What is a trade-off?
Think of your personal life
- Cheap used car no payments - repair bills; new car payments - warranty and comfort
- Fun and enjoyment - spending money; hard and boring work - making money
- You have $3, you can buy a soda or a candy bar (or save the $3)
- Spending now vs. investing for the long term
Government rade-offs: Collective Benefits vs Individual Rights
Free riders and taxation
Economic trade-offs
- inflation vs unemployment
- taxes vs economic growth
- too high tax rates can reduce government revenue
Public health vs. vice laws and excise taxes
- alcohol tax
- marijuana prohibition
- cigarette taxes
- prohibition of flavored cigarettes
- soda taxes
The trade-off
- The trade off: not just about public benefit vs private wants and needs
- benefit vs cost of enforcement
- financial costs of enforcement - just the beginning
- Human costs of enforcement
- Remember the definition of government!
John Hancock: Smuggler 1737-1793
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John Hancock, first signer of the Declaration of Independence was a smuggler evading British taxes on imported goods.
Eric Garner: Smuggler 1970-2014
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Eric Garner: Killed by New York police while selling loose cigarettes to evade NY cigarette taxes
Source: Seven Last Words of the Unarmed
Unintended Consequences Add Complexity
- Unintended consequences of public policy make it even more difficult to judge the trade-offs
- Unintended consequences: the results of actions that were not foreseen or intended by a purposeful action.
Unintended consequences Examples
Policy: Raising “sin” taxes
- People use less and revenue drops
- Black markets are created - crime increases
- Black market are created - revenue drops
Policy: very high progressive income taxes
- more later
Unintended consequences Examples
Raising “sin” taxes
Very high progressive income taxes
Ban of pesticide DDT in 1972
- millions of mosquito born illness deaths
- sickness related financial costs to individuals, families, and governments
Unintended consequences Examples
- Raising “sin” taxes
- Very high progressive income taxes
- Ban of pesticide DDT in 1972
- Three strikes laws and capital punishment for rape or kidnapping
Unintended consequences Examples
Raising “sin” taxes
Very high progressive income taxes
Ban of pesticide DDT in 1972
Three strikes laws and capital punishment for rape or kidnapping
- Criminals want no witnesses
- increase in murders
Unintended Consequences
- Unintended consequences are an important trade-off
- They are not always predictable
- They should be expected and considered
Road to Serfdom
F.A. Hayek - Nobel Memorial Prize in Economic Sciences (1974)
Instead of repealing bad economic regulations because of unintended consequences, we pass more more economic regulations with more unintended consequences
WWII, response to totalitarianism in Nazi Germany and Soviet Russia
The Road to Serfdom in Five Minutes
Road to Serfdom
F.A. Hayek - Nobel Memorial Prize in Economic Sciences (1974)
Instead of repealing bad laws because of unintended consequences, we pass more laws with more unintended consequences
Hayek focus: economic central planning
Road to Serfdom
F.A. Hayek - Nobel Memorial Prize in Economic Sciences (1974)
Instead of repealing bad laws because of unintended consequences, we pass more laws with more unintended consequences
Hayek focus: economic central planning
What else could this apply to?
Incarceration Rates
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Incarceration Rates
Judging Public Policy Trade-offs: Economic and Social Trade-offs
- Poverty reduction versus climate change reduction
- Minimum wage increase versus job growth
- Subsidized healthcare versus inflation in healthcare prices
- Higher public spending vs higher deficits and inflation
- Education vs infrastructure
- Inequality vs. income growth
Judging Public Policy Trade-offs: Economic and Social Trade-offs
- Defense vs social services
- Free trade: more jobs overall vs job losses in some industries
- Costs of immigration vs economic growth contributions of immigrants
- inequality vs economic growth
- Tax rates vs tax revenue
- Tax rates vs economic growth
Judging Public Policy Trade-offs: Economic and Social Trade-offs
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Laffer Curve: Tax Revenue vs Tax Rate
Source: Cato Institute
Judging Public Policy Trade-offs: Economic and Social Trade-offs
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Laffer Curve: Tax Revenue vs Tax Rate
- Does the Laffer Curve mean lowering taxes always increases revenue?
- Does the Laffer Curve tell us anything about economic growth?
Source: Cato Institute
Judging Public Policy Trade-offs: Economic and Social Trade-offs
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Federal Spending Categories: 2024-2025
Judging Public Policy Trade-offs: Short-term vs Long-term Benefits
- Higher taxes now vs. slower poverty reduction
- More consumption now vs. environmental issues later
- Higher spending now vs. Higher taxes later
- More educations spending now vs. economic growth later
- More infrastructure spending now vs. economic growth later
- More regulation now vs. fewer and lower paid jobs later
- Lower immigration now vs. population decline soon
Recap
Government is a dangerous solutiona and not the only solution
Where government is the solution, trade-offs should be considered carefully including:
- policy benefits versus individual freedoms and human costs
- economic and social trade-offs
- short-term versus long-term benefits
The problem that makes us want government to “do something” is only one part of deciding if a policy is good - often the least important part
Authorship and License
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