Why does government work so well? Huh?

In this post on EconLog, Bryan Caplan explores why government enterprises work so well.

He makes a good point.

I think the small-government types (like myself) can overplay disasters of government involvement and we lose credibility when we do so. So, I do think its helpful to recognize when government seems to be doing, at worst, okay.

On the flip-side, I think big-government types can overplay the successes of government enterprises.

But, I think much of this is explained to the extent of what level of government we are talking about and the dynamics of that level, to what extent it is bottom-up or top-down.

I discussed this in more detail in this post back in 2013. I think government enterprises that work pretty well are more bottom-up and the ones that don’t work so well are top-down.

That post was inspired by an apples-and-oranges comparison often made by government-types.  They say that fire and police departments are government, and work pretty good. Then they make the logical leap to use this to support that some Federal government enterprise will work.

The lapse in that logic is that fire and police departments, while government enterprises, operate at the local level. There are thousands of these departments, that operate rather independently of one another, across our country. This makes these enterprises operate much more like a bottom-up organization, than top-down. This allows these enterprises to benefit from the same dynamics of innovationism as businesses.

“U.S. Scurries to Shore Up Spying on Russia”

When I read that headline in the Wall Street Journal, my initial thought was that perhaps ‘the U.S.’ has been a bit too preoccupied with spying on its own people.

“Envy is an unsound basis for government policy”

Don Boudreaux says it well:

Here’s my summary take on this issue [income inequality]: unless someone steals from you, you have no business fretting over how much money that person has relative to how much money you have.  If you insist, absent any such thievery, on fretting over such a thing, you are deeply immature, excessively materialistic, and obnoxiously antisocial – and, thus, unworthy of having your opinions taken seriously by serious people.  (Envy is an unsound basis not only for government policy but also for personal ethics.)  And if someone did steal from you, then what you should fret about is that person’s thievery rather than about his or her monetary wealth relative to your own.  After all, if the thief’s theft raised his or her income to a level more in line with your own, you surely wouldn’t shrug and excuse the thievery on the grounds that it helped to equalize incomes – and you’d be appalled if the police did such shrugging.

Bottom-up vs. Top-down

Forget comparisons like ‘government vs. free market’ or ‘public vs. private’. We can all pull out examples from each realm that works and doesn’t work.

I think a better distinction of human interaction systems can be drawn between ‘bottom-up vs. top-down’. Bottom-up systems tend to be driven by decisions and interactions very close to the individual. Top-down systems are driven by decisions made by a few individuals at the top of the hierarchy.

I often hear proponents of a central government — a top-down system — cite bottom-up examples to support their view, demonstrating that they don’t understand the top-down/bottom-up distinction.

Fire departments, police departments and roads are prominent examples of this and sound like, “These things are run by government and they work pretty well, let’s expand Federal government.”

Yes. These are usually run by government entities. But local government is not equivalent to Federal government. Local government is more bottom-up than top-down.

I think it’s helpful for discussion and policy-making to be able to recognize the two different systems. Here are a couple of thoughts.

  • To what degree do individuals have the ‘power of voice’?
  • To what degree do individuals have the ‘power of exit’?

Power of voice is an individual’s vote, purchasing decision or the ability to have the decision-makers hear your voice. Votes carry more weight in local elections than national elections. It’s easier to get in touch with city councilmen or the mayor than it is the Congressman or President. A purchase is a vote indicating that the individual values the product at that price.

Power of exit is the individual’s ability to leave or not choose a certain product. If I choose not to buy a product, I’m signaling that it’s not worth it. If I don’t think the city council is steering my city in the right direction, I can move a couple of miles to the next city over. Same if I’m looking for a better a school district.

Power of exit is a function of how many choices are available to me and the dynamics of competition among those choices.

I have lots of choices of products. Competition among those products is generally high. I can incur little cost for choosing one store over another or one product within a store over another.

In my area, I have lots of choices on cities, townships and counties that I can live in. Not as many choices as I have for different types of beer, but still quite a few. Since I do have a fair amount of choice, competition is relatively high and these cities and townships try to do things to voluntarily attract residents — like providing good fire departments, police departments, schools and roads. The cost to move is higher than the cost of choosing one product over another, but still not terribly high if things get really bad (this is why suburbs suck the life out of mismanaged urban areas).

I have 50 states to choose from, but the costs to move between states is relatively high. I have many countries to choose from, but the costs to change countries is even higher. So, competition goes down as these costs increase and so does my power of exit. I still have it, no doubt, but things have to get really bad before exercising that power.

I think there are a couple other elements of the bottom-up vs. top-down systems that are worth mentioning. I don’t think they are as useful in helping us recognize these systems, but I think they explain why bottom-up system work better than top-down.

1. Lots of independent trials/experiments. It’s hard to tell what will work and what won’t, so it’s best to try a lot of stuff.

2. No single point of failure. Since it’s hard to tell what will work, it’s best not to have a single point of failure, which top-down systems have.

3. How far apart are the benefits and the costs? Or, another way to think about it, how far removed are the decision-makers from the consequences of their decisions? This gets down to, how much skin-in-the-game do decision-makers have?

I will discuss more about these last three in future posts.

The good ole days

Thanks to John Hawkins for compiling this excellent list of Margaret Thatcher quotes. Here are a few that struck a chord with me.

My policies are based not on some economics theory, but on things I and millions like me were brought up with: an honest day’s work for an honest day’s pay; live within your means; put by a nest egg for a rainy day; pay your bills on time; support the police.

If you want to cut your own throat, don’t come to me for a bandage.

I always cheer up immensely if an attack is particularly wounding because I think, well, if they attack one personally, it means they have not a single political argument left.

I think we have gone through a period when too many children and people have been given to understand ‘I have a problem, it is the Government’s job to cope with it!’ or ‘I have a problem, I will go and get a grant to cope with it!’ ‘I am homeless, the Government must house me!’ and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first… There is no such thing as society. There is living tapestry of men and women and people and the beauty of that tapestry and the quality of our lives will depend upon how much each of us is prepared to take responsibility for ourselves and each of us prepared to turn round and help by our own efforts those who are unfortunate.

…The larger the slice taken by government, the smaller the cake available for everyone.


Open Immigration

I think the biggest problem with immigration is that government limits it.

Good legislation mirrors social norms and the social norms recognize that most illegal immigrants are hard-working people looking for opportunity through value-added work effort rather than value-draining government benefit programs. That’s win-win. We should eliminate government limits on immigration to match what we believe to be true that we generally accept immigrants.

Now, some folks make the case that immigrants attracted by government handouts are a drain on society. However, I think that should be taken as a valid case against government handouts rather than immigration.

Others worry about the cultural impact of open immigration, yet the U.S. has survived many waves of immigrants before. I’m not sure I understand why a current wave should be feared, especially if they are coming here for opportunity.

Update: Here’s a good, related post on Arnold Kling’s askblog. In response to the analogy “Illegal immigrants are to immigration what shoplifters are to shopping,” Kling wrote:

Let me continue with the analogy. We have a store that makes the process of dealing with the sales clerks very complicated, with people having to stand in line at the cash register for years. Maybe we would not have so much shoplifting if we fixed the checkout process–or at least if we offered an “express lane” to people willing to pay a fee of $5,000 or so.

One of Kling’s commenters took it a bit further and wrote:

Illegal immigrants are to immigration what front-of-the-bus riders are to Jim Crow.

Liberty isn’t rugged invidualism

Advocates of liberty are often wrongly characterized as ‘rugged individualists.’ I often hear our position referred to as ‘survival-of-the-fittest’ or an ‘on-your-own’ society.

I think this straw man exists for a couple of reasons.

First, it’s an expedient portrait to paint of political opponents when you don’t wish voters to think too deeply about the issues. It turns out that Don’t vote for the mean guys is a compelling campaign message.

Second, and possibly more common, is that a great many people confound government and society as one in the same. They see society expressed through government, rather than government as having a specific and limited role to play in society, like the role a janitor or security guard has in cleaning and protecting a building.

To these folks “we”, government and society are interchangeable ideas. Whatever “we” think “we” should do, should be done through government.

In my The Government Subsidy Fallacy post from January, 2012, I reference a David Henderson Econlog blog post that referenced this quote from 1800s French economist, Frederic Bastiat:

When we oppose subsidies, we are charged with opposing the very thing that it was proposed to subsidize and of being the enemies of all kinds of activity, because we want these activities to be voluntary and to seek their proper reward in themselves.

This applies to all government activity. If you oppose a government program intended to help the poor, you are accused by the people who confound government and society for not wanting to help the poor at all.

And, if you prefer liberty to big government, then that can only mean that you are a rugged individualist — you believe only the fittest should survive and everyone should carry their own weight.

But, you don’t need to be a rugged individualist to respect that the next guy deserves a chance to decide what is right for him without you sticking your nose in, just as you expect the same respect from him (“golden rule of liberty”).  You earn your freedom by letting others have theirs’.

That may be individualism, but it is not rugged individualism. And definitely not ‘survival of the fittest’ or ‘on your own’ society.

Individuals are important. Individuals are the building block of society. Without them, there is no society. It’s as simple as that. I think this is something that most people in our country believe intuitively. That’s not an -ism. I don’t think we would take the effort to educate people or attempt to help others through government or otherwise if we didn’t believe individuals were important.

Respecting the liberty of others doesn’t mean that you want an ‘on-your-own’ society. Quite the contrary. It means that you recognize that the greater good is better served from the voluntary actions of individuals than through involuntary, even if well-intended, actions of government.

Voluntary actions work so well for the greater good that not only do the unfit survive, but they don’t even really exist. In a free society with lots of specialization, nearly everyone can usually find something with which they are fit.

But for those who confound government and society, they have trouble seeing the benefits that result from voluntary actions be it trading, charity or otherwise. Why?

Even as they personally benefit from so many things provided by profit-seeking trading including basics like indoor plumbing, bountiful food, shelter, climate control and amenities like fashion handbags, smartphones and a camera in just about everything, these people scoff at the idea that businesses do good by seeking profit for their owners. They view profit-seeking as a drain on society.

They don’t see that they are the very people who have rewarded the owners with profit. They also don’t understand why they rewarded the owners — because they too gained value (or profited) from the product. Even though they participate and benefit from this activity 24/7, it is such a part of their daily lives, it is invisible to them.

These people also discount the notion that charitable activities can ever be generous enough to meet all the needs of the poor or they have strange ideas about why they do not prefer private charity. I recall one conversation where I mentioned how well churches carry out charity. The person agreed, but said she didn’t want people in need to have to get a pitch on religion just to get help. There was so much wrong with that, I didn’t know where to begin.

So, with trade, charity and other voluntary actions discredited as a reliable and viable way to achieve the greater good, that leaves government. If they see one person who wasn’t served well by private actions (usually these are the people who are asked to stand at State of the Union addresses), that’s all the convincing they need for government intervention. Rarely do they ask, can I do something to help solve this problem? It’s far easier to support government doing it and then assume the moral high-ground for that. In fact, that requires no action beyond flapping lips.

So, as a supporter of liberty, when someone tries to pin you with the ‘on-your-own’, rugged individualist tag, don’t let them off so easy. Explain that one of the things that attracts you liberty is that it does a far better job of serving the greater good than government and why you think that. It may not lead to an immediate change in thinking, but it could plant a seed that could blossom later.

Give the Governor Harumph!

In this week’s EconTalk podcast, guest Glenn Reynolds says well something I think about often:

 …it’s always funny to me that the people who go on the most about sustainability in other areas seem the least concerned about sustainability when it comes to things like government and spending.

Here he sums why government grows:

…there is a scene in it [the movie Blazing Saddles]–which I regard as one of the most powerful metaphors for our political situation every produced–and it’s the one where Mel Brooks, playing Governor Le Petomane, has all his cronies around a big conference table and he says: Gentlemen, we’ve got to protect our phony-baloney jobs. And the problem with making the government smaller is it threatens a lot of people’s phony-baloney jobs.


This immediately follows his plea to protect their phoney-baloney jobs:

Here Reynolds mentions what motivates politicians, something that should get more airtime:

I think it’s a mistake that a lot of economists make–not just economists but a lot of other critics of government–to think that the only question is just sort of money. I think the other issue that people guard almost as vigorously, and maybe more vigorously, is the non-monetary economy of self-importance.

Which I think for politicians is really what drives them more than anything else. I think the sense of being a big man.

It’s funny to me that it is assumed by default that CEOs are motivated by greed, but this motivation of a politician goes past society nearly undetected. Rather, politicians are often considered to be ‘serving the people’, when all they’re doing is spending other people’s money and getting their kicks out of being loved and a big shot.

Reynolds offers a nice rebuttal to a previous guest, Louis Michael Seidman’s, position that we shouldn’t be beholden to the Constitution.

If you are the President, if you are a member of Congress, if you are a TSA agent, the only reason why somebody should listen to what you say instead of horse-whipping you out of town for your impertinence is because you exercise power via the Constitution. If the Constitution doesn’t count, you don’t have any legitimate power.  …if we are going to start ignoring the Constitution, I’m fine with that; the first part I’m going to start ignoring is I have to do whatever they say.

Though, in Seidman’s defense, I think Russ and Reynolds are missing something in Seidman’s argument (even though they kind of mention it in the podcast, but don’t connect the dot back to Seidman’s argument). I hear Seidman basically saying that what ‘we’ consider the Constitution has evolved over time, without necessarily being updated through the official amendment process. I believe this is a fundamental point made by libertarian-minded folks like F.A. Hayek. Law isn’t the set of rules written on paper. That’s legislation. Law is the set of norms and customs by which people get along with one another. When legislation lines up with the customs, it looks like we are following the written rules (like stopping at red lights). But, when legislation doesn’t line up with custom, we generally ignore them (like driving 5 miles over the speed limit).

One last tidbit. Here’s Reynolds’ idea to help slow the growth of government (emphasis added — incentives matter):

…create a third house of Congress, which I call a House of Repeal, in which people run for election in which their only power is to repeal laws. And if that one house repeals a law, that law is repealed. And when you go before the voters every two or four years or whatever term you choose for it, the only thing you’ve got to run on is which laws you struck down. Because right now, one reason why we’ve got growth of big government is there is literally nobody in the government with an institutional incentive to shrink government. Courts can strike down laws as unconstitutional, and they do sometimes, but it doesn’t do anything for them institutionally to do so. The other two branches are all about making government bigger. And everybody runs for election and tells voters what they are going to do for them; it would be nice if we could have somebody run for election and tell voters what they are going to undo for them.

Good intentions vs. Scams

Politicians use ‘jobs programs’ to get elected. Jobs programs sound good. They help people find jobs, after all, right?

Not always.

As with many government programs, the actual outcome doesn’t always mesh with the well intended, campaign sound bite.

We need more investigative journalists like John Stossel who recently sent his interns to these supposed jobs programs. Here’s a link on Dan Mitchell’s blog about their findings. This is what one intern reported and it sums up the problem well:

“First I went to the Manhattan Jobs Center and asked, “Can I get help finding a job?” They told me they don’t do that. ‘We sign people up for food stamps.’ I tried another jobs center. They told me to enroll for unemployment benefits.”

How can this be?

As I write about often on this blog, it’s all about feedbacks and incentives. I imagine that when these jobs centers were originally funded by a legislative stroke of a pen authorizing the expenditure of taxpayer funds, they did intend to help folks find jobs.

But that same authorization gave birth to a bureaucracy which would become staffed by self-interested (not greedy) folks just like you and I. Over time, the good intention of helping folks find jobs gets subtly replaced with the bureaucracy’s intention of preserving itself.  As Stossel states elsewhere in his piece:

The private market for jobs works better than government “job centers.”

So the staffers at jobs centers look for other ways to be useful to the politicians who fund them. Soon, jobs centers become the front offices for other government programs.

Feedback is the reason I prefer private activities over government activities.

It’s not that I think government activities are inherently evil or bad. I even believe that sometimes government activities can produce value and innovation.

The weakness I see in government activities is that the failure feedback loop is indirect and weak, and sometimes the opposite of what it needs to be.

That means that when the activity does not produce the intended benefits, it can persist, even grow. Sometimes the failure of a government program can attract even more political and taxpayer support to try to fix the failure. That usually leads to an even bigger failure.

The failure feedback loop happens to be more direct and stronger in private activities. Monster.com is a private ‘jobs center’ that works well. Companies with job openings pay to post their jobs on Monster.com because they like the pool of candidates it brings.

If something else does a better job, Monster.com will either have to adapt or it will go out of business. The failure feedback loop is direct and strong.

Two fine points

A few weeks ago, I wrote about a fine point made by Thomas Sowell regarding Obama’s “You didn’t build that” comment and, in general, the idea the we always owe something to “society” or “government” because government provides a plethora of infrastructure.

Sowell wrote:

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

Don Boudreaux adds to Sowell’s fine point in his column this week in the Pittsburgh Tribune-Review (bold mine).

Sure, Wal-Mart uses government-built highways to speed its inventories to its stores. But the fact that Wal-Mart would be unable to operate without the highway system doesn’t make those highways a uniquely special input to which Wal-Mart owes all, or even much, of its success.

Wal-Mart would be equally unable to operate without farmers to grow food to feed its truck drivers — or without textile producers to supply clothes for those drivers — or without oil companies to fuel its fleet of trucks.

Would Obama therefore conclude that Wal-Mart owes some special, open-ended obligation to oil companies? Would he insist that, if oil companies now squander their revenues, Wal-Mart and other retailers are morally compelled to chip in to help oil companies get back into the black?

Does Wal-Mart owe a special, open-ended obligation to oil companies?

If an oil company exec gave a speech suggesting that the oil his company provides is so valuable that they should be able to come along after someone has bought and used oil to make a profit and charge them again, that exec would be laughed off stage. Most people have a sense that oil has a price and once price has been paid, there’s no further obligation to the oil company.

So, why wasn’t Obama laughed off stage? Why have I only heard two economists point out that the folks using the services provided by government have already paid for the use of those services?

Boudreaux goes on to make another fine point, often overlooked or treated with much skepticism by folks who don’t give this a lot of thought:

Among the kinds of infrastructure that have, in fact, been supplied successfully by private businesses are city streets, highways, sewage systems, formal education, policing, money and commercial law. Government provision of such infrastructure, therefore, cannot be read as evidence that government’s role on this front is necessary.

If government failed to build highways to connect, say, Atlanta to Pittsburgh, private firms almost certainly would. (It’s easy to collect tolls from drivers who use highways.) And likewise for nearly any other pair of cities in America. So in what way is any actual, government-built highway necessary for any private entrepreneur’s economic success? None — if (as is likely) private enterprise would have done what government instead did by crowding out private efforts.