Is there a name for adjusting bad regulation until its negative impact is no longer detectable?

Question

Taking (a highly simplified view of) Minimum Wage as an example:

• A standard "pro" argument is that an effective Minimum Wage increase improves the standard of living of the lowest-wage employees.
• A standard "con" argument is that an effective Minimum Wage increase reduces demand for those employees, increasing unemployment.

In practice however, results are mixed - Minimum Wage increases sometimes do not appreciably affect unemployment. There are several proposed explanations for the discrepancy between basic supply/demand theory and practice. One important point is that typical methods of estimating policy impact are subject to a great deal of noise.

The focus of this name-seeking effect, is that Minimum Wage increases do not take place in a vacuum. In practice, politicians are incentivized to maximize employee voter support with the highest Minimum Wage increase the market will bear, while minimizing employer lobby opposition with the lowest Minimum Wage increase acceptable. Thus, Minimum Wage increases tend on average to approximate natural wage growth. For example, if the current Minimum Wage is \$10/hr, but most businesses are already paying \$12/hr, and economic projections suggest that by next year, \$13/hr would be a reasonable expectation for the average low-wage worker, then one can safely schedule an increase to \$13/hr for next year, without fearing a major economic fallout, while gaining voter support. Meanwhile, the regulation is effectively hollow, as it simply roughly estimates what the market would do naturally.

A similar example is Rent Control. As Wikipedia puts it (quoting from a 1985 paper): "the economics profession has reached a rare consensus: Rent control creates many more problems than it solves." However again, in practice rent regulations do not universally result in housing supply reduction or other undesirable effects.

One possible reason for this is the same issue as above: Setting acceptable rent increase guidelines does not take place in a vacuum. A politician who successfully implements rent regulations that roughly emulate market forces (eg, rent increases that track inflation, market value, etc) while convincing renters that they are receiving government protection, can pull off Rent Control as long as its negative effects are sufficiently below the radar to be indistinguishable from noise. Again, the policy thus becomes hollow in effect.

The "laissez faire" or "free market" viewpoint however, is that any regulation causes market inefficiencies that may be difficult to measure (eg, administrative costs, legal costs, opportunity for corruption, rent-seeking, inflexibility to market forces, reduced long-term industry innovation, etc), so undetectable negative consequences are not the same as good policy. Moreover, this name-seeking effect is potentially applicable to many controversial regulations (eg, immigration quotas, affirmative action, labour protection, tenant protection, etc) that can survive criticism by adjusting their impact until it is no longer reliably detectable (eg, by emulating market forces), and hence hollow in effect.

Is there a name for this effect? Or alternatively, a reference to a paper that discusses it that I can refer to so that I don't have to give the (lengthy!) description above each time?

Answer 1

There is term policy optimization or optimal policy design or just policy design, which refers to idea of optimizing or fine tuning public policy. It is a term that will be mentioned in any undergraduate or graduate public economics textbook.

However, note even with policy optimization it is impossible to get rid of all negative effects of policies since there are always trade-offs. Also goal of policy optimization is not to just have policies pro forma but to have them produce actual result.

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Also, your question contains lot of false claims. You state:

A standard argument of the "socialist" viewpoint is that an effective Minimum Wage increase improves the standard of living of the lowest-wage employees.

This is not true. Socialism, at least from economic perspective, is ideology that advocates communal ownership of property (Nove 2018). If anything following socialist writings, such as some of Marx writings, minimum wages are just a bribe to workers that postpones the socialist revolution that is supposed to replace the 'capitalist' system based on private property. Once means of productions are collectivized there is no reason for arbitrary restrictions of the power of government or commune to set wages they like.

A standard argument of the "econ 101" viewpoint is that an effective Minimum Wage increase reduces demand for those employees, increasing unemployment.

Again not true. Econ 101 is very broad term. There are Econ 101 models where this does not happen. For example, simple bargaining model with firm having market power and quasi rents can generate equilibria in which employment is not affected by minimum wages.

In practice however, results are mixed - Minimum Wage increases sometimes do not appreciably affect unemployment. There are several proposed explanations for the discrepancy between theory and practice.

There isn't necessary discrepancy between theory and practice. There isn't a single theory of labor market. You have theory that describes competitive labor markets, and theories that describe labor markets where employers have significant market power. There are theories with and without bargaining etc.

The reason for this is that there isn't a single homogenous labor market. For example, in market for seasonal work there might be zero bargaining, whereas in market for white collar workers there might be a lot of bargaining involved.

Of course, for each market there can be competing theories where one is wrong and other correct, but just finding result that goes against what theory of competitive labor market says, when in fact real life labor market is not competitive, is not pointing to discrepancy per se.

The focus of this name-seeking effect, is that Minimum Wage increases do not take place in a vacuum. In practice, politicians are incentivized to maximize employee voter support with the highest Minimum Wage increase the market will bear, while minimizing employer lobby opposition with the lowest Minimum Wage increase acceptable.

Based on what you came to this conclusion?

Minimum wage creates winners and losers and a priori it is difficult to say how it affects voting. For example, even when minimum wage does not increase unemployment, empirical evidence is crystal clear large amount of minimum wage is passed onto consumers in form of higher prices (MaCurdy, 2015; Lemos, 2006; Harasztosi and Lindner, 2019).

How can we a priori say that the minimum wage worker voting block (btw in most countries the number of workers actually affected by minimum wage is very small just few percentage points), is somehow bigger or more influential then consumer and employer voting block?

Moreover, this is quite naive approach to public choice theory. Politicians care about elections, and depending on electoral system they might just cater to lets say median voter or certain groups.

A similar example is Rent Control. As Wikipedia puts it (quoting from a 1985 paper): "the economics profession has reached a rare consensus: Rent control creates many more problems than it solves." However again, in practice rent regulations do not universally result in housing supply reduction or other undesirable effects.

Preponderance of empirical evidence shows that they do reduce supply of housing (e.g. see Diamond et al 2017 and other sources cited therein). I don't know where you got the idea it doesn't in practice. This is well studied topic. Of course, there are some studies that find no effect, but you find occasional studies where there is link between vaccines and autism. False positives or negatives are a thing.