malnutrition is a growing problem within India. This condition is both paradoxical and tragic, yet there was no mention of one key word in the Wall Street Journal where this story was written. That word is price. There can be a surplus of anything at any given time, but a chronic surplus of the same thing year after year means that the price is being artificially prevented from falling. Otherwise the excessive supply would drive the price down leading producers to produce less and consumers to consume more until the surplus is gone. What is happening is that the government of India is keeping the price of wheat and some other agriculture produce from falling. That is exactly what the American government has been doing for more than half of a century, leading to chronic agriculture surpluses here as well. Although Americans are suffering from obesity and India from malnutrition, the principle is the same.

Controls that keep prices from falling to the levels they would reach in response to supply and demand are not limited to agriculture price supports like those in India, but also minimum wage laws, which are equally common in countries around the world. Just as artificially high price for wheat set by government leads to a chronic surplus of wheat, so an artificially high price set by government for labor leads to a surplus of labor – better known as unemployment. Since all workers are not the same this unemployment is concentrated among the less skilled and less experienced workers. Many of them are simply priced out of a job.

In the United States, for example, the highest unemployment rates are almost invariably among black teenagers, but this was not always the case. Although the federal minimum law was passed in 1938, wartime inflation during the 2nd WW meant that the minimum wage law had no major effect until a new round of minimum wage increases in 1950. Unemployment rates among black teenagers before then were similar to white teenagers and a fraction of what they are today.

A caveat in Thomas Sowell’s philosophy is that he presupposes competitive markets are allowed to work. If monopoly, oligopoly, or oligopsony conditions exist then free and competitive markets can not function. Fortunately in a democratic and capitalistic society like ours, with only a few exceptions, we do have competitive markets. Some of the exceptions such as the cheaters at Enron, WorldCom, Global Crossing, and Arkadelphia were dealt with by government prosecution. More difficult to deal with is government interference with free markets such as by minimum wage laws and stringent and unnecessary controls on business.

At one time it was, and in many quarters still is, assumed that the 1929 stock market crash led to the Great Depression that lasted through the 1930’s. Now economists and other informed people have concluded that what the government did both deepened and extended the economic depression. Neither Republican President Herbert Hoover nor his Democratic successor, Franklin D. Roosevelt, had a clue about economics or a policy that made any sense. Both sought to keep prices, including wages, up, despite the fact that the money supply had declined by 1/3. How was the country supposed to buy all of the output at existing prices and employ all of the workers at existing wages when there was so much less money?

In reality it was Hoover, not Roosevelt, who first threw the power of the federal government into the effort to get the country out of the depression. In recent years it has become more widely acknowledged that Roosevelt’s New Deal was essentially Hoover’s policies raised to the next exponent. The fact that the first government effort to get the country out of the depression, by both Hoover and FDR, was followed by the longest depression in our history has not been lost on some economists. Quite apart from specific harm done by specific government programs, the general uncertainty generated by unpredictable government interventions made investors reluctant to make the long term commitments needed to generate more jobs, more output, and more purchasing power.

Not only did the Federal Reserve with its tight money policy and two presidents manage to make the Great Depression worst, but Congress did as well. When Congress passed the Hawley-Smoot tariff in 1930 (it could more accurately be called the Hoover-Hawley-Smoot bill) it contributed to a worldwide contraction in international trade as country after country tried to “save jobs” by protectionism. Professor Peter Temin of MIT has pointed out that in 1987 the “stock market fell almost exactly the same amount on almost exactly the same days of the year as 1929 and there was no depression. The Reagan administration was not the New Deal.

Charges of “price gouging” as occurred during hurricanes in Florida usually arise when prices are significantly higher than what people are used to. Florida’s laws in fact make it illegal to charge more in emergencies than the average price during the previous 30 day period. This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy? Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels you are used to any more special or “fair” than other prices that are higher or lower. What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.

How do “price gouging” and laws against it fit into this? When either supply or demand changes, prices change. When the law prevents this, as with Florida’s anti-price gouging laws, that reduces the flow of resources where they would be the most in demand. At the same time price controls reduces the need for the consumer to limit his demand for existing goods and resources. Rent control has consistently led to housing shortages and price controls on food have led to hunger and even starvation.

Among the complaints in Florida is that hotels raised their prices. One hotel whose rooms normally cost $40 per night now charges $109 a night and another hotel whose rooms likewise normally cost $40 per night now charge $160 per night. Those who are long on indignation and short on economics may say that those hotels were now “charging all that the traffic would bear.” But they were probably charging all the traffic would bear when such hotels were charging $40 a night. The real question is: why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels. In short, the new prices make as much sense under the new conditions as the old prices did under the old conditions.

It is essentially the same story when stores in Florida are selling ice, plywood, gasoline, or other things that reflect today’s supply and demand rather than yesterday’s supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will. None of this is rocket science. As Justice Oliver Wendell Holmes said, “we need education in the obvious more than investigation of the obscure.”

Some people work themselves into a depression by thinking about all of the “manufacturing jobs” being exported from the United States to low wage countries overseas. However, manufacturing jobs are less of a problem than manufacturing confusion. Much of what is being said confuses what is true in one sector of the economy with what is true of the economy as a whole.

At the beginning of the 20th century 10,000,000 American farmers and farm labors produced the food to feed 76,000,000 people. By the end of the century fewer than 2,000,000 people on the farms fed more than 250,000,000 people. Therefore more than 8,000,000 agricultural jobs were “lost.”

Between 1990 and 1995 more than 17,000,000 American workers throughout the economy lost their jobs. But there were never 17 million people unemployed during this period any more than there were 8 million agricultural workers unemployed before. People moved on to other jobs. Unemployment rates in fact hit new lows in the 1990’s. This is not rocket science either. When the same thing happens in the international economy it is much easier to manufacture confusion. There is no question that many computer programmer jobs have moved from the United States to India. But this is just a half-truth which can be worse than a lie. Peter Drucker in a Fortune magazine article points out that “Nobody seems to realize that we import two or three times as many jobs as we export.” Included are jobs in Japanese automobile plants making Toyotas and Hondas on American soil. The Swiss company Siemens alone has 60,000 employees in the United States. Drucker says “We are exporting low paying jobs, but are importing high skill, high paying jobs.”

None of this is much consolation if you are one of the people being displaced from a job that you thought would last indefinitely. Few jobs last indefinitely though. You cannot advance the standard of living by continuing to do the same things in the same ways. Progress means change whether those changes originate domestically or internationally. The grand fallacy of those who oppose free trade is that low wage countries take jobs away from high wage countries. Even though it is true for some particular jobs in some particular cases, it is another half-truth that is more misleading than an outright lie. While American companies can hire computer programmers in India to replace higher paid American programmers, that is because of India’s outstanding education in computer engineering. By and large, however, the average productivity of Indian workers is about 15% of American workers. In other words if you hired Indian workers and paid them 1/5 of what you paid American workers, it would cost you more to get a job done in India. That is the rule and computer programming is the exception.

Facts are blithely ignored by those who simply assume that low wage countries have an advantage in international trade, but high wage countries have been exporting to low wage countries for centuries. The vast majority of foreign investments by American companies are in high wage countries, despite great outcries about how multinational corporations are “exploiting” Third World workers. Apparently facts do not matter to those who are manufacturing confusion about manufacturing jobs.

A simple phrase can define a complete mindset. Tax cuts are characterized by liberals as “showering benefits on the wealthiest taxpayers.” Imagine, keeping money that you have earned is called having benefits “showered” on you! By this reasoning someone who has the power to take something from you, but does not take it all is “showering” benefits on you. Big government spenders and taxers never want to admit that wealth is not created by government, but rather by the people who are taxed. Moreover, these are not, for the most part, people who “happen to have money” as the phrase goes. Most people who have money got it by providing other people with something they wanted enough to pay for it. This is never called “public service” by the left. Selling people what they want, in order to get what you want, is called “greed.” Given this mindset you can see why letting people keep more of the money they earn is considered indulging them with benefits that the government “showers” on them. To those types it is like subsidizing sin.