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Fellows with Friedman

What Drives Economic Progress

Thomas Sowell 

Watch this interview with Thomas Sowell, “Discrimination And Disparities With Thomas Sowell” where he discusses his book Discrimination and Disparities and breaks down economic principles about free trade, income inequality, and why the ideas of socialism are inherently wrong. He says that the socialist notion that capitalists grow rich by exploiting the poor has never been proved. He points out that if the socialist idea is true then “in a country with lots of billionaires, you should correspondingly have great amounts of poor people. But if you compare the actual data, there are more billionaires in the United States than in Africa and the Middle East put together, and yet the standard of living of the poor in the United States is higher than that of people in Africa and the Middle East.” Therefore, income inequality does not inherently prove that the wealthy are profiting off the poor. 

Watch Thomas Sowell in, “Thomas Sowell On The Myths Of Economic Inequality,” where he discusses economic inequality, racial inequality, and the myths that have continued to falsely describe the system of poverty among different racial and economic classes. He breaks down why income inequality and poverty are not as simple as the rich getting richer and the poor getting poorer. He discusses how governments operate by their own self-interests, not in the interests of the people they serve. He explains the economic theories behind these pervasive myths and proposes fact-based solutions for seemingly intractable situations. 

Read Thomas Sowell’s article, “Socialism for the Uninformed” where he breaks down the myths of socialism versus capitalism and how capitalist societies have made their citizens wealthier overall. Sowell argues, “people who attribute income inequality to capitalists exploiting workers, as Karl Marx claimed, never seem to get around to testing that belief against facts — such as the fact that none of the Marxist regimes around the world has ever had as high a standard of living for working people as there is in many capitalist countries.” Socialist countries that try to keep everyone equal in fact make the citizens poorer overall. Socialist ideas like high minimum wage laws reduce the number of workers that a company can hire, which raises unemployment rates and increase income inequality. 

Watch Thomas Sowell discuss his book, Wealth, Poverty, and Politics. In the interview, Sowell argues that political and ideological struggles have led to a dangerous confusion about income inequality in America. He debates the myths of inequality and argues that people cannot properly understand inequality if they focus on the distribution of wealth and ignore wealth production factors such as geography, demography, and culture. He maintains that what is important is not inequality but human capital; once human capital is unleashed it creates an enormous amount of wealth for people of all classes, reducing income inequality and improving the lives of everyone in the society. 

Read Thomas Sowell’s article, “Low Taxes Do What?” where he breaks down the necessity of free trade and how it can increase job employment and reduce inequality between two countries at once. He writes, “free international trade produces both the benefits of increased productivity and the adjustment problems that all other forms of increased productivity produce—namely, job losses in the less competitive firms and industries.” Free trade incentivizes market competition across countries which improves the quality of goods and services for everyone. 

John Cochrane

In the words of Milton Friedman, “there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by capitalism and largely free trade.” Indeed, as John Cochrane argues free trade is good for the U.S. economy as it allows Americans to buy better goods at lower prices and provides bigger markets where we can sell our goods. The more people you are connected with, the more you can grow. 

Finally, as we increase our number of trade partners, we see increased benefits from competition. Competition encourages innovation, which leads to lower prices and higher-quality products. You can learn more about the benefits of competition in this short story:

According to John Cochrane, current protectionist international trade treaties are not the best option. considers current international trade treaties and why there are other options of free trade available that could improve the popularity of trade deals. He states, “Our trade treaties have strong elements of managed mercantilism, not free trade, and can serve the interests of global corporations. There is a "better" trade that is also freer trade, and may address some of the political unpopularity of trade deals.” Better free trade deals between countries could better serve the interests of the global economy over the interests of global corporations. Read his full blog post, “Trade insight.”

The American economy’s biggest problem is growth. To achieve growth, Hoover Institution fellow John Cochrane argues,  America needs to simplify the tax code and deregulate the economy. He discusses how government agencies must conduct serious, transparent, and retrospective cost-benefit analyses, get rid of special interests, and remove disincentives if they want businesses to flourish. Cochrane notes that the US economy needs more innovation, deep tax reform, and better regulations to unleash growth. When business owners can depend on good policy and not pay for play, they will start and invest in their companies and the economy will expand. Watch the full interview with John Cochrane here

John Taylor

According to John Taylor, “a global monetary and financial system conducive to a stable global order has three attributes: (1) open capital markets, (2) flexible exchange rates between countries or blocs and (3) a predictable and transparent, or rules-based, monetary policy.” He argues that an open capital market, flexible exchange rates, and transparent rules based monetary policy helps grow the global economy in a stable manner. He states that these are the keys to sustaining an open and stable global financial order. 

After a generation of trade liberalizations, many Americans—on the left and the right—are having second thoughts. Free-trade agreements have lowered tariffs, reduced trade quotas, and strengthened trade relationships. And how have Americans benefited? For many, they only see fewer manufacturing jobs, shuttering of factories, and a large trade deficit. They have concluded that freer trade may not be all it is cracked up to be. 

But do these concerns rest on firm economic foundations, or are we merely repeating the mistakes of past generations that feared expanded trade? Click here to learn the about the benefits and downsides of free trade.

In additions to that, free trade connects us to more people and allows us to purchase better goods at a lower price. With bigger markets comes a bigger incentive to develop advanced technology. After all, the iPhone doesn’t get invented if it can only be sold to a few hundred people. In fact, the consequences of free trade are very similar to what happens when a new technology is invented. In both cases goods and services get better and more affordable for everyone, new jobs are created, and some jobs are replaced. So, the next time someone proposes new trade barriers, imagine instead that they had proposed outlawing a new invention.

Watch this short video on Trade and Immigration: Trade, Technology, And Jobs: How To Think About Free Trade:

Richard Epstein 

Check out Richard Epstein’s article,“The "Income Inequality" Warriors” where he argues against policies to reduce income inequality. He proposes that to truly reduce poverty, first proposals need to focus on the creation of wealth. He argues that is illusory “to think that it is possible to address questions of inequality without taking into account any productivity losses that these proposals may take. Those difficulties do not arise if the first emphasis is placed instead upon the creation of wealth. Indeed it is altogether possible to improve the position of the worst off in society by a set of productive measures that widen the income gap between rich and poor.” He argues for increasing wealth to reduce poverty and improve the conditions of society as a whole. 

Watch Richard Epstein analyze redistributive remedies for income inequality in this video.

He breaks down various policies for redistributing wealth and demonstrates how those policies will reduce the “the size of the pie” for everyone in society. Instead he argues for reducing taxation to increase opportunity and allow wages to increase which increases the size of the pie for everyone.

Read Richard Epstein’s article, “Trump Vs. Free Trade”, where he breaks down the disadvantages of protectionism and how free trade helps the global economy. He states, “Open trade among our states has produced growth and lowered costs for goods and services—and it could do the same at the level of nations. It would be a national disaster if states erected barriers to goods and services coming from other states.” He discusses protectionist policies from other countries and why those policies have prevented those countries from prospering, in addition to why notions of “fair trade” are often misinformed. 

According to Richard Epstein, attacking the free trade is wrong and spreads the misinformed idea that free trade increases poverty. He argues that free trade gives the federal government strong incentives to improve the economy through free market competition. He discusses why the best protection for workers to is an open economy that offers a variety of housing and employment options. Read his full article, “Defending Free Trade.”

David Henderson

According to David Henderson, “one of the biggest policy victories for the United States—and, indeed, for the world—over the last 60 years has been on international trade…the blossoming of freer trade has made both Americans and foreigners better off.” Henderson analyzes the fallacies surrounding free trade and the misinformation that leads politicians to preach protectionism. Protectionists frequently argue that outsourcing jobs to foreign countries and opening the border to exports hurts Americans. Henderson discusses why these ideas are misinformed and that in fact free trade can only benefit America. Read more in David Henderson’s article, “Trump’s Trade Fallacies.”

Check out David Henderson’s article, “Income Inequality Isn’t the Problem”, where he breaks down the income inequality debates and why they’re not as simple as politicians would have one believe. He argues that, “In any given year, there isn’t just one inventor or innovator. There are thousands. So each one’s success increases wealth inequality a little but also improves the well-being of tens of millions of people who are less wealthy.” Decreasing the wealth of some does not improve the wealth of all. Innovative goods and services created by one individual can make that person wealthy, while at the same time improving the lives of everyone who uses those goods and services. 

According to David Henderson, in his article, “AOC Versus Adam Smith,” new proposals to raise tax rates on the rich are doomed to increase poverty. He quotes Adam Smith, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” The vendors sell goods to earn money to pay for their own cost of living, not to better society with the goods themselves. The goods produced however improve society through free trade. Henderson argues that people will always look out for their own self-interest including in regard to paying higher taxes. This means that when tax rates are raised, people are less willing to earn higher salaries and therefore work less. 

Read David Henderson’s article, “The Case Against Higher Tax Rates,” where he analyzes the “deadweight loss” of high taxes on high-income Americans. He breaks down deadweight loss from taxes as “a loss imposed on some that is not a gain to anyone.” This loss is caused by people trying to avoid high tax rates by intentionally earning less money so they won’t lose it. High taxes incentivize tax payers to do make inefficient decisions they would not have made at a lower tax rate. When people work less, they produce less goods and services which decrease the amount of goods and services for others to buy. This decreases the overall wealth of everyone instead of growing the wealth of everyone. Decreasing tax rates incentivizes people to become higher earners, which in turn grows the overall economy. 

Russ Roberts 

Russ Roberts analyzes the arguments against free trade and breaks down why he believes people may find protectionism appealing, though misguided. He admits, that “If trade is about getting cheap stuff at the price of wrecking millions of lives, then the American people and its leaders would be right to reject it.” However, he argues that this idea is incomplete, and leaves out the most important and positive impact on people’s lives that trade provides, which is that it often improves the standard of living. He argues that while loss does happen, overall societal gains can be enormous. Free trade is a long-term solution, he says and “makes most of us better off and that in turn allows for growth and innovation that benefits almost all of us especially our children and grandchildren.” It allows for long term generational economic growth, improving society over time. Read the full essay by Russ Roberts, “The Human Side of Trade.”

Check out Russ Robert’s essay, “Why We Trade” where he discusses free trade and mercantilist ideas that Trade deficits—importing more than we export will lead to economic ruin. He examines the benefits of trade and trade deficits and the impact imports have on job market. Roberts says, “imports don’t destroy jobs. They destroy jobs in certain industries. But because trade allows us to buy goods more cheaply than we otherwise could, resources are freed up to expand existing opportunities and to create new ones. That’s why we trade—to leverage the skills of others who can produce things more effectively than we can, freeing us to make things we otherwise wouldn’t be able to afford.” Engaging in free international trade allows resources to be reallocated to new industries as innovation continues to create new job opportunities as society evolves. 

Lee Ohanian

In this article, “U.S. Needs A President Who Understands Benefits Of Free Trade” Lee Ohanian and Jesus Villaverde discuss the benefits of free trade and analyze the historical failure of protectionist policies as demonstrated by the protection of the U.S. auto, steel, and sugar industries which have never become competitive in the market. They argue that, “the historical record of American protectionism is one of chronically declining domestic industries, higher consumer prices and destroyed jobs.” History has proven that protectionism does nothing to help the global economy. Ohanian and Villaverde state, “The U.S. -- and the rest of the world -- would have more economic opportunities if there were fewer subsidies and fewer trade barriers.” Ending protectionism and reducing trade barriers can help the global economy in the long run. 

Edward Lazear

According to Edward Lazear in his essay, “The Zero-Sum Fallacy,” incomes rise or fall together and what moves them is economic growth. This refutes the idea that reducing the incomes of higher income individuals will raise the incomes of lower income individuals. Instead focusing on economic growth will improve the economy and increase wages for both high- and low-income individuals. He states “All groups’ earnings grow when the economy is prospering, and high growth is especially important for lower-income earners. Additionally, the lagging earnings among the least-skilled workers reflect deficiencies in demand for those workers—and this deficiency, crucially, is a result of low productivity.”