This week, I have some questions about the consequences of legislation from Navy Veteran Howard M. He says:
“Proposed legislation tells us who will benefit from it but not who will be harmed by it. When things go wrong because of bad legislation, politicians tend to pass it off as unintended consequences, but when we know what those consequences are likely to be, and if they are not good for one or more groups of people, and since we cannot read minds, who can be sure if they are unintended or deliberate?
Putting together Bastiat's essay, That Which Is Seen and That Which Is Unseen and Hazlitt's Economics in One Lesson, my question is, could better laws be made if every proposed piece of legislation required an explanation of foreseeable harmful consequences?”
Howard asks a couple of good questions here—first about the intentions of lawmakers and second about a policy intended to highlight the downsides of policies. I’ll begin by discussing the economics of politics.
The Economics of Politics
One way to think about government and the politicians who populate it is that the government is an all-knowing, all-powerful, benevolent organization which seeks to further the welfare of society first and foremost.
It’s probably obvious to you that this would be a silly way to think about politics. Nonetheless, this sort of thinking is exactly what is assumed when researchers talk about finding the “optimal policy.” This sort of thinking, however, has a hard time squaring with the reality of harmful, supposedly unintended consequences of policy.
A more consistent approach would be to think about government the same way we think about other institutions in the economy. Government is composed of individuals with differing knowledge and incentives who pursue their self-interest.
Using this approach, let’s consider a policy to tackle Howard’s first question. In part of the email I excluded, Howard brings up the minimum wage as an example of a policy with harmful consequences. In the case of the minimum wage, the under-discussed downside is that raising the minimum wage will mean higher unemployment, all else held constant.
So, are these consequences unintended or deliberate? It is probably a little of both. The late great economist Walter Williams analyzed the history of minimum wage laws and their origins. Williams highlights in a lecture available on YouTube that racist unions in apartheid South Africa explicitly lobbied for minimum wage laws to keep black workers unemployed.
Similarly, some of the biggest supporters of minimum wage laws in the US are also unions. Unions are able to keep out competing labor by having the minimum wage set such that other workers can’t underbid the union workers.
Do the politicians who support these laws intend to cause the unemployment which benefits unions? As Williams points out in the video, it doesn’t make a difference. The intentions are irrelevant to the effects.
If a politician doesn’t understand economics and doesn’t know higher minimum wages cause unemployment, but they support the minimum wage, labor unions will support the politician and perhaps donate money and lobby union members for votes.
If the politician does understand that this sort of policy benefits unions at the expense of non-union workers, the politicians will still receive the financial support and votes of the labor union for supporting the law.
On a system-level, the intentions of the politician are somewhat unimportant. True believer or not, the political system selects for politicians who support policies which give them votes and donations.
Because politicians are not all-knowing, they cannot determine which policies provide the most benefits to recipients. Since politicians do not have access to the knowledge of profit and loss generated in the market process, they cannot know if their policies create or destroy wealth on net from the perspective of consumers.
Instead, they must choose their policies based on some other criteria. And the political system is such that there will be a tendency to select for politicians who support policies that allow them to win elections.
In other words, politicians can get ahead by creating policies with clearly visible upsides which go to small groups, the negative consequences of which are imposed in very small amounts on a great number of people which makes them difficult to notice. In short, winning policies tend to be ones with conspicuous, concentrated benefits and inconspicuous, dispersed costs. The political system, by its nature, will generate hard-to-see consequences, intended or not!
The Downside Transparency Rule
To combat this, Howard proposes that we require lawmakers to disclose the downsides of policy. For example, why not require all legislation focused on increasing the minimum wage to have a harmful side-effects label like we do with pharmaceuticals? Warning: this policy may cause unemployment.
Let me begin by saying, I would prefer to live in a world where it was the case that people would be informed of all the downsides of a particular piece of legislation. I think that knowledge would improve things. In this sense, I like the idea. That being said, I’m not confident in the ability of a rule like this to have the intended effect.
Here we have a chicken-and-egg problem. The political system rewards politicians who can create policies with hidden downsides and clear upsides. Given this, would we expect politicians to create and use a policy which makes their shortcomings plain? I don’t think so. If we can’t trust them to make the rules, we also can’t trust them to make the rules about making rules.
Instead of its intended effect, I think this policy would generate a few very bad behaviors.
First, parties and political action groups would spend a lot of resources trying to generate a list of downsides about an opponent's policies. This may sound like a good thing at first, until you consider the fact that there is no reason to expect these lists to be accurate.
Smart researchers can make statistics say a lot of different things. Likewise, run enough studies and you’re likely to find one or two that break your way. Essentially I think this policy encourages politicians to develop a large research industrial complex where political donors funnel money to create fake consequences.
Second, you’ll similarly have legislators trying to debunk good research which reveals true consequences. For example, a somewhat recent paper out of the National Bureau of Economic Research (NBER) by David Neumark and Peter Shirley surveys all the research over the last three decades about the effect of the minimum wage on unemployment.
“In its totality, this body of evidence and conclusions points strongly toward negative effects of minimum wages on employment of less-skilled workers,” they write.
Despite this “clear picture” the researchers point out this finding is “at odds with how this research is often summarized.”
In other words, there are relatively few studies which do not find a relationship between minimum wage increases and unemployment, but these studies are often over-emphasized. Why?
My guess is it is convenient for legislators who support minimum wage increases to tout the outlier studies that find what they like. The incentive to use exceptions to mischaracterize research increases if we force legislators to label policies with negative consequences.
Third, I think politicians would use these policies to signal to their base. Think of the classic question in job interviews: “what is your greatest weakness?”
The best way to answer this question if you’re trying to game the interview is usually to say a weakness that is either relatively unimportant to the job at hand or, if you can make the case convincingly, a weakness which is secretly a strength. “What’s my greatest weakness? I’m sometimes too honest with people!” Too honest sort of sounds like a weakness, but really it’s probably a strength in a lot of situations.
Now apply this reasoning to legislators. Imagine a Bernie Sanders type proposing legislation which has a negative consequence of “making billionaires lose money” or something like that. That sort of consequence would be something his supporters would love.
So while I do wish there was more transparency about the downsides of policies within the political system, I think the problems inherent in the political system also cause problems for internal transparency.
But not all is lost. At the center of economic theory stands the idea of opportunity cost. Using your resources in one way means you lose or give up something else. There is no such thing as a free lunch.
This is always true in politics. Every dollar used in policy is a dollar taken from someone or somewhere else. Politicians can try to hide this, but it always remains true. As such, it is the art of economics for economists to highlight these hidden costs. Great economists (professional or not) serve as a means of enforcing transparency about the downsides of policies.
It isn’t a perfect system, but we do not live in a perfect world. Economists do their best work when they perfect this art, as emphasized by the economist Ludwig von Mises:
“It is impossible to understand the history of economic thought if one does not pay attention to the fact that economics as such is a challenge to the conceit of those in power. An economist can never be a favorite of autocrats and demagogues. With them he is always the mischief-maker, and the more they are inwardly convinced that his objections are well founded, the more they hate him.”