We have seen the future, and it sucks.

Curing the Unemployment Blues

29th November 2011

Richard Epstein lays out some inconvenient truth.

One of the enduring faiths of modern progressive thought is that omniscient policy makers can cancel out the errors of one form of economic intervention by implementing a second. That lesson was brought home to me when I was a third year student at Yale Law School, whenever discussion turned to the perennial debate over the minimum wage. The charge against the minimum wage was that it had to introduce some measure of unemployment into labor markets by raising wages above the market-clearing price. “Not to worry,” came the confident reply. The way to handle that imperfection is to raise the level of welfare benefits in order to remove the dislocations created by the minimum wage. If one government program had its rough edges, a second government program could ride to the rescue. Implicit in this argument was the tantalizing, but fatal, assumption of economic abundance: The government has the power to tax, and with that power, has access to a cornucopia of public funds that never runs empty—at least until it does.

And such arguments tend to ignore basic principles of economics in the sure and certain knowledge that whenever basic economic principles cough up an undesirable result, a government-applied patch can take care of it. Inherent in this approach is the assumption that each of these result-patch pairs is discrete and independent — that everything else will stay the same as a part is tweaked here and a part is tweaked there. This is obvious nonsense for a dynamic system like an economy, but it’s astonishing how thoroughly this pervades public policy discussions. A good example is the ‘static scoring’ used by government accountants to justify taxes that (a) don’t raise the predicted revenue and (b) have other unpleasant consequences as people modify their behavior accordingly. Funny how that works. Or the blathering by various OccupyStupidity drones who think that a static snapshot of income levels at any one particular time is a valid basis for ‘redistributing’ said incomes.

The massive level of economic dislocation both at home and abroad offers conclusive evidence that this venerable two-part strategy does not, and cannot work. Pinpointing its systematic errors is critical to avoid expanding on past mistakes. The proper approach is simple to state but hard to execute: Always seek “first-best” solutions. The correct response to any restriction on capital or labor is its prompt removal. A “second-best” effort to introduce some offsetting program only makes matters worse. The two errors do not cancel out. They cumulate.

Adjustments that a free market would make automatically and efficiently are made by government regulatory apparatchiks only slowly, inefficiently, and far too often wrongly.

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