Good intentions yield poor results

Dr. Gary McDonnell

Good intentions are a driving force behind many government policies. The proposal to increase the minimum wage is one example. The “stimulus bill,” The American Recovery and Reinvestment Act of 2009, passed in response to the recent recession is another.

Who could be against economic recovery, investment or America for that matter?

Increased incomes for the poor and promoting economic growth are certainly worthy goals.

While it’s true that government spending on infrastructure — roads and bridges — may be worthwhile projects in themselves (perhaps not, though — “bridges to nowhere,” anyone?), it is not necessarily true such spending will stimulate overall income and employment.

The stimulus bill increased spending on construction materials like steel, concrete, etc. Suppose a business person (say in Marquette) made plans to add on to her business, which will require steel, concrete, etc.

The increased demand by the government makes the price of concrete and steel higher, which now makes the project more expensive and perhaps unprofitable.

The project may be canceled. If she goes ahead with the project in spite of the higher price, she will have less to spend on other projects because of the higher cost.

Nevertheless, people may still argue that the government spending stimulated the economy because what will be “seen” is the increased employment of resources into the production of infrastructure — the roads and bridges.

What will be “unseen” is the decreased spending on other private projects as a result of the stimulus.

This argument, called the broken window fallacy, can be traced back to the nineteenth century French economist Frederic Bastiat, who pointed out that it would be a mistake (if not immoral) to argue that by breaking windows and stimulating the employment of window installers (glaziers), it would be possible to stimulate overall economic activity.

The unseen aspect of fixing broken windows would be the money not spent on other goods as a result of spending money on repairing windows.

There is much more to this argument, but suffice to say that many people (including some economists) tend to regard only what is seen rather than the unseen when making the argument for policies, such as government stimulus spending.

What about regulation like the minimum wage? Doesn’t that help the poor?

There are many reasons to believe it will make many of the poor worse off. No doubt, the higher wage will benefit some.

However, a low wage is an entry-level wage paid primarily to workers with little or no experience or few if any skills.

Such workers require more supervision and training than more skilled and experienced workers and are riskier to employ.

A higher minimum wage decreases the likelihood that the least skilled will be hired.

Furthermore, there are many jobs that may go unfilled if the minimum wage increases — the shopkeeper cleans up herself rather than hire a teen to mop the floor.

Many potential employers, facing higher costs, may not get their businesses off the ground or be able to expand if the minimum wage increases.

This effect goes largely unseen.

Moreover, there is more to an entry level job than merely the wage paid to the worker.

An entry level job early in life tends to cultivate the basic skills and virtues necessary to have a higher income later in life.

Policies that make it more difficult to obtain an entry level job create a barrier to long-term employment, independence and the ability to contribute to the welfare of others.

To point out the possible disparity between goals and outcomes is not to argue against the intent behind a policy, but rather is to argue for more effective means of achieving particular goals.

Good policy requires consideration of the unintended consequences — the “unseen” as well as the “seen.”

Editor’s note: Dr. Gary McDonnell is an associate professor of economics at NMU.

The Professor’s Corner is a weekly column in The North Wind. Professors interested in appearing in The North Wind should contact the Opinion’s Editor at [email protected]