Why the left consistently commits economic fallacies- they don’t understand the ‘economic problem’

Words like ‘market’, ‘economy’ , ‘economic policy’ and ‘economic problem’ are perhaps more popular than ever in current policy debates. Even though they are common terms, the basic vocabulary of economics relays complex concepts; how we conceptualize what these terms mean inform our views on economic policy and greatly influence our thoughts on all things regarding economics. In fact, the rhetoric that the left uses and the economic policies they support, suggests that they have an uninformed understanding of what the ‘market’ and the ‘economic problem’ are.  

            The left sees the economic problem as one of ‘distribution.’ This uninformed conception of the economic problem is becoming more and more apparent. Conceptualizes the economic problem this way is problematic because it suggests that an economy should justly distribute resources amongst us. Given this conception, its obvious why the left so often vilifies high level Wall Street executives and Presidents of large corporations: because if the economic problem is one of distribution, the left thinks that certain individuals yield an unfair power over the distribution of resources.

            This view of the economic problem is perfectly exemplified in an April 9 article in the Huffington Post, “The Biggest Republican Lie -- 'America Is Broke' by Robert Creamer.  

            Creamer writes, ““And note that GDP per capita has increased six fold since Social Security was passed in 1935 and 2.3 fold since Medicare was passed in 1965. Demographic trends, like the number of seniors in society, have been massively outstripped by increases in our per capita gross domestic product -- or standard of living. Those who claim that while we might have been able to afford Social Security and Medicare when they were passed, we just can't afford them anymore, are just plain wrong.”

            Aside from the fact that GDP is an accounting measure for output and not value-creation, and the fact that “just plain wrong” is not an argument (much less a convincing one) the quote illustrates the leftist view of economics. Creamer feels a need to complain about how GDP is growing, but policy debates include cutting entitlement programs because on the left the economic problem is about distribution.

            Of course, cherry picking one quote and using it to make my point would be unfair, but Creamer Continues: “So if per capita gross domestic product keeps going up, how could it be possible that the median income of ordinary Americans hasn't increased in twenty years? And why do we have such big budget deficits? Why do we feel so broke in our everyday lives? The answer is that we are not living in a time of scarcity. We have been living in a time of enormous inequality.” Need I say more?

            According to the left, the Rich and powerful hold and unfair power over the direction of the economy and use it to generate wealth for themselves at the cost of ‘inequality’. Regarding a hedge fund manager, Creamer angrily writes that, “Instead, he paid at a rate of only 15 percent, since he earned his money by speculating as a hedge fund manager instead of making a useful good or service. Makes sense, right?”. It makes sense that Hedge Fund managers don’t create value when you believe that markets distribute resources. However, if you understand that markets create knowledge one can easily understand why Hedge Fund managers do provide a valuable service. Hedge fund managers give capital to companies they believe will use it to create value so that both the hedge fund and the company can profit from the investment, and these investments lead to changes in different prices which further send signals to all actors in the economy- creating knowledge.  

            During the socialist calculation debate, F.A Hayek put the intellectual nail in the coffin of socialism by explaining that there is no way that a government or super computer could figure out how to best distribute resources because the market process itself generates knowledge, via prices, about how resources should be used.         

            F.A Hayek explained that the Economic Problem is one of knowledge. In his article The Use of Knowledge in Society he explains, “The peculiar character of the problem of a rational economic order is determined precisely by the fact that knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.” Prices communicate individual’s fragmented knowledge of demand, the costs of substitutes, preferences etc. across the entire economy, and as things are bough and sold, prices simultaneously change; this is the market process, and the process itself yields the ‘knowledge’ we need to solve the economic problem and coordinate the allocation of all resources in our economy. Most importantly, the market process is the product of voluntary exchange between individuals. Thus, the same knowledge that that market produces cannot be replicated by mandate government distribution or re-distribution.

            Leftists like Creamer think that we should keep up the spending and redistributing since increases in GDP lead them to conclude that there is plenty to distribute. However, those of us who understand how markets work know that re-distribution come with some pretty heavy financial costs: taxes reduce companies profits, and consumers earnings, and lead to higher prices, and the mechanisms by which we re-distribute funds require a big expensive government that has no incentive act benevolently with our money and ever incentive to continue to expend in size and scope.  But those arguments are not new. What is important to note is that the left is lead to overlook these ‘costs’ because they don’t see them as distortions that mitigate the market process; that’s because the market isn’t a process that creates knowledge, for them it’s a process that distributes resources.

It’s not what government does- it’s that they’re talking

The national debt and deficit are no doubt part of nearly every current political news story (outside of gun control). Unfortunately, because many of our representatives aren’t going be re-elected if they cut as much as our country needs to cut from the federal budget, congress has been searching for ways to “raise revenues,” which is the politically neutral way to say that they would like to raise taxes. Of course, raising taxes comes at the cost of taking that money away from people and businesses, and, as we have seen, the effectiveness of such a measure has certainly not gone without debate. However, what has been missed in the debate about policies that include higher regulatory burdens is that, regardless as to whether or not they are implemented they leave countries with a great deal of uncertainty; that uncertainty does not go without economic consequence.

            After congress began to consider implementing a sales tax on Internet commerce- like sales on amazon- companies in the Internet sales business faced even more uncertainty than they were facing in our weak economic environment. Regardless as to whether this policy is implemented or not, the mere conversation of economically destructive public policy causes uncertainty for companies, and encourages them to start planning for the worst. A company who ‘could’ face a large tax increase is less likely to start large new investment projects, hire new workers, or take on new risks. In fact, companies are more likely to start cutting costs in order to protect their earnings from a being hurt by a new tax.

            When our President and Congress begin debates about creating a sales tax for online retailers, raising the minimum wage, raising the debt ceiling, or continuing to fight the Obamacare implementation battle- their policies make companies uncertain; companies are not likely to invest and expand when they face regulatory uncertainty.

            Not only are companies facing uncertainty as a result of the left’s talking points on potential economic policy, but also companies are still facing regulatory uncertainty from previous government action. Banks continue to be confused about how exactly Dodd-Frank regulations work, and no one knows what the FED’s exit strategy is for quantitative easing.  Not even congress knows how much Obamacare is going to cost us.

            Merely mentioning a new policy can have economic consequences. The more debate and gridlock in Washington there is surrounding economic policy, the more uncertainty large corporations and small business owners face. Debate, itself, about economic policy is a headwind to economic growth, even if the policies are never implemented. Of course, this does not mean that we can never debate economic policy, that would be impractical and impossible, but given their adverse effects, we should consider the timeliness of such debates; the midst of a slow economic recovery isn’t the time.