Some government policies that have unintended consequences according to Jean Tirole

I submitted the following two weeks ago to my local paper, The San Antonio Express-News. But it looks like it will not get printed.

 

It seems like hardly a day goes by without an editorial or op-ed appearing in The Express-News that advocates a new government program, regulation, higher taxes or increased spending to solve some social problem.

 

Many of the advocates are well meaning and often experts on the particular issue they address. So, what is the problem?

 

“Solutions” to some social problems can have unwanted and unintended consequences. All the programs combined might be too costly for the government to sustain.

 

This may seem like a typical complaint that comes from free market ideologues. But instead, these points are found in the book Economics for the Common Good by French economist Jean Tirole.

 

Winner of the 2014 Nobel Prize, he is no laissez-faire zealot. But I think anyone advocating more government should seriously consider reading his book in order to understand the problems involved.

 

According to Tirole, we might be indignant over a problem. But our “feelings are a poor guide for economic action.”

 

Also, “the problem of limited information is everywhere.” We may not know enough to solve a problem or foresee the unwanted effects of a “solution” to a social problem.

 

Here are examples of French policies, similar to some here in the U.S., Tirole cites that have not worked out as intended.

 

All the various benefits given to the poor “combine to create threshold effects, setting a poverty trap.” That is, a person may have no incentive to increase their income since the gains may be completely (or even more than completely) offset by a reduction in these benefits once they reach a given income.

 

Workers are actually hurt in France by requiring employers to go to court to fire someone. Modifying such rules would lead to more workers hired and reduce total spending on unemployment insurance.

 

Policies that protect renters who are in arrears backfire. Landlords “select renters more carefully,” harming young people and those on fixed-term labor contracts.

 

Rent controls lead to housing shortages and poor quality. Maybe subsidies are the answer.

 

But housing subsidies contribute to rent inflation. They increase demand, and, along with building height limits, do nothing to increase supply. You get higher prices when demand increases with no supply increase.

 

The minimum wage in France is above that of most countries. Tirole says “this has contributed to unemployment.”

 

How much? In 1968, French youth unemployment was 5%. Now it is 25%.

 

These examples come in a section of Tirole’s book on inequality. I think his point is that finding solutions that work, that don’t do more harm than good, is not easy.

 

They need to be very well thought out. But very often they are not.

 

Tirole suggests that when formulating policies, we often only look at the direct effects (“a higher wage helps poor workers”) but don’t also examine the indirect effects (“employers might not hire as many workers”).

 

Also, we often only see the faces of the direct beneficiaries (workers whose jobs are protected because employer must go to court to fire them) and never see the faces of those indirectly affected (young, less skilled workers who have difficulty finding a job since employers become more selective in whom they hire).

 

Tirole suggests what underlies these poorly thought out policies is hubris or “government’s excessive confidence.” He says “the state hardly ever has the information it needs to make allocation decisions by itself.”

 

He certainly does not advocate just leaving markets alone. The market is an instrument, not an end in itself. But ignoring market realities can lead to counterproductive policies.