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What The Media Tell Americans About Free Enterprise

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June 1998


What About the Costs?
Guest Editorial, D. Eric Schansberg

Henry Hazlitt was a notable journalist earlier in this century. His most famous book, Economics in One Lesson, teaches that good policy analysis requires looking at the long run as well as the short run, and the impact on all groups, not just one group. Although his "lesson" is an intuitively obvious proposition, its application is surprisingly difficult, so thorough journalists should pay special attention to it.

To see why this lesson is difficult to apply, imagine a hypothetical government program which takes one dollar from every citizen ($260 million) to create jobs for a group of 10,000 people ($26,000 each). Some people benefit greatly while a small cost is imposed on the general public. On net, economy-wide, little has changed. $260 million worth of economic activity is created while $260 million of economic activity is destroyed since the general public has $260 million less to spend and invest. We have simply shifted money from one place to another - a shell game.

But the public and the press typically focus only on the benefits of the policy - the jobs that are created. Why? For one thing, the advocates of the program - politicians and the direct beneficiaries - will loudly sing its praises. But aside from that, the benefits are, by nature, more obvious than the costs. The job creation is concentrated in a small, obvious group, but the job destruction is more dispersed and subtle. Jobs are destroyed a few dollars at a time since the public has less money to spend and invest. The reasoning necessary to understand the costs of the activism is usually too sophisticated. One has to imagine the jobs that are destroyed - when one can see with his own eyes the jobs that are created.

This combination typically leads to poor policy analysis. Most government activity fits the description of the above mechanism: small costs are imposed on the general public to redistribute concentrated benefits to special interest groups or to reach some other goal. As a result, the public is rationally ignorant and apathetic about the small per-person costs of the policies imposed. As such, we can easily explain corporate welfare and other examples of "reversing Robin Hood," such as $500 hammers at the Pentagon and bureaucracies that never die. In each case, the impact on the economy is clearly negative, but because the costs-per-person are relatively small, little or no alarm is raised. Thus, the failure to implement "Hazlitt's lesson" is of widespread concern.

One way I like to explain the problem is with the hypothetical "Alaskan banana farmer." When the Alaskan economy was suffering from low oil prices, imagine that an Alaskan senator was successful in implementing a plan to stimulate his state's economy - an import ban on foreign bananas and a $1 billion annual subsidy for new banana growers in Alaska. After awhile, Rep. Ebenezer Scrooge (I-IN), decides to oppose the banana boondoggle. What will happen? The elected representatives from Alaska will protest vehemently, claiming that Ebenezer is trying to destroy the Alaskan banana farmer. (Of course, they're right!) They might even say that we don't want to go back to the days when we were dependent on foreign bananas. The banana farmers would help finance Ebenezer's opponent in the next election.

And what would Ebenezer gain? Not much. Lower banana prices and slightly reduced taxes ($4 per person) are not issues to raise the passions (and thus, votes or money) of one's constituency. In a word, because we focus on the jobs preserved in Alaska, instead of the jobs destroyed elsewhere, a highly inefficient policy could easily survive into perpetuity. Journalists assist this process by usually only focusing on the benefits of inefficient policies, and not the costs.

The policy applications are legion. The failure to embrace a more comprehensive policy analysis plagues public discussion of international trade restrictions, governmental regulations, and so on. The point is not that these policies have no merits, but that their merits are virtually the only factor considered. If we looked at the costs as well as the benefits, we would be more likely to reject any particular proposal for government activism.

In this context, ignorance is not bliss. Naive policy analysis may make us feel good, but can result in poor policy. The key is that we (including journalists) must get better at applying Hazlitt's lesson - seeing (and reporting on) the relatively subtle costs of government activity.

D. Eric Schansberg is associate professor of economics at Indiana University (New Albany) and the author of Poor Policy: How Government Harms the Poor.


Rich Noyes


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