During the campaign to retake the White House in 2008, Governor Sarah Palin famously said “Drill, baby, drill.” This seemed to establish her credentials as both a conservative and a member in good standing of the boy’s club. Her thoughts are also on target with respect to our public discourse. There are a lot of half-baked ideas floating around out there because people don’t drill all the way down into the core before they start advocating them. In my view this unwillingness to “drill, baby, drill” is exacerbating our inability to solve our own problems.
The root issue is correlation versus causation. Simply put, just because the data from two variables are correlated does not mean that one caused the other. If I step outside and it rains, does that mean that one caused the other? Nope. I have a quaint example from my own life. I got in trouble as a junior associate in a big law firm when I told this story: I was in my apartment in Los Angeles during law school and I was watching President Reagan and his wife Nancy board the Marine One helicopter on the White House lawn as they waved goodbye to the nation for the last time. At that very moment, there was a small earthquake in my area. Of course, that was just a coincidence, but the fact that I told the story made me look stupid, as if I believed that one caused the other. To me, it was just a cool story because Ronald Reagan had been a two time Governor of California and president of the Screen Actors’ Guild. I’m not admitting that I’m superstitious, you understand? Knock on wood.
Anyway, back to the main point. We live in a complex world with many variables and it is often difficult to figure out what is causing what phenomenon. As a result, we often suffer from what I like to call “misattribution of causation.” We blame the wrong people; we scapegoat. Some of this is unintentional, but when people do it purposefully in order to obtain or retain power, they are making it a lot harder for us to solve our problems. It is almost as if some people want to keep certain problems alive so that they can continue to profit from them. Not very neighborly, if you ask me.
We need to drill all the way down into our policy ideas. I’ll give five examples of how it is done.
First, we have an ongoing debate about the right level at which to set the minimum wage. If we raise the minimum wage too high, we will lose jobs because businesses cannot endlessly raise prices to accommodate the rising costs of doing business. If we have too low a wage, then workers can’t make ends meet and won’t have the disposable income needed to drive an economy that is mostly based on consumption. Now, what’s the problem with that last point? We don’t have a closed economy that stops at the U.S. border. We are competing against many other countries where the general price level, including wages, is much lower. If we raise the minimum wage too high, jobs that can leave the U.S. for a foreign location, will. Thus, while boosting consumption through higher wages might work in an economy composed solely of the U.S., that effect will be heavily diluted in a global economy. But to see that clearly, you have to drill down, or rather “out”, and see the big picture.
Second, the Affordable Care Act (hereinafter “ACA”), which is also known unaffectionately as “Obamacare,” required the creation of exchanges. These exchanges were to be an IT platform or website through which federally qualified health plans are sold to the public. The idea is that competition between insurers would result, driving down healthcare costs. What the problem with that idea? There is a difference between a “price” and a “cost.” The market for health insurance is an entirely different and distinct market from the market for healthcare services.
As an analogy, if you are running a small business that sells chocolate chip cookies, you may come under heavy competition from Mrs. Fields and The Cookie Corner and have to lower your cookie prices. But does that mean that your electric bill goes down? By no means! All that happens is that the usual incentive to control costs is intensified. Returning to the ACA, just because there is downward pressure on health insurance premiums doesn’t mean that healthcare costs are going to go down. Observe also that the incentive for cost control exists already anyway because the ACA has a medical loss ratio (MLR) requirement that limits the amount of money that an insurer can spend on administrative costs. In addition, most states have regulatory oversight over premiums. Worse, the downward pressure from government on premiums can have unintended consequences, such as: (a) consolidation between insurers and between insurers and healthcare providers; and (b) the proliferation of narrow provider networks. Does this improve competition or weaken it? More counterproductive policy. And by the way, although I like websites, I’m old enough to know that market competition existed even before the Internet.
Third, we have been borrowing to enable deficit spending by the federal government for decades in order to stimulate our economy. The idea is simple: we take money that would have been spent many years in the future on a future economy and future citizenry in order to spend it on ourselves now. It seems like a straightforward idea. But again, we need to drill down. Government stimulus of this type will only change behavior if enough of the right people believe that it will help the economy. If the inability of the government to solve problems (including our existential fiscal problem) scares consumers, they might not run out and go on a spending spree. In addition, if a business owner sitting on cash still thinks the future is grim or very uncertain, he isn’t going to reinvest that money in his business, he is going to save for a rainy day. Yes, that’s right, businesses are not only sellers in our economy, they are also important buyers.
What’s more, the effects of government stimulus of this type can be wiped out by countervailing factors, such as if the government dumps tons of new regulations on businesses, thereby increasing compliance costs and exacerbating uncertainty about the future. You see my point: things are not that simple because we are dealing with mass psychology, not mathematics. I should also point out that John Maynard Keynes only advocated temporary government stimulus. Therefore, what we are doing to ourselves now is not Keynesianism; although it might be “Krugmanism.” And remember that as the debt grows, so does the amount paid for debt service and to the extent that those who hold our bonds are outside the U.S., these payments do not help our economy.
People who like government intervention sometimes don’t realize that there are other people who don’t and who find such intervention frightening. If your objective is to build confidence, having a government that scares people isn’t a good idea. Why might people lack confidence in government interventions? Because the history of those interventions is a mixed bag. Here’s a handy hint for those who favor government action: screw ups, impotence and failure do not inspire confidence. So if you’re going to do something, get it right; otherwise, don’t do it. But I digress.
Fourth, some people want to increase taxes on the very rich, but they usually fail to mention that there are two types of income—salary and investment income. A policymaker could look at those two items the same way, but because they are not the same, we are not obligated to treat them the same. The old saying is that if you want more of something, subsidize it, and if you want less of something, tax it. Higher taxes on salaries create some disincentive to work for a salary. Higher taxes on investment income create some disincentive to invest.
Now, for those who don’t know already, when we invest money in debt or equity, we are providing financing to corporations that they need to succeed. But that’s not the only issue here. The problem is that investing (ownership of assets) is the main way the rich get richer. So if we can’t engineer significantly higher wages for poor or working class people, then how else can those folks get ahead except by a little investing? We don’t want taxes on investment income to hurt poor people, do we? In addition, although this argument can be overstated, if rich people tend to employ poor people, hammering rich people might one day have a bad effect on poor people, right? I believe that follows (more or less). As an aside, the reason taxes on investment income are irritating is because you get taxed on losses even if they are unrealized because you do not sell the asset. That is another thing that doesn’t have to be if we don’t want it to be.
Fifth, central banks can pursue a low interest rate policy in order to stimulate borrowing and spending, but it increases risk by encouraging investment in riskier assets with higher returns and tends to really hurt savers with shorter time horizons like the elderly. In addition, printing money is usually inflationary, and although it may not have been in the last few years because of low aggregate demand and deleveraging, sooner or later inflation will start to bite. Now some of you might say: “Well I have nothing in the stock market, so what do I care?” Remember that government pension funds have a lot invested in the stock market and that their payment obligations aren’t easy to escape in addition to being generally underfunded at present. We’re all in the same boat.
The moral of these five examples is clear: if we don’t drill down all the way into our policy ideas, we might miss something important. It also means that when a politician tries to sell you on their ideas, be aware that they might not be telling you the whole story.
Now, there are trade-offs with any kind of decision and most of those consequences are known at the time the decision is made. In fact, some of the things that people complain about the most after the fact were intended by the policymakers. This is because when it comes to policy, just as with people, their greatest strengths are often also their greatest weaknesses. But we also often have unintended consequences, perverse incentives, and what I call “policy inversion”–where some of the effects of the policy actually work in the opposite direction of its stated purpose. Not all of that is avoidable, but we do want to go in with our eyes open. We don’t want our policymakers to say: “if I had known then what I know now, I would not have voted for that policy.” Trial and error is inevitable, but the rigidity of the law and government makes it very problematic and costly. We should try to minimize unintended consequences by thinking all the way through things, drilling all the way down to the core. Drill, baby, drill!
Now, I have talked about “unforced errors,” but I suspect that there is something more going on here. I think sometimes we “cut off our noses, to spite our faces.” Underlying that is a little self-loathing. I’m all for humility and honest self-reflection on the fact that we humans are far from perfect. But I’m not for some of the bashing of America and Western culture that I see going on in some circles. If we want to be successful economically, then we have to like ourselves just a little bit.
We need to make speed towards solutions of the key problems we face, such as our fiscal problem. If we do not act decisively soon, then we may end up like poor Richard in Shakespeare’s play “The Tragedy of King Richard the Second.“ After his Fate has been sealed, Richard laments: “I wasted time, and now doth time waste me.” Let’s not go there. We should have acted yesterday.
The author formerly worked for the State of Hawaii as an insurance regulator, but his views as expressed here do not necessarily reflect the views of his former employer. He has a B.A. from Columbia University, a J.D. from UCLA, an M.B.A. from the University of Hawaii at Manoa, and a CPCU.
“Social engineering has failed, but I think that we can continue to improve incrementally through the free exchange of ideas and a relatively free market system. As we do this, however, we must remain realistic. We may not have to accept the world as it is, but we must take it as we find it. You can’t get to utopia by living in a dream world.” From page 164 of “No More Stupidtry: Insights for the Modern World,” by Lloyd Lim (Tate Publishing 2016).