Friday, February 10, 2012

Mock Convention Economics

Sen. Huckabee gave a speech at Washington and Lee on Friday, 10 February as part of W&L's quadrennial Mock Convention. I caught only a portion, in which he spoke of the role of values, that if all followed the Golden Rule, we would need no of government. What he said was thoughtful, at times eloquent, and certainly commensurate with my understanding of Scripture. But as a theory of government it is incomplete.
Certainly our brokenness is central for criminal law and the like; if sin were only skin deep rather than reaching to the core of our beings, the world would be a different place. But that represents but a small part of what a modern government does. In a modern economy, government is about our finite nature rather than our sinful nature.
Leviathan is above all local, not Federal. Government is first and foremost dominated by educating our children, and then by attending to the needs of our cars, providing us with water and taking care of our, uh, sewage, and with the exigencies of accidents. At the Federal level the largest function is addressing the side effects of aging, in particular the poor ability of markets to allocate resources over long time horizons in the face of high levels of uncertainty.
Trying to address these in a purely private manner presents insuperable challenges. Society benefits from a citizenry who are literate, numerate and engaged. Should a parent teach their child to read? send them to high school? – if it is left up to a market system, then the financial constraints that families face (after all, children come early in life, incomes peak later in life) and the uncertainties of the gains from education (does buying a college education really pay off?) would mean that we would regress to the 19th century, when illiteracy was pervasive.* And remember that education is not "bankable" – absent loan guarantees, who would lend money up front on the chance that years later Johnny or Julie would get a good enough job to repay with interest? This isn't a matter of sin – the issue persists even with an underlying willingness to pay.
Then there are simple efficiencies. Sewage treatment is costly, but less so if households can use a common system. Fire protection is hard to run on a pre-paid basis, and impossible on a fee-for-service one, billing a resident and their neighbors after a house burns down. Some of this stems from the challenges of coordinating the whole thing – setting up a membership system, convincing people to join, billing, and so on. Plus (rightly or wrongly) there is wide divergence of how much these services are worth. Government provides a one-stop-shop, while the political process tries to arrive at an acceptable compromise given the diversity of perceptions and preferences among society. But Americans are pretty good at team sports, and at management. All impressions to the contrary, over time we've improved the efficiency of government: despite a more complex world, and a far greater range of government services, it's no greater share of the economy now than it was in the 1950s.
So government does serve as a response to human brokenness. But it is also a response to our finite natures, to the costliness of information, and to the costs of coordination. The more complex a society is – the richer a society is – the greater the number of such issues, and also the greater the (market) value of our time. We simply can't be bothered with each and every issue, we don't have the knowledge, we don't know where we stand – and when we do, we seldom are so concerned as to be willing to spend time to work out our differences.
Of course this also means that government almost never gets things right.** Should we complain? No, we should get involved, while realizing that it's the unusual committee that votes our way all the time. That's what our forefathers did in rebelling against the British. It wasn't over taxes – after all, the first act of the new Congress was to levy one on tea. It wasn't over a failure to provide a legal system and courts, what we did there was pretty much to continue what the British had put in place. It was over voice. The Mock Convention hopefully instills a practical experience with that in Washington and Lee students that they will carry over into decades of active citizenship.
* Footnote: Now with guarantees, banks do lend, but students aren't good judges of whether for them education makes financial sense, plus they may simply prove unlucky, graduating with a degree at a time when no one is hiring. The track record of "manpower planning," of forecasting which skills will be in demand years down the road, is poor. So is any other attempt to predict the future. Would-be students are no more prescient than the experts. Markets don't work very well, can't work very well: without public provision our education levels would be abysmal. [If you never looked at a school or university budget, you may not realize that even private education is highly subsidized, with deductible charitable contributions, property tax and endowment income exemptions. Nor do we tax operating surpluses. (No, no! – "surpluses" are not profit.)]
** Footnote: Arrow's Impossibility Theorem shows this to be a general issue: all voting rules have defects. To rephrase this, no one ever seems to agree with me, and I get overruled in ways that are unfair–or are unfair to others. Arrow in fact has a second Impossibility Theorem, his proof of the existence of Walrasian general equilibrium, which is a necessary foundation for thinking that prices are good signals of scarcity. He in fact showed that the restrictions necessary for markets to work well and deliver the "right" prices are, well, too restrictive for the real world. And that's without factoring in either our finiteness or our sinful nature.

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