Thomas Sowell attacks some common econcomic fallacies in Low Taxes Do What?:
Everyone has heard the claim that a high-wage country like the U.S. loses jobs to low-wage countries when there is free trade. When the North American Free Trade Agreement went into effect a decade ago, there were dire predictions of ‘a giant sucking sound’ as American jobs were drawn away, to Mexico especially.In reality, the number of jobs in the U.S. increased by millions after Nafta went into effect and the unemployment rate fell to low levels not seen in years. Behind the radically wrong predictions was a simple confusion between wage rates and labor costs.
Wage rates per unit of time are not the same as labor costs per unit of output. When workers are paid twice as much per hour and produce three times as much per hour, the labor costs per unit of output are lower. That is why high-wage countries have been exporting to low-wage countries for centuries. An international study found the average productivity of workers in the modern sector of the Indian economy to be 15% of that of American workers. In other words, if you paid the average Indian worker one-fifth of what you paid the average American worker, it would cost you more to get the job done in India.
It sounds like Laffer’s “voodoo economics” worked:
One of the apparently invincible fallacies of our times is the belief that President Ronald Reagan’s tax cuts caused the federal budget deficits of the 1980s. In reality, the federal government collected more tax revenue in every year of the Reagan administration than had ever been collected in any year of any previous administration. But there is no amount of money that Congress cannot outspend. [...] What Mr. Reagan’s “tax cuts for the rich” actually cut were the tax rates per dollar of income. Out of rising incomes, the country as a whole — including the rich — paid more total taxes than ever before.