Sunday, November 18, 2012

Tax and Spend, often better than the alternative

To grossly simplify policymaking, when there's a problem there are usually three options available to the government.  You can always ignore the problem.  You can raise money and pay someone to deal with the problem.  Or you can pass laws to force some third party to deal with the problem.  When phrased that way the last often sounds like a bad idea, but if pick a third party that is unpopular or that seems like maybe they ought to be helping with the problem anyway then the specific plans can sound quite appealing.  But I'd argue that there are a couple of reasons to resist the urge to do this even when it sounds like a good idea at first.

The first is that by putting a burden on a specific group, you're creating an incentive for people not to join that group.  If you'd prefer that people didn't join that group then this is a pretty good deal.  But often you have a group like, say the people who employ poor people which you don't want to shrink.  But when you're passing a law it's often easy to assume that the group is static and never grows or shrinks, that the people in it are objects to be acted upon and wont' respond to the incentives around them by choosing new actions of their own.

The other problem is that while things the government pays for appear in the budget and so get re-examined at budget time each year in terms of whether they're worth their cost mandates on groups don't naturally lend themselves to being re-examined this way. 

And, of course, there's always the risk that the costs being created won't be born by the people you assume are going to bear them, but that the people you've given a mandate to will turn around and find a way to pass the expense on to someone else.  This post was inspired by see a section of a paper that Tyler Cowen had linked to:

I consider the labor-market effects of mandates which raise the costs of employing a demographically identifiable group. The efficiency of these policies will be largely dependent on the extent to which their costs are shifted to group-specific wages. I study several state and federal mandates which stipulated that childbirth be covered comprehensively in health insurance plans, raising the relative cost of insuring women of childbearing age. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for that group.
 So there you have it.  Mandating that employers pay for better insurance coverage for women just resulted in the financial burden falling on women.  Where the government had seen that it didn't like the way the results of the market were falling out and decided to pay for the cost of the insurance itself, we wouldn't have seen that.

People comparing the US and European states often think of the US government as much smaller, but a lot of that is simply the US's greater preference for achieving it's ends by mandate rather than by paying for things directly. 

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