A Libertarian’s Case For Government Intervention
Bryan Caplan is one of my favorite libertarian writers. He’s very persuasive and even when he doesn’t convince me he’s consistently insightful. In his Wall Street Journal review of Nick Powdthavee’s book, The Happiness Equation, he highlights one of the most important metrics for evaluating public policy:
For instance, happiness research makes a powerful case against European-style labor-market regulation. For most economists, the effect on worker well-being is unclear. On the one hand, regulation boosts wages; on the other, it increases the probability that you will have no wages at all. From the standpoint of a happiness researcher, however, this is a no-brainer. A small increase in wages has but a small and ephemeral effect on happiness. A small increase in unemployment, by contrast, has a massive and—unlike most other factors—durable effect on happiness. Supposedly “humane” regulations to boost workers’ incomes have a dire cost in terms of human happiness.
At the other end of the political spectrum, consider immigration. The most pessimistic researchers find that decades of immigration have depressed native wages by about 5%, total. The effect of immigration on Third World migrants’ wages, by contrast, is massive: One recent paper finds that allowing a Haitian to take a low-skill job in the U.S. increases his earnings 10 times. If you care about happiness, the implication is clear: Government should get out of the way.
In many instances, he’s right, government should relax regulations that obstruct full employment. But maximum freedom doesn’t always lead to full employment. Market economies with lax regulation can suffer from painful volatility.
Furthermore, during times of high unemployment like today, government could boost employment at relatively low cost to future growth (or possibly no cost). The corollary to when Caplan argues that a “small increase in wages” isn’t worth the “small increase in unemployment” is that a small decrease in future wealth is worth an increase in today’s employment. Caplan’s sound logic should help convince policymakers to support public investment programs that employ idle workers and to reverse the fall in public employment.
(The surge around May and subsequent drop is mostly due to the temporary census workers)
Over regulation can often raise unemployment, but during downturns it can also provide worker safety as some German labor policies demonstrate. From The Economist’s Free Exchange blog:
Germany proceeded to protect its labour market from major disruption by the great recession, through the use of its “short work” labour sharing programme. Firms were encouraged to cut hours rather than jobs, and workers facing reduced work hours were provided an income subsidy. The result? Germany’s huge output fall produced only a labour market wiggle.
Caring about people’s happiness also makes a further mockery of the hysteria around any Fed policy that might generate higher inflation, which would certainly boost growth and lower unemployment.
If you care about happiness, the implication is clear: Bryan Caplan makes a great case for occasional government intervention.