Economic laws are not subject to a vote. They can’t be wished away because you don’t like certain realities they reveal. They don’t bend to accommodate your feelings or the politician’s will.
These harsh realities must be kept in mind when anticipating the results of public policy.
For instance, there’s no surer way to make the price of a good or service rise dramatically than a government program to make it “affordable.”
Whether it’s health care, housing, college, or any other of the several targets of government “affordability” efforts, costs have skyrocketed following initiatives intended to rein them in.
In such cases, the economic laws of supply and demand cannot – and will not – be broken. In fact, their unbendable nature is underscored every time a government program to make something more “affordable” backfires with ballooning costs.
These laws are pretty straightforward and intuitive. The law of demand states that other factors held equal, consumers will purchase more of a good at lower prices and less of that good at higher prices. The law of supply states that other factors held equal, sellers of goods and services will produce less when the price is low and more when the price is high.
Most government programs to make goods or services more “affordable” include subsidizing demand, or cost-shifting the price of the products to taxpayers. Billions of dollars in government subsidies to people for housing or college, for example, prop up the amount of those goods people purchase. With perhaps tens of thousands of dollars worth of subsidies in hand, more and more housing or college consumers are willing and able to pay ever-increasing prices.
While this helps those receiving the aid, it puts college or housing out of reach for many in the middle class who make too much to receive the subsidies but not enough to afford the skyrocketing prices. Our nation’s current multi-trillion-dollar student debt crisis reflects this reality. Moreover, because tuition is covered by government grants or scholarships, many unprepared low-income students are enticed to enroll in four-year universities and end up dropping out.
In health care, programs like Medicaid and Medicare help shift the cost of medical care from the patient to taxpayers. The cost to the consumer is pushed near zero in some cases, serving to drive up consumption. Government subsidies for health insurance has similar effects.
The result is a spike in the consumption of medical services, oftentimes unnecessary. A 2018 ProPublica study estimated that $756 billion is wasted every year on unnecessary testing and procedures, which amounts to roughly one-fourth of all health care spending.
Total health care spending climbs uncontrollably, and providers must shift the costs onto privately insured patients, driving premiums through the roof. Health care becomes more expensive and unaffordable to more and more, courtesy of government programs like the misnamed “Affordable Care Act.”
As tragic as natural disasters like hurricanes can be, they still don’t have the power to erase economic laws. So-called anti–price-gouging laws may make people feel good and allow politicians to attempt to wish away the reality of economic laws, but economic laws continue to prove unbreakable.
In the wake of a hurricane, demand for certain goods, like generators, gasoline, or plywood, inevitably spike. When forcibly kept at pre-disaster prices, consumers face little incentive to economize. Similarly, producers and sellers of these products face little incentive to redirect extra supply to the affected areas.
If, however, prices were allowed to rise to reflect the increase in demand and scarcity of supply, consumers would economize by buying only what they truly need to get through the emergency, leaving more for others in need. Moreover, the higher prices would incentivize sellers to bring more of the highly demanded goods to the impacted region, ensuring more availability of desperately needed products. Shortages for potentially lifesaving goods would be far less severe and more short-lived.
And let us not forget minimum wage laws. Politicians and advocates sell minimum-wage increases as a compassionate way to provide a raise to low-wage workers with no downside. But no amount of compassion or good feelings can override economic laws. Making low-skilled labor more expensive ensures less of it will be demanded by employers. Fewer low-skilled jobs will be available, while employers who don’t reduce the number of jobs will cut back on hours or benefits to offset the higher mandated wage.
Meanwhile, more people are willing to supply their labor at the higher wage. This means more middle- or upper-class people with more skills or education who would not find $8 an hour worth their efforts would be drawn to these jobs at, say, $15 an hour. Such additional supply would serve to crowd out the lowest skilled workers most in need of these opportunities.
Good intentions are not enough. Indeed, government policies supposedly inspired by good intentions often harm those they are intended to help. Economic laws cannot be broken. Politicians trying to do so invite punishment, a punishment typically foisted upon society’s most vulnerable.