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Monday, January 1, 2007

Smart Economics: Commonsense Answers to 50 Questions about Government, Taxes, Business, and Households


Praeger • 2005 • 202 pages • $34.95

Thanks to a steady diet of misinformation from teachers, politicians, and the media, most Americans believe a great many false ideas regarding the economy. Many believe, for example, that a “single-payer” health-care system would improve care and lower costs, and that the collectivist pitch line “the rich are getting richer while the poor are getting poorer” is true. Ideas like that incline people toward the acceptance of policies that increase the size and power of the state—to the detriment of us all.

In an effort to counteract economic misunderstanding, North Carolina State University economics professor Michael Walden has written Smart Economics: Commonsense Answers to 50 Questions About Government, Taxes, Business, and Households. It consists of 50 short essays, usually about three pages in length, each of which takes on a common misconception rooted in people’s lack of economic sophistication. The virtue of the book is that it so easily and clearly identifies the errors in reasoning that lead so many Americans astray. If everyone read and understood Smart Economics, politicians and interest groups would have a much more difficult time hoodwinking the country into supporting statist, interventionist measures.

Walden is not trying to promote any political agenda of his own. In fact, his chief motive in writing the book is to depoliticize economic thinking. He rues the fact that partisans on the left and right use deceptive economic arguments to advance their preferences for action by the state. Walden just wants Americans to be able to see through fallacious economic arguments.

Here’s a sampling from the book.

In one chapter Walden asks whether budget deficits cause interest rates to rise. Politicians and others who want an excuse to raise taxes often point to the massive budget deficits of the federal government and say, “If we don’t do something about that, government borrowing to cover the deficit will drive up interest rates, and that would be bad.” (Hardly ever do we hear the logical conclusion that the government should spend less!) Walden demolishes the supposed connection between budget deficits and interest rates with empirical evidence (sometimes rates go down when deficits are large and sometimes they go up when deficits are small) and with economic reasoning (federal borrowing is just one of many factors that affect interest rates).

In another chapter the author tackles the notion that war is an economic stimulus. Lots of Americans believe, for example, that it was the huge federal spending of World War II that finally brought the country out of the Great Depression. Walden explains the crucial concept of opportunity cost to shatter that myth. “Spending $1 million on artillery shells to blow up targets leaves nothing in return, whereas spending that same million on new factory technology can pay dividends to the business for years to come.”

Or consider this recent governmental fad—laws against “price gouging.” Most Americans think that such laws are good, allowing politicians to revel in the publicity that they have done something to “protect” people hurt by natural disasters from the added injury of greedy businesses raising their prices. Such laws, however, are actually damaging. “Higher prices,” Walden writes, “are like a bright light signaling to manufacturers and dealers that more money can be made by selling their wares in the disaster-ravaged region.” Exactly so.

What about profits? Many people are inclined to think that prices would be lower if only businesses didn’t try to make a profit. Their misunderstanding helps anti-market politicians when they propose “windfall profits taxes” and price controls. Walden does an excellent job in showing that the search to make the most profit in a free market actually keeps costs down and quality up.

Other topics covered in Smart Economics include corporate taxation, free trade and the imaginary harm of having a “trade deficit,” whether the United States should strive for energy self-sufficiency, the notion that American manufacturing is dying, the supposed inability of American workers to compete with low-wage workers in developing countries, the belief that under capitalism “the rich get richer and the poor get poorer,” and the myth that government intervention can lower health-care costs for people.

Only rarely does Walden fail to cut right to the heart of an issue, but I’ll cite one instance. In discussing the idea that more spending on public schools will improve student performance, he writes that it can “as long as that spending is done in the classroom.” Given the socialist structure of public education, I don’t think there is reason to believe that more spending anywhere necessarily leads to improvement. By failing to discuss the inherent flaw in government schooling, Walden missed the jugular.

Nevertheless, this book is a splendid effort. Get a copy for friends who need to be gently steered away from their economic myths.


  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.