10 March 2016

Social reform as arbitrage

Changes in laws and regulations (including for instance tax rates) are presented by their proponents as improvements to society in general, but it is generally obvious (and accepted) that they favor one group to the expense of another: for instance, changes in labor law can be to the advantage of the employer or the employee.

Sometimes, however, these measures are advertised as benefitting all involved, with no negative effects. Instead of altering the balance between the various players, the new laws are expected to eliminate inefficiencies in the social and economical system, as the practice of arbitrage levels price differences between markets.

This is counterintuitive, and so are the arguments used by the advocates of change, who forecast an outcome exactly opposite to the one expected in normal settings, because the situation is supposedly very unbalanced, even untenable (hence the urgency of the changes.) The problem is that the system to be changed has often existed for decades: the claims that some extreme imbalance has persisted (or has gradually evolved) and that something needs to be done right now (before the next election cycle, preferably) are difficult to take seriously.

A recent example are the proposed ammendments to French labor law: they are supposed to reduce unemployment by relaxing conditions on layoffs and overtime. I guess this could only work if the labor market were completely unbalanced in France.

This is similar to Reagan's proposal of increasing tax revenue by reducing tax rates, which would only have been possible in very specific circumstances (on the decreasing side of the Laffer curve.)

No comments:

Post a Comment