Late last year, I wrote a column for Townhall called 10 Life Changing Books To Give This Christmas. One of those books is Thomas Sowell’s Basic Economics 4th Ed: A Common Sense Guide to the Economy. Note the “4th Ed” part. That’s relevant because the book has recently been re-released. If you want a phenomenal, readable book about economics, you could not do better than Basic Economics 4th Ed: A Common Sense Guide to the Economy.
Happily, because Thomas Sowell’s promoting his book, I had yet another opportunity to interview one of the finest minds living on the subject he’s better than anyone else at explaining, the subject of economics. Enjoy!
We’re getting very close to the point where we could have states default on their debts for the first time. What should happen then?
They should go bankrupt. I’m looking forward to it.
There are three possibilities — bankruptcy or bailouts or ruinous taxations. Of the three, bankruptcy is the one that makes the most sense because it’s the one that conveys the most accurate knowledge — which is that they’ve run out of money and couldn’t cover all the promises they made. That fact should be revealed to all for future reference. The other thing about bankruptcy is that it’s the only thing I know of that can get rid of these ruinous public sector union contracts with these extravagant pensions. Those pensions are so popular because the politicians can promise the pension now and get votes now without losing the votes of taxpayers now, because they don’t set aside enough money to cover the pensions. Then they simply kick the can down the road and leave it to somebody else to figure out what to do when the money runs out.
Well, related question to that — certainly we should allow unions in society. Should we be allowing government workers to unionize?
Oh, I don’t know about allowing them to unionize, but they certainly should not be allowed to strike — and there was a time when they weren’t allowed to unionize. There’s a whole atmosphere in which a strike is regarded as some kind of sacred thing. A strike is not simply a refusal to work. We all can refuse to work whether we’re unionized or not. A strike is a refusal to let other people do the work that you refuse to do and I don’t know why anybody should have that right.
Yes, I agree. There’s a worry that China could essentially engage in economic warfare against the United States because they hold so much of our debt. Should we be greatly concerned about that?
Yes. For years, the Keynesians loved to downplay the importance of debt by saying we owe it to ourselves. There are problems with that which I go into in Basic Economics. But there are even bigger problems when in fact, we don’t owe it to ourselves, and something like 40 something percent of American debt is owed to foreigners. That means that at some point in the future, all those trillions of dollars worth of real goods and services in output of the American people will have to be shipped overseas to pay back the debt that we borrowed.
Well, speaking of trade issues, the United States has a rather sizable trade deficit. But you say in Basic Economics that the way it’s measured is very misleading and it’s really not that big of a problem. Tell us why that is.
Well, a product or trade is defined as the movement of physical goods across a national frontier, international trade that is, across national frontiers. But of course, that’s just one aspect of international economic relations. If the Japanese send us more cars than we send them and, therefore, they have a trade surplus, they’re not going to just put the money in the bank and let it gather dust. They’re more likely to buy assets in the United States, including such assets as automobile manufacturing plants — so they can build their Toyotas here instead of shipping across the Pacific. So the bigger picture, of course, is the financial picture.
But in general, I think the crucial evidence against the importance of international trade is during the Great Depression in the 1930s. For that entire decade, we had an export surplus. That didn’t seem to do the economy any good. I’m not saying it did any harm either. By the same token, during the 1990s when we had great prosperity, we had a trade deficit. So those things have to be looked at in terms of the specifics of the time and place. They’re not good things or bad things, just in general.
A related question to that: Over time people have gotten very concerned about manufacturing jobs being lost in the United States to other nations, where the employees work for very low wages. Should people be extremely worried about that?
I have never understood why a manufacturing job is different from a job in an insurance company or a bank or anywhere else. I mean it’s just one of those arbitrary things that people manage to get themselves worked up over.
So it’s really not a big concern?
Not to me certainly. I don’t know how many manufacturing jobs there are in say, Switzerland, where there’s a big financial sector. But just because we don’t get cuckoo clocks from Switzerland as often as before perhaps, there’s no reason why the Swiss should worry or why we should worry. What matters is the general prosperity of the country, not this particular sector where that prosperity happens to be concentrated at the moment.
Now, in recent years we started to hear more people calling to get rid of the Federal Reserve. Good idea, bad idea? What are your thoughts?
Good idea? What do you think we should replace it with? What do you think we should do?
Well, it’s like when you remove a cancer, what do you replace it with? I understand the wonderful theories about the great things the Federal Reserve can and should do. That’s totally different from what the Federal Reserve has done and is likely to do in the future. It’s painful to read Woodrow Wilson’s glowing words when the Federal Reserve was set up, about the things it was supposed to do — like keep the money supply from either contracting suddenly or having runaway inflation or having bank failures and so forth.
All those things empirically have become worse after there was a Federal Reserve System. So, there’s no question that there are good things the Federal Reserve could do just as there are good things that the government could do. But people who say that never seem to want to look at the record and say, “Never mind what they could do; what have they actually done and what are they likely to do, given the incentives?” The incentives are there for both the Fed and for the political branches to interfere with the economy, to the detriment of the economy.
The tax that has certainly caught everybody’s eye in Washington, that they’re all talking about now, is a value added tax. Good idea, bad idea? Is that something that Americans should want or be scared of? What do you think?
Adding value is not something you should penalize. I mean, if I have a swimming pool built alongside my house that raises the value of the house — therefore, they tax me more. Now is the world worse off if I added a swimming pool?
No. OK, two more questions. We’ve gotten to a point in our society where almost half the country pays no income tax. Healthy for the nation?
No, enormously unhealthy. It shows again the shortsightedness of Republicans, in that they will allow this to happen over and over again because they’re so scared of being regarded as the party of the rich, which they’re going to be regarded as anyway, regardless of whether there’s a speck of evidence for it or not.
I think it’s very unhealthy to have people who think of the government as simply a dispenser of largesse for themselves at no cost to themselves. Now I remember a time when I was – this was back in the 1940s, when I was a young man making $25 a week and $2-1/2 of that went for taxes. Now, I was very outraged whenever I discovered that politicians were wasting that $2-1/2 that I could have sorely used. I was probably angrier than any millionaire. But I think there needs to be nobody in the society who has nothing to lose when the government wastes money.
Absolutely. Last question. What do you say to the claim that we can’t afford to do anything to reduce deficit spending right now because it may slow down economic growth?
Well, if deficits were going to speed up economic growth, we would have runaway economic growth after all the TARP spending, the stimulus spending, and now the so called QE2 by the Federal Reserve. So I think there’s no basis for that. If spending money was going to do it, I mean, the Weimar Republic would have been one of the most prosperous nations of all times because they had, I think it was, 1,700 printing presses running at one time, turning out money.
Well, Mr. Sowell, thank you very much.
Thank you. Bye-bye.