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Thursday, November 30, 2006

The Feel-Good Axiom of Economics

I have a rule that is based on my observations about economics over the years: the economic policy or action that makes people feel good is guaranteed, nearly without exception, to be the most harmful to those it is intended to help. Some examples:

1. The minimum wage hurts the poor by driving up unemployment, and pushes some number of the poor - as well as their employers - into the underground market. A better way to help the poor is with the EITC.

2. "Fair trade" and most things trade-related hurt poor countries more than they "help". But they do make you feel good about your latte...

3. If you're a Chinese peasant, your employment options typically include a threadbare existence scraping food out of the ground, or a hope of a better future by working in a Walmart-supplying factory. Going after Walmart hurts far more poor people than it helps, both here and abroad.

4. Want to improve education? Support vouchers. Want to feel good about it? Support pumping more money at the educational establishment; they're doing such a good job...

The fundamental reason the feel-good axiom holds is that there ain't no free lunch. If you add conditions and regulations to things, no matter how well-intentioned, they get more expensive and result in unintended consequences.

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