Government Also Has An Invisible Hand

    Do not think about, write about or deal with  human behavior without determining the effects of incentives.

     The problems with politicians is not that they have bad policies; it’s that they have policies. It’s not that they don’t fulfill their campaign promises; it’s that they do fulfill their campaign promises. It’s not that politicians have strong beliefs; it’s that they do. Alas, the vast majority of these beliefs are so wrong, the opposites are correct.

    Yesterday was Ground Hog Day. It’s a silly event, but that underground rodent has a better record of predicting the weather than Al Gore whose record is, just to be clear,  0%.

    Wherein we see that government “policies” also have hidden consequences, most of them bad. There are two concepts, both of them wrong, of course, whirling around the liberal conceptual sphere; minimum wage and income inequality. The solution, being liberal, will be to pass laws which don’t have a hope of changing the “problem”. The notion that economic effects can be changed by legislation has been around longer than the Tooth Fairy. One the positive side, the Tooth Fairy is just as real.

    3 Feb 2014
    National Post – (Latest Edition)
    Jesse Kline

Let the free market fight poverty

A boost to the minimum wage won’t help someone who can’t find a job in the first place

    With Ontario’s Liberal government trying to increase the minimum wage from $10.25 to $11 an hour, and U.S. president Barack Obama pledging to unilaterally raise the minimum wage to $10.10, the cost of labour would certainly seem to be the cause de jour these days. As many commentators (including myself ) have noted, however, using the minimum wage to alleviate poverty is akin to using dynamite to weed a garden: There’ll be fewer weeds, but you’ll kill most of the garden in the process.

The reality is that increasing the minimum wage will help some workers, who will be paid more, at the expense of many other workers who will either lose their jobs or never be hired in the first place. The reason for this boils down to simple economics: If the price of beef increases, people tend to eat less of it. The same is true for any other commodity, including labour. When the cost of labour goes up, companies tend to hire fewer people. Indeed, when researchers at the Fraser Institute looked at the academic literature on the subject in 2011, they found that a 10% increase in the minimum wage leads to a 4%-6% increase in the number of families living below the poverty line.

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    Aside from not working, good idea.

Last week, The Daily Show with Jon Stewart attempted to poke fun at the economic argument against increasing the minimum wage by juxtaposing them with minimum-wage earners who were having trouble making ends meet. “If we raise the minimum wage, eventually the market is gonna adjust to that and then everybody’s going to lose purchasing power,” The Daily Show’s Samantha Bee said to a fast-food worker protesting for a wage increase. The response: “We cannot survive on the bare minimum.”

And herein lies the problem: It’s hard to say to someone struggling to get by on a minimum-wage salary that their employers should not be forced to give them more money, even though there are many more faceless individuals who will have their hours cut, or never get a job, as a result of any increase in wages. The politically expedient move is clearly for politicians to raise the minimum wage. But governing should be about instituting policies that benefit the many, not just a select few.

The problem with many people who argue against increasing wages is that they rarely offer concrete alternatives. Sure the status quo is better than increasing the minimum wage, but it doesn’t do anything to help lift people out of poverty. This is why I was pleasantly surprised to see the National Post’s Andrew Coyne advocating a universal-income guarantee. “If we really want to help the poor,” writes Coyne, “here’s a radical idea: give them more money. Only do so directly, using the tax and transfer system, rather than fixing wages and hoping some of it reaches them.”

Coyne acknowledges that some people might think, “That’s communism.” But a universal basic income is an idea advocated by F.A. Hayek, one of the leading free-market economists of the 20th century. Indeed, such a scheme may work if money was diverted from the many inefficient social programs we have now, and transferred directly to individuals. While it’s an idea worth looking at, there are many other things governments can do to address the institutional barriers that prevent people from climbing the economic ladder. Here are just a few examples:

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    Saying that a policy makes sense because it was promulgated by an individual who usually has good ideas is belief in the individual not an analysis of  his ideas.

Supply management raises the price of many of the basic necessities of life. It’s important to remember that we’re not talking about luxury items here. While $4 for two litres of milk may not seem like much to upper- or middle-income earners, half-price milk would mean a lot to families whose children are forced to go to bed hungry every night.

Trade barriers do the same for many other goods and services: While import duties and quotas may keep a few jobs here in Canada, they raise the price of those goods, making them less affordable, especially to low-income people.

Monetary policy also plays a role in making goods and services less affordable. The Bank of Canada tries to keep inflation low, but not so low that prices decrease. Imagine what would happen if we had sound money.

The cost of basic goods and services would go down, instead of up. People making the minimum wage wouldn’t have to constantly struggle to increase wages, because their money would be worth more over time. It would also encourage saving, instead of the current situation, where artificially low interest rates encourage people to go into debt.

  If people did save money, more of them would be able to buy houses with loans they are able to repay. The system we have now encourages banks to make loans based on government standards, since it really comes down to whether or not the CMHC will assume the risk for the loan, rather than ensuring the loans are actually sound.

   Taxes and regulations also play an important role. Every business that doesn’t open or move to Canada because of excessive regulations or high taxes represents jobs that could increase employment.

Much as raising the minimum wage helps the people who retain their jobs, at the expense of those who lose their jobs or never get one in the first place, many of the aforementioned policies benefit special-interest groups, at the expense of the Canadian public. Supply management, for example, raises the income of a small number of farmers, but makes it more expensive for everyone else to buy poultry, eggs and dairy products.

Conservatives and libertarians should be concerned about the needy and should acknowledge that the best way to help the poor is through free-market initiatives. Until we have a government that is willing to stand up to special interests, we will continue to see governments engage in activities that garner votes, but do little to help those who need it the most.

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    The best way to help people most times is to stop helping them.

   To order my novel, “Days of Songs and Mirrors: A Jacobite in the ‘45”, click here.

Cheerio and ttfn,
Grant Coulson
Cui Bono–Cherchez les Contingencies

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