thanks to arbitrage, rational people stand to profit when irrational people let prices and wages stray from efficient levels. That’s what justifies the economist’s assumption of rationality—a small number of rational profit-seekers keep markets rational as a whole even when many participants aren’t.
Unfortunately, tax policy has no such mechanism. Tax policymakers suffer the same cognitive biases as everyone else, but the “market” for tax policy—made up of legislators, voters and lobbyists—is much less self-correcting. In traditional markets, bad business practices get pushed out by competition, and bad pricing decisions get corrected through arbitrage. But in tax policy, inefficient tax laws can survive on the books for generations.
Chamberlain cites a paper by Edward J. McCaffery and Jonathan Baron that looks at the irrational beliefs that people tend to have about taxes.
One theme of Learning Economics is that markets learn to eliminate errors, but governments do not. Thus, government intervention tends to have at best a one-time benefit of increased efficiency. Over time, any efficiency gains will be reversed, as political sclerosis sets in.
For Discussion. What examples come to mind of government policies that were initially successful but ultimately proved resistant to change and detrimental?
READER COMMENTS
Randy
May 2 2005 at 8:11am
All government programs are resistant to change. And most benefit some to the detriment of others. But government programs are self correcting – its just that it often takes a crash to correct them.
David Thomson
May 2 2005 at 8:55am
“But government programs are self correcting”
Yeah, when hell freezes over. Even a “crash” often accomplishes little. The bureaucrats and their pet politicians will simply say that more money will turn things around. Can someone point to even one major government program that was ever eliminated? At best, they change the name.
Government programs continue indefinitely because the politicians usually hear only from their beneficiaries. The rest of us have lives to lead. For instance, a bureaucrat may benefit greatly from the continuation of a twenty million dollar program. It’s behooves them to expend enormous time and effort to fight on its behalf . My personal taxes, however, may pay only .00000000000000000001 of the total bill. I therefore have no incentive to fight against something that is essentially meaningless to my pocketbook.
Randy
May 2 2005 at 9:48am
David,
I hear you, but I think these programs only seem indefinite because they have lasted throughout our lifetimes. Remember that the New Deal is only (repeat, only) 75 years old. The Great Society only 40. There are two current indicators that there will be an end. One is the rise of fiscal conservatives in the ranks of the middle class – higher taxes breed conservatives. Two is the current debate on Social Security – the cracks in the system are becoming visible.
spencer
May 2 2005 at 10:34am
What do you mean by success. If a private industry controls a regulator and uses it to stifle competition is that success?
The best example I can think of is control of the airwaves — radio & TV, etc. This government program was a good program for decades. But now it is breaking down for two reasons. One is technology that sharply reduces the value of monopoly control of portions of the radio spectrum. The second is political that is shifting control of the spectrum from those who favor freedom to those who would use it to push a narrow political interest.
Another example is agricultural research that was supported and disseminated by government for decades that generated massive public benefits. Now the center of ag research has shifted and government support has been massively reduced.
Public health measures were more responsible for the massive improvement in longivity then anything the private sector did. But now that area is being taken over by the private sector but if this is a good thing or not is still open to question.
While I agree that the big difference between the market and government is that it is extremely difficult for government programs to be ended, I am not so sure that sclerosis is as severe as you believe. I can think of numerous government programs that have been massively altered or ended.
Lawrance George Lux
May 2 2005 at 12:07pm
I am not trying to be flippant, but Keynesian policy. It was formulated originally to correct sharp suppression of Demand. Now it is used as a Political tool to buy Campaign funds with Tax Cuts. lgl
Timothy
May 2 2005 at 3:13pm
Social Security, Medicare/Medicaid, the EPA, The Dept. of Labor, the Dept. of Energy, the Dept. of Education, need I go on?
Tim Shell
May 2 2005 at 5:35pm
What examples come to mind of government policies that were initially successful but ultimately proved resistant to change and detrimental?
The whole “Japan, Inc.” thing.
Paddy Mullen
May 2 2005 at 11:40pm
Not related to this post, I just applied Industrial Organization concepts to Terri Schiavo on my blog, you might enjoy it. http://yorkpaddy.blogspot.com/2005/05/industrial-organization-applied-to.html
dsquared
May 3 2005 at 1:50am
“and wages”? what the heck? What arbitrage is possible in the wage market??
Timothy
May 3 2005 at 1:52pm
“and wages”? what the heck? What arbitrage is possible in the wage market??
Temp agencies?
Comments are closed.