Priceless politics
I’ve always wondered how politicians get away with promoting programs and policies that contradict the most basic principles of economics. I thought maybe I was missing something, or that they are promoting the “greater good” when actually, oftentimes, politicians are banking on the resulting short-run market adjustments and aberrations to tout these popular, effect-at-first-blush policies and win votes. Afterall, if everything was in unlimited supply there would be no need for prices, and a politician really could manipulate them without negative after-effects. In a scarce world like ours, though, that doesn’t work. So politicians continue to declare different price controls at the request of the population at large. The people are temporarily appeased as gas prices are capped, wages have a floor, rent has a ceiling, or other manipulations are implemented, and the politician gets votes to keep them in office. Less obviously, some time later, the real effects of the price manipulations take their toll: You have to wait in long lines to get gas, wait months for a major medical operation, people lose their jobs or are replaced by less expensive automated machinery, and families are displaced from their apartments. Thomas Sowell has written a few good articles dealing with this same issue, Politicians Ignore the Role of Prices, and Obama’s Worn-out Economic Ideas. It’s worth reading both of them, which are short, because these excerpts hardly do it justice. Some excerpts:
With all the advances in sophisticated analysis by professional economists, very little of even the basic principles of economics has gotten down to the average citizen and voter.
Many, if not most, of the economic policies advocated by politicians today would never pass muster if the average voter understood as much economics as an economist like Alfred Marshall understood 100 years ago or David Ricardo 200 years ago.
Nothing is more basic in economics than prices — and yet the role of prices is repeatedly ignored or even misrepresented by politicians and the media.
What do prices do?
Prices impose the most effective kind of rationing — self-rationing. Why is rationing necessary? Because what everybody wants always adds up to more than there is.
It doesn’t matter whether you are talking about a capitalist economy, a socialist economy, a feudal economy or whatever. Resources are limited but desires are not. That is the basic and defining problem of economics.
…Labor unions, like the government, can change prices — in this case, the price of labor — but without changing the underlying reality that prices convey.
Neither unions nor minimum wage laws change the productivity of workers. All they can do is forbid the employer from paying less than what the government or the unions want the employer to pay.
When that is more than the labor in question produces, some workers who are perfectly capable become “unemployable” only because of wages set above the level of their productivity.
In the short run — which is what matters to politicians and to union leaders, who both get elected in the short run — workers who are already on the payroll may get a windfall gain before the market adjusts.
But, sooner or later, the chickens come home to roost.
…But politics is not about facts. It is about what politicians can get people to believe.
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March 1st, 2007 at 7:12 pm
In reality, however, the policies do not contradict the most basic economic principle of all: self-interest.
Politician promotes program. Politician is re-elected. Rinse. Repeat.
March 1st, 2007 at 10:51 pm
In a working market system self interest is pitted against self interest and both parties benefit. In the case of politicians, it’s the self interest of politicians promoting programs that the public thinks it wants (is self-interested in), so the public re-elect said politician to the public’s own detriment when those programs are actually implemented.
Normally when the market fails to optimize society’s plight, a regulatory body can step in and fill in the gaps. So how can you regulate politics so that it is in the benefit of both parties; politician and body politic? And also, why does the general public occasionally, yet consistently, vote for policies that are ultimately to their own detriment?
March 3rd, 2007 at 11:47 am
And also, why does the general public occasionally, yet consistently, vote for policies that are ultimately to their own detriment?
Of course, one explanation would be the law of unintended consequences.
But I would argue that what you see a lot of times are people voting for programs (through their proxies, the politicians) that actually do benefit them.
A couple examples of what Democrats propose, from the point of view of the “average man”:
- Repealing tax cuts for the most wealthy: this definitely benefits everybody but the most wealthy! Right? I don’t pay more taxes, only the most wealthy do. And the fact of the matter is that there isn’t much evidence that the tax cuts for those top-top wage earners has benefited the working stiff any over the past 6 years (real wages are flat). So it’s not illogical for the majority of folks to think, “I can’t be hurt if we roll back Bush’s tax cuts and spend money on some important government programs that will benefit me.”
- Raise the minimum wage: Everybody making the minimum wage immediately makes more more. This one is pretty simple. Of course, will businesses lay a few people off? Sure! But that’s not a problem because most people will keep working, and at least now they’ll be making a more decent wage.
See, you and I are thinking of the invisible hand how free trade and free markets reach an optimal outcome where everyone wins. In the macro this is true. Both Mexico and the US, on the whole, have benefited enormously from NAFTA. But a lot of folks have suffered. In a free market there are both winners and losers. People have lost their jobs, seen wages depressed or slower wage growth than usual, etc, etc, etc.
The problem is that these wins and losses don’t get spread around. The proverbial gap between the rich and the poor in the US is not improving. And so you get John “Don’t I Have Pretty Hair?” Edwards going around and promoting protectionist nonsense. And George Bush slapping tariffs on steel before the last election (hmmm…would that have helped him in Ohio? Yup). And the list goes on and on.
In summary, if the “spoils” don’t get spread around, then you end up with serious class envy (and perhaps rightful?) where the middle class and poor look at the upper class and think, “Gee, we’re not seeing any of the benefits of free trade/free markets, lets take some of their money through government programs.” In the same vein, since the losses can’t get spread around (the three factories closing in Cleveland only affect Cleveland) you get politicians who can cater to a specific geographic region. Whether that’s a presidential candidate angling for electoral votes or just a state legislator running from that district, the effect is the same: more government intervention in the economy.
The truth is that democracy is sometimes two lions and a zebra voting on what’s for dinner…
March 7th, 2007 at 8:02 am
So can we say that while political issues that would benefit people in the long run, or on a broad scale, hurt some people temporarily while benefiting the rest. On the voter side: People seem to be willing to vote for things that will benefit them in the short run (like labor protection, wage controls, protectionism, entitlements, etc) when in fact they may well hurt them in the long run.
The public thinks in the short-term when it comes to benefits, and the long-term when it comes to detriments. Is this just another example of instant gratification and procrastination of consequences?