Controversial Essays

by Thomas Sowell

  Another great Indian industrial empire, that of the Birla family, was likewise refused the government permissions needed to expand. The net result was that they bought pulp in Canada, had it converted to fiber in Thailand, had the fiber converted to yarn in Indonesia and then had the yarn made into carpets in Belgium. All the while, India remained a very poor country in need of economic growth and the jobs and incomes that these operations could have provided.

  At one time, it was a violation of the law to produce more output than you were authorized to produce by the government. A manufacturer of cold medicines was fearful that his sales had overshot the mark during a flu epidemic and had to have a lawyer spend months preparing a legal defense, in case he was hauled before a government commission.

  Gurcharan Das is careful to point out that these and many other economically disastrous policies grew out of good intentions. Indian leaders from Jawaharlal Nehru to his daughter Indira Gandhi put their faith in the government-planned economy and distrusted both businesses and the consuming public. What they lacked in any serious knowledge of business or markets they made up in socialist dogma and smug self-righteousness.

  When the head of the Tata industries tried to explain some facts of life to Nehru, the prime minister's response was: “Never talk to me about profit, Jeh, it is a dirty word.”

  Though the Indian statist leaders thought of themselves as looking out for the poor, their policies have been estimated to have held back economic development to the point where the average Indian's income would have been hundreds of dollars a year greater without their restrictions. In a country with millions of very poor people, some suffering from malnutrition, the loss of a few hundred dollars in annual income meant far more than it would have meant to the average American.

  Like so many socialistic policies around the world, those in India were not relaxed or ended because of better understanding but because of bitter experience. When these policies had the Indian government on the verge of bankruptcy, its leaders had no choice but to make fundamental changes in the economy, in order to qualify for help from the International Monetary Fund and the World Bank.

  After the 1991 reforms freed Indian entrepreneurs from suffocating government controls, the economy took off. Growth rates reached new heights, Indian businesses expanded and foreign investments poured in. The kind of hi-tech success that Indians had achieved in Silicon Valley they now began to achieve in India.

  Although this is a book about India, many of its lessons are universal—and have not yet been learned by American political, intellectual and media elites.

  CAPITAL GAINS AND “TRICKLE DOWN”

  Among the suggestions being made for getting the American economy moving up again is a reduction in the capital gains tax. But any such suggestion makes people on the left go ballistic. It is “trickle-down” economics, they cry.

  Liberals claim that those who favor tax cuts and a free market want to help the rich first, hoping that the benefits they receive will eventually trickle down to the masses of ordinary people. But there has never been any school of economists who believed in a trickle-down theory. No such theory can be found in even the most voluminous and learned books on the history of economics. It is a straw man.

  This straw man is not confined to the United States. A critic of India's change from a government-dominated economy to more free market activity in the 1990s accused those behind this change of having “blind faith in the ‘trickle-down' theory of distributing the benefits of economic growth among different socio-economic groups in the country.” But free-market economics is not about “distributing” anything to anybody. It is about letting people earn whatever they can from voluntary transactions with other people.

  Those who imagine that profits first benefit business owners—and that benefits only belatedly trickle down to workers—have the sequence completely backwards. When an investment is made, whether to build a railroad or to open a new restaurant, the first money is spent hiring people to do the work. Without that, nothing happens. Money goes out first to pay expenses and then comes back as profits later—if at all. The high rate of failure of new businesses makes painfully clear that there is nothing inevitable about the money coming back.

  Even with successful businesses, years can elapse between the initial investment and the return of earnings. From the time when an oil company begins spending money to explore for petroleum to the time when the first gasoline resulting from that exploration comes out of a pump at a filling station, a decade may have passed. In the meantime, all sorts of employees have been paid—geologists, engineers, refinery workers, truck drivers.

  Nor is the oil industry unique. No one who begins publishing a newspaper expects to break even—much less make a profit—during the first year or two. But reporters and other members of the newspaper staff expect to be paid every payday, even while the paper shows only red ink on the bottom line.

  In short, the sequence of payments is directly the opposite of what is assumed by those who talk about a “trickle-down” theory. As for capital gains, some countries don't tax capital gains at all. They tax a business' earnings, but not capital gains, which are harder to define and sometimes illusory.

  The real effect of a reduction in the capital gains tax rate is that it opens the prospect—only the prospect—of greater future net profits. But that is enough to provide incentives for making current investments. Reductions in the capital gains tax rate tend to draw money out of tax shelters like municipal bonds and into creating jobs and productive capacity. That's the point!

  As with all taxes, a distinction must be made between tax rates and tax revenues. Tax revenues went up while tax rates went down in the 1980s. Similarly in the 1960s and the 1920s. That is because incomes rose more than tax rates fell. But still it will be claimed that we cannot “afford” to cut tax rates because it would create deficits. Spending creates deficits—and it is big spenders who fight hardest against cutting tax rates.

  It is not faith but empirical evidence that is overwhelming on the actual track record of tax cuts and free markets. By the 1980s, this mounting evidence convinced even left-wing governments in various parts of the world to cut back government operations and sell government-owned enterprises to private industry. Faith had nothing to do with it.

  In India, in the decade since the 1991 economic reforms which were condemned as “blind faith,” the country's economic growth rate has soared. It has been estimated that the real blind faith—in government planning—had cost the average Indian hundreds of dollars a year in income during the decades when socialist dogma ruled. In a poor country like India, this was income they could not afford to miss. Even in a prosperous country like the United States, there is no need to forego economic benefits for the sake of a political phrase.

  NO SENSE OF PROPORTION

  Mathematicians use the term “rational numbers” for numbers that can form a ratio. By this definition, there is a lot of irrationality in California, where many people seem incapable of forming a ratio or proportion between different things.

  California's electricity crisis is a result of years of refusing to have any sense of proportion between the desirability of environmental goals and the desirability of having electricity. Yet apparently the state's politicians have learned nothing from any of this.

  Having provoked an electricity crisis and a financial crisis by imposing impossible conditions on public utilities, the California government is now imposing similarly irrational conditions on the automobile industry by requiring them to produce a certain quota of electric cars for sale in the state, as a precondition to their selling any other cars in California.

  The purpose of the electric cars is to reduce the air pollution created by cars that burn gasoline. Obviously, no one is in favor of polluted air, but the question is whether the desirable goal of reducing pollution is to be pursued in utter disregard of other desirable things.

  Electric cars may be fun at amusement parks, where the
y don't have to go very far or very fast. But if the consuming public wanted electric cars for regular use, Detroit would be manufacturing them by the millions. Only people infatuated with their own wonderful specialness would think that their job is to coerce both the manufacturers and the consuming public into something that neither of them wants.

  California seems to have more than its fair share of self-infatuated people proclaiming utopian notions. Worse yet, such people are indulged by the media, the political system and the courts, while the enormous costs they create are quietly loaded onto unsuspecting consumers and taxpayers.

  Somebody is going to have to pay for these electric cars that the public does not want. State agencies can buy some of them with the taxpayers' money. Some private individuals and organizations may be subjected to pressure from the state government to buy them. And some electric cars may just sit on dealers' lots or in storage, gathering dust. But they are still all going to have to be paid for by somebody because there is no free lunch.

  Maybe those who imposed these new requirements think that the automobile companies can be forced to absorb the losses. Imposing costs on people out of state is a ploy that has been tried before with electricity. But apparently some people never learn.

  Nothing is easier than glib enthusiasm for the benefits of electric cars—and some of those benefits may even be real. But there is still the need to have a sense of proportion, because there are other benefits that will have to be sacrificed and other costs that will have to be paid.

  Electric automobile engines are not powerful enough to move full-size cars at any reasonable speed, so that means people have to drive around in flimsy vehicles that can easily become death traps in an accident. Make no mistake about it, air pollution increases the incidence of fatal diseases. But will more people die from that than from traffic deaths in flimsy cars? People who are crusading for electric cars are not interested in that ratio.

  Cars running on electricity may create no air pollution themselves, but the electricity has to come from somewhere to charge and re-charge the batteries that run these cars. What difference does it make if the car itself creates no pollution but the pollution occurs at an electric power plant, miles away, that is the ultimate source of the energy that moves the car?

  Why doesn't the public want to buy electric cars? Because in real life you have to be able to get where you want to go, in some reasonable time, whether or not your destination is within the narrow range of an electric car's batteries. And you want to be able to turn around and come back when you are ready, not have to wait for hours to re-charge your batteries for the return trip.

  You may not get there at all if you are oozing down a highway in a fragile little vehicle that is out of sync with the fast-moving heavy traffic around you. But none of this matters to people who are not in the habit of weighing one thing against another. Nor do such people want to allow other people to weigh one thing against another for themselves, rather than have their choices dictated from on high. No sense of proportion.

  HEADLINE NEWS

  The obvious continues to make headlines in California. “Federal price limits backfire” read the big front-page headline in the San Francisco Chronicle. These price limits are the federally imposed “caps” on electricity prices that California Governor Gray Davis has been clamoring for, backed up by Congressional Democrats.

  “Some generators withhold power rather than abide by rate caps” the news story said. Where there are high costs of generating or transmitting electricity, the price caps in western states can make selling electricity to these states unprofitable or even create losses for the electricity suppliers.

  Although officials in both California and Nevada had urged the Federal Energy Regulatory Commission to impose price controls on electricity, they now concluded that “the newly imposed limits have had the unintended consequence of increasing a threat of blackouts in the two states.” In other words, people supply less when you reduce the price they will be paid. This news is literally thousands of years old.

  People withheld supplies when price controls were imposed in the days of the Roman Empire. George Washington's troops nearly starved at Valley Forge when price controls were imposed on food. During the French revolution, there were likewise price controls on food, with the result that “as soon as we fixed the price of wheat and rye we saw no more of those grains.”

  When President Nixon imposed controls on meat prices in 1973, much American cattle began to be exported, mostly to Canada, rather than being supplied to the U.S. market. Price controls on gasoline had motorists waiting in long lines at filling stations, sometimes for hours. But there have been no such gas lines for the past 20 years, since Ronald Reagan got rid of these price controls as one of his first acts after becoming president in 1981.

  Price controls have had the same effect around the world, for centuries on end, among people of every race, color and creed, and under governments ranging from the most democratic to the most totalitarian. Why then is everyone so surprised that price controls on electricity in the western states seem to be reducing the supply of electricity there, creating rolling blackouts in Nevada and threatening more of the same in California?

  Part of the reason—aside from widespread ignorance of both economics and history—is that a very successful political propaganda campaign has depicted opposition to price controls as being based on nothing but “ideology” or “theory.” These words were repeated endlessly in the media by Democrats in California and Washington, as they sought to pressure the Federal Energy Regulatory Commission to impose price controls, or at least embarrass President Bush for opposing such controls.

  Far from being a theory or an ideology, the effects of price controls on supply have been confirmed by facts as consistently as anything outside the realm of pure science. What the attempt to reduce this to mere ideology is saying is that there couldn't possibly be any real reason to be against price controls, unless you were just a lackey for the power companies.

  This whole political game has been played before—and with disastrous effects for the public. One of the reasons price controls on oil were not repealed when other price controls were ended back in the 1970s was that a political propaganda campaign had demonized oil companies as the cause of the shortage of gasoline.

  All sorts of charges and rumors were spread about the nefarious machinations of oil companies as the cause of all our troubles. Extensive government and private investigations failed to substantiate any of these charges and rumors. Nevertheless, the smear stuck and no politician wanted to be seen as caving in to Big Oil by ending price controls on petroleum.

  In other words, a wholly needless problem of shortages was created and sustained by the demonizing of those who produced the product that was needed. That is exactly what is now happening with electricity.

  Scarcely a day goes by without California Governor Gray Davis making sweeping accusations against electricity suppliers—“robber barons” he calls them—and the polls show that these accusations are working. California's attorney general is threatening lawsuits and criminal indictments against power companies. All this is great political theater but none of this will keep the lights on or the machinery of industry running.

  WARRIOR IN A 200-YEAR WAR

  The death of Julian Simon was a special loss because he was one of those people who took on the thankless task of talking sense on a subject where nonsense is all the rage. A professor of economics at the University of Maryland, Julian Simon wrote fact-filled books about population—all of them exposing the fallacies of those who were promoting “overpopulation” hysteria.

  Ironically, Professor Simon's death occurred during the 200th anniversary of Malthus' Essay on the Principle of Population which started the hysteria that is still with us today, despite two centuries of mounting evidence against it. Like so many other theories that can survive tons of contrary evidence, overpopulation theory relies on slippery definitions and a constituency that n
eeds a mission more than it wants facts.

  What Malthus said two centuries ago was that human beings have the potential to increase faster than the food needed to feed them. No one doubted this—then or now. From this he made the fatal leap across a chasm of logic to say that there was a real danger that people would in fact grow so fast as to create a problem of feeding them.

  The truism that the capacity to produce food limits the size of the sustainable population does not mean that population is anywhere near those limits. No automobile can drive faster than the power of its engine will permit, but you cannot explain the actual speeds of cars on roads and highways by those limits, because only an idiot drives at those limits.

  Julian Simon set out to explain what happened to real population in the real world, not what happens in abstract models or popular hysteria. In the real world, as he demonstrated with masses of facts and in-depth analysis, we are nowhere near to running low on food or natural resources.

  Professor Simon made a famous bet with the leading hysteria-monger of our time, Paul Ehrlich of Stanford University. Simon had offered to bet anybody that any set of natural resources that they claimed were running low would in fact be cheaper in the future than today. Professor Ehrlich took him up on it. Simon allowed Ehrlich to pick which resources and which period of time.

  Ehrlich and his fellow hysterics chose a bundle of ten natural resources and a period of ten years. At the end of the decade, not only was the real cost of that bundle lower than at the beginning, every single natural resource that the Ehrlich camp had picked had a lower real cost than when the decade began.