November 28 marks the 125th anniversary (the quasquicentennial, for Latin aficionados) of one of America’s most prolific public intellectuals — Henry Hazlitt. According to Lew Rockwell, he “was familiar with the work of every important thinker in nearly every field,” and “wrote in every important public forum of his day.” He published roughly ten million words as a journalist, literary critic, philosopher, and economist, including Economics in One Lesson, perhaps the most popular economics book ever written
Given that Economics in One Lesson focused on seeing through the logical problems with political proposals that ignore economic realities, it could also have been titled One Lesson in Protecting us from Politicians. Given the frequency and vastly expanded costs of such proposals from politicians and their allied political predators in America today, remembering its lesson is an appropriate way to honor Hazlitt’s birthday.
Hazlitt’s lesson was that “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Looking at the Long Run as Well as the Short Run
Policies’ long-run effects are often very different from their short-run effects. Consider rent control. Because rental housing tends to be long-lived, rent control’s erosion of the rental housing stock does not appear very quickly, allowing proponents to allege the effect doesn’t exist, rather than “it doesn’t exist in a major way, yet.” However, the long-term effects of rent control have been likened to widespread bombing in their ability to destroy the housing stock. Similarly, Keynesians’ focus on increasing consumption has reduced saving and investment, depressing the growth of the capital stock and economic growth. As Hazlitt put it, “Today is already the tomorrow which the bad economist yesterday urged us to ignore.”
Looking at all Groups, Not Just Some Groups
Virtually every government expenditure program not wholly financed by the beneficiaries illustrates the need to look at policies’ impacts on all affected groups, not just the ones who receive special treatment. That is because government has no resources of its own, so any largesse must ultimately come from other citizens. So analysis must extend to how and from whom those resources are to be acquired, and the consequences. If resources come from taxes, those effects must be incorporated (including the costs to society from the distortions created in addition to the direct costs of the taxes). If resources come from government borrowing, essentially a government commitment to increased future taxation, the present and future effects must also be considered.
Even the language used to shill for policies often misleads us from Hazlitt’s lesson. For example, “we Americans pay our Social Security taxes and we Americans get the benefits,” is true in a sense. However, it commits the logical sin of using the same word “we” to mean different things. Early generations got trillions more in benefits than they paid, forcing later generations to pay far more than they will get as benefits, but equivocating on what “we” means hides the massive redistribution.
Similarly, programs supported as helping groups like “the poor,” such as minimum wages or housing assistance, which actually impose large costs rather than benefits on a substantial subset of “the poor” (e.g., those who lose their jobs, hours of work, on-the-job training, etc., or who don’t get funding for their housing, but face rental prices raised by subsidies others get), which cannot be squared with helping “the poor” as a group.
Incentives Matter
Hazlitt offers many more illustrations than those provided here, making it a “must read” for anyone who wants to understand policy despite the violations of his lesson involved. However, I think his two-part lesson would benefit from a third part. We must also recognize and accurately evaluate all the margins at which supposed beneficiaries’ incentives are changed, not just one, because policies cannot change just one incentive.
Food stamps (now the Supplemental Nutrition Assistance Program) offer an instructive example. They were intended to increase food consumption of low-income people. However, they actually have very limited effects on food consumption. Almost all recipients get less in SNAP benefits than they would have spent on food, allowing the benefits to be substituted for dollars spent on food, freeing them up to be spent however recipients choose.
Further, since SNAP benefits are reduced as incomes rise, the food stamp program acts as an income tax, reducing incentives for recipients to develop and use their skills to benefit others. Such effects are magnified for individuals in multiple assistance programs, which is very common.
Asset tests have also been applied which kept people from putting together sufficient resources to go to school to learn their way out of poverty or to start a business and earn their way out of poverty.
Ludwig von Mises said of Henry Hazlitt that “in this age of great struggle in favor of freedom and the social system in which men can live as free men, you…are the economic conscience of our country.”
Economics in One Lesson offered important guidance for that struggle. However, during his life, Hazlitt concluded that “So far as the politicians are concerned, the lesson…does not seem to have been learned anywhere.” Now, with far more resources forcibly taken from some for whatever and whoever the government decides, his insights are more important than ever.
Gary M. Galles is an economics professor at Pepperdine Univeristy.
