Public Policy

Public policies, especially economic policies, produce many side effects because virtually everything in the economy is interconnected in a complex manner. Because of side effects, the overall effect of a narrowly focused policy can easily be negative. To improve social welfare, policymakers should address all related matters in a comprehensive manner. This approach, however, is impractical. It is extremely difficult to formulate an analytically sound policy that takes all relevant factors into consideration. Furthermore, political compromise can easily turn a sound policy into a problematic one. Because of complex interactions among various parts of the economy, "going halfway" or even "almost getting there" can be worse than "staying put." In many cases, therefore, "doing nothing" is the second best. Contrary to conventional wisdom, "reaching across the aisle" is not a virtue in making economic policies. In this book, I analyze various policies, including healthcare policies, housing policies, education policies, labor market policies, and monetary policies. Indeed, many of those policies fail to achieve their goals and produce serious side effects, possibly making their net outcomes negative. As a solution, I propose a two-tiered system. The government can avoid much of the complexity by segregating its roles from those of the market. The government should identify the most fundamental issues and address those issues in a direct, simple, and transparent manner that minimally disturbs the market. All other issues should be left to the market. We need both the government and the market, but we should not mix the two. This approach is particularly important for the redistribution of income.