The middle class is angry. Feeling left out of sharing in the nation’s prosperity the way they used to, they are increasingly turning to populist demagogues who appeal to their emotions and peddle collectivist solutions while blaming some group — from immigrants in America to workers in China. Yet, it is individuals, not groups, who drive economic growth. And individuals are best helped by giving them the freedom to succeed. An agenda to help the middle class must be based on that freedom.
There is little doubt the average middle-class American is much better off than he was even 20 years ago, in terms of the quality of goods and services at his command. But many middle-class Americans still feel shortchanged. As well they should. Over the last seven years, the Obama administration’s aggressive regulatory agenda has held back economic growth. In other words, Washington has suffocated the freedom to succeed.
Some left-leaning critics, such as Thomas Piketty and Paul Krugman, simplistically blame the current middle-class malaise on “income inequality.” The policies they propose to reduce inequality do help some people, but not all, as they ignore the trade-offs.
They favor increases in the minimum wage, at the expense of greater unemployment among teens and the low skilled, who are denied opportunities to gain the skills and experience they need to earn more in the future. Contrary to their supporters’ intentions, minimum wages actually hurt the poor, as they chop off the bottom rungs of the employment ladder.
Such policies are classic examples of Frédéric Bastiat’s “That Which Is Seen and That Which Is Not Seen,” with the added poignancy that the unseen are people, suffering as a result of policies intended to help them.
Other solutions favored by the left suffer from the same problems. Increased unionization and collective bargaining, for instance, damage the overall economy, as a Competitive Enterprise Institute (CEI) study shows. Because of the trade-offs involved, unionization actually drives down wages overall. So how can we avoid these problems?
My colleague Ryan Young and I examine this policy problem in two upcoming papers, soon to be released by CEI. In the first, “People, Not Ratios: Priorities, Please,” we argue that inequality in itself is not the problem — poverty is.
Piketty and Krugman’s focus on income inequality treats people like statistics. Instead, we should focus on individuals’ actual standards of living and on ways to empower them — as individuals — to improve their lot.
In the second paper, “Policies to Help the Poor,” we suggest a policy agenda to make poor and middle-class individuals better off in absolute terms.
Of course, the elimination of global poverty is a bigger topic than even the longest think tank policy paper can fully address, so we focus on some key regulatory actions that can have a significant impact, such as ensuring access to affordable energy, easing access to capital for entrepreneurs, ending minimum wages to create greater employment opportunities for the young and low-skilled, and repealing compulsory collective bargaining laws that hurt nonunion workers.
Each proposal counters the generally accepted wisdom of demagogues, especially those on the left who consistently focus on the seen problem and on the inability of people to visualize the unseen effects. Conentrating only on what is easily seen has been the source of much of their trouble over the years.
Just as importantly, we focus on the regulatory process itself. If you want better results, you need better rules — and better rules about rules. The current rules of the game are stacked toward creating more and more regulations and against eliminating old, redundant, and harmful rules. In other words, they are stacked in favor of large companies that can afford Washington lobbying offices and against innovative start-ups.
The rule changes we propose include increased disclosure of costs and benefits and mandated, periodic attic-cleanings of dusty old rules that do no good and much harm. Two Nobel Prize–winning economists Douglass North and James Buchanan made their names precisely by pointing out that the rules of the game — institutions, as they called them — are more important than anything else in bringing the benefits of economic growth to those who need it most.
If one’s goal is to help people, rather than to flatten out “inequality,” this is a wise approach.
Orignally posted at the Foundation for Economic Education.