Freeman

ARTICLE

Iatrogenic Government

DECEMBER 01, 1980 by RUSSELL SHANNON

This past May, Mount St. Helens erupted in the Pacific Northwest. Almost simultaneously, at the other extremity of our contiguous states irate blacks erupted in violent demonstrations; 14 people perished and many buildings burned. Although the immediate cause was largely local in nature, the underlying conditions in Miami so closely resemble those in other urban cores that many people predicted more widespread death and devastation. Later events in Orlando and Chattanooga proved that these fears were not entirely unfounded.

That our cities are sick is surely no news to anyone who has seen their graffiti-smeared stores and garbage-strewn streets. The disease is chronic, the decay corrosive. The problems exceed the aesthetic: the demoralizing effects on the urban inhabitants defy denial.

Two needs seem especially urgent. We must (1) increase job opportunities and (2) improve living conditions. To achieve these ends, many public leaders insist on getting additional federal financial assistance.

But these two particular problems have another, superior solution, one that will relieve the federal government from having to butter up to cities just when Americans perceive a greater need for more guns. It will also not place further inflationary stress on our sadly ailing economy.

Instead of spending more, the government could simply regulate less. In fact, certain regulations intrude catastrophically in both these urgent areas.

One lethal regulation is the legal minimum hourly wage. In January 1981 it rises to $3.35. Any worker whose productivity is less than that will no longer be worth hiring. Many urban youths, lacking skills and experience, could not get jobs at the previous minimum wage. Those willing to work for less are turned away. Why exacerbate this problem?

If business firms were permitted to pay less, they could provide energetic youths with an honest income and spare them from aimlessly roaming the streets. They could also offer something of even greater value than money—a sense of self-worth and an opportunity to gain useful skills and experience. Before long, the young workers’ wages would likely rise and they would be eagerly sought out elsewhere.

There is another regulation, local in scope, which should also be repealed. That is rent control. Just as minimum wages prevent companies from providing jobs, so do maximum rents discourage people from offering living quarters.

Sure, rents may be “too high” for some people in some places. But if that means landlords are raking in lots of profit, then someone with entrepreneurial drive (sometimes known as greed) will come along and build more apartments. As a result, rents will fall. People will not only have access to more places to live, but also less rent to pay.

In fact, viewed in this light, government is not the solution to some of our most important problems. Rather, it seems clear that, more often than not, excessive government is actually the cause of them.

There is a medical term which ap-plies here: “iatrogenic.” It refers to sickness caused by the doctor. Last February, for example, the Wall Street Journal reported on a study which, the Journal said, showed that “mistakes by physicians are responsible for more than one-fourth of the incidences of the leading cause of illness and death among newborns.”

The term “iatrogenic” need not necessarily imply malign intent. Doctors may well prescribe medicine by mistake or provide advice which unexpectedly makes their patients worse. But in either case, the doctor’s business is apt to expand.

Such behavior is not peculiar to medicine, of course. Business firms regularly strive to increase people’s dependency on them. After all, that’s the purpose of most advertising. Should we really be surprised, then, that government policies often turn out to increase our need for government? Just like physicians, preachers, and the producers of Pontiacs, Polaroids, and Poptarts, politicians would like to expand the market for their product.

We can observe the process at work in the field of energy. To please the public, politicians impose price controls on gas. But that causes shortages: at such low prices, there’s not enough to go around. How do we allocate the gas? We must establish a government agency to determine who gets it!

Likewise, excess profit taxes deprive oil companies of the funds and incentives to discover new supplies and develop novel sources. What do we do? That’s right! Establish a massive federal funding program to finance energy research. Iatrogenic government rides again!

Perhaps it is in the realm of unemployment that the government’s iatrogenic inclinations are the most devastating. The effect of the legal minimum wage has already been described. But that is only one of a number of government policies which have the effect of increasing unemployment statistics.

Another is unemployment compensation. Certainly this program provides important benevolent effects by enabling workers who lose their jobs, through no fault of their own, to make ends meet for themselves and their families. Yet this compensation is often so generous that it almost equals the workers’ net take-home pay when they are actually employed. Thus, there is little or no incentive to take a new job, so search is prolonged, and the unemployment statistics paint a grim though somewhat misleading picture.

The government’s taxes also contribute to unemployment, beyond the fact that they may themselves be a serious disincentive to work. Recently there have been numerous reports about our large and growing “underground” or “subterranean” economy. To avoid the growing burden of federal income and social security taxes, more and more people are working for cash so their income will not be recorded or reported to the Internal Revenue Service. At the same time, however, in order to qualify for welfare benefits, these people may report themselves as unemployed. Once more, the unemployment statistics may be misconstrued.

All of these factors added together have increased the nation’s reported unemployment rate to the extent that many economists now believe it is simply no longer possible to reduce the unemployment rate below 5.5 or 6 percent. Yet the government has a mandate, under the Employment Act of 1946 and the more recent Humphrey-Hawkins Act of 1978, to provide “full employment”—which is presumed to imply that only 3 or 4 percent of the labor force is without jobs!

In short, various acts of Congress have exacerbated chronic unemployment. At the same time, Congress has charged itself with healing the sick patient. What does Congress then prescribe? Massive doses of government training programs (such as CETA) and even more substantial expenditures to provide jobs. As Paul Craig Roberts pointed out in the Wall Street Journal, “It is, after all, unemployment that provides the rationale for deficit spending—Congress’s ‘something for nothing’ method of giving handouts.” And quite likely an appreciative but unwitting electorate will gratefully return their benefactors to office at the next opportunity!

However, spending enormous amounts of money will not assure success. R. J. Reynolds has just proven that. It recently withdrew “Real” cigarettes from the market after having spent an unprecedented $40 million to convince people of their worth.

But whereas corporate advertising at least has some prospect of success, government employment projects are almost surely doomed to be a failure at increasing the total number of jobs. Rather, they are simply apt to appear successful—after all, we can see the people employed by government—while actually there is almost certain to be a corresponding reduction of employment in the private sector which is hidden and unobserved. We should not forget that the money the government spends to provide jobs either comes directly from our pockets (via taxes or borrowing) so that we have less money to buy goods and provide jobs, or else it results in an excessive expansion of the money supply which taxes us via inflation.

An exception to this rule is said to occur during a recession, when government spending may increase employment. But the recessions of both 1974 and 1980 were brought about by restrictive policies imposed by government in an effort to reduce inflation—which government itself had caused. Once again, “iatrogenic” is the appropriate inference.

Clearly, there is an important difference here between persuasion of the private sort and that applied by government. We are not compelled to buy what producers offer to sell. If you suspect your doctor is making you sick and lose your patience with him, then he will lose his patient!

Not so with government! It makes offers which we too often cannot refuse. Its growth can put cancer to shame. Only the stout resistance of taxpayers and voters can stem its relentless tide. Unless we hold back, it will end up by ravaging us all.

By comparison, the devastation in Miami or at Mount St. Helens will seem minuscule indeed. If this judgment seems harsh, just remember: in the United States, government has already (1) deprived some people of the right to earn a living and (2) denied others a decent place to live!

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December 1980

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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