posted February 27, 2004 03:50 PM              

Low Taxes Do What?

By THOMAS SOWELL

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, Prof. 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 Mr. Nader.

Prof. 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 U.S. 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 U.S. 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% 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 U.S. 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 handloom 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 Mr. 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.

Mr. Sowell, a senior fellow at the Hoover Institution, is the author, most recently, of "Basic Economics: A Citizen's Guide to the Economy, Revised and Expanded," just published by Basic Books.

posted February 27, 2004 06:48 PM            

quote:

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In reality, the number of jobs in the U.S. increased by millions after Nafta went into effect..

---

I wish they would cite their sources cause I believe this to be a lie.

I found several sources citing exactly the opposite. More than 800,000 jobs were lost to the US workers after NAFTA passed.

Source-The high price of 'free' trade
NAFTA's failure has cost the United States jobs across the nation

posted February 28, 2004 04:50 AM              

"in spite of difference of soil and climate, of language and manners, of laws and customs--in spite of things silently gone out of mind, and things violently destroyed, the Poet binds together by passion and knowledge the vast empire of human society, as it is spread over the whole earth, and over all time"

...things violently destroyed...to get a different perspective "from the bottoms" i think it would be a good idea for the elite to view michael moore's bowling for columbine...or roger and me...it is funny how my dittohead family refuse to even look at it...they detest michael moore, although they have no idea what he is about...i think rush limbaugh probably said something about him being "one of those liberals" in that sneering tone of voice, and hence they do not want to bother--the thinking has been done... {{{(O.o)*)}}}

posted February 28, 2004 01:08 PM            

I'm sure I do this too, even. Everyone does. Lately I've been trying to consciously make an effort to keep my mind open as possible but honestly, I still have my ideas of how the world is and it still affects how I process information.

I'm still wondering what source the w.s.j. used for that article. I mean, it's one thing to fudge the truth a little but to say that millions of jobs were created seems so outrageous.

posted February 28, 2004 01:10 PM            

I hardly ever use the thing but here's the one I had previous..

------------------
Where the mind is without fear and the head is held high;
Where knowledge is free;
Where the world has not been broken up into fragments by narrow domestic walls;
Where words come out from the depth of truth;
Where tireless striving stretches its arms towards perfection:
Where the clear stream of reason has not lost its way into the dreary desert sand of dead habit;
Where the mind is lead forward by thee into ever-widening thought and action--
Into that heaven of freedom, my Father, let my country (or our world!!) awake.

posted February 28, 2004 06:15 PM              

all of this has left me more depressed than i have been in months [and it is not me who has lost a job, even--i simply care about those who have!]

this indifference of society to the sufferings of others--if they lose their job, so what? i have mine...

people insulate themselves with the most asinine thinking...after all, they reason, if others lost their jobs because of random economic factors, then i could be subject to the same loss--it just feels much better to blame some personal flaw of theirs, to allow me to live my illusion of security--they must be a bad person or something to have had that happen. i am good, so others' realities do not matter to me

is there anything more selfish? and pity me, my whole family are selfish dittoheads... there really is no need to think, it has all been done and their "rush" filter is permanently on...is there any hope for them? will they all awaken one day to realize only too late where their depraved indifference and greed has led our country?
i keep telling my family members they are not rich enough to be republicans, not the way that party has spiraled downward into the role of a mere puppet to vested interests...like scalia now...sigh...

by the way, i really could use some help with my life orientation...could you check out my post under 2004 politics and see if you might be able to offer any help? my shrink told me i was so "needy" i think that is simply that i have cancer rising, and feel this huge need to nurture, but my connection with the universe gets lost sometimes, and my own universal nurturing to keep my own reservoir intact is blocked...help!

posted March 01, 2004 03:19 PM            

It's important to retreat into something that makes you happy and just give yourself a break on thinking about all the problems and challenges the world faces. Innundating yourself with news and politics can be the most draining thing in the world if you don't regularly practice something that recharges your batteries. Be it spirituality, sports, reading fiction, art, astrology or whatever.

If you feel ignoring the problems in the world is bad then instead of focusing on the problems, put some energy into soulutions. (That was a genuine spelling mistake but it's sooo Freudian I had to leave it. )

I took a permacultue design course that really helped me focus my energy into somthing that not only sustained my soul but also works towards helping society become sustainable.

posted March 04, 2004 12:11 AM              

Maybe jobs are being outsourced not only to bolster the stock market and make corporations more rich, but to make it so that the only real option for lower and middle class folks to survive is to join the military......hence feeding into the new American imperialism....

Can you believe I think these things without drugs? hehehehhe

Here's the method behind my madness.....
1) the USA is rapidly becoming a nation that no longer MAKES anything. That was our saving grace for the first half of the previous century. Now, the greatest sector of jobs and job growth is service- ie. Walmart, McD's, etc.
2) We are being outpaced in the tech sector, with the exception of military technology. Even tech support functions are being outsourced to India, Pakistan, Phillipines.. leaving many well paying, middle class workers unemployed.
3) Bush's imperialistic bent..axis of evil, and the issues in the Middle East. Not only is the issue being presented as a theological issue (its good vs. evil, democracy vs dictatorship, yadda yadda) its also a grab for resources. Even if we drill in ANWR thats not nearly enough oil to satisfy the USA's great dependence on petroleum. We need to control oil reserves SOMEWHERE, to insure the survival of our standard of living.
4) See Harpyr's excellent post on why wont our leaders do something- about the possible future breakdown of the Earth's ecosystem due to global warming, and the threat it postulates about society and global crisis.
5) Lets be honest: Our leaders dont give a shite about the people. We are wage slaves, important only for the labor we do and the taxes paid into the government. How can I say this? Because this administration has shown its callous disregard for any type of program to better the lot of its constituents. This topic could warrant an entire thread, but some highlights..
"No Child Left Behind" unfunded mandate that is basically crap anyway.
The cutting of VA benefits, the "new" Medicare program (crap) the robbing of Social Security, cutting funding to programs that help low income households in cold climates pay for HEAT, an amendment to ban same sex marriage, the threat to womans rights...need I go on?

I will bet anyone on this board that if Bush gets re-elected, there will be a draft.
In order to move forward with what the Bush Cartel postulates for the future of the America Empire, its going to need bodies to fight the wars we will be commited to.
Making it nearly impossible to survive in a local economy sure makes the military, with its health benefits, living quarters, and guarenteed job look attractive, now doesn't it?

Yes, this is a huge jump of logic. I will blame it on my 1st house Neptune and heavily aspected Uranus.....

But anything is possible....and stranger possibilites, ones that people said "that will never happen!" HAVE happened.

posted March 04, 2004 02:06 AM              

the operative word being "gradual"

would you like to be super fat, er, I mean, supersize that?

har de har har...compassionate conservatism at it's finest

posted March 04, 2004 08:46 PM              

I wonder if the "normal" sizes will suddenly increase.......

posted March 13, 2004 03:18 PM              

i finally got a chance today to go through the source of the data you posted. then i did i search on the u.s. beaureau of labor statistics.

the epi does original research and produces its own statistics emphasizing a thesis on low and middle income workers. i am not clear on how the statistical methodologies are formulated, and what political affiliations the think tank has - though it states non-profit and non-partisan. i would assume they look at publicly released government data, in addition to applying a methodology to fill in any possible holes the government does not take into consideration when evaluating low to middle income workers. this makes me think about epi's underlying focus as a presence for the disinfranchised groups.

the u.s. beaureau of labor statistics probably depends a great majority of its presentation based on data submitted by workers themselves at government agencies and companies filing employee data to various government agencies. the statistics here, as in epi, depend on a large part on how they are collected and organized. each agency has specific variables.

that said, companies are very private about human capital strategies. variances in their understanding of what they must submit can project inaccuracies and misunderstandings about the movements of labor.

there are no doubts that there are u.s. jobs eliminated, and jobs created in foreign countries. as a research analyst on the outside looking in, i can't say for certain that the same exact jobs (qualifications, conditions, learning curves, etc.) are replicated at other sites. companies do build subsidiaries and create partnerships with local governments, which complicate how employees are accounted for and reported.

at best, statistics from anywhere are guesstimates based on how the author perceives the situation and organizes the thesis. what i posted was a side of an argument, which by no means should be declared set in stone nor tossed into the fireplace. as we continue to read through articles, we will notice large variances in numbers and what people are saying.