March 23, 2020
By Timothy Sandefur
The economic impact of the coronavirus crisis is already severe, with one out of five workers now being laid off or having their hours reduced and all domestic auto manufacturers shutting down—with more announcements likely to come. Americans are already beginning to ask how we will recover. Dire as things might get, recovery can be swift and effective.
But the choices policymakers make now—in a state of fear and with a focus on the short term—could hinder that recovery. There’s precedent for that happening, from nearly a century ago: the New Deal. Today’s economists generally recognize that much of what federal and state governments did in the 1930s in response to that crisis was counterproductive, lengthening and deepening the misery. It’s imperative that we avoid making the same mistakes, so that Americans whose lives have been thrown out of whack by this crisis can get back to providing for themselves, their families, and their communities as swiftly as possible.
Unfortunately, many of the economic fallacies that worsened the Depression in the ’30s are still highly popular among both Republicans and Democrats today, and if implemented again, they could transform this painful but temporary setback into a long-term upheaval. And some of the institutions designed to protect us against the worst abuses—particularly the courts—have been undermined by legal precedents dating to the ’30s that essentially nullified constitutional protections for the economic freedom that is so crucial to recovery.
Fortunately, the lessons of past well-intentioned but deeply misguided policies that worsened the Great Depression can help guide lawmakers today. Here are a few we must keep in mind:
1. You don’t get create prosperity by breaking stuff.
In his classic Economics in One Lesson, Henry Hazlitt used a simple example to explain why so many economic policies are counterproductive: Imagine a baker shows up for work in the morning, to find that during the night a vandal has broken his window. As he sweeps up the glass, a friend calls out, “Look on the bright side! This is good for the economy because now you’ll spend $100 on a new window, and that’s work for the window-maker and then he’ll go buy groceries—and it’ll all trickle down!”
This sounds right, but it’s wrong—because the baker was going to spend that $100 on a new coat. Then he would have had both a coat and a window. Now he has to spend it on the window, and never get the coat. Hazlitt calls the coat the “unseen cost” because it’s never made, and never comes into existence. It’s the wealth that could have been, but which the vandal destroyed. Wise economists always consider the unseen cost. But it’s easy to forget, and we’re often fooled into thinking that economic destruction or waste is beneficial.
One example is tariffs. Economists today recognize that among the leading causes of the Great Depression were international trade restrictions such as the Smoot-Hawley Tariff. Tariffs are taxes on Americans who choose to buy goods made overseas. This benefits domestic manufacturers because it limits competition and raises prices—but that hurts consumers. Slap a $5 tariff on a sweater made in Indonesia, and the unseen cost is what the consumer would have done with that extra $5. Now he only has a sweater, instead of the sweater and that other thing. And things are even worse if Indonesia retaliates by further restricting trade.
Tariffs are a form of economic destruction masquerading as economic growth. Yet while economists now largely recognize the folly of increasing prices for things people need at a time of economic crisis, politicians in both major parties still loudly demand these laws against commerce. Recovering from this economic slump requires us to lower trade barriers, not raise them—and we certainly should not adopt new ones.
2. You don’t foster economic opportunity by making people’s jobs illegal.
Laws that bar people from taking jobs they otherwise would choose to take are a terrible idea. Yet they’re commonplace, thanks to the notion that such laws improve the quality of jobs. The truth is, this is only another example of the “broken window” fallacy, because such laws only improve the quality of existing jobs by destroying the jobs that would have been created—but now just never appear.
Who would pass laws against jobs? Unfortunately, it’s common. Consider California’s recently enacted AB 5, which requires that people who work freelance jobs be classified as “employees” instead—something that’s far more expensive to businesses. This is sometimes described as “protecting” these employees, but it really hurts them by making it more expensive to hire them. Making it more expensive to hire people means fewer people will be employed.
Another example is the minimum wage. Although often sold as helping workers get more income, these laws prohibit the employment of people who would willingly work for less than that rate, if given the choice. A $15-per-hour. minimum wage law is really a law that forbids people from taking jobs at $14-per-hour. But are people really better off unemployed at $15-per-hour than employed at $14-per-hour? Economists agree that minimum wages worsen unemployment problems and hinder economic improvement. Time and again, they have harmed the very people they sought to help: women seeking a flexible working environment, young people starting their careers, folks working in the service industries, and even taxpayers. They also result in higher prices for goods and services (since businesses must get that money from somewhere), and this burden tends to be felt most severely by lower-income consumers. If we want a booming economic recovery, the last thing we should do is prohibit people from taking jobs at wages they’re willing to accept.
3. Government can cause jobs, but can’t create them.
One thing everyone knows about the New Deal is how many government construction projects resulted from it. Some of these are certainly grand. But government make-work projects can also be profoundly wasteful. The money spent on them comes from taxes, and those taxes come from the wages of people who would have chosen to spend that money on something else, if they’d been asked. Taking $100 from a working mom in Nebraska to pay to build a highway in Florida might look like helping—because we get a highway in Florida—but it makes life harder for that mom, who will never see that highway, and now has to find another way to afford groceries. (The groceries are the “unseen cost.”)
In other words, government “stimulus projects” tend to shift money from things that people would have preferred to buy, to things that politicians want them to buy instead. When a company offers people jobs, it’s because there’s market demand. When government offers people jobs, it’s because there’s a political demand. That’s not to say that government aid can’t ever be justified; as Megan McArdle observes, if government closes businesses, it seems only fair to compensate them. But it’s typically better to let people keep their money and decide for themselves what to do with it.
4. Don’t create cartels.
One bizarre aspect of the New Deal was what’s called the “cartelization” of the economy. The National Industrial Recovery Act of 1933 allowed business leaders to establish so-called Codes of Fair Competition that actually outlawed competition and innovation. Fortunately, the Supreme Court declared that unconstitutional, but other forms of cartelization were implemented later, and many persist to this day. Giving existing businesses power to decide who gets to compete against them and how is a terrible idea for consumers and a good way to prolong economic crisis.
Sadly, cartel-style laws have already worsened the coronavirus crisis. Laws in many states (called certificate of need laws) forbid people from opening new clinics or buying certain medical equipment without first getting permission from existing clinics. In other words, the new business must ask permission from its own competitors before it opens—and they often refuse. The result is fewer services for those who need them.
The government should never let existing businesses block competition. Perhaps the most important sentence in Adam Smith’s classic book The Wealth of Nations reads: “Consumption is the sole end and purpose of all production, and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” In other words, we should worry about whether consumers are getting what they need at low prices—not with whether businesses are outcompeting each other. Competition benefits consumers, even if some businesses can’t compete—and it should be encouraged whenever possible.
5. Instability and confusion is a terrible idea.
The New Deal wasn’t really a sustained plan but a whole slew of “experiments” that were imposed on businesses, only to have them suddenly changed or reversed. As historian Amity Shlaes writes in The Forgotten Man, this “unceasing experimentation” tended to “frighten business into terrified inaction” rather than building the foundation for stable, long-term growth. Investors know America is an economic powerhouse and will be again, once we’re past this. That confidence is likely our best asset. But it can be squandered if political leaders take a scattershot approach that prevents entrepreneurs, business owners, and employees from knowing whether the today’s rules will be the rules tomorrow. The worst thing officials could do would be to react to political pressures instead of choosing a steady, rational path and sticking to it.
One cause of such instability is vagueness in the law. Many permit requirements and licensing laws are written not in objective terms but in vague phrases that allow government to issue a permit for “good cause” or something to that effect. Nobody knows what these terms mean, so applicants can’t know what they need to do to get a license—and these vague terms give bureaucrats dangerous power to decide arbitrarily whether to issue a license or not. States should rein in abuses by licensing agencies by adopting the Permit Freedom Act to ensure that licensing requirements are clear and unambiguous.
6. Don’t assume what’s done today will be temporary.
The oldest mistake in the book is to think that what’s done in an emergency will be undone when the emergency passes. (Remember the telephone tax passed in 1898 to pay for the Spanish-American War—and remained on the books until 2006?) Sometimes politicians cynically use “emergency” as an excuse to do what’s wrong, but more often people genuinely believe they can put up with a bad policy because it’s only temporary—and then find afterward that circumstances make it impossible to undo. That’s why it’s crucial to think carefully and rationally about the policies we adopt—and not succumb to the “do something!” mentality. Best to presume that the rules written today will be in force a long time, and act accordingly.
We have many advantages that our grandparents in the ’30s didn’t have. We know more about economics, for one thing, and can learn from their mistakes. For another, we have vastly better technology, including a fabulous online e-commerce infrastructure that makes it possible to even consider forcing Americans to stay in their houses. We also have a far larger and smarter workforce that includes whole populations—women and members of minority groups—who a century ago were largely barred from helping do work that needed doing. And—one hopes—we’re a lot more skeptical of government. That skepticism will be indispensable in the coming months.
So is there anything policymakers itching to “do something” can do? Absolutely. Governments at all levels can and should get rid of unnecessary and harmful regulatory barriers that stand in the way of recovery. With an unprecedented number of Americans working from home (and others who will be forced to look for new job opportunities), legislators should ease burdensome regulations on home-based businesses and the entrepreneurs who run them. And when health concerns subside, states can help folks get back to work by removing restrictions on the right to work and recognizing occupational licenses obtained out-of-state.
The American spirit is resilient, and we can recover from this slump. But short-sighted, panicky, or economically ignorant policies adopted today could prevent America’s powerhouse economy from shifting back into gear. Instead, policymakers should remember the lessons of the past, and focus on reforms that embrace new economic opportunities and enable us to pursue the American Dream once again.
Timothy Sandefur is the Vice President for Litigation at the Goldwater Institute.