May 11, 2015

Extorting Low-Income Individuals to Help "the Poor"

Gary Galles

Many policies are supposedly justified because they would “take from the rich and give to the poor.” While that fits with the view that theft “for a good purpose” makes one a philanthropist, from the perspective of self-ownership, it is an assertion that the majority’s might makes their coercion right.

However, advocates of redistribution often ignore the fact that their policies redistribute wealth from many low-income individuals in the name of helping an abstract group known as “the poor.” At the same time, it is also assumed that many poverty relief efforts impose costs on wealthier groups, but in fact, much of the cost is borne by the low-income households themselves.

Even if low-income households did gain current income as a group when measured in statistical studies, only individuals bear actual benefits or costs, and many of those individuals who bear the costs of such programs are low-income.

Wage Controls

Those who support minimum wages assume the poor will gain income as a group. However, as labor economist Mark Wilson put it, “evidence from a large number of academic studies suggests that minimum wage increases don’t reduce poverty levels.”

And how do low-income individuals fare under minimum wage laws? They are often harmed. Some lose jobs and others lose hours. For those who keep their jobs and hours, on-the-job training and fringe benefits will fall, or required effort will rise, to offset hiked wages. And higher current wages are often less valuable than what is given up, particularly on-the-job training, that enables people to learn, and therefore earn, their way out of poverty. That is why labor force participation rates fall and quit rates rise when the minimum wage rises. This is the opposite of what would happen if all workers who kept their jobs benefited.

In addition, higher minimum wages also force the least skilled to compete with more skilled labor at mandated higher wages. They will suffer from its undermining of their one big competitive advantage — a lower price. Those with the fewest skills, least education and job experience face the greatest employment losses. The effect is magnified by the fact that employers pay far more than the minimum wage to those workers, through added costs for the employer half of Social Security taxes, unemployment insurance taxes, worker’s compensation premiums, etc.

With the minimum wage, some of those low-income workers lucky enough to already have job experience and a work history will keep their jobs. Many others will simply find themselves to be unemployable.

Rent Control

Supporters of rent control often assume they are Robin Hood-like policies that transfer money from “wealthy” landlords to beleaguered renters. In fact, the poor are among the greatest losers from rent control.

Rent control takes a large portion of the value of residential rental properties from landlords to coercively transfer wealth to current tenants (which is why those who live in strict rent controlled units almost never leave).

But that does not mean most of the poor benefit. Since landlords are unable to capture the value of their buildings, existing housing deteriorates in quantity and quality, and new construction of affected rental units becomes paralyzed. The result is a progressive reduction in the supply of rental housing.

In the end, rent control does little for the poor beyond a few lucky individuals. Those who were “there first” capture virtually all the gains, and the rest are left with a smaller and more dilapidated housing supply.

What do poor people seeking rental housing find after strict rent control is imposed? Mainly, they find “no vacancy” signs. Lowered rents increase the amount of housing renters would like, but reduces the housing available. That reduction in housing availability directly harms the numerous low-income individuals, even if policy makers are able to produce reports showing that some low-income households have benefited — at the expense of other low-income households.

Meanwhile, those with higher incomes, better connections, etc., can better maneuver around the restrictions (e.g., through under the table payments, condo conversions, etc.). The consequence is that those of limited means may populate the rhetoric of rent control, but far less of the housing available under it. Rent controlled areas are instead often increasingly populated by higher income tenants with few children.

Good Intentions Are Not Enough

Labor and housing market interventions do not exhaust the range of counterproductive government “social welfare” policies for the poor. But they illustrate an important, undiscussed form of redistribution. Attention is focused on Robin-Hood redistribution, supported with Swiss-cheese arguments for why it is acceptable to impose the costs on particular individuals who in no way caused the problem at hand, so long as the poor gain in the aggregate. But those policies also greatly harm many members of the groups whose welfare is supposedly being advanced. And harming large numbers of individuals who are poor cannot be justified by simply claiming that the intent is to help the poor.

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read. Send him mail. See Gary Galles's article archives.

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