Economics assumes that consumers act rationally. Sometimes this is a real leap of faith, but without the assumption of rationality, the predictive nature of the science becomes impossible. This creates difficulties when analyzing public policy because the result is rational voters and politicians that choose bad policies from the economic perspective: farm subsidies and trade barriers among the most common.
The standard explanation of this behavior goes something like this: the benefits of such policies are concentrated while the costs are diffused. Take sugar beet farmers in northwest Minnesota as an example. The combination of subsidies and the tariff on imported sugar means big money for a relatively small group of farmers, thus the farm bill means tens of thousands of dollars. The costs are spread out among all consumers of products with sugar, the resulting higher price of sugar may mean a few dollars a year. As a result, the beneficiaries (farmers) have a big incentive to lobby members of congress and work for protection from foreign competition and a continuation of subsidies. Because the cost to any individual consumer is relatively small, the consumer has little incentive to work for removal the wasteful policy. The explanation assumes that citizens know the policy is bad, they just don’t have the incentive to work end it.
In his book The Myth of the Rational Voter, George Mason University economics professor Brian Caplan has a different explanation. My blog post day is based on an interview with economists Russ Roberts found
here. If you are interested in politics and economics and are willing to invest 80 minutes, you will enjoy listening. Caplan says voters actually approve of bad policy because they have incorrect information. Politicians continue to support these bad policies in order to get votes. He points to three biases as the source of much bad policy that citizens and therefore politicians continue to support. I discuss the “make work bias” below.
Caplan says many voters rate economic policy by the number of jobs created instead of how much is produced. We often hear people berate free trade and technology for the number of jobs that were lost as a result. They praise government policy that creates jobs, regardless of the cost. What voters miss is that what we consume as a nations is determined by what we produce and what we produce is a function of productivity, not the number of jobs. Therefore the key to a higher standard of living is policy that increases productivity, even if job losses result. Bastiat called the bias Sisyphism after the Greek mythological character that was condemned to roll a stone uphill forever – the lucky guy had eternal job security. If the amount of labor were the goal, the 19th century was more successful than our own, there was more than enough work to do on the farm and the workday was close to 14 hours a day. The easiest way to increase the number of jobs is to reduce productivity by reducing the amount of technology; a strategy employed by the Soviet Union to fulfill their promise of full employment. Of course this decreases productivity and therefore standard of living, but people seem to be more concerned about jobs. Maybe we should become luddites and ban calculators, personal computers, software, and the internet. We would create thousands of jobs as people would have to do computations, research and letter writing with paper and pencil again. Of course many of those people would be pulled from jobs that produced goods and services that people value that would not longer be produced.
This is not to say that the jobs and productivity have a negative correlation. Indeed, the period starting after the 1990 recession was a period of extremely low unemployment, but also a period of massive job losses due to new technology being applied in the workplace. Of course those workers found jobs elsewhere as the efficiency gains created wealth and spending in other sectors of the economy. In spite of this growth, it is easy for the media to focus on the massive job losses.
News Reporter: “Corporation XYZ announced it will be laying off 25,000 employees over the next 18 months due to foreign competition and new technology.”
The average viewer ends up cursing the greedy corporation for putting profits ahead of people. The solution proposed usually involves trade barriers or government assistance to prop up the failing business. What is more difficult to identify and less interesting to viewers is the thousands of new and small firms who start up every year and hire 10-20 employees at a time. Indeed, the number of jobs in an economy is not a static number.
I often tell my students that if Santa Claus were real, unions would actively try to ensure that he stayed away from American shores stating that his products destroy American jobs in the toy and retail industry. I am sure that the American voters would agree and politicians would respond with a ban-Santa law. However, the economist would say that Santa Claus frees up resources that can now be put to use in other parts of the economy.
I would suggest reading Bastiat’s essay
The Candlemakers' Petition, it is an interesting read.
