Thomas Sowell speaks to TheDC about the financial crisis, health care, and his ideological transformation from Marxism to conservatism

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While you may need a forklift to get it on your nightstand, Thomas Sowell’s most recent edition of his popular guide to economics, “Basic Economics: A Common Sense Guide to Economics,” will aptly navigate all — from laymen to experts — through the treacherous subject that has seemingly stumped many as of late.

Dr. Sowell recently spoke about his book with The Daily Caller and offered his insight on some of today’s most vexing problems:

TheDC: Why did you decide to write the initialBasic Economics” and how does this, the Fourth Edition, differ from the earlier versions?

Thomas Sowell (TS): Well I guess the most obvious difference is the Fourth Edition is about twice the size and it would have been even bigger had I not taken 60 pages out of the Third Edition and put them on the Internet, which kept the Fourth Edition from looking like the Oxford English Dictionary.

Why did I write it? Because there was so much more that needed to be said. I added one new chapter, which was on the history of economics itself and all the kinds of issues that are raised when looking at economics as a field. I also have a large section on the economics of the corporation, particularly because of the news in recent years — which I put in the chapter “Big Business and Government.” But obviously there have been many other developments that needed to be taken care of and so the book just expanded on its own, as it were. In other words, I didn’t sit down to write a bigger book. I sat down to update some figures and see what else needed to be said, it just took off from there.

TheDC: In your book you write, “Profits may be the most misconceived subject in economics.” What are the primary misconceptions about profits and why are profits important? Why are they so demonized in our current culture?

TS: Wow. Gee. Do you have a couple of hours? It is true, and I think part of it is sheer repetition and I think sheer repetition carries a big weight, as Joseph Goebbels understood back in the Nazi era. Over and beyond that, there are certain misconceptions. One misconception is that profits are fundamentally different from other kinds of income. I’m always fascinated by people who say, you know, “this came from a non-profit organization,” as if it is an organization that is unbiased. No, just because one person’s income is called profits and other’s is called something else does not change anything fundamental.

The amount of profits that a business makes, that is the percent return on investment, is — when people are asked what they think it is they almost always grossly overestimate — usually it fluctuates around 10 percent, usually much lower than that. The profit that really affects the price is the profit on sales and that is really small — just pennies on the dollar. A supermarket for example can prosper by making one penny profit on each dollar sale because they have those cash registers going all the time. It adds up to a nice return on investments.

TheDC: Who do you think should be blamed for the financial meltdown? Fat-cat bankers, irresponsible borrowers, government?

TS: I would say all of the above. The question is, how much? If you are asking what drove it, it originated in the idea that the government could make housing “more affordable” by intervening in the market. All the evidence….shows that housing has been far more affordable where there has been the least government intervention. It has been most unaffordable in places where the government comes in very heavily, as in coastal California and preeminently San Francisco.

In the process of trying to make housing more affordable, they lean on lenders to lower the standards for lending to people and that really is the crucial factor. Without that, the rest of the crisis wouldn’t have happened. Other people made their mistakes that added to it, but the crucial mistake was the government forcing the lending institutions to lower their lending standards. And of course when you lower the lending standards people default.

TheDC: There is an argument on the left that says in order to overcome an economic crisis, the government must spend more. Is this the case? How should we rehabilitate the economy?

TS: We shouldn’t be rehabilitating the economy, we should be leaving the economy alone. History shows it rehabilitates itself much faster than when the politicians intervene. Most people are unaware that for more than a century after the founding of this country, the federal government did not consider it its job to intervene when there was a downturn in the economy. Those downturns ended much faster than the downturns where the government intervened.

TheDC: What are the practical implications of our high deficit? Is it too late to do anything about it?

TS: It is never too late. The question is how likely it is that what is done will make things better for us. The high deficit can be [a big deal]. It depends on whether it is high in absolute numbers or high relative to the gross domestic product. Out current deficit is high in both those respects and it shows every prospect of growing higher. We already have the highest deficit that has ever been created in peace time, not only absolutely, but relative to the Gross National Product (GNP), in other words our GNP is much higher, but even relative to that it is a run away.

The big problem of course is the deficit can not be considered in isolation. The question is, what are you going to do about it? And if what you are going to do about it is simply raise the tax rates, then you are off to a whole new set of problems that mean that recovery is unlikely to occur anytime soon.

TheDC: What do you see as the best way to responsibly reduce government spending?

TS: Politicians, whenever they want to weasel out of some big spending problem, they say, “we’ll eliminate waste, fraud, and abuse.” Of course they never do it. But if they did eliminate waste, fraud and abuse, the government would shrink to a fraction of its size. There are whole departments that represent nothing but waste, fraud, and abuse. I would think for example the Department of Labor, Health and Human Services, you could run through a whole list of them. So the question is not whether there are a lot of things that are expendable from the standpoint of the public interest, the question is whether anyone has the political will to take on the special interests — who are going to defend to the death their particular branch of the waste, fraud, and abuse.

TheDC: Should we be concerned about the trade deficit? And in that vein, China: friend or foe?

TS: I don’t think nations have friends. They do have foes. In some respects China is a foe and in some respects it is not. The whole idea of friendship between nations just grates to me. When I hear that phrase it is like hearing chalk scraping across a blackboard. I cringed when George W. Bush spoke of, “my friend Vladimir Putin.” Countries don’t have friends, they have alliances for the convenience of the moment, and when the moment passes they have different alliances.

The trade deficit is not something I would lose a lot of sleep over. If you look at history, for example during the Great Depression of the 1930s we had a trade surplus every single year. It didn’t help us get out of the Great Depression. By the same token, during the prosperity of the nineties we had a trade deficit every year, and that didn’t stop the prosperity. Those words [trade deficit] have a lot more emotional impact than they have economic impact.

TheDC: Politicians make a lot of noise about the large gap between the “rich” and the “poor” and how “unfairly” income is distributed — a CEO making more than a teacher, etc. How do we justify, do we need to justify, such discrepancies in income and is the gap between the “rich” and the “poor” a big deal?

TS: One of the things that is sad about this is people don’t even define what they mean by rich and what they mean by poor. They usually talk in terms of comparing two different income brackets. And the problem with that — when you are comparing income brackets, or any other statistical category, you are not necessarily comparing flesh and blood human beings and that is because people move from these brackets, from one to another, over the course of their lifetime. So most Americans are in the bracket defined as “poor” when they start out, in their entry level jobs, and somewhere in their peak, sometime in their fifties or sixties, they are in one of the brackets the media and others call “rich.” But they were not rich or poor in either case.

One of the true hallmarks of dishonest statistics are citations of household income. And that is because households contain radically different numbers of people from one income class to another, from one time period to another, from one race to another, etc. For example in the top 20 percent of households there are 64 million people, in the bottom 20 percent there are 39 million people. So we are comparing apples and oranges from the beginning. If you talk in terms of people who work, there are more heads of households that work in the top 5 percent than there are in the bottom 20 percent. So how big of an injustice is it that people who work have more money than people who don’t work?

Age is huge in these things. Most of the people who are at or near the minimum wage are from 16 to 24 years of age. We do not need a government program to stop them from staying 16 to 24, they are going to grow out of that regardless of what the government does. So a lot of this is frankly just hogwash.

TheDC: During a press conference about the economy in 2009 Obama said this: “We have a long-standing critical problem in our health care system that is pulling down our economy. It’s burdening families, it’s burdening businesses, and it is the primary driver of our federal deficits.” Is health care really the primary driver of our federal deficits? If so, why? And is the president’s health care reform law the best way to rectify that?

TS: Health care as such is not driving the federal deficit. It is the insistence of the federal government to inject itself into the health delivery system that creates costs for the private system and then creates costs for the federal government when they insist on setting up entitlements rather than allowing these things to take care of themselves in the market.

Another thing the government could do if it were serious, and it is one of the signs that it is not is, is simply make it much more difficult for lawyers to sue doctors and hospitals. It is not just the multimillion dollar settlement fees they get out of these lawsuits. It is the fact that so much of medicine has become defensive medicine — expensive tests are done that would never be done if all you were concerned about was the welfare of the patient, but which are done because the doctors and the hospitals cannot risk being ruined financially by having something happen and having some clever lawyer get up before a jury and tell them, “if only he had done this or that test we would have solved the problem.”

John Edwards got rich saying all these birth defects were due to the fact that the birth was not by Cesarean section. As a result of that there have been an explosion in the number of birth by Cesarean sections. The conditions that John Edwards’s cases involved did not change in the slightest. All it did was drive up the cost of health care and increase the risk for the women and babies.

TheDC: I read that you identified yourself as a Marxist in your college days. What prompted your change in ideology?

TS: I was a Marxist I guess for a decade from about the time I was 20 to 30 roughly. What changed my mind was not anything I had read. I was a Marxist when I went into Milton Friedman’s course at [the University of] Chicago and I was a Marxist when I came out of it.

What changed me was working as an economic intern in the government in 1960 and discovering what the government bureaucracies were like in terms of their motivations and how they do their job. I immediately realized government is not the answer. Life taught me. I think that is true for most people.

Most of the leading conservatives were not conservatives when they were young. Milton Friedman was a liberal, he even described himself in his autobiography as Keynesian in his thinking. Friedrich Hayek was a socialist. Ronald Reagan was so far left that the FBI was keeping an eye on him. So you run through the list — of course the whole neoconservative movement was on the left initially. And the same thing happened in Europe and elsewhere. A lot of the indoctrination that takes place in educational institutions begin to erode when people get into the real world and start thinking for themselves.