Business Times - 12 Sep 2008
By LEON HADAR
A FRIEND of mine who lives in New York City told me that she and her husband were planning to vote for independent party presidential candidate Ralph Nader this year. 'He is the only one who is ready to tax all these millionaires in Manhattan,' she said.
The only problem is that these two Naderite voters make a living making expensive jewellery for a rich clientele on the East Side of Manhattan. And a Nader administration that would end-up squeezing her customers for more taxes could eventually hurt my friend's business.
'Don't you get it?' I asked.
'Well, I didn't think about it,' she responded. 'I didn't take economics in college.'
Indeed, as George Mason University economics professor Bryan Caplan explains in The Myth of the Rational Voter: Why Democracies Choose Bad Policies (Princeton University Press, 2008), the average American voter holds mistaken views about economics that are radically different from those of mainstream economists.
Hence, when the average voter sees business conspiracies, economists see supply-and-demand. When he or she sees ruinous competition from foreigners, economists see the wonder of comparative advantage. When laymen see dangerous downsizing, economists see wealth-enhancing re-allocation of labour. When the man or woman in the street sees economic decline, economists see progress.
There are many reasons why so many Americans don't understand economics. Among other things, economics is not so easy to grasp, especially the part that has to do with statistics. Perhaps that is the reason that Republican presidential candidate John McCain, like my New York friend, never took economics in college. In fact, this is what Mr McCain said during the Republican primaries: 'I'm going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated.'
Similarly, he told an audience that 'the issue of economics is not something I've understood as well as I should'. But, 'I've got (former Federal Reserve chairman Alan) Greenspan's book,' he added.
Mm . . . It's bit late for a 72-year-old man who hopes to start managing the world's most powerful economy, especially in this turbulent economic times, to start studying economics. And take into consideration that Mr McCain's running mate Sarah Palin is even more illiterate about the subject than he is.
Demonstrating a lack of understanding about one of the key economic issues likely to face the next administration, the Republican vice-presidential nominee, while discussing the developments of the perilous housing market this past weekend, claimed that lending giants Fannie Mae and Freddie Mac had 'gotten too big and too expensive to the taxpayers'. The problem is that the companies aren't taxpayer-funded but operate as private companies.
My guess is that not unlike Mrs Palin, most of the American taxpayers/voters have very little understanding of why and how Fannie Mae and Freddie Mac had gotten into their current mess and that they had to be nationalised by the government (even if no one is using the 'N' word here). The main concern of the average voter these days has to do with the pregnancy of Mrs Palin's teenage daughter. No worry about complex figures here . . .
But the mix of a president, vice-president and an American public who are ignorant about economics could prove to be quite toxic not only to America but to the entire global economy. Take, for example, Mr McCain's proposal to establish a League of Democracies that would exclude Russia and China, and his commitment to embrace a tougher foreign policy approach towards these two global players. Only recently, he advocated applying US power to punish Russia for its attack in Georgia.
The problem is that as US policymakers have discovered, Russian and Chinese and other foreign investors - not American taxpayers - own a huge chunk of about US$1 trillion of the debt issued by, yes, America's two mortgage giants, broadening the fallout of any failure beyond US borders and giving the Bush administration one more powerful reason to take over Fannie Mae and Freddie Mac.
One could imagine what would have happened if this financial crisis had taken place while the US was heading towards a military confrontation with China or with Russia over Ukraine. Which raises a question about why Mr McCain and his advisers seem to be gloating over the reports that the crisis in the Caucasus has had a devastating effect on the same Russian financial institutions that own securities of Fannie Mae and Freddie Mac.
Like my New York friend, they just don't get it. They should ask Mr Greenspan for a crash course in economics.
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