Krugman should be called out for, in effect, insisting that policies be judged only by their “seen” effects and not by their “unseen” consequences

By Don Boudreaux of Cafe Hayek.

"Paul Krugman is calling for “an example of a prominent Republican politician proposing anything that would reduce after-tax-and-transfer inequality.”  But Krugman restricts the permissible domain of examples to encompass only those that are not “bank shots” – that is, examples not involving indirect consequences."

"there lurks in Krugman’s post a problem deeper than his failure to recognize that such ‘non-bank-shot’ examples can be found."

"focus on Krugman’s rejection of what he calls “bank shots” – that is, indirect consequences of policy changes.  This denial of the relevance or importance of indirect effects speaks volumes about Krugman’s own current mindset and that of his target audience and of his admirers.  This mindset is fundamentally anti-economics.  It’s a mindset that directs undue attention to what Frederic Bastiat called “the seen” and away from that which is unseen.  Put differently, it’s the mindset of a child who believes that intentions are results, and who – because he or she cannot yet trace out consequences beyond the first and most immediate ones – assumes that the consequences of any action are limited to those consequences that are visible and that occur first.

But whatever inequality exists is almost fully the indirect result of a hugely complex process of on-going, decentralized private actions that are affected by an array of also very complex and intertwined – sometimes conflicting and sometimes reinforcing – government policies.  (This reality holds regardless of your ethical assessment of the current extent of inequality.)  Therefore, to reject as irrelevant any policies that might only indirectly reduce inequality is to reject as irrelevant any policies that are fashioned with a mature awareness, not only of their immediate and “seen” effects, but also of their unavoidable indirect effects.

For example, eliminating the minimum wage will, quite plausibly, reduce inequality.  Yet this reduction in inequality would be the result of what Krugman dismisses as a “bank shot,” so he would reject this policy suggestion as one being too far-fetched to satisfy the criterion “reduce economic inequality.”  The reason Krugman would reject this policy proposal on the grounds that it is a “bank shot” is that, while the long-run (“unseen”) effects might well all work to reduce economic inequality, the immediate and direct (“seen”) effect of eliminating the minimum wage would increase inequality by reducing the hourly pay of many low-skilled workers.  Yet outside of the direct line of economic sight, eliminating the minimum wage would reduce inequality by

- soon raising the incomes of many low-skilled workers from $0 to whatever they will earn when they are able to find employment at hourly wages below the legislatively dictated minimum;

- raising the incomes over time of low-skilled workers by enabling more of them to find and keep gainful employment and, hence, to acquire job skills that they cannot acquire if minimum-wage legislation prevents them from finding employment; such job skills to be used in the future are perhaps even more important to most low-skilled workers than are the incomes they earn today in their entry-level jobs;

- lowering the incomes of those higher-skilled (or, more generally, less-risky-to-employ) workers whose incomes are indeed made higher by minimum-wage legislation; an example of such a worker is my own 17-year-old, private-school-educated, white and already affluent son whose minimum-wage job – which he had no trouble finding – would almost certainly pay him a lower hourly wage in the absence of minimum-wage legislation."