December 4, 2013

Why Government Institutions Fail to Deliver on Their Promises: The Public Choice Explanation

Testimony Before the House Oversight and Government Reform Committee
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Chairman Issa, Ranking Member Cummings, thank you for the opportunity to testify today regarding the limitations of government intervention.

Despite Washington’s recent focus on the disastrous Affordable Care Act website rollout, policymakers are missing what the rollout glitches symbolize: the fundamental flaws that imbue government intervention.

The work of public choice economists such as Nobel laureate James Buchanan, Gordon Tullock, Mancur Olson, and William Niskanen has shown that, despite good intentions and lavish use of taxpayer resources, government solutions are not only unlikely to solve most of our problems—they often make problems worse.

Public Choice Economics: Politics without Romance

Congress spends a great deal of time discussing the need to address market failures such as monopolies and pollution.

However, even when such a problem does exist, the policies implemented to address it are often ineffective or undesirable.1 That’s because, as public choice economists have pointed out, while there may be market failures, there are also government failures. In his Nobel Prize acceptance speech, popularized in his famous essay “Public Choice: Politics without Romance,” James Buchanan explains why looking to government for solutions often results in more harm than good.2

Public choice theory applies economic analysis—or the study of how incentives influence behavior—to politics. For instance, economists assume that people interacting in the marketplace are mostly driven by self-interest. That doesn’t mean that people aren’t concerned about others, or can’t act charitably. It simply means that their dominant motive—whether they are employers, employees, or consumers—is a concern for themselves. Public choice economists make the same assumption about government actors. As Jane S. Shaw writes in a primer about public choice economics, “although people acting in the political marketplace have some concern for others, their main motive, whether they are voters, politicians, lobbyists, or bureaucrats, is self-interest.” 3

In other words, unlike many economists before them, public choice economists revolutionized the field of economics by having symmetric assumptions about humans in public and private settings and replacing “romantic and illusory notions about the workings of governments” with more realistic ones.

Government Incentives

In the marketplace, scarcity guarantees that people compete for resources. In that environment, the price system and the risk of losses, combined with the prospect of potential profit, are powerful signals that guide people’s decisions to prudently buy, sell, invest, and save.

But unlike in the marketplace, the incentives for good management in government are very weak. For instance, even though lawmakers are expected to pursue the “public interest,” they make decisions that use other people’s money rather than their own. This means that their exposure to the risk of a bad decision is fairly limited, and there is little to no reward for spending taxpayers’ money wisely or providing a service effectively or efficiently.

Furthermore, because each voter bears a very small part of the cost of these bad decisions, and they have their daily lives to manage, voters lack the incentives to sufficiently monitor the government.4 And, as Shaw explains, voter ignorance can be quite rational:

Even though the result of an election may be very important, an individual’s vote rarely decides an election. Thus, the direct impact of casting a well-informed vote is almost nil; the voter has virtually no chance to determine the outcome of the election. So spending time following the issues is not personally worthwhile for the voter. Evidence for this claim is found in the fact that public opinion polls consistently find that less than half of all voting-age Americans can name their own congressional representative.

That is not, of course, the case in the private sector. Consumers have great incentives to make sure the car or the house they buy is worth the price they will pay for it. Employers also have great incentives to make sure they hire the best employees, as there is a high and direct cost for employing someone who can’t perform the job he or she is hired for.

Yet lawmakers—however well-intentioned—face serious difficulties in making the right decision. Many factors come into play, but it is worth highlighting the following two. First, the government does not have better information than private agents operating in the market, whether this be the health care market or any other market (financial, housing, etc.).5 Making matters worse, government decision-makers are usually insulated from market signals, and thus often lack important information about the problem at hand and the market itself.

Second, the resources government provides are often so enticing that companies may switch their focus from meeting the needs of customers to meeting the wishes of government officials—thus producing a less effective outcome.

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