If Liberals Understood Economics…

…what a wonderful world it would be! Do liberals actually think about what the consequences of their policies will be, or do they vote for measures solely because it makes them feel good about themselves? At Cafe Hayek, law professor Todd Henderson emails to point out a basic contradiction in liberal policy prescriptions:

Perhaps you’ve made this connection before, but reading all your posts about the minimum wage and global warming this morning, I was struck by the paradox in the proposed remedies for these two problems by politicians. The first problem is income inequality, and the remedy is to set minimum contract terms. The second problem is externalities from carbon [production], and the remedy is to tax output levels. In both cases, the solution is to raise firm costs. The assumption driving the policy prescription for a Pigovian tax on carbon is the idea that higher costs will spur innovation in ways of reducing carbon output. Of course, that private firms subjected to higher costs will innovate in ways to reduce those costs is precisely the problem with minimum wage legislation, as you point out. This is an obvious point, but my mind never made the connection before.

The innovation point is actually a relatively subtle one. More fundamental is the fact that if you raise the cost of anything, whether carbon emissions or labor, you will get less of it. Liberals understand the law of supply and demand when they are trying to suppress something. Hence the carbon tax, and an even better example, taxes on cigarettes. Liberals justify sky-high tobacco taxes by saying that they don’t want people to smoke, and the more expensive cigarettes are, the less people will smoke them. That is undoubtedly true. So why can’t they understand that the more expensive entry-level labor is, the fewer people will have jobs?


Books to read from Power Line