Government interference with the free market often lowers efficiency, shrinking the economic pie.
Just as important, many interventions rearrange who get the biggest slices, in ways that make no sense from any distributional perspective. Instead, interventions harm the poor relative to the rich.
An interesting example is tariffs, as documented by Lydia Cox and Miguel Acosta:
The U.S. tariff code has a surprising and little-known feature: Tariffs are systematically higher on lower-end versions of goods relative to their higher-end counterparts. For example, a handbag made of reptile leather has a tariff rate of 5.3 percent, while a plastic-sided handbag has a tariff rate of 16 percent. In this paper, we document the presence, historical origins, and consequences of this regressive pattern. Regressive tariffs are present throughout the tariff code, but are especially pervasive in consumer goods categories, where tariffs are 1.2 percentage points higher, on average, for low-value varieties. Using a newly constructed dataset on legislated tariffs that covers all major trade agreements back to the 1930 Smoot-Hawley Tariff Act, we show that this variation in rates across varieties largely originated in trade agreements made in the 1930s and 40s and has persisted over time. Welfare estimates suggest that the regressive nature of tariff rates on consumer goods has important distributional consequences.
This example is far from unique; interventions routinely harm both efficiency and equity. I will provide more examples in future posts.