8. A Positive Contribution from Wise Legislators
Remarkably, a majority of Americans do not recognize the leading principle in which government can actually help citizens along economic lines, even in the context of a balanced budget, zero borrowing, and zero re-distribution. A whopping 70% of respondents in ISI’s survey failed to identify the intellectually rich, microeconomic concept, and reality of a “public good.” While government cannot create wealth, it can create more value per tax dollar with wiser use of taxpayers’ money, through the purchasing of legitimate public goods. The free market does not produce these valued public goods, or else the free market under-produces them. Even the classical economist Adam Smith, the founder of modern economic theory, recognized the fact of public goods and developed his reasoning in the latter chapters of his magnum opus, The Wealth of Nations (1776).
Adam Smith used the term “public works” which has yielded to its contemporary idiom of “public good.” It constitutes the foundational concept for identifying those instances of market failure, and how ideal government action might help all citizens. It is a close cousin to the later concept of externality, a concept developed in the early 20th century by British economist Arthur Cecil Pigou. Pigou’s sometimes exaggerated notion of externality was later refined by the Nobel Laureate and University of Chicago economist Ronald Coase in his 1960, The Problem of Social Cost. Building upon Adam Smith’s Wealth of Nations, and more recent mathematical proofs by Paul Samuelson of MIT, Francis Bator wrote a classic and readable article on “public goods” for The American Economic Review appearing in 1957 and titled, The Simple Analytics of Welfare Maximization.
Surprising to many, most government economists are hired for their microeconomic expertise on public goods, externalities, anti-trust, and cost-benefit analysis, not macroeconomic financial stabilizing, though both are important and related. The ideal government action that advances human welfare through the provision of “public goods” involves the purchasing of the optimum amount of familiar things such as: national security, infrastructure maintenance, pollution abatement, a trusted legal system for enforcing disputed contracts and property rights, a moral-legal code that encourages trust and reduces expensive policing, a stable currency, among others.
Notice that bread is not included in this list of “public goods,” but things like lighthouses are included. What is the difference? For-profit firms will not provide public goods such as lighthouses due to the problem of “free riders.” In other words, private citizens want public good services, and are secretly willing to pay for these services more than it costs to procure them, so long as everybody pays their fair share of taxes. Bread involves no free rider problem because an entrepreneur is able to practically withhold bread in the absence of payment by the benefitting consumer. A ship enjoys the warning of a lighthouse beacon, but without having to pay for the service, preventing a lighthouse entrepreneur from collecting payments from the beneficiaries to cover construction and operation costs. One can understand this without the assistance of modern game theory. For example, Adam Smith, an influential contemporary of the American founders, wrote in 1776 that, “The third duty of the sovereign is the erection and maintenance of those public works and institutions which are useful but not capable of bringing in a profit to individuals.”
Interestingly, a state-level, policy think tank in the state of Washington thanked ISI for including on its civics test its question on “public goods.” Confusion over the concept has resulted in it being used to justify any and all policies. For example, approximately one in five government officeholders mistakenly attribute a Keynesian meaning to public goods. To them, a “public good” consists of any government program that increases employment, no matter if it comes at the expense of private employment. With this criterion, no logical principle stands in the way of nationalizing all American businesses.
Economic illiteracy becomes even more apparent with attempts to classify traditional welfare, re-distribution, or entitlement programs under economists’ distinct concept of “public good.” Welfare programs require different reasoning and justification from that of the public good argument. For example, a heartfelt charity extends to those most vulnerable members of society, especially those who are unable to provide for themselves. This of course includes the orphan, the widow, and more generally the children and the elderly. It also includes those adults displaced from jobs through no fault of their own, and who are unable to find new jobs even at a lower wage.
Any principled defense of the current bailout policy should appeal more or less to this latter possibility of temporary and involuntary unemployment from a potentially prolonged recession. Bailing out irresponsible bankers is not the high intention of the law, especially since it can encourage the “moral hazard” of even more irresponsible lending and speculation in the future. Its higher aim is to assist those dedicated workers who might potentially lose their jobs when the loans dry up that are necessary to buy the goods that they produce. University of Chicago economist Gary Becker recently wrote that, “While I find helping these banks highly distasteful, moral hazard concerns should be temporarily relaxed when the whole short term credit system is close to collapse.”
Meanwhile the American commonwealth risks serious undermining when, during otherwise normal times, elected government leaders attempt to show their care and generosity with unlimited and open-ended welfare assistance. Recent history reminds us that it dilutes incentives to work, study hard in school, save, and invest, resulting in the dramatic reduction in the volume of goods placed in the metaphorical basket of goods for redistributing. In other words, simple justice and minimal prosperity requires government to maintain some positive correspondence between individual effort, fruitful results, merit, and take-home pay; a principle recently re-emphasized by people as diverse as President Bill Clinton, University of Michigan economist Rebecca Blank, and the late John Paul II. This prudential though not exclusive principle of political economy is lost, for example, on thirty-five percent of college graduates in America. They could not identify the nature and implication of an indefinitely sharper progressivity in the tax code on ISI’s Spring 2008 test.
Again, when the evidence is viewed in full, it reveals that most Americans are simply not prepared to understand and to engage these issues of political economy, and how the government budget can be used for the general welfare, or else rigged by the opportunistic few at the expense of the many. The guardians of the current bailout policy need to be especially vigilant to prevent this. For further reading on this general theme, see for example, The Logic of Collective Action by Mancur Olson (Harvard University Press, 1965).
Too many Americans do not see the potential danger of manipulating the government budget for narrow ends. Consider that seventeen percent of Americans recently surveyed by ISI believe that that the implication of “taxes equaling government spending” was that, “tax loopholes and special interest spending are absent.” This particular pocket of Americans do not see the potential, for example, of the rich voting in favor of a higher tax on the poor in order to finance government payments back to themselves, all the while maintaining an equality between total taxes collected and total government outlays.
Taxpayers, it should be noted, may not lose at the expense of bank owners with the current bailout, provided that government-purchased financial asset prices recover sufficiently to pay taxpayers back. But additional examples show how the system can be rigged against the general welfare, even while maintaining equality between taxes and government spending. For example, a majority of South-westerners might vote to re-distribute money away from a minority of Midwesterners. A real tension exists today between the young and the old for how payroll taxation and Social Security benefit payments will be adjusted to bring about solvency of this New Deal Program of Social Security.
As a final piece of evidence on the state of the American economic mind, twenty-one percent of Americans considered the implication of a balanced budget to be, “government is not helping anybody.” That mindset once again begs the question of how government ever “helps” anybody. All of this possible maneuvering of one citizen against another need not rest upon a philosophy of suspicion of fellow Americans’ motives, or upon an egoistic assumption of human nature. It may arise quite innocently through ignorance of the consequences of their actions, whether it is a culpable ignorance or not. Citizens may simply be taking those self-interested actions necessary to care for their own families and employees, including the financing of expensive quality education for their children.
