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Public Policy Always Costs Somebody Something

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Tags Bureaucracy and RegulationTaxes and Spending

09/03/2017

Teaching and writing about public policy for more than half my life has taught me that most of the errors made in that realm are not complicated or sophisticated, beyond the ability of “ordinary people” to understand. They are failures to apply basic logical and economic principles. The complications and sophistication mainly arise from efforts to disguise the misrepresentations and wealth transfers being committed, when policies are designed, presented and scored. (For example, see my “Comparing Obamacare Scams.”)

My experience implies that seeing through the policy camouflage to recognize where analyses are inconsistent with core principles is a primary skill in evaluating policies.

One such helpful guide to accurate economic analysis is the principle of symmetry. That is because the logic of economics focuses on the need for individuals to choose, which derives from scarcity. Choosing in the face of scarcity means bearing the costs of foregoing other things we also value with every choice. Consequently, virtually anything that would change the marginal expected benefits or the marginal expected costs of a choice to a decisionmaker would predictably influence what self-interested individuals choose.

An increase in the marginal expected benefits or a decrease in marginal expected costs of a choice or behavior will tend to increase its amount. Symmetrically, a decrease in marginal expected benefits or an increase in marginal expected costs of a choice or behavior will tend to decrease its amount.

Such symmetry means that if a lower price leads to an increase in the quantity of some good demanded, other things equal, a higher price for a good must lead to a decrease in quantity demanded, other things equal (i.e., the law of demand holds in either direction); that if a higher price leads to an increase in the quantity of a good supplied, other things equal, a lower price must lead to a decrease in quantity supplied, other things equal (i.e., the law of supply applies in either direction). Similarly, if a $1 per unit subsidy would increase production of a good, a $1 per unit tax would decrease its production.

Failures to apply such symmetry in economic analysis reveals misunderstanding and/or intentional deception. Yet such errors are ubiquitous in the marketing of public policy proposals, always (shockingly) in the direction that advances the self-interests of the special pleaders.

Consider how this plays out with price controls. Those who push for higher minimum wages (and similarly for other price floors) go to great lengths to argue that they won’t have an appreciable effect reducing employment (i.e., the law of demand has so little power that it essentially does not hold in that case); those who push for rent controls (and similarly for other price ceilings) go to similarly great lengths to argue that they won’t have an appreciable effect reducing the amount of rental housing available (i.e., the law of supply has so little power in that case that it essentially does not hold). They often supplement their “this is an exception” claims by hiring what Henry Hazlitt called “the best buyable minds” to produce “research” reverse-engineered to get the desired conclusions (for example, when the city of Seattle authorized a study of a higher minimum wage, and then authorized another study to contradict it when the results were adverse).

In fact, the pro-price control cases both misrepresent the analysis and contradict each other.

Minimum wage advocates present the issue as a simple leading question for low-skill workers: “If you could earn more per hour of work, wouldn’t you would be better off?” It is true that they would be willing to work more at higher wages, reflecting the law of supply, but higher wages reduce how many of their services employers will hire, reflecting the law of demand. Since you need both willing buyers and willing sellers for each market exchange, fewer of those labor services will be actually be employed as a result. Therefore, the framing of the question misrepresents what economics reveals would be the result.

Symmetrically, rent control advocates frame that issue as a simple leading question for renters: “If you could rent for less, wouldn’t you be better off?” It is true that reducing rents by law will increase how much housing renters will want (reflecting the law of demand), but rent control will reduce how much landlords will offer (reflecting the law of supply). Since you need both willing buyers and willing sellers for each market exchange, renters will get less housing, rather than more (although existing renters gain because the costs are focused on those not yet trying to rent in an area). The framing of the question again misrepresents what economics reveals would be the result.

Further, despite the fact than minimum wage increased supporters also support rent controls, those argument for each shows the glaring error in the argument for the other.

If higher mandated wages increase the amount of labor services offered, the reverse must also be true. Lower wages must reduce workers willingness to offer labor services. But if that is so, rent controls must, symmetrically, reduce landlords’ willingness to provide housing, and rent control will restrict rather than expand tenants’ housing options.

Similarly, if legislated lower rents increase willingness to rent housing, the reverse must also be true. Higher rents would reduce families’ willingness to rent housing. But if that is so, higher minimum wages must, symmetrically, reduce employers’ willingness to hire low-skill workers, and the minimum wage will restrict rather than expand their employment options.

Many violations of symmetry also haunt government stimulus claims.

Government spending supposedly created jobs. That is true as far as it goes, but those same resources, left in the hand of their owners, would have been spent elsewhere, also creating jobs. Treating those two options symmetrically reveals that government moves rather than creates jobs.

Government spending also supposedly generates multiplier effects, producing additional benefits beyond where those dollars are spent, because added incomes from government spending generate additional spending and still more income, etc. However, leaving those dollars with private individuals instead would have left them with more of their own incomes, triggering additional spending, which would have also led to parallel multiplier effects. Government spending delivers multiplied gains only at the expense of multiplied costs, but the latter are routinely ignored.

The economic approach also requires correctly counting benefits and costs. But double counting is common. Most commonly, jobs and income are both asserted as benefits, even though the jobs are actually the work that must be done (a cost, not a benefit) to earn the incomes.

The deficit financing involved with government stimulus is also misleadingly compared to tax financing. Tax financing imposes the full resource burden of government spending in the present. Deficits, however, defer much of the burden into the future (by forcing higher future taxes, crowding out future disposable income and consumption, to pay off the added debt or finance it over time).

While these symmetry failures do not exhaust the cornucopia of examples, they reveal that it is not uncommon for multiple logical and economic errors to be incorporated in public policy proposals. Each one becomes a faulty premise in the analysis. And as I emphasized in my book, Faulty Premises, Faulty Policies, “When there are several false premises, the odds turn heavily against the likelihood of good policy…while the ability to use such tools to misrepresent or deceive increases sharply.” 

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read.

 

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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