Why Getting the Facts Right is Important
September 9, 2008 Economic Illiteracy

Suppose you were put on a governmental commission to design a “green-energy” power plant that could convert our organic garbage into steam power, and produce no by-products at all.

It is not a matter of opinion to decide the minimum temperature you need to get the water in the system heated to in order to produce steam. If water is 150 degrees Fahrenheit, you get a pot of really hot water. If water is 600 degrees Fahrenheit, you might have expended too much energy to heat it up that much (maybe not). But we know, as scientists, (making simple assumptions about atmospheric pressure and a few other factors) that water needs to be heated to at least 212 degrees Fahrenheit before it starts to boil and turn into steam.

If it was popularly believed that we needed to boil water to 3400 degrees Fahrenheit, would you be alarmed? Would policymakers be alarmed? That’s more than an order of magnitude wrong! In fact, 3400 degrees is hot enough to melt virtually any metal you can think of. Gold melts at around 2000 degrees. Iron at 2800 degrees. Titanium at 3300 degrees.

And I was asking about water. Imagine the cost of the stoves we would produce if we based manufacturing standards on this information! Imagine the destruction they would inflict! Imagine how we would go about designing our new green energy plant using this as the basis of our knowledge.

Yet, this is exactly the way we make economic policy in this country. This is not to single any one out, but when I queried my students about what portion of the American labor force earned the minimum wage or less, I received far more answers above 50% than I did below 10%. The median answer was certainly well more than an order of magnitude off (probably around 50%). The latest data indicate that 1.73 million workers earned the minimum wage or less in 2007. The labor force was roughly 153 million people in 2007. So, the share of the American labor force earning the minimum wage is roughly 1.1%. ONE POINT ONE PERCENT. Not 60 percent, or 50 percent or even 10 percent. Another way to state it is that roughly half a percent of all Americans have a job and are in a job that pays minimum wage or less (ignore WHO makes the minimum wage for the time being). So, for every 200 people you randomly meet in a given day, one of them is likely to have a job paying minimum wage or less.

One of my fine colleagues likes to say that sometimes what we call “beliefs” are actually nothing of the sort. Because by holding those “beliefs” you are doing so without any cost to yourself. For example, what is the significance of putting a “Free Tibet” bumper sticker on your car? Are you planning in starting a war with China? Do you send all of your savings to Tibetan freedom-fighters? If Tibet stays unfree are you at any risk? So saying that you want to free Tibet is something other than a belief, for it is a completely costless statement to you.

So, how am I to characterize the popular notions of American wage earners? Are these beliefs? Or are these something else. If the political process is as demented and effective as some think it is, then sadly, these are actual beliefs. Wrong as they may be, the very people who will select candidates on populist grounds will end up promoting policies that put themselves and their friends and family on the unemployment line, or worse. Of course, the people who are actually making these claims are not likely to be the same people who are earning the minimum wage, or who are at risk for earning the minimum wage – so we are back into non-belief land again. There are no consequences to themselves for holding these beliefs.

This is a huge market failure. Many people hold ideas about economic facts that bear no resemblance to truth. They can hold these ideas because they do not themselves bear the costs of these ideas. However, there are enormous consequences of these ideas being widely held. Horrible policy gets put into place that puts the people most at risk for bad economic outcomes into even more dire straights – and then they blame “the system” for it. Furthermore, these ideas lead to policies that very likely could diminish economic growth going forward, much to the detriment of future generations, who do not have an agent today to represent their interests. These bad ideas are like communal property in that regard. The interests of the current generation are far more heavily weighted than “ought” to be.

Of course, the preferred solution to market failure, particularly among the kind of folks that label themselves “Progressive” is for the government to get involved and make the appropriate corrections. What types of corrections would remedy this problem? Mandate that every American be forced to sit through several of my economics lectures (hmmm … I can imagine myself forming an organization to lobby for that … for the public good, right?). You don’t like that idea? Then how about a tax on bad ideas.  Imagine your worries then! Who gets to decide what is a bad idea? Who gets to decide how much the appropriate tax should be? And who is responsible when the program fails? Or succeeds?

This is just the tip of the iceberg. How are we to effectively convey important economic principles when there is such widespread and persistent misunderstanding of facts? I raise this point because often after I present the relevant data, the response is shrugged shoulders and a comment under the breath about me being an evil, greedy capitalist tool for corporate America. Ask folks why they hold these ideas … and inevitably it will be because someone told them this was the case, or they watch too much TV.

I certainly do not think these ideas are held because of innocent ignorance. How could it be?  My guess is that people have more direct experience in their daily lives with interacting with wage earners than they do with boiling water. Yet ask most people what temperature boils at, and if they cannot give you a precise answer, they will be in the ballpark. The same is not true of economic data.

I should have gone hiking today.

"11" Comments
  1. It’s too late for me to laud this post with the accolades that it deserves. Suffice it to say that you succinctly state what I’ve believed since I’ve lived a while.

  2. I enjoyed this survey.

  3. This survey was very interesting in its showing of the misconceptions in the “beliefs” of the average American. It really makes you think.

  4. I had no idea Americans held so many misconceptions.

  5. The whole time i was reading this article, all i kept thinking about was the book “Whats the Matter with Kansas”. A book about why Kansas continuously votes republican even though voting democratic is more in line with what they want economically.

  6. I enjoyed the survey. It really made me think about a lot of interesting issues.

  7. The survey had several fact-based questions which your average informed college student would have no idea about, myself included.

    There were also several subjective questions which forced a libertarian agenda, by pointing out consequences that people hadn’t thought of. But aren’t there other consequences, still unconsidered, which might not suggest such a libertarian approach to the American economy?

  8. Great Survey. I probably got at least half the questions wrong, shows you that there are so many important questions out there about our society and people don’t even think about it. Hopefully now I find out the real answers.

  9. This survey was really eye-opening. The extent of American’s misconceptions and their effect on policy is surprising and also disturbing. It makes me wonder how much more efficient and successful our nation would be if they were reduced.

  10. Well, I need a lot to learn about the economy. . .

  11. Aced it, yay google.

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