Economic Facts of Life

Essay: Twenty Economic Facts of Life
Robert A. Hall, MEd, CAE
August 29 2009

The world economy is such a complex system that no single person—or group of people—can understand the hundreds of billions of variables and interactions that comprise the entire system. Thus it is understandable that economists—like experts in other disciplines—argue endlessly about what the results of various trends, policies and developments will be. These arguments are colored by each economist’s worldview and life experience, as they are for the rest of us.

But there are some basic economic principles that have proven consistent, and that are fairly easy to understand. You may argue the physics of a complex system like the universe, but still have to agree that H20 turns from liquid to solid at 0°C at sea level on a fairly consistent basis, even if your worldview says it should freeze at 5°C. As Senator Patrick Moynihan reportedly quipped to a colleague, "You are entitled to your own opinion, but you are not entitled to your own facts."

But facts can be slippery things, starting with the old bromide, “Figures don’t lie, but liars figure.” In many of our current political debates, too many people seem to prefer their own facts, and to ignore the evidence of long experience, because the evidence doesn’t fit their worldview.

Here, then, are what I consider to be Twenty Economic Facts of Life, which guide my thinking in policy matters.

1. People do more of what they are rewarded for doing, and avoid what they are punished for doing.

If that seems obvious, politicians and voters forget it all the time. Both JFK and Reagan lowered Capital Gains Taxes and discovered that government revenue went up, as more people invested money, rather than put it into other areas. Likewise, CGT increases have resulted in reduced government revenue. When I pointed this out to a liberal newspaper columnist in Madison, WI, his response was that it was a Republican, Pro-Business fact, and he wasn’t interested in those kinds of facts. He felt entitled to his own facts. But promising to “soak the rich” in the name of fairness is often counter-productive for government revenue, however popular it is with economically-ignorant voters.

Maryland is a recent example. They decided to drastically increase taxes on people with million dollar incomes, only to find that the following year they had about half as many folks reporting million dollar incomes. Some of that decline was doubtless due to the recession, but a lot of it was due to millionaires relocating their legal domiciles, and often their businesses to states like Florida with no income taxes. Zero-income tax Texas is still doing fairly well in this recession while high tax California is crashing, and liberals can’t figure out why.

When you punish people for investing in job-creating businesses, they will create fewer jobs, and you will collect fewer tax dollars, not more. It really is that simple.

Politicians also do what they are rewarded for, and their reward is votes. The next election is at most two or six years away. Voters love government spending and hate government taxes. So politicians get re-elected by voting for spending and against taxes. This results in an almost-permanent government fiscal crisis and ever-higher deficits. During my five terms in the Massachusetts senate, I observed one senator who never voted for a tax bill, but voted for every spending bill or spending increase to the state budget—with one exception. She always voted against legislators and judges pay raises, which, regardless of the merits, had minuscule fiscal impact on total spending. But it had a large PR impact, as with the help of a lazy press that never dug too deeply into the details of the budget, she trumped her fight for fiscal responsibility—these pay-raise votes—to her constituents. And she was re-elected year after year, becoming the dean of the senate. She wasn’t the only one following this "spend, but don’t tax" strategy.

2. There aren’t enough “rich” to pay for everything we want.

The IRS reported that in 2006, only 5% of the taxpayers made $153,500 or above, but that 5% paid 60% of the total taxes. (This was under the Bush tax cuts, which Democrats say favored “the rich.”) The 50% of the taxpayers with the lowest incomes paid a total of 3% of the taxes. “We’ll spend and just raise taxes on the rich, they can afford it,” is fraudulent as a Ponzi scheme, because you soon run out of “the rich.” There aren’t enough of them, and the poor don’t pay taxes, so when government spending goes up, most of it is going to come out of people in the middle, because that’s where most of the money is.

The politicians will try to delay that reality through borrowing, hide it in fees, or disguise it in inflation. But when the government spends a lot more money, it’s going to come out of the hides of middle income earners one way or another.

3. Politicians will sacrifice the country’s long term economic interests for their short term political welfare.

President Hoover signed the Smoot-Hawley anti-trade tariff bill against the advice of a thousand economists. Many economists believe that was the key to a collapse of world trade, which turned what might have been a severe recession into the great depression. But, contrary to the myth that he did nothing, Hoover was under great pressure to do something, even if wrong, and he did what was politically popular, not what made economic sense. When it didn’t work, he was defeated anyway.

Once Republicans got control of Congress in the 1990s, they started spending money in the kind of amounts they had criticized Democrats for, because spending gets you votes. Politicians using their own money to buy votes is illegal, but using our grandchildren’s money to buy votes, by passing earmarks, pork barrel spending and entitlement programs, is not only legal, but practiced by both parties. Someone pockets every one of those dollars, and is thus inclined kindly toward the politician who provided it. The party out of power always criticizes this, as Obama did the Bush deficits (ignoring that they were approved in 07 and 08 by Democrat-controlled Congresses). But once in office, Obama’s first-year deficit was greater than all eight years of the Bush deficits combined, as hungry supportive constituencies had to be rewarded in the name of economic stimulus, to keep them voting Democrat in the future.

Elections are short term, while deficits are a long term problem. Thus we usually have deficits.

4. Free trade increases economic prosperity.

Free trade is popular with everyone, until it impacts their own income. Then workers and businessmen alike howl about “sending American jobs overseas.” (Liberals always wanted to help the downtrodden in other countries—but that didn’t mean the downtrodden should have jobs, only handouts. Like the poor in our cities.) The historic record is clear. Free trade increases prosperity among all the trading partners. After Bill Clinton and the Republican Congress passed NAFTA, the number of jobs in both countries went up—Ross Perot notwithstanding—just as the European Market has increased prosperity in Europe.

People circulating e-mails urging boycotts of “foreign” goods should recall how prosperous we were when international trade collapsed in the 1930s. But both businessmen and workers howl if they are the ones paying the price, so “saving American jobs” by barring trade will continue to be popular with politicians. Barack Obama is only the latest politician to pander to this ignorance.

5. Cause and effect in large economic systems are often impossible for most people to discern or understand.

When people who complain about high taxes and deficit spending still vote for their member of Congress because of the new bike path he brought to the district, making no connection at all, it’s little wonder they can’t understand economics. The jobs lost to NAFTA were concentrated in some industries and the workers and businessmen who lost out were very vocal. People demanded their public officials do something about the loss of jobs. Because the larger number of jobs gained were spread around the economy, people holding them usually had no idea they owed their jobs to free trade—and were doubtless clamoring against NAFTA in support of those who lost jobs!

Coupled with the voters’ notorious short term memories, this gives politicians endless chances to manipulate the ignorant. As Lincoln might have said, “You can fool all of the people some of the time, and some of the people all of the time, and them’s pretty good odds.”

6. Waste is in the eye of the beholder.

Give me a couple of CPAs, a calculator and a laptop and I believe that in a month or so I could balance the Federal Budget. After which, a howling, outraged mob would rip me into cat food. All our politicians say they want to bring down the cost of healthcare. One of the huge healthcare costs is malpractice insurance and the defensive medicine that results from the threats of lawsuits. So are these billions in savings on the table in “healthcare reform?” They are not. A majority of legislators, particularly among Democrats, are lawyers. Lawyers get the benefit of these lawsuits and don’t see it as waste at all. It’s not a topic for discussion.

This is why the rest of us may fume at the extravagance of the “Murtha Airport,” but Congressman Murtha gets re-elected by his constituents, who don’t realize that to get their pork airport, Rep. Murtha has to go along with the other Congresscritters taking pork home to their districts, at the expense of his constituents.

7. Government never runs efficiently.

Business, which is organized with the sole goal of making a profit, has a hard time running efficiently. Non-profit organizations, where there are a lot of goals other than profit, have a bigger challenge. And in government, the bureaucrats are rewarded for following the rules, regardless of how much sense they make. Plus, they are subject to political influence in the decision making process, and the rules are set up to reward favored political constituencies, not efficiency. The results they strive to achieve are continued employment for both the bureaucrats and the politicians, not the efficient conduct of whatever the program’s mission is.

Name a government agency or program that you’d hold up to the corporation where your IRA is invested as a model. The Post Office? The DMV? The Pentagon? Medicare, Medicaid, the VA or the Indian Health Service? The Highway Department? Social Security? The Congress, state legislature or city council? (Okay, I’m cheating a bit—we wouldn’t really want them to be more efficient.)

A classic case was reported by John Steele Gordon in his essay, “Why government can’t run a Business.” According to Gordon, “In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged. When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.”

8. When government makes you poorer, it’s a tax.

If the government spends money, but doesn’t raise taxes, and instead prints more dollars, it causes inflation. (See Jimmy Carter.) If it gets really bad, it causes hyper-inflation, as in Zimbabwe, where it can cost billions of Zimbabwe dollars for a loaf of bread. Inflation makes your dollars worth less, so you are poorer. Government caused inflation is a hidden tax on your income and your retirement savings.

If the government passes legislation that makes things cost more, such as the proposed “cap and trade” energy bill to fight global warming, it makes you poorer. It might be necessary, or for a good cause. But if they make heating your home or buying gasoline 10% more expensive, there’s no difference between that and putting a new 10% tax on energy. In either case you are worse off—they just don’t call it a tax.

9. The free market makes better decisions than central planners.

One would think, logically, that one person in charge—a czar for the economy, to use the currently popular term—could look at the big picture and make better decisions. And that is what the statists always believe. But the opposite is true.

Every day in our economy, billions of economic decisions are made by millions of people. When you decide to buy whole wheat bread rather than white, the czar would have to be able to predict that, in advance, for you and 300 million other people, and order all the steps in production to increase whole wheat—for people like you, but not those who prefer white this week.

Each step of the way requires specialized knowledge and experience. The guy who knows how to make a tractor doesn’t know how to grow wheat. The farmer doesn’t know how to get it to the bakery; the baker doesn’t know what sells in a particular neighborhood like the grocer does. There are hundreds of steps and decisions for every product. The czar would have to be God—which is why people always, always have higher standards of living in free economies than in planned economies. (Government bureaucrats and politicians only think they are God.)

10. Business people make economic decisions, politicians make political decisions.

Much was made of the “fact” that banks discriminated against blacks, “proved” by their giving home mortgages to whites at higher rates than to blacks. So the government stepped in, and created the Community Reinvestment Act to force banks to give loans to poor black people, thus earning votes for those politicians. This was followed by Fannie Mae and Freddie Mac, huge loan schemes guaranteed (though they claimed not) by the taxpayers to be sure poorer folks could own homes. Thus started the housing bubble which was the first domino in the current recession. Attempts by the president and some legislators to more tightly regulate Fannie and Freddie were beaten back by supporters, ever eager to cry “racism” to get more dollars for their voting constituencies.

But the brilliant economist Dr. Thomas Sowell points out the banks were in business to make a profit. If loans to poor blacks in the inner city were profitable, they—or someone else—would have been making them already. And Asians were getting mortgages at higher rates than whites—were Asians running the banks and discriminating against whites? No. Asians had better repayment rates than whites, and whites better than blacks, thus making loans to them safer and more profitable. Sowell, for those who don’t know, grew up in a poor black family in NC.

11. There is no political freedom without economic freedom and property rights.

If you cannot own a home and a business and be free to run it as you wish, other freedoms are meaningless. If the government controls your shelter and your livelihood (from the root word “life”), it can tell you what to say, do and think. You are a slave as surely as any slave on a plantation in the old south, because the Master controls where you can live, how you can live, and what you eat and own. The right to own property is the most basis right, in terms of economic prosperity.

12. Government grows at the expense of individual economic and political freedom.

Most of us recognize that government is necessary to provide for the common defense, protect us from criminals, and provide infrastructure we cannot provide individually, like roads and harbors. We are neither anarchists on one end of the political spectrum, believing there should be no government, nor total statists on the other end (communists, Nazis, fascists, socialists) who believe the individual should always be subservient to the ruler’s idea of the “common good”—that is, to the state. The statist tendency is always to build the power of government at the expense of the individual’s freedom, as people keep telling politicians they should do something to solve perceived problems—and the politicians respond. But government owns most of the means of coercion—the military and police—and it has the power to take part or all of your income, to take your house, to tell you where to work. It was to thwart this tendency that the founders established the separation of powers—now much eroded—preserving to the states and the people any power not expressly granted to the federal government.

13. Power equals money.

You have a full wallet, but the guy in the alley has a gun. Suddenly he has a full wallet. The more power government, large corporations, large unions or criminal gangs have, the more money they will extract from the rest of us.

14. Corruption, crime, violence and instability make people poor.

One has to look no further than our large cities to see this at work. Would you open a factory to employ people where you would be hit for bribes by the local government? If you had to hire people based on politics, rather than skills? If you couldn’t get insurance because arson was rampant in the area? If crime made employees fearful of coming to work? Welcome to the American metropolis, run by Democrat bosses.

Many of the poorest third world countries are rich in resources, and have willing workers, but investors won’t start businesses there for the same reasons they prefer not to invest in corrupt, crime-ridden inner cities. Plus, there is always the fear that the third-world government thugs will seize your property. So the people languish in poverty, while the oligarchs get rich off them—and our foreign aid.

The classic example is Zimbabwe, which under the evil rule of a minority white government, led by Ian Smith, exported food to many other countries. But minority rule was “unjust,” so the world, the US included, helped to bring down Smith’s government and install black majority rule in the person of Robert Mugabe, a Marxist-Maoist. Mugabe appropriated white-owned farms and gave them to his black supporters, but was unable to appropriate the experience, knowledge and work ethic of the white farmers. Famine ensued, tens of thousands died, black life expectance fell from 64 to about 36, hyperinflation and terror stalked the land. The people are desperately poor because of corruption, crime, violence and instability, as investors do what is in their self-interest. And liberals called it “justice” because the statists had won.

15. The lower the cost of a “good,” the more of it will be consumed.

Last year when gasoline went to well over $4 a gallon, usage fell dramatically, burning the oil speculators and bringing down the cost. My step-daughter was driving home with the AC off to save pennies on a tank of gas, which she was paying for, then cranking up the AC in the house, which I was paying for—the AC at home was a free good to her.

No matter how many times this truth is proved, politicians still don’t get it. Are expenditures for medical care too high with the average American paying 13 cents on the dollar out of pocket for care? Let’s make it “free” and see if total costs go down.

People in supermarkets try free samples of foods they’d never give a second glance to, if they weren’t free. “Cash for Clunkers” was predicted to cost $1B in three months, but it burned through $3B in one month. It was “free money.” But even folks who hated the idea of the program figured if they were going to have to pay higher taxes to cover it, they might as well reap the benefits. (This is known as the “Tragedy of the Commons.”)

16. Government does not create wealth.

Wealth is created when investors start businesses, hire labor and produce goods or services. When government “stimulates” the economy by putting money in, it has to take money out of the economy elsewhere, through higher taxes (dollars spent on taxes don’t get spent in other parts of the economy) or through borrowing (money lent to the government is not invested in the private sector).

And whenever government gives a dollar (or a dollar’s worth of some good, like medical care) to someone who didn’t earn that dollar, it must take that dollar from someone who did earn it through labor or investing (perhaps in a retirement fund.) The person who earned the dollar doesn’t get the benefit of it—the other person does.

If I steal your wallet, and spend the money in it, is that better for the economy than if you had spent it yourself? Or is it just better for me and the favored people I spend it with?

17. Everyone tries to improve his or her own economic situation.

Whenever my wife and I are house hunting—all too often due to my career—we always think that there are houses just out of our price range that would be perfect. I’m sure if we could afford a million dollar house (we aren’t close), we’d be dreaming of a $1.3M cottage. And so it goes. People work to improve the lives of their families and themselves—and appetites are unlimited. Economic systems that ignore people’s commitment to self interest are doomed. The free market system harnesses people’s efforts to improve their lives, to make everyone more prosperous. Other systems discourage economic activity and innovation.

18. Money isn’t the only cost of something.

Time is a cost. My wife and I love yard sales and flea markets, and delight in finding bargains. But is the money we save worth the time investment? Probably not—especially when many of the treasures we find were unknown desires until we saw them. It’s really a hobby, rather than a sound economic strategy. If you did your grocery shopping at ten stores instead of one or two, you could take advantage of the sales and specials at each, and save a great deal on your grocery bill. So why don’t you? Because time is a cost as well, often a more painful one. Just learning where the sale items are takes a lot of time. (See Dr. Thomas Sowell’s writings on the cost of knowledge.)

19. Bankruptcies and failure are vital to the economy.

It’s not just success that makes our economy work. If a company can’t fail, its owners and employees have no incentive to be efficient, to provide the most desirable goods and services at the best price. In short, it becomes like government, which can’t fail because it can always get more money—from you. This is why so much of the current economic bailout is so troubling to conservative, free-market economists.

20. There can never be equal outcomes and trying to achieve them is harmful.

It doesn’t matter how many government programs you pass, or how much you talk about fairness or social justice, I’m never going to have the life style of Michael Jordan or Donovan McNabb. Oh, I can say it’s racism that gives them a better, richer lifestyle than me, but the truth is they had slightly better athletic talents, a marketable skill I didn’t have, and thus got ahead. No government program can give me justice and equality, by making my lifestyle—and everyone else’s—equal to theirs. Nor is it desirable to bring everyone to the same level. If the outcome was the same for the kids who partied and did drugs as it was for Bill Gates, what is the incentive for hard work and creation?

In 1965, I was an 18-year-old private on mess duty in the Marines. I asked a fellow “messman” how come his coffee was so bad. “I make it double strength,” he said. “If I make it regular strength, they drink three pots during chow. Double strength they only drink one, so I do less work and get paid they same.” There, my friends, is socialism. When there are no incentives—except, perhaps, fear—for doing better, no one does better.

I have seen the future—and it doesn’t work.

*****

A Marine Vietnam Veteran, Robert A. Hall holds a BS in Government from the University of Massachusetts and an MEd in history from Fitchburg State College. After graduating from college, he served five terms in the Massachusetts Senate. He is not an economist. For a better understanding of economics than he can possibly give, he recommends Basic Economics and Economic Facts and Fallacies, both by Thomas Sowell, PhD.