Beware the Unintended

It seems these days one cannot open a newspaper (online or otherwise) without reading something about Title IX abuse.  Title IX, originally instituted to prevent gender bias and discrimination in education (a noble goal) has become a hammer for schools to police and prosecute sexual activity among students (something schools are greatly unprepared to do).  Students are routinely denied legal council and due process, all because of Title IX.  What was originally intended to be a guide for diversity and equal rights has become a tool for extra-legal prosecution of consensual behavior and an arbitrator of free speech.

Title IX is hardly the only piece of legislation that has developed disastrous unintended consequences: The Community Reinvestment Act, passed to help ensure everyone can have a place to live and thriving communities (a noble goal), lead to The Great Recession.  Civil Asset Forfeiture, designed to help the US Navy combat piracy, has become a greater source of legal robbery than robbery itself (often without conviction of a crime).  Other examples are legion.

This is why, as a classical liberal and free market supporter, I often oppose government attempts to fix issues.  Their actions, while nominally noble, can lead to highly repressive and disastrous consequences.  I believe a good maxim when evaluating legislation is to consider how can such legislation be abused or lead to unintended consequences.  In other words, its not what is written or intended, but what can be read and applied.

Question the Methods, not the Motive

Over at Cafe Hayek, Don Boudreaux writes about a common slur we free-market supporters get called: shills for Big Business.  Don does an excellent job discussing how ridiculous such mudslinging is, so I’d like to discuss a tangentially related point: motive.

On top of being called shills, we’re often told we either don’t care about the poor (or, worse, are actively trying to oppress or hinder the poor) by opposing various “Progressive” welfare actions such as minimum wage, protectionist trade tariffs, or immigration restriction and the like.

The reality, however, is quite different.  We oppose these schemes because we, like many other economists including those on the Left, believe they to be counter to the poor’s well-being.  Our arguments are not that we hate the poor, that they just should be happy with their lot in life, or any other strawmen our accusers like to erect, but because we genuinely believe that free trade is the best mode to help the poor, or that minimum wage will make it harder for the poor to get a job.  It’s all about achieving the desired results, not just intending to.

To conclude this post, allow me to quote from one of my favorite bloggers and economists, Steve Horwitz: “I’m a libertarian because I do care about the poor and I don’t care how good your intentions are.”

Don’t Let Perfect be The Enemy of Good

The most common argument I hear against free trade and free immigration by supposed limited-government supporters is something along the lines of “because we have big government policy X, we cannot have liberal* policy Y.”  For example, “we have the welfare state, so we cannot have free immigration,” or “China subsidizes their exports so we cannot have free trade with China.”

The problem with this line of thinking is it lets perfect be the enemy of good. In other words, we avoid taking concrete, albeit small, steps toward a more free world because the steps aren’t 100% ideal. But, as the old saying goes, the journey of a thousand miles begins with a single step.

Liberty isn’t an end; it’s a journey.  Liberty won’t be accomplished overnight with one great lurch toward freedom.  The State’s encroachment on personal liberties has been slow and deliberate.  The fight for liberty will be similar.

Economists are trained to think on the margin; to explore how little changes can affect things and to see how we can make things even just a little better off.  Marginal steps toward liberty will help us accomplish our goals.  If we wait until things are ideal, to wait for the hypothetical “perfect market” conditions, then we will remain stagnant while the State continues to encroach.

We need to keep advancing liberty on all fronts and for all people, even if the conditions are not perfect.  We cannot afford to be slow.

*I, of course, am using the term “liberal” in its original form.

A Discussion on Costs and Benefits

Economics revolves around the study of benefits and costs.  The goal of any economic action is to maximize net benefits (Total Benefits minus Total Costs).  That maximization occurs when marginal benefits (the incremental benefit achieved from one additional unit) is equal to the marginal cost (the incremental cost achieved from one additional unit).

Whenever there is discussion in the economic world on different policies (for example, minimum wage, government stimulus, or protectionist tariffs), we spend much time discussing the costs and the benefits.*  And, indeed, there are some studies that find that the estimated benefits for some government intervention will outweigh its estimated costs.

So, why then do I oppose these measures if the research may show a gain in benefits?  The reason why is simple: those who benefit are not necessarily those paying the cost (and, as is often the case, those for whom the benefit is intended don’t receive it).

Let’s take, for example, minimum wage.  As a casual search of this blog shows, I vehemently oppose minimum wage legislation in all its forms.  Minimum wage is designed to help the poorest workers earn a little more.  However, the beneficiaries of such legislation tends to be current minimum wage workers who are relatively better off and more secure in their skill set: they tend to be white, middle-class teenagers who work minimum wage to earn a few bucks.  Those who tend to pay the costs of minimum wage tends to be current minimum wage workers with fewer skills: they tend to be minorities, immigrants, or less-educated folks.  In the discussion of minimum wage, it fails its objective to adequately help the poorest workers.  Additionally, those who benefit are not the same as those who pay the costs.

Another example is protectionist tariffs.  The beneficiaries are clearly designated: the companies (and their stockholders, profit holders, and employees) protected.  The costs are harder to determine, but they are there: the purchasers who must now pay a higher price for the same goods.  Again, we see the costs and the benefits do not accrue to the same person.

This is where the discussion of costs and benefits in an aggregate sense runs into issues.  The discussion of costs and benefits, MC = MB and all that, that we economists discuss in our textbooks and undergraduate classrooms focuses on the costs and benefits accrued to the single economic actor (the individual, the firm, or the institution).  In which case, the economic actor pays both the cost and enjoys the benefit.  He/She/It can make a rational decision.**  However, when aggregating, the benefits do not necessarily accrue to the same actor as the costs and it can easily lead to poor decisions that make people worse off even if the benefits outweigh the costs!

The TL;DR version of this post is this: At an aggregate level, looking at the total benefits and total costs is meaningless.  One needs to look at who benefits and who pays.  By focusing only on the aggregate and not on the micro level, one may conceivably design a policy that increases total net benefits but those benefits accrue to someone for whom the policy wasn’t intended.

 

*I say “economic world” because in the political world, these items are often treated as costless.

**Rational does not mean perfect, by the way.  The fact that people may make bad decisions is not a case for government intervention or a breakdown in the market theory or its underlying assumptions.

The Missing Question

The 2016 election is shaping up to feature some of the most horrific, dispicable human beings in history.  There is a lot to dislike about all the candidates, and each side has highlighted the obvious failings and personal shortcomings of each other.

However, no one is asking the biggest, most important question: why should anyone have this much power?

Trump is only scary to non-supporters because of the potential power he can wield.  Clinton is only scary to non-supporters because of the potential power she can wield.  Sanders, Cruz, Kasich are only scary to non-supporters because of the potential power they can wield. 

Over the last century, the Federal Government’s power, and especially that of the Executive Branch, has expanded exponentially.  Both Republicans and Democrats are responsible for this.  Rarely has this expansion been questioned, even rarer has it been checked.  But now it’s gotten to the point where, to quote Penn Jillette, “the president is so powerful it doesn’t matter who he is.”  Power always attracts those who are least qualified too wield it, and it seems we are approaching a nadar.

The Economics of Hope

California is moving to raise their minimum wage to $15/hr.  New York wants a similar law.  Among economists, the results of the legislation is generally expected to be negative (for example, the research of UC Berkeley economist Michael Reich, who fully backs the state’s plan to implement a higher minimum wage, found that the hike will both on net cost jobs and reduce the size of the economy). Economists agree universally that the minimum wage has costs associated with it; none of us believe in a “free lunch.”

But mainly we’re talking about the “seen” costs of minimum wage.  The unseen costs are considerably higher, and they fall disproportionately among minorities, immigrants, and low-skilled workers.  They are not ones benefiting from the hike; they are the ones paying for it.

Some evidence: In 2011, a paper was released by the Employment Policies Institute that found that:

[E]ach 10 percent increase in a state or federal minimum wage has decreased employment by 2.5 percent…But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.

The effect is similar for hours worked: each 10 percent increase reduces hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and 6.6 percent for black males.

Prominent economist Thomas Sowell found that:

The last year when the black unemployment rate was lower than the white unemployment rate was 1930, the last year before there was a federal minimum-wage law.

The annual unemployment rate for black teenagers has never been less than 20 percent in the past 50 years and has ranged as high as over 50 percent.

Incidentally, the black-white gap in unemployment rates for 16- and 17-year-olds was virtually nonexistent back in 1948. But the black teenage unemployment rate has been more than double that for white teenagers for every year since 1971.

Another economist, this one from George Mason University, Walter Williams has compiled excellent information on the effects of minimum wage on minorities.

But it’s not just in the US.  Alex Tarabok, GMU economist, had an interesting blog post discussing labor market rigidity in Europe and Muslim violence.

These items of legislation which, prima facie, are supposed to help these workers actually harm them.  The legislation harms minorities by pricing them out of the labor market and create a class of essentially unemployable workers (which, I hasten to remind you dear readers, was the original goal of minimum wage).  But worst of all, the legislation harms them by taking away hope.

For me, minimum wage is among the most evil of all legislation for the reason that it eliminates hope for those who need it most.  To a young black man trapped by poverty, even a minimum wage job can be the key to freeing himself from those binds.  But if he is told that he cannot be hired because he cannot be afforded thanks to this legislation, that is crushing.  He has no way, legally, to better himself, to gain the skills needed to earn more money.  He has, essentially, been cast back into that pit of poverty and told there is no way for him to escape.  Is it any mystery, then, that black and minority youth must turn to crime?

In the case of Europe, the labor market rigidity prevents immigrants from assimilating into European culture.  Is it any mystery, then, that the youth feel disaffected when a full 25% can’t get a job?  Is it any mystery, then, that the ghettos that exist in Europe have become hotbeds of radicalization?

I’d like to end what has become a much longer post than I anticipated with a quote from Captain America:

When I was a kid, it was my father’s people, the Irish, who were looked down upon. Called filthy foreigners. Discriminated against. Is that the xenophobic America you want? All religions, all nationalities, we all want the same thing. To see our children grow strong. To provide safety for our families. To live in quiet times.

The hope that he describes here, the hopes of people longing to come to America and those already here (in short, the American Dream) is what drives people to work hard, to cross dangerous oceans, to leave their families and belongings behind and start anew in a strange place.  But when that hope is crushed, when you are essentially told that you can never be employable, then it can destroy a man’s spirit and have him, in his despair, turn to bad means to survive.

If we want to help minorities escape poverty and violence, then we must put away these grandiose gestures of “kindness that can kill” that sound nice but perpetuate the problem, and begin doing things that no one will get recognized for, but will actually solve the problems.  That will never happen as long as politics is given as the solution to all that ails.  After all, actions that are done away from glamour, rather than “announced with trumpets in the streets as the hypocrites do” are far more likely to be effective.