Economics in a Nutshell
Economics writer Henry Hazlitt does a great job explaining complex issues simply in "Economics in One Lesson". Although the book was first published in 1946, it’s more relevant today than ever.
The book centers on the inability of many politicians, economists and other "experts" to consider two points: (1) long-term results and (2) the community-wide impact of the public policies. Many of the "magic recipes" of economists err in one or both aspects.
For example, thinking that public spending will spur economic activity on its own is a major fallacy for one simple reason: the resources come from one of two sources: higher taxes or greater public debt. The former will necessarily displace private spending, which is always much more efficient than public spending. And more debt breaks with the pact between generations.
When the political elite argue in favor of a tax increase, they always promise greater well-being for all. However, this rarely happens for two reasons: government projects rarely meet intended expectations ̶ often because of incompetence, lack of control, or corruption ̶ and tax increases must be paid by families or companies. The government does not have a magic wand to generate wealth. And if it resorts to printing money, the only thing created is inflation, which is the worst of all taxes.
When a parent pays 1,000 pesos more in taxes, he or she is sacrificing something for the family, such as food, transportation, better educational opportunities, or maybe just taking in a movie or going on vacation. The political elite have no right to question the free will of families and the way they spend their money.
Meanwhile, companies give up one of two things: investment or shareholder dividends. If they sacrifice dividends, families will be affected, with the consequences we previously mentioned, and if they give up investment projects, the result will be a decrease in the productivity of the national economy and less job creation, which is what we have seen since 2014: stagnation in productive investment.
Taken to the extreme, this results in companies that are poorly capitalized and unable to compete in the global economy. In response, the next goal of a populist is protectionism, with terrible consequences for society as a whole.
Politicians typically lecture us on the "common good," of the "nation’s welfare," or similar abstract concepts ̶ which they rarely manage to materialize ̶ and offer us fantasies and tangible harm to family well-being. Increases in taxes are rarely justified and usually hamper economic development.
Another fallacy that Hazlitt tears to shreds is the notion that import tariffs " protect industry and therefore jobs." This idea has become fashionable north of the Rio Grande, but in reality, it is a broken record dating back more than 300 years and it has always failed. Tariffs only benefit a handful of industries, and in fact help some of the worst, namely those that are unable to produce world-class goods.
Let’s suppose I am an "industrialist" who produces poor-quality, uncomfortable shirts. No doubt, people will prefer soft, higher-quality shirts even if they are imported. Nevertheless, what if I form a business group to pressure the government and impose a 35% tariff on shirt imports?
Our infallible argument is job protection. Indeed, who can oppose the reasoning? This powerful argument could lead to tariffs on shirts, with some consumers enduring discomfort and bad appearance to save a few pesos, and others paying 1,350 pesos for a shirt they could have previously bought for 1,000 pesos.
Who wins and who loses? Of course, some jobs will be "saved" and the industrialists involved will be able to generate greater profits, at the cost of general well-being.
At the same time, millions of people will go through life wearing uncomfortable and ugly shirts, while others will sacrifice the consumption of other goods to avoid the embarrassment and annoyance of the inferior product.
The industrialists who produce the sacrificed goods will see their earnings diminished and will cut jobs, which quickly deflates the "preserving employment" argument. Meanwhile, purchases of shirts will necessarily be reduced because these products will now be bad and/or expensive. The well-being of millions of people will be affected in exchange for retaining some barely competitive jobs and generating extraordinary profits for a few inefficient industrialists. These are not the incentives we need to create world-class industries.
Another argument that has gained adherents among populists north of the border is that increasing public spending on infrastructure will necessarily benefit society. Once again, to finance this new spending, you must raise taxes or increase debt and we’ve already discussed the terrible consequences of either of these two measures.
Governments also tend to have terrible track records in terms of adjusting budgets, completing projects satisfactorily, and calculating their benefits. Frequently we see bridges that go nowhere, badly built highways that require continuous maintenance, airports where a single flight a day arrives, and hospitals or sports centers that are abandoned a few months after being opened. And let’s not get started on the useless and abominable border wall between the United States and Mexico.
At least in Mexico, we have racked up billions of dollars in public works projects of little or no value. All this has been paid with resources that were taken away from companies or families and could have been earmarked for more productive purposes.
Applying Hazlitt's lesson, not only do the arguments in favor of public spending and tariffs collapse, but many others as well, such as: (1) the alleged dangers of technological change; (2) the advantages of creating public jobs; (3) the obsession with promoting exports at all costs and avoiding imports; (4) the benefits of establishing a minimum wage; (5) the "fair price" fallacy; (6) the obsession to save strategic industries; (7) the advantages of the war economy, and many other common fallacies.
"Economics in One Lesson," is a must read in times of "alternative truths" and "fake news," in which discussions about public policy are increasingly expressed in 140 characters.