Basic Economics

Thank you.

Because I want people to read it. And if you make it unreadable, they're not gonna read it.

Because so many people, when they think about economic, issues, act as if we have a, sort of a whole rainbow of o- of options out there, and that we can just pick a little bit here and a little there, and so forth. And no, the, the options that we have are usually much more limited, and we have to realize that whatever we do will be within those constraints.

Yes.

Yes.

no. No. l- li- the science isn't dismal. Life i- m- may be dismal. But the fact is that we have to operate within the constraints that we have. All right. And if we, and if we think we have a much wider range, we're gonna make some very foolish mistakes.

Oh, my, you're bringing out... We have-

I flunked the, tryout with the Dodgers. I mean, I came to the pl- I came in there and I looked at this, short right field wall and I said, "Oh, boy, I'll hit..." And there was an old building behind the wall with, you know, well, abandoned. I said, "Well, I'll hit a few through those windows." And, you know, and, then I learned that the Dodgers give you, gave you a fielding test first, and only those who passed the fielding test got to bat.

I, I, sal- salved my, feelings by reminding myself that they lost Johnny Mize doing that.

Actually, nobody discovered that. I just persisted. and, at some point, I decided I would apply to Harvard. Had I known, then what I know now, I would've realized the odds were hopelessly against it. but fortunately since I didn't know, I went ahead, and that's it.

It was the s- it was the subject in which I did the best I mean, it was, it was a no-brainer

Yes. It made sense, which not everything taught at Harvard, made sense at the time, or now.

Yes.

No, heavens no. That was, when I was, 20 years old. that was when I first came across some stuff by Marx. and what he said seemed to, explain the world around me. And, one of the reasons is that, like many kids then and now, they don't really get any alternative explanation. And so it's like you have to have a candidate to beat a candidate.

Yeah.

No, well, no But for example, my first job, was as a Western Union messenger. I was 16 years old. My first full-time job. And, I used to, on some evenings come home, instead of taking the subway, which was a nickel in those days, I would splurge and take the 5th Avenue bus, which was 15 cents. If I was feeling, you know. You'd

Yeah. And, so it w- it was... We'd start out from 23rd Street and go all the way up 5th Avenue, pa- past all the gla- glittering places. And we would turn left at 57th Street and go out past more glittering places, including Carnegie Hall.

And then we'd turn up, to, around Columbus Circle, up s- Broadway, and then out to Riverside Drive, all the fancy stuff there. And then, at 135th Street, we'd come in off a viaduct, and immediately there'd be the tenements. And of course, this is where I lived. And I went, "Well, what is this?" And, Marx seems to ex- seemed to explain that.

1960.

I mean, I was still a Marxist after taking Mi- Milton Friedman's course. but I went- Did, and- But one summer in the government was enough to let me say, "No, this, government is really not the answer." I mean, that is...

The f- federal government did. So what- Now, never say the federal government doesn't do anything.

Well, I, I, what, my job was to look at, to study minimum wage, setting in Puerto Rico. And of course, there w- and I discovered that as they kept raising the minimum wage- Is

Yes...

Yeah... okay. All right. Got it. Got it. And for a report. Right. And I noticed that as they kept raising the minimum wage, the, the employment kept going down. And of course, eco- economics was saying that was why, but the, there were two theories. The, the unions and, said that, the reason it was going down was that, there were hurricanes came through, a series of hurricanes, during the time they collected the data, and that, it destroyed the f- the sugar cane in the field, so there was less required to be processed. And so the question is, which of those is right? And I, and I thought... I'd been trained in Chicago that if there are two different theories, there must be some factual thing that would be different- Right... at least in principle. So I spent the whole summer trying to figure out what, how would I test this? And finally, I came in one day and announced to the little group here in the office that I have it, that what we need are statistics on the amount of sugar cane standing in the field before the, before the hurricane came through. And I'm waiting for the congratulations, and I can see look of, looks of shock in the room, like, "This idiot has stumbled on something that will ruin us all," you know? And I realized I was concerned as to whether this law was beneficial or not beneficial to low-income people. They were concerned because this law was providing one-third of the income of the US Department of Labor. And once you begin to see that the government agencies have their own self-interest, quite aside from what it, whatever they're theoretically supposed to be doing

That's right.

Yes.

And Hayek.

Well, by the time, by the time I left, left, I went back to Chicago at, in the fall.

this- But that wouldn't, that wouldn't have mattered for the work that I was doing.

I suppose so.

Yes.

Because it means you don't have to look for a boogeyman to explain why everybody's not making the same money or h- having the same wealth.

the, there are rivers, for example, on all the continents, but they aren't the same rivers. on the Zaire River in, Central Africa, which is, longer, I think, than the Mississippi, but, in a p- in a, in a space of 150 miles, there are more than 30 cataracts, and they fall, the water falls a total of almost 1,000 feet. The Mississippi River falls at a rate of four inches per mile.

they are not the same river in terms of being able to transport anything back and forth.

We picked the wrong planet- Right... but here we are.

Yes.

Well, yes. and sometimes it's simply a propaganda trick, depending on who's doing it. I read Piketty's, stuff

Right. And he's a star around the world for doing so. And he talks about how the top 10% are separate from the rest of us and they are able to do all sorts of nefarious things. And then I, since then, I've gone and done a little research, and it turns out that 56% of all American households will be in the top 10% at some point or other in their lives, usually when they're older.

And so if

Yes. and, and actually in the, when you get down to the top 1%, it's even more, incredible. of all the people in the top 1%, in the course of a decade, the majority, the great majority are there one year. Only 13% are there two years. And so we're talking about people who have a spike in income in one year for some reason or other. They inherited something. - They

they, yeah, they have assets accumulated over the years and they sell them in that one year. I mean, in the year, I'm su- I haven't checked, but I wouldn't be surprised if I hit my income peak, when I, when I sold my house on the Stanford campus, and have never been near that since. no, and of course it was all absorbed in paying for another house So I, you know. Welcome to

Well, partly what I r- just mentioned, that over the course of people's lifetime, m- most of, much of the disparity consists of different people at different stages of their lives.

And moreover, over time, for example, back in 1951, people reached their peak income between 35 and 44 years of age. -hmm. And the people in that bracket made about 60% more than people who were in their early 20s. Go forward a few years and now, they're making more than twice as much as people in their 20s. And go forward another decade or so, and now the whole bracket has moved up to f- 45 to 54, and now they're making three times what people in their lo- And all, and what it means is that as time goes on, the advantages of youth, namely strength, and, and, energy, account for less and less 'cause machines provide the power. But you have to more and more be able to do more complicated things.

And when you, when-...

Yes. And when you think about it, if you, if we me- measure, adult, life at beginning at 18, then that means that some, a man who's 40 years old has more than 10 times the experience of a man who's 20 years old.

So it's, there's nothing mysterious about any of it.

Not particularly. Right.

failure- Especially when I discover his errors. Among them, among, one of them, for example, he says that, under Herbert Hoover the highest income bracket, was, fif- 25%. The Internal Revenue record shows that in 1932, the highest income bracket paid 63%. So I'm not sure how many of his va- loon- You,

Yes.

sure that's fair. Oh, that, that- I'm not sure that's-... that, that will, that will, that will turn you into a cynic in a very short time.

You know, it always amazes me that people think that if you say the market is imperfect, that means the government must step in. And I think, you know, we're so much more rational in sports. I mean, when Babe Ruth went up there and struck out, they didn't say, "We gotta send in a pinch hitter for n- for him next time at bat." Because who knows, the pinch hitter might strike out, and he's not like, as likely to hit a home run as Babe Ruth is

Oh, I'm in favor of many things that are said in preambles. It's just when they get into the actual text of the law that the problems begin.

Well, for one thing, it's an example of why the government doesn't have to, have to, learn from its mistakes. If you were to ask me, who were the two men who did the most to bring on the housing collapse from which this economy has still not recovered, I would've said, Chris Dodd and Barney Frank.

That's right.

Good. Good. But they, but they, but they left this behind as their legacy.

By having the government underwrite risky loans, and by, in fact, the power of the government being used to force private lenders to underwrite risky loans. Because if they didn't, they'd be set upon by the, a- by HUD, by the Federal Reserve. And Janet Reno, threatened to prosecute those who weren't making enough loans to low-income people.

Yes.

Well, in fact, I just, the other day I see, saw where the federal government is now going to h- be supporting lo- loan, house loans, with 3% down. Which...

And, yeah, and you ask, "Well, h- h- w- why don't they learn?" And the answer, they do learn. They learn that they gain the political benefits of doing things like that. And when it blows up in their face, they can blame someone else, and then they can come back later and make the same mistakes with probably the same benefits.

I, it really is amazing how these con games are played. people, a- actually, the premiums have gone up, but it would've been a disaster if they hadn't gone up because the deductibles have gone up. I mean, at a sufficiently high deductible, I would be willing to set up an insurance company and insure you for $10 a month for everything imaginable. And I say, I would, you'd have a, we'll have a million-dollar deductible. Got it. And after, and a- and after you've had your, all your illnesses th- that could happen to you, and you're maybe at 8 or $9, 8 to $900,000 out, you know, I still wouldn't have laid out a penny.

Repealed outright. That would fix it.

Badly. they- By keeping the interest rates low, they're, they're, for example, depriving a whole generation of a decent return on money that they saved, which would normally go into the marketplace and earn them a decent rate of interest. But now the Federal Reserve is, keeping the, interest rate low, and so they won't get it.

That's true. But more than unfair, it's a, it's a, it's a bad allocation of resources. If, if someone wants to set up a business and is willing to pay 5%, for money to do that, a- and the government comes in and follows a policy that brings it down to virtually zero, then the, then the, investments will not go where they would've gone or- ordinarily in a free market.

It sounds good. it's on- Why, thank you... it's, it's, it's, it's, it's on- it's only if you look at history that, that it, there's, is a problem. For example, there's a book out which is called The Forgotten Depression. I haven't read it, but I, but I know what it's about. And so now when Warren Harding's takes office in 19- This is James Grant's new book, right? I think so. Okay. when Warren G. Harding takes the office of president in 1921, unemployment was something like 12%.

Yes. Harding did absolutely nothing except to cut back government spending because there were, there were less taxes coming in, so he cuts back the spending. Now, obviously the k- the Keynesian would say, the Keynesians would say, "Oh my God, what is wrong with the man?" Right. The following year, the unemployment rate was around 6%, and the year after that it was around 4%. And Harding did absolutely nothing again. So if, when people say things like, "The government has to do something," I say, "Have you ever studied what happens when the government does something compared to what happens when they don't do anything?" And for 150 years, the government of the United States did nothing when there was a depression. No depression during all those 150 years was ever as bad as the Great Depression of the 1930s in which the government did more than it had ever done before in its entire history, under both Hoover and Roosevelt.

Yes.

Well, it's not even a question of if, it's wh- it's a question of when. You see, the stock market crash occurred in 19- in October 1929.

Two months later, unemployment peaked at 9%, and then it started conf- declining. And by June of 1930, it was down to 6.3%. That was when the first government intervention took place, and within six months it was in double digits, and it stayed in double digits for the entire decade of the 1930s.

Yes.

Absolutely. And more than that, I, Harding, after all, c- was eligible to run for office again. Remember, his famous thing was, "I do not choose to run."

Yeah.

Yes. Right. And then he, then he won presidency in his own right, but he'd only served one term in his own right, and they were expecting him to run again in '28, and he decided not to. if he'd stayed on, I'm sure he wouldn't, he would never have done what, Hoover did.

Well, see, one of the things about the immigration debate is they talk about immigrants in the abstract, and there are no immigrants in the abstract, as that passage indicates. And we don't know who those people are that are here. They may all be PhDs from the University of Chicago, in which case they should all stay. Or they may in fact be people who, majored in sociology at Berkeley, in which case it's get them all out of here, as soon as possible., you know? But we don't know. Th- that's one of the problems of, so-called immigration policy. We don't have an immigration policy unless we control the border. It doesn't matter what our policy is. If anybody who wants to cross the border can cross, then our policy is just a bunch of words on paper.

Yes.

No. And especially when they're trying to, talk about having people in agriculture. I mean, this is a country that has had a chronic surplus of agricultural output for decades on end, costing the taxpayers billions upon billions of dollars.

Yes. All right,

Y- yes. And, and in fact, I, I think the federal government s- subsidizes the water that creates the surplus that it then subsidizes again. and I think, I think that, any discussion of people in the abstract drives me crazy, because there are no abstract people. 100 years ago, people understood that, and so when there was a debate about immigration, there was a multi-volume set of tomes about the characteristics of the immigrants from various countries. Where, where do they, how do their kids do in school? What-

Yes.

Yes. "

Yes.

They should find out What kind of people, h- how are the people that we know about now, how are their kids doing in school? What is their crime rate? What is their disease rate? All those things. That matters. You know, I, they brought out all these kids and I said, "These are just kids." Well, you know, kids do grow up, and they have other kids. w- we don't know. May- maybe that's a good thing. Maybe it's a bad thing. We don't have a clue.

Yes.

Well, in 1960, which would be almost 100 years after the end of slavery- Right 22% of Black kids grew up in homes with only one parent.

Yes.

Yes. 30 years later, after the liberal welfare state, that number had more than tripled. And so I say, well, let us compare if we can speculate on how much that 22% was due to the legacy of slavery, but we know that tripling was not due to the legacy of slavery. It was due to the legacy of a whole different set of policies. And you can, and you can look at it so many other ways. education. Stuyvesant High School in New York, as you know, you get into only by passing a very tough exam.

in 2012, the percentage of Black students who had gotten into Stuyvesant High School was less than one-tenth of the percentage of Black students who had gotten into Stuyvesant High School 33 years earlier.

the, Dunbar High School in Washington, which was an elite Black high school for a very long time, in 1993, the number of, kids out of Dunbar High School who went on to college was less than it was 60 years earlier, which would've been in the depth of the Great Depression. and so, and you can run through a whole bunch of other things like that. look at the, housing projects. the housing projects in the first half of the 20th century, during that first 100 years after slavery, were, ha- did not have the high crime rates, the murder rates, the graffiti, the, all the rest of it that we associate. None of that was there. people, like the New York Times, I should, Kristof should read his own pa- old papers. pointed out that on Saturday mornings, it was common in the housing project of this earlier era- -hmm... for parents to leave their doors unlocked, because some of the parents could afford television, some couldn't. So the ones who had television would leave their doors unlocked, and the kids from the other families could come down there and watch television with them. Well now, the latest figures show that, most people below the poverty line have two television sets and cable, but they wouldn't dare leave their doors unlocked in a public housing project.

Yes.

No, I do not.

Yeah, I... One, one, ano- another thing, crime and violence. now we take it for granted that there's crimes, tremendous levels of crime and violence, in the Black community. That was not always the case. In the '20s, it was very common for white celebrities, including George Gershwin and William Faulkner, to go up to Harlem, not only for entertainment places, but to go into private homes of kid- people they knew. and Gershwin played Rhapsody in Blue in, in this home where Walter White lived. Milton Friedman, when he was a graduate student at Co- at Columbia, he and the lady he later married would go dancing at the Savoy Ballroom in Harlem. And he said, "We had no fear of being, mugged or accosted on the street or anything like that."

Not totally safe to you. I wouldn't exaggerate, but it's nothing resembling today. I mean, I did sleep, on hot nights, I would sleep out on the fire escape. When I tell people in Harlem that today, they think I'm, I'm, I'm from another galaxy. You know? But the people slept in, on the fire escapes, in New York, and in the public parks in the '30s, all over the city. Because it was not like, it was not a jungle. What, there was a lady I'll, one other example. -hmm. There was a woman who was a Black woman in Harlem who was an actress. She'd be like going out to the theater district, and then after the play, you know, they'd have their drinks and eat something or whatever. And she said at 1:00 in the morning, she would simply get on the subway and go on up to Harlem, and, and, and, and walk home from there. Now, it so happens that the subway station she got off at was right, very near a, a grocery store where I was a delivery boy. And on Saturday nights, I would be working usually until around midnight. And when I would go home, I would go past that very same subway station she's talking about. I never had the slightest trouble

Well, well, I, I'm, I don't, I don't think we could be here enough hours for me to answer all of those. But, to take the political thing, one of the things I discovered in the research for my n- for my book I'm currently working on is that leaders of groups that are lagging in countries around the world, almost invariably have counterproductive policies for them. And it makes perfect sense because insofar as members of lagging groups assimilate into the values and, achievements of the larger society, they don't need those leaders.

you know, a- and, you see this. You look at the history of the Czechs in the 19th century. People are worried that the Czechs are all learning to speak German. Well, at that time, if you wanted to become a, a professional person, scientist, anything like that, you had to l- use books that were written in German- Right... simply because the German acquired a, a volume of a literature centuries ahead of Czech. and yet they f- they fought tooth and nail against that. if you look at the, in Sri Lanka, the, one of the arguments that was made there to the Buddhist, leaders was that if we don't do something, the Tamil minority will assimilate members of the, of the, of the, S- Sinhalese, majority, and then there'll be no Buddhists or Sinhalese in another several ge- se- generations. And so, I mean, there's no r- there's no mystery to me as to why Jesse Jackson says what he does, or Al Sharpton and others, because that benefits them, but it does not benefit the people they lead. And all the incentives are for, are for leaders to lead people, i- into things that don't help the people, but help the leaders.

Yes. But he, one of

Well, it's, it's like insurgent movements in general. when an insurgency starts off, by definition it, it has an uphill battle. Now, as the ins- and you can look at the history of Christianity, for heaven's sake. Right. if you're gonna be a Christian in the, in the, in the Roman Empire, you know, before the First, in the First Century, you had, you had a lot of grief to go through. Now, but after Christianity becomes the official religion of the Roman Empire, this is a bonanza, and there's a lot to be done. And so now you will follow policies that are the opposite of what you advocated. You will see that with all kinds of other, insurgent movements.

She was my eighth grade teacher. Homeroom teacher.

Well, I, I was sometimes, bored, in class, and so I would do various little things to just, liven things up, I think is the way to put it. I remember once, there was one prank that really got her, and she said, "Oh, if I ever find out who did this, Sowell." I mean, the presumption of the innocent was just not there. And so one a- one a- one, afternoon, I'm being kept in after school as per usual, and Miss Sheroff was sitting down there with her papers to s- to work on, and she says, "Well, here we are again, Sowell, just the two of us." And I said, "Good grief, Miss Sheroff, if we keep staying after school together all the time, people will begin to talk." And she said, "We'll just have to live with the scandal." And she didn't even, didn't even look up from her papers.

There was no, there was no, Eric Holder-... to keep them from punishing me. Heaven knows I might've gone on to cri- become a criminal.

hmm.

No.

In most cases, yes.

Oh, yes.

Yes.

I took, I took, I took two classes from him. one was in literature, but one was in, was in ri- in, creative writing. And a number of people have... who took his classes have gone on to become well-known writers, by the way. I had... I knew nothing. I didn't know he was a writer or anything else when I took his class.

Yes.

That's right. That's right. And he was, he was, he was essentially burning my bridges behind me so that I wouldn't dare show my face on Howard University campus if I didn't make it at Harvard.

Partly. Partly, yeah.

Yes. And, and in fact, the, in the book that I'm writing now, I discover this is true not only in the United States. it's true in England, and the, and the situation is wholly different. And yet if you read, the data, for example, from, London, the, the, educational tests and so forth, you see that, there, immigrants from Africa pass this test they have, I'm talking about low-income people now- -hmm si- nearly 60% of the time. Blacks from, the Caribbean like 50%, so on. Native-born whites in the same low-income bracket pass this test 30% of the time. and it's the same thing. The foreign people come in, they haven't had generations of being steeped in the welfare state vision, the vision of grievances, victimology, and resentments, and the idea that there are enemies out there dedicated to keeping you down. That's the, that's the message that's been pumped into the head of the, of the white lower class in Britain, and that's the image that's been pumped into the Black low-income people in the United States. And the, and the results are the same in both cases.

I don't

Well, I'm sure it couldn't be repeated on television. But, I would say nothing, actually.

I am sure that Jesse Jackson makes 10 times as much money a year as I do, and I don't think I should take on the project of convincing somebody to reduce his income by 90%.

Yes.

Not well. one of the reasons I'm glad to be as old as I am is it ma- it means I may not, I be s- may be spared seeing what's gonna happen to this country, either internally or as a result of international, complications

Nothing is irreversible.

Nothing is irreversible, but I think that, we're, we're like a team that's coming to bat in the bottom of the ninth five runs behind. We can win it, but this is not ni- I wouldn't bet the rent money on it

Since I don't know what that America's gonna be, I don't wanna say anything to them. - But I, I don't, I don't, I don't think... By the time they get here, I think the issue will have been settled one way or the other.

If- It'll be se- E- either we will have pulled out, pull out of the, out of the dive, as it were, or else it will be all over

Thank you.