a libertarian perspective on economic and social policy lecture 23 the costs of government policies...

A Libertarian Perspective on Economic and Social Policy

Lecture 23

The Costs of Government Policies

©2007 Jeffrey A. Miron

Introduction

• The approach adopted in this course has been to examine policies one by one.

• In virtually every case, the conclusion has been that government interventions do more harm than good.

• And the presentation emphasizes that this conclusion derives not from some general principle but from the details of costs versus benefits for specific policies.

Introduction, continued

• The fact that, time and again, this approach concludes that government does more harm than good might suggest there are general principles at work.

• The purpose of this lecture is to address that issue.

• Specifically, the lecture addresses the question of whether negative side effects from government intervention are inevitable.


• The answer offered here is simple:– Yes; it is more or less guaranteed that government

interventions generate a lot of negative consequences, and these potentially outweigh any benefits.

• And this follows from the nature of interventions:– These have certain features in common, so they

change incentives and affect behavior in predictable, and usually undesirable, ways.

• It is not just that existing government is badly designed; the negative assessment is an inevitable consequence of government intervention.


• This is the flip side of the usual approach to defending libertarian views:– Many defenses argue that markets are great, so

intervention can only mess things up.

• The view advocated here has been, partly, that markets do things better than critics recognize;

• But even more, the argument presented has been that interventions have so many negatives, there is a good chance markets do it better even when markets are imperfect.


• So, the goal today is to identify the various negative consequences that arise from government interventions and argue that most of these are inevitable and pervasive across interventions.

• Thus, it should not be a surprise that the analysis presented in the course has concluded that most interventions are undesirable.

Outline

• Tax Distortions and the Costs of Raising Funds.• Pareto-Improving Exchanges• Overexpansion of Government• Arbitrary Redistributions and Rent-Seeking• Dishonesty and Reduced Respect for the Law• Increased Polarization• Reduced Self-Reliance and Personal

Responsibility• Thought Control

Taxation and theCosts of Raising Funds

• A first negative of interventions, and one that applies in all cases, is the deadweight loss of the taxation necessary to pay for government.

• To review, any tax that is not lump-sum distorts the relative prices faced by participants in the relevant markets, reducing economic efficiency.

• For example, taxes on specific goods cause people to substitute to other goods for reasons other than the relative utility they receive from the different goods.

• Or, taxes on income cause individuals and businesses to make decisions based on the tax consequences rather than just maximizing income or profits.

The Costs of Taxation,continued

• In addition to these standard “Harberger Triangles,” taxation generates compliance costs:– The time individuals spend filing out tax forms.– The time businesses spend collecting and processing

sales and wage taxes.– The time corporations spend computing and

complying with the corporate income tax.– The reduced transparency of corporate accounting.– And so on.

The Costs of Taxation,continued

• There is room for reasoned disagreement over the magnitude of both the distortions and the compliance costs.

• But there is no question that these are substantial:– Tens of billions, if not hundreds of billions, of

dollars per year for the US economy.

Preventing Pareto-Improving Exchanges

• A second major cost of interventions is preventing pareto-improving exchange.– A pareto-improving exchange is one in which at least

one party is better off and no party is worse off.– Thus, a policy that prevents such an exchange has,

as one effect, reduced utility for at least one party.

• The standard economic presumption is that whenever exchange is voluntary it must be pareto-improving; otherwise it would not occur.

• So, whenever policy inhibits voluntary exchange, it prevents pareto-improving exchange.

Preventing Pareto-Improving Exchanges: Examples

• A group of policies that aims explicitly to prevent PI exchange is prohibitions against vice.

• When the law says it is illegal to buy and sell drugs, or sex, or gambling services, or the like, it is preventing trades that both sides believe make them better off.– Some people argue that buyers are not acting

“voluntarily” because of addiction:– Even it that is true in some cases, however, it is not

true in all.• And milder restrictions (like minimum purchase

ages) have the same kind of effect.


• A different kind of policy that interferes with PI exchange is economic regulation:– OSHA regulation– Collective bargaining laws– Price controls– Anti-Trust Laws– Entry barriers like fees, permit, licensure– Child labor laws;– And so on.


• Various others policies also inhibit PI exchange:– Campaign finance regulation;– Compulsory education;– Gun controls;– Zoning.

• There are many policies, of course, that do not have a direct or substantial impact in preventing PI exchange:– Education or housing vouchers;– Transfers programs like Social Security, Medicare,

Medicaid, Disability Insurance.• But a large fraction of policies have this effect.

Summary So Far

• Thus, for a broad range of interventions, there are at least two negatives right from the start:– Interventions imposes costs on the economy because

they require funding and therefore taxation;– The direct effects – the intended effects – of the

interventions are bad (assuming they work as intended);

– That is, the interventions prevent PI exchange.• Thus, all such interventions must be correcting

an externality or having some other benefit that is substantial to have any chance of pass a cost-benefit test.

Governments Expand Too Much

• In a broad range of areas, there is no reason to think markets are getting it exactly right:– Deviations from perfect competition, information asymmetries,

externalities, public goods issues are often present to some degree.

• So, one can frequently make a case for at least some degree of intervention;

• This conclusion assumes the actual intervention is designed by benevolent and competent policy makers;

• The conclusion also ignores unintended effects;• And the conclusions assumes the policy stays “small.”• Nevertheless, one can argue logically that a small

intervention is almost always desirable under the idealized, textbook assumptions.

Governments Expand Too Much,continued

• A key problem, however, is that the small, textbook programs do not stay small.

• The reason is that all “entities,” whether individuals, or firms, or non-profits, or government, attempt to survive.

• And one path to survival is getting bigger.– This can mean growing in size, or it can mean

expanding in scope;– Either way, the intervention becomes more than what

was originally intended.


• The fact that government agencies, programs, and policies have an incentive to survive is especially problematic because they typically do not face competition:– So, unlike firms in markets, bad performance is not readily

driven out.

• Plus, government often exerts substantial control over the information that would allow people to judge the success of government.

• Thus, it is likely if not inevitable that, no matter how well motivated or how well intentioned, government expands beyond the point that can be justified through standard arguments.


• It is hard to dispute that most government programs have expanded enormously since their inception.

• And the activities of many programs are much broader than their “original missions.”

• This is not proof of “excessive” expansion, but it certainly makes you wonder:– It is hard to think of more than a handful of examples

where government has contracted.– Indeed, whenever someone proposes cutbacks there

is an outcry over the disastrous effects likely to result if even the rate of growth is reduced.

Governments Expand Too Much:Examples

• Civil Rights Act

• Pure Food and Drug Act

• Social Security

• Medicare

• Anti-Trust

• Education

• Economic Regulation

Arbitrary Redistributions

• A different effect of many government policies is to redistribute income “stupidly.”

• Reasonable people can certainly disagree about how much redistribution makes sense, assuming we are talking about redistribution that is from richer to poorer.

• But when the redistribution is random, or from low to high income, or just among people of similar income, then it is all cost and no benefit.

Arbitrary Redistributions

• It is inevitable that many interventions cause these redistributions because to have any effect, programs inevitably create winners and losers.– Those whose behavior is approved of by the policy

get rewarded.– Those whose help is needed to implement the policy

also get rewarded;– Those whose behavior is disapproved of get

penalized.

• And a main motivation for many policies is to redistribute, but not in defensible ways.

Arbitrary Redistribution: Examples

• Government construction projects (housing, schools, roads, hospitals, offices buildings, etc.)– Government typically contract out this work.

Some firms get these and others do not. – In principle, one might auction off the work to

the most efficient supplier;– In practice this is hard, so luck plays a big

role.– Thus, some construction companies get rich.

Arbitrary Redistribution: Examples

• Government-Operated Airport Security. – To do this, the government must buy the scanners and other

equipment;– Some firms happen to be in a good position to do this, or they

are well-connected;– They get lucky and get huge contracts.– And, all the work goes to one firm.– Later on, this firm convinces the government it needs newer,

better equipment, and so on, so it gets richer still. – This would not be an issue if merit determined which firms get

the contracts, but that is frequently not the case;– Indeed, the sleazy firms that oversell the value of their products

will win at the expense of honest firms.– And, it is hard to fire the firms that mess up.

Arbitrary Distributions: Examples

• And the examples like this go on and on:– Firms that make scrubbers for manufacturing plants– Data processing firms that process Medicare claims– Financial Services firms to run private accounts– Psychometrics firms that design high stakes tests– Advertising firms that run anti-drug media campaigns

• Various economic regulation also generate odd redistributions:– Unions, minimum wages, rent controls, and so on.

• And there are plenty of other examples:– State universities that offer low tuition independent of financial

need.– Regulation generally; it enriches lawyers and accountants.

Rent Seeking

• A closely related negative of government policies is encouraging what economists call rent-seeking.

• Rent, in economics language, means a return or profit that an economic entity earns that is in excess of the return necessary to get that entity to engage in the activity in the first place.

Rent Seeking, continued

• One classic example of economic rent is the income earned by a star athlete or entertainer.

• In many of these cases, the income such persons could earn in their “next best” occupation would be drastically lower.

• Thus, star athletes or movie stars would supply roughly the same level of effort if they earned, say, 1 million a year instead of 10 million a year.

• The 9 million difference is therefore rent.

Government Policies Create Rents

• A large range of government policies create the opportunity for particular groups to compete for rents:– The reason is that having the government’s purchase things “at

costs” is hard.

• For example, if the government is going to buy a weapons system, it has to determine how much it will pay.– Ideally, it pays the economic costs.

• But no one knows this exactly, and if the government underpays, there is no supply at all.

• So, there is some bias toward offering too much.• But then lots of suppliers want in: they seek the rents.

Government-Created Rents: Examples

• See the examples above under “Arbitrary Redistributions.”

• But note that when there can be rent-seeking, the negative consequence is worse than just a stupid transfer;

• People expend socially inefficient effort trying to get these rents:– So, not only does government throw money out the

window; people waste time standing under the window, jockeying for position.

– The number of lobbyists in Washington, and in state capitals, is one piece of evidence these rents are big.

Rewarding Dishonesty and Generating Disrespect for the Law

• Virtually any government program has a range of things one can do to avoid / evade it. – Government attempts to detect and sanction violations of the

rules it makes are imperfect, sometimes highly imperfect.

• Inevitably, therefore, people who voluntarily obey the law lose out relative to people who do not.– That is, the honest suffer relative to the dishonest.

• And both those who break the rules, and those who do not, learn that laws are for suckers.

• So, government interventions foster the attitude that rules are “made to be broken.”

Dishonesty, Disrespect for the Law: Examples

• Prohibitions against Vice• Speed limits and other traffic rules.• Safety and Health Regulation• Minimum Wage Laws and Rent Controls• Affirmative Action• Licensing, permits, and entry fees• High Tax Rates and/or Complicated Tax Codes • Campaign Finance Regulation

Disrespect for the Law, continued

• There are instances, of course, where government “rules” make sense even though there will be violations:– Laws against violence or theft.

• But these are the exceptions not the rule;– And, the exceptions are instances where almost

everyone agrees the actions have negative consequences to innocent third parties, so everyone wants the rules obeyed.

– This does not apply to the vast majority of government rules, most of which prevent PI exchange.

Polarization

• A different cost of many interventions is polarizing society.

• This applies especially to federal policies, but it also applies at the state or local level.

• The reason this occurs is because interventions push – or shove – everyone toward behaving in a particular way.

• The reality is that there is huge heterogeneity in what is right for different people;

• Or, there is a broad range of views that is defensible.• Imposing one position thus forces lots of people into

something they think is bad or requires them to accept a position they find disagreeable or offensive.

Polarization: Examples

• Abortion Policy:– There are strongly held, divergent views; federal intervention

squashes one side.

• Public Schools:– By operating schools, government are forced to take a stand on

issues where people differ substantially, such as school prayer, or speech codes, or curricular content, or teaching methods.

• Marriage– By being in this business, government is forced to take a stand

on gay marriage.

• Affirmative Action:– By requiring this approach, government creates resentment by

some groups relative to others.

Polarization, continued

• In some instances of course, polarized reactions might be something one has to accept:– The Supreme Court decision on flag-burning as

protected speech might be an example.

• But there are far more instances where the benefits of the “tough” stance are hard to see:– And, in particular, a policy of leaving things to the

states would have substantially reduced the degree of resentment.

Reduced Self-Reliance

• A broad range of policies sends the message that people are too dumb to make reasonable decisions on their own.

• There are undoubtedly cases where people might benefit from advice, or rules, or being protected from themselves.

• But it’s impossible to do this without also creating a broad atmosphere of reduced self-reliance and personal responsibility.

Policies that Discourage Self-Reliance: Examples

• Laws against false and misleading advertising• Prohibitions on “bad stuff” like drugs• Nutritional guidelines• Regulation of decency content on television• Child labor laws, compulsory education• Social Security• Safety regulation in occupations• Food labeling laws• Licensure restrictions into medicine and law

Self-Reliance and Personal Responsibility, continued

• This effect of interventions is thus pervasive.• And the problem is that no matter how large it

becomes, government cannot be everywhere or make every decision.

• So unless people are in the habit of using common sense, or in the habit of using private institutions that provide good rules of thumb, they are still going to make many bad decisions or be taken advantage of in many situations.

Thought Control

• A final, but extremely important, cost of most government is the power to control thought, or ideas.

• By its existence, government interventions take a stand on important issues.

• Worse, many government interventions control the information that people receive about the values of the intervention.

Thought Control, continued

• The potential for thought control is most obvious for policies like education or funding of research.

• But it applies broadly:– Having economic regulation takes a stand on how

markets work;– Taxing corporations perpetuates a view that

inanimate objects, not people, pay taxes;– Redistributing income takes a position on self-

reliance, personal responsibility, and the like;– Campaign finance regulation endorses particular

views on the merits of wealth and on certain policies.– And the list goes on and on.

Though Control, continued

• Thus, government cannot intervene without perpetuating particular views about how society should be run, who should be the winners and losers, and what is good or bad.

• If this were done by benevolent, competent people, the negatives might be small, but that is not the case:– People are people.

• Some policy makers have good intentions, some do not.• And even those who have good intentions make

mistakes.• Thus, adopting a particular view, by means of force –

putting control over ideas into the hands of a few – is fraught with potential for disaster.


• Many non-libertarians regard this last point as ridiculous exaggeration:– They see no evidence that countries like the

U.S. are slipping toward more, broader, and less benevolent government.

– Maybe they’re right.


• But if you compare the median view about the size of government now to the median view a hundred years ago, you will find radical change in the direction of accepting far more government.

• And that is exactly the point– A century of expanding government means people

now accept a much larger government as the norm;

• If you buy even some of the arguments above, that is potentially disastrous.

What About the Policies That Libertarians Accept?

• The discussion so far has argued that, across a broad range of policies, there are many costs of interventions.

• If these negatives are really so common, then a natural question is whether they apply to the few policies libertarians accept:– National defense, criminal justice, contract

enforcement.

What About the Policies That Libertarians Accept?, continued

• The short answer is that, to a substantial degree, the costs occur for these policies too:– Tax Distortions yes– Inhibit PI Exchange not much– Overexpansion yes– Arbitrary Redistributions, Rent-Seeking yes– Dishonesty, Disrespect for the Law not

much– Increased Polarization yes– Reduced Self-Reliance some– Thought Control yes


• Then why do libertarians accept these specific policies?– First, libertarians do argue that even these

policies should be much smaller and narrower in scope than they are now

– Second, the libertarian view is that, at least when limited to an appropriately narrow focus, the benefits substantially exceed the costs.


• In particular, a society cannot survive unless it defends itself, so some form of national defense seems necessary.

• And there are few examples of significant societies that have ever survived by means of private national defense.

• So, this is not a “proof” that the benefits of these interventions outweigh the costs, but it makes that view at least plausible.

• Still, it is totally appropriate to apply libertarian skepticism to even those few policies that libertarians (grudgingly) accept.

The Costs of Intervention: Summary

• The fact that interventions have costs is not the whole question:– The right question is, “do the benefits outweigh the costs?”

• But, the discussion throughout the course and in this lecture indicate there are good reasons to think most or all policies have a broad range of costs.

• Moreover, these costs are endemic, not just accidents or the results of fixable design flaws in certain policies.

• Thus, there is at least as strong a presumption against intervention as there is for it.

a libertarian perspective on economic and social policy lecture 23 the costs of government policies...

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