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How Does Economics Help Us Make Better Policy? Here are Four Examples

Economics: it’s the study of human action and its unintended consequences, and I think it teaches us a lot about wise Christian stewardship and compassionate, prudentpublic policy. Here are four examples I recently shared with students in a colleague’s class at Samford University.

1. Minimum Wages.

Pretty much every ethical, religious, or theological system has a special place for the poor and the downtrodden. However, merely meaning well is not the same thing as doing good, and evidence on the effects of minimum wages suggests that those who want to #Fightfor15 would do better to #FightForZero.

That, of course, looks and sounds harsh. In what way would people be better off with a minimum wage of zero dollars per hour? This is not to say that people are somehow ennobled or bettered by lower wages per se; rather, it is to say that when we follow Thomas Sowell’s advice and think past the most immediate effects and ask “then what happens?”, it’s not at all clear minimum wages make people better off.

First, there’s the straightforward effect we get from basic supply and demand analysis. A price floor increases quantity demanded and reduces quantity supplied, so people want to work more than firms wish to hire at the mandated higher price.

There are other important effects, as well, because workers are not compensated with wages alone. Even if employment doesn’t change, the structure of workers’ compensation might change. Benefits, for example, might become less generous. It’s hardly clear that we are making poor people better off, on net, with minimum wages and restrictions on the competitiveness of the workplace.

2. Tariffs to #MAGA

The logic is deceptively simple: make foreign goods more expensive, and more Americans work. But that’s what Sowell would call Stage One thinking. When we ask “and then what happens?” we’re led to ask how these policies affect everyone in the market and not just the American workers in steel and aluminum plants.

Tariffs have four basic effects. First, they provide the government with some revenue, and it might (might!) be that, all things considered, tariffs are the best way for the government to get revenue. This is a transfer from consumers to the government with no efficiency loss. So far, so good.

The second effect is the transfer from consumers of the now-more-expensive steel and aluminum to producers. Again, this is a transfer with no efficiency loss, but it’s important to note that the dollars going into the pockets of Sally Steelworker are coming directly out of the pockets of Sarah Steelbuyer. There’s no increase in wellbeing, just a transfer.

But the third and fourth effects are where we see how tariffs Make America Poorer Again (or, if this were 2009, how tariffs are change we shouldn’t believe in).

Third, tariffs create deadweight loss by reducing the amount of now-more-expensive goods. We buy less of the stuff that contains now-more-expensive steel and aluminum. We buy fewer cars. Less beer. And so on.

Fourth, tariffs induce Americans to waste resources producing domestically what could be purchased more cheaply from abroad. Suppose a ton of steel would cost $300 on the world market, costs $350 to produce, and sells for $400 due to tariffs. In this case, we would be wasting $50 worth of valuable resources in order to produce the ton of steel we could have gotten for $300 with free trade. If we want to help Sally Steelmaker, there are almost certainly more efficient ways to do it without hurting a lot of other people like Sarah Steelbuyer and the workers in industries that don’t exist because we’re overpaying for steel.

3. Laws against “Price Gouging”

Every natural disaster is accompanied by saber-rattling about the evils of “price gouging.” Once again, though, economics shows us how price controls are likely to hurt exactly the people we think we are helping. By using the force of government to hold prices of gas, flashlights, bottled water, generators, plywood, and other goods below what the market will bear, we actually create shortages: instead of small quantities at very high prices, people are unable to get anything at any price. It’s not clear that makes them better off. What’s worse, we make the consumers of these goods worse off by changing not what they pay but how they pay. Instead of paying with money, people lining up for price-controlled goods end up paying with the time they spend standing in line. They incur a cost—their time is valuable—but they don’t produce a benefit for anyone. From a social perspective, it’s pure waste that could be avoided if we allowed prices to rise. Higher prices would encourage people to compete not by waiting but by creating value, and in post-disaster contexts, people can be remarkably resourceful. To use just one example, I could imagine a cash market for debris clearance developing. Instead of standing in line for an hour to get a gallon of gas for $2, someone could work for an hour doing debris clearance and use the money to buy the readily-available-at-the-higher-price gas.

4. Drug Prohibition

Today, our neighbors to the north in Canada have legalized recreational pot. Now, to a person among the groups I’ve surveyed today people don’t think it’s a good idea to smoke pot recreationally. Just because something is a bad idea doesn’t mean banning it is the right answer—and Canada will provide a lot of useful evidence on the effects of legalization. In the case of drugs, consumers tend not to be very responsive to changing prices, and restricting supplies via prohibition mean much higher prices—and very profitable opportunities for people with a comparative advantage in crime. As I’ve written before, drug prohibition is literally a textbook example of a policy with negative unintended consequences. In this case, I’m pretty sure the cure (prohibition) is worse than the disease (drug use). The economic analysis of drug prohibition gives us an example of how economics can help us be better stewards of our blessings and better policymakers—and specifically, it can show us how trying to fix a problem by banning something could ultimately make things worse.

One of the beautiful things about economics is that it is non-partisan. Economists rain on everyone’s picnics, whether they be members of Team Red, Team Blue, or Team In-Between. As a lot of scholars have said for a very long time, economics puts parameters on people’s utopias. Without paying close and careful attention to what economics has to teach us, we run the very real risk of hurting exactly the people we think we are helping.

Art Carden is a Research Fellow at the Independent Institute and an Associate Professor of Economics at Samford University’s Brock School of Business.

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