Monthly Archives: November 2001

The Moral and Economic Basis of Government

November 27, 2001

POLS 475 Essay #2

by David Veksler

Topic: When does “big government” become too big?

The Moral and Economic Basis of Government.

 

Throughout the last decade, “Big Government” has been frequently denounced by Republicans and Democrats alike, especially after the term was popularized by President Reagan in the 1980’s and Clinton announced that “the era of Big Government is over” during his second term. Nevertheless, the reality is that during Republican and Democratic administrations alike, the government keeps growing regardless of the party dominating Congress or the Presidency. While this fact may be surprising to the average American, the politically-savvy citizen knows that budgetary and political expansion is almost always in the interest of any given politician or bureaucrat regardless of which major party he belongs to.

The presence of such perverse incentives and bureaucratic inefficiency is often justified by the idea that there are certain activities and functions which are not supplied by the market, and while government is not always efficient at performing them, it is the only entity capable of providing them. However, when evaluating the size of the government, a crucial question is to ask whether the benefits of a certain government activity outweigh the costs – costs such as loss of income through taxes, decreased economic efficiency, and a loss of civil liberties.

Because government by its very definition has a monopoly on the use of force, all of its actions are acted through involuntary measures. Whether it is providing for a military or optional services to business, all its services cost money that must be paid in involuntary taxes that in principle depend on the “consent of the people,” but in practice are beyond the control of the average citizen. Thus, the economic justification of governmental action must be complemented by an equally important ethical justification, as each governmental action necessarily restricts individual rights. It is my opinion that these two mandates for the existence of a government are crucial to the justification of every governmental action and lead to the same conclusion – the only government that meets the twin mandates of moral legitimacy and maximal economic efficiency is a constitutional republic that limits its actions to the protection of life, liberty, and property and the creation of a few basic institutions to maintain an environment suitable for a free-market economy.

The Constitution of United States provides for a form of government very close to such an ideal, but governmental powers have quite clearly expanded far beyond the original boundaries of the Constitution. Thus, when we ask if government has become too big, we can answer the question by analyzing both the economic and ethical basis for government action and seeing if the current functions of government overstep these boundaries.

 

The Economic Basis of Government

It is worthwhile to consider the ideal model of democratic government and the reality of what happens when politicians come into the scene. Ideally, citizens demand government actions to “fix” situations of “market failure” – cases where the market leads to less-than-efficient outcomes, such as when a used-car salesman lies about the quality of the cars he sells. Ideally, taxpayers consent to the use of their money to correct the asymmetrical information problems, by say, mandatory information stickers on used cars. If politicians had the sole interest of the public in mind, this might indeed lead to greater economic efficiency, but human nature dictates that man is self-interested and reality quickly confronts such ideals. The bureaucrat who makes his living inspecting car dealerships is unlikely to suggest to his superiors that a consumer protection agency would be better at his job, or that bringing a mechanic to the dealership is a cheaper solution to government intervention. He is more likely to suggest that more regulations be placed on used car lots so that he may hire assistants or increase his work hours. Meanwhile, the consumer knows little of such inefficiencies in the inspector’s work, because the best judge of the efficiency of inspecting used cars – the government inspector himself is the one least likely to reveal the inefficiencies of his job — because they may lead to his demotion or loss of work. The point is not that regulation of used car dealerships is harmful to consumers, but that government bureaucracy is inherently inefficient and self-promotional, and the costs of such inefficiencies must always be balanced with the potential benefits.

There is another, more dangerous aspect of government regulation. The used-car dealership rarely takes regulation lying down. Rather, it will hire lobbyists, create ad campaigns to raise public support, court politicians, and in various other ways attempt to influence public policy. It is undeniable that business has such influence with the policy-makers of the United States. The problem is that as soon as an industry seeks to influence the government, it begins to compete on two levels – the competition for market power and the competition for bureaucratic power. Firms no longer strive to produce the best product at the lowest price, but for political “pull” – and the ones that win the war of pull are rarely the ones that are the most efficient. Thus, firms try to out-regulate each other out of existence rather than out-compete each other. Such is the inevitable side-effect of government regulation.

Finally, it is crucial to recognize that government is not especially good at producing any one good – it is only capable of transferring wealth from one party to another. Taxes, tariffs, licenses, and regulations either take wealth or create barriers to market entry, and private and corporate welfare, agricultural subsidies, tax-breaks, and regulations give wealth and monopoly powers to other parties. There are many arguments for such transfers of wealth, and it is impossible to answer them all in a short space, but it is sufficient to consider the previous two arguments, as they inevitably corrupt any good intentions legislators have when they enact such legislation.

When one considers the above effects of market regulation, it is easy to see why politicians have such a bad reputation. Many reformers propose further regulations and agencies to oversee politicians’ actions and finances – but this only increases the size of government. The real solution was provided to us by the Constitution of the United States — while imperfect, it contained built-in limits on the power of government to intervene in the market. When the government remains small and stays out of the regulation business, businesses have little interest in lobbying government because their livelihood is not at stake, and consumer groups have little success in imposing regulation because of court oversight of legislation. Such is the ideal size of government. When it strays into the market, it immediately becomes too big and acquires tremendous incentives to expand more and more.

At this point, it is reasonable to mention that the free market requires certain institutions to function optimally. Property rights are the basis of a capitalist economy and several government institutions provide for their protection. Civil and criminal courts provide for mediation of personal and business conflicts, a patent office creates additional property rights in trademarks and patents, and other agencies may extend property rights to airway frequencies, marine territories, and even space in the form of non-interfering satellite orbits. Today’s federal agencies accomplish all these tasks, but they also inject a large amount of additional regulation that creates much inefficiency. Radio and television spectrums are complicated by a complex grid of grants to use certain frequencies that have come to resemble quasi-property rights, yet grossly deviate from market outcomes due to massive lobbying in the part of telecommunications companies, radio and television content providers and other such groups. The same idea applies to the fields of aviation, medicine, and many others, and the net effect is a stifling of innovation and combined with massive, bloated federal and state governments.

Protection of life, liberty, and property includes protection from criminals and outside invaders. The police and the courts accomplish the first task, and a military accomplishes the second. As long as their task remains solely to protect the rights of citizens, agencies such as the FBI and CIA are justified parts of the government, and may even impose certain restrictions on trade and immigration for the sake of national security. But when the military or police agencies focus on missions that favor a certain industry (such as oil interests in the Middle East) or are unrelated to the protection of citizens rights, (such as politically motivated forays into distant nation such as Bosnia and Somalia) as they often do, they once again lead to “big government” and expand endlessly as they acquire more and more goals unrelated to their primary duties but favorable to their bureaucratic instincts.

Regulations designed to “protect” the public from “coldhearted” industry have several additional flaws. Besides the economic harms described above, they assume that the common law courts will be unable to create an environment that discourages dangerous and unsafe products from being introduced into the market. This is clearly not the case as there have been many well-publicized examples of courts being too harsh on business, not too lenient. Public juries and court judges are clearly less likely to be bought off by rich corporations than politicians. Protective regulations also ignore the role of consumer report services such as Consumer Reports, which will inevitably spring up in the place of regulation and provide efficient reporting product safety and quality ratings such as the Good Housekeeping seal does today. Furthermore, new legal tools such as class action suits and technological progress in measuring damages allow even widespread harms such as air and water pollution to be tried and discouraged by the courts.

It is worthwhile to mention that there are alternatives to civil courts in the form of private mediators, alternatives to the police and military through private provision of defense services through insurance firms, and alternatives to patents through trade secrets, but these are only supplements to the basic duties of a government and suitable replacements if and when they are judged to be better than their public alternatives.

This is the basic outline of government’s legitimate functions. Any additional functions lead to “Big Government” and can only be detrimental to its citizens, because just as the used-car salesman has perverse incentives, so do bureaucrats, and they have no market oversight to punish their trespasses.

 

The Moral Basis of Government

 

One of the reasons why a moral justification of government action is necessary is because oftentimes equity rather than efficiency arguments are used to justify redistributive programs such as welfare, Medicare, Medicaid, social security, various other job-preservation policies of government, and even public education. These functions are major portions of the federal and state budgets, and if one is to maintain that a limited Constitutional view of government is ideal, it is crucial to dispute these programs on ethical as well as economics grounds. The major problem with redistributive programs is that they violate the primary purpose of government – to protect rights, and condone legal theft under a guise of democratic approval.

Redistribution as theft may be explained by looking at the two basic models of elected government – republican and democratic. The basic purpose of a republican government is to maintain a monopoly on the legitimate use of force by the consent of those governed and use it to protect individual rights from being violated. These are the rights to life, liberty, and property. Any other supposed rights – such as the right to healthcare, food, or a job necessarily infringe on the primary rights to liberty and property because welfare requires that wealth be taken by force from one party and given another.

An alternative view is presented by a democratic government. Such a government is ideally a mirror of the majority opinion, and the larger the public participation in such a government, the stronger its mandate to rule. In such a government, equity may have a higher value than property rights in some instances, and the individual thus becomes a tool for a vague ideal known as the “social good”. The problem with such a notion is that society is not a living entity – only the individual is capable of enjoying goods, and a standard of social good ultimately leads to an inefficient and unjust redistribution of wealth to those groups of society who have the most political influence. The concept of social good is not only at the heart of socialist regimes, but also pervasive in all “mixed-economy” states, including America.

It is possible to debate redistribute policy in terms of individual versus social responsibility, as the major political parties do, but this is not necessary. It is sufficient to point out that such policies violate the basic mandate and purpose of government — to protect individual rights and subject them to social good under the guise of democracy.

Finally, redistribute policies also have perverse effects on the recipients as well as the involuntary contributors to such policies. By preempting private charity, they discourage voluntary charity and provide an excuse to bureaucratic expansion. In a sense, high taxation combined with government social programs in place discourages private donations. Ironically, the enormous funds earned for the 9-11 terrorist attack suggest that the private sector has the ability and interest in providing charity, given proper information about causes and widespread motivation to be active. Another case us social security — a program that despite being a pyramid scheme is popular with both parties. Nevertheless, it a classic example of a government program. It forces working persons to give up some of their wage for a retirement program that consistently has a lower rate of return than the market—even if the market is in a recession! While there are many private retirement plans that are much more efficient than social security, bureaucrats have incentives to promote their own version out of their own self-interest and successful sell the necessity of the program to the public, which is far less aware of the program’s faults that the people running it. Meanwhile, the cost of social security withdrawals prevents all but the well-to-do from being able to afford a real retirement policy, and is likely to be a giving a false sense of security to those who rely upon the government version if some of the dire predictions about its financial stability hold true.

Thus, the moral premise and sole purpose of government is the protection of individual rights. Any other claimed rights to a minimum provision of any good or service are invalid because they necessarily infringe on this basic purpose. Government is a contract among the people it governs that maintains a monopoly on the legitimate use of force, but the will of the majority does not give it the right to go against its basic purpose and make any individual a tool of the state or the whim of the majority.

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