Naked Economics by Wheelan, Charles (best books to read .TXT) 📗

Wal-Mart because the store offers an amazing range of products cheaper than they can be purchased anywhere else. This is a good thing. Being able to buy goods cheaper is essentially the same thing as having more income. At the same time, Wal-Mart is the ultimate nightmare for Al’s Glass and Hardware in Pekin, Illinois—and for mom-and-pop shops everywhere else. The pattern is well established: Wal-Mart opens a giant store just outside of town; several years later, the small shops on Main Street are closed and boarded up.

Capitalism can be a brutal, cruel process. We look back and speak admiringly of technological breakthroughs like the steam engine, the spinning wheel, and the telephone. But those advances made it a bad time to be, respectively, a blacksmith, a seamstress, or a telegraph operator. Creative destruction is not just something that might happen in a market economy. It is something that must happen. At the beginning of the twentieth century, half of all Americans worked in farming or ranching.15 Now that figure is about one in a hundred and still falling. (Iowa is still losing roughly fifteen hundred farmers a year.) Note that two important things have not happened: (1) We have not starved to death; and (2) we do not have a 49 percent unemployment rate. Instead, American farmers have become so productive that we need far fewer of them to feed ourselves. The individuals who would have been farming ninety years ago are now fixing our cars, designing computer games, playing professional football, etc. Just imagine our collective loss of utility if Steve Jobs, Steven Spielberg, and Oprah Winfrey were corn farmers.

Creative destruction is a tremendous positive force in the long run. The bad news is that people don’t pay their bills in the long run. The folks at the mortgage company can be real sticklers about getting that check every month. When a plant closes or an industry is wiped out by competition, it can be years or even an entire generation before the affected workers and communities recover. Anyone who has ever driven through New England has seen the abandoned or underutilized mills that are monuments to the days when America still manufactured things like textiles and shoes. Or one can drive through Gary, Indiana, where miles of rusting steel plants are a reminder that the city was not always most famous for having more murders per capita than any other city in the United States.

Competition means losers, which goes a long way toward explaining why we embrace it heartily in theory and then often fight it bitterly in practice. A college classmate of mine worked for a congressman from Michigan shortly after our graduation. My friend was not allowed to drive his Japanese car to work, lest it be spotted in one of the Michigan congressman’s reserved parking spaces. That congressman will almost certainly tell you that he is a capitalist. Of course he believes in markets—unless a Japanese company happens to make a better, cheaper car, in which case the staff member who bought that vehicle should be forced to take the train to work. (I would argue that the American automakers would have been much stronger in the long run if they had faced this international competition head-on instead of looking for political protection from the first wave of Japanese imports in the 1970s and 1980s.) This is nothing new; competition is always best when it involves other people. During the Industrial Revolution, weavers in rural England demonstrated, petitioned Parliament, and even burned down textile mills in an effort to fend off mechanization. Would we be better off now if they had succeeded and we still made all of our clothes by hand?

If you make a better mousetrap, the world will beat a path to your door; if you make the old mousetrap, it is time to start firing people. This helps to explain our ambivalence to international trade and globalization, to ruthless retailers like Wal-Mart, and even to some kinds of technology and automation. Competition also creates some interesting policy trade-offs. Government inevitably faces pressure to help firms and industries under siege from competition and to protect the affected workers. Yet many of the things that minimize the pain inflicted by competition—bailing out firms or making it hard to lay off workers—slow down or stop the process of creative destruction. To quote my junior high school football coach: “No pain, no gain.”

One other matter related to incentives vastly complicates public policy: It is not easy to transfer money from the rich to the poor. Congress can pass the laws, but wealthy taxpayers do not stand idly by. They change their behavior in ways that avoid as much taxation as possible—moving money around, making investments that shelter income, or, in extreme cases, moving to another jurisdiction. When Bjorn Borg dominated the tennis world during my childhood, the Swedish government taxed his earnings at an extremely high rate. Borg did not lobby the Swedish government for lower taxes or write passionate op-eds about the role of taxes in the economy. He merely transferred his residence to Monaco, where the tax burden is much lower.

At least he was still playing tennis. Taxes provide a powerful incentive to avoid or reduce the activity that is taxed. In America, where much of our revenue comes from the income tax, high taxes discourage…income? Will people really stop or start working based on tax rates? Yes—especially when the worker involved is the family’s second earner. Virginia Postrel, a columnist on economics for the New York Times, has declared that tax rates are a feminist issue. Because of the “marriage tax,” second earners in families with high household incomes, who are more likely to be women, pay an average of 50 cents in taxes for every dollar they earn, which profoundly affects the decision to work or stay home. “By disproportionately punishing married women’s work, the tax system distorts women’s personal choices. And by discouraging valuable work, it lowers our overall standard