Friday, August 22, 2008

Westover does public finance 

Craig goes from a discussion of Federalist 51 to a discussion of classic public goods:

At the heart of [MN House Speaker] Kelliher's misconception is a failure to distinguish between "private benefits" and "public goods," admittedly not always a simple distinction. The problem is, policy-makers who resort to the clich� of taxes as the price of civilization generally don't recognize that there is a distinction. "Public good" cannot simply be applied to the project de jour.

The best way to understand the idea of "public good" is by contrasting it with the more familiar "private benefit." Each of us engages in private benefit transactions when we exchange money for products and services we want. We get in a taxi, and for a fare, we enjoy the benefit of getting from point A to point B. We buy cup of coffee; we drink it, and nobody else gets to drink it. That particular cab ride and cup of coffee are not available to others.

Public goods in support of legitimate government functions provide benefits that, unlike our cab ride or cup of coffee, don't exclude anyone. A streetlight is the classic example: It benefits everyone and anyone equally at the same time. It would be virtually impossible and highly inefficient to limit access or proportionally charge people for the streetlight's glow. Police and fire protection and the court system are other examples � they don't limit discrete benefits to some at the exclusion of others.

The policy distinction boils down to this: If a taxi ride from point A to point B is a private benefit for which an individual pays a market fare, why is a bus or light-rail ride from point A to point B a "public good" subsidized with tax dollars? The only answer is, it is a more "civilized" way to travel.

Let me help my MnFMI colleague out here, because there's a distinction to be made. There are volunteer fire departments. Do they provide any less service than those supported by tax dollars? Well they might -- there was a story a few years ago of a house near International Falls that was allowed to burn to the ground because the home's owner didn't pay his annual fee of $25. They didn't allow the homeowner to free-ride, though they did hose down his garage since it was close to another house that had paid the fee.

The source of the problem there, and in Craig's case for transportation, is one of transactions costs. The situation in International Falls was hampered by negotiation over replacing voluntary fees with a property tax surcharge. Taxes are, as Craig says, the price we pay for not being completely civilized ... and the willingness of people to free ride is a good example of the "angels" that led to Madison's role of government. Transactions costs are another impediment that institutions aspire to overcome, and yes, sometimes those are taxing districts. If all we are going to concern ourselves over is the efficient way of delivering pure public goods, you will continue to combat cases where market failure and free riding are trotted out as explanations for greater use of force.

What folks like Speaker Kelliher lack is not a failure to understand public finance theory, but the ideal that persuasion and cooperation are the best form of social organization. Government is force, wherever it appears. Sometimes force can reduce transactions costs but not often, and the temptation to use force for other things, once granted in the case of fire or police, is something to which every politician, of every party, succumbs. Don Boudreaux makes the case:
Just as many on the right naively fantasize that foreign problems are best solved by force, "liberals" fantasize that domestic problems - real and imaginary - are best solved by force. Jobs disappearing in Ohio? No problem - force Americans to buy fewer foreign goods. Too many Americans without health insurance? Force taxpayers to give it to them. The "distribution" of income doesn't satisfy some Very Caring Person's criterion? Government should forcibly redistribute. A mine collapses in West Virginia? Uncle Sam should force mine-owners to increase safety. See? All very simple.
Kelliher and other liberal DFLers who favor interventionism preach market failure but do not address the likelihood of government failure. And yes, government failure is always a possibility for foreign policy too, as Boudreaux condemns the right of ignoring. A more rational view of government explains why Kelliher ignores the distinction of pure public goods -- private benefits to one's political supporters are often more efficient in building a winning coalition in a democracy than are public goods. The pure public good can waste resources acquired through confiscatory taxes by conferring benefits on political opponents. The DFL is smart enough to recognize that waste.

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