#124 The March of Foolish Things

Senate Majority leader Chuck Schumer wants to lower inflation by increasing taxes.  This is just one of many silly economics ideas that are part of what Thomas Sowell has called “The March of Foolish Things. 

 

Today’s podcast title comes from a Wall Street Journal headline way back in 2015.  It’s based on an interview with the great Thomas Sowell, whom I have declared our greatest living economist.  The title came to mind this week when Senate Majority Leader Chuck Schumer added to the foolish list the following quote, “If you want to get rid of inflation, the only way to do it is to undo a lot of the Trump tax cuts and raise rates.”  Sometimes the level of ignorance on economic matters is just astounding.  Take a look at the graph from my Macroeconomics textbook, authored by Gregory Mankiw.  Notice how the price is artificially increased by taxes when it moves from the equilibrium point on the blue line to the red line.  So Mr. Schumer is saying, “The way to lower prices is to raise prices.”  Kinda makes you wonder which Alice in Wonderland rabbit hole he’s stepped in, doesn’t it?

Ginger and I have this running discussion about determining God’s will for our lives.  The question goes something like, “How do you know when God is closing the door, or Satan is testing you?  Because, if God closed the door, you should stop.  But if Satan is in your way, you should push through.  Our general answer is: The closer you are to the Holy Spirit, the more clear these decisions are.  Ginger and I must not be very close, because we have trouble making some decisions.

You know, the same is true for economics.  When something SEEMS wrong, it probably is.  Or as Benjamin Franklin quipped, “When in doubt, don’t!”  Albert Einstein said, “Science is merely the refinement of everyday thinking.”  Raising prices to stop inflation is NOT everyday thinking.

 

When Prices go Up

I started my Macro class this semester by asking two students simple questions.  I walked into the classroom at 8:00 AM, and didn’t even say “Good morning,” “This is Macro,” or “I’m professor Arnott.”  I approached a young woman and asked, “What’s your name and how much did you pay for the coffee?”  She answered, “Shelby, $4.00.”  I turned to a young man across the aisle and asked “What’s your name, and if the cost of coffee goes up this semester, will Shelby buy more or less?”  His name is Caleb, and he surmised that if the cost of coffee went up, Shelby would buy less.  For the rest of the semester, we called it “The Shelby Rule,” sometimes “The Caleb Rule.”  “Well,” I announced, Caleb has been studying economics for 45 seconds and he knows more about it than President Obama, who edited the Harvard Law Review and was elected President of the United States twice.  President Obama claimed that when you raise the minimum wage, employment goes up.  

Notice the diagram again: As prices go up, less is demanded. The diagram shows the quantity going from 100 to 90.  When you artificially increase the price the quantity demanded decreases.  Back to my story: Then I turn to the class and ask, “Who’s right, your fellow student Caleb or President Obama?”  Some students mumbled, “Caleb.”  And I announced, “Welcome to Macroeconomics,” where a 20-year-old DBU student knows more than a President who earned a total of about 150 million votes in two elections. 

 

Modern Monetary Theory

In a Wall Street Journal article about Mr. Schumer’s plan, the headline states, “Tax Increases Won’t Cure Inflation.”  The subtitle reads,