Why Bad Economics Makes Such Good Politics
As the election nears, politicians will more and more frantically point out what wonderful favors they've done for the voters — or what favors they will do for the voters, if elected.
Of course, they never mean all the voters. They mean groups or individuals within the voting population who believe they benefit from laws, taxes, regulations, and spending programs supported by the politician in question.
Two such examples of these sorts of favors are tariffs and minimum wage laws. Both impose costs on both producers and consumers overall, while benefiting a small sliver of the population that is able to take advantage of the government mandate.
The economics of each of these, or taxation and business regulation in general, have already been addressed numerous times in these pages.
It must suffice to point out that these policies, for which politicians think they deserve accolades, potentially benefit only very specific interest groups. Nevertheless, these policies can prove to be politically popular, and may help a politician get elected.
But why should policies that help so few — and impose many costs on even those they purport to help — be politically popular?
Hazlitt and Mises on the Popularity of Bad Economics
Answering this question was one of the main reasons that Henry Hazlitt wrote his perennially popular book Economics in One Lesson.
In the very first chapter, Hazlitt notes that economic science is prone to so many errors because people are motivated to believe an incorrect version of economics that supports their own economic interests. Or as Hazlitt put it, economic errors "are multiplied a thousandfold ... by the special pleading of selfish interests."
Sometimes, these attempts to throw good economics in the garbage are spectacularly successful. After all, for decades, no insignificant number of Americans believed the claim that "what's good for General Motors is good for America."1
While every group has certain economic interests identical with those of all groups, every group has also, as we shall see, interests antagonistic to those of all other groups. While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.
In other words, it's amazing what you can get people to believe with the right ad campaign or lobbying campaign.
Ludwig von Mises also defined the problem in his book Theory and History, noting that the common good (which he called the common weal) was most certainly not the same thing as the good of the special interests. Nevertheless, many (bad) economists, Mises tells us, have tended to support policies that benefit whatever group the economists happen to like:
People aim at definite ends when resorting to a tariff or decreeing minimum wage rates. When the economists thought such policies would attain the ends sought by their supporters, they called them good.
The real job of an economist, however — according to Mises — is something else:
In dealing with [economic policies] ... economics ... merely investigates two points: First, whether or not the policies concerned are fit to attain the ends which those recommending and applying them want to attain. Secondly, whether these policies do not perhaps produce effects which, from the point of view of those recommending and applying them, are undesirable.
When politicians support minimum wages or tariffs, they usually frame these policies as being beneficial to nearly everyone. (This is why headlines like "Raising the minimum wage would benefit everyone" are so common.) Meanwhile, both Mises and Hazlitt would maintain, drawing on sound economics — and not even using the empirical evidence which backs them up — that these policies harm nearly everyone and benefit only a few. Moreover, the benefit enjoyed by that small minority may even extend only to the short term, or may even be negative when the bigger picture is considered.
As Hazlitt notes, it is the job of the economist to consider all of these angles and options, and thus economists do their job when explaining how and why minimum wages and tariffs don't "attain the ends" which their supporters claim.
The Problem with "I'm Willing to Pay a Few Bucks More..."
Confronted with the simplicity and basic common sense of the economic arguments, advocates for minimum wage hikes and tariffs often fail to get the support they like. To counter this, they employ a different tactic.
When economic arguments fail, supporters of these policies then claim that "well, I am willing to pay the price of adopting the interventionist economic policy in question because...." suggesting that the cost is low, and that there is a moral imperative to adopt their interventionist point of view.
This is how it works: Economist A points out to Activist B that a tariff raises the price of goods, thus making products and services more expensive for entrepreneurs and producers who use those goods. This leads to fewer goods being available on the market, fewer choices for everyone, and higher prices to boot. Activist B then responds: "well, maybe the tariff will make prices higher, but I'm willing to pay that price because the Chinese are cheating us! Beating the Chinese is worth a few bucks more on widgets!"
But here's the rub: when Activist B says "I'm willing to pay that price" what he is really saying is that he's willing to have you pay more for the goods and services affected — whether you like it or not.
And if you're not happy to pay more in order to "beat the Chinese," (or whatever) well, then that's just tough luck. The fact that the tariff might be slashing profit margins at your small, family-owned steel-fence manufacturing firm means nothing to them. The fact that a higher minimum wage might force you to close your family restaurant is equally of no concern. They're willing to pay the price of adopting the policy they want, so you are expected to do the same since, in their minds, the good of their own interests — whether they be economic or moral — trumps the interests of everyone else.
Ultimately, this is nothing more sophisticated than the belief that the police power of the state ought to be used to force economic policies on everyone to satisfy the whims of a few. It's nothing more than good old-fashioned mercantilism. Many good economists, thinking they had thoroughly discredited mercantilism 200 years ago, continue to be dismayed that a sizable portion of the voting public continues to be hoodwinked by it all. But, if history is any indicator, mercantilism never really stopped being popular.
- 1. This is an often-repeated, though not-quite-accurate version of GM President Charles Wilson's 1953 quotation: "for years I believed what was good for our country was good for General Motors, and vice versa."