The future of economic policy

Politicians are given kudos for spending public money on worthwhile schemes. But they receive our condemnation for increasing taxes. It is therefore unsurprising that when new schemes are announced it is implied that they are a gift from a generous government. Our journalists never ask, "Which citizens will be disadvantaged to pay for that?"

For example, if government announces "free childcare" that is a huge benefit for young families and child-care workers. It would make no sense for it to be paid for by taxing the families who will benefit. It follows that some other sector of society will be taxed to pay for it. They will then have fewer resources for other things. They may be unable to afford a granny flat in the back yard so they can look after an aging relative, or spend money on their children's education, or fund a local charity. Lacking resources to pay for things themselves, they may ask government to build an aged-care facility, or a library for their children's school, or to fund the change rooms at their local sporting facility. In this way, communities become dependent on government and on the political process rather than being personally responsible for meeting their wants.

One very popular economic fallacy is the efficacy of tariffs. Theoretically we have known since Adam Smith that everyone benefits if we specialize in what we are good at and trade with strangers to obtain the things we need at the best possible price. Certainly, no-one who ever read Bastiat's witty demolition of protection A Petition on Behalf of the Manufacturers of Candles, Waxlights, Lamps, Candlelights, Street Lamps, Snuffers, Extinguishers, and the Producers of Oil, Tallow, Resin, Alcohol, and, generally, of Everything Connected with Lighting could possibly remain a believer in tariffs. Yet the idea persists. There are many who still mourn the loss of our ability to make shoes and cars in Australia.

Hazlitt patiently explains how the benefits of tariffs to the workers in the protected industry are outweighed by the fact that the higher costs that other workers have to pay for the locally produced goods reduces their capacity to buy other things and effectively lowers their wages.

Because of the COVID-19 crisis, we have become very aware of our dependence on goods from overseas. There is bound to be political pressure to ensure that we can source critical items locally and quickly. There will be pressure to support local industries by introducing tariffs. It is worthwhile thinking through what we actually need. Reliable supply. We might achieve this by manufacturing locally, by diversifying sources of supply, or by holding higher inventories of crucial items. Maybe some combinations of all three. We may even simply want to maintain the capability to manufacture quickly if needed. Whatever we choose we should recognise that we shall be paying a premium to avoid risk.

Perhaps the most contentious of Hazlitt's fallacies is his view on minimum wages. He argues that the minimum wage may enable a select few to be paid more but that if you force employers to pay above market rates then there will be fewer jobs and fewer opportunities for people to learn the job skills that enable them to climb the ladder. There is also the perverse effect that someone who might be employable at slightly below the minimum wage instead must accept unemployment benefits which are typically half that wage. There is no economic output from the unemployed; so society's wealth is diminished.

"All this is not to argue that there is no way of raising wages. It is merely to point out that the apparently easy method of raising them by government fiat is the wrong way and the worst way. This is perhaps as good a place as any to point out that what distinguishes many reformers from those who cannot accept their proposals is not their greater philanthropy, but their greater impatience. The question is not whether we wish to see everybody as well off as possible. Among men of good will such an aim can be taken for granted. The real question concerns the proper means of achieving it. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces. The best way to raise wages, therefore, is to raise labor productivity."

Elsewhere, (see How to Bolster Youth Employment), I have shown that the negative effects of the minimum wage have most impact on young people; unemployment rates for them are typically double the overall average.

In the 1978 edition, Hazlitt added a final chapter reviewing what had changed in the intervening 32 years. He was horrified at the extent of inflation. In America, the stock of money had increased from $113 billion in 1947 to $357 billion in 1978. "The effect of this increase in money has been a dramatic increase in prices. The consumer price index in 1946 stood at 58.5. In September 1978 it was 199.3. Prices, in short, more than tripled."

"More than forty years after the publication of John Maynard Keynes' General Theory, and more than twenty years after that book has been thoroughly discredited by analysis and experience, a great number of our politicians are still unceasingly recommending more deficit spending in order to cure or reduce existing unemployment."

Keynes had recommended public works to soak up underutilised resources. The deficit spending in the poor years were to be balanced by surpluses in the good ones. It never happened that way. Politicians throughout the world were seduced by the opportunity to buy votes via policies which provided gifts to special groups. In practice, there were deficits in six years out of every seven. Following COVID-19 we may not get a surplus even one year in every seven.

The impact of inflation is that wealth is transferred to the asset-rich. The house that you bought for $2million is now valued at $3million, but your mortgage does not rise.