Archive for October 8th, 2016

One of the great flaws of Keynesian economics is that proponents assume policy makers are angels who are motivated solely by a desire to help people by boosting the economy when there’s a downturn.

Needless to say, that’s an absurd assumption. To cite just one real-world example, we can see how Obama’s stimulus scheme was simply an opportunity for politicians and interest groups to do what they like doing regardless of the economy’s performance, which is to have fun with other people’s money. Think scams like Solyndra, but expanded to almost all parts of the federal budget.

This sober-minded assessment of how government really works is sometimes categorized as being part of “public choice economics.”

Here’s what I wrote about this theory earlier this year, as part of a column explaining why politicians will keep spending even if they know it will lead to disaster.

…there’s an entire school of thought in economics, known as “public choice,” which is based on making real-world assumptions about the self-interested behavior of politicians and interest groups. …In other words, both voters and politicians can have an incentive for ever-larger government, even if the end result is Greek-style fiscal chaos because taxes and spending reach ruinous levels. I call this “Goldfish Government” because some think that a goldfish lacks the ability to control its appetite and therefore will eat itself to death when presented with unlimited food. …America’s Founding Fathers had the right solution. They set up a democratic form of government, but they strictly limited the powers of the central government. This system worked remarkably well for a long period, but then the Supreme Court decided that the enumerated powers listed in the Constitution were just a suggestion.

One of the key insights of public choice theory is that we often get excessive government because the people getting handouts from any particular program have a very strong incentive to lobby for those goodies while the average taxpayer often does not have the time, knowledge, energy, or incentive to to either learn what’s happening or to figure out how best to fight against the various counterproductive redistribution programs.

Here’s a video from Learn Liberty that explains how “concentrated benefits” and “dispersed costs” produce bad outcomes (and if you have any doubts that this is true, just think about the Export-Import Bank or farm subsidies).

By the way, I hope everyone noticed, in the hypothetical law that was discussed, that half the money collected from taxpayers would be burned.

This is an under-appreciated reason why redistribution is so damaging. I’ve tried to make this point by talking about how federal spending involves taxing people around the nation, carrying the money in a leaky bucket to Washington, pouring some of it down a toilet, and then carrying it in a leaky bucket back to interest groups in various parts of the nation.

Building on these concepts, Professor Ben Powell uses the example of farm subsidies to explain how we get bad policy (think ethanol).

Kudos to Ben (who also narrated a great video on “sweatshops”). I particularly like his explanation of how interest groups recycle money back to politicians.

Indeed, it’s no exaggeration to say that the federal government is a racket that lines the pockets of insiders at the expense of taxpayers.

Last but not least, here’s Professor Mark Pennington from the University of London discussing public choice, market failure, and government failure.

If you’re interested, I recommend that you also watch Part II, Part III, and Part IV of Mark’s presentation.

At this stage, you may be thinking that fixing the mess in Washington is hopeless. After all, if it’s in the self interest of politicians to expand the burden of government to buy votes and win their next elections, then aren’t we doomed to have “goldfish government”?

That’s certainly what’s happened in nations such as Greece that presumably have reached and surpassed a “tipping point” of too much government dependency.

But here’s why I think there’s still hope for the United States.

…asking politicians to reduce government is like asking burglars to be in favor of armed homeowners. …we know politicians generally have bad incentives. But it’s not hopeless. While I certainly enjoy mocking politicians, they’re not totally immoral or even amoral people. Many of them do understand there’s a problem. Indeed, I would argue that recent votes for entitlement reform are an example of genuine patriotism – i.e., doing the right thing for the country. So is there a potential solution? Maybe. Let’s use an analogy from Greek mythology. Many politicians generally can’t resist the siren song of a go-along-to-get-along approach. But like Ulysses facing temptation from sirens, they recognize that this is a recipe for a bad outcome. So they realize that some sort of self-imposed constraint is desirable. And that’s why I’m somewhat hopeful that we can get them to impose binding spending caps. We know there are successful reforms by looking at the evidence. And we know there is growing support from fiscal experts. And we even see that normally left-leaning international bureaucracies such as theOECD and IMF acknowledge that spending caps are the only effective fiscal rule. So if Ulysses can bind himself to the mast and resist the sirens, perhaps we can convince politicians to tie their own hands with a Swiss-style spending cap.

P.S. Though whenever I think about the 2016 election, I confess that’s it’s hard to be optimistic.

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