Wednesday, October 8, 2014

The Free Market Is the Best Antidote to Poverty

The Free Market Is the Best Antidote to Poverty:

Fifty years ago, President Lyndon Johnson declared "War on
Poverty." It sounded great to me. I was taught at Princeton, "We're
a rich country. All we have to do is tax the rich, and then use
that money to create programs that will lift the poor out of
poverty." Government created job-training programs for the strong
and expanded social security for the weak.

It seemed to work. The poverty rate dropped from 17 percent to
12 percent in the programs' first decade. Unfortunately, few people
noticed that during the half-decade before the "War," the
rate dropped from 22 percent to 17 percent. Without big government,
Americans were already lifting themselves out of poverty!

Johnson's War brought further progress, but progress then
stopped. It stopped because government is not good at making a
distinction between needy and lazy. It taught moms not to marry the
father of their kids because that would reduce their welfare
benefits. Welfare invited people to be dependent. Some people
started to say, "Entry-level jobs are for suckers." Many could live
almost as well without the hassle of work.

Despite spending an astonishing $22 trillion dollars, despite 92
different government welfare programs, poverty stopped declining.
Government's answer? Spend more!

Rep. Paul Ryan (R.-Wis.), chairman of the House Budget
Committee, points out that government measures "success" by the
growth of programs: "based on inputs, how much money are we
spending, how many programs are we creating, how many people are we
putting on these programs—not on outcomes—how many people are we
getting out of poverty? ... Many of these programs end up
disincentivizing work, telling people it pays not to go to
work because you'll lose more in benefits than you gain in earning
wages."

That doesn't mean the poor are lazy. It means they respond to
incentives. They are rational about choosing behaviors that, at
least in the short term, pay off.

It's not only welfare that makes it harder for the poor to climb
the ladder of success. Well-intended laws, such as a minimum wage,
hurt, too. But most people don't understand that. Even Republicans,
according to opinion polls, support a higher minimum wage. A
minimum sounds compassionate. It's hard to live on $7.25 an
hour.

But setting a minimum is anything
but compassionate because that eliminates starter
jobs. The minimum wage is why kids don't work as apprentices
anymore, nor clean your windshield at gas stations. They never get
hired because employers reason, "If I must pay $9, I'm not taking a
chance on a beginner."

To most economists, the claim that the minimum wage kills
starter jobs is not controversial. But it is among the general
public. And so politicians pander.

On my TV show this week, Rep. Jim McDermott (D.-Wash.) says that
people like Paul Ryan and I "just want to cut the size of
government. And trust the private sector to do everything."

Well ... yes. The private sector does just about everything
better.

McDermott says, "This whole business about somehow raising the
minimum wage causes a loss of jobs—if that's true, why don't we
just drop the minimum wage altogether and let people work for a
dollar a day or $1 an hour?"

OK, let's do it! It's not as if wages are set by the minimum
wage. That is a great conceit of the central planners: thinking
that only government prevents employers from paying workers nearly
nothing. But the reason Americans don't work for $1 an hour is
competition, not government minimums. Competition is what forces
companies to pay workers more. It doesn't much matter that the law
says they can pay as low as $7.25. Only 4 percent of American
workers now make that little; 95 percent make more.

The free market will sort this out, if politicians would just
let it. Left free, the market will provide the greatest benefit to
workers, employers, and consumers, while allowing charity as
well.

It would all happen faster if politicians stopped imagining that
they are the cause of everything.