Economic policies on taxes or health care seldom are redesigned from scratch. Instead, change comes as serial modifications to existing systems. This is an understandable outcome of our political process, but it makes us poorer than if we occasionally stepped back from the trees to view the whole forest.
Economic historian and Nobel Laureate Douglass North offered insight when he identified what he called “path dependency.” North argued that societies often face choices between several equally good options.
Once a choice is made, society locks itself into a given course. Subsequent shifts to alternative paths that were equally good at the outset — and even superior later — become difficult.
The idea initially applied to technology.
The distance between railroad rails is 4 feet, 8 1/2 inches. This odd figure was the traditional wheel spacing of horse-drawn coal carts. It isn’t better than alternatives, but once most railroads built to this standard, change became difficult.
The QWERTY keyboard is ergonomically inferior to alternatives. One explanation for its adoption is that rapid typing tended to jam early typewriters. QWERTY slowed typists down. Even with better alternatives, hundreds of millions of people are familiar with QWERTY and change may never occur.
Path dependency can also apply to policies. When Congress considered subsidizing a transcontinental railroad, it feared wasting money on poorly built lines. The B&O, the best-engineered railroad, had maximum grades of 2.2 percent. Congress passed the bill, but required that the grades on subsidized railroads not exceed 2.2 percent.
This particular grade was not economically optimal for every railroad. Society would have been richer if some railroads had been built to a looser standard. But once Congress established the 2.2 percent standard, all subsequent subsidies contained the same provision. Even unsubsidized railroads incurred higher interest on bonds if their plans exceeded 2.2 percent. This was policy path dependency.
The U.S. health care system is unique in that working for a large employer significantly affects whether one has health insurance. This is an outcome of World War II wage ceilings. Large employers offered free health coverage to attract more employees at a time when offering higher wages was illegal. Small companies did not offer similar coverage. Now we face problems because large employer provision is a bedrock feature of the system.
Land and gasoline were cheap when the Twin Cities grew dramatically after the Depression. Few new suburbanites wanted mass transit. Continued growth increased road congestion, however. Public transit might relieve congestion, but grafting a transit system onto cities designed for autos is extremely expensive.
Our economy might be more efficient and fair if we replaced our corporate income tax with something called a value-added tax. But even if both Republican and Democratic economists agree on this, achieving the change is nigh impossible because both parties fear the electoral perils of getting out of a rut.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.