Economics · Politics

Changing Things Hurts Someone!

Every time there is a proposal to create, remove, or change a government program, one of the complaints that inevitably arises is that some group of people is going to be harmed by it.

Economics Review

If you aren’t familiar with economics, the key thing to understand is it looks at the choices involved in allocating limited resources. A government is no different from a family, in that it has access to limited resources, and it makes choices about how it will allocate those resources. A government has far more resources to work with, but they are still limited.

So, a government can only do three things with the resources it has access to: Increase its available resources (increase tax revenues), reduce its available resources (decrease tax revenues), and change how it allocates those resources (shift funds from one program to another). Note, programs can include borrowing money, paying off debts, and building savings. Many new laws will combine several of these changes, but they all break down to those three items.

Change Hurts Someone

Virtually every change either will, or will appear to, hurt some group. A new regulation means somebody either cannot perform an action they were engaged in, or increases the risks/costs of continuing to perform it. People can argue about the value of the activity, but most things that we prohibit are to stop people from doing something they currently are doing. Changing emissions standards on cars, for example, increases the complexity of the engines and/or fuel, which makes cars more expensive to manufacture, which means new cars cost more or have less features. If you remove regulations, at the very least, the people responsible for enforcing them will no longer have a job.

Some changes will appear to be harmful, but are not. For example, every time there is a discussion of increasing or decreasing tax rates, there is an assumption that there will be a corresponding increase or decrease in tax revenues. This is not true. A trivial example is to propose setting all tax rates to 100%. Under the assumption, people would continue to work, happily giving all their money to the government. In reality, nobody would work (except in the black market) and the government would lose all existing tax revenues. Since a 0% tax rate would also generate no revenue, that means there is an ideal tax rate between 0% and 100% that generates maximum revenue for the government. A move towards that tax rate will increase revenues, away will reduce revenues. If that move is lower, then both tax payers and the government will benefit.

Finally, changes to spending allocation will hurt someone. Consider the Department of Education. One proposal is to provide school vouchers to parents instead of providing all federal funds directly to states/school districts. The anticipated consequence is that some parents would use those funds to send their children to private schools. This would increase the amount of money going to private schools, and decrease the amount of money going to public schools. Of course, this would also increase the teaching/administrative burden for the private schools and decrease the teaching/administrative burden for the public schools. Depending on how significant the change, private schools could need to hire, while public schools would need to fire, teachers and/or administrators. The benefit to one group comes at the detriment of another.

You Can’t Set Policy by Pain

If your goal is to avoid hurting people, you will not be able to pass any legislation. Any change will result in someone getting hurt, so any change will be “bad”. Businesses don’t just look at the negative consequences of any potential change, they also look at the positive consequences. This is called a Cost-Benefit Analysis. If all you are doing is measuring the costs of a proposal, but not the benefits, then you will never fully understand your options.

For example, cutting taxes sounds bad if you like government programs. There’s a cost of reduced income per dollar of economic activity. However, there’s also a benefit: lower tax rates mean people/businesses get to keep more of their earnings and will be encouraged to engage in providing/consuming more goods and services, which increases the total amount of economic activity. Assuming you can accurately estimate the changes in economic activity, then you can determine whether the overall tax revenues will go up or down.

The Takeaway

The discussion above has been based on governments, because making changes to government policy tends to provoke discussions that everyone is interested in. The above applies just as much to businesses, families, and individuals. For example, I generally don’t go out to eat for lunch. I use the saved money to purchase games and movies. I could easily afford to go out to eat for lunch daily, but that would leave me less money for other things. Where I spend it depends on where my values lie.

With governments, the same is true. The programs, regulations, and policies will reflect the balance of that government’s priorities and values. If someone objects to a change based on the costs, challenge that person to name the benefits of the change. That will tell you if they truly understand the impact of making a given change.

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