What can we expect from government?

by Russ Roberts on May 18, 2007

in Politics

In the comments to this post about lending to the poor, Ryan writes:

It may well be the case that being "poor" is correlated with being
"financially stupid". Perhaps you are uncomfortable with that idea, or
perhaps you are uncomfortable with the idea of government intervening to
assist the financially stupid. But I think there are many cases of the
financially, legally or scientifically stupid asking the government to
restrict their choices. You can’t take it as a given that, in
retrospect, everyone will be happy with the choices they’ve made.

Ryan, you’re right on the first count. I am uncomfortable with the idea that the poor are financially stupid. Lots of rich people make dumb or ill-considered financial decisions, too. I did find the Business Week article condescending—it treats the poor as unable to fend for themselves. And I totally agree with you about the last point. In retrospect, we often regret the choices we have made.

My real disagreement, and it’s a profound one, is what’s implicit in the middle of your comment:

…perhaps you are uncomfortable with the idea of government intervening to
assist the financially stupid. But I think there are many cases of the
financially, legally or scientifically stupid asking the government to
restrict their choices.

There are two themes in this short excerpt that are often linked together: government can help  people so let’s ask government to do so. Missing from the logic is whether it is reasonable to assume that asking government to do X is likely to lead to X happening. I understand the theory. But is there evidence for the theory? And putting evidence to the side—it’s often ambiguous—is it reasonable to assume that government will act in the way you expect? Does government have the information that would enable a wise decision? And most importantly, does government have the incentive to act wisely?

In the case of helping the poor in the area of credit, the typical government intervention is to limit interest rates that lenders can charge the poor. Does this help the poor? It probably helps some poor people—the ones who are sufficiently good credit risks that lenders are willing to lend to them even at low rates of interest. But it clearly hurts other poor people, those who can no longer get a loan. Some of those poor people as you point out, might end up better off from being restrained from borrowing. But others will certainly be worse off.

One interpretation of this story is that life is imperfect. Well-intended policies inevitably have winners and losers. But at the root of the story is the assumption that you make, that government is responding to the request of poor people to help them. Is this plausible? Poor people have very little political power. They don’t vote as often as others and they give little in the way of financial support. So why would you presume that the purpose of the law is to help them?

An alternative assumption is that politicians respond to incentives like everyone else. One of the not so obvious beneficiaries of interest rate limitations are financial firms who now face handicapped competition.

Even if I think people make bad decisions, even if people have regret, even if people want government to help them, why would we presume that the actual policy (as opposed to the way it’s described) will be one that helps them?

In my view, it’s best not to assume any motives on the part of "government." There’s really no such thing as "government" other than an abstraction we use to describe the sausage factory of legislation. Politicians do have motives. They are the same as mine and yours—a mixture of self-interest and altruism. In the case of the poor, I think it is too easy for a politician to convince himself or herself that interest rate limitations are good for the poor. They are actually good for the wealthier constituents.

It is tempting to assume that government is our friend. My friend might see me about to make a bad financial decision and ask me whether I’m sure it’s a good idea. The friend does that out of love or affection. But government does not love. Even the love of a politician is unlikely to extend beyond that of any other stranger. So why do we expect the politician to be our friend and do what is right for us? Given power, I assume the politician will often be tempted to do what is best for the politician. So I think it is best not to ask government to help us make better decisions. Politicians do not have the incentive or the information to help poor people make better financial decisions. And as for the evidence, I see none that suggests that past policies passed in the name of helping the poor have actually done so.

Ryan, thanks for helping me clarify my thinking on this topic.


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