I know I have harped on the dismaying extent to which our policymakers legislate on the basis of ideology rather than evidence, but I want to revisit that theme again today.
Several people have commented on my recent post/IBJ column about the drug war–and the enormous sums we continue to spend (in a time of austerity, no less) on a policy that everyone sentient knows has not only failed miserably, but in many ways has been counterproductive.
As a civil libertarian, I would have great qualms about the drug war even if it HAD been effective. But let me suggest another policy area where ideology has trumped experience.
It always seemed to me that the argument against confiscatory tax rates having a negative effect on job creation made sense. (Leave aside the question of what constitutes a “confiscatory” rate for now.) If I am a wealthy person, and I know that even a successful investment in a new factory or other job-creating enterprise will yield a minimal after-tax return, why should I take that risk? And even if lower tax rates leave me with more dollars in my pocket that I DON’T invest, filling my order for that fur coat and yacht creates jobs, too.
Unfortunately, experience has not supported that eminently logical proposition. As a number of economists have documented, job creation has actually IMPROVED after tax increases. Again, actual performance depends on how much of an increase, on what, and how steep the rate is following the increase. But increases in the general income tax rates have demonstrably NOT harmed job creation-quite the contrary.
There are many reasons why we have experienced this puzzling departure from theory. The most likely is that–contrary to the belief that people are “rational actors,” humans are more complicated, and what constitutes a “reward” or “incentive” will vary widely from individual to individual. I can attest that many academics who could make much more money in the private sector work as hard for the recognition of their peers as many private-sector folks work for financial rewards. (As I so often tell my students, “it’s more complicated than that theory might suggest.”)
The real question, however, is not why a particular, perfectly reasonable, theory didn’t hold up. The real question is, why do so many people stubbornly cling to the theory and ignore the evidence provided by actual experience?