Why Government Doubles Down on Policy Mistakes

Why Government Doubles Down on Policy Mistakes

The Stream - Tuesday September 20, 2016

by Charles Blahous

Frustrated voters often wonder why, after electing well-intended lawmakers to office, so many subsequent government economic policies prove damaging. Part of the answer lies in the nearly irresistible public policy dynamic of "doubling down" on mistakes. Lawmakers, press and the public need to understand the strength of this phenomenon and guard against it when adopting policy positions.

In simplified form, the dynamic runs as follows:

Government, in response to a perceived need, takes action to meet that need in a manner that distorts economic behavior and produces predictable adverse effects. The public consequently experiences problems and expresses concern. The problems themselves become justification for additional government actions that worsen the distortions and the resultant problems. As problems worsen, the public more urgently demands corrective actions. Steps #3 and #4 are repeated ad infinitum.

We have seen and continue to see this dynamic operate in many areas of economic policy. To cite but a few:

Worker Health Benefits

With the best of intentions the federal government has long exempted worker compensation in the form of health benefits from income taxation. Lawmakers aren’t scaling back the flawed policy that fuels these problems. There is wide consensus among economists that the results of this policy have been highly deleterious. As I have written previously, this tax exclusion "depresses wages, it drives up health spending, it's regressive, and it makes it harder for people with enduring health conditions to change jobs or enter the individual insurance market." Lawmakers have reacted not by scaling back the flawed policy that fuels these problems, but rather by trying to shield Americans from the resulting health care cost increases. This has been done through the enactment of additional health programs and policies that further distort health markets and which themselves drive personal and government health spending still higher.

Federal Health Programs

The federal government has enacted programs such as Medicare and Medicaid to protect vulnerable seniors and poor Americans from ruinous health care costs. The positive benefits of these programs co-exist with well-documented adverse effects. For example, it is firmly established that creating these programs pushed up national health spending, driving health costs higher for Americans as a whole. Consumer displeasure over these health cost increases subsequently became a rationale for still more government health spending, rather than reducing government's contribution to the problem. Examples of this doubling down include the health exchange subsidies established under the Affordable Care Act (ACA), as well as its further expansion of Medicaid. As the problem of high health care costs remains, proposals have proliferated to expand government's role still further; for example, some have proposed making Medicare available to the entire US population. Though intended to provide relief, such legislation inevitably adds to national health spending growth.

Education

The cost of higher education has become an increasingly salient policy/political issue. In an effort to broaden access to education, government has subsidizedits cost with a heavy emphasis on grants and loans to students and their families. It is now fairly well understood that these subsidies have had the predictable effect of increasing tuition costs. Students and their families regularly complain about having to choose between footing a massive education bill, or taking out student loans that create crushing levels of indebtedness. Many politicians have reacted to these trends not by reconsidering the policies that give rise to them, but by proposing dramatic further expansions of government education subsidies.

Social Security

Social Security collects payroll taxes from workers and provides monetary benefits to retirees, surviving family members and the disabled. Savings rates among Americans of modest incomes are undesirably low. It operates as an income transfer program rather than by building retirement savings. Because of this, whenever its benefits and tax burdens are expanded, Americans' abilities and incentives to save for retirement are reduced. This phenomenon is most pronounced with low-income, liquidity-constrained workers who, after program expansions in the 1970s, were promised Social Security benefits equaling a very high percentage of their earnings, while at the same time were left with very little surplus earnings to put aside while working. There is general agreement among economists both that Social Security depresses other saving and that savings rates among Americans of modest incomes are undesirably low. Paradoxically, however, many advocates cite these low savings rates as a reason to further expand Social Security.

As these and countless other examples reveal, whenever government policies create or exacerbate adverse economic effects, the political focus often turns to relieving the consequent hardship rather than addressing its policy causes. The resulting relief is often short-lived because the remedial legislation has usually failed to correct the underlying problem and often has made it worse.

The ACA

The ACA threatens to repeatedly be such a case. It is complex legislation with far-reaching consequences both positive and negative, offering many opportunities to double down on its more problematic policy choices. Lawmakers should resist trying to repair its problematic provisions by expanding them. Here are two examples of where the temptation is likely to be faced:

Fixing the ACA's work disincentives. Experts ranging from economist Casey Mulligan to those at the Congressional Budget Office have substantiated that the ACA is driving many workers out of the work force at a time when we can least afford it. A primary culprit is the design of its health exchange subsidies, which are skewed so heavily toward the lowest-income individuals that anything they earn subjects them to a substantial loss of federal support. To see the double down instinct at work, read for example columnist Catherine Rampell, who acknowledges the work incentive problem under current federal laws, but then argues the answer lies in expanding the ACA's various subsidies (which are themselves ample work disincentives, and expansion of which would worsen the ACA's troubled finances). Fixing the ACA's effects on health insurance premiums. The ACA effectuated many requirements that are causing health insurance premiums to rise. Combined with this problem are many horizontal inequities arising from the law's complexities. For example, individuals with identical incomes receive different levels of support depending on whether they get insurance through exchanges or through their employer. As I noted in 2012, this creates enormous temptation for the federal government to provide relief from premium increases by expanding subsidies to those buying insurance outside the ACA's exchanges. Doubling down in this manner would considerably worsen the ACA's rising price tag.

With the ACA specifically and with economic policy in general, it is vitally important that lawmakers understand the doubling-down trap and use their awareness to avoid it. If an economic distortion is created or exacerbated by government policy, the best first response is to look squarely at the policy that has caused the problem, and consider whether it needs to be tweaked, redesigned, scaled back or even eliminated. When instead we focus only on alleviating the hardship caused by flawed government policies, too often we perpetuate those very policy flaws while allowing the hardship to re-emerge again and again.

 

Copyright 2016 Foundation for Economic Education. Republished with permission.

A version of this article was first published by Economics21. 

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