Book Review: Basic Economics: A Common Sense Guide to the Economy

Thomas Sowell is one of the bright intellectual lights of the conservative movement. His specialty is capitalist economics. What Sowell chose to do in Basic Economics is provide a great public service to people like me who skated through a semester of Economics 101 bored and were overwhelmed by charts. There are no charts or graphs in this book. There are few numbers. Instead, there is a logical explanation for how the economy flows.

What makes Sowell's work important is that he does not just address basics like scarcity, supply and demand, and prices, but also how all of these concepts are affected and often distorted by political decisions. This is an important lesson because Econ 101 usually covers only "pure" economics, meaning a description of how markets are supposed to work if no one interferes with with them. However, our government interferes with our economy with increasing frequency, and Sowell does his level best to demonstrate the usually negative consequences of that interference.

Here are some of the basic precepts of free-market economics that Sowell translates for the uneducated reader:

• Economics is the study of how society copes with scarce resources that can have alternative uses.
• Prices, expressed in terms of money, are the result of multitudes of decisions made by free individuals.
• Consumers try to buy as many goods as they can at a lower price until the supply drops and the prices rise.
• Producers of goods and services (in free-market economies--though Sowell covers socialist, communist, and barter economies as well) divert their energies where they can get the most money.
• Multiple producers enter a market where prices are rising. However, they cannot overcharge or they will be underbid by their competitors. Eventually, as more and more suppliers enter a market, prices fall.
• Government interference in a market can take many forms, including rent, price, and wage controls. While these policies are promulgated to benefit some special interest group (often "the poor"), they often lead to worse conditions for the poor. This happens because suppliers cannot make a great deal of profit where prices or rents are fixed. So what they do, as in the the case of rent control, is let the property fall into decay in an effort to get the low-paying renters out so they can turn the property into something that will make more of a profit, like a commercial site or luxury housing, thereby reducing the stock of available low-income housing.

Sowell provides multiple examples of how government interference makes the economy worse or how the intentions of certain policies create the opposite result because politicians do not consider what sorts of incentives (or disincentives) occur when the policies are established. If there is one primary lesson Sowell has for his readers, it is that informed voters should be more careful about paying attention to the quantifiable effects and results of government interference in the marketplace rather than accept emotion-based calls to "do something!" And he informs the reader with his relentless logic page after page, covering the full range of economic issues, from prices to wages to banking to insurance, government finance, international trade, and "non-economic values," (those being the arguments people use to push for government action that costs a lot of money but that MUST be done because some things are just too important to leave to the marketplace).

There are some issues, I must confess, where Sowell didn't answer my questions as fully as I would have liked. One of those non-economic values, for instance, is national defense, which he dismisses with the argument that too many industries are protected in the name of national defense because they are fallaciously perceived as "necessary" to defend the country. Just because some industries are unnecessarily protected does not mean that all of them are. And if we reach a point where we find ourselves at war with multiple sole-suppliers of war materials (as Japan did prior to World War Two), what options will we have except to restart such industries from scratch or take such industries from others?

Another place where Sowell falls down in the field of protectionism is in offering alternatives or recommendations for what to do about low-skill (but often high-wage) assembly line workers in the U.S. who lose their jobs to cheaper, lower-wage workers overseas. He sees the overall benefit to the economy coming through lower prices and higher standards of living for the majority. He also makes the point that protectionist tariffs or regulations might protect jobs in, say, the domestic steel industry, but said jobs end up increasing the prices of many items made from steel across the economy, thereby raising the cost to the economy of jobs saved. What Sowell leaves out is that people in assembly-line or low-skill jobs have fewer educational or job-retraining opportunities, are less able (or inclined) to move, and might be less retrainable in general. What is to be done about them if they are unable to find employment but unable to move to where jobs are better?

We are a compassionate society, which is one of the reasons that politicians and media types are able to portray battles between labor and management or Americans vs. foreigners as opportunities to "do good" or "take action," even when such actions prove disastrous in the long run.

Again, I buy most of Sowell's arguments. However, there are times when free trade results in long-term, permanent blight or unemployment or lost hope. Consider the nation's "rust belt" as one example. It is not just a matter of economics vs. politics. There are also cultural, educational, and human ability issues that need to be addressed. It might be worth an email to Dr. Sowell just to see how he responds. That said, Basic Economics is a sound book, well written and easy to understand. If it runs a little on the long side, it is still time well spent because you really will come away with a better appreciation of the benefits and pitfalls of what used to be called the "free market."

The Economy, Continued

George W. Bush handed off a bad economy to Barack Obama. I believe we can all agree on this. However, after that, the perception of economic reality between conservatives and liberals diverges. For example, Bush took the wrong step--after cutting taxes during the '01-03 recession--of attempting a massive government bailout/intrusion into the economy. The '08-'09 recession has been the result of a collapse in home prices, credit, and some of the financial and industrial concerns that depended on the credit markets. The bail-outs under Bush and Obama, administered by the Secretary of the Treasury, have not worked. Credit remains tight, more mortgages are failing, and credit remains tight. Enter Barack Obama.

It is time to stop blaming George W. Bush for the economy. This economy has been Obama's for a month now. Gone is the soaring rhetoric of "hope" and "change." Now we are treated to grim reality, "It's going to get worse before it gets better," and more excuses for the government to intrude into the private sector.

A jolt of government spending on private-sector products and services could temporarily juice the economy, though John Maynard Keynes himself said that incentives were necessary to encourage businesses to invest and expand. Those incentives generally include tax cuts and reductions in regulations. The Obama stimulus plan has not done this. It has focused on government spending on government-focused activities that increase the federal bureaucracy but does not increase private-sector productivity, which has always been more dynamic and profitable than government activity. It has increased taxes on the people with the most money, who would be the ones paying the most taxes and investing in the most profitable businesses. He has proposed a massive new dose of federal spending that the nation cannot afford, foreign investors do not want to subsidize (or want concessions to support), and which could inflate the currency in the long run.

Furthermore, President Obama and his party in Congress have attached regulations and strings to their version of the bailout money. President Obama has criticized CEOs for flying in private jets or going on business travel to expensive places, potentially damaging businesses and jobs in those industries. The more the government interferes, the less businesses are likely to take risks, for fear of being targeted or criticized for their attempts at success.

Obama has preached about a new "era of responsibility," but the government bailing out businesses and individuals who made bad decisions guarantees more irresponsibility in the future because somewhere, somehow, people believe that the government will always bail them out if they screw up. Indeed, the bigger the screwup (billions of dollars lost), the more likely it is that a company will get a bailout!

Obama wants more Americans working, but extending unemployment benefits or upping the benefits is an incentive to stay home and let the government take care of you. And so forth.

In short, I believe President Obama's policies and public statements are making the economy worse, not better. I want my country to be rich. Heck, I want to be rich! I want my 401(k) back. I've been told I need to "give Obama a break." At what point can the voters make him accept responsibility? When the Dow doubles down a couple more times? When unemployment hits 10%? 15%? 25%, as it did under Roosevelt? At what point can we stop blaming Bush? And saying things like "Well, Bush did X worse" is not helpful, nor is it a terribly effective defense of Obama. Bush is not president anymore, Obama is, and I want him to know what he is going to do that will be good for the economy.

I want the president to cut taxes. I want him to ease up on the private sector. I want him to stop telling businesses that it's not appropriate to travel to Las Vegas or Orlando for conventions. I want him to stop criticizing anyone able to afford a private plane. I don't want him to spend more in one year than most of the most expensive years-long projects in American history. If he's going to spend taxpayer money, let it be for basic infrastructure, basic research and development (including space exploration), quality academic and trade education, and temporary relief of economic hardship. If he really wanted to kick up the economy, he could cut the number of the federal regulations (and the bureaucracy responsible for increasing their number), bypass bailing out banks and other companies, and send every taxpayer $10,000. We would probably still come out ahead...plus, he'd stimulate consumer spending like nothing anyone has ever seen! I could get behind a program like that.

Heck, if he did all that, I might vote for him in '12!

Book Review: The Forgotten Man: A New History of The Great Depression



Amity Shlaes, author of The Forgotten Man, is a classically trained (capitalist as opposed to Marxist) economist, and so has great insight into the policies employed to address the economic crisis following the stock market crash of 1929. This insight, plus the lively detail she puts into her history of the 1920s to the early 1940s, makes this book required reading for students of history, government, and economics. It also needs to be read by the Obama administration as it struggles to cope with the current recession.
Shlaes begins her narrative by talking about a desperate time--one where businesses were failing and people were committing suicide in the face of desperate economic straits--that time was not 1930, but 1937, after the New Deal had already been in place for five years. During this introduction, the author states her thesis regarding the extended length of the Depression. Rather than focusing on the Smoot-Hawley Tariff or the Dust Bowl or Hoover's attempt to force wage increases or tax increases during a period of economic hardship, Shlaes emphasizes that "the intervention, the lack of faith in the marketplace," which in previous downturns had always recovered through minimal government interference, was hindered by intensive government manipulation of market mechanisms.
Going back to the 1920s, Shlaes then contrasts Hoover (who was Commerce Secretary) with his boss of the time, Calvin Coolidge. While Coolidge was a hands-off administrator and a believer in capitalism, Hoover, an engineer, believed that the economy could do even better when tinkered with or directed by the government. In times of crisis, Hoover further believed that government had the right and duty to set things right again.
Elected in 1928, in part due to his ability to marshal federal resources to help the Midwest recover from a flood of the Mississippi, Hoover set the tone that FDR was to take to greater extremes when he took office in 1932. In hopes of protecting American jobs, Hoover signed off on the Smoot-Hawley tariff, a tax on imported goods that caused other nations to raise their own import duties in retaliation. Next, to curb inflation (the primary concern of most 20th century economists), Hoover pushed the Federal Reserve to tighten up the money supply by raising interest rates. This "tight money" policy created a state of deflation, making money hard for businesses and individuals to obtain. Some cities even turned to creating non-dollar-based scrip or bartering to keep their local economies moving. Hoover also pushed for public works programs to increase employment, through such programs as the Boulder Dam, more commonly known today as Hoover Dam. All of these actions came together to ensure that Hoover remained a one-term president, and usually one of those that Democrats today hang around the necks of Republicans as a symbol of failure. However, Roosevelt would make his own interventions, and those, too, would interfere with recovery.
When FDR took office in 1933, an incredible 25 percent of the American workforce was unemployed (compare this, say, to the 10.3 percent unemployed during the early years of the Reagan administration or the paltry 7.2 percent unemployment we're experiencing today). FDR was a new political animal, an old-money aristocrat who dared to war on his fellow aristocrats, a liberal who emphasized group rights at a time when classical liberalism still emphasized individual rights. FDR's rhetoric also changed the context of previous economic theory. Consider these two conceptions of "the forgotten man," from which the book takes it title:
...as opposed to its original context...

"These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensible units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid."
--Governor Franklin Roosevelt of New York, 1932

"As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X. Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X...What I want to do is look up C. I want to show you what manner of man he is. I call him the Forgotten Man. Perhaps the appellation is not strictly correct. He is the man who never is thought of...He works, he votes, generally, he prays--but he always pays.
--William Graham Sumner, 1893

Again, Shlaes wants the reader to understand the changes FDR made to the traditional relationship between government and business. Prior to the 1930s, Washington was a quiet city, with a budget much smaller than many or most businesses nationwide. Its power was limited, and the public expectations of the federal government likewise remained limited. FDR would change all that, and more.
Roosevelt was one of the first mainstream American politicians to engage in "class warfare," a method usually practiced by socialists, wherein labor was set against "capital" (management), and goverment was expected to make capital pay for its misdeeds toward labor. In providing direct aid to poor blacks, FDR also shifted that voting bloc, which from the time of the Civil War had been reliably Republican, to the Democratic Party.
FDR pushed for higher taxes on big business, government management of electrical power, and government regulations of everything from consumer choice to labor wages. He approached market capitalism with confident skepticism and moral disdain. Shlaes also highlights his willingness to tinker with the economy, sometimes because he didn't know what would work, and sometimes just to irritate political rivals. Inverting traditional American assumptions of the time, FDR did what he could to restrict the power of big business under the assumption that "bigness" or success were obvious signs of corruption or unfair dealings. When big businesses were profitable, FDR established higher corporate tax rates to punish "excess profits." When corporations refrained from investing--out of fear of having their businesses nationalized or made unprofitable through government intervention--he created an "undistributed profits" tax to ensure that the federal government got its share regardless.
The problem with all of these interventions, regardless of the rhetoric used to justify them, was that they scared private enterprise from performing its usual function, which was to invest in new businesses, develop new products and services, and thereby create jobs. The government's tinkering exascerbated the very uncertainty they were supposed to overcome. According to Shlaes, the New Deal created many disincentives to typical economic activity and many perverse incentives to prevent the very activity they were supposed to help create.
One item in this book that was eye-opening to me was that government spending on World War II was only half of the equation in getting America's economy out of the Depression. Roosevelt also ceased his war on big business, allowing the economy to grow sufficiently to build the "Arsenal of Democracy." While Shlaes doesn't say so specifically, this seems to be pretty conclusive proof that Roosevelt was well aware his interventionist prescriptions were harming the economy, and that he stopped them only as a tool of national survival. Unfortunately, it might take a similar crisis to keep the current government in Washington from interfering in the market further.
There are other smaller stories within the greater narrative of The Forgotten Man that deserve attention, like the community- and individual-level self-help groups formed by characters like "Father Divine," a black preacher in New York, and Bill Wilson, the famous "Bill W" who created Alcoholics Anonymous. Shlaes also gives the reader insight into the behaviors of the political and big business magnates of the time, whose names are still familiar to us today: J. P. Morgan, Henry Morgenthau, Felix Frankfurter, Harold Ickes, Andrew Mellon, and Alexander Forbes. All of these stories flow as unique side trips along the great current of history that was the Great Depression, and they help a new generation understand what can go right and wrong when government attempts to help a nation out of economic troubles.