In my first post, I talked about the Broken Window Fallacy, which was my personal restatement of an idea that has been around for well over a hundred years. If you haven't read that post yet, please do so, because this post relies on understanding a few key points from my earlier post. You can find it here. I'll wait.
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Now, with that out of the way, I have a bigger point to make, the main point of which can be summarized as one simple principle, which can be stated in two ways:
1. When considering an economic policy, you must consider all effects on all people and for all time.
2. It is a serious mistake to consider the effects on only certain groups, or only for the short run.
It may not be immediately clear what I'm talking about, so let me begin with an example.
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In a certain large country, clothing manufacture has long been a huge, important industry. In recent years, however, competition from another country with cheaper labor has been steadily chipping away at their own clothing industry. Country A--let's call it Ameristan--can sell T-shirts for an average of $15 each, while Country B--Philistan--can produce, ship, and sell them to Ameristan all for only $5.
Now, some politicians in Ameristan decide to do something about it. (Politicians nearly always feel the need to do something about random problems; it's rather pathological to the profession.) They consult several factory owners about it, and conclude that the best course of action to take would be to impose a tariff on clothes from Philistan. They decide to place a $20 tariff on each shirt, and other tariffs on other items of clothing. The net effect is that Ameristan-produced shirts continue to cost $15, while Philistan-produced shirts will rise to $25. Problem solved, and Ameristani clothing manufacturing jobs protected, right?
Not so fast; we've only considered things in the immediate short run. A month or two after the policy goes into effect, Ameristani manufacturers will begin to notice that they're crushing the competition by being a full $10 cheaper. In fact, they could continue to crush the competition even if they were only $5 cheaper. So they raise the price to $20. People still choose the Ameristani shirts, as they're still cheaper. The manufacturers decide to push a little more, to see how far they can raise the price while continuing to sell a majority of shirts. An equilibrium eventually settles around $23 for Ameristani shirts.
Who does this hurt? Consumers, most obviously. Previously they could buy shirts for as little as $5; now they must shell out $23 minimum for a decent T-shirt. Note that this doesn't result in a higher quality shirt, just the same average quality that used to go for $5.
The politicians argue that this is unfortunate, but it is of great benefit to the national economy overall. After all, without this tariff, most of the textile workers would soon be unemployed. They wouldn't make any money, so they couldn't spend any money to circulate and stimulate the economy. The fact that their industry is now thriving provides a great boom, in fact!
Ah, but do you remember my first post? What's missing here? We're considering the effect only for the textile workers, who do in fact have things very good at this point. But when we shift spending from one sector to another, we don't actually create any wealth. Millions of consumers now spend $23, rather than $5, to purchase shirts. When Joe Doe purchases a shirt, he has $18 less in his pocket than he would without a tariff. Without a tariff, he would have bought a shirt for $5, then would have taken his girlfriend out to a movie with the other $18. With the new price, he has only the shirt. The textile manufacturing industry is richer, but the movie industry is poorer. Jane Doe would have used the extra $18 to buy a couple of books; the publishing industry is now slightly poorer as well. In fact, every single other industry is slightly impoverished by the textile tariff, since every single consumer now has to spend more on clothing, and less on other items. Moreover, consumers are now actually poorer, since they don't get a shirt plus some other thing now; they only have a shirt.
Why don't we notice this? It's mostly because the benefits of the tariff to one specific group are immediate and easily seen. Jobs, once shrinking in that industry, are now growing tenfold. The factories are operating at capacity, and new ones are being built. The policy looks to be an absolute success.
But the widespread failure of the policy is not immediate and is very hard for anyone to detect. The movie industry does not immediately cut costs. It takes a few years for them to realize that people are buying less tickets now. When they do downsize, they merely cut a few jobs here and there. Likewise, the publishing industry doesn't start massive layoffs, but a few years down the line they notice there isn't quite as much demand for books, so one of the companies starts producing 120 books a year instead of 130. No one notices, or if someone does, they have no idea why. Would you have any idea why, specifically? Of course not. It's very hard to trace these things back to their roots, but the roots are there.
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The effect is compounded by the fact that, of course, government doesn't concern itself solely with textile tariffs. The government has its hands into ten thousand different things which impact the economy, and many of them accomplish nothing except shifting certain benefits to certain select groups while very slightly impoverishing everyone else. I'd like to relate three real-world examples of the unintended consequences of government policies (though of course there are thousands more).
*Subsidies and lucrative government contracts to big corporations who provide campaign donations to politicians (e.g. Halliburton during Bush's term, Goldman Sachs during Obama's term). These provide a massive short-term benefit to the company, but damage the entire rest of the economy.
*Rent controls. Some city governments (notably New York) like to control the costs of rent in downtown areas (notably Manhattan) by fixing the price by law, so that rents cannot increase. This benefits one specific group: renters. It simultaneously harms two groups: leasers and (very ironically) renters. By holding costs down, it also holds potential profits in real estate down. Potential profits are usually the only reason people invest money into new ventures. So instead of investors building new, more, bigger, and/or better housing options in Manhattan, they stick with what's already there. With a free market, there would be a half million new apartments in Manhattan in the next twenty years, which may even have the effect of lowering rents as there would be a much greater supply of housing. With the status quo, very few new apartments will be built, demand will continue to vastly outstrip supply, rents will stay high, and apartments will continue to be very hard to come by.
*Building codes. Most places have very complex building codes, used to enforce safety and (in some cases) the good looks of a neighborhood. Those are nice goals, certainly. But who do these codes harm? Take a walk around a poor neighborhood in any major urban center in the US at night, and I'm sure you will see some people sleeping on park benches. Why don't they just get some ultra-cheap housing to get themselves in out of the weather? Oh, right, there is no ultra-cheap housing, due to building codes! Having spent many a vacation in poorer countries without building codes (or at least, none enforced), let me tell you: there may be more poor people there, but they aren't sleeping in parks. They have houses! Their houses may be made of scrap wood and metal, with dirt floors and no running water. You may not ever want to live in that kind of house. It may not be the safest house. But surely it's preferable to sleeping on a park bench on a frigid winter night; that is unsafe!
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To repeat, then: consider all effects for all people in the long run, not merely the effects on one group or for a short time.
My first few posts here have primarily been concerned with economics. I like writing about economics, and will continue to do so in the future. I don't intend to write only about that, though, as I plan to make the topics here rather wide-ranging.
My next post, then, is going to tackle a very different topic: racism.
