Higher costs won’t help U.S. economy

By John Hood

Raleigh, NC – If you think the cost of living is too low, I bear good tidings. The Biden administration and its allies in Congress, regulatory agencies, and state governments across the country are working nonstop to raise the cost of food, shelter, energy, and education. Help is on the way!

crop man getting dollars from wallet
Photo by Karolina Grabowska

Embedded in President Biden’s proposed COVID-19 relief package, for example, is a hike in the minimum wage to $15 an hour. Even if phased in over several years, such a pronounced increased in labor costs can’t be absorbed by restaurants, retailers, and other tight-margin service industries as lower returns. Investment capital would flow elsewhere. And small enterprises, in particular, would simply become unprofitable.

So, inescapably, a boost in the wage to $15 an hour will mainly give some low-skilled workers a pay boost at the expense of giving others a pay cut to $0 an hour. Their jobs will be supplanted by kiosks or other technology. Most of the remaining financial hit will show up as higher consumer prices.

What about shelter? I recognize that many progressives who staff federal, state, and local agencies are genuinely concerned about affordable housing. Unfortunately, the regulations and other policies they espouse would have the effect of making it more expensive to build the housing stock consumers desire. If businesses can’t supply new homes to middle-class and affluent buyers, the older homes these buyers would have vacated won’t be available for folks of modest means to rent or buy.

Energy? The Biden administration has an explicit goal of raising the cost of electricity and transportation by heavily taxing or regulating fossil fuels. Yes, if natural gas and motor fuels are more expensive, consumers would more willing to shift to other options. I do think we should take the long-term consequences of climate change seriously. But right now, without affordable and reliable alternatives (such as next-generation nuclear power), the inevitable effect of hiking energy costs will be to make goods much more expensive to produce — and to deliver by truck, train, or ship.

On education, you might argue that President Biden’s talk of forgiving student-loan debt, and parallel proposals at the state level to increase government appropriations to universities, would reduce rather than increase the cost.

There is an important distinction to be made, however, between price and cost. It is possible for government to reduce the price of a good such as a college education by subsidizing it. With other revenues flowing into their coffers, universities might charge their students lower tuition than they otherwise would (although this doesn’t necessarily happen in practice). Indeed, if we are talking about public universities, governments could even mandate that tuition be lowered.

But that would constitute only a lower price, not a lower cost. The actual cost of delivering education consists of the resources consumed in paying employees and vendors, purchasing supplies and equipment, and otherwise running the campus.

Are President Biden and his allies the only ones using public policy to increase the cost of the goods and services we consume? Not at all. Former President Donald Trump imposed tariffs on a range of imports — and not just those from China. Using these taxes to jack up the price of imports was supposed to allow politically favored industries to charge higher prices, boosting their profits and employment.

Predictably, Trump’s policy didn’t work. The trade deficit didn’t shrink. Domestic industries that use imported goods in production, such as manufacturers of machine parts, got socked with higher costs themselves. Alas, Biden says he will maintain some of these protectionist policies rather than restoring consumer choice and competition.

The great surges in living standards enjoyed during most of our country’s history came not from making things more expensive but by making them less expensive. Invention and innovation allowed us to grow vastly more food, manufacture more products, and deliver a wide array of other goods and services at ever-decreasing cost per unit.

It’s hard to do, of course. But this is what real progress looks like.

John Hood is chairman of the John Locke Foundation and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution.