Constrained Policy Recommendations

How do people go about making policy recommendations? In one sense, we live in the best of all worlds; existing policy is optimal. Taking this stance firmly rules out any room for improvements. If there were a feasible way to make the world better, given the costs of making the change, it would have already happened. This insight is behind the great Armen Alchian’s idea that “whatever is, is efficient.” It’s an important lesson to learn so we remain humble in our ideas.

However, taking this tautological view too seriously leaves everyone without the ability to say anything about policy or take actions to improve our world. Instead of doing so, we can simply recognize that there are trade-offs while also recognizing that we may currently not be making the trade-offs optimally. This approach is encapsulated in Milton Friedman’s refrain “There ain’t no such thing as a free lunch,“ or just TANSTAAFL. Anytime someone makes a policy recommendation, the recommendation implicitly or explicitly recognizes that trade-offs exist. TANSTAAFL. I want policy X, even though I know it will cost Y. All policy recommendations recognize some constraints. We can debate whether policy X is good, but we should acknowledge the constraints and discuss the costs.

Libertarians are quick to recognize certain constraints. When someone says “Everyone should have free health care,” libertarians correctly point out that nothing is free and that the resources required to provide health care to one individual must come from somewhere. Health care does not fall from the sky, nor from the benevolent hand of a government agent. The libertarian response recognizes constraintson resources.All goods and services must be provided by someone. This is in contrast to an unconstrained policy recommendation that works on the implicit assumption that health care is free. 

This distinction between constrained and unconstrained choices, while originally coming from mathematics, is beautifully expanded on in Thomas Sowell’s classic A Conflict of Visions. In Sowell’s book, he distinguishes between constrained and unconstrained visions. Someone who has a consistent view of the world as constrained will also make constrained policy recommendations, as I am arguing they should.

One of the benefits of using economic models (my favorite blogtopic) is that you need to explicitly recognize the constraints in the economy. People can’t consume more apples than are produced. Supply must equal demand. That way of thinking comes naturally to people after much practice with economics and economic modeling.

The world includes other constraints beyond just resource constraints. There are information constraints. No one knows everything, and it is costly to learn things. There are also policyconstraints, which involve not only resource constraints and information constraints, but also legal constraints, political constraints, procedural constraints, and much more. Any policy recommendation takes an implicit stance on these constraints and what is feasible, and it’s not always clear how we should think about them. In the world we have with the politicians we have facing the constraints we have, is the recommended policy good?

Let’s be a little more concrete. In a previous article, I discussed a working paper that argued against the removal of banking regulations created after the financial crisis. The authors never claim that the banking regulations are optimal in an unconstrained sense. But in a constrained world, where politicians have the incentive to bail out banks, regulation may (or may not) be a constrained improvement.

Very few people will proudly claim they are making unconstrained policy recommendations, but we all make such recommendations sometimes. Constraints are everywhere, and we want to escape them. For example, when I argue for a free-banking system, I am treating constraints as much looser than when I argue that our current central bank should target the level of nominal GDP. Different levels of discourse will naturally move from one constraint to another.                                            

The art of making policy recommendations involves finding constraints that are not binding and persuading people and policy makers to take different actions given this realization. It is to ask: how can we move in the right direction on the margin?

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Brian C. Albrecht

Brian C. Albrecht is a Ph.D. student in the Department of Economics at the University of Minnesota. His research interests include political economy and monetary economics. He has published articles in scholarly journals, including the Journal of Economic Methodology and the NYU Journal of Law & Liberty.
 
Albrecht earned his M.A. in Economics from the University of Minnesota, his M.Sc. in Economics of Public Policy from the Barcelona Graduate School of Economics, and his B.A. in Physics and Political Science from St. Olaf College.