Friday, October 5, 2012

The Danger of Homogeneous Activity in the Public Sector

My response to PrometheeFeu from our discussion over on Daniel Kuehn's blog entry...A Quick Thought on Voting...

Scenario 1, I send money to the EPA. Scenario 2, I do not send money to the EPA. What is different between the two scenarios? Nothing of consequence.
Scenario 1, you buy asparagus.  Scenario 2, you do not buy asparagus.  What is different between the two scenarios?  Nothing of consequence.  Nothing of consequence?  Somebody prevented you from buying asparagus...and you would consider it to be inconsequential?  I thought you liked asparagus?  What if they did the same thing to me and everybody else who wanted to buy asparagus?  The little consequences would add up to the big consequence that the demand for asparagus would not determine the supply of asparagus.  Therefore, there would be a significant disparity between supply and demand.
My whole tax bill could not pay an extra secretary at the EPA, much less significant regulatory activity.
Just like your entire income could not pay for a new field of asparagus.  Or maybe it could?  Could you really eat that much asparagus though?  What about the opportunity cost?
So your scheme suffers from the same weakness as voting: your incentive is not to reveal your policy preferences.
But here's what you wrote earlier.
If a socialist came to me and argued that my purchases don't count because my single purchase can't possibly affect the price level, I would not respond that I have a duty to keep markets working. I would point out that I wanted chicken and asparagus for dinner and that's why I went to buy them and that's why my true preferences were aggregated.
Why would buying asparagus and chicken be any different from donating to the Red Cross or the World Wildlife Fund or paying taxes to the EPA or the Dept of Education?  You either want more of those things...or you don't.  The supply of those things is either determined by demand...or it isn't.  If it isn't determined by demand...then clearly there's going to be a disparity between supply and demand which represents a misallocation of scarce resources.  We'd be getting too much of one thing and not enough of another.  Without consumer's opportunity cost decisions the allocation would not even be close to being Pareto Optimal.
I support giving tax-payers having the freedom to choose which government organizations they give their taxes to because it is more morally correct and it would make me feel good to not send money to certain programs.
We currently allow 538 congresspeople to spend 1/4 of our nation's revenue which comes out to roughly $3.5 trillion dollars...yet you support applying market principles to the public sector for moral reasons?'s kinda hard to complain when most people don't support the idea for any reasons.

But surely there have to be some significant economic consequences for allowing 538 congresspeople to spend 1/4 of our nation's revenue?  As far as I can tell it's the primary cause of recessions/depressions.

On the individual level you will experience a severe recession/depression if you gamble your home on a failed business idea...right?  You misallocated a significant portion of your limited resources.  That's why most entrepreneurs pitch their ideas to venture capitalists.  And what do venture capitalists do?  They hedge their "bets".  Every decision to spend your money/time is a gamble...which is why VCs don't put all their eggs in one basket.  They spread their capital over numerous start-ups.  If they are good at picking winners then they'll increase their capital.  But they certainly don't ultimately determine whether a start-up is a winner or loser...we do.  We use our wallets to indicate whether a VC's allocation was a misallocation or a profitable allocation.

If heterogeneous activity makes sense on a smaller scale...then it should make even more sense on a larger scale.  And every single socialist experiment provides empirical evidence that this is the case.  If heterogeneous activity makes sense for a small amount of resources...and it makes sense for an entire nation's resources...then please explain why it doesn't indicate that there's a clear and present danger to allowing 538 congresspeople to allocate 1/4 of our nation's revenue among government organizations.  It would be one thing if taxpayers were able to choose exactly which congressperson they gave their taxes to...and that congressperson would have sole discretion how they spent "their" taxes in the public sector...but all 538 congresspeople have to agree on how 1/4 of our nation's revenue is spent.  Spending activity doesn't get more homogeneous than that.  

If there truly are winners in the public sector...which we can only guess at...then the tax allocation decisions of 150 million taxpayers who all want more for less will reveal exactly who the winners are.  These public sector winners will help offset any possible shortage of private sector winners.  This will help hedge our bets against recessions/depressions.  If, on the other hand, it turns out that there are very few winners in the public sector...and assuming the losers fail to adapt...then the scope of government will shrink...the tax rate will decrease accordingly...and resources will be freed-up for winners in the private sector.

Giving people the freedom to choose how they spend their money guarantees heterogeneous activity because we have extremely diverse interests, values, tastes, preferences, concerns, hopes and dreams.  Our diversity is our greatest strength...which is why failing to apply this fundamental fact to the public sector is our Achilles Heel.

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