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Saturday, August 05, 2017

The Economics of Policy Reform

Economists are much better at pointing out "Hicksian Pareto Improvements" in policy rather than pure "Pareto Improvements".   Road pricing and pollution permit pricing represent the former but are unlikely to be the latter. In Los Angeles, many poor people drive and this group would prefer to waste time stuck in traffic rather than paying $ for a toll road.  Economists have not thought hard enough about how to implement our clever ideas so that the losers from a change in the status quo policy are actually compensated, and expect to be compensated in the future as the new policy persists.  This point arises again and again. Read this excellent New York Times piece about the challenge that France's President Macron faces in reforming his nation's labor laws.  In a nutshell, Europe's pro-union labor laws create terrible incentives for French firms to actually hire workers.   These policy induced labor market frictions affect the young's well being and thus their human capital accumulation and training.  Firms who know that they can't fire workers won't hire and won't take a chance on unproven workers.

Is President Macron smart enough to offer the unions a deal that compensates them for giving up their veto power?  What would such a deal look like?  The challenge here is that the union seeks to protect its current members and hopes to have future young people pay dues to join the union.  Macron would probably like to make a one time payment to these incumbents to accept the changes in return for a large lump sum amount of $.  The problem is one of "time consistency".  Some unborn future person will read Piketty's "Capital Book" and form a union in the future to protect "labor" from the interests of "capital".  Some future Macron will say, "wow, I thought that old man Macron back in 2017 took care of this issue, why do I need to pay Picketty Jr?"  Put simply, unions today cannot tie the hands of future young people to not re-unionize in the future.  

Recognizing this point, Macron could pre-commit to the following rules;  "If our nation grows by over 3% per year, I will contribute $xx billion to this pro-poor fund each year.  If our nation grows by less than 3% per year, I will discontinue these contributions."  The people could then vote on whether to accept the bundle of reforms. Note that my proposal gives "the people" a stake in the aggregate growth of the nation.