Saturday, February 02, 2008

Thomas Sowell's new book discusses economic fallacies

There's a lot of fiction that gets passed off as authoritative on economics in the media and the blahgosphere these days.

Sowell's Economic Facts and Fallacies
sets some of them straight.


Q: "Are the subprime credit crisis and the stock market’s swoon and the dollar’s drop in value symptoms of a deeper, larger, broader problem?"

A: "Well, no, they are simply the problems that they are. The government has brought on the housing problem, partly by these very low interest rates, which encouraged many people to go way out on a limb. They’ve brought it on by highly restrictive building policies, which have caused housing prices to skyrocket artificially.

And they’ve brought it on by the Community Reinvestment Act, which presumes that politicians are better able to tell investors where to put their money than the investors themselves are. When you put all that together, you get something like what you have."

Q: "What’s an example of a fallacy from your book?"

A:" One is the income gap between rich and poor. It’s maddening to me to keep hearing how the rich are getting richer and the poor are getting poorer, and so on. The fundamental difference is the difference between talking about abstract statistical categories and talking about flesh-and-blood human beings.

Since the book came out, for example, there’s been a study released by the Treasury Department based on income tax returns. There, they are talking about following the same human beings over a span of years, which is wholly different from following income brackets over a span of years, because in all the brackets more than half the people change in the course of a decade. So what happens to a bracket is an abstract question; what happens to the flesh-and-blood human beings is different.

For example, for the flesh-and-blood people who were in the bottom 20 percent of taxpayers in income in 1996, their average increase of income over the next decade was 91 percent -- so they almost doubled their incomes. Meanwhile, for the people in the top 1 percent -- presumably the rich who are getting richer -- their average income declined 26 percent.

That's diametrically the opposite from what we’re hearing from nearly every newspaper and practically every political platform.

But of course it’s also true that if you look at the income tax brackets, the distance of the top bracket from the lowest bracket has increased. One reason is that the very lowest bracket is zero, so it can’t go any lower. So as you pay people more and more money and as the economy grows and skills become more sophisticated, obviously the ratio from the top and the bottom is going to increase."

And this.......

"There are three questions that I think would destroy the left if people could ask them: 'What are the facts? What are the consequences of what you are going to do?'

And 'What is the trade-off?'

People talk as if you can just save the people whose homes are at risk, and that’s it. Well, if that was the case, why not save them? But at what price? We could ratify the Kyoto Treaty, but the question is 'At what price and what benefits would there be to offset that price?'

That’s the question that the politicians and the ideologues don’t want to ask. They don’t want to compare. They don’t want to weigh one thing against the other."

That's perfectly understandable.

If some politicians were forced to compare, they wouldn't be able to pander the way they do.

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