An Interview With Thomas Sowell About Economic Facts and Fallacies
On Friday of last week, I conducted a phone interview with Thomas Sowell about his new book, Economic Facts and Fallacies (Incidentally, I’ve just finished the book and as per usual with Sowell’s work, it’s very good).
What follows is a slightly edited transcript of our conversation.
We’ve frequently heard, and will hear much more I am sure if Hillary is the Democratic nominee, that women make 76 cents for every dollar a man makes. Can you give us a basic rundown of why that discrepancy exists?
There are lots of reasons. Men and women do not work the same number of hours. They do not work in the same occupations. They do not work continuously the same, and so on.
You know, if it was really true that you could hire a woman for three quarters of what you could hire a man with exactly the same qualifications, then employers would be crazy not to hire all women. It would be insane to hire men. Not only would it be insane, it would probably put them out of the business because the ones that were smart enough to hire women would have such a cost advantage that it would be really hard for the others to compete.
There are lots of gross differences between men and women and other groups and some of them shocked me when I first started doing the research. For example, I found that young male doctors make considerably more than young female doctors. But, when I dug into it a little deeper, I discovered that young male doctors work an average of 500 hours a year more than young female doctors. Obviously, a doctor that works 500 extra hours is going to make more money than the other doctor.
One profound thing you said in the book, when talking about disparities between the wages earned by white workers and minority workers in this country was that there are differences between groups all over the world, so why should we expect different groups to make the same amount of money in the first place? Can you tell us a little bit more about those differences…
I think most people have heard that there are these differences, but I think that what most of them have not heard is that there are the same differences between Asian-Americans and whites as there are between whites and blacks. Asian-American families have higher incomes than white families; during downturns in the economy, whites get laid off moreso than Asian-Americans. Among people who apply for mortgage loans, whites get turned down more often than Asian-Americans. Whites have to resort to sub-prime loans more often than Asian-Americans.
But, most of the people who talk about these things leave out Asian-Americans because it really kills their whole story. Their whole story is that non-whites do poorly because of white racism. Well then, if you find that there is the same disparity between Asian-Americans and whites as there is between whites and other non-whites, that whole argument falls down.
All that being said, you’ve also noted that if you compare apples to apples, black Americans and white Americans earn very similar amounts. Can you tell us about that?
Well, for example, black married couples have had a poverty rate in single digits ever since 1994, even though the black population as a whole, particularly blacks in the ghettos, have far higher poverty rates than whites.
So, what we’re really saying is that there are lifestyle differences that have profound effects on economic outcomes. So, obviously it’s not just simply the act of getting married, it’s that there are a whole set of commitments and values and whatnot that differentiate those who get married from those who have a more adventurous lifestyle.Another thing we hear discussed quite a bit is that wages have been stagnant for a long time. You explained in your book that whether you are talking about per capita individual or per capita family wages makes a big difference in that area. Can you tell us about that?
Yeah, most of the data that is thrown around is data about households or families and the problem with that is that the size of households differs over time, it differs from one racial/ethnic group to another, and it differs from one income bracket to another.
For example, when they told me how the bottom 20% (in per capita family wages) weren’t doing as well as the top 20% — well, the last time I checked, there were 39 million people (comprising) the bottom 20% of families and there were 64 million people (comprising) the top 20%. So, we’re really not talking about the same number of people, we’re talking about categories.
One of the other problems, too, in talking about income brackets is that it’s true that top income bracket is increasing its income faster than the bottom income bracket. But, the joker in all this is that people are moving from one bracket to another.
So, if you follow actual flesh and blood human beings over time, you find for example that people who were in the bottom 20% (in per capita individual wages)in 1996 — had their incomes increase by 91% by 2005. Over that same span of time, people who were in the top 1% had their incomes decrease by 26%. So, if you follow flesh and blood people over time with income tax returns as the Treasury Department does, you find the direct opposite result of what you do if you talk about these abstract brackets. If we’re talking about “rich” and “poor,” we should be talking about rich and poor people, not rich and poor brackets. If we have compassion, we should have compassion for people, not for abstract statistic categories.
There’s a rather large trade gap in this country between what we buy and what we export. What are the ramifications of that and should we be greatly concerned about it?
Not really. There are circumstances in which that could be a problem and other circumstances in which it would not. There’s nothing wonderful about having an export surplus rather than an import surplus.
We had an export surplus throughout the Great Depression of the 1930s and we had an import surplus throughout the prosperity of the 1990s. There are all sorts of other factors that are involved that make far more of a difference.
During his campaign for the presidency, Ron Paul has talked a great deal about monetary policy and getting off of the gold standard. He blames that for a wide variety of economic ills. Talk to us a little bit about that. If we went back on the gold standard tomorrow, what would that do for us or do to us? What would be the pluses and minuses of that?
Oh, I guess the pluses would be that you would limit the extent to which politicians could play around with the money. But, I think that’s not really at the root of the problem because the Great Depression got started while we were still on the Gold Standard. That doesn’t save you from foolish government policies and I think foolish government policies were the real problem that caused us to get into the Great Depression and to take a whole decade to get out of it.
…The value of the dollar has dropped quite a bit during the Bush administration. Can you tell us about the pluses and minuses of having a weak dollar?
Well, the plus is that it makes American goods cheaper and therefore it encourages foreigners both to buy more American goods and to buy American securities. The downside is that it makes buying goods more expensive to us. But, that’s one of the ways that the import/export balance tends to correct itself.
Another point you made in the book was that slavery doesn’t adequately account for the break up for the black family and black-on-black crime. Can you tell us why that’s the case?
Oh yes, because the studies have been done showing that in fact, most black children were raised in two parent families even under slavery itself — in fact, all the way through, until the middle of the twentieth century.
So, I think there’s no greater indictment of the welfare state than the fact that the black family held together through centuries of slavery and discrimination, but fell apart in the liberal welfare state.
The subprime mortgage crisis has been in the news quite a bit of last. Tell us what caused the subprime mortgage problems and what we should do to fix them.
There were any number of things that contributed to it. One of the things was that the Fed lowered the interest rate by a tremendous amount, down to about 1% and under those conditions, many people thought that they could afford to buy a house and in fact, they could afford to buy a house so long as the interest rates remained low and the housing prices kept rising. (However), markets go up and down and have for centuries, so those who got themselves out on a limb, got themselves in deep trouble in part because of that.
The government was also, at the same time, leaning on lenders to lend to people they would not lend to otherwise, particularly under the Community Reinvestment Act, that empowered politicians to tell lenders that they ought to put so much money here rather than there — as if politicians know better, which they don’t.
Between those two things, you had a lot of people out there in very dicey situations and now the politicians are saying that they want to ride to the rescue. Well, heavens, they created the problem and I can only imagine that they’re going to make it worse, the more they intervene.
It was also very interesting to read in your book some of the facts and fallacies about the poorest 20% of Americans. Can you tell us why most, but not all, of the poorest 20% of Americans are poor?
Again, we have to distinguish between statistics and people. Of course, most of the people who are in the bottom 20% at a given time are gone inside of a decade. They don’t spend their lives down there. A lot of them are just young people starting off in their careers and this is one of the reasons income for that particular set of people nearly doubles in a decade.
(Other) people who are down there are down there for another reason. There are people who have already been up in higher brackets and are down there because they have an off-year — for example, business people. A millionaire can have an off year and lose money. One of the things that struck me immediately was how many — I think its hundreds of thousands of people who earn less than $20k a year and are living in homes that cost $300,000 and up. Obviously, if this is a permanent situation, it seems very odd that so many people could afford those kind of houses. But, if you live in that kind of house and you have an off-year and your income drops for that one year, it’s perfectly understandable how that can happen.
Another fascinating thing in the book was where you talked about the statistical fallacy that leads some people to declare that the middle-class is vanishing. Can you talk to us about that, how people get the false impression that the middle-class is vanishing?
Oh my, it’s so simple that it’s hard to explain. If you take some fixed amount of income and you say that people between these two sets of income, we’ll call that the middle-class. Fine.
But, what happens over time is that the average income in the country increases and so the whole distribution of income moves to the right and now there are fewer people in those fixed brackets. Of course, what that really means is that the middle-class is having a higher income.
This is how people create hysteria, saying the middle-class is vanishing and there will be nobody but the few rich and the masses of the poor, etc., etc. Once people, particularly on the Left, find something that fits their preconceptions, they grab it and run with it. They don’t investigate any further.
How much of a positive difference does foreign aid transferred from the first world to the third world tend to make and if it doesn’t tend to make a significant positive difference, can you tell us why that might be?
Oh, it doesn’t — in fact, some have argued that it makes things worse in the sense that — for example, the so-called forgiveness of loans. Well, if you think that financial irresponsibility is a way for a country to become more prosperous, that is a tragic mistake.
There is so much more money available in the private market place than there is from these foreign aid things. But, if you cut off all foreign aid, the difference is that the governments of these countries would have to reduce the corruption, they’d have to reduce the red tape, in order to attract private money, but they’d be able to attract several times as much. These politicians much prefer to get a certain amount of blank check money that they can use for corruption or whatever they want to use it for, rather than getting a much larger amount of money from international markets where they’d really have to clean up their acts in order to get it.
Give us an economic fallacy that conservatives tend to believe.
…There are some conservatives, for example, who are arguing that we are losing jobs to our overseas competitors and therefore, the government should step in to stop that.
What bothers me when people talk this way, whether they’re conservatives or liberals, is that they never compare how many American jobs are going overseas with how many overseas jobs are coming to the United States.
I mean Toyota; I don’t know how many tens of thousands of people are manufacturing Toyotas right here in the United States. Siemens, Honda, all kinds of other companies, have American employees just as American companies employ people overseas.
But again, in order to have some kind of rational discussion about that, you’d have to compare the number of jobs and take other factors into account, too. If the country becomes more prosperous as a result of this, there will be more domestic jobs in the United States. So, even if we lost jobs on net balance in terms of movement in and out, we’d still have more jobs than we would have without all this process. It troubles me that very few people even attempt to weigh how many jobs we wouldn’t have except for this outsourcing in both directions.
Can you tell us a little bit about your new book, Economic Facts and Fallacies?
Oh heavens, I couldn’t hope to cover all the fallacies, so what I wanted to do was pick out a few and look at them in depth, mainly to show how plausible a fallacy can sound when you first hear it and how it can collapse like a house of cards when you look below the surface.
The biggest fallacy in terms of being the foundation of other fallacies, is what I call the zero-sum fallacy. That’s the notion if one party gains, the other party must lose when in fact, it would make absolutely no sense for the transaction to go on (voluntarily) unless both parties gained….
Mr. Sowell, I really appreciate your time…
Thank you very much. Goodbye.
10 Questions With Thomas Sowell (January 22nd, 2004)