A successful society needs effective, affordable governmentto perform its necessary functions well, and that includes sufficient revenueto fund those functions. But a government that grows too large, centralized,bureaucratic, and expensive substantially impairs the private economy byeroding individual initiative and responsibility; crowding out privateinvestment, consumption, and charity; and damaging incentives with high taxrates. It also risks crowding out necessary government functions such asdefense. That is today’s Europe in a nutshell,with America not far behind.
The recent death of James M. Buchanan, the father ofpublic-choice economics, is reason to reflect on his sagewarnings. Buchanan was awarded the Nobel Prize in 1986 for bringing to thestudy of government and the behavior of government officials the same rigorousanalysis that economists had long applied to private economic decision-making.Buchanan concluded that politicians’ pursuit of self-interest inevitably leadsto poor outcomes.
Buchanan’s analysis stood in marked contrast not only toAdam Smith’s dictum that the pursuit ofself-interest leads, as if “by an invisible hand,” to desirable socialoutcomes, but also to the prevailing approach topolicy analysis, which views government as a benevolentplanner, implementing textbook “solutions” to market failures.
According to this view, if markets do not fully internalizeall of the costs of private action – environmental pollution is a classicexample – some “optimal” tax or subsidy supposedlycan correct the problem. So, if a monopoly is restricting output and raisingprices, regulate firms and industries. When weak demand leads to recession,increase government spending and/or cut taxes by just the right amount,determined by a Keynesian multiplier, and – presto!– the economy rebounds quickly.
Buchanan considered such analysis romantic. He showed thatpublic officials, like everyone else, are driven by self-interest and governedby the rules and constraints operating in their economic environment.Households have a budget constraint. Firms have technological, competitive, andbottom-line constraints. For politicians, the ability to exercise power – fortheir own interests or those of vested interests – is constrained by the needto get elected.
Buchanan predicted that, by hiding the full costs, theability to finance public spending through deficits would lead to higherspending and lower taxes at the expense of future generations, whose memberswere not directly represented in current voting. He predicted ever-largerdeficits and debt – and ever-larger government as a result.
On this issue, Buchanan was, unfortunately, prescient – and wellbefore financial crisis and deep recession led to yet another jump inthe size and scope of government, accompanied by large deficits and explodingdebt in the United States, Europe, and Japan. Buchanan argued tirelessly for lower government spending, balancedbudgets (even a balanced-budget amendment to the US Constitution), andstreamlined regulation.
Buchanan, along with Milton Friedman and many others,correctly pointed out that government failures are as numerous as marketfailures. So, even in areas like infrastructure or education, it is necessaryto compare the benefits and costs of the imperfect fiscal and regulatory policieslikely to be implemented by fallible,self-interested officials with potentially imperfect market outcomes.
These government failures include rent-seeking, pork-barrel spending, social engineering, regulatorycapture, and induced dependency. Market failures or claims of unmet need arenot sufficient to prescribe government intervention in the private economy,because the cure may be worse than the disease.
There are, of course, important, successful governmentprograms. In America, the post-World War II G.I. Bill financed higher educationfor demobilized soldiers, and was a highlybeneficial public investment in human capital. Social Security has helpedreduce poverty among the elderly. The military has kept the US safe and free.
But the gap between textbook solutions drawn up inuniversities and think tanks and the reality on the ground can be vast. More spending or regulation does not always leadto better outcomes.
Government spending is no lesssubject to diminishing returns than anything else. Programs become entrenched, develop powerful constituencies, and arehard to shrink. Few programs are targeted carefully enough to real needs – orto the really needy – as politicians buy votes by spreading coverage far beyond what is needed to achieveprograms’ stated goals. Hence Buchanan’s disdainfor romanticizing government action.
In country after country, one casualtyof the ongoing debate over spending, taxes, deficits, and debt has been effortsto make government more effective and efficient. In most areas of government,from defense to entitlements, better outcomes can be achieved at much lowercost, which should please both the left and the right.
For example, America’s federal government has 47 separatejob-training programs in nine different agencies, costing almost $20 billion ayear, most of which the Government Accountability Office reckons are ineffective orpoorly run. President Barack Obama added the 47th – for green-energy jobtraining – in 2009. The success rate was so poor (a tiny percentage ofparticipants got targeted jobs) that the Labor Department’s Inspector Generalrecommended shutting it down – and this at a time of massive unemployment, withfirms listing millions of job openings but unable to find workers with therequired skills.
We have seen what ultimately results when unsustainablespending leads to exploding debt: economic chaos and human tragedy. Somewherebetween “romanticized” government solutions to problems and Buchanan’sself-interested government officials, we must find leaders willing to eliminatepoorly performing programs; modernize, streamline, and consolidate others;improve services; and limit pressure for ever-higher growth-destroying taxes.