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
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.