Wednesday, September 9, 2015

Chris Edwards' Rothberror

Thanks to Arnold Kling, I learned of this excellent critique of government written by Chris Edwards.  Edwards' critique comprehensively covers the various causes of government failure.  Unfortunately, he concludes that the "only way" to fix the government is to greatly reduce its size and scope.  The only way?  The only way?  The only way?

Evidently Edwards hasn't read my blog.  That's disappointing... but understandable.  But it's less understandable that he missed this article by David Boaz... We should get to decide how the government spends our taxes.  Boaz and Edwards both work at Cato.  The topic never came up in a meeting?  Or over lunch?  Maybe Boaz never sent the memo... and if he did... Edwards missed it?

This entry will be my attempt to try and ensure that Edwards receives, and understands, the memo.  I'm hoping that in the future, at a bare minimum, he'll mention tax choice (pragmatarianism) in a footnote.

While reading his critique I copied a few key passages and pasted them into my database.  And now I'll go through my database and copy and paste some, or all, of his passages into this entry.  Starting with...

The driving force behind market economies is that voluntary exchanges are mutually beneficial. Millions of buyers and sellers pursuing their own interests engage in billions of exchanges, each creating value on both sides.  These transactions generate market prices, which help guide people and businesses toward the best use of their efforts and resources. The price system allows for the synchronization of vast amounts of production and consumption across the nation and around the globe.

This is good... but it's not great.  The vast majority of allocations that take place in the private sector really do not involve price tags.  Right now I'm allocating my limited time to writing this entry.  Is there a price tag involved?  Nope.  When I e-mail this entry to Edwards... will his decision whether to spend his time reading it be based on a price tag?  Nope.  If he does decide to read this entry... will his decision whether to spend his time replying to it be based on a price tag?  Nope.

What helps guide limited resources to their best uses is individual valuation of the opportunity costs.  For example... my second favorite liberal, John Quiggin, recently published this blog entry... Economics in Two Lessons: Income distribution.  I'd really like to write a reply to Quiggin's entry (X) but instead of doing so... here I am writing a reply to Edwards' critique (Y).

Based on my unique preferences/circumstances...

X < Y

X is the opportunity cost of Y.  I'm sacrificing X for Y.

The valuation of the alternative uses of our own limited resources is what ensures the efficient allocation of resources.

The driving force is the desire to choose the most valuable use of our limited resources.  The driving force is the desire to get the most bang for our buck.

And I'm pretty sure that Edwards grasps this.  Pretty sure.

Focusing on prices is advantageous because it's a concise and easy way to explain government failure.  The government fails because it doesn't have prices.  Voila!  Simple.  The problem is that the non-profit sector doesn't have prices either.  Like I said, the vast majority of allocations in the private sector don't involve prices.  So the disadvantage of relying on prices is that it distracts people from the real reason why the government fails.

With pragmatarianism... clearly there wouldn't be any prices in the public sector... but there would be taxpayer choice.  Earlier I used the term "individual valuation" but I think that "earner valuation" is a better term.  The term "earner valuation" implies ownership... which is a very important distinction.  It's one thing to valuate the uses of resources which you've earned... and another thing entirely to valuate the uses of resources which you haven't earned.

With libertarianism... even if the scope of government was reduced to defense, courts and police... these three extremely important and potentially dangerous public goods would not be subjected to earner valuation.  So the chances would be extremely good that we would continue to suffer from unnecessary wars, miscarried justice and police brutality.

The government does not work like this.  Rather than voluntary exchange, it generally relies on coercion to pursue its ends. One consequence is that we cannot be sure that government actions generate net value. Because the government’s activities are not based on mutually beneficial coordination, there is no sure source of information indicating whether or not they are useful. This is a fundamental weakness of government.

Libertarianism wouldn't solve this problem.  It would reduce the size and scope of the problem... at least temporarily... but like I mentioned... there would continue to be highly detrimental consequences of preventing earners from valuating defense, courts and police.

And, just how great can earner valuation truly be if it wouldn't improve defense, courts and police?  And, just how bad can non-earner valuation truly be if it can be trusted with defense, courts and police?

In making its spending and regulatory decisions, the government is flying blind. Regulations are top-down requirements for action or restraint, not efforts at finding voluntary agreement. Federal spending relies on compulsory taxation, not customer revenue. Without voluntary agreement behind its actions, the government faces a large information void. There is no system of supply and demand, prices, and profits to inform policymakers if their activities are generating net benefits to society. Policymakers may believe that their interventions make sense, but that is usually wishful thinking based on guesswork.

This is largely correct... but the argument really loses its punch when libertarians turn around and argue that this information void that government faces really isn't a problem when it comes to defense, courts and police.

In markets, individuals and businesses often make bad decisions. But if they continue down the wrong path, their resources get depleted.  A business making misguided investments will be punished by financial losses and may face bankruptcy or a takeover. About 10 percent of all U.S. companies go out of business each year, which is a remarkably high exit rate.  But losses and business failures prompt the beneficial reallocation of resources to more promising activities.

Excellent passage!  Producers make guesses wherever they are.  The fundamental difference is who gets to determine the accuracy of guesses.  In the private sector it's up to consumers to determine the accuracy of guesses.  In the public sector it's not up to consumers to determine the accuracy of guesses.

Does it matter whether or not consumers determine the accuracy of guesses?  I'm pretty sure that it does matter... and I'm pretty sure that defense, courts and police are not exceptions to this rule.

In sum, federal subsidies and regulations induce individuals and businesses to change their behaviors. Those changes undermine overall prosperity because resources are diverted from their best uses.

Yup!  And again, "best" use is a function of earner valuation.  So protecting defense, courts and police from earner valuation ensures that resources will be diverted from their best uses.

Garbage In, Garbage Out (GIGO) is just as applicable to economics as it is to computers.

In defense of federal policymakers, they have a difficult task. There are no clear cut metrics they can use to judge the success or failure of programs. The benefits are usually visible, but the costs are often unseen. In the marketplace, when consumers dislike products, sales and profits fall, which gives companies a strong signal to change course. There is no such built-in feedback for government programs.

Another excellent passage.  And again, reducing the scope of government to defense, courts and police really doesn't provide policymakers with a clear cut metric.  Which again begs the question of just how important a clear cut metric truly is.

Government intervention is not just an invisible job killer, it is an invisible knowledge killer. Market processes generate information about consumer needs, costs, production methods, and technologies, but intervention undermines those processes. When regulations block entrepreneurs from entering markets, we never learn what innovations they might have created. When taxes prevent companies from buying new machines, technological advance is slowed because new machines often incorporate new designs. When farmers receive subsidies, we lose improvements they might have discovered if they had faced the full rigor of the market. Hayek noted, “Freedom is important in order that all the different individuals can make full use of the particular circumstances of which only they know. We therefore never know what beneficial actions we prevent if we restrict their freedom to serve their fellows in whatever manner they wish.”

And another excellent passage.  But again, can facing the full rigor of the market truly be that great if libertarians want to prevent defense, courts and police from facing the full rigor of the market?  Defense contractors would still be subsidized... so why should we be concerned about farm subsidies?

Allowing taxpayers to choose where their taxes go would create a market in the public sector.  This market would clarify the demand for public goods.  Clarifying the demand for public goods would allow is to clearly see the breadth and depth of demand for public goods...

Seeing the demand breadth/depth for farm subsidies isn't nearly as important as seeing the demand breadth/depth for war...

In our economy today, markets guide billions of decisions based on fast-changing in formation across the globe. Prices, profits, and other market signals inform people about the adjustments they should make. Entrepreneurs try new strategies in millions of trial-and-error processes. Individuals and businesses sometimes fail, but they have strong incentives to get back on track. Markets are a process of ongoing change and discovery.

I agree that market signals are important... which is why I'm a pragmatarian rather than a libertarian.  Market signals are just as important for public goods as they are for private goods.   I'm a pragmatarian rather than an anarcho-capitalist because I believe that, when it comes to public goods, the free-rider problem distorts the accuracy of market signals.  But this distortion is easy enough to correct with taxation.  Once people are required to contribute to public goods then they have every incentive to accurately signal their preferences for public goods...

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his “true” preferences for public goods. — James Buchanan, The Economics of Earmarked Taxes

Buchanan published that paper in 1963.  Unfortunately, nearly everybody missed the memo.

In the marketplace, consumers have a strong incentive to examine products and make sure that they get a good deal. By contrast, people know that their individual votes in elections will have almost no effect on outcomes, and so they have little reason to research candidates and policies in detail. As a result, people tend to know more about, say, their favorite television shows than about the workings of the federal government.  It is logical for most people to be “rationally ignorant” about public policy, meaning that it does not pay for them to investigate the issues.  Opinion polls of Americans over the decades have found “appalling levels of ignorance” about federal policy, notes Schuck.

Do we truly benefit from the strong incentive that consumers have to try and get good deals?  If so, then wouldn't we want consumers examining defense and ensuring that they are getting a good deal?  Wouldn't we want them to be free to spend their taxes elsewhere if they decided that they weren't getting a good deal? 

Libertarianism would reduce the problem of rational ignorance... but it wouldn't eliminate it.  I think that we should eliminate, rather than reduce, rational ignorance... which is why I'm a pragmatarian.

Even in the crucial role of providing national defense, the pursuit of parochial advantage “has become a full-time preoccupation that permeates Congress’s activities and members’ decision making processes.”  That is the view of Winslow Wheeler in his book, The Wastrels of Defense. As a long-time congressional aide, Wheeler found that members responsible for national defense put most of their efforts into grabbing benefits for their states, rather than overseeing the Pentagon and ensuring the effectiveness of our armed forces. He argued that Congress has “degenerated into a gaggle of wastrels competing for selfish advantage.”

Reducing the scope of government to defense, courts and police wouldn't change this.

Also, because many voters remain ignorant about the details of policy, legislators have leeway to pursue their own private and ideological goals. The problem is that these other goals often produce failed policies as well. There is no built-in check—no invisible hand—to guide members to make value-added decisions, so their personal beliefs about policy may be untethered from reality.

The invisible hand still wouldn't be in the public sector if the government was limited to defense, courts and police.  We'd continue to suffer from the inevitable consequences of the visible hand supplying defense, courts and police.  Suffering from the visible hand is entirely unnecessary.  Replacing it with the invisible hand would be as easy as allowing taxpayers to choose where their taxes go.  Then the supply of all public goods would be tightly tethered to reality.  No longer would massive amounts of society's limited resources be allocated to tilting at windmills.

Congress proceeds with many failed policies because it does not confront direct cost benefit tradeoffs. In the marketplace, people compare a product’s cost to the expected benefits before they spend their money. Politicians do not face such a tradeoff. They are spending other people’s money, which nobody spends as carefully as his own.

This is certainly true.  It would also be true even if the government was downsized.  But it certainly wouldn't be true if taxpayers could choose where their taxes go.

Many federal programs deliver benefits to narrow groups but spread the costs widely across the population. Small groups of individuals and businesses are easier to organize than larger groups, and they have more focused goals, so they can be very effective in lobbying Congress for benefits.  The costs of narrow benefits—such as subsidies and regulatory advantages—are often diffused across tens of millions of taxpayers or consumers, often without the victims knowing that their pockets are being picked.

Concentrated benefits and dispersed costs would still be a problem with libertarianism.  But legal plunder really wouldn't be a problem with pragmatarianism.  The only possible way that your taxes could be spent on defense would be if you reached into your own pocket and spent your own taxes on defense.  Nobody else would be able to reach into your pocket in order to spend your taxes on defense.

If you're a pacifist then, with libertarianism, people would still be able to reach into your pocket and spend your money on defense.  This forced-rider problem would guarantee that the wrong amount of money would be spent on defense.  And I really don't want the wrong amount of money to be spent on defense... which is why I'm a pragmatarian rather than a libertarian.

Ideally, federal legislators would carefully evaluate programs by comparing the costs to the benefits, and they would do so in a manner transparent to the public. However, legislators have developed numerous techniques to hide the costs of federal spending. As a result, people perceive the “price” of government to be lower than it really is, and they demand too much of it. Economists call this bias “fiscal illusion.”

Fiscal illusion would still exist with libertarianism.  And as long as fiscal illusion exists... any fat that's trimmed from the government would quickly be replaced.  The only permanent solution would be to eliminate fiscal illusion entirely.  This could be accomplished by allowing taxpayers to choose where their taxes go.  Pragmatarianism would guarantee fiscal equivalence.

The use of fiscal illusion is a contributing factor to government failure. By partly hiding the burden of government, policymakers are emboldened to pursue ill-advised programs that have higher costs than benefits. Citizens and voters are left in the dark, not recognizing that the costs of all the benefits pouring forth from Washington are higher than they seem.

With libertarianism... citizens and voters would still be left in the dark.  They wouldn't be able to recognize the true costs of defense, courts and police.  And if the public fails to understand the true costs of these public goods... then it's a given that they will want the government to supply more public goods.

With pragmatarianism, on the other hand, taxpayers would fully recognize and bear the costs of everything that the government does.  And when it comes to something like war... we really want taxpayers to fully bear the costs.

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. - Adam Smith, Wealth of Nations

This is the most important memo.  Most citizens have not gotten this memo.  And they won't get this memo until libertarians fully accept and recognize the fact that fiscal illusion causes the most harm when it's applied to defense/offense.

The best libertarians stand shoulder to shoulder with Adam Smith.  But in order to truly make progress... you have to stand on his shoulders.  That's what being a pragmatarian is all about.

Poorly performing agencies do not go bankrupt, so there is no built-in mechanism to end low-value activities. There is no automatic corrective to programs that have rising costs and falling quality. In the private sector, businesses abandon activities that no longer make sense, but “the moment government undertakes anything, it becomes entrenched and permanent,” noted management expert Peter Drucker.  In government, resources remain stuck in obsolete activities, rather than being reallocated to better uses. Drucker said that “the strongest argument for private enterprise” over government is not the role of profits, but the role of losses.  Losses send a powerful signal to businesses that they need to make changes. Failing government programs do not send such a signal.

There wouldn't be any profits if we created a market in the public sector... but there would certainly be losses.  The least beneficial government organizations (GOs) would lose revenue.  They would either improve their performance or go bankrupt.

See... the fundamental question is... what should the government do?  There are two ways to answer this question...

1. The market
2. The not-market

If we created a market in the public sector... then the invisible hand would determine the size and scope of government.  This answer would reflect the maximum amount of dispersed information.  It would reflect the diverse preferences and circumstances of millions and millions of individuals.

If we didn't create a market in the public sector... then the visible hand would determine the size and scope of government.  This answer would not reflect the maximum amount of dispersed information.  It would not  reflect the diverse preferences and circumstances of millions and millions of individuals.

Which answer would be the most valuable?  The answer provided by the not-market (libertarianism)?  Or the answer provided by the market (pragmatarianism)?

Congress does not have the time or expertise to allocate resources efficiently in all these areas. Members are spread too thin, which is evident from the fact that they routinely miss all or parts of congressional hearings.  Congress grabs for itself vast powers over nonfederal activities, but then members do not have the time to properly monitor how their interventions are actually working.  It might be argued that the pyramids were efficiently constructed.  This argument would imply that costs were somehow minimized.  But it can't be argued that the pyramids represent an efficient allocation of Egypt's limited resources.  This is because allocative efficiency depends entirely on the preferences/priorities of the people whose resources were allocated.  If Egyptian taxpayers had been free to directly allocate their taxes... and they allocated their taxes to building the pyramids... then, and only then, could we say that the pyramids represent an efficient allocation of society's limited resources.

In the absence of a market in the public sector... limiting the scope of government might allow congress to help ensure that the DoD is more effective/efficient... but the allocative efficiency of a war depends entirely on how well it matches the true preferences of every individual in society.  And the true preferences of every individual can only be known by their spending decisions.

With a libertarian government... congress might help ensure that we saved a trillion dollars on a war against Canada.  But if taxpayers wouldn't have spent their taxes on this war in the first place... then it's a monumental case of missing-the-point to argue that we saved $1 trillion dollars on a $10 trillion dollar war that there was virtually no demand for.

My guess is that Edwards is trying to come up with some explanation as to how congress would improve its decisions if it had less on its plate.  But no amount of reduction in congressional responsibilities or duties would make congress omniscient.  Someone would have to have a very tenuous grasp of reality to assume omniscience on the part of planners...

I shall present a pseudo-demand analysis that would provide an omniscient planner with one method of solving the optimality equations of the original model. - Paul Samuelson, Pure Theory of Public Expenditure and Taxation

Reducing the size/scope of government really wouldn't improve the efficiency of congress's allocations.

While legislators are overwhelmed by the size and scope of the government, the bureaucracy has also become unmanageable. Paul Light thinks that one reason for the increase in failures is the “ever-thickening hierarchy” of departments.  He says that “communication continues to be a major source of failure, in part because information has to flow up through multiple layers to reach the top of an agency.”  President Obama’s frequent appointment of “czars” partly reflects the recognition that the traditional bureaucracy is not working.

Information flow is necessary to the proper function of any organization.  But a properly functioning bureaucracy is only beneficial when the organization is supplying something that's truly demanded.  And it's only when dissatisfied consumers have the option of easy exit that bureaucracies have any incentive to improve.  Reducing the scope of government to defense, courts and police really wouldn't provide taxpayers with easy exit.

In sum, political and bureaucratic incentives and the huge size of the federal government are causing endemic failure. The causes of federal failure are deeply structural, and they will not be solved by appointing more competent officials or putting a different party in charge. Americans are deeply unhappy with the way that Washington works, and everyone agrees that we need better governance. The only way to achieve it is to greatly cut the federal government’s size and scope.

The only way?

The problem with libertarianism should be painfully clear.  It severely undermines its strongest economic arguments by applying them inconsistently.  The result is an incoherent case for freedom.

Rational ignorance is a problem?  Yes... except when it comes to defense, courts and police.

An information void is a problem ? Yes... except when it comes to defense, courts and police.

The lack of incentives is a problem?  Yes... except when it comes to defense, courts and police.

The lack of losses is a problem?  Yes... except when it comes to defense, courts and police.

Spending other people's money is a problem?  Yes... except when it comes to defense, courts and police.

The lack of a clear cut metric is a problem?  Yes... except when it comes to defense, courts and police.

Legal plunder is a problem?  Yes... except when it comes to defense, courts and police.

Fiscal illusion is a problem?  Yes... except when it comes to defense, courts and police.

The absence of consumer choice is a problem?  Yes... except when it comes to defense, courts and police.

The visible hand is a problem?  Yes... except when it comes to defense, courts and police.

From my perspective... all these real and significant problems are equally applicable to defense, courts and police.  Add the free-rider problem to the list of real and significant problems and you'll have most of the reasons why I'm a pragmatarian.

For sure I'd love it Edwards converted to pragmatarianism.  But at a bare minimum I hope that, in the future, he'll acknowledge that libertarianism really isn't the "only way" to try and improve government.  Decades ago Buchanan pointed out that there's another way.  And it's wonderful that Boaz has more than recognized the existence of this alternative.  It would be great if more libertarians followed his lead... but even just acknowledging the existence of tax choice would be a significant improvement.

See also: John Quiggin And David Boaz Fusion Food For Thought 

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