Applied Economics: Thinking Beyond Stage One

Sowell's main thesis is that political decision-makers, which include both politicians, administrative agencies, and large government bureaucracies, often are rewarded for what he calls "stage one" thinking. In other words, because a politician's main objective is to get re-elected, policies which are popular and appear to, or do, have short-term benefits are often pursued without regard to the policy's long-term consequences. Ultimately, the politician will not be rewarded for the benefits that accrue in 10 or 20 years from the superior policy, but may be voted out of office for his unpopular stance.The basic claim of Applied Economics is that political policies must be analyzed, not based on their avowed goals, but rather on their foreseeable short AND long-term consequences. By considering the incentive policies such as rent control create, it is easy to see how policies that sound good, and are therefore popular, may have disastrous results, often for precisely those persons whom the policy is designed to protect. To establish this point, Sowell amasses significant historical and empirical evidence to back up his claims in a variety of topics. His analysis of the economics of housing, immigration, and insurance are particularly excellent.Free and Unfree Labor:The first topical discussion begins with a history lesson, providing an eye-opening account of the many forms of unfree labor. Americans tend to think of labor as either being free (wage labor) or unfree (slavery), but in fact, there were many forms of labor that fell somewhere in between these poles. Sowell's economic analysis explains why white Irish immigrants rather than black slaves performed some of the most dangerous manual labor, why slave plantations overseen by owners resulted in less brutal behavior than those overseen by third parties, and why the south developed a self-sustaining population of slaves while other colonies and nations did not. Ultimately, Sowell provides strong evidence for the fact that slavery not only exacted a massive human toll, but also led to the wasteful allocation of human capital, and thus resulted in the South's inferior economic stature.Economics of Housing:I found this section to be the most interesting. Sowell convincingly shows how land use restrictions such as zoning have led to massive increases in land prices in CA and elsewhere, resulting in astronomical housing prices, and horrid traffic as a result of the need for middle-class workers to live farther and farther from their place of work. Rather than focusing on anecdotes, Sowell cites to empirical research which has established that zoning restrictions, rather than responding to escalating land and home prices, have rather caused such increases. He also shows how "rent control" has resulted in a reduction, rather than an increase in housing for the poor.Discrimination:Unlike many authors, Sowell begins by careful defining his terms - prejudice, bias, and discrimination. He explains the difference between reliance on general group attributes (elsewhere referred to as statistical discrimination) and prejudice (prejudgment). He explains how such discrimination may in fact be highly rational.Sowell differentiates between "taste discrimination" - a preference for one group over others, versus discrimination based on a group's perceived inferiority.Most importantly, Sowell discusses what is so often ignored - that discrimination imposes costs not only on those who are discriminated against - but also on those who discriminate. He uses economic analysis to explain why an individual or organization's racist preferences don't always result in more discrimination. Because racists, like anyone else, respond to incentives, economic realities often discouraged organizations from acting on their racist beliefs. Sowell asserts that blacks were allowed in the entertainment business in the 1920s, despite rampant racism, because the cost of exclusion in the highly competitive business was high. In contrast, where costs were low - for example in government (the army, public universities etc.) and in government-created monopolies such as AT&T - NO blacks were allowed until several decades later.In addition, Sowell describes how anti-discrimination laws may in fact result in greater discrimination. For example, empirical evidence suggests that the ADA (Americans with Disabilities Act) resulted in REDUCED hiring of disabled persons because the "reasonable accomodations" required by the statute were so costly that employers chose to stop hiring disabled persons rather than comply. Because of the small number of disabled persons in the labor market, it is very difficult if not impossible, to establish statistical evidence of discrimination. Presented with a remote chance of liability for discrimination and very high costs of compliance, many companies have simply not hired disabled persons. Thus, the ADA has largely harmed rather than helped the group that it sought to protect.Despite these excellent sections, I found Sowell's analysis of the health care system to be deeply flawed. While he raises many valid points, he fails to address the benefits of socialized medicine. Universal coverage encourages preventative care, which like insurance generally, reduces the total cost of preventing harm. Uninsured persons often allow conditions to worsen, and only then report to the E.R. at which point the cost of treatment is dramatically higher. This imposes needless human and economic costs on society. Preventative treatment often yields LESS harm and LOWER cost. There is substantial empirical evidence to this affect, yet Sowell ignores the area entirely. He simply mentions that uninsured persons can always go to an E.R. He also ignores the fact that the E.R. can do nothing about chronic illnesses which require surgery or alternative treatment.Sowell still makes many valid points, the most important of which is the need to allow financial contributions to organ donors. Steve Levitt makes the very same argument in SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance. Others such as Richard Posner and Prof. Becker have done so as well. Unfortunately, while such a policy could eradicate the waiting periods for organ transplants and thus save tens of thousands of lives a year, it will almost certainly be rejected due to political considerations for the general reasons Sowell discusses.Overall, I found Applied Economics to be a very thought-provoking and insightful text. I learned a great deal from Sowell's historical account of immigration and slavery, as well as his discussion of the economics of housing. While I did not agree with all of his claims (reflected by the nearly 200 notes I took in my Kindle :P), the book made me think a great deal, which is always a positive attribute. Highly recommended.Kindle Specific: The book is properly formatted, and the Table of Contents provide links not merely to the main chapters but to the various subchapters. Endnotes are hyperlinks, and therefore, it is easy to navigate from the main body of the text to the endnotes. I quite enjoyed reading this book on my Kindle as I found it easy to navigate, annotate, and highlight.

"Applied Economics" is full of the calm voice and sound thinking that readers have come to expect from Thomas Sowell who regularly makes compelling reading out of "the dismal science." Economics can be helpful for making decisions, but it doesn't make them for us. All it can do is help us to see the trade-offs, the costs and benefits inherent in different choices we make. Thus, "what policies will most likely lead to higher productivity?" is an economic question. While the question "is it better to grow our economy or to share its benefits more equally?" while important, is not an economic question.Economics can also help to clarify the longer-term consequences of those decisions, what Sowell calls the stage two consequences. Political decision making (or rather politicians) often ignore this stage. Since their primary motivation is usually to remain in power, they are mostly interested in short-term results that will appear before the next election. They also prefer to talk about "solutions" rather than trade-offs. They sell benefits but hide costs. The necessary corrective to this is an informed electorate to hold them accountable. That's where books like this one come in.Sowell's presentation is very compelling and richly illustrated with examples from economic and social history. Since a large percentage of the bad ideas currently in circulation have already been tried, it makes a great deal of sense to look at the outcomes.There is a fair bit of overlap between this book and Sowell's 2007 title "Economic Facts and Fallacies." Both are very worthwhile but if -- like most people -- you haven't got time for both, I would recommend this one.The newly revised and expanded 2009 edition includes a new chapter on the Economics of Immigration and new material that is particularly timely in the chapters on the Economics of Housing and the Economics of Medical Care. In addition to these three, there is a discussion of the economic aspects of labor, risk, discrimination, and the development of nations.

This is the follow up of another seminal book by Sowell. He is clear, straight forward, and helps you to see the whole picture. A must for everybody and should be compulsory reading (specially for politicians...) and Fed chairmen.

This book is one of my favourites since it addresses issues that are often debated in politics. For someone interested in economics, law and politics this book will be an enjoyable and informative read.

It has not added much. Same old stuff, in my opinion. Weak section on development. Well-known discussions about market solutions to economic shortcomings.

Dr. Sowell's books are always a delight to read. He distills the concepts down to layman's terms and everyday examples that demonstrate economics in real life.

Thomas Sowell is a very good author and relates economic principles to everyday events.