Over the last year, both populists and progressives have urged greater government control of the economy, including the imposition of a formal industrial policy. Both groups argue that an influx of foreign workers and goods made more cheaply overseas stagnate wages at home and result in fewer jobs for Americans.
These economic policies that the far left and far right support for boosting wages are doomed to fail, just as they have in the past. Such policies, for instance, prolonged the Great Depression.
A recent article on Alt-M, part of George Selgin’s series on the New Deal, provides a stark reminder of the perils of “progressive” labor policies aimed at boosting wages. One of the most disappointing aspects of the (ephemeral) March 1933 to May 1937 recovery, it notes, was “the persistence of high unemployment.” Even though wages rose sharply during that period and people were spending more money, businesses still were not hiring. More than 20 percent of the labor force remained out of work.
Much of the blame lies with the “codes of fair competition” that were established by the National Industrial Recovery Act (NIRA). The labor codes, particularly, aimed to boost wages and impose standards for overtime pay via regulatory fiat. “Like many people,” the article notes, “FDR believed that higher wage rates would translate into an overall increase in workers’ ‘purchasing power,’ which, by enabling them to spend more, would in turn promote recovery.”
But trying to mandate higher wages regardless of what market conditions dictate is a mug’s game—one that ignores the basic laws of supply and demand. As the post argues: by artificially boosting wage rates, “the codes undermined the employment-generating capacity of increased spending, by reducing the number of jobs any given level of spending could support.”
Of course, there’s more to the failure of the New Deal programs, but the basic idea regarding wages is pretty straightforward: when government imposes higher labor costs on businesses, they do not hire more workers.
This is why minimum wage laws harm workers (especially the most economically vulnerable) and fail to reduce poverty. And the same principle applies to the other types of economic plans favored by populists and progressives. Any policy that imposes above-market costs on businesses for the sake of artificially boosting wages will have similar results.
Restricting immigration, for instance, would (initially) reduce the supply of workers, thus placing artificial upward pressure on wages (holding all other factors constant). But this in no way guarantees that most people will earn more, because businesses will not automatically be able to hire new workers at higher wages—they cannot hold all other factors constant as the economic theory requires.
This is not to say that there should strictly be zero restrictions on trade or immigration—something that most free-market advocates, even Adam Smith, have long acknowledged. There can be legitimate non-economic reasons—such as national security concerns, terrorist threats, or even dependency on government services—for restricting trade or immigration. Nonetheless, the economics are clear: Manipulating the flow of migration or trade to achieve some preconceived wage level is misplaced.
The emphasis on boosting certain kinds of jobs – such as manufacturing jobs – is similarly misplaced, because it assumes that businesses can simply hire more workers to produce whatever goods are no longer being acquired via international trade. It also assumes that: more people want to work in factories; people benefit from paying higher prices; and people do not benefit from having more non-manufacturing and manufacturing-related jobs from which to choose.
These restrictive policies also ignore the positive effects of competition. Isolating American citizens – even those with low skills – from competition with foreign labor and products makes them less productive and leaves them ill-prepared for the many economic challenges and opportunities that shape our lives.
A Wisconsin manufacturer actually bolstered this point in a speech at the Republican National Convention, albeit inadvertently. The entrepreneur said that her company had lost almost half of its business “to China” before the Trump administration imposed restrictive trade policies. But as she describes how her company survived, it doesn’t appear to have anything to do with those restrictions:
We are tenacious and we’re creative. We took a risk and purchased a 3D printer. 3D printing technology allows us to do things that China can’t. Now, we can take a customer’s idea from sketch to sample to production in just a few weeks. This opened up new opportunities for us.
In other words, the competition forced the company to become stronger; they specialized their processes and found new ways to provide what customers wanted. In the end, just as economic theory predicts, the positive (productivity enhancing) effects from trade ended up outweighing the negative (job displacing) effects. That’s why a free-enterprise system works.
As the Heritage Foundation recently reiterated in True North: The Principles of Conservativism, “America’s economy and the prosperity of individual citizens are best served by a system of free enterprise, with special emphasis on economic freedom, private property rights, and the rule of law. This system is best sustained by policies promoting free trade and deregulation, and opposing government interventions in the economy that distort markets and impair innovation.”
People are not cogs in an economic machine. Treating them as though they were always ends badly. The idea that government can optimize workers’ welfare by raising wages to some particular level might seem comforting, but centuries of such efforts have proved it is a fantasy.
This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2020/10/07/free-market-labor-policy-superior-in-the-new-deal-era-and-in-the-21st-century/#10701a335daa