10 Economic Truths Not Understood by Liberals

June 19, 2014

While today's political climate is tense, agreement on some essential economic truths could help lawmakers get things done in Washington, says Jeffrey Dorfman, University of Georgia economics professor.

Dorfman identifies 10 important economic facts that he says policymakers need to recognize:

  • Government only reshuffles wealth, jobs and income; it cannot create anything on its own, as it has to take money from some in order to spend it on others. Any money collected or jobs "created" by government merely replace the private sector investment and job creation that would have occurred had people been allowed to spend their own funds.
  • Income inequality does not harm the economy. While the poor spend nearly all of their money, higher-income earners save some of their income, which is just as good for the economy as spending, if not better. Saving leads to more investment and greater national income in the long run.
  • Paying low wages is not corporate exploitation. Just as businesses have to set prices according to consumer demands, they establish wages based on the supply and demand for labor.
  • Environmental over-regulation drives up prices. Because the poor spend a greater percentage of their income, especially on energy, such over-regulation acts as a regressive tax.
  • Education is not a public good. While we publically fund K-12 education, it produces human capital that is privately owned by each person. While many defend public education because it is a "public good," it is important to realize that the ensuing benefits of education are not given away for free.
  • CEO pay may be high, but so is the pay to athletes and movie stars. Such pay may reduce a company's profits, but it does not reduce the pay of other employees, as their pay is determined the marketplace.
  • Consumer spending does not drive the economy. Saving more and spending less of our income will lead to greater wealth in the long run.
  • "Free" things provided by the government are typically low-quality and unnecessarily expensive.
  • Injustices happen. The government cannot correct every injustice, and every time the government steps in to "fix" something, it puts costs on someone else. Affirmative action policies, for example, grant college admissions only by denying admissions to other applicants.
  • There is no such thing as a free lunch. "Free" government services cost money. Similarly, raising the minimum wage gives money to employees only by taking away jobs and raising prices for consumers.

While liberals often focus their policy arguments on compassion, compassion cannot trump basic economic truths, writes Dorfman. All too often, government policies have unintended -- and harmful -- consequences.

Source: Jeffrey Dorfman, "10 Essential Economic Truths Liberals Need to Learn," Forbes, June 5, 2014.

 

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