The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.
This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.
We all in 2017 remember “too big to fail”. Hazlitt had heard these arguments in 1946 and thought they were important enough to address.
The representatives of X industry lobbies Congress because X industry is sick and dying. It
must be saved, which requires a tariff or higher prices or a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores, and local motion picture theaters will lose business. Economic depression will spread in ever-widening circles.
If X industry is saved through prompt Congressional action it will buy equipment from other industries. More workers will be employed and they will give more business to the butchers, bakers, and electronic gadget makers. Prosperity will spread in ever-widening circles.
There are an endless number of X industries this argument could be made for. In Hazlitt’s day it was coal and silver. In our day it is farms and “renewable” energy. To “save silver” Congress did immense harm. One of the arguments for the rescue plan was that it would help “the East.” One of its actual results was to cause deflation in China, which had been on a silver basis, and to force China off that basis. The United States Treasury was compelled to acquire large amounts of unnecessary silver at prices far above market level, and to store it in US vaults. The essential political aims of the “silver Senators” could have been achieved, at a fraction of the harm and cost, by government subsidy to the mine owners or to their workers; but the public would never have approved of such a blatant transfer of money without dressing it up in propagand about “silver’s essential role in the national currency.”
To save the coal industry Congress passed the Guffey Act, which compelled coal mine owners to conspire together not to sell below certain minimum prices fixed by the government. Though Congress had started out to fix “the” price of coal, the government soon found itself (because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge) fixing 350,000 separate prices for coal. One effect of this attempt to keep coal prices above the competitive
market level was to accelerate the tendency toward the substitution by consumers of other sources of power or heat—such as oil, natural gas, and hydroelectric energy — which then required subsidies to flow to the coal industry to offset this lost revenue.
For Hazlitt’s argument, he asked readers to set aside consideration of defense contractors or public utilities and instead look only at industries that are shrinking or perishing due to free compeition in the general economy and who are making the argument that their demise will bring down the economy with it and that being artificially propped up will help everyone else.
Yes, this is the same argument made by farmers for parity pricing and manufacturers for tariff protections. The same arguments that stood against these also stand against “too big (or important) to fail.”
X industry may claim that their field is already overcrowded, so they need the government to prevent other firms or workers from entering it.
Hello, the medical field!
Or they may insist they need to be supported by a direct subsidy from the government.
Hello, renewable energy!
If X industry is really overcrowded as compared with other industries it will not need any coercive legislation to keep out new capital or new workers. New capital does not rush into industries that are obviously dying. Investors do not eagerly seek the industries that present the highest risks of loss combined with the lowest returns. Nor do workers, when they have any better alternative, go into industries where the wages are lowest and the prospects for steady employment least promising.
If new capital and new labor are forcibly kept out of the X industry, either by monopolies, cartels, union policy or legislation, it deprives this capital and labor of liberty of choice and forces investors to put their money where the returns seem less promising to them than in the X industry. It forces workers into industries with even lower wages and prospects than they could find in the allegedly sick X industry. It means, in short, that both capital and labor are less efficiently employed than they would be if they were permitted to make their own free choices.
This should be a familiar argument by now. It leads to lowering of production which results in a lower average living standard, caused by either lower average money wages or by higher average living costs, or by a combination of both. Restrictive
policies might force wages and capital returns higher than otherwise within X industry itself, but wages and capital returns in other industries would be forced lower than otherwise. The X industry would benefit only at the expense of the A, B, and C industries.
Direct subsidy to save X industry would merely transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained.
The only real advantage of a subsidy from the taxpayers’ point of view is that it is at least honest. There is far less opportunity for the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing, or monopolistic exclusion.
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.
Subsidies result not only in a transfer of wealth or income, but also in the shrinkage of other industries. Capital and labor are driven out of industries in which they are more efficiently employed and are diverted to an industry where they are less efficiently employed.
Less wealth is created. The average standard of living is lowered compared with what it would have been.
If X industry is shrinking or dying why should it be kept alive by artificial respiration? It’s illogical to assert that all industries must be simultaneously expanding. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries.
If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.
It is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production. Improved methods of production must constantly supplant obsolete methods, if both old needs and new wants are to be filled by better commodities and better means.