I’m convinced that one of the most devastating economic fallacies affecting public policy is one that virtually no one is even aware of. I call it “naive bundling”. To describe it, let’s start by looking at a case of non-naive (intentional) bundling. Imagine we are asked to vote on a bill which would do two things:
- Build a “Bridge to Nowhere”
- Tax CO2 emissions
The immediately obvious problem is that these are two independent considerations. It’s likely for people to support one provision but not the other. This is related to the concept of germaneness. While germaneness isn’t always a good thing, it usually is, and we would expect backlash if such unrelated items were bundled into a single bill.
But what if we fail to independently consider distinct provisions because we do not even recognize that they are distinct? This is naive bundling.
Consider a bill which institutes a minimum wage, as Germany did in the summer of 2014. While this superficially appears like a single provision, it is in fact two distinctly different policies. This is more obvious if we rephrase the bill as follows:
Policy #1: Employees will be subsidized the difference between their hourly wage and the amount of $12 per hour worked.
Policy #2: Employers will be taxed the difference between each employee’s wage and the amount of $12 per hour worked.
This is economically equivalent to instating a $12 per hour minimum wage. But unbundling these policies allows us to consider them independently on their own merits, which is tremendously valuable.
Let’s start with the subsidy outlined in Policy #1. Let’s assume for the sake of argument that most people agree these hard working individuals should make more money, so that they can have a better quality of life and not have to struggle to put a roof over their heads and food on the table.
So then what about Policy #2? It’s effectively a tax on employing people. Considering the myriad of bad things we could tax (like carbon emissions), is employing people really the best thing to tax? My point isn’t to cast a verdict on this particular case, but simply to point out that naive bundling prevents us from even asking that question. This leads to a massive amount of inefficiency across the global economy.
How might we fix this, short of requiring elected officials to have economics degrees? As a thought experiment, suppose we were to enact a law which would strictly forbid any expenditure to be based on any particular revenue stream. One could only specify a fixed amount, or a function of total revenues, or some combination of the two. But you could not, for instance, stipulate that schools would receive 40% of the revenues generated by a soda tax. I’m curious to hear readers’ thoughts on other approaches.