Jon Murphy recently posted a letter definition why is he skeptical about the use of taxes to eliminate market failures. His thinking was that the implementation of tax policy will inevitably be distorted by political incentives, and these incentives may not be compatible with what is in the public interest.
I agree this is a big problem. One of my most recent explanations of this problem came from Scott Alexander. Alexander used an example of how, in theory, taxes and subsidies could be used to get people to eat healthier. But Alexander goes on to comment:
You probably think this is an argument that vouchers + taxes/subsidies are a good solution. Nah. I say that legally they are a great solution. In fact, they have failed spectacularly, because we are subsidizing healthy food and limiting healthy production.
After giving many examples of the types of subsidies and restrictions caused by the political process as it really exists, Alexander concludes that “Given our current government, it should not be allowed within one year to determine anyone’s diet. To speculate that maybe the people in charge of this program will be honest people who work for the benefit of the community, means that what has happened will not happen.”
But there is another reason why I doubt this approach, which holds even if it removes all the problems about political mobilization. But first, here’s a (seemingly) random regression – what is the effect of time-restricted eating on how much people weigh?
Intermittent feeding (also known as intermittent fasting) is a popular method that people use to help lose weight. Time windows vary, but the most common method is called the 16:8 method, where a person goes 16 hours between meals, and eats all of their meals within the remaining 8 hour window. A person who does this may skip breakfast, wait until noon before eating anything with calories, and then eat between noon and 8pm. Then, they would wait until noon the next day to start eating again.
Food and nutrition studies are known to be very difficult to conduct and often have very different results. But there was a really interesting meta-analysis that looked at the effect of time-restricted eating among Muslims observing Ramadan. This is the practice of fasting between sunrise and sunset, as research notes, it can be a fasting window of between 9 and 22 hours depending on how far one lives from the equator. And it’s a trend observed by hundreds of millions of people, which provides a much better sample size than most nutrition studies.
So, what effect does this have on people’s weight? The answer is “all.” It has every possible influence on people’s weight. Some people who observe the Ramadan fast lose weight, some maintain their weight, and some gain weight. Some people lose weight because restricting their time to eat causes them to eat fewer calories than they otherwise would. On the other hand, some people who are nearing the end of their fasting window find themselves in a physical state known, to use the technical term, as “crazy hungry” and will eat when the eating window begins, eventually eating. More total calories than they would have had they just eaten all day. And for others, these two effects are basically balanced and their total caloric value remains unchanged. As a meta-analysis put “The effects of Ramadan fasting on weight vary between people, from weight loss to weight gain, depending on whether or not the energy intake during fasting is less or more-compensating for the lack of energy during the fasting period. .”
So what does this have to do with the use of taxes and subsidies to mitigate market failures? However, the use of such taxes and subsidies implicitly assumes that people will respond to taxes or subsidies in a predictable and desirable way – and people can actually respond in all sorts of different ways to taxes and subsidies, just as people’s total caloric intake can respond in all sorts of ways to time-limited feeding.
One famous example of this is cobra effect. As I have already explained before:
The British government wanted to reduce the number of cobras [in India], so he decided to pay the people for all the cobras they had killed. Seems logical, right? But policy makers did not anticipate how people would react. Many people started to breed cobras in large numbers, to kill them and turn their skins for money. Eventually, the British government realized what was happening and canceled the program. This has led snake breeders to release their useless livestock. As a result, the value of the cobra is actually increased.
Removing the number of cobras was judged to produce good externalities, and was therefore judged to be undersupplied in the market. Policy makers supported the killing of cobras because they expected it to lead to an increased number of cobra poaching, thus eliminating the market failure by increasing the killing of cobras to a socially acceptable level. But people reacted differently than policymakers expected. Instead of hunting cobras, people started breeding cobras. So the attempt to use subsidies to reduce the number of cobras has had the opposite effect.
But is this just a case in point? Or is there reason to believe that the inability to predict the exact ways people will respond to taxes and subsidies is the rule rather than the exception? In my expanded review of Jeffrey Friedman’s book The Power of IgnoranceI revealed the to argue Friedman argued that this issue is the rule and not the exception, and why this undermines the arguments made by technocratic economists, who think they can direct intelligent behavior throughout society by using taxes and subsidies to create “right” incentives. Friedman asserted that “incentives alone cannot necessarily produce behavioral predictions or, therefore, policy advice.”
This, Friedman says, is because “knowing what motivation is assumed to affect the behavior of these agents is not useful—for predictive purposes—if the economist does not know it well. How will affect it. But this requires knowing exactly how agents will interpret their situations in light of perceived motivation. Only if they interpret their circumstances in the way that an economist would ‘matter’ in a way that an economist would be able to predict.” But, as Friedman goes to great pains to argue, different people see things in different ways and think in different ways, which means that how people will respond to any given stimulus will be variable and unpredictable. As a result, economists (and policy makers in general) lack the “ability to predict a future agent’s interpretation of how to behave under future conditions such as the agents themselves will perceive and interpret them.”
A book-length demonstration of this issue is a recent book by Scott Hodge Taxocracy: What You Know About Taxes and How They Rule Your Everyday Life. It’s a good read and a breeze. Hodge cites all sorts of examples over the centuries where people’s responses to taxes – unanticipated responses by policy makers who impose taxes – have produced all sorts of unintended consequences. Some of them are just funny, like how some old houses in France are built like mushrooms – small and narrow first floors with wider floors above. Houses were built this way because “property tax was based on the square footage of the house.” Therefore, people cheated the tax collector by designing a small floor level and wider stories above it.”
But sometimes the results are not funny and very dangerous. King William III imposed a tax on windows, assuming that residences and buildings with many windows were likely to belong to the rich, so this would be a way to tax the rich. However,
the tax “led to dire conditions for the urban poor, as landlords closed windows and built dwellings without adequate light and ventilation.” Some buildings were built without windows on some floors which led to “the spread of many diseases such as dysentery, dysentery, and typhus.”
Granted, in all those cases taxes were passed as a way to correct market failures. But the key issue – that people will respond to taxes (or cuts) in all sorts of unpredictable ways – is as true as taxes (or subsidies) are intended to correct market failures or just taxes with the general purpose of raising revenue.
Friedman says this undermines the arguments in favor of technology policy – which includes the use of taxes and subsidies to change behavior in a way that corrects market failures. Friedman wrote: “If we have reason to think that we cannot precisely know the consequences of a certain action (such as a certain technological action), then our knowledge of the beneficial effect of taking that type of action cannot serve as a decisive measure.” mind so, as technology requires, as we lack such knowledge. Likewise, if the defender of technology admits that it is possible to produce unintended results but admits, again, that he does not know what it might be, then his knowledge of the beneficial effects of technology (prevention, reduction, and solution of social problems) cannot serve as a reason for that, because he does not have knowledge of what depends on the cost side of the book.”
So even without the politically incorrect motives (a real problem in itself) there is another problem with trying to use taxes and subsidies to correct market failures. Because, according to Friedman, if we have reason to think that we do not know precisely the ways in which people will change their behavior in response to a Pigouvian tax or subsidy, and I think we actually have good reason to think this, then the claim that the claim that taxes or subsidies will alleviate market failure cannot work as a reason of that policy.
Source link