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.

LOL

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.

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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.

A quick exercise based on previous post

Think about just about any government program.  Here’s one example: Public education.

What problem was it was marketed by politicians (in exchange for votes) and special interests to solve?  Public education was meant to solve the problem of giving everyone equal access to a high quality education.

Has that problem been solved? Public education has given everyone access to education, but not high quality education. In fact, the very people public education was meant to solve this problem for seem to be the very ones with limited choice in escaping low-quality public schools. 

What other trade-offs and unintended consequences has the government solution created?  Public education has many trade-offs and unintended consequences. Just a couple: It has put a high price tag on low quality education. We keep kids in school and away from more productive pursuits, like gaining on-the-job experience and learning a trade, for far too long.

Now you try it. Pick a government program and answer those three questions.  Let me know if you find any where the unequivocal answer to the second question is “yes”.

Things fail

Here’s an interesting post from Arnold Kling on EconLog. 

In it, he discusses federalism and cartel federalism. Few people consciously view government in these terms, but should.

Federalism is the idea that governments compete for citizens, much like how companies compete for customers. When people are free to move, they tend to move to areas that offer governments they find more attractive.

As a small example, when I was ten years old, my parents moved seven miles to exit a poorly performing school district to a better school district.

Cartel federalism is when political elites, driven by similar motivations as business people, try to reduce competition between governments by colluding to offer similar types of government.

Bastiat reminds us to “treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.”

For the same reason, we should treat all political questions from the viewpoint of the citizen.

When I studied engineering, they taught us to avoid designing systems that have a single point of failure. Why? Because things fail.

No matter how durable and reliable we believe something to be, we don’t possibly know enough to know with certainty it will not fail.

We forget that when it comes to governments. Enron failed and hurt a small portion of the economy. The Soviet Union failed and took down the whole economy. That’s a single point of failure.

Even with governments, it’s good to have choice and competition. Why? Because things fail.

‘Government is overhead’ follow-up

Last August, I wrote this post about how I think we should view government as an overhead expense. Yesterday, Edward wrote the following response to that post:

A very interesting post. I agree with your premise that government is overhead. However, if you look at government expenditures relative to GDP, they are lower than the average overhead rates of successful companies. Currently this rate is 19 percent or so (gov/gdp) and for companies this number is in the high twenties. Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

This is my response to Edward.

The Federal government is not the only overhead in the economy. It’s a piece of it. Comparing Federal government spending to all business overhead is an apples-to-oranges comparison.

For example, all government — Federal, state and local — is part of overhead. According to this graph, all government spending makes up nearly 40% of GDP, which is more than ten percentage points higher than Edward’s ‘high twenties’ benchmark.

And still, all government is only a part of the economic overhead. For example, all the overhead tied to successful companies that Edward mentions, is also economic overhead.

Also, anything we do to comply with the government is overhead. For example, the time and money you and the companies you deal with spend to keep records and prepare your taxes — at all levels — is economic overhead that does not show up in government spending.  That’s time or money that we could have spent doing something productive, like cleaning our toilets.

Edward then asked a question that I’m really glad he asked:

Why is it that anti-tax folks presume that the correct level for our national enterprise is even lower than the faultless private sector can achieve?

First, as I pointed out above, economic overhead is higher than the ‘faultless private sector’.

Second, and more important, folks of my political persuasion don’t believe the private sector is faultless, as Edward suggests. Far from it. I’d guess the failure rate of government and private sector is about the same. Why wouldn’t it be? Both are run by humans after all.  Are the humans in government less fallible than the humans in the private sector, or vice versa? No.

One reason we favor the private sector is the difference in how it and government naturally respond to failure. The private sector is better in this regard, though not perfect.

The private sector — you, Edward and I — reward organizations that provide us with stuff we value by buying that stuff and we punish the others by not buying their stuff.

When it comes to government, that success/fail feedback isn’t quite as strong, and sometimes it’s the opposite of what it should be.

For example, for years the answer to “Public schools are failing!” was “Public schools need more money!”

This sounded reasonable to a lot of folks. I bet those same folks would scoff if “Public schools” was  replaced in those two sentences with “Enron”.

We realize that giving more money to the corrupt leaders of Enron so it could try to “fix its problems” and save some jobs would have made no sense.  Those corrupt leaders would have blown that money on themselves.

The market clobbered Enron’s stock and put it out of business long before the government even figured out what was going on.

We realized that the best thing was for Enron to go out of business. The market naturally stripped the fraudsters running Enron of their power. Its failure caused some painful collateral damage to people down the totem pole, but it also taught a generation of people valuable lessons in prudence, investment diversification and ‘if it sounds too good to be true…”  And, all this happened without taking the whole economy with it. Markets naturally isolated the disturbance.

This wouldn’t be the case a few years later when government actually encouraged fraudulent practices in home lending.

I also believe that the success/feedback loop is weak in overhead functions, whether those functions are in private companies or government.

I’ve been a part of overhead of private organizations most of my career. I’ve witnessed this from the inside. Strong underlying businesses can feed crony, corrupt and political bureaucracies in the overhead departments, precisely because the success/fail feedback loop is weak.

It wasn’t a stretch for me to recognize that government also had this success/fail feedback problem.

Again, that is precisely the reason government tends to grow in good times and bad and is one reason why anti-tax folks would like to minimize government and overhead.

Politicians tell you they can solve your problems if you vote for them and allow them to spend your money (or the rich guy’s money) and too many people believe them.

Happy Tax Day

A family member recently complained about the high cost to have her taxes prepared.

I said:

Well, taxes are complicated. If you want simpler taxes and a lower cost to prepare your tax return, vote for different people. Congress designs the tax code.

It was a rare occasion where this person didn’t have a comeback and, judging by the look on her face, hadn’t considered that connection before.

That reminds me of something else I read in the last couple days, but can’t remember where: We should move election day closer to tax filing day. We might see different results.