September 23, 2014

Bad Arguments for Good Policy

Donald J. Boudreaux

Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
Summary

History and sound analysis supply many reasons for those of us who celebrate mass prosperity to support free markets. Yet champions of free markets sometimes offer bad arguments to support their positions. These bad arguments only damage the case for free markets.

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History and sound analysis supply many reasons for those of us who celebrate mass prosperity to support free markets. Yet champions of free markets sometimes offer bad arguments to support their positions. These bad arguments only damage the case for free markets.

One bad argument is that high tariffs and other forms of protectionism decrease the number of jobs in the home market.

In fact, protectionism does not decrease employment. Nor, however, does protectionism increase employment. What protectionism does is shift workers from jobs that are more productive into jobs that are less productive.

The number of jobs in an economy is determined by the size of that economy's labor force and by conditions in the domestic labor market. For example, government policies, such as ObamaCare, that artificially raise firms' costs of employing workers will result in fewer domestic jobs.

But preventing consumers from buying foreign-made products neither causes workers to leave the workforce nor raises firms' costs of hiring workers. Such protectionist policies merely increase demand for workers in the protected industries. But these workers are drawn to these protected industries from other domestic industries.

The bottom line is that the case for free trade is harmed, not helped, whenever champions of free trade assert that protectionist policies mean fewer jobs.

Another bad argument often made by some advocates of free markets is that raising the minimum wage causes inflation. Minimum-wage legislation is responsible for a bevy of awful outcomes, but higher inflation is not among them.

Inflation is a fall in money's purchasing power. It's caused by an increase in the supply of money. Because raising the minimum wage does not cause the money supply to increase, raising the minimum wage does not cause inflation.

It's true that raising the minimum wage causes some prices to rise. Specifically, the higher the minimum wage, the higher are the prices charged by firms that employ large numbers of low-skilled workers, such as supermarkets and fast-food restaurants. Raising the minimum wage raises these firms' operating costs. The result is higher prices charged by these firms.

But to pay these higher prices, consumers must spend less money buying other products. The prices of these other products, therefore, wind up being lower than they would be otherwise. Overall, the price level remains unchanged. There is no inflation.

Yet another mistaken argument often made by free-market types is that America was saved from the Great Depression by World War II. This argument is offered to refute the claim that the Depression was ended by New Deal policies.

It's true that New Deal policies did not end the Depression; in fact, such policies made the Depression worse. But entry into World War II also did not end the Depression.

Entry into the war did reduce unemployment, of course, because many men were drawn into the military. Yet there's no evidence that the private economy improved during the war years. Quite the contrary.

As economist Robert Higgs has shown, the U.S. economy emerged from the Depression starting in 1946, only after the increasingly socialist FDR was replaced by the more middle-of-the-road Truman and the GOP won both houses of Congress.