Excusing the Government

An excerpt from Chapter 3 of *Unbeatable*

Greetings from Dubai! You’re invited to the Meet-up at Karam Beirut in the Mall of the Emirates on May 22 at 6 PM. Please RSVP in the comments.

Now here’s the latest excerpt from my next major book.

[from Chapter 3: Absurdly Overrated: Why Economists Are Wrong About Government]

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The near-ban on immigration. The draconian regulation of housing. Universal redistribution. Free and nearly-free education and medicine. The near-ban on nuclear power. I invoke the Biggest Losers not merely to show that that government is very bad. I invoke them to make the deeper point that mainstream economists are deeply confused about the goals of government. Contrary to almost every intro econ teacher, the “Normative as Positive” view is not remotely true. Actually-existing governments rarely use the theory of market failure to make markets work better. Instead, they routinely use the practice of Social Desirability Bias to make markets work worse. The chief output of government isn’t “public goods,” but private goods – and pure waste – that people pretend to want much more than they really do. See Social Security and Medicare.

Is there any excuse for what government does? The impulsive reply is to double-down on Social Desirability Bias. To demagogically denounce my conclusions with lurid imagery and faux incredulity. “Open the borders?!” “Bulldoze San Francisco?!” “Gut Social Security?!” “Defund education?” “Privatize health care?!” “You want a hundred Chernobyls?!” Imagine, however, that mainstream economists sought to excuse the government without demagoguery. How could mainstream economists salvage their position?

One route is to enumerate counter-examples. The Biggest Losers are hardly the totality of government action. What if we look for the Biggest Winners instead? Surtaxes on gasoline, cigarettes, and alcohol may not be fine-tuned responses to negative externalities, but they’re in the right ballpark. You could make analogous claims about contracyclical monetary policy, deposit insurance, natural monopoly regulation, and the per se antitrust rule against price-fixing. From there, pile on every other believable instance of careful technocratic correction of market failure. In the end, perhaps, you’ll compile a long list.

Yet this “defense” is only a dodge. It doesn’t explain why governments rely so heavily on bans, regulation, direct ownership, and giveaways. It doesn’t explain the rarity of tailored taxes and subsidies. Above all, you can’t dismiss the Biggest Losers as “just six isolated gargantuan examples” of government failure. Anyone can find fault. What the Biggest Losers show is that the main activities of the United States government – the biggest interventions, the costliest programs – are terrible.

How else could mainstream economists excuse the government? Since policy-makers blatantly ignore textbook advice, the most promising defense is a good offense. Argue, in short, that the textbook is simplistic – or flatly wrong. Economists opaquely label this critique the “Theory of the Second Best.”[i] In a nutshell: Policies that work well in homework problems work poorly in the real world. When perfection is unattainable, stubbornly striving to approach perfection can lead to worse outcomes than consciously “settling” on a realistic goal.

A classic case: Economics textbooks show little sympathy for special taxes on imports. A broad-based income tax supposedly makes far more sense than squeezing importers dry. Yet development economists who intimately know the Third World occasionally protest, “Do you know how hard it is to collect revenue in these countries? The port is the one location these governments control tightly enough to tax.” The textbook approach is to categorically condemn Third World governments for falling short of perfection. The Theory of the Second Best, in contrast, potentially praises Third World governments for doing the best they can given their constraints or “low state capacity.”[ii]

You can excuse First World governments in a like manner. Sure, textbooks “prove” that transparent pollution taxes are blatantly superior to convoluted pollution regulations. But in the real world, perhaps we lack cost-effective ways to meter pollution. Maybe there’s no good way to actually collect the taxes. Corruption could vitiate our best efforts. Alternately, auditing regulatory compliance might just be cheaper than auditing tax compliance. For all these reasons – and whatever others spring to mind – “one-size-fits-all” rules are conceivably the best real-world tool for pollution control.

Getting more meta, you could maintain that even the appearance of inequity poses grave danger to our social order. For all their flaws, existing immigration, housing, and nuclear rules sound fair to most people. Letting people “pay for citizenship,” “pay to build,” or “pay to split atoms” doesn’t. Though pandering to popular illogic may seem illogical, what if a system of transparent fees leads to a gradual collapse of social trust, leading to civil unrest, ultimately spiraling into civil war? Unrealistic fears can spawn horrors that are all-too-real. You can’t observe the danger until you try – and after you try, it’s possibly too late to undo the damage. What does your precious textbook say about that?! The same goes for lavish funding of pensions, education and health care. Though they look awfully wasteful through the narrow lens of Effective Altruism, these programs could be the pillars that eventually save our society from collapse. While the Theory of the Second Best doesn’t entail such fragility, the framework definitely allows for it.

The Theory of the Second Best is logically sound. Later on, I shall appeal to it myself. Yet it provides only flimsy excuses for actually-existing government policy. Consider pollution. First World governments already collect a wide range of taxes. Corruption is low.[iii] And they plainly know how to meter emissions: Many states already require vehicle owners to get their emissions measured to ensure they’re under the legal limit. Under current law, excessive polluters have to try to fix the problem, then get reinspected. Using existing data to tax emissions would streamline the convoluted status quo. Furthermore, auditing tax compliance is almost always cheaper than auditing regulatory compliance. Your tax bill is one number. Your regulatory compliance is a sprawling checklist of Do’s and Don’ts. Governments are plainly capable of switching from regulation to taxation. They just refuse to do so.

Nor does the Theory of the Second Best do much to excuse governments’ marriage to the Biggest Losers. Governments take angry complaints about immigration, housing, and nuclear power at face value. Then they pass laws to “handle the complaints.” Replacing all their rules with transparent fees would be child’s play. How hard can it be to declare, “You’re a 33-year-old high school graduate with no criminal record; your annual immigration fee is $12,000?” Governments take flowery words about retirement, education, and medicine at face value. Then they spend trillions to “ensure every American has the best.” Replacing this profligacy with means-testing and user fees would, again, be child’s play. How hard can it be to say, “Your home is worth a million dollars, so handle your own retirement?”

Governments’ refusal to apply readily available textbook solutions isn’t just bad. It is a bad sign. Since governments spurn the sensible responses to externalities, you shouldn’t be shocked that they even fail to verify externalities’ direction. The net externalities of housing, for example, are very likely positive. Though governments try mightily to impede construction, people gladly pay large premia to experience the combined plusses and minuses of city living. The net externalities of education, similarly, are very likely negative. Though governments try mightily to foster education, the clearest overall effect on labor markets is credential inflation.

Excuses that appeal to extreme tail risk are the hardest to refute because they’re so empty. Cross-examination goes quickly when the “witnesses” have yet to witness anything. Once you start admitting morbid speculation as evidence, however, you should at least admit wishful speculation as well. Maybe mass immigration will lead to civil war in a century. Then again, maybe immigration laws will exclude the parents of the man who would have cured human aging. Maybe deregulated developers will tear down the Empire State Building. Then again, maybe they’ll build the Empire State Building of the future. Approving new nuclear plans could lead to dozens of new nuclear accidents. Then again, maybe they’ll stop global warming dead in its tracks. You get the idea. From a close-up perspective, sticking with the muddled status quo may seem safer than heeding textbook advice. Yet from a bird’s-eye view, sticking with the status quo has often been disastrous. The adage that “Generals always fight the last war” highlights the danger of statis.

The last-ditch excuse for government is a Panglossian embrace of the world as it is. If replacing regulations with taxes is so smart, it would have already happened, right? You could tone that down to, “If replacing regulations with taxes was such a good idea, it would have already happened somewhere, and the rest of the world would slowly come to emulate them.”

The mild response is that a few countries, most notably Singapore, have already replaced some common regulations with taxes.[iv] The strong response is that innovation and emulation work one way in the private sector, and entirely otherwise in the public sector. “Business innovation” equals “Finding new ideas that work well.” “Government innovation” equals “Finding new ideas that sound good.” “Business emulation” equals “Copying ideas that work well elsewhere.” “Government emulation” equals “Copying ideas that sound good elsewhere.”

Upshot: When politicians discover new bad ideas that sound good, they gain power. Their discoveries spread – and global policy deproves. Thus, the “radical idea” of open borders used to be the global norm. Free immigration was a great success while it lasted. The population of new high-productivity countries like the United States, Brazil, Canada, and Australia exploded thanks to mass migration.[v]Until visionary politicians gradually realized that immigration restrictions sound glorious to psychologically normal humans. Once free immigration started dying to thunderous applause, the visionary politicians’ conventional colleagues took notice.[vi]Before long, this impoverishing innovation swept the world. A victory for change; a defeat for progress. As Candide lamented in his Panglossian disillusion, “If this is the best of all possible worlds, what then are the others?”[vii]

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[i] Don’t miss https://link.springer.com/content/pdf/10.1007/s10797-007-9036-x.pdf.

[ii] Cites.

[iii] Cites on First World corruption?

[iv] Details.

[v] Cites

[vi] To quote Star Wars Episode 3: “This is how liberty dies. With thunderous applause.” https://www.goodreads.com/quotes/5149-so-this-is-how-liberty-dies-with-thunderous-applause

[vii] https://www.gutenberg.org/files/19942/19942-h/19942-h.htm, p.24.