Came across this article (5 Conservative Economic Myths Occupy Wall St. Is Helping Bust) yesterday by Dave Johnson who is a Fellow with Campaign for America’s Future and a Senior Fellow with Renew California where he writes about some of the alleged ‘Conservative’ Economic myths (someone please tell me what this ‘Conservative Economist’ creature is?) that Occupy Wall Street is allegedly helping bust. A single glance at it reveals fallacies and inaccuracies that anyone who has taken Economics 101 would be able spot. Dave Johnson first builds up a straw-man ‘conservative economist’ then attributes certain ‘conservative economic myths’ (sic) to the said ‘conservative economist’ and then valiantly proceeds to dismantle this staw-man and dispel these alleged myths. So let’s look at what these alleged ‘conservative economic myths’ are that our 200lbs pooping, drug peddling, whining Occupy Wall Street hippies are allegedly helping bust.

Alleged Myth 1. Business does everything better than government.

According to Dave Johnson, ‘conservative economists’ have been arguing all along that business do everything better than government because they are more efficient and profit driven. He writes

“They argue that constant competition, placing companies under constant fear of going under and people under constant fear of job-loss, focuses the mind like a pending execution. They say it leads them to do only what they should be doing and no more, in the best possible way, always looking for the best and most “efficient” ways, forcing innovation to occur… But as we have seen, what actually happens in this kind of dehumanized “Force You” system (as in “F.U.”) is that businesses are forced to cut every corner, cheapen every product, cut out every service, lay people off, cut people’s wages while adding hours, gut benefits … and probably go under anyway because when every business does the same 99 percent of us can’t afford to buy or do things anymore.”

Let’s first dissect the heading of the myth “Business does everything better than government”. Really? Do they always? What about public goods, goods which are non rival in consumption and non excludable? With public goods, it’s pretty hard to get private parties interested and that is where government needs to step in and take it up. Examples of such public goods would be defense, police force, public parks, various public services etc. In all those cases, private enterprise would find it hard to survive, and therefore the government needs to do those. And any economist, whether ‘conservative’ or otherwise, would be happy to point that out.

Now let’s look at the explanation he provides, that is ‘placing companies under constant fear of going under and people under constant fear of job-loss’ doesn’t result in good performance. For one, he exaggerates the whole thing; I don’t think the average employee of a private corporation is under ‘the constant fear of job-loss’ when he/she is participating in office gossip at the cafeteria or surfing Facebook during office hours. Sure, you are not expected to make big screw-ups (and I am pretty neither are public sector employees) but you won’t be kicked out of our job for every other fault. Even if your employer is a sadist, the cost of hiring (and subsequent training) alone acts as a deterrent from employers firing their employees at every whim and fancy. Lets take the case of Apple; Steve Jobs was known to be hard taskmaster and was not easily satisfied; his employees had always been in fear of displeasing him and he is was known to have fired people for very minor issues (once because someone dared to use his white board). Going by Dave Johnson’s logic, Apple should the producing the most crappy products in the universe. On the contrary Apple comes up with dazzling products which have the highest possible craftsmanship and with an attention to detail that’s borders on the obsessive. Apple does not cut corners with the quality of it’s products and their service at the Apple stores is legendary.

The same applies to corporations as a whole; sure you can’t bring up one crappy product after another but the market would not wipe you out at your very first mistake. Fear of failure is an important motivator. What if a teacher agreed to give an A to every student despite their performance in the tests of quality of project work? How many would actually bother to study? A few would, most wouldn’t. I am a student myself and therefore I know.

All being said, public companies aren’t always worse than private ones. One of my friends was recently praising the service of the State Bank of India (SBI),a public sector bank, while criticizing that of another private bank. In fact, SBI, the once slow moving lazy behemoth, has kept up considerably well with private retail banks; you can get an account made in 2 days against a week or so not long ago, you can get a new ATM card on the spot instead of waiting for 2-3 weeks.

Alleged Myth #2. Rich people are “job creators.”

Dave Johnson says “This is the old “trickle-down” idea — that if you give enough money to the already-rich eventually some of that money will trickle down to the rest of us. This is also called the “getting peed on” theory of economics.”

What does he mean by “give enough money to the rich”? Have the rich become rich by asking for handouts like OWS hippies? He makes it sound almost as if that these OWS hippies have been writing cheques to the rich and now are simply protesting to get that money back. And I have never heard of “getting peed” on “theory of economics”. Which textbook did Mr. Johnson read? He then goes on to quote and misquote Ann Rand who, last time I checked, wasn’t an economist at all, conservative or otherwise.

So are rich people job creators? First of all, I have never seen any economist claiming that anyone who has money will create jobs. However, most people who got rich did so because they created successful companies which employed people. So yes, being rich and creating jobs goes somewhat hand in hand. Of course some of you would point out that financial firms and people who run them (particularly fund managers) do not create jobs proportionate to their wealth. But is it really? What does a hedge fund manager do? He manages a fund for his clients and invests his client’s (who are rich people) money in businesses and these businesses in turn produce products and services and therefore employ people. The job of the hedge fund manager then is to choose the best possible investment opportunities for his/her clients so that their money is invested in viable and sound businesses. And that’s a pretty important job and a job that in turn creates many other jobs in the company in which the money is invested.

More importantly, it’s entrepreneurs, and not the rich, who create jobs. And successful entrepreneurs become rich.

Alleged Myth #3 : Government and taxes take money out of the economy

Dave Johnson writes “They argue that the money government collects is a) pocketed by politicians; or b) stuffed under a giant mattress; or c) is just wasted.”

Obviously, Mr. Johnson completely failed to understand the meaning of “taking money out of the economy”. It has nothing to do with getting money pocketed by politicians or getting it ‘stuffed under a giant mattress’ or ‘getting it wasted’. The meaning is quite different. When people are taxed they lose purchasing power and therefore save less, buy less, invest less; liquidity drops and interest rates increases. If interest rates increase, entrepreneurs and business will find it tough to get loans to start businesses which would have otherwise resulted in employment of lots of people, the average guy would find it tough to get a loan for a house or a car, so on and so forth. Of course, too much money supply would also be detrimental because it would lead to runaway inflation which isn’t something governments want either.

He also advocated high tax rates saying “High top tax rates also reduce the incentive to be greedy and destructive, which can overcome many of us and make us do things we shouldn’t”. Really? It is a pretty well established fact that per capita working hours as well as per capita productivity declined (by 20%) in Europe from 1970 onwards owing to higher tax rates, high minimum wage and other regulations while US productivity rose by 20% in the same period. Not just that, high tax rates, higher minimum wages and regulations (like employee health care benefits) also resulted in higher unemployment in European countries. High tax rates can quite easily induce people to work less, why would a CEO put two extra hours at work per day when she knows that the extra salary would be taxed much higher, why not go home and relax instead? The marginal utility of those extra hours is much less. That being said, taxes are needed to pay for much of the public goods. However, taxing higher and higher is not the solution.

Johnson also alleges that

“Cutting top tax rates in the ’80s forced a change in business models away from long-term planning and building wealth by building sustainable businesses over decades. Instead, since you could take home a fortune overnight, it made more sense to go for the get-rich-quick, sell-the-farm-style schemes so prevalent today”

Of course he conveniently does not provide any proof for the assertion. So let’s think for ourselves. Let’s take some of the most visible tech companies – Apple, Microsoft, Oracle, Sun Microsystems (acquired by Oracle) and the more recent, Google and Facebook. All these companies worked towards building a long lasting brand, making revolutionary products that have pushed the edge of technology.

Alleged Myth #4: Regulations Kill Jobs

Sure they do. But no economist would be stupid enough to argue towards removing all regulations. If that were so, we should also decriminalize murder because I am pretty sure there is a thriving potential market for contract killing that would surely employ a lot of people. Regulations, and therefore government is needed, even in a free market, in fact more so in a free market. A free market needs a government and the rule of law to ensure that contracts are upheld and buyers and sellers can trust each other; without that there can be no market.

Alleged Myth #5: “Protectionism” hurts the economy

Aah, that’s by far my favourite one.Dave Johnson begins with a load of rhetoric claiming that there is no ‘free trade’ anymore.

“the trade deals of recent decades have not been free or fair, and can’t really even be called “trade.” What has happened is countries sell to us but do not buy equally from us, causing huge trade deficits that have drained our economy and our jobs and our wages”

So according to him, it is trade only if I buy from you goods worth $1 and you also buy from me goods worth $1? I am sorry Mr. Johnson, that’s not trade, that’s barter and barter is just one form of trade. In a global marketplace it is practically impossible for all trade between any two countries to balance out and there is nothing wrong with it. Besides, trade deficit in itself is not a big problem; constantly surging trade deficit is. Most countries run a trade deficit with some countries while a trade surplus with some others which may result in an overall trade surplus or deficit. And hey, for much of recent history the US has been a beneficiary of globalization running huge trade surplus through exports to other countries. It is only recently that Asian economies have risen up exporting goods and services to the US and Europe and thereby gaining prosperity. For long the US has argued against protectionism, overtly and covertly arm twisting smaller countries to open up their economies. It benefited Americans, their corporations made money by selling products in many countries and American citizens got jobs. But now it’s our turn, why cry hoarse now Mr Johnson? I didn’t see you complaining when American companies sold drugs at exorbitant prices in India which only the top 5% of Indians could afford. Every dog has it’s day, you had yours, now let us have ours.

But is protectionism good? The answer : It depends. Take examples from India itself. We had a highly protected economy until as recently as 1990s. Cars were expensive and made largely by two companies – Maruti Udyog Limited and Hindustan Motors. There were some fringe suppliers like Peugeot etc. One had to wait for years to get a car or a bike and it was way too expensive. Zips used to be cheap and broke down easily, quite embarrassment if someone noticed your zip open in public. Banking was highly protected too and you had to bribe the bank staff to get loans. Look at us now, an Indian these days has multiple options for cars (sure not as many as an American does ) and bikes and banks vie for your attention to give you a loan at competitive rates; you don’t have to bribe the bank employee any more, instead they would rather send an employee over to your home to get documents signed. Sure, some of those firms made lesser profits because of the opening up of the economy, but Indians at large became more well off.

However, had we opened our economy too early some of our firms would not have become competitive enough to match up to the global competition. Nowhere is it more evident than the pharmaceuticals industry. With American and European firms having a patent on each and every drug and selling those in India at exorbitant prices in the 1950’s, medicine has become unaffordable for all but the top 5% of Indians. We didn’t have any competitive Indian firms that could sell medicines at affordable prices. So we did away with product patents and instead set a process patent regime that enabled our pharma companies to become competitive to a point where our processes now are far more efficient that those in US and European pharma firms. Now that our pharma firms have become competitive we have re-established product patents in pharma since 2005 and our pharma firms will now have to spend a lot more on R&D and come up with new molecules rather than simply innovate on the process.

It all boils down to a trade-off between producer surplus and consumer surplus and of course concerns about national competitiveness. South Korea selectively protected some of it’s industry until those became globally competitive; China is doing something similar. In the end, opening up economy does benefit the people by providing goods and services at cheaper prices. That has been established fairly well with numerous studies. Anyone doubting this is urged to read up some of Bhagwati’s research.

Johnson further adds

“Conservatives say that it is good that businesses in countries like China are more competitive because they don’t have a lot of regulations to comply with. Countries where the people have little say in things don’t have to spend the money to pay minimum wages, keep the environment clean, keep workers safe and keep products up to standard and they don’t have to worry about lawsuits.”

Minimum wage law exists in China (and India) and employers are supposed to abide by those. Sure, some don’t. But to claim that the only reason Chinese (and Indian) companies are competitive is because they don’t have enough regulations is very simplistic at best and fallacious and academically dishonest at worst. There are a lot of factors that contribute to China’s export competitiveness. One of the major being labour wage arbitrage because living standards are different in China. A Chinese working at a McDonals in China would not demand the same salary as that of a McD guy is New York because things cost less in China, Purchasing Power Parity (PPP), remember? As a matter of fact, an Indian call centre workers get paid less, when measured in dollars, than a pizza delivery guy in US. But that does mean that the call centre employee is living worse off than the pizza delivery guy. Besides, US has a high exchange rate while China undervalues it’s currency. That acts as a indirect subsidy on each and every Chinese export.

More importantly, by arguing for protectionism these Occupy Wall Street protesters are only displaying their hypocrisy. If companies decide to protect jobs and bring back jobs to the US, millions will become unemployed in India, China and may other countries and these countries would be pushed into deeper poverty. These OWS hippies may consider themselves to be the allegedly disadvantaged 99% but to much of the world they are the 1% and by arguing to protect these jobs, they are in effect conspiring to take away jobs from the rest of the world. Not kosher at all.

Overall, Dave Johnson make a rather poor, ill informed case for OWS. If only he had passed the draft of his post through a Undergrad economics student, the flaws would have become evident. For anyone who wants to understand the other side of this argument, I urge you to read Guy Sorman‘s ‘Economics does not Lie“