Economics in one Lesson: The Invisible Side of Policies

Jefrey Quiroz

Professor Nick Hamilton

Economics 2010-111

6 November 2017

Economics in one Lesson: The Invisible Side of Policies.

I have an open mind with a bit of progressive bias; I believe all people are created equal and deserve an equal chance to reach their potential. I hate the idea that government is ran more and more by the connected wealthy and powerful to protect their own and support policies that level the playing field and fight discrimination and fight for those with disadvantages. However, this book opened me to the idea that some of my supported policies might not be doing as much good that I thought they were; I never thought enough about the invisible consequences of different policies and the way Henry Hazlitt explains it, makes it clear that there is more to the story.

First, the most powerful lesson in the book comes right at the start with a story about broken window and a glass company. It seemed obvious that the glass company gets a sale each time a window is broken so that the company can make more sales, hire more people, spend growing profits around the town and everyone pays more taxes creating the positive cycle of economic growth. But I didn’t factor in the negative cycle that the cost of the window takes away from the spending of the bakery so some other company does not get a sale of a suit, dinner, rent, college tuition, books and coffee. The result is that the economy will actually decline by the value of the broken window. This simple but not obvious story makes me think a little differently on some policies I’ve had a little support for. I’ll list a few examples from the book. Rent is raising at an incredible rate in so many places across the country, it feels to me unfair that only wealthy people get an opportunity to live where the best job opportunities are. I’ve heard that the wealthiest people are the land owners and putting a cap on what they can charge for people that don’t make a lot of money seemed reasonable. Otherwise, how do students, artists and service workers survive and what place is worth living without them?

Hazlitt brings up some points: he encourages inefficient use of space: as family shrinks, tenants won’t downsize. The costs paid by a landlord in lost rents is the budget the landlord would use for expansion of new units and improvement of the existing ones, he encourages the building of more luxury apartments since they are most likely exempt, reduces property taxes received by government. The longer it goes on, the more impossible it is to remove because now too many people will be homeless at market rents. Its discriminatory in favor of the few lucky ones that get the rent control apartments. 

Furthermore, after doing some research, I find that the cities that have the most robust rent control laws: San Francisco, Los Angeles, Washington DC, and Oakland, are the ones with highest rents and gentrification. The research points out that in a 1992 survey of economists, 93.5% were against rent control. San Francisco has the most expensive rents in the country and is the only big city in the country that is becoming more white as the county is diversifying. 

From an article on Public radio KQED: By 2040, San Francisco County is projected to have a non-Hispanic white majority — jumping from 42 percent in 2013 to 52 percent in 25 years. The percentage of Asians is expected to fall from 34 percent to 28 percent. The Latino population is forecast to shrink from 15 percent to 12 percent. The city’s dwindling number of African-Americans, currently down to 6 percent, should remain the same. Hazlitt makes a pretty persuasive case that rent control is an unproductive way to make a city more affordable because it restricts buildings and raises rents on the majority in the long run. 

Furthermore, another thing that I came across is that minimum wage is a growing problem that more and more wealth is going to a smaller slice of wealthy, mostly white males. According to the Federal Reserve in a 2017 report the richest 1% own 38.6% of our nation’s wealth and the bottom 90% own just 22.8% It seems unfair to me that hard working people get a small share where connected and wealthy people get so much. Raising the minimum wage seemed like a reasonable way to help some. Hazlitt makes a few contradictory points: First, people who earn less than the new minimum, find it impossible to get hired and you deprive the community of the moderate services he/she was providing. Second, the government will need to support those that can no longer be hired. Third, companies will raise prices to pass on the higher wages so consumers see higher costs and must cut elsewhere. Fourth, some workers will benefit but increased consumer prices reduce expansion of other business so other workers lose their job or don’t get the job that should have existed. Fifth, the best way to raise wages is make labor more efficient and productive through new machines, inventions, education and training. 

Continuously, a real life example of these theories is in process in Seattle, in 2014 the city council unanimously voted to raise Seattle minimum wages to $15 over a few years. The city contracted with the University of Washington to study the effects. In 2017 UW released their initial results: wages rose about 3 percent, but the number of hours worked by those in low-wage jobs dropped about 9 percent — a sizable amount that led to a net loss of earnings on average. It reduced the earning of minimum wage employees on average of $125 per month in 2016. This doesn’t include the full broken window fallacy effects that the increased costs to consumers will reduce their spending on products from other businesses so new new jobs will probably not exist that should if it wasn’t for the increased costs of minimum wages to companies. Hazlitt again makes a pretty strong case that minimum wage laws aren’t ideal the solution to help low wage workers capture more of the economic pie.