Thursday, June 23, 2011

basic economics, public choice theory and us

Basic economics in part joins the concepts of scarcity and choice. Because no society has the resources necessary to produce all the goods and services necessary to satisfy all human wants, scarcity always exists. Because of this always present scarcity, we are required to make choices.

Public choice theory studies the behavior of politicians and bureaucrats at all levels as mostly self-interested individuals (motivations include such things as power, money, influence, fame, electability and, occasionally, public service). Instead of acting solely in what they consider to be the long term best interests of the general public, these players behave in a self-interested manner.

Time inconsistent behavior means that we too often favor short term outcomes even though these choices will have negative long term consequences.

We'll try to answer herein the three following questions with the aforesaid principles in mind; (1) Why is it seemingly so hard to live within our means, (2) Who's to blame, and (3) What does the future look like?

Before trying to answer, let's review what "public choice theory" has to teach us. To repeat, public choice theory regards politicians and government officials as mostly self-interested agents who are active players "in the system" instead of impartial referees or public servants acting objectively and outside of or "on the system". Politicians in effect represent just another self-interested competitor among the various other competitors, in other words.

It also helps if we understand that even while getting into the economic mess we're in today, most participants in the process have acted "rationally", at least in the short term.

My optimistic conclusion, nevertheless, is that better times lie ahead. Our enormous debt levels, when combined with high unemployment and weak economic conditions, will mandate that we stop kicking the can down the road (along with the rest of the world, too) and face directly our all too real longer term issues. As we do, our politicians and bureaucrats at all levels of government will jump in front of the parade and begin to act in the best interests of the general public.

What will precipitate this much needed change in alignment? Our debts and deficits. An old and somewhat trite aphorism says that if something can't go on forever, it won't. Our current private and public debt levels aren't sustainable and can't go on, so our future "rational" choices must of necessity deal with this enormous debt issue in a serious and effective way.

Public choice theory explains that while the political decision making process is often rational in the short term, it is also in direct conflict with the long term general welfare and overall desires of the general public". As an example, although "bridges to nowhere" and other wasteful pork barrel projects are not desired by the general public, it is often rational for politicians to vote them into existence anyway.

In this "game" of public choice, the private (specific industries) or public sector (unionized public employees such as teachers) special interests and related lobbying groups are focused intensely on getting the favorable treatment sought from the politician. By spending time and money to gain the politician's favor and the grant of taxpayer money (whose own money the politician isn't spending), the lobbying party prevails. In the short run, for the favor seeker as well as the favor granter, it's been time and money well spent. And finally, let's not forget the taxpayers at large. We the disinterested and uninformed taxpayers have acted rationally as well, since it would have cost us a whole lot of precious time, energy and money to defeat the individual proposal. The benefit of defeating that single project or favor would have been very small to the unfocused and unconcerned general public. At least in the short term.

Hence, in the three party (favor seeking special interest, favor granting politician and disinterested general public) game that's been played for far too many decades now, everybody acted rationally in the short term, even though the long term best interests or even wishes of the general public were not served.

Because of the current debt levels, however, the long term future is here. As George Allen, former head coach of the NFL Washington Redskins once said, "The future is now."

Debt has accumulated to unsustainable levels as government spending consistently has grown at an unprecedented rate while we've all been playing the short term rationally irrational game described so well by public choice theory.

Special interest industry lobbyists (companies, unions, localities, elderly, public employees and so forth) and the rational ignorance of a very broad cross section of passive consumers/citizens/owners/taxpayers have combined to cause or enable the politician to spend taxpayer money improperly but at no cost to his political future. In fact, it helped his future as a politician.

That game is now over. Debt levels are going to force us into playing a long term rational game now. That time consistent approach will help create a brighter future for one and all.

Back to the questions of (1) why is it so hard to live within our means, (2) who's to blame and (3) what's the outlook?

In my view, the answers are as follows: (1) It won't be that hard to live within our means, because it will be necessary, (2) we are all to blame and (3) the outlook, once we get past the short term, is looking better as we begin to act as responsible American adults.

Let's recap what happened in the past. The smaller (relative to the whole society), the better organized and the more focused the group, the more likely it was able to get what it wanted from the political class. And this was true whether the politician "listeners" resided in Washington, the state capitol, city hall or wherever else the piles of "free taxpayer money" could be found. As a result of this three party short term oriented "spend the taxpayer money" game, we've all suffered greatly, and we'll still be suffering for years to come.

The Chamber of Commerce has its headquarters in our nation's capitol for a compelling reason. As does the American Association for Retired Persons (AARP). As does the largest union of public employees, the Service Employees International Union (SEIU). As do countless other special interests. Why Washington? As world famous bank robber Willie Sutton replied when asked why he robbed banks, "That's where the money is."

The solution is straightforward. For those who insist on acting solely in their self-interests, let's hunt them all down and run them out of town, at least figuratively. {As for us, we've been too ready to applaud when our local congressman brought home the "local goodies". So have the constituents of the other 534 national congressmen. In so doing, we've all ignored the much bigger and wasteful game that was being played. Let's stop applauding.}

The money the government "gives" comes from its citizens. That's us. If we take out more than we pay in, a fellow citizen foots the bill. The same lack of conscious thinking applies to government borrowing and debt. Borrowings are nothing more than deferred taxes to be paid at a later point in time. Who will pay these deferred taxes?. Maybe we will or maybe our children will or maybe our grandchildren will. But in the end, somehow they will be paid by someone. We all know that. And China sure won't pay our way, nor will Japan.

So why the optimism? Ironically, in large part it comes from the debt we've accumulated. We simply have to get serious about stopping its growth and start doing what is necessary to resume strong economic growth. And to begin again to live within our means. So we will.

The short term time inconsistent political game is going the way of the dodo bird. Independents are becoming, if they aren't already, the "biggest political party", and a backlash against wasteful and unaffordable government spending is growing each day.

My bet is that the political class will give us the government we want. And that government will be a fiscally responsible government at all levels. The game of "get what you can from your fellow citizens through the politicians" is over. We're heading back to the future and in the direction of smaller government and greater individual self reliance. Finally.

Thanks. Bob.

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