Public Choice 13:41

Public choice economics applies economic reasoning to decisions made in a governmental context, rather than a market context. Building on the last lecture, Boaz talks about how incentives influence government action, with a special emphasis on the relationship between big government and war.

Transcript

David Boaz: There’s a school of economics called public choice. It means you study public choice. Normally, economics studies private choice. How do you decide what job to take, what human capital to develop, what products you will buy? Public choice is about how we make decisions through government. Public choice economists talk about rational ignorance. They talk about the concept of concentrated benefits and diffused cost. We’re getting back to the special interest case there. What are concentrated benefits and diffused costs? The idea is that for any government program, the benefits are going to be concentrated on a relatively limited number of people. It could be major oil companies. It could be Wall Street banks. It could be all the corn farmers in America. It could be all the people who work in textile companies who are going to be protected from competition. It could be all the elderly who are going to get a rise in their Social Security benefits. But it’s very unlikely to be all the people. And so the benefits are concentrated on these people. The costs are diffused across all the taxpayers or all the consumers. If we put protectionist measures on textiles so that clothes that you buy are more expensive, those costs don’t show up on the government’s books. They’re not a cost to the taxpayer. They are cost to all the consumers who want to buy clothes, especially inexpensive clothes. So the benefits are concentrated, the costs are diffused among 300 million people, and that makes it very hard to organize those people. How much does the sugar quota cost every sugar consumer in America? A dollar? Five dollars? Not enough to learn about it and write your congressman. How much does it benefit the one or two sugar companies in the United States? A lot. So who hires lobbyists? The sugar companies do. Who hires lobbyists on the trade bill? Mostly unions and protectionist companies that want to be protected from foreign competition. 

There are a lot of other analyses of the way this works. One is called the iron triangle. The idea there is the iron triangle is the congressional committee that oversees a program, the bureaucrats who administer it, and the special interests who benefit from it. And political scientists talk about a revolving door between these people. The congressional committee writes the law. Then some of the staff members of that congressional committee go over and implement the law with the regulatory agency. And then when they’re ready to start making money to send their kids to college, they go get hired out as a lobbyist for the special interests that are benefitted from it. 

Or alternatively, a special interest group (the oil industry, the corn farmers, whatever) comes up with an idea for a law, they lobby the congressional committee, and then they get appointed to the bureaucracy that will oversee it because after all, who knows the business better? It’s logical to hire regulatory administrators who know something about the corn, the oil, the technology, whatever. So you get a revolving door back and forth between the policymakers, the policy implementers, and the policy beneficiaries.

Milton Friedman talked about the tyranny of the status quo. And what he meant there was we may argue a lot over whether a program ought to be implemented. We talked about National Health Insurance for 40, 50 years. We’re still moving in that direction, but we haven’t entirely gone there. So we have debates before we pass laws. But once the law is passed, Friedman says, then the tyranny of the status quo kicks in. Nobody ever says one year later, four years later, “Okay, was that law a good idea? Maybe not. Let’s get rid of it.” Never get rid of these laws. So once the law gets implemented, it stays there forever. There’s no government manual on how to close down a government agency, because why would you need one. They never close anything down. Now I’m saying never in all ways here. And you understand once in a great while, the Council on Wage and Price Stability got abolished. The Civil Aeronautics Board got abolished. That was the one that held airline prices high for consumers. Interestingly enough, the airlines were against abolishing this regulatory agency because it was protecting them from competition and holding prices high. But pretty much tyranny of the status quo. Once the program is on the books, that’s the last time anybody questions it. The next year, they discuss whether its budget should be increased by 4 percent or 8 percent, but they don’t discuss whether it ought to be ended.

Now there’s an additional angle here I want to talk about, and that is the relationship between the State and war. At one level, you might think war is devastating to a state after all. You might lose a war like the Nazis and be swept away and put on trial and hanged, and that does happen. But a lot of times, war benefits the State. War brings the State more power, more tax revenue, more spending opportunities, more opportunities for regulation, lost freedoms. Just here in the United States in the 20th century, what did we see? We saw that World War I gave us conscription and the income tax. World War II gave us tax withholding. We got wage and price controls in World War II. Prohibition comes out of World War I. The Patriot Act, the NSA spying, all comes out of the reaction to the 9/11 attacks. In all of these ways, because people feel threatened, they’re willing to give the government more power to tell them what they can drink or what they have to do with their money or spying powers. And usually, those powers don’t go away even when the war ends. So classical liberals, libertarians have always understood war enhances the power of the State. War is bad enough in its direct effects. People die, buildings are blown up, crops are devastated – those things are bad enough. But the additional problem is that the State gains vast new powers, and it tends to hold on to them. Some people like the vast powers of the State, but they don’t like the killing involved in war. They’re decent enough people to think war is a terrible thing, children die. So they’ve come up over the years with what is often called the moral equivalent of war. Okay, we’re not actually going to war, but the energy crisis, the drug crisis, the war on poverty – all of those things can be used as excuses to organize society essentially in a warlike manner. William James, about a century ago, talked about the moral equivalent of war as a way to bring discipline and fortitude and patriotism and conformity to American youth, get some sense knocked into them. 

In more recent times, we did see President Carter’s energy crisis. What was that about? It was about huge new regulations to make people accept that they were going to have to wear sweaters and sweat a little in the summer because we didn’t have enough energy. It turns out we have plenty of energy, but President Carter liked the idea that people would get patriotic and they would wear sweaters and they would wear T-shirts in the summer. The moral equivalent of war brings more power to the State without actually having to suffer the devastation and the grief that war itself brings. 

That’s why, in a sense, it is the apotheosis of all these processes I’ve been talking about. If you can convince people we’re in a struggle for national survival, whether that is against the Nazis or just against energy shortages, then you can persuade people to give up all sorts of freedoms to give more power to the government. And then people in the government are able to administer this additional power.

There’s often an assumption that if you’re in the private sector, you’re self-interested. Not that that’s a terrible thing, but let’s face it. If you’re in a business, then you’re self-interested – whereas if you go into the government, then you’re not self-interested. You’re public-interested. And it was the public choice economist who first said, “Really? Just because you graduate and go to work for General Motors and you graduate and go to work for the Department of Transportation, suddenly, you’re a selfish egoist and you’re an altruist? That doesn’t make any sense.” What if we assume that people in the government are self-interested just like people in the private sector? What would we observe? We would observe they’re aggrandizing more power to themselves. Oh, and that is what we observe. We would observe they’re building the bureaucracy that reports to them, and that is what we observe. Seems like the public choice economist demonstrated that making government more powerful is indeed what bureaucrats and politicians have in mind. Fortunately, we do have a constitution. We do have an occasionally alarmed citizenry that prevents them from doing everything they would like to do. 

But when we talk about there should be a government program for that, there should be a program to feed children, there should be a program for free student loans, there should be a government program to help with poverty in the Third World, we need to recognize politicians and bureaucrats will administer that program. Ever seen a picture of Mitch McConnell and Harry Reid? When you say the government should do X, you’re saying Harry Reid and Mitch McConnell should decide how that will be done. Instead of 300 million people interacting in the market process, that is a reality that I think you have to accept. If you want bigger government, you have to agree bigger government is going to come with waste, lobbyists, politicization, all of those sorts of side effects. And maybe you think it’s worth it. Maybe National Health Insurance is worth having politicians in charge of our healthcare. But put that on the table. That’s what we’re talking about.

Question: So when you describe how a lot of our citizenry views how government works, I couldn’t help but be reminded of the Schoolhouse Rock song ‘I’m Just a Bill’. And I was wondering where that home notion comes from.

David Boaz: Well, it’s a sort of democratic mythology. I mean that’s what we believe democracy is supposed to be. And so yeah, we teach it in our schools, and our politicians give Fourth of July addresses about it. It is what is in the civics book when you’re in junior high school or high school. Maybe by college, the civic books are getting a little more realistic. But yeah, it is, I think, a national mythology. We’re democratic. We’re not like the old system. We came to this country to create freedom and democracy. And part of the issue, of course, is the confusion in American thinking between liberty and democracy. As a libertarian, I’m in favor of liberty. I’m in favor of a free society in which people are free to come and go as they please, to eat what they want and smoke what they want and marry who they want and work as they want and refuse to work as they want, spend their own money as they choose. Everybody in America is basically in favor of that. But they often call that democracy. And, of course, democracy means something different. Democracy is about how you make the rules. And the ideal system of democracy really is kind of predicated on an assumption of this Greek arena. All the citizens, which remember, of course, was basically the slave-owning Greek freeborn men at the time. But the idea that all the citizens go down into the arena, listen to the arguments, engage in deliberation, and then make a decision which will be implemented seamlessly by public-spirited bureaucrats, it’s the mythology, and all sorts of aspects of the State talk about it that way. I think every American sort of knows it doesn’t quite work that way, but it’s still there as our background assumption.