Tuesday, May 28, 2019

Headwinds to progress; how too much government makes life difficult

John Cochrane is one of my favorite economists, and I regularly read his blog. One of his latest posts is on the subject of minimum wages—how they make no economic sense but yet there are plenty of folks who nevertheless try hard to find ways to justify them. Included in his post is a list of other policies that governments have imposed on us that are supposedly designed to make things better but which eventually lead to perverse and unexpected results. I expand on his list here:

Minimum wages. If the minimum wage that a policymaker sets is higher than the wage which would result from market forces, the eventual result will be an increase in unemployment among those who lack skills. Businesses can't afford to pay a worker more than a worker's value added; that’s a basic economic fact. Moreover, as I mentioned in this post, fewer than 1% of all those who work make minimum wage or less. The minimum wage affects very few people, but those affected are precisely the ones who would be better off without it, especially when it’s set too high. The real crime is that a high minimum wage makes it difficult for those who are just entering the workforce to get the opportunity to work and learn. Almost everyone who works today makes more than minimum wage, and that’s because they have learned skills that are valuable thanks to their first job. Once you get started in the workforce, you inevitably learn and with time you make more money because you can bring more value added to the table.

Labor laws, regulations, and taxes. By raising the cost of hiring and retaining workers, these policies end up reducing employment, especially among less-skilled workers. If it's difficult and expensive to fire workers who don't live up to expectations, businesses will naturally be less willing to hire in the first place. The goal of public policy should be to make it easy to hire those who are just starting out; not to make sure that those hired earn a “living wage.” That comes later.

Public education. By eliminating competition and choice, too many public schools—especially those in disadvantage neighborhoods where two-parent households are scarce and unable or unwilling to play a role in their children's education—end up being run for the benefit of unionized teachers rather than pupils. Imagine how life would be if we all had to shop at a state-run supermarket. As Milton Friedman once said, public education is more properly termed “state” education. The state is not well-equipped to run anything, because state-employed workers don't face the discipline of market participants. Competition is good for business, and it’s good for schools. We need more Charter Schools, not fewer.

Criminal justice pathology. Draconian drug laws, life-destroying treatment of innocents, lack of education and training, and laws and rules against hiring people with criminal records are a plague on our society.

Zoning and building restrictions. These make it difficult for housing to be built and located close to where the jobs are. Which in turn creates the need to commute, which in turn wastes people’s time and money and pollutes the air. These policies also contribute to housing shortages in areas where jobs are abundant, which in turn make homes less affordable, which in turn hurts lower and middle-income folks the most. Silicon Valley is proof. I've heard it said by the folks at Cato that in California, 95% of the population lives on only 5% of the land. No wonder housing is so expensive here.

Occupational licensing. A thousand hours of training and a big test just to open a nail salon? That’s insane. It’s like death by a thousand cuts: restrictions on low-price, low-income entrepreneurship. 

Business licenses. Zoning that disallows businesses in residential areas, laws that make it hard to hire people -- all of which send low income people to the illegal economy, which is a poor way to transition to the legal economy.

Disincentives built into social programs can easily create 100% marginal tax rates for many. Subsidies sound great, but they almost always have a cutoff point, beyond which a person loses the subsidy. Earning just one dollar more might mean losing a benefit that is a significant fraction of one's income. That equates to a very high marginal tax rate, which then becomes a huge disincentive to make more money. See this post of mine from several years ago which expands on the subject.

Disincentives of "affordable" or other subsidized housing. When my local government mandates that new housing projects include "affordable" homes, I immediately think that mandating subsidies is a very stupid and inefficient way of helping those who really need the help. Who pays for the subsidies? Those who work hard enough to pay for non-subsidized housing. That just makes housing more expensive for everyone. And who decides who qualifies to buy artificially cheap housing? Politicians, of course, who are incentivized to do that which is likely to boost their reelection chances. The lucky few who get cheap housing are incentivized to re-sell it at market prices as soon as they are able. And the people who end up in subsidized housing located in choice areas most likely don't have the means to maintain their properties as normal owners do.

Social background: Many people grow up in neighborhoods where there are no two-parent families, few adults with permanent jobs, widespread crime, no business. Government actions bear a lot of the blame for these conditions, which in turn result in the deterioration of homes in marginalized areas of the economy.

When you consider the magnitude and the pervasiveness of all these policies, it's a wonder that we are doing as well as we are. If there's a reason to be optimistic it's because there are so many problems all around us that could be fixed for the better without too much difficulty.


steve said...

Wow, complete agreement-especially re "min wage" and for exactly the same reasons. The REAL sad news is the US is becoming more and more left over time. It's inexorable due to demographics. As Newt Gingrich says, all the democrats want is to "rule or ruin". Bernie Sanders recently came out against all charter schools kowtowing to his left wing base that somehow thinks "state" run schools are better for our children. I seriously doubt that they really believe this. They just don't give a damn.

On a separate issue the 10 yr yield is tanking and that is NOT good. Trump's craziness on trade is affecting the markets absolutely wiping out any "gain" he thought might result from forcing China to open their markets.

Literally protectionism at its finest.

Grechster said...

Love the list. Spot-on. I would add "defense" spending to the list. The massive size of the "defense" budget represents one of the greatest misallocations of capital in the history of man. And after many years of spending that no reasonable man can justify, it is making life difficult for America's people.

We all read that we pissed away $6 trillion on just the Iraq War. Consider that had we spent this money in different ways we wouldn't have a major infrastructure problem. Or a health care problem. Or possibly even an entitlement problem. The resultant debt of such wasteful spending, I believe, is crowding out investment and is a primary reason we can't get to a sustainable 3% GDP growth rate.

And, of course, this doesn't even address the moral stain of interventionist war which, I believe, has also made life more difficult (for us as well as for its direct victims). But perhaps that's best left for another day.

randy said...

Love the list too. Conservatives would do well to actively promote a position that, while there is no better system than capitalism, inequality of opportunity and excess rent seeking is something that can and does exist, and a program to address items on the list (and others) would serve to properly reduce inequality.

steve said...

Spot on Grechster. Although I wouldn't waste it on entitlements. A major infrastructure rebuild would have been nice though. Freakin defense spending is a pariah that neither party seems to be able to dent.

Benjamin Cole said...

My favorite: do everything possible to decriminalize push-cart vending or truck-vending of all kinds. This will create millions of business opportunities for people with limited capital.