welcome to uncommon knowledge I'm Peter Robinson be sure to join us by the way on Facebook at facebook.com uncn knowledge facebook.com uncn knowledge an economist syndicated columnist and best-selling author Thomas soul is a fellow at the Hoover institution over the course of his long and storied career Dr Soul has taught economics at institutions including Cornell Amherst and UCLA Dr Soul's latest book a revised and updated version of his classic volume basic economics here is the first edition of basic economics and here is here is the new edition showing that Tom soul never rests to quote from basic economics through its various additions the fundamental idea behind basic economics Remains the Same learning economics should be as uncomplicated as it is informative close quote welcome Tom no charts no equations all words plain English that's right no graphs no graphs no graphs all right um well would you help me to uncomplicate a few things today all right all right segment one the present crisis now uh I posted notices several places that I'd be interviewing you and asked folks for questions and got overwhelmed with questions I can only offer a few but here are some from Ken Sweeney of Ricochet this is the basic of the basics how is wealth created and why does the United States have the highest per capita GDP of any major country wow how many how many years do we do I have to answer this question it's television you've got about 90 seconds at the most oh I guess wealth is created uh when the circumstances are such that people who know how to create it are free to do so uh one of the things that pains me current in the current crisis is people saying that Congress really needs to do something to make the economy recover no they need to let the economy recover that the economy did not get to be the the biggest in the world by politicians doing things all the millions of other people that we whose names we don't even know those are the people who made it the the biggest economy in the world and if politicians will get out of their way uh we we we can and let the economy recover it can do that Tom we've been talking about the the crisis let's take a step back 1983 until 2008 the American economy experiences a quarter of a century of nearly uninterrupted economic growth then beginning in the Autumn of 2008 trouble what went wrong well actually it started it started much earlier and I think the first it was the housing boom followed by the housing bust which occurred in 2006 2006 so and then so the reverberations of that that is there were people out there who had trillions of dollars invested in Securities based upon mortgages and when people stopped paying their mortgages the value of the Securities vanished Into Thin Air so you do not argue that this was a financial crisis that spilled over into the real economy you argue that it was a problem in the real economy particularly the housing market that started the problem in the financial sector oh absolutely if people had kept paying their mortgages the Securities would have been good and we would have all lived happily ever after now now the problem is that the politicians uh made the mortgages more risky by changing the rules in other words at one time mortgages were considered the safest investment this is for the widows and orphans who need need the money coming in regularly and you put it into into real estate but the politicians decide that we must have more uh home ownership and more affordable housing and so they began to prescribe rules you had to uh lend money to people you wouldn't have lent to before and of course there was a reason they weren't lending to them before and we discovered the hard way what that reason was that they weren't likely to be able to pay them to pay them back very import profound question here I think anyway did what happened indicate the housing market problem did that indicate that markets some markets wonderful as they are wonderful as you demon over and over again in basic economics that free markets are that they sometimes experience troubles calamities even that the markets are are imperfect because they're rooted in human experience and we live in a fallen world or did it demonstrate that the government messed things up the government messed them up after all the for a century you never had this kind of crash in the real estate market for centuries people who have been who made it did their life work lending money for mortgages did that without the politicians interfering once the politicians started meddling uh the results were what you could have predicted it's what was predicted in fact all right response to the crisis the Federal Reserve floods the financial markets with liquidity while first the Bush Administration and then the Obama Administration enact stimulus and bailout packages that now amount to as best I can make it out something like $3.6 trillion correct responses to the to the crisis did the government do the right thing no uh those are easy questions all right uh one of the painful thing I mean you can call anything anything you want to call it you can call it a stimulus all the data indicated didn't stimulate anything except boondoggles across the country uh as politicians handed out money to all the special interests that they are interested in uh uh pleasing uh but uh for example when when they dumped all this money into Banks the idea was the banks would then pass that money on and more lending right lending went down uh they dumped all this money into the businesses the businesses reduced their investment uh all kinds of money is piling up there's wrecked amounts of money piling up what about GM surely that's the one success story workers are still employed GM is now a competitive company again they're paying back billions to the American taxpayer oh this is this is the famous one where uh we we we guaranteed them and and it didn't cost the taxpayers a dime right yes yes uh it's like going to Las Vegas you know and saying uh uh uh I I put my quarter in the machine and out came all came $100 yes now put another quarter and see if you get another hundred and put a million dollars in there and see if you get a million dollars back uh we had the same thing with the Savings and Loan crisis in couple of decades ago they said you know we're we're we're backing the Savings and Loan industry we're guaranteeing it but it's not cost the taxpayers anything well it's not until it fails and then it cost the tax payers all right segment two what is to be done now fed chairman Ben Bernan announced this past Autumn that the Federal Reserve would engage in a new round of quote I'm using his term quantitative easing the so-called QE2 the FED will purchase Tom wipe that smile off your face this is serious this is serious the FED will purchase something 600 billion of Treasury instruments to keep interest rates low and spur economic growth that's Ben Bernan on the other hand we have our colleagues at the Hoover institution John Taylor Mike bosin and John kogan signing an open letter to Ben Bernanke which read in part quote we believe the largescale asset purchase plan should be discontinued the planned asset purchases risk currency debasement and inflation and we do not think they will achieve the fed's objective of promoting employment close quote who side is Tom so on oh I'm on the size of people say they should shouldn't have done it easy another easy one oh my gosh yes there used to be a phrase was it was called monetizing the debt it means that that the Tre the treasury Department has deficit spending so they put out all these bonds that they're selling and if the public won't buy them the Federal Reserve will buy them because the the Federal Reserve can legally print its own money so it's no problem for this Federal Reserved by them it's just that that's what that amounts to is one inflation and two it amounts to a hidden tax which will not be confined to the rich as we as they call it I mean in other words if you've got uh X th000 of in your bank account and the Federal Reserve starts printing more money it is simply stealing the value of the money that you put aside so and so that that's the same thing as a tax only it's it's an inflation tax but Tom this is you're answering these questions with a greatest of ease and even and you even find I can tell from your face you find some of the questions amusing but so a Layman like like me like our viewers is who now wait a minute Dr soul is an eminent figure and I even had in these emails somebody commenting on your lovely baritone voice you're a sterling you're a sterling figure in all kinds of ways but Ben Bernan is a princ in other words what is he thinking what do the other what what does Ben Bernan think he's doing it can't be that easy can it to say oh no that's a mistake well you know uh Ben verik is Chairman of the Federal Reserve System he's no longer a professor at Princeton well he's he's an Abit imerit or right right right he's taking a leave of absence right yes yes and so we have a whole different set of incentives and constraints on him one of the most painful things uh for me was reading um an article by arthor F Burns based on his experience when he was chairman of the Federal Reserve System uh in the 70s this would be 60s and 70s Richard Nixon right uh and he spelled out that you know when when you're when you're in the Federal Reserve System you're not a free agent it's not like you're conducting a seminar uh at Columbia and can just simply say and do whatever you want to do you're operating within very narrow limits uh the Federal Reserve is quote independent unquote but Congress can change that the amount of that Independence anytime they take a notion and so even if you're following policies that are good policies you've got to watch your back because Congress can step in at any time and stop you and so it's it's a very kind of situation all right um Wall Street Journal December 8th quote in accepting the deal to cut payroll on business taxes and extend all of the Bush era tax rates through 2012 as you and I speak this hasn't been enacted in the Congress but that we're talking about the deal that President Obama cut with Republicans to continue the quotation Mr Obama has implicitly admitted that his economic strategy has flopped he is acknowledging that tax rates matter to growth that treating business like robber barons has hurt investment and hiring and that tax cuts are superior to spending as stimulus close quote you buy every word of that oh yes okay well but what what is painful to me really looking back that this argument is not a new argument this argument was made in the 1920s people were saying the same thing on both sides they're saying right now the difference is that 75 years have elapsed and they've been four administrations of two of both parties that have reduced High tax income tax rates every single time name them uh the kulage Kennedy Reagan and George W bush right every single time the reduction in the tax rates has led to an increase in tax revenue so I hear people on television saying how the government can't afford to give to give this tax cuts to the rich you know not giving anything to anybody right uh here's a question about Ricochet contributor Steve Manis quote it's as close to Dogma as there is among conservatives that cutting taxes particularly marginal rates Spurs economic growth but Bill Clinton raised taxes including marginal rates and the economy boomed do tax rates really matter to economic growth and if they do how do you explain the Clinton expansion I haven't looked at the Clinton expansion but I know that the Clinton quote Surplus was Surplus taxes uh that those laws are passed in Congress all spending and taxing bills originate in the House of Representatives and when the House of Representatives is in the hands of the opposite party I don't know how any president can take any credit for what what whether there's a surplus or not okay this Milton Milton Freedman defined surpluses when the money comes in so fast that even Congress can't spend it um that's true segment three Healthcare let me give you a quotation and a fact the quotation comes from you in basic economics quote a long-standing staple of political rhetoric has been the attempt to keep the prices of Medical Care reasonable or affordable yet the amount of resources required to supply the things we want are wholly independent of what we're willing to pay it is completely unreasonable to expect reasonable prices that's the quotation here's the fact the United States devotes 177% of its GDP to healthcare the next country down and that is Switzerland at about 11% of its GDP so we devote something like 50% more than the next country down now surely it's not unreasonable to suggest that we're just spending too much the question is uh people when people are spending their own money I I don't know how third parties can say it's too much ironically Rah emanuel's brother who's a doctor uh has on board for this whole Obamacare thing but really he he he he revealed why Americans spend more uh Americans uh don't when they go to a hospital they are in private or semi-private rooms more often than in countries on government uh uh health care and so instead of being in a ward uh you're in your own private or semi-private room it costs more uh you know American doctors are more readily available uh there is less waiting time uh some people prefer to pay in money and other in waiting time now when you have a painful disease and the government tells you it's there's a six-month waiting list uh that you you're paying in a different way it doesn't show up in the statistics but you may you may not even live the six months depending on what you have so we pay Seven we pay more and get more that's it that's that's that's it that's all there is to it that's it you don't want to say but at the same time our system is terribly inefficient in various ways you know no it's not it's not inefficient for people to buy what they want it to be more complicated than that you know it's what's inefficient is having third parties decide what you need and don't need as for example in Sweden where if they and it's not like an insurance company saying they won't pay for it in Sweden if they say that you don't need this you can't pay for it with your own money because they control the whole system and so your your choice at that point is to leave Sweden uh which if you're very sick may be a little hard to do or to have what you need smuggled into you right Tom in one of the last conversations I had with our friend Milton fredman I recall his saying he was musing about the future of healthcare which as you know interested him for five in fact there are no new ideas just proposals by Milton fredman that haven't gotten around to being enacted yet I sometimes feel but Milton said the situation we have in this country is untenable over the longer term and he said broadly speaking about 50% of American Health Care is private subject to the usual incentives of the private Market but about 50% with Medicare Medicaid and so forth about 50% is effectively socialized run through the government in one way or another and Milton said this is untenable we will probably either go to a much more socialized system in which we will at least have the virtue of controlling prices quality May deteriorate but prices might be controlled or we'll go in the other direction and push more of healthcare into the market which would control prices and improve quality does that make sense to you that analysis yeah it's about 5050 but it's untenable that we're at I don't know why it's untenable it's one of the few times I'm I'm sure if he were if he were here he' of course you'd say I misstated it or yeah yeah yeah but uh when people want something and and you know when I when when when I was in the hospital last I had a private room no doubt that cost more than if I were in a ward right particularly as as in Britain you know where you can be ignored by the nurses uh you know the women in in Britain one of the scandals is that they having their babies in the hospitals but not in the delivery room I mean they're having their babies in the hallway and the and the elevators because they're calling for the nurse and the nurse will get around to it when she feels like it uh and the baby is not going to wait okay let me ask you then a question about practical politics you one of the points you make in basic economics is that the Govern politicians face incentives the way ordinary actors in the free markets face incentives so here's a question it seems to me as a Layman watching things that the people who are in favor of pushing more Healthcare into the free market have been on the defensive for the last couple of years since President Obama was elected now we've had a change in the house of election and Republicans have come in and they are saying we're going to fight this thing every step of the way I hope they do well it still feels defensive to me we're we're going to hold up the money here we're going to file a court challenge there and it's a kind of a peacemeal attack how how can the terms of the debate be changed if indeed they can so that the the the argument for for the market becomes dominant and unselfconscious and and and and aggressive in a certain sense well that that would require articulate Republicans all right now on to the next question no well we have are you encouraged when you look at the current Eric caner these new people who've emerged in the house I I must say I saw I saw Chris Christie governor of New Jersey for the first time I thought my gosh an articulate Republican when was the last time I saw one of those articulate and also willing to fight yes yes yeah all right segment four trade lots of questions about trade China the rest of the world here's from a rioch a member who calls herself faded rattlesnake if you read her post she's highly intelligent and very amusing uh I don't know where the name comes from but here's the question how much should people really worry about the balance of trade somewhat less than you worry about being struck by lightning okay here's a statistic I heard just the other day here's how many cars Korea sells in the United States every year 500,000 here's how many cars we sell in Korea every year 5,000 why shouldn't we be worried about that imbalance I'm not sure why we should obviously if the Americans want that did were Americans forced at gunpoint to buy these cars from Korea clearly not no no so no problem I see I I don't see why third parties should be should concern themselves about it okay you've done it again you've batted away the question so with so easily that it leaves me wondering what the argument is on the other side why do some people why do some people worry about the trade balance then oh because the argument that they're making is that uh this is sending American jobs abroad now unfortunately this this argument was made some years ago uh in 1930 uh a thousand economists took out full PID page ads across the country saying do not put up International Trade restrictions it will not increase employment it will just set off a new round of retaliation uh it was one of those wonderful things the media like it was a bipartisan effort the Democratic Congress want to pass the smooth Holly tariffs and the Republican president signed it into law and it was one of the biggest disasters in the history of the country uh at the time this this law you know people think that the reason for the high unemployment in 30s was because of the stock market crashed right after the stock market crashed unemployment peaked at 9% for one month and started downward it was down to 6.3% before the federal government intervene it was only after the federal government intervened that the downward movement reversed itself and shot all up or in a few years to 25% so the people who are out there just dying for the government to come in with their solution uh I don't know if they have studied history or not um what's the correct way here I'm interested in the way to think about the problem China We There are constant predictions that soon maybe within a decade or so the Chinese econom will become as big as ours so bigger economy than ours that sounds in some way something about which we ought to be nervous on the other hand there are 14 14 times as many Chinese As Americans so when their economy becomes as big as ours it only means that their per capita GDP will be 1114th that of ours so should we be worried about what the growth CH should be worried as to why their economy is not got it's so far behind that of the United States all right right um although I must say their economy is enormously better than it was in the days of of ma right and and is and is so as a result of putting in more Market uh allowing more freedom in the market just as uh in the past couple of years we're trying to reduce the freedom of the maret well okay so let me take the United States out of it for a second at the end of the Cold War Russia as we were allowed to call it once again the Soviet Union ceased to exist Russia embraced democracy pretty rigorously under Boris yelson true election to the Duma and so forth and suffered an economic collapse from which they have never recovered China Embraces the markets to a limited extent but still a very extensive extent but refuses to touch democracy refuses to permit political freedoms and experiences this period of some two decades now of economic growth unparalleled really for country of that size anywhere at any point in human history so what does that tell us about the connection between democracy and economic growth we Americans like to talk about Democratic capitalism as though the two are somehow intertwined are they not well China is proven that they're not inevitably so um there are a lot of things that you have to have to make make an economy work first of all you have to allow the people allow the market to work and the Soviet in Russia uh when when the new capitalist was simply the old Communists who had taking over the uh Industries uh you didn't have uh capitalism in the real sense of the word you had what some have called crony capitalism uh and you had people who disappear off the streets when they uh you know get in the way of what the government wants to do so it's really uh I think sub RS of fascism fascism being different from socialism and that the private ownership is there but the government tells people what to do and what about China do you believe that they can continue to sustain High economic growth rates without some semblance of democracy without beginning to open up political freedoms can they I I think they are doing some of that and particularly as you get larger and larger numbers of people who are successful in the private Marketplace and who then begin to have influence and as the old guard dies out I think but it'll be a very slow process I mean I wouldn't I wouldn't hold a stopwatch on it all right um from China to Europe here in the United States nobody would start talking about the threat to the dollar as a currency if Texas has experiences a a high growth rate and Michigan experiences high unemployment and Manufacturing decline no nobody talks about that as a threat but in Europe we see that the troubles in Greece and Ireland and now Spain and Portugal are being talked about as a threat to the euro why because they're trying to create something that that that a country would would would create uh in in a situation where you have sovereign states and so you you can't have a common currency and then have each government go off on its own little tangent because they they'll they'll end up in situations where that common currency is threatened because of what someone did in Greece or Spain so do you consider the Euro untenable over the longer term I don't know but because people people can always change their policies and uh uh personally I I never thought it was such a great idea what would you have done instead just permit with what they've done for centuries all right have each you know Mark L that's it all right segment five Theory lots of questioners want to know whether you share Congressman Ron Paul's skepticism of the fed and I'm going to quote you this isn't in basic economics but a recent column quote for most of the history of this country there was no Federal Reserve System there you go that dirty trick of bringing in history oh yes uh there was no Federal Reserve System which was established in 1914 to prevent bank failures but bank failures in the 1930s exceeded anything ever seen before the Fed was established close quote if you could if we could make you dictator would you abolish the FED yes you would yes I mean for for the reasons I just gave the history there's no you know the FED represented wonderful hopes but but we've had so many programs that represented wonderful hopes that ended in disaster I don't doubt that someone who is sufficiently uh scholarly could come up with examples of where the Federal Reserve made things better but the question is overall what was it supposed to do was supposed to not only prevent bank failures it was supposed to prevent huge changes in the money supply in particular uh great deflations right the greatest deflation in American history occurred under the Federal Reserve System you know we there was a crisis in 1907 uh JP Morgan the original JP Morgan called the other Bankers into a room supposedly locked the door doors and said we got to do something or we're going to all collapse and they did something and they didn't all collapse but but the but people the progressives were were shocked that one man could come in and take command of the situation and especially someone who wasn't the UN in the government right so but so what would you do you'd move us back to the gold standard or you'd let Banks issue their own currencies the way they did uh up through the Civil War say you you could I could I could well they weren't doing any of those things as the the Federal Reserve was was created we were on the gold standard though but uh whether we're on or off the gold standard there's that's another whole set of arguments there's no evidence that I can see that over this vast period of time that the Federal Reserve has existed that things on the whole have been better the great post World War II uh uh inflation was fed by the F by the Federal Reserve doing exactly what they're planning to do now namely buying up the bonds issued by the treasury oh but don't you have I have to say I wasn't expecting your answer to run in this direction so I don't have questions followup questions prepare you may actually have I may actually have to think here in real time but don't we have the example of that period from 83 through uh couple years ago that 25 years of economic expansion we had only two downturns they were both very shallow and very brief and what you had was Paul vuler whom Carter appointed but Reagan gave the freedom actually to ring inflation out of the currency he did that by the 80s the economy takes off Allan Greenspan does a reasonably good job and then at the end there's too much money in the but maybe five years of getting it wrong so what vulka did was undo the harm that previous federal reserves had done including Arthur Burns yeah unfortunately who was my teacher and one of one of I much admired right right so but what would you replace it with how would the currency who who would how would the currency run we we we we would replace it we could replace it with what existed when it was created which was the gold gold standard well it maybe the gold standard but maybe not but I but there's no evidence these what would you replace it things always bother me you know when someone removes the cancer what do you replace it with okay all right all right closing few questions here that didn't really seem to fit in they just but they struck me as good questions from JJM director on Twitter some claim the bailouts worked we have the banks recovering now you mean banks have never recovered before all right thank you very much Michael lots of questions on keynesianism Michael leite of Ricochet what explains the Allure of Keynesian economics excuse me we've already said that this effort to stimulate the economy Obama's first two years that was essentially keynesianism so Ju Just to tie that in to what we've discussed earlier what explains the Allure of Keynesian economics despite its lackluster empirical record or here we have a fellow called Jack rehea of our Facebook page does the Keynesian school have any credibility left close quote well there are ideas of canes that that that still exist Milton Freeman said said as much as he said there there's uh in a sense we're all keynesians now and in another sense nobody's a Keynesian meaning that no one buys the whole Keynesian package anymore uh but there are particular insights that and and ways of think of analyzing that came out of canes that people of different schools of thought will use when they feel like it so KES was K's provided us with technical with tools yes rather than a prescription he provided us with both it's just that the prescriptions haven't turned out as well as the tools all right we began the program I began the program by asking why does the United States have the highest GDP per capita of any major country and what I'd like to ask final question basic economics you've said that some of the debates taking place today are frustrating to you because they took place in the 20s and the 30s and you just feel as though the country isn't making progress is there within basic economics has the discipline made enough progress and will the political realm respond to progress in the discipline enough that and here I come finally to the final question you feel confident that 25 years from now and 30 years from now the United States will still have the highest per capita GDP of any major country I think the answer to those questions would be uh yes no and uh and no uh and with an addition that uh fortunately I'm at the age where I don't I don't we well what's going to happen in 25 years well okay but you have children um well are you optimistic about you're not uh it's the problem is not that the profession hasn't reached a level that that that of understanding I think if the average citizen understood economics as well as it was understood by economists 200 years ago most of the nonsense that's done in Washington would be impossible politically uh so economists have very little uh influence in that sense the people in Washington decide what they want to do and they find an economist who will Who will go along with it but Tom the Tea Party just arose out of nowhere we just had a Title Wave in which the Republicans won 61 new seats in the House of Representatives they have a majority of 49 seats which is the biggest majority the GOP has had in decades nobody supposes was because they were Republicans it's because of anger at the nonsense doesn't that give you some glimmer of yes yes yes cuz if if if if the if uh Obama had retained the power that he had had before the election I think I I would have been more than pessimistic I would have just been despairing all right Dr Thomas Soul the nond despairing Dr Thomas Soul author of the fourth edition of basic economics which I have already bought for my college age student at home thank you very much thank you I'm Peter Robinson for uncommon knowledge on the Hoover institution thanks for joining us