This is in response to Mike Ginsburg’s question in the Quodlibet. I’m again having technical difficulties with the cloud and the Cascade server for faculty web sites.
I will cut and paste this into the Quodlibet later today sometime.
Here is Mike’s question:
What are the major implications on businesses from political actions
including minimum wage laws, welfare spending, and tax policy.
Mike was late, so I made him flesh this out more as a penalty. Here’s
what he added.
The economic policies that the public sector pushes through the
legislature affects the way that the private sector. My question to you was,
“What are the major implications on businesses from political actions
including minimum wage laws, welfare spending, and tax policy?” As a
Political Science major, I put most of my focus on the public sector of the
economy; but I personally think that most of those policies of the public
sector negatively affect the private sector.
I am a firm believer in free markets and privatization of many of
the federal government’s programs. I know that the effects of government
action, although well intended, put strain on businesses as well as
businesses and families. For example, I like to look at taxes as a great
example of how the public sector influences and hurts the private sector.
From a business standpoint, one wants to make as much profit and work
as hard as possible to make that money. Taxes, though, discourage the
economy from growing. From an individual or family standpoint, the
taxes I have to pay hinder me from using that money for things that I
want or need. But I want to learn about how other macroeconomic
decisions made by politicians and through public policy negatively (or
positively), affect the way businesses run.
The government is responsible for many things, and I understand
that are seen by many as being responsible for the well-being of others. I,
though, tend to disagree. The private sector has brought great growth and
wealth to society. Through the private sector, not the government, is
where we can see the most growth and best equality for society.
Here’s my answer:
You should get by now that there are two levels on which to address this question: aggregate and per capita. I’ve pushed you towards thinking primarily about per capitas.
At the aggregate level, the important determinants of how the economy does are the levels of capital, labor and technology. At the per capita level, it’s capital per capita, and the level of technology. In turn, capital per capita is driven by the saving rate, the population growth rate, and the rate of technological change. There are also effects from the depreciation rate, and the Cobb-Douglas alpha — but we really don’t think policymakers can influence those much.
For the per capita level, we also need to consider if a policy changes the steady state (a permanent change) or just the path to the steady state (a temporary/transitory change).
First off, we're at the point where I think I say (and have you already convinced) that the data indicates that government policy is unlikely to make much direct difference just because it comes from the government. But, it can make an indirect difference if it gets embodied in changes in capital, labor, and technology that have permanent effects.
For example, our null hypothesis should be that Obamacare (in and of itself) has no effect on the economy. But, we also need to consider that if Obamacare changes incentives, then it will make a differences; for example, if Obamacare reduces the incentive for the private sector to create new technologies, then that will have a permanent effect on the steady state (and the path we take to get there) through the rate of technological change.
Secondly, I think we need to think about whether a government policy changes the path we take towards the steady state, or just shifts us along the same path (so that we take a slightly different infinite amount of time to get to it). This is applicable for something like "cash for clunkers". People were ultimately going to get rid of those cars anyway, and buy new ones. All the policy did was change the timing.
Third, I think we need to think about whether a government policy may just substitute one-to-one with something the private sector might do. Take SUU for example. Could this be provided by the market? Yes. Would it be provided by the market? Maybe not. Would we be better off if the money was spent some other way? I think that depends on the quality of the decision making between the government choosing this path, and the private sector choosing some other way to spend the money. The results of that probably all boil down to incentive structures. A lot of our beliefs about whether it's better or worse if the government spends the money are about our beliefs about who has better incentives. On that issue, I know what I believe, but I'm not sure how concrete that is.
Fourth, we need to remember that governments have been evolving away from doing things, and towards collecting and sending checks. To the extent that they do that, the first two issues go away, and the third becomes about who wins and loses. If they tax my right pocket to give to my left, it's a wash. But if a net tax on my right pocket supports a net subsidy to your right pocket, then it might make a difference (might not, too, if we're similar). And if it does, it again comes back to whether that difference gets embodied in capital, labor and technology.
Lastly, we need to think about elasticity. The steady state is inelastic with respect to changes in the policy variables. So, it’s probably difficult to envision large changes coming through embodiment of policy in capital. The one variable that doesn’t operate that way is the rate of technological growth: that’s the most critical thing to the well-being of people, and changes in it have permanent effects because it moves the steady state. Through that lens, the only question we should ever ask about government policy is if it will increase or decrease the rate of technological change. Our experience around the world suggests that governments frequently get hijacked by interest groups that are threatened by technological change. To the extent that is true, we should be suspicious of all government programs.