Democrats and Economic Alchemy

There was a time when people believed in magic. Say the right words and one could turn lead into gold; the laws of the natural world did not matter.

Today, too many politicians operate as if they have discovered special powers that allow them to rise above other laws — such as those of economics. All they need to do is to invoke the proper spell or incantation and the outcome they want will come to pass.

Take, for example, the Washington, D.C., city council. They recently became the latest group of politicians to decide that many workers were not being paid enough. They might have tried to fix the city’s high taxes and anti-business regulations, the kind of reforms needed to bring better-paying jobs to the city. Instead, they simply spoke the magic words and declared that, henceforth, big-box stores, such as Walmart or Home Depot, would pay their workers $12.50 per hour.

Politicians can’t make things happen just because they want them to, any more than the alchemists of old could transmute lead into gold.”

But here’s where the laws of economics come in: The amount of compensation a worker receives is more or less a function of his or her productivity. Walmart is not going to pay workers $12.50 per hour unless those workers provide roughly $12.50 worth of productivity. As Greg Mankiw notes, “Economic theory says that the wage a worker earns, measured in units of output, equals the amount of output the worker can produce.” This oversimplifies, of course. There are other factors involved. But one can’t just arbitrarily declare a worker’s value.

So, it should come as no surprise that Walmart has already announced that, if the law goes into effect (it faces a possible mayoral veto), the company will cancel plans to build three stores in the District and will explore the logistics of canceling the three others that are under construction. The net result will be a loss of at least 1,800 jobs.

In a similar way, reality trumps magic when President Obama declares that companies have to provide workers with health insurance. A worker’s compensation is not just wages but the full cost of employing that worker, including taxes, benefits, and health insurance. Obamacare’s employer mandate — now delayed but not canceled — simply increases the cost of employing workers.

It shouldn’t be a surprise, then, when employers are reluctant to hire new workers, or when they shift to part-time workers who are not subject to that mandate. According to a Gallup Poll, 41 percent of small businesses said they have already held off on plans to hire new employees, and 38 percent said they’ve pulled back on plans to expand their businesses in other ways. Worse, 11 percent indicate that they have already laid off workers or cut back their hours. And we have seen a dramatic increase in part-time workers. According to the June jobs report from the Bureau of Labor Statistics, the number of part-time workers rose by almost 600,000 from March to June of this year, with the number of Americans in part-time work for economic reasons rising to 8.2 million, while full-time jobs fell by 240,000.

Politicians cling to plenty of other magical fantasies — for example, the belief that government can create jobs. The president and many in Congress may believe that they can simply speak those jobs into existence. But government has no resources with which to create jobs unless it first takes those resources from the private, job-creating sector. As Frédéric Bastiat wrote in “The Seen and the Unseen,” when government “gives jobs to certain workers … it deprives certain other laborers of employment. That is what is not seen.” That is why Bastiat concluded that trying to increase employment through government was “a ruinous hoax, an impossibility, a contradiction.”

Politicians seem to have a magic spell for every occasion. If they create a program to fight poverty, poverty will disappear. Yet despite 126 separate federal anti-poverty programs, adding up to nearly $1 trillion in spending per year when combined with state efforts, poverty persists, nearly unchanged.

If they declare that “no child will be left behind,” our failing schools will get better. But despite more federal intrusion into local schools and massive increases in federal education spending, we see little improvement.

If they say that Social Security and Medicare are solvent, trillions of dollars in unfunded liabilities will simply disappear. Yet every year those programs plunge deeper in debt.

Politicians on the right have their own versions of magic, of course. Passing a law will not make people more moral; you can’t impose democracy on non-democratic societies by wishing (no matter how many tanks you sprinkle into the pot); and not every tax cut pays for itself.

Government is not a wizard. Politicians can’t make things happen just because they want them to, any more than the alchemists of old could transmute lead into gold. It’s not a question of good intentions. It’s just the way the world — the real world — works. If politicians would realize this, we might do a better job of actually dealing with the problems we face.