Is the government inefficient? Sunday, Jan 3 2010 

I found this passage somewhere on the Internet, unknown author:

This morning I was awoken by my alarm clock powered by electricity generated by the public power monopoly regulated by the U.S. Department of Energy. I then took a shower in the clean water provided by the municipal water utility. After that, I turned on the TV to one of the FCC-regulated channels to see what the National Weather Service of the National Oceanographic and Atmospheric Administration determined the weather was going to be like using satellites designed, built, and launched by the National Aeronautics and Space Administration. I watched this while eating my breakfast of the U.S. Department of Agriculture-inspected food and taking the drugs which have been determined safe by the Food and Drug Administration.

At the appropriate time as regulated by the U.S. Congress and kept accurate by the National Institute of Standards and Technology and the U.S. Naval Observatory, I get into my National Highway Traffic Safety Administration-approved automobile and set out to work on the roads built and maintained by the local, state, and federal departments of transportation, possibly stopping to purchase additional fuel of quality level determined by the Environmental Protection Agency, using legal tender issued by the Federal Reserve System. On the way out the door, I deposit any mail I have to be sent out via the U.S. Postal Service and drop the kids off at the public school.

After work, I drive my NHTSA car back home on the DOT roads, to a house that has not burned down in my absence because of the state and local building codes and fire marshal’s inspection, and which has not been plundered of all its valuable thanks to the local police department.

I then log on to the Internet, which was developed by the Defense Advanced Research Projects Administration and post on freerepublic.com and FOX News forums about how SOCIALISM in medicine is BAD because government can’t do anything right.

What this passage is getting at is the myriad functions that government serves— sometimes unbeknown to the general public—and it only begins to scratch the surface. It would, I think, be pretty safe to say government is responsible for or at least crucially linked to the development of modern society, not free markets. That’s just a descriptive statement, and I believe the main point of the quoted passage. There are some, like those “on freerepublic.com and FOX News forums,” who bemoan government and its supposed inefficiency, yet take for granted all the things it provides them (like roads and police protection).

The question, really, is an economic one. One issue that arises concerns what are called public goods. In technical terms, a public good is any “good that is non-rivalrous and non-excludable.” All non-rivalrous means is that when one person uses that good another person is not restricted from also using that good (e.g., when I log on to the Internet, this does not preclude you from doing the same). All non-excludable means is that no one wanting access to the good can be reasonably denied access to that good. A decent example might lighthouse beams that provide light to ships, regardless of which ship it might be (that is, it’s difficult to exclude other people from seeing this light). As the Wikipedia article points out, “there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.” (The economic idea of public goods, by the way, was developed by Paul Samuelson, the pioneering Nobel laureate who died just three weeks ago.)

The problem that arises is that public goods are not produced efficiently in “free markets.” They’re under-produced. This causes what is called market failure; the market does not operate efficiently. The reason for this is because you can’t make a profit off of it, or not very much the closer the good approaches the concept of a public good. If a good produces a benefit to society that the creator of the good cannot profit from, there’s little economic incentive to produce such a good. That’s standard neoclassical economic theory, anyway. The idea is tied to what are called externalities. A positive externality is something people benefit from, e.g. clean air, but those who benefit from it don’t necessarily have to pay for it. An example I get from Milton Friedman, the great free-market thinker, is that when I plant a pretty garden in my front yard, other people get to experience the benefit of it without having to pay or do any work for it. Again, these are under-produced in free markets, according to standard theory, because there is not enough economic incentive to produce these things.

Well, one solution has been to have the government produce goods for public use, which is where the entire passage quoted above comes from. The result is that we all get to benefit from government involvement in the market place. I get the ability to tell the precise time because the government has taken the initiative to keep accurate account of time—something theory tells us profit-maximizing corporations would be unwilling to do.

At the same time, however, as the story above illustrated, people still bemoan government and its attempts to provide for the public good. The market is great, it will provide us all the things we need, and it will do so efficiently, they might say. The socialist might respond by pointing out that this is not necessarily true, and point to things like externalities and asymmetric information, which exist nearly everywhere, and conclude the market rarely works efficiently. For this reason, we need the government to provide for the public good, particularly when the unfettered market cannot. The right-winger (if they’re not Austrian) might concede that things like externalities and asymmetric information exist but posit that the government still ought not get involved because that would constitute an abridgment of our freedom, is coercive, evil, etc. The question becomes harder. Indeed, for many the question is not only economic but also ethical. At this point, I think most people begin to ask what the right balance is between market forces and government involvement. The question is left unanswered and, in mind, the answer remains to be seen.

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America’s brand of socialism Friday, Jul 3 2009 

Excuse the long period of time of inactivity. I’ve just been busy with other activities; in addition, Iran’s election has been dominating the news. There’s not a lot of things I have to say about that which has not already been said by plenty of people (namely: Iranians should have the right to peacefully assemble and protest their government, be free from coercion and violence, and to freely voice their opinions; that the vote-counting process was suspect and that Iran should conduct a recount; and that the U.S. government should not interfere).

Instead, I want to talk about what many want to refer to as “socialism in America.” See, for example, this post by King Banaian, a professor and the chairman of the economics department at SCSU. In it, he argues that America’s economic policy is most accurately described as “interventionism” rather than flat-out “socialism,” as some people have suggested. I would not call it flat-out socialism either. People who simply throw around the word “socialism” use it as a scare word of sorts, to draw emotional responses from people wary of government intervention. If we try to use that loose definition of socialism, however, it would be impossible to name any country that exists or that has ever existed that wasn’t socialist. So that doesn’t seem correct (unless you want to call every country a socialist one).

I prefer to think of socialism that has varying degrees of intervention. Stalinism, for example, might be approximated at one of the spectrum where the state has total control over political and economic systems. Current-day America would be on the opposite end, where the state is moderately involved in economic matters, mostly through regulation. We could say it’s a weak form of socialism. This brand of socialism now includes the bailouts of Wall Street, Big Bank, and the automotive industry, highlighted in Bush’s final months in office and continued through Obama’s current presidency. It’s important to look at the characteristics of America’s socialism, which is sometimes referred to as “socialism for the rich and capitalism for the poor.”

This form of socialism has long been seen as a criticism of America’s “capitalist” system. It is sometimes also referred to as “privatizing profits and socializing costs”; “lemon socialism”; “crony capitalism”; “corporate welfare”; or, as I referred to it as during the Wall Street bailouts, “Wall Street socialism.” There are an equal amount of euphemism to defend this policy, such as “trickle down economics,” “too big to fail,” “lender of last resort,” etc.

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There has been constant refrain all throughout, however, which is that the state ensures big business is being protected, often at the cost of others not a part of corporate America (sometimes referred to as “Main Street,” as opposed to Wall Street). Some use this to explain the “rich getting richer and the poor getting poorer,” i.e. wealth or economic inequality and disparities. One way this is achieved is through privatizing corporate profits and socializing their costs. We saw this, for example, with the bailouts of AIG et al. at the expense of tax payers. Such actions by the state create what are called moral hazards, meaning corporations such as these are being shielded from risk (of failure) and so act differently (more riskily).

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One problem is that power is being concentrated in unaccountable and unresponsive institutions (both non-governmental and quasi-governmental) such as the Federal Reserve (see, e.g., this and this post by Dr. Banaian). These institutions are unwilling to sacrifice themselves or succumb to market forces. This is why, for example, President Bush came out and admitted he had to “abandoned free market principles to save the free market system.” (Remember the old arguments that we have to abandon freedom in order to be free?) Another problem, of course, is unresponsive and non-participatory democracy in America, which I have discussed here.

This has been going on for a long time, of course. But this trend was especially marked during the Reagan era—an era that spoke a lot about free trade and laissez-fair economics, but one that rarely practiced it. Take, for example, when then-Treasury Secretary James Baker boasted to business groups that the Reagan administration has offered more protection to American business than any post-war presidency. (In reality, it was more than all of them combined.) As it happens, President Clinton was also unusually popular with Corporate America for being a Democrat—the reason being his unwavering protection of big business (NAFTA being a big part of that). This is, of course, all while the benefits of free markets are being touted. Never mentioned is the fact that America’s prosperity has been a product of state intervention, trade interference, and market distortions on massive scales completely unnatural to a truly free and capitalistic market. This has continued into the present with the bank, insurance, airline, and auto bailouts seen under both Bush and Obama.

The dominate message being relayed to the American people is that in order for big business, and therefore the American economy, to survive, it must be subsidized, protected, and bailed out by the state. Incidentally, this is why a national health care system has finally entered the political discourse. For decades now, Americans have placed the health care system as a top domestic priority, with most wanting some sort of nationalized system. Prior to this campaign, such a thing was described as “politically impossible”—never mind that it was what most of the population wanted. In 2008, that was different; we saw Edwards, Clinton, and Obama bringing up the issue. What changed? It certainly wasn’t public opinion. What changed was that manufacturing industry in America was being crippled by the soaring costs and so began supporting such a system. It is only through the process of it becoming a problem for a major sector of American capital and corporate interests that it enters the political agenda of the leadership in this country. Naturally, what will happen is that the costs will be socialized but their profits will continue to remain privatized.

That’s American “capitalism” in practice.