Economic Fallacies

John Hawkins interviews Thomas Sowell on some prevailing economic carnards. 

Thomas Sowell has just released Economic Facts and Fallacies: Second Edition . I read the first edition, thought it was outstanding, and would highly recommend it. I was also pleased to have the opportunity to interview Thomas Sowell about the Second Edition of the book. What follows is the slightly edited transcript of our conversation. Enjoy!

A lot of people say that income has stagnated for most Americans over the last 40 years. Talk about that a little bit; is that true?

No, it’s not true. It shows what you can do by playing games with statistics. It’s not true that income stagnated. People who argue that way almost invariably cite the household statistics or family income statistics when in fact the income per person, even in real terms eliminating inflation, has been rising very substantially over the years.

The problem is that households and families are getting smaller and smaller so that today if there is a family where, for example, there are two people working and in the past there were three people working, now the two people are making what the three people used to make. Then they say, “Well, you see, income has stagnated.”  No, income has gone up by 50 percent.

We also hear a lot about income inequality these days. There is a wide disparity between the rich in this country and everyone else and that’s presented as evidence the system is not fair, that it’s bad for the poor and the middle class, and that we need to tax the rich a lot more. True?

No. One of the sad things that happens is that people look at numbers and they translate the numbers into a concept that has no relationship to those numbers.

Being rich and being poor are thought of as classes of people who endure over time. In reality the great income inequality is between people of different ages. People in their 50′s make a lot more money than people in their 20′s. But that’s not a class because anyone who lives a normal lifetime is going to be in his 20′s at some point and in his 50′s at a later point. I see all this stuff about wealth even moreso than income and, yes, most people under the age of 15 don’t really have any wealth and there are millions of them, but that is not a class issue. That’s an age situation and most of the people who have no income and are under 15 are being supported by other people. So there are all kinds of numbers that are seized upon to be forced into some kind of a pattern, a pattern that bears no relationship to reality.

Now, poverty is commonly believed to be a root cause of crime and even terrorism. How much truth is there to that?

Close to zero. In fact, if you look at say, the 1950′s, people were a lot poorer in 1950 than they are today. The crime rate was a lot lower. The crime rate was lower even during The Great Depression than it was in some later times. So there is a correlation, but what little correlation there is has to be looked at in terms of the correlation is not causation. Many of the same characteristics that lead people to remain poor are also characteristics that promote crime by the same people. Even there, when you find a correlation, you have to find out which way the direction of causation goes. Most people who talk this way just automatically assume that people commit crimes because they’re poor.

Related question to what you just said there — If someone asked for a basic formula of what you need to do in life to avoid being poor, what would you tell him?

Finish high school and get married. The poverty rate among black married couples has been in single digits ever since 1994. You would never learn that from most of the media. Similarly you look at those blacks that have gone on to college or finished college, the incarceration rate is some tiny fraction of what it is among those blacks who have dropped out of high school. So it’s not being black; it’s a way of life. Unfortunately, the way of life is being celebrated not only in rap music, but among the intelligentsia, is a way of life that leads to a lot of very big problems for most people.

For a lot of Americans, the debate about the budget and what it means for them personally down the road is very abstract. Could you talk about the real world consequences for the average American if the government continues to overspend? 

Oh, there are a lot of consequences. The most obvious one is that you’re going to get taxed and unfortunately we’ve created a situation where a large number of the people are exempt from taxation and think none of this affects them. One of the biggest taxes is a hidden tax and I’m not referring just to sales taxes or things like that, but to inflation. They may not be taxed, but the company who produces their electricity will be taxed and their electric bills will go up. So technically it’s true they will not be taxed, but it’s playing with words when they end up having to pay money for electricity that is greater than what they would have had to pay had there been no tax put on the utility companies.

I left out inflation which is a huge tax on everybody. To give you some ideas of inflation; as of 1998, a $100 bill would not buy as much as a $20 bill would buy in the 1960′s. So every dollar that’s in your wallet or in your bank or wherever you keep your money is going to be worth less than it was before because the government is printing more dollar bills and spending it. So there are all kinds of ways in which they can transfer wealth from the public to the government without changing the tax rate.

Now many people blame the economic issues in Africa, India, Pakistan, the Middle East on colonization by Western nations and stinginess on the same part by those nations. In other words if the West were willing to pony up enough money at this point, the economic problems of those countries would be solved. How fair do you think that analysis is?

I think it’s remote from any reality and what reinforces that is that the people who say these kinds of things never back it up with any hard data. The hard data shows the opposite of what they’re saying. You can look at the case of those countries which finally opened up to the rest of the world and allowed foreign investors in and foreign businesses in, the two biggest examples in recent times, India and China. People by the millions have risen out of poverty in China and in India after they began to open up their markets to Western investments.

None of this is mysterious. When people come in to build phones or other devices in China, the people who set up those business in China make money, but the people in China also make money. The reason is because there is a net increase in the wealth produced by the country. I’m always amazed at how little interest people on the Left have in what does and does not increase the actual production of wealth. They are hypnotized by the notion of redistribution of wealth without any concern about how is the wealth produced in the first place. You can’t redistribute it until it’s produced and if your methods cause less to be produced, people are going to be poorer.