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Jewish World Review Feb. 5, 1999 /19 Shevat, 5759
Thomas Sowell
Why economists visit
(JWR) --- (http://www.jewishworldreview.com) BEING AN ECONOMIST IS NOT EASY. You end up gnashing your teeth a lot when
you hear the kinds of ignorant nonsense about the economy that is par for
the course in the media.
How often have you heard people in the media and in politics refer to "the
trickle-down theory"? This theory is supposed to be that you give benefits
to the rich, in hopes that the money will trickle down to the poor.
The only problem is that there is simply no such theory and never has been.
As someone who spent the first decade of his professional career researching
the history of economic theories and writing about them in scholarly
journals, I can assure you that no recognized economist in any part of the
spectrum has ever had any such theory.
This non-existent "trickle-down" theory is trotted out every time someone
wants to cut taxes in general or capital-gains taxes in particular. But tax
cuts to encourage investment are not intended to let anything trickle down.
In order to have capital gains, you first must invest --- which is to say,
create jobs, products and industry. Nothing trickles down to the working
class. It is the workers who first get the money and only later do the
investors find out whether they have made money or lost money. Benefits
trickle up -- not down -- if and when the investment pays off. There are no
capital gains to tax until afterwards.
Misconceptions of international trade are the norm in the media. When our
trade deficit increases, that is said to be a "worsening" and when it is
reduced, that is called an "improvement." Adam Smith knew better than that
two centuries ago. But apparently this knowledge has not yet "trickled down"
to the media --- or to politicians.
If a growing trade deficit is a "worsening," then why did we achieve our
highest level of prosperity last year at the very same time when we had our
largest trade deficit in history? Rather than attempt to answer such
straightforward questions as these, those who are spreading alarm about the
trade deficit say that it "can't go on forever."
If it can't go on forever, then why do we need government policies to end
it, since we know that it will end anyway?
To listen to those who panic over international trade, you would think that
the whole purpose of it was to get rid of as much of what we have produced
as possible and to get as little as possible of what other countries have
produced in return.
A perennial fallacy about international trade is that countries with high
wages cannot compete with countries that have low wages. The cold fact is
that 19th-century Britain was the leading exporter in the world when it had
higher wages than most of the countries that bought its products. The same
is true of the United States today.
Countries have high wages for a reason --- and that reason is usually that
its output per worker is higher. When a worker is paid twice as much and
produces three times as much per hour, the labor costs per product are
lower.
Proposals for freer trade have set off hysterical talk about "that giant
sucking sound" that would be heard as American jobs were siphoned overseas
to low-wage countries. In reality, we now have lower rates of unemployment
than we had when there were more trade restrictions and the total number of
jobs has hit an all-time high.
Some people do lose their jobs because some foreign country produces their
particular product either cheaper or better. But that is equally true within
the United States. The fallacy is in imagining that you can generalize, when
in fact millions of other Americans get jobs because of international trade
and consumers -- meaning all of us -- benefit from getting what we want from
wherever we want at the lowest price or the highest quality.
The stock market is another economic phenomenon routinely misunderstood in
the media. For example, it always seems to come as a big surprise to
newscasters that the stock market has gone up or down, even though stock
markets have been going up and down for as long as there have been stock
markets, anywhere in the world. Nevertheless, the news-readers seem to need
to come up with some special reason why it went up or down today.
We don't need more economists. We need more people to take Economics
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