Sunday, December 8, 2013

Economics From Barack Obama

Here's two very simple, very fundamental economic principles:

1.) Incentives matter.

2.) Supply and demand matters.

You would think that the President of the United States would understand both of these principles. However, he still says things like this:

"And the evidence shows that unemployment insurance doesn’t stop people from trying hard to find work." 

And this:

"But there’s no solid evidence that a higher minimum wage costs jobs."


Both of these statements are incorrect. There is indeed a large amount of evidence that unemployment insurance and the minimum wage have significant, negative impacts on employment. Indeed, such evidence has been discussed on this blog (here and here)

It's also true that such evidence does not necessarily mean that increasing the minimum wage or extending unemployment insurance are bad ideas. It does mean that these policies have real costs that need to be considered.

My real concern with these statements, however, is not that Mr. Obama is misrepresenting the literature on these issues (even though he is). Instead, my real concern is that these statements both are highly illogical from an economic point of view.

One need not look at large amounts of evidence to know that, all else equal, unemployment insurance leads to less employment. All one needs to know to understand this is that incentives are real. If Barack Obama is saying that unemployment insurance has absolutely no effect on employment, he is essentially saying that incentives don't exist.

The same is true of the minimum wage. Wages are determined by supply and demand. Putting a binding minimum on a wage or price, all else equal leads to less demand for that good or service. In the context of wages, that means lower employment. Barack Obama's statement on this is not merely incorrect. It is illogical.

If the literature indeed showed what Barack Obama said it showed (which it does not), the correct way to phrase it would be that these policies do not have large enough effects to make a significant difference in lieu of other factors.

This is not meant as a criticism of Barack Obama, but the fact that our president is saying things like this is a bit disconcerting.

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