RALEIGH – A key reason that politicians so often produce bad public policies is that they are particularly prone to the post hoc and cum hoc fallacies.
For those who don’t dig Latin – I’m a Greek man myself – you might be more familiar with the phrase “correlation does not prove causality.” The fact that one event follows another (post hoc), or is associated with another (cum hoc), does not mean that one event causes the other. My favorite examples involve rain. It is true that if it rains, the ground gets wet. But you can’t prove that it rained by feeling the ground for moisture, because a wet ground could be the result of water sprinklers (particularly this summer). Similarly, you can’t prove that the ground isn’t wet by proving that it didn’t rain.
In public policy, people often assert that because good things happen after government passes a law or regulation, or bad things happen after government fails to pass a law, the consequent is due to government’s action or inaction. That’s fallacious. But it’s a common argument.
Consider the example of workplace safety. Years ago, while conducting some research on North Carolina’s then-troubled system of workers-compensation insurance, I discovered the work of Dr. Kip Viscusi, an economist formerly with Duke and Harvard universities and now at the new program in law and economics at Vanderbilt. Viscusi’s specialty was exploring the real-world effects of public and private incentives on health and safety outcomes. Rather than settling for correlations and sequences, or assuming that the announced intentions of a government policy were sufficient to assess its effectiveness, Viscusi employed statistical techniques and careful analysis to establish relationships between key inputs and outputs.
On worker safety, defenders of the Occupational Safety and Health Administration (OSHA) have observed that since its creation in 1970, workplace accidents and fatalities declined substantially. Skeptics have pointed out that the rate of safety improvement before 1970 appeared to be similar to the post-1970 trend. Viscusi was able to determine that two other factors were hugely more important in workplace-safety improvement than the prospect of OSHA fines: labor-market effects on employment costs and premium costs for workers’ comp insurance.
Workplace accidents impose substantial costs not just on employees and their families but also on employers. If the accident is serious enough to end an employee’s service, the firm bears the cost of recruiting and training a replacement. More importantly, workers in more-dangerous industries tend to demand higher wages to compensate for the risk, and studies indicate that these demands do, indeed, lead to higher wages than would otherwise prevail. On top of that, the workers’ comp system – which has existed for about a century, and is based on a competitive insurance market – rewards workplaces with better safety records.
Against the monetary effects of these two factors – wage costs and workers’ comp premiums – the prospect of OSHA fines dwindles to near-insignificance, as Viscusi explains in a new interview with the magazine of the Richmond Fed. “You are looking at zero effect in the early years of the agency, and maybe something like 1 percent to 2 percent total effect on safety in recent years,” he said. “It’s very small.”
While the data on this matter seem overwhelming, that hasn’t stopped politicians from promising major benefits from expanding OSHA or enacting new workplace-safety laws. Here in North Carolina, policymakers continue to make similar mistakes. During the 2007 legislative session, they sought to impose costly new regulations on mortgage lending and building homes on slopes – asserting that state action was needed to protect against home defaults and losses, as if lenders and insurers had no preexisting financial incentives to pursue these objectives. (The lending regs passed. The slope bill didn’t.)
Incentives attract and repel. They don’t guarantee. There is no way absolutely to prevent a costly or tragic event, regardless of whether the incentives are created by market competition or by government fiat. But because government’s effects are more categorical – regulations are typically “yes or no” instruments, not “depends on the circumstances” instruments – they do a poorer job of balancing the costs and benefits of varying levels of risk.
So instead of some jobs, loans, or products costing more than others because of market-priced risks, government often simply eliminates those jobs, loans, or products. On balance, the public loses. But gaining an opportunity to tout their good intentions, politicians win.
Hood is president of the John Locke Foundation.