In 1848 the French free market economist Frédéric Bastiat taught a lesson most people still have not learned:
In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. (“What Is Seen and What Is Not Seen”)
Bastiat’s eloquent passage could be boiled down to nine words, popularized by science-fiction writer Robert Heinlein and Nobel Prize–winning economist Milton Friedman: There ain’t no such thing as a free lunch (TANSTAAFL). That idea has been located “at the core of economics.” It’s also been formulated as the law of unintended consequences.
Any proposed government policy should be subject to the TANSTAAFL test. After all, how could anyone praise an idea before considering the future consequences?
Take paid family leave. President Trump’s 2018 budget calls for paid leave for mothers and fathers of newborns and newly adopted children. According to The Washington Post, the Office of Management and Budget estimates the first-decade price tag at $25 billion. However, two senior budget officials said “details of the program still had to be worked out through negotiation with Congress.”
Regardless of how leave would be explicitly paid for, however, the Bastiat principle exposes it as a bad idea.
How in the world could government-mandated paid parental leave be a bad idea? It’s pro-family and pro-work, isn’t it? But if the policy were shown to burden its intended beneficiaries, that ought to make advocates think twice. Let’s see if that’s the case.
We may begin by noting that two economists not known for their hostility to economic regulation foresee grave consequences of mandated paid leave precisely for those intended beneficiaries. Larry Summers, President Obama’s director of the National Economic Council, wrote in 1989 that mandated benefits induce employers “to hire workers with lower benefit costs.” In other words, if women are more likely than men to take parental leave (and they are), employers will tend to favor male job applicants or pay women employees less than men. It’s supply and demand: if the cost of females’ labor rises, employers will demand less or seek to cut other costs. The “targeted group” (i.e., women) bears the brunt of the policy.
Jonathan Gruber, an economist and architect of the Affordable Care Act (Obamacare), came to a similar conclusion in 1994: “I find substantial shifting of the costs of these mandates to the wages of the targeted group … on the order of 100 percent.”
But where are these costs shifted to? The answer would be obvious if the Trump administration were planning to force employers to keep paying the wages of workers who take leave. But that’s probably not how it would be done. The wages would likely be paid through state unemployment programs, and we don’t yet know how the money would be raised. Regardless of the method, however, unintended consequences would follow. A tax on employers or employees would of course mean lower wages, so the tax burden would not be confined to women, who are more likely than men to take parental leave. The same would be true if the money were taken from general revenues. (However, with the budget deficit, that would require more borrowing and higher taxes later, reducing take-home pay later.)
But no matter how the money is raised, female job applicants would be specifically harmed because their months-long absence with a guaranteed job on return would disrupt business. Employers might have to train temporary workers or other staff members. (Thus, even the current federal policy of unpaid leave under the 1993 Family and Medical Leave Act is costly.) Since women are more likely to take leave than men, employers would expect that, other things equal, hiring a man would likely be less costly than hiring a woman. So they would hire fewer women or pay them less than men. In a word, TANSTAAFL.
Advocates of government-mandated paid leave say the policy is good for business. But if that’s so, why is a mandate needed? Businesses would either gladly adopt the policy or be pushed into it to compete against more-efficient competitors. Either way, government compulsion, which is always morally objectionable, would not be necessary. Women applicants should of course be free to negotiate with employers for paid leave.
Business decisions should be made in the marketplace, not in the halls of government.