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Why Do Governments Fail?

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As a defender of free markets and the Constitution, Edward’s warnings about the growing size of government are resonating with a larger proportion of the population. “When Gallup recently asked Americans what the most important problem facing the nation was,” he wrote, “more people identified ‘government’ than any other problem, including ‘the economy,’ ‘immigration,’ ‘health care,’ or ‘terrorism.’” One cause for fear is that federal spending now constitutes one fifth of the country’s GDP, and, on top of that, the government extracts more from the private sector through regulatory burdens. “Federal agencies impose more than 3,000 new regulations each year,” Edwards wrote. “Total federal regulations now span 168,000 pages. The government will spend about $4 trillion this year and distribute benefits to people through more than 2300 programs.”

Then, on top of direct regulatory burdens is something Edwards refers to as “deadweight loss.” Businesses stay in the market by balancing quality output with costs of manufacturing. When taxes and regulation become part of the equation, it becomes the rational best interest of businesses to make decisions they would not not otherwise. “Since taxes are compulsory, they induce people to try and avoid them by changing their working, investing, and consumption activities.” Edwards estimates a $10 billion energy subsidy program, “putting aside whether the program is ethical or constitutional,” would have a deadweight cost of $5 billion. One of his colleagues, Chris Conover, estimated Obamacare taxes would average $50 billion in deadweight losses a year, “which was in addition to the bill’s official cost of about $1 trillion.” Punned Edwards, “Coercion is not free.”

Arguments about the appropriateness of government intervention aside, the federal government is widely believed to have failed in sending relief to Hurricane Katrina victims, in preventing 911, and in rolling out Obamacare. Some near-universal criteria offered to judge whether a particular government activity has failed include: (1) bureaucratic problems such as fraud, corruption, and bloated costs, (2) legislative problems such as pork-barrel politics and poor agency oversight, (3) policies that have higher costs than benefits, even if they are well-managed, (4) policies that undermine freedom and prosperity, and (5) policies that intrude on activities better left to the states and private sector.

Edwards cited Clifford Winston of the Brookings Institution’s assessment of federal attempts to “correct market failures,” something free marketeers insist would not exist without government meddling in the economy. Winston concluded they cost hundreds of billions of dollars a year. He judged, “public financing and management of transportation infrastructure, public lands, and various services have been extremely inefficient,” while “redistribution policies have often made little progress in achieving their goals while wasting considerable resources in the process.”

Edwards criticized top-down planning. While coercion certainly has social and moral implications, he stuck to its role in distorting markets. In a free market, prices are set in real time at the micro level as individuals trade value for value. Exchanges are mutually beneficial. When government provides a service, it is paid with taxes, which the general public has little say in agreeing to pay. Without competition for services, the people are stuck paying what government asks, and this eliminates incentives to streamline, stay up-to-date, and engage in other activities private-sector businesses must to remain marketable.

As a corollary, he addressed the fatal conceit of the few in power presuming to know how to control so many aspects of so many peoples’ lives better than personal choices with ears-to-the-ground data may. He referenced an analogy used by economist Dan Klein. Ice skaters do just fine on a rink. Some fall, but others will rush to the rescue or steer clear, and the skating continues. He contrasted that to a central planner barking orders to all skaters. He could slow things down and limit the number of skaters, but things would be nowhere near as fun. In this situation, it is easy to see that systems of increasing complexity can be best-managed by individuals knowing their own goals and limitations. Applying this to economics, Edwards writes, “While markets gather knowledge from the bottom up and are rooted in individual preferences, the government’s actions destroy knowledge and squelch diversity.”

As for government charity, Edwards quotes the late Sen. Daniel Patrick Moynihan, “It cannot too often be stated that the issue of welfare is not what it costs those who provide it, but what it costs those who receive it.” Government gets bigger by making people smaller. Standouts in a long list of perverse incentives funded by taxpayer participation include: (1) Foreign aid empowers foreign dictators and stalls reforms, (2) Food aid reduces the incentives for poor countries to feed themselves, (3) Disability benefits encourage people who could work to drop out of the labor force, (4) Social Security and Medicare discourage saving for retirement, (5) Health mandates raise insurance costs and induce firms to drop coverage, (6) Programs for the needy reduce private charity, (6) Workers’ compensation induces workers to be less careful on the job, and (7) Medicare’s set fees encourage doctors to order unnecessary services with less incentive to reduce errors.

Reasons suspected for government failure are valid. Edwards talks about politicians putting political careers ahead of national interests. Campaigns cash in on the emotions of the uninformed. Edwards gives people more credit. “People know enough to recognize the big-picture problems in Washington, such as the giant federal debt and all the lobbying and corruption. But few people have knowledge about what the best solutions to such problems are. And that is where politicians gain leeway.” Once elected, politicians humor special interests by collecting fractions of a penny from taxpayers. To bring home the bacon, politicians fight for defense manufacturers in their state that make things the Pentagon does not want. Programs proliferate for feel-good, while it takes a huge national scandal to shut anything down.

When things go wrong, politicians often blame the bureaucracy. After all, he wrote, “Civil servants act within a bureaucratic system that rewards inertia, not the creation of value. Various reforms over the decades have tried to fix the bureaucracy, but the incentives that generate poor performance are deeply entrenched in the executive branch.” For example, an article in Time magazine called out the Army Corps of Engineers, saying the organization had repeatedly been caught, “skewing its analyses to justify wasteful and destructive projects that keep its employees busy and its congressional patrons happy.” Referring back to Adam Smith’s Invisible Hand, Edwards contrasts this with the free market, where, “A business making misguided investments will be punished by financial losses and may face bankruptcy or a takeover. About 10 percent of all U.S. companies go out of business each year. . . . If government leaders are no more skilled than business leaders, their efforts will also have a high failure rate. But government activities that create no value can live on forever because the funding comes from a mandatory source: taxes.”

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