Insights from Thomas Sowell on Economics

Welcome to Uncommon Knowledge. I'm Peter Robinson. Be sure to join us, by the way, on Facebook at facebook.com forward slash UNC knowledge. Facebook.com forward slash UNC knowledge. An economist, syndicated columnist, and best-selling author, Thomas Sowell is a fellow at the Hoover Institution. Over the course of his long and storied career, Dr. Sowell has taught economics at institutions including Cornell, Amherst, and UCLA. Dr. Sowell'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 the new edition showing that Tom Sowell never rests. To quote from Basic Economics, Through its various editions, 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. Well, would you help me to uncomplicate a few things today? All right. Segment one, the present crisis. Now, 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 years 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 when the circumstances are such. That people who know how to create it are free to do so. One of the things that pains me 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 biggest in the world by politicians doing things. All the millions of other people whose names we don't even know, those are the people who made it the biggest economy in the world. And if politicians will get out of their way and let the economy recover, it can do that. Tom, we've been talking about 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 much earlier. And I think the first, it was the housing boom. Followed by the housing bust, which occurred in 2006. 2006, much earlier. And so the reverberations of that, that is, there are people out there who had trillions of dollars invested in securities based upon mortgages. And when people stopped paying their mortgages, the value of 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. Yes. 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, the problem is that the politicians 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 their money coming in regularly, and you put it into real estate. But the politicians decided that we must have more. Home ownership and more affordable housing. And so they began to prescribe rules. You had to 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 back. Very important, profound question here, I think anyway. Did what happened indicate the housing market problem, did that... indicate that markets, wonderful as they are, wonderful as you demonstrate 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, for a century, you never had this kind of crash in the real estate market. For centuries, people who did their life's work lending money for mortgages did that without the politicians interfering. Once the politicians started meddling, the results were what you could have predicted. It's what was predicted, in fact. Alright. 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 crisis? Did the government do the right thing? No. Those are easy questions. Alright. One of the painful things, I mean, you can call anything anything you want to call it. You can call it a stimulus. All the data indicated it didn't stimulate anything except boondoggles across the country as politicians handed out money to all the special interests that they are interested in pleasing. But, for example, when they dumped all this money in the banks, the idea was the banks would then pass that money on and more lending. Lending went down. They dumped all this money into the businesses. The businesses reduced their investment. All kinds of money is piling up. There's record 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 the famous one where we guaranteed them and it didn't cost the taxpayers a dime. Right. Yes, yes. It's like going to Las Vegas, you know, and saying, I put my quarter in the machine and out came $100. Yes, now put another quarter in and see if you get another $100. And put a million dollars in there and see if you get a million dollars back. We had the same thing with the savings and loan crisis a couple of decades ago. They said, you know, we're backing the savings and loan industry, we're guaranteeing it, but it's not costing the taxpayers anything. Well, it's not until it fails and then it costs the taxpayers. Segment two, what is to be done now? Fed Chairman Ben Bernanke 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 some $600 billion of Treasury instruments to keep interest rates low and spur economic growth. growth. That's Ben Bernanke. On the other hand, we have our colleagues at the Hoover Institution, John Taylor, Mike Boskin, and John Kogan, signing an open letter to Ben Bernanke, which read in part, quote, we believe the large-scale 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. Whose side is Tom Sowell on? Oh, I'm on the side of people who say they shouldn't have done it. Easy. Another easy one. Oh my gosh, yes. There used to be a phrase, it was called monetizing the debt. It means that 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 Federal Reserve can legally print its own money. So it's no problem for the Federal Reserve to buy them. It's just that what that amounts to is, one, inflation, and two, it amounts to a hidden tax, which will not be confined to the rich, as they call it. I mean, in other words, if you've got X thousands of dollars 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 an inflation tax. But, Tom, this is you're answering these questions with the greatest of ease. And even you even find I can tell from your face you find some of the questions amusing. So a layman like. Like me, like our viewers, says, whoa, whoa, whoa, now wait a minute. Dr. Sol's 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 Bernanke is a Princetonian. In other words, what is he thinking? What is the other, what does Ben Bernanke think he's doing? It can't be that easy, can it? To say, oh no, that's a mistake. Well, you know, Ben Bernanke is chairman of the Federal Reserve System. He's no longer a professor at Princeton. Well, he's in absentia. Emeritus. Right, right, right. He's taken a leave of absence. Yes, yes. And so we have a whole different set of... incentives and constraints on him. One of the most painful things for me was reading an article by Arthur F. Burns based on his experience when he was chairman of the Federal Reserve System. In the 70s, this would be, 60s and 70s? Yes. Richard Nixon. Yes. And he spelled out that, you know, when you're in the Federal Reserve System, you're not a free agent. It's not like you're conducting a seminar at Columbia and can just simply say and do whatever you want to do. You're operating within very narrow limits. The Federal Reserve is, quote, independent, unquote. But Congress can change 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 a very tense kind of situation. All right. Wall Street Journal, December 8th, quote. In accepting the deal to cut payroll and 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 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, what is painful to me, really, looking back, 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 there have been four administrations of both parties that have... Reduced high income tax rates. Every single time. Name them. The Coolidge, 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 this tax cuts to the rich. You know, they're not giving anything to anybody. Right. Here's a question about Ricochet contributor Steve Manisek, 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 taxes are... 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 whether there's a surplus or not. Okay. Milton Friedman defined a surplus as when the money comes in so fast that even Congress can't spend it. That's true. Segment three, health care. Let me give you a quotation and a fact. The quotation comes from you in Basic Economics. Quote, a longstanding 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 are willing to pay. It is completely unreasonable to expect reasonable prices. That's the quotation. Here's the fact. The United States devotes 17%. of its GDP to healthcare. The next country down in 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, when people are spending their own money, I don't know how a third party can say it's too much. Ironically, Rahm Emanuel's... brother who's a doctor, has been on board for this whole Obamacare thing. But really, he revealed why Americans spend more. Americans don't, when they go to a hospital, they are in private or semi-private rooms more often than in countries on government health care. And so instead of being in a ward, you're in your own private or semi-private room. It costs more. American doctors are more readily available. There is less waiting time. Some people prefer to pay in money and others in waiting time. Now, when you have a painful disease and the government tells you there's a six-month waiting list, you're paying in a different way. It doesn't show up in the statistics. But you may not even live the six months, depending on what you have. So we pay more and get more. That's it. 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? No, it's not inefficient for people to buy what they want. It has to be more complicated than that. You know, 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 choice at that point is to leave Sweden, 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 Friedman, I recall his saying he was musing about the future of health care, which, as you know, interested him for five... In fact, there are no new ideas, just proposals by Milton Friedman 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 health care into the market, which would control prices and improve quality. Does that make sense to you, that analysis? Yeah. It's about 50-50, but it's untenable? I don't know why it's untenable. It's one of the few times I'm... I'm sure if he were here, he'd explain. If he were here, of course he'd say I misstated it. Yeah, yeah, yeah. But when people want something, and, you know, 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 in Britain, you know, where you can be ignored by the nurses. You know, women in Britain, one of the scandals is that they are having their babies in the hospitals but not in the delivery room. I mean, they're having their babies in the hallway and the elevators because they're calling for the nurse, and the nurse will get around to it when she feels like it. And the baby is not going to wait. Okay, let me ask you then a question about practical politics. One of the points you make in Basic Economics is that the government, 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 health care 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. It still feels defensive to me. 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 piecemeal attack. How? How can the terms of the debate be changed, if indeed they can, so that the argument for the market becomes dominant and unselfconscious and aggressive in a certain sense? Well, that would require articulate Republicans. All right, on to the next question. No, well, we have, are you encouraged when you look at the current, Eric Cantor, these new... people who've emerged in the House. I must say, 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. All right, segment four, trade. Lots of questions about trade, China, the rest of the world. Here's from a Ricochet member who calls herself Midget Faded Rattlesnake. If you read her post, she's highly intelligent and very amusing. 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 the... Were Americans forced at gunpoint to buy these cars from Korea? Clearly not. No, no. So no problem. 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 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 this is sending American jobs abroad. Now, unfortunately, this argument was made some years ago in 1930. A thousand economists took out full-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. It was one of those wonderful things the media liked. It was a bipartisan effort. The Democratic Congress wanted to pass the Smoot-Hawley tariffs, and the Republican president signed it into law. And it was one of the biggest disasters in the history of the country. At the time, there's this law. You know, people think that the reason for the high unemployment in the 30s was because of the stock market crash. Right. After the stock market crash, unemployment peaked at 9% for one month and started downward. It was down to 6.3% before the federal government intervened. It was only after the federal government intervened that the downward movement reversed itself and shot all up over a few years to 25%. So the people who are out there just dying for the government to come in with their solutions. I don't know if they have studied history or not. What's the correct way? Here I'm interested in the way to think about the problem, China. There are constant predictions that soon, maybe within a decade or so, the Chinese economy 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 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 one fourteenth so should we be worried about what the growth of china should be worried as to why their economy is not got is so far behind that of the united states haha alright um... although i must say their economy is enormously better than it was the days of of mao and and is a and and is so as a result of putting in more market allowing more freedom in the market, just as in the past couple of years we're trying to reduce the freedom of the market. 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 Yeltsin, 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 a country of that size at any point in human history. So what does that tell us about the connection between democracy and economic growth? growth. We Americans like to talk about democratic capitalism as though the two are somehow intertwined. Are they not? Well, China has proven that they're not inevitably so. There are a lot of things that you have to have to make an economy work. First of all, you have to allow the people, allow the market to work. And the Soviet and Russia, when the new capitalists were simply the old communists who had taken over the industries, you didn't have capitalism in the real sense of the word. You had what some have called crony capitalism, and you had people who disappear off the streets when they, you know, get in the way of what the government wants to do. So it's really, I think, sub-rows of fascism. Fascism being different from socialism in 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? 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 it will be a very slow process. I wouldn't hold a stopwatch on it. All right. From China to Europe. Here in the United States, nobody would start talking about the threat to the dollar as a currency if Texas experiences a high growth rate and Michigan experiences high unemployment and manufacturing decline. 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 a country would create in a situation where you have sovereign states. And so you can't have a common currency and then have each government go off on its own little tangent. Because 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 people can always change their policies. And the... Personally, I never thought it was such a great idea. What would you have done instead? Just permit? What they've done for centuries. All right. Have each, you know, have... Deutschmark, Lira... 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. Bringing in history. Ah, yes. 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 the reasons I just gave, history. There's no, you know, the Fed represented wonderful hopes, but we've had so many programs that represented wonderful hopes. that ended in disaster. I don't doubt that someone who is sufficiently scholarly could come up with examples of whether Federal Reserve made things better. But the question is, overall, what was it supposed to do? It was supposed to not only prevent bank failures, it was supposed to prevent huge changes in the money supply, in particular, great deflations. The greatest deflation in American history occurred under the Federal Reserve System. There was a crisis in 1907. J.P. Morgan, the original J.P. Morgan, called the other bankers into a room, supposedly locked the doors, and said, we've got to do something or we're going to all collapse. And they did something, and they didn't all collapse. But the progressives were shocked that one man could come in and take command of the situation, and especially someone who wasn't even in the government. 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 up through the Civil War, say? Well, they weren't doing any of those things as the time the Federal Reserve was created. We were on the gold standard, though. But whether we're on or off the gold standard, 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 inflation was fed by the Federal Reserve doing exactly what they're planning to do now, namely buying up the bonds issued by the Treasury. 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, follow-up questions prepared, or I may actually have to think here in real time. But don't we have the example of that period from 83 through... A couple of 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 Volcker, whom Carter appointed, but Reagan gave the freedom actually to wring inflation out of the currency. He did that by the mid-'80s. The economy takes off. Alan 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. But Volcker did. ...was undue the harm that previous Federal Reserves had done. Including Arthur Burns. Yeah, unfortunately, who was my teacher and one of my much admired. Right, right. So, but what would you replace it with? How would the currency, who would, how would the currency run? We would replace it, we could replace it with what existed when it was created. Which was the gold, gold standard. Well, maybe the gold standard, but maybe not. 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? OK. All right. All right. Closing few questions here that didn't really seem to fit in. But 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 Labite 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 just to tie that in to what we've discussed earlier. What explains the allure of Keynesian economics despite its lackluster empirical record? Here we have a fellow called Jack Rea of our Facebook page. Does the Keynesian school have any credibility left? Close quote. Well, there are ideas of Keynes that still exist. Milton Friedman said as much. As he said, 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. But there are particular insights and ways of analyzing that came out of Keynes that people of different schools of thought will use when they feel like it. So Keynes 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 twenty five years from now in thirty years from now the united states will still have the highest per capita gdp of any major country i think the answer those questions would be uh... yes no and uh... uh... uh... uh... and no uh... and out the way with an addition that uh... fortunately i'm at the age right on out of where was going to happen twenty five years well okay children Are you optimistic about it? You're not. The problem is not that the profession hasn't reached a level 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. So economists have very little influence in that sense. The people in Washington decide what they want to do, and they find an economist who will go along with it. But, Tom, the Tea Party just arose out of nowhere. We just had a tidal 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 it was because they were Republicans. It's because of anger at the nonsense. Doesn't that give you some glimmer of hope? Yes, yes, yes. Because if the... But if Obama had retained the power that he had before the election, I think I would have been more than pessimistic. I would have just been despairing. All right. Dr. Thomas Sowell, the non-despairing Dr. Thomas Sowell, 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 and the Hoover Institution. Thanks for joining us.

Welcome to Uncommon Knowledge. I'm Peter Robinson. Be sure to join us, by the way, on Facebook at facebook.com forward slash UNC knowledge.

Facebook.com forward slash UNC knowledge. An economist, syndicated columnist, and best-selling author, Thomas Sowell is a fellow at the Hoover Institution. Over the course of his long and storied career, Dr. Sowell has taught economics at institutions including Cornell, Amherst, and UCLA. Dr. Sowell'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 the new edition showing that Tom Sowell never rests. To quote from Basic Economics, Through its various editions, 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. Well, would you help me to uncomplicate a few things today? All right.

Segment one, the present crisis. Now, 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 years 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 when the circumstances are such. That people who know how to create it are free to do so.

One of the things that pains me 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 biggest in the world by politicians doing things.

All the millions of other people whose names we don't even know, those are the people who made it the biggest economy in the world. And if politicians will get out of their way and let the economy recover, it can do that. Tom, we've been talking about 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 much earlier. And I think the first, it was the housing boom.

Followed by the housing bust, which occurred in 2006. 2006, much earlier. And so the reverberations of that, that is, there are people out there who had trillions of dollars invested in securities based upon mortgages. And when people stopped paying their mortgages, the value of 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. Yes. 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, the problem is that the politicians 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 their money coming in regularly, and you put it into real estate. But the politicians decided that we must have more. Home ownership and more affordable housing. And so they began to prescribe rules.

You had to 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 back. Very important, profound question here, I think anyway. Did what happened indicate the housing market problem, did that...

indicate that markets, wonderful as they are, wonderful as you demonstrate 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, for a century, you never had this kind of crash in the real estate market.

For centuries, people who did their life's work lending money for mortgages did that without the politicians interfering. Once the politicians started meddling, the results were what you could have predicted. It's what was predicted, in fact.

Alright. 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 crisis? Did the government do the right thing? No. Those are easy questions. Alright.

One of the painful things, I mean, you can call anything anything you want to call it. You can call it a stimulus. All the data indicated it didn't stimulate anything except boondoggles across the country as politicians handed out money to all the special interests that they are interested in pleasing.

But, for example, when they dumped all this money in the banks, the idea was the banks would then pass that money on and more lending. Lending went down. They dumped all this money into the businesses. The businesses reduced their investment.

All kinds of money is piling up. There's record 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 the famous one where we guaranteed them and it didn't cost the taxpayers a dime. Right. Yes, yes.

It's like going to Las Vegas, you know, and saying, I put my quarter in the machine and out came $100. Yes, now put another quarter in and see if you get another $100. And put a million dollars in there and see if you get a million dollars back. We had the same thing with the savings and loan crisis a couple of decades ago.

They said, you know, we're backing the savings and loan industry, we're guaranteeing it, but it's not costing the taxpayers anything. Well, it's not until it fails and then it costs the taxpayers. Segment two, what is to be done now?

Fed Chairman Ben Bernanke 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 some $600 billion of Treasury instruments to keep interest rates low and spur economic growth. growth. That's Ben Bernanke. On the other hand, we have our colleagues at the Hoover Institution, John Taylor, Mike Boskin, and John Kogan, signing an open letter to Ben Bernanke, which read in part, quote, we believe the large-scale 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. Whose side is Tom Sowell on? Oh, I'm on the side of people who say they shouldn't have done it. Easy. Another easy one.

Oh my gosh, yes. There used to be a phrase, it was called monetizing the debt. It means that 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 Federal Reserve can legally print its own money.

So it's no problem for the Federal Reserve to buy them. It's just that what that amounts to is, one, inflation, and two, it amounts to a hidden tax, which will not be confined to the rich, as they call it. I mean, in other words, if you've got X thousands of dollars 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 an inflation tax. But, Tom, this is you're answering these questions with the greatest of ease. And even you even find I can tell from your face you find some of the questions amusing. So a layman like.

Like me, like our viewers, says, whoa, whoa, whoa, now wait a minute. Dr. Sol's 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 Bernanke is a Princetonian.

In other words, what is he thinking? What is the other, what does Ben Bernanke think he's doing? It can't be that easy, can it? To say, oh no, that's a mistake. Well, you know, Ben Bernanke is chairman of the Federal Reserve System.

He's no longer a professor at Princeton. Well, he's in absentia. Emeritus. Right, right, right.

He's taken a leave of absence. Yes, yes. And so we have a whole different set of...

incentives and constraints on him. One of the most painful things for me was reading an article by Arthur F. Burns based on his experience when he was chairman of the Federal Reserve System. In the 70s, this would be, 60s and 70s?

Yes. Richard Nixon. Yes.

And he spelled out that, you know, when you're in the Federal Reserve System, you're not a free agent. It's not like you're conducting a seminar at Columbia and can just simply say and do whatever you want to do. You're operating within very narrow limits.

The Federal Reserve is, quote, independent, unquote. But Congress can change 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 a very tense kind of situation. All right. Wall Street Journal, December 8th, quote.

In accepting the deal to cut payroll and 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 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, what is painful to me, really, looking back, 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 there have been four administrations of both parties that have... Reduced high income tax rates.

Every single time. Name them. The Coolidge, 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 this tax cuts to the rich.

You know, they're not giving anything to anybody. Right. Here's a question about Ricochet contributor Steve Manisek, 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 taxes are...

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 whether there's a surplus or not.

Okay. Milton Friedman defined a surplus as when the money comes in so fast that even Congress can't spend it. That's true. Segment three, health care.

Let me give you a quotation and a fact. The quotation comes from you in Basic Economics. Quote, a longstanding 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 are willing to pay. It is completely unreasonable to expect reasonable prices. That's the quotation. Here's the fact. The United States devotes 17%.

of its GDP to healthcare. The next country down in 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, when people are spending their own money, I don't know how a third party can say it's too much. Ironically, Rahm Emanuel's... brother who's a doctor, has been on board for this whole Obamacare thing. But really, he revealed why Americans spend more.

Americans don't, when they go to a hospital, they are in private or semi-private rooms more often than in countries on government health care. And so instead of being in a ward, you're in your own private or semi-private room. It costs more. American doctors are more readily available. There is less waiting time.

Some people prefer to pay in money and others in waiting time. Now, when you have a painful disease and the government tells you there's a six-month waiting list, you're paying in a different way. It doesn't show up in the statistics.

But you may not even live the six months, depending on what you have. So we pay more and get more. That's it. 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? No, it's not inefficient for people to buy what they want.

It has to be more complicated than that. You know, 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 choice at that point is to leave Sweden, 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 Friedman, I recall his saying he was musing about the future of health care, which, as you know, interested him for five...

In fact, there are no new ideas, just proposals by Milton Friedman 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 health care into the market, which would control prices and improve quality. Does that make sense to you, that analysis? Yeah. It's about 50-50, but it's untenable?

I don't know why it's untenable. It's one of the few times I'm... I'm sure if he were here, he'd explain. If he were here, of course he'd say I misstated it.

Yeah, yeah, yeah. But when people want something, and, you know, 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 in Britain, you know, where you can be ignored by the nurses.

You know, women in Britain, one of the scandals is that they are having their babies in the hospitals but not in the delivery room. I mean, they're having their babies in the hallway and the elevators because they're calling for the nurse, and the nurse will get around to it when she feels like it. And the baby is not going to wait. Okay, let me ask you then a question about practical politics. One of the points you make in Basic Economics is that the government, 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 health care 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. It still feels defensive to me.

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 piecemeal attack. How? How can the terms of the debate be changed, if indeed they can, so that the argument for the market becomes dominant and unselfconscious and aggressive in a certain sense?

Well, that would require articulate Republicans. All right, on to the next question. No, well, we have, are you encouraged when you look at the current, Eric Cantor, these new...

people who've emerged in the House. I must say, 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. All right, segment four, trade. Lots of questions about trade, China, the rest of the world.

Here's from a Ricochet member who calls herself Midget Faded Rattlesnake. If you read her post, she's highly intelligent and very amusing. 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 the... Were Americans forced at gunpoint to buy these cars from Korea?

Clearly not. No, no. So no problem.

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 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 this is sending American jobs abroad. Now, unfortunately, this argument was made some years ago in 1930. A thousand economists took out full-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. It was one of those wonderful things the media liked. It was a bipartisan effort.

The Democratic Congress wanted to pass the Smoot-Hawley tariffs, and the Republican president signed it into law. And it was one of the biggest disasters in the history of the country. At the time, there's this law.

You know, people think that the reason for the high unemployment in the 30s was because of the stock market crash. Right. After the stock market crash, unemployment peaked at 9% for one month and started downward.

It was down to 6.3% before the federal government intervened. It was only after the federal government intervened that the downward movement reversed itself and shot all up over a few years to 25%. So the people who are out there just dying for the government to come in with their solutions. I don't know if they have studied history or not.

What's the correct way? Here I'm interested in the way to think about the problem, China. There are constant predictions that soon, maybe within a decade or so, the Chinese economy 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 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 one fourteenth so should we be worried about what the growth of china should be worried as to why their economy is not got is so far behind that of the united states haha alright um...

although i must say their economy is enormously better than it was the days of of mao and and is a and and is so as a result of putting in more market allowing more freedom in the market, just as in the past couple of years we're trying to reduce the freedom of the market. 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 Yeltsin, 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 a country of that size at any point in human history. So what does that tell us about the connection between democracy and economic growth?

growth. We Americans like to talk about democratic capitalism as though the two are somehow intertwined. Are they not?

Well, China has proven that they're not inevitably so. There are a lot of things that you have to have to make an economy work. First of all, you have to allow the people, allow the market to work.

And the Soviet and Russia, when the new capitalists were simply the old communists who had taken over the industries, you didn't have capitalism in the real sense of the word. You had what some have called crony capitalism, and you had people who disappear off the streets when they, you know, get in the way of what the government wants to do. So it's really, I think, sub-rows of fascism. Fascism being different from socialism in 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?

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 it will be a very slow process. I wouldn't hold a stopwatch on it.

All right. From China to Europe. Here in the United States, nobody would start talking about the threat to the dollar as a currency if Texas experiences a high growth rate and Michigan experiences high unemployment and manufacturing decline. 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 a country would create in a situation where you have sovereign states. And so you can't have a common currency and then have each government go off on its own little tangent.

Because 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 people can always change their policies. And the... Personally, I never thought it was such a great idea.

What would you have done instead? Just permit? What they've done for centuries.

All right. Have each, you know, have... Deutschmark, Lira... 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.

Bringing in history. Ah, yes. 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 the reasons I just gave, history.

There's no, you know, the Fed represented wonderful hopes, but we've had so many programs that represented wonderful hopes. that ended in disaster. I don't doubt that someone who is sufficiently scholarly could come up with examples of whether Federal Reserve made things better.

But the question is, overall, what was it supposed to do? It was supposed to not only prevent bank failures, it was supposed to prevent huge changes in the money supply, in particular, great deflations. The greatest deflation in American history occurred under the Federal Reserve System. There was a crisis in 1907. J.P.

Morgan, the original J.P. Morgan, called the other bankers into a room, supposedly locked the doors, and said, we've got to do something or we're going to all collapse. And they did something, and they didn't all collapse.

But the progressives were shocked that one man could come in and take command of the situation, and especially someone who wasn't even in the government. 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 up through the Civil War, say? Well, they weren't doing any of those things as the time the Federal Reserve was created. We were on the gold standard, though.

But whether we're on or off the gold standard, 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 inflation was fed by the Federal Reserve doing exactly what they're planning to do now, namely buying up the bonds issued by the Treasury.

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, follow-up questions prepared, or I may actually have to think here in real time. But don't we have the example of that period from 83 through... A couple of 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 Volcker, whom Carter appointed, but Reagan gave the freedom actually to wring inflation out of the currency. He did that by the mid-'80s. The economy takes off.

Alan 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. But Volcker did. ...was undue the harm that previous Federal Reserves had done. Including Arthur Burns.

Yeah, unfortunately, who was my teacher and one of my much admired. Right, right. So, but what would you replace it with? How would the currency, who would, how would the currency run? We would replace it, we could replace it with what existed when it was created.

Which was the gold, gold standard. Well, maybe the gold standard, but maybe not. 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? OK. All right.

All right. Closing few questions here that didn't really seem to fit in. But 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 Labite 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 just to tie that in to what we've discussed earlier. What explains the allure of Keynesian economics despite its lackluster empirical record? Here we have a fellow called Jack Rea of our Facebook page.

Does the Keynesian school have any credibility left? Close quote. Well, there are ideas of Keynes that still exist. Milton Friedman said as much. As he said, 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.

But there are particular insights and ways of analyzing that came out of Keynes that people of different schools of thought will use when they feel like it. So Keynes 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 twenty five years from now in thirty years from now the united states will still have the highest per capita gdp of any major country i think the answer those questions would be uh... yes no and uh...

uh... uh... uh...

and no uh... and out the way with an addition that uh... fortunately i'm at the age right on out of where was going to happen twenty five years well okay children Are you optimistic about it? You're not.

The problem is not that the profession hasn't reached a level 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. So economists have very little influence in that sense.

The people in Washington decide what they want to do, and they find an economist who will go along with it. But, Tom, the Tea Party just arose out of nowhere. We just had a tidal 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 it was because they were Republicans. It's because of anger at the nonsense.

Doesn't that give you some glimmer of hope? Yes, yes, yes. Because if the...

But if Obama had retained the power that he had before the election, I think I would have been more than pessimistic. I would have just been despairing. All right. Dr. Thomas Sowell, the non-despairing Dr. Thomas Sowell, 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 and the Hoover Institution. Thanks for joining us.

Transcript for:Insights from Thomas Sowell on Economics

Transcript for:
Insights from Thomas Sowell on Economics