Why Reject Bank Shots?

by Don Boudreaux on February 16, 2015

in Curious Task, Seen and Unseen, Work

Thanks to David Henderson, I learn that Paul Krugman is calling for “an example of a prominent Republican politician proposing anything that would reduce after-tax-and-transfer inequality.”  But Krugman restricts the permissible domain of examples to encompass only those that are not “bank shots” – that is, to examples not involving indirect consequences.  (Skilled billiards players often sink balls into holes, not by causing the cue ball directly to project balls into holes, but instead to do so indirectly by ‘banking’ shots off of the edge of the table.)  Krugman wants examples only of policies that would directly reduce economic inequality.

David wisely offers as a good example G.O.P. Sen. Rand Paul’s call to end the war on drugs.

Yet there lurks in Krugman’s post a problem deeper than his failure to recognize that such ‘non-bank-shot’ examples can be found.  (I don’t intend my post here as a criticism of David: his post makes a superb point.  I just want to make another point.)

Forget Krugman’s questionable premise that economic inequality is inherently bad – so bad that the power of the state should be deployed in attempts to reduce it.  Obsessing or fretting over snap-shot-captured differences in monetary incomes or wealth is, I believe, both economically unwarranted and ethically offensive.

Forget Krugman’s focus on proposals issued by prominent politicians.  Politicians are mainly in the business of winning popularity contests called “elections” and not in the business of seriously studying the causes and effects of various real and imagined social ills.

Forget Krugman’s implicit assumption that “prominent Republican politicians” (and, no doubt, also obscure Republican politicians) are generally and strongly committed to the principles of a free society.  They aren’t.  They are generally and strongly committed to furthering their own careers, to accumulating power, and to achieving the cheap prominence and unjustified respect that the public stupidly accords to people who succeed at winning political elections.

Instead, focus on Krugman’s rejection of what he calls “bank shots” – that is, indirect consequences of policy changes.  This denial of the relevance or importance of indirect effects speaks volumes about Krugman’s own current mindset and that of his target audience and of his admirers.  This mindset is fundamentally anti-economics.  It’s a mindset that focuses undue attention on what Frederic Bastiat called “the seen” and away from that which is unseen.  Put differently, it’s the mindset of a child who believes that intentions are results, and who – because he or she cannot yet trace out consequences beyond the first and most immediate ones – assumes that the consequences of any action are limited to those consequences that are visible and that occur first.

But whatever inequality exists is almost fully the indirect result of a hugely complex process of on-going, decentralized private actions that are affected by an array of also very complex and intertwined – sometimes conflicting and sometimes reinforcing – government policies.  (This reality holds regardless of your ethical assessment of the current extent of inequality.)  Therefore, to reject as irrelevant any policies that might only indirectly reduce inequality is to reject as irrelevant any policies that are fashioned with a mature awareness, not only of their immediate and “seen” effects, but also of their unavoidable indirect effects.

For example, eliminating the minimum wage will, quite plausibly, reduce inequality.  Yet this reduction in inequality would be the result of what Krugman dismisses as a “bank shot,” so he would reject this policy suggestion as being too far-fetched to satisfy the criterion “reduce economic inequality.”  The reason Krugman would reject this policy proposal on the grounds that it is a “bank shot” is that, while the long-run (“unseen”) effects might well all work to reduce economic inequality, the immediate and direct (“seen”) effect of eliminating the minimum wage would increase inequality by reducing the hourly pay of many low-skilled workers.  Yet outside of the direct line of economic sight, eliminating the minimum wage would reduce inequality by

– soon raising the incomes of many low-skilled workers from $0 to whatever they would earn when they escape the ranks of the unemployed by finding employment at hourly wages below the legislatively dictated minimum;

– raising the incomes over time of low-skilled workers by enabling more of them to find and keep gainful employment and, hence, to acquire job skills that they cannot acquire if minimum-wage legislation prevents them from finding employment; such job skills to be used in the future are perhaps even more important to most low-skilled workers than are the incomes they earn today in their entry-level jobs;

– lowering the incomes of those higher-skilled (or, more generally, less-risky-to-employ) workers whose incomes are indeed made higher by minimum-wage legislation; an example of such a worker is my own 17-year-old, private-school-educated, white and already affluent son whose minimum-wage job – which he had no trouble finding – would almost certainly pay him a lower hourly wage in the absence of minimum-wage legislation.

….

Krugman should be called out for, in effect, insisting that policies be judged only by their “seen” effects and not by their “unseen” consequences.

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