2012-11-19

On Public Policy

In the world of public policy, we begin from the assumption that there is a problem that needs to be solved. From there, we hypothesize a series of policy solutions and estimate the impact of each. The one with the most "pros" and fewest "cons" represents the probable optimum.

Economists are typically the people tasked to come up with policy solutions, and across the generations, they have wrestled with the many problems of public policy. The early economists believed that utility was cardinal, i.e. that a perfect solution existed, and if everyone heard about it, they would all agree that it was the best solution, objectively speaking. Eventually, more refined economic thinkers appeared, and the so-called "subjectivist revolution" occurred. Utility could no longer be considered a cardinal or objective thing. Economics because "radically subjective" and the idea that different people prefer different things (which is common sense) became an economic truism.

This left public policy analysis, or "political economy," in a bit of a pickle, since there was no longer any clear consensus on what "best" means. An economist could design one solution that many people would prefer, while another economist could design an entirely different solution that many other people would prefer. The radical subjectivists postulated that the only viable solution in a subjective world is the absence of policy. This more than simply "if it ain't broke, don't fix it." It is more like, "if anyone is made worse off, then it would be unjust to act." Most of us have heard the more formalized version of this latter sentiment: primum non nocere, or "First, do no harm."

For what it's worth, I believe the medical analogy in this case is apt.

But economics continued to blossom long after the subjectivist revolution, and today we have behavioral economists who propose that we design public policies that "nudge" people into making choices that are said to be better for the economic actor than the actor herself would choose, left to her own devices. The obvious objection to the "nudge" paradigm is that it nullifies the revealed preference of the actor. If she chooses to do something other than what the policy designer believes is "the rational choice," then it is in the behavioral economist's power to proclaim that choice "irrational" and to design a nudge that "corrects" it.

In life, some of us are spendthrifts and some of us are misers, and most of us fall somewhere in between. Realistically, though, it would be impossible to arrive at a supposed "correct" level of spending versus saving, one that fits all people, all the time. And so it goes for all kinds of things: some of us pollute while others attend to the environment; some of us engage in unhealthy habits like smoking and drugs, while others are health freaks; some of us work 80-hour weeks, while others prefer scraping by with a part-time job; and so on. There are as many lifestyles as there are lives. Any policy designer who seeks a cardinal optimum is doomed to fail.

For this reason, I believe that most policy designers and behavioral economists are really interested in designing policies that result in a preferred choice, whether or not it is cardinally optimal. As soon as "policy designer" or "behavioral economist" became a valid job description, the job itself was validated. That is, because people can earn a living designing policies that the rest of us must obey under penalty of law - or additional financial burden - it stands to reason that any policy that optimizes the designer's annual job review is the policy that will be aimed for.

In other words, designers of public policy are not necessarily shooting for a social optimum, they are engaging in the same kinds of things the rest of us do at work. We all aim to please the boss, earn a raise, get tenure, add to our alottment of vacation days, etc. We all modify our workplace performance to reap personal rewards.

Therefore, if the boss says "reduce CO2 emissions," or "produce more solar panels," or "ensure that a higher percentage of people buy a health ensurance plan," or "bomb more countries," then that is precisely the policy that will be designed.

See, there really is no such thing as a social optimum of anything. It all comes down to what the heads of state prefer. They may prefer Policy X because it is what the voting public wants, or they may prefer Policy X because it is what the heads of state themselves prefer, or they may simply be trying to impress the hot new intern in the state office. The underlying reasoning doesn't matter. It matters only that the heads of state determine what the optimum policy is.

So please do not take matters of public policy too seriously. There is never any compelling reason for Policy X or Policy Y. The reasoning eventually boils down to the fact that whatever policy is being debated is the policy that the state wants to see implemented. And it will be implemented, regardless of the ensuing debate.

Today, we debate environmental regulations/policies because that is what our heads of state want us to debate. They are simply looking to implement the policy being debated. There is no point opposing it. We debate wars in foreign lands. There is no point to the debate, the invasion will occur anyway. We debate nationalizing the health care sector. There is no point to arguing, the sector will be nationalized. We debate tax hikes. Why debate? Our taxes will rise, regardless.

The very least we can do here refuse to behave like pawns. If the heads of state and policy designers want to create policies that force us to endure certain conditions, they can do so. We have no choice. We live under their rules. But let's not legitimize tyranny with a list of pros and cons.