I’ll try to keep this one short. I was starting a post on another topic when Donald Trump distracted me… again. This time it was the $2,000 per person “tariff dividend” he’s proposed. This would be paid to all low- and middle-income Americans starting in mid-2026. As if the federal government was a profitable enterprise. Obviously that’s the wrong model! This is either sheer stupidity or willful government failure. Sure, the Fed can just print money, so why not? Who knew Trump was a closet modern monetary theorist?
It’s such a bad idea…. Tariffs themselves are bad enough. They are taxes, of course, a truth about which Trump and his central trade planners have denied since the beginning of the escapade. Tariffs hurt consumers and businesses who import inputs. Tariffs retard growth by increasing input costs, disrupting supply chains, and raising the prices of not only imports, but also domestically-produced goods that compete with imports. Surely Trump knows all this and the implications for his political capital: he’s already backtracking on tariffs for certain food items.
The tariff dividend is a transparent attempt to compensate consumers for the harms of taxation. It’s also a transparent attempt to buy or keep votes, much as he’s already sought to buy-off farmers harmed by tariffs. The income limit for the dividend hasn’t been announced, but make no mistake: this represents another form of redistribution.
It’s also striking that the tariffs won’t generate nearly as much revenue as will be required to begin paying the dividend by mid-2026. In fact, it could be short by as much as $300 million! Will the Treasury borrow the rest? More pressure on the bond market and interest rates.
Furthermore, the so-called dividend would be inflationary if the Federal Reserve fails to neutralize it. It would amount to another “helicopter drop” of cash, similar to the cash dump from Covid relief payments: money printing under the guise of fiscal policy.
To the extent that tariff revenue flows, it should be used to reduce the federal deficit or to pay down the gigantic government debt already outstanding ($38 trillion today not including the impending cost of funding entitlement programs). Instead, Trump is proudly following in the footsteps of generations of spendthrift politicians.
Keep in mind that the dividend is a promise Trump might not be able to keep. The Supreme Court will soon announce its decision on presidential power to impose tariffs. This decision will bear on the president’s authority under the International Emergency Economic Powers Act (IEEPA) — if and when an actual emergency is at hand, which it clearly is not. More broadly, the decision hinges on whether a “foreign facing” tax falls within the president’s Article II powers under the Constitution.
The proposed tariff dividend undermines the Administration’s argument before the Court that tariffs are primarily regulatory tools, and that any revenue from tariffs is merely incidental. Thank God the dividend would have to be authorized by Congress! I truly hope there are enough sensible legislators on the Hill to beat back this idiocy.
We’re told again and again that government must take action to correct “market failures”. Economists are largely responsible for this widespread view. Our standard textbook treatments of external costs and benefits are constructed to demonstrate departures from the ideal of perfectly competitive market equilibria. This posits an absurdly unrealistic standard and diminishes the power and dramatic success of real-world markets in processing highly dispersed information, allocating resources based on voluntary behavior, and raising human living standards. It also takes for granted the underlying institutional foundations that lead to well-functioning markets and presumes that government possesses the knowledge and ability to rectify various departures from an ideal. Finally, “corrective” interventions are usually exposited in economics classes as if they are costless!
Failed Disgnoses
This brings into focus the worst presumption of all: that government solutions to social and economic problems never fail to achieve their intended aims. Of course that’s nonsense. If defined on an equivalent basis, government failure is vastly more endemic and destructive than market failure.
“According to ancient legend, a Roman emperor was asked to judge a singing contest between two participants. After hearing the first contestant, the emperor gave the prize to the second on the assumption that the second could be no worse than the first. Of course, this assumption could have been wrong; the second singer might have been worse. The theory of market failure committed the same mistake as the emperor. Demonstrating that the market economy failed to live up to the ideals of general competitive equilibrium was one thing, but to gleefully assert that public action could costlessly correct the failure was quite another matter. Unfortunately, much analytical work proceeded in such a manner. Many scholars burst the bubble of this romantic vision of the political sector during the 1960s. But it was [James] Buchanan and Gordon Tullock who deserve the credit for shifting scholarly focus.”
John Cochrane sums up the whole case succinctly in the “punchline” of a recent post:
“The case for free markets never was their perfection. The case for free markets always was centuries of experience with the failures of the only alternative, state control. Free markets are, as the saying goes, the worst system; except for all the others.”
Tracing Failures
We can view the relation between market failure and government failure in two ways. First, we can try to identify market failures and root causes. For example, external costs like pollution cause harm to innocent third parties. This failure might be solely attributable to transactions between private parties, but there are cases in which government engages as one of those parties, such as defense contracting. In other cases government effectively subsidizes toxic waste, like the eventual disposal of solar panels. Another kind of market failure occurs when firms wield monopoly power, but that is often abetted by costly regulations that deliver fatal blows to small competitors.
The second way to analyze the nexus between government and market failures is to first examine the taxonomy of government failure and identify the various damages inflicted upon the operation of private markets. That’s the course I’ll follow below, though by no means is the discussion here exhaustive.
Failures In and Out of Scope
An extensive treatment of government failure was offered eight years ago by William R. Keech and Michael Munger. To start, they point out what everyone knows: governments occasionally perpetrate monstrous acts like genocide and the instigation of war. That helps illustrate a basic dichotomy in government failures:
“… government may fail to do things it should do, or government may do things it should not do.’
Both parts of that statement have numerous dimensions. Failures at what government should do run the gamut from poor service at the DMV, to failure to enforce rights, to corrupt bureaucrats and politicians skimming off the public purse in the execution of their duties. These failures of government are all too common.
What government should and should not do, however, is usually a matter of political opinion. Thomas Jefferson’s axioms appear in a single sentence at the beginning of the Declaration of Independence; they are a tremendous guide to the first principles of a benevolent state. However, those axioms don’t go far in determining the range of specific legal protections and services that should and shouldn’t be provided by government.
Pareto Superiority
Keech and Munger engage in an analytical exercise in which the “should and shouldn’t” question is determined under the standard of Pareto superiority. A state of the world is Pareto superior if at least one person prefers it to the current state (and no one else is averse to it). Coincidentally, voluntary trades in private markets always exploit Pareto superior opportunities, absent legitimate external costs and benefits.
The set of Pareto superior states available to government can be expanded by allowing for side payments or compensation to those who would have preferred the current state. Still, those side payments are limited by the magnitude of the gains flowing to those who prefer the alternative (and if those gains can be redistributed monetarily).
Keech and Munger define government failure as the unexploited existence of Pareto superior states. Of course, by this definition, only a benevolent, omniscient, and omnipotent dictator could hope to avoid government failure. But this is no more unrealistic than the assumptions underlying perfectly competitive market equilibrium from which departure are deemed “market failures” that government should correct. Thus, Keech and Munger say:
“The concept of government failure has been trapped in the cocoon of the theory of perfect markets. … Government failure in the contemporary context means failing to resolve a classic market failure.”
But markets must operate within a setting defined by culture and institutions. The establishment of a social order under which individuals have enforceable rights must come prior to well-functioning markets, and that requires a certain level of state capacity. Keech and Munger are correct that market failure is often a manifestation of government failure in setting and/or enforcing these “rules of the game”.
“The real question is … how the rules of the game should be structured in terms of incentives, property rights, and constraints.”
The Regulatory State and Market Failures
Government can do too little in defining and enforcing rights, and that’s undoubtedly a cause of failure in markets in even the most advanced economies. At the same time there is an undeniable tendency for mission creep: governments often try to do too much. Overregulation in the U.S. and other developed nations creates a variety of market failures. This includes the waste inherent in compliance costs that far exceed benefits; welfare losses from price controls, licensing, and quotas; diversion of otherwise productive resources into rent seeking activity, anti-competitive effects from “regulatory capture”; Chevron-like distortions endemic to the administrative judicial process; unnecessary interference in almost any aspect of private business; and outright corruption and bribe-taking.
Central Planning and Market Failures
Another category of government attempting to “do too much” is the misallocation of resources that inevitably accompanies efforts to pick “winners and losers”. The massive subsidies flowing to investors in various technologies are often misdirected. Many of these expenditures end up as losses for taxpayers, and this is not the only form in which failed industrial planning takes place. A related evil occurs when steps are taken to penalize and destroy industries in political disfavor with thin economic justification.
Other clear examples of government “planning” failure are protectionist laws. These are a net drain on our wealth as a society, denying consumers of free choice and saddling the country with the necessity to produce restricted products at high cost relative to erstwhile trading partners.
There are, of course, failures lurking within many other large government spending programs in areas such as national defense, transportation, education, and agriculture. Many of these programs can be characterized as centrally planning. Not only are some of these expenditures ineffectual, but massive procurement spending seems to invite waste and graft. After all, it’s somebody else’s money.
Redistribution and Market Failures
One might regard redistribution programs as vehicles for the kinds of side payments described by Keech and Munger. Some might even say these are the side payments necessary to overcome resistance from those unable to thrive in a market economy. That reverses the historical sequence of events, however, since the dominant economic role of markets preceded the advent of massive redistribution schemes. Unfortunately, redistribution programs have been plagued by poor design, such as the actuarial nightmare inherent in Social Security and the destructive work incentives embedded in other parts of the social safety net. These are rightly viewed as government failures, and their distortionary effects spill variously into capital markets, labor markets and ultimately product markets.
Taxation and Market Failures
All these public initiatives under which government failures precipitate assorted market failures must be paid for by taxpayers. Therefore, we must also consider the additional effects of taxation on markets and market failures. The income tax system is rife with economic distortions. Not only does it inflict huge compliance costs, but it alters incentives in ways that inhibit capital formation and labor supply. That hampers the ability of input markets to efficiently meet the needs of producers, inhibiting the economy’s productive capacity. In turn, these effects spill into output market failures, with consequent losses in .social welfare. Distortionary taxes are a form of government failure that leads to broad market failures.
Deficits and Market Failure
More often than not, of course, tax revenue is inadequate to fund the entire government budget. Deficit spending and borrowing can make sense when public outlays truly produce long-term benefits. In fact, the mere existence of “risk-free” assets (Treasury debt) across the maturity spectrum might enhance social welfare if it enables improvements in portfolio diversification that outweigh the cost of the government’s interest obligations. (Treasury securities do bear interest-rate risk and, if unindexed, they bear inflation risk.)
Nevertheless, borrowing can reflect and magnify deleterious government efforts to “do too much”, ultimately leading to market failures. Government borrowing may “crowd out” private capital formation, harming economy-wide productivity. It might also inhibit the ability of households to borrow at affordable rates. Interest costs of the public debt may become explosive as they rise relative to GDP, limiting the ability of the public sector to perform tasks that it should *actually* do, with negative implications for market performance.
Inflation and Market Failure
Deficit spending promotes inflation as well. This is more readily enabled when government debt is monetized, but absent fiscal discipline, the escalation of goods prices is the only remaining force capable of controlling the real value of the debt. This is essentially the inflation tax.
Inflation is a destructive force. It distorts the meaning of prices, causes the market to misallocate resources due to uncertainty, and inflicts costs on those with fixed incomes or whose incomes cannot keep up with inflation. Sadly, the latter are usually in lower socioeconomic strata. These are symptoms of market failure prompted by government failure to control spending and maintain a stable medium of exchange.
Conclusion
Markets may fail, but when they do it’s very often rooted in one form of government failure or another. Sometimes it’s an inadequacy in the establishment or enforcement of property rights. It could be a case of overzealous regulation. Or government may encroach on, impede, or distort decisions regarding the provision of goods or services best left to the market. More broadly, redistribution and taxation, including the inflation tax, distort labor and capital markets. The variety of distortions created when government fails at what it should do, or does what it shouldn’t do, is truly daunting. Yet it’s difficult to find leaders willing to face up to all this. Statism has a powerful allure, and too many elites are in thrall to the technocratic scientism of government solutions to social problems and central planning in the allocation of resources.
Much of what is labeled market failure is a consequence of government failure, or rather, failure caused by misguided public intervention, not just in individual markets but in the economy more generally. Misguided efforts to correct perceived excesses in pricing are often the problem, but there are myriad cases of regulatory overreach, ham-handed application of taxes and subsidies for various enterprises, and widespread cronyism. But it is often convenient for politicians to appear as if they are doing something, which makes activism and active blame of private enterprise a tempting path. The Biden Administration’s energy crisis offers a case in point. First, a digression on the efficiency of free markets. Skip the next two sections to get straight to Biden’s mess.
Behold the Bounty
I always spent part of the first class session teaching Principles of Economics on some incredible things that happen each and every day. Most college freshmen seem to take them for granted: the endless variety of goods that arrive on shelves each day; the ongoing flow of services, many appearing like magic at the flick of a switch; the high degree of coincidence between specific wants and all these fresh supplies; the variety and flow of raw materials and skills that are brought to bear; the fantastic array of sophisticated equipment deployed to assist in these efforts; and the massive social coordination necessary to accomplish all this. How does it all happen? Who collects all the information on what is wanted, and by whom? On the feasibility of actually producing and distributing various things? What miracle computer processes the vast set of information guiding these decisions and actions? Does some superior intelligence within an agency plan all this stuff?
The answer is simple. The seemingly infinite set of knowledge is marshaled, and all these tasks are performed, by the greatest institution of social cooperation to ever emerge: decentralized, free markets! Buying decisions are guided by individual needs and wants. Production and selling decisions are guided by resource availability and technology. And all sides react to evolving prices. Preferences, resources, and technology are in a constant state of flux, but prices react, signaling producers and consumers to make individual adjustments that correct larger imbalances. It is tempting to describe the process as the evolving solution to a gigantic set of dynamic equations.
The Impossible Conceit
No human planner or government agency is capable of solving this problem as seamlessly and efficiently as markets, nor can they hope to achieve the surplus welfare that redound to buyers and sellers in markets. Central planners or intervening authorities cannot possess the knowledge and coordinating power of the market mechanism. That doesn’t mean markets are “perfect”, of course. Things like external costs and benefits, dominant sellers, and asymmetric information can cause market outcomes to deviate from the competitive “ideal”. Inequities can arise from some of these imperfections as well.
What can be much worse is the damage to market performance caused by government policy. Usually the intent is to “correct” imperfections, and the rationale might be defensible. The knowledge to do it very well is often lacking, however. Taxes, subsidies, regulations, tariffs, quotas, capital controls, and manipulation of interest rates (and monetary and credit aggregates) are very general categories of distortion caused by the public sector. Then there is competition for resources via government procurement, which is frequently graft-ridden or price-insensitive.
Many public interventions create advantages for large sellers, leading to greater market concentration. This might best serve the private political power of the wealthy or might convey advantages to investments that happen to be in vogue among the political class. These are the true roots of fascism, which leverages coercive state power for the benefit of private interests.
Energy Vampires
Now we have the curious case of the Biden Administration and it’s purposeful disruption of energy markets in an effort to incentivize a hurried transition from fossil fuels to renewable energy. As I described in a recent post on stagflation,
“… Biden took several steps to hamstring the domestic fossil fuel industry at a time when the economy was still recovering from the pandemic. This included revoking permits for the Keystone pipeline, a ban on drilling on federal lands and federally-controlled waters in the Gulf, shutting down production on some private lands on the pretext of enforcing the Endangered Species Act, and capping methane emissions by oil and gas producers. And all that was apparently just a start.
As Mark Theisen notes, when you promise to destroy a particular industry, as Joe Biden has, by taxing and regulating it to death, who wants to invest in or even maintain production facilities? Some leftists with apparent influence on the administration are threatening penalties against the industry up to and including prosecution for ‘crimes against humanity’!”
In addition to killing Keystone, there remains a strong possibility that Biden will shut down the Line 5 pipeline in Michigan, and there are other pipelines currently under federal review. Biden’s EPA also conducted a purge of science advisors considered “too friendly” to oil and gas industry. This was intertwined with a “review” of new methane rules, which harm smaller, independent oil and gas drillers disproportionately.
Joe Biden’s “Build Back Better” (BBB) legislation, as clumsy in policy as it is in name, introduces a number of “Green New Deal” provisions that would further disadvantage the production and use of fossil fuels. Hart Energy provides descriptions of various tax changes that appeared in the Treasury’s so-called “Greenbook”, a collection of revenue proposals, many of which appear in the BBB legislation that recently passed in the House. These include rollbacks of various deductions for drilling costs, depletion allowances, and recovery rules, as well as hikes in certain excise taxes as well as taxes on foreign oil income. And all this while granting generous subsidies to intermittent and otherwise uneconomic technologies that happen to be in political favor. This is a fine payoff for cronies having invested significantly in these rent seeking opportunities. While the bill still faces an uphill fight in the Senate, apparently Biden has executive orders, held in abeyance, that would inflict more pain on consumers and producers of fossil fuels.
Biden’s energy policies are obviously intended to reduce supplies of oil, gas, and other fossil fuels. Prices have responded, as Green notes:
“Gas is up an average of 57% this year, with corresponding increases of 44% for diesel and a whopping 60% for fuel oil.”
The upward price pressure is not limited to petroleum: electricity rates are jumping as well. Consumers and shippers have noticed. In fact, while Biden crows about wanting “the rich” to pay for BBB, his energy policies are steeply regressive in their impact, as energy absorbs a much larger share of budgets among the poor than the rich. This is politically suicidal, but Biden’s advisors have chosen a most cynical tact as the reality has dawned on them.
Abusive Victim Blaming
Who to blame? After the predictable results of cramping domestic production and attacking fossil fuel producers, the Biden team naturally blames them for rising prices! “Price gouging” is a charge made by political opportunists and those who lack an understanding of how markets allocate scarce resources. More severe scarcity means that prices must rise to ration available quantities and to incentivize those capable of bringing forth additional product under difficult circumstances. That is how a market is supposed to function, and it mitigates scarcity!
But here comes the mendacious and Bumbling Buster Biden. He wants antitrust authorities at the FTC to investigate oil pricing. Again from Stephen Green:
There’s nothing quite like a threat to market participants to prevent the price mechanism from performing its proper social function. But a failure to price rationally is a prescription for more severe shortages.
Biden has also ordered the Strategic Petroleum Reserve (SPR) to release 50 million barrels of oil, a move that replaces a total of 2.75 days of monthly consumption in the U.S. The SPR is supposed to be drawn upon only in the case of emergencies like natural disasters, so this draw-down is as irresponsible as it is impotent. In fact, OPEC is prepared to offset the SPR release with a production cut. Biden has resorted to begging OPEC to increase production, which is pathetic because the U.S. was a net exporter of oil not long ago … until Biden took charge.
Conclusion
Properly stated, the challenge mounted against markets as an institution is not that they fall short of “perfection”. It is that some other system would lead to superior results in terms of efficiency and/or equity. Central planning, including the kind exercised by the Biden Administration in it’s hurried and foolish effort to tear down and remake the energy economy, is not even a serious candidate on either count.
Granted, there is a long history of subsidies to the oil and gas sector. I cannot defend those, but the development of the technology (even fracking) largely preceded the fruits of the industry’s rent seeking. At this point, green fuels receive far more subsidies (despite some claims to the contrary). Furthermore, the primacy of fossil fuels was not achieved by tearing down competing technologies and infrastructure. In contrast, the current round of central planning requires destruction of entire sectors of the economy that could otherwise produce efficiently for the foreseeable future, if left unmolested.
The Biden Administration has adopted the radical green agenda. Their playbook calls for a severe tilting of price incentives in favor uneconomic, renewable energy sources, despite the economy’s heretofore sensible reliance on plentiful fossil fuels. It’s no surprise that Biden’s policy is unpopular across the economic spectrum. His natural inclination is to blame a competitive industry victimized by his policy. It’s a futile attempt to avoid accountability, as if he thinks doubling down on the fascism will help convince the electorate that oil and gas producers dreamt up this new, nefarious strategy of overcharging customers. People aren’t that dumb, but it’s typical for the elitist Left presume otherwise.
The headline describes a kind of government failure. In an ideal private transaction, costs and benefits are fully internalized by the buyer and seller. Both reap private gains, or surplus, from mutually beneficial transactions. On the other hand, there are cases in which external costs are inflicted on otherwise unrelated third parties, as when production emits pollutants. Or, there might be external benefits that inure to third parties, as when a homeowner pays to beautify their property and the whole neighborhood gains. These “externalities” are commonly citied as rationale for government interference in private markets. A good government, it is said, would seek to “internalize the externalities”, in one way or another, to prevent too much trade in a good imposing external costs, or too little trade where there are external benefits. Imposing taxes, granting subsidies, intervening with price controls, quotas, or various regulations are all ways in which corrective action might be attempted by public authorities.
The problem is that government often chooses badly, both misidentifying externalities, poorly estimating their magnitude, or in choosing how best to address them. When mistakes of this nature occur, the internal gains from trade are not just compromised or even destroyed. They are often externalized — revoked and redistributed to non-participants. The formerly private and internal gains may be extracted in the form of taxes, ultimately flowing to unconnected third parties. They are externalized internalizes, if I may coin a phrase. In other cases, in order to subsidize favored industries, individuals might be taxed on their income. Yet the favored industry is likely unconnected or external to the taxed individual’s source of income. While the gains that might accrue in the favored industry are internalized there, their source is an externalized internality.
Putting the troubling issue of takings or confiscation aside, these mistaken interventions distort relative prices and production decisions, with false signals propagating into other markets — which again are external effects. This, in turn, distorts the allocation of resources across various uses. These cases are clear-cut examples of externalized internalities.
I will confine this discussion to economic matters. By “internalities“, I mean all things within the economic realm that are private and/or reserved to the individual by natural rights. That includes private property and the individual’s freedom to trade and contract with others.
Wrongly taxing presumed “bads” or wrongly subsidizing presumed “goods” are absolute cases of externalizing internalities. And taxing a “bad” excessively (at more than its true social cost) or subsidizing a “good” excessively (at more than its true social benefit) are cases of externalizing internalities. The political temptation to subsidize might be the greater danger, as it is all too easy for public officials and politicians to identify and sell “deserving” causes, especially if they intimate that others will pay.
For example, subsidized education, which primarily benefits private individuals, is billed to the taxpaying public. It over-allocates resources to education, including students with greater value as human resources in other pursuits. Subsidized energy pays the seller of a power source more than its value to buyers, courtesy of taxpayers, and over allocates resources to those energy sources relative to non-subsidized energy and other goods.
Even if an industry is taxed in exact accordance with its true social cost, there is still the question of how the proceeds of the tax are to be distributed. Ideally, unless the social costs are borne equally by all, the distribution should bear some proportionality to the damages borne by individuals, yet that is seldom considered outside of certain kinds of litigation. The true victims will almost certainly be shorted. Benefits will accrue to many who are free of any burden inflicted by the undesired activity. The corrective action thus fails to properly address the externality, and it bestows an incidental external benefit on wholly unconnected parties.
Likewise, subsidies paid to an industry in exact accordance with its true social benefits require taxes that may burden individuals who do not stand to benefit from the subsidized activity in any way. That is true unless the industry in question produces a pure public good. Indeed, if the taxed individuals had a choice in the matter, they would often use the funds for something they value more highly. Thus, suboptimal distribution of the tax proceeds for funding a less-than-pure “social good” involves the extraction of an internality.
Other forms of government action have similar externalization of internal costs or benefits. With the imposition of a wage floor, or minimum wage, the least-skilled workers are likely to lose their jobs. Consumers are likely to pay higher prices as well. The job losers become more dependent on public aid, which must be funded via taxes on others. The wage floor will also degrade working conditions for those lucky enough to keep their jobs. All of these effects of market intervention demonstrate the public piercing of internal gains from private, voluntary trade. Some of what is excised gets spilt, and some gets siphoned off to external parties. Thus internalities are externalized.
Regulation of private industry often results in regulatory capture, whereby regulators impose rules with compliance costs too high for small competitors and potential entrants to afford. This obviously strengthens the market power of larger incumbents, who may in turn increase prices or skimp on quality. Taxpayers pay the regulators, consumers pay the inflated prices, smaller firms shut down, and resources are under-allocated to the product or service in question. These distortions spill into other markets as well. All these effects are part of the despoilment of internal gains from trade. To the extent that trades are prevented at competitive prices, the external winners are those who capture trades at higher prices, along with the regulators themselves and anyone else standing to benefit from graft as part of the arrangement. And again, the wrongful gains to the winners can be described as externalized internalities.
There are many other examples of government failure that fit the description of externalized internalities. In fact, extracting internalities is the very essence of taxation, though we readily accept its use for expenditures on goods that are of a truly public nature, which by definition confer benefits that are non-exclusive. The classic case, of course, is national defense. The differences in the cases of government failure cited above, however, are that the internalities extracted via taxation or other forms of intervention are externalized for private gain by other parties, no matter how widely distributed and diffuse. This is an extremely pernicious kind of government failure, as it ultimately leads to a cannibalization of private activity via our role as public actors. Beware politicians bearing gifts, and beware them just as much when they demonize private trade.
Should economic growth drive changes in the Social Security disability insurance rolls? It appears to have done just that over the past ten years, suggesting that the program embodies a degree of sham. The Political Calculations blog has some fascinating charts and discussion of this phenomenon entitled “The Disability Dumping Ground“. It shows that the number of workers receiving disability benefits rose across many age cohorts, and especially more “mature” cohorts, as the economy entered the Great Recession. Successful claims continued to rise throughout the weak economic recovery, but the increases began to taper as economic activity finally neared and exceeded pre-recession levels. However, the post notes that:
“the vast majority of those who were added to Social Security’s disability rolls during the period from 2008 through 2013 are still on them.“
One must question whether the Obama Administration had a motive to encourage more latitude in the approval of disability claims during this period:
“And because being classified as disabled would remove such individuals from being counted as both unemployed and part of the U.S. civilian labor force, the Obama administration had a strong incentive to get the program’s administrators to look the other way at the disability insurance applications for benefits that were being made as jobless benefits were expiring, as the resulting math would considerably reduce the official unemployment rates reported by the U.S. Bureau of Labor Statistics.“
Of course, an intentional effort to bring more of the long-term unemployed onto the disability rolls might be defended as counter-cyclical fiscal policy and on immediate humanitarian grounds. However, the accelerated depletion of the Disability Insurance Trust Fund implies “that the payments to individuals receiving … benefits will be reduced by nearly one-fifth.” Such cuts would be extremely unjust to those suffering from more legitimate disabilities. In any case, this makes the pretext under which payroll taxes are collected highly suspect.
It would be interesting to know whether changes in the disability rolls or benefit payments bore a correlation to economic growth over a longer history. The social gains from pooling risks at this level are easily frittered by mismanagement and fraudulent activity, faults to which government activity is particularly prone.
We often hear we’re at the “peak” availability of some resource, but what’s really meant is that we’re at a cliff’s edge, about to run dry. These claims are usually uninformed and have been wrong historically. Of course, scarcity is real; it’s why I do economics and love markets, which solve the problem of scarcity through voluntary, arms length cooperation in balancing needs and wants with the availability of resources. But scarcity at any point in time rarely implies anything about the availability of resources going forward. Current knowledge and conditions, and existing technology for extracting and utilizing resources, provide signals about opportunities; they should not dominate our outlook for the future in a dynamic economy.
The view that the availability of resources is subject to hard limits, or that they will “run out”, is discussed by David Henderson in his post “The Jevons Fallacy,” regarding the “peak” views often credited to economist William Jevons. Henderson quotes his own bio of Jevons:
“Jevons failed to appreciate the fact that as the price of an energy source rises, entrepreneurs have a strong incentive to invent, develop, and produce alternate sources. In particular, he did not anticipate oil or natural gas. Also, he did not take account of the incentive, as the price of coal rose, to use it more efficiently or to develop technology that brought down the cost of discovering and mining (see natural resources).”
Don Boudreaux has a few thoughts on Henderson’s post and the topic of scarcity, emphasizing the contribution of human ingenuity to the supply of resources:
“Atoms are created and made into matter by the impersonal forces of nature (or, if you are a theist, by God). In contrast, matter is made into resources only by human creativity, especially when this creativity is unleashed and directed by markets. So more humans – and more markets – quite realistically (and, so far, historically) mean an increasing, not a decreasing, supply of resources.”
A 2005 post at the humansunderrated blog made the same point: “Only one resource truly matters and that is the human mind.” And the human mind, guided by market signals, is what ultimately solves the problem of scarcity. It does not get solved when human initiative is shackled by regulation, insecure property rights, or protected monopoly interests, which are all varieties of government failure.
“And so here we go again on the trial of exhaustion theory, one step removed from the scientism of central planning where decline rates are projected and a social cost of depletion is calculated for an extraction tax. But it is all bad science. ”
There is no end to scarcity. It will always be with us, but we have not reached peak oil, peak fossil fuels, peak food, or peak anything. The dreary viewpoint credited to Jevons and Thomas Malthus is misguided as long as people remain free to engage in voluntary production and trade. The “peak” perspective serves the interest of statists who’d prefer to impose arbitrary limits on our productive potential.
Who told Congress the following? “We oppose ALL subsidies, whether existing or proposed, including programs that benefit us, which are principally those that are embedded in our economy, such as mandates.”
And this? “[We don’t] view these as ‘benefits’ even if they are in industries we’re in. They are wasteful and market distorting, and allow other firms to run businesses that aren’t making money any other way.”
“The company owned by billionaire philanthropists Charles and David Koch, as well as groups frequently associated with the fraternal libertarians, are pushing Congress to let 55 tax breaks expire, including several that provide billions in tax relief for corporations such as Koch Industries.”
They are similarly opposed to regulatory cronyism that restrains competition and the sort of public largess favoring lucrative contract awards for large corporate entities. These are the same Koch brothers typically demonized by the Left (but not always), as if their political contributions were an effort to garner public subsidies. Clearly that is not the case. Moreover, Left-leaning billionaires such as Tom Steyer, Michael Bloomberg and George Soros are far more prolific political contributors than the Koch brothers. And what do these corporatists want for their money? Surely not a smaller government; they’d like a big fat administrative state from which their many corporate interests can suckle.
Some kinds of subsidies are transparently wasteful, such as tax breaks for already-profitable businesses or bailouts to firms that have made bad decisions, or to firms in dying industries. More fundamentally, all public subsidies circumvent the unforgiving cost-benefit calculus imposed by the market, misdirecting resources via signals distorted by the visible fists of government. This often allows activity to continue that would otherwise be judged wasteful or unsustainable, or excessive investment of resources into particular activities. Self-interested politicians and public officials, however, often justify these subsidies by asserting the existence of external benefits unrecognized by market valuations. Too often, these assertions rely on value judgements. Regardless, the supposed benefits are never easily measured. Our experience with pervasive cronyism and waste in government should always lead us to insist on a skeptical evaluation of proposed subsidies. Rent-seeking behavior is usually at the root of such initiatives.
Die-hard Obamacare supporters are in full denial over the lousy results of the health care plan in its first year. They’re tone deaf, living a delusion. This piece from Forbes.com notes that the Affordable Care Act (ACA) has been an abject failure thus far on six of seven major counts, and even the one “success” is terribly blemished. Close to 90% of the increase in the number of insured is due to expansion in the Medicaid and state Children’s Health Insurance Program roles. Both of those welfare programs predate the ACA and certainly could have been expanded without Obamacare and its collateral damage to existing health plans and the health care industry. In fact, according to Business Week, less than half of physicians now accept Medicaid, so it’s not always easy for those “newly insured” individuals to gain access to actual care.
In fact, Medicaid patients are not the only ones with access problems. This USA Today article linked by Forbes notes that physicians are limiting the number of Obamacare exchange-covered patients they’ll accept. After the disastrous unraveling of the “if-you-like-your-plan-you-can-keep-it” fiction, it was revealed that many of the policies foisted upon the “previously-insured-but-no-longer” group through Obamacare exchanges offered severely limited provider networks. If you liked your doctor, you might well have lost your doctor.
For the majority who do not qualify for taxpayer subsidies under Obamacare, the health insurance premia on policies acquired on the exchanges have risen drastically. This problem is covered in the Forbes article. Far less expensive short-term plans are being offered by insurers as an alternative to Obamacare, but they are only renewable if the insured remains healthy. It is precisely these kinds of circumstances that might devolve into a death spiral for Obamacare: an increasingly sick risk pool and universal rating may lead to accelerating premium hikes for the exchange policies.
So, prospects for improvement under the ACA are quite bleak. We’ve seen a botched rollout of the Obamacare website, the chief enrollment vehicle, which is still problematic; a wrecked individual market with policies cancelled and replaced by coverage with limited provider networks; a medical device industry battered by new taxes; a negative impact on full-time employment as firms reduce hours to avoid coverage requirements; expanded welfare programs with a concomitant burden on taxpayers; increased emergency room utilization; physicians opting out due to inadequate reimbursement and high compliance costs; healthy individuals opting out and sick individuals opting in; higher premia with more increases on the way and the prospect of an insurance death spiral; and we’ve seen arbitrary exemptions carved out for various cronies of the Obama administration all along the way. Oh, and we’ve seen lies, delays, and every effort to back-load costs and front-load benefits, an implementation governed by political considerations rather than improving health care. The next shoe to drop is likely to be widespread cancellation of employer-sponsored coverage as the ACA coverage mandate hits employers in 2015.
Desperate propaganda continues to flow, but that can’t change the fact that Obamacare is terrible policy with results to prove it. Here is government failure.
When it comes to “diseases of poverty,” Bryan Caplan knows that the right prescription has nothing to do with redistribution and everything to do with creating conditions that foster capitalism and economic growth. He marvels at the inattention of populist pundits and politicians to the realities of economic history:
“It’s almost like the last two centuries never happened. Quick recap: During the last two hundred years, living standards exploded even though the distribution of income remained quite unequal. How is such a thing possible? Because total production per person drastically increased. During this era, no country escaped dire poverty via redistribution, but many escaped dire poverty via increased production.”
I linked to an article yesterday about prerequisites for prosperity in my post entitled “Ending Terror With Economic Empowerment.” The author of that article, Harry Veryser, might just as well have said that those conditions are prerequisites for enhanced public health, since as Caplan notes, economic development and public health are inextricably connected.
Dr. Ron Paul makes this same general point in “Liberty, Not Government, Key To Containing Ebola.” He gives great emphasis to the destructive effect of war on the ability of any country to develop an effective health care system:
“It is no coincidence that many of those countries suffering from mass Ebola outbreaks have also suffered from the plagues of dictatorship and war. The devastation wrought by years of war has made it impossible for these countries to develop modern healthcare infrastructure. For example, the 14-year civil war in Liberia left that country with almost no trained doctors. Those who could leave the war-torn country were quick to depart. Sadly, American foreign aid props up dictators and encourages militarism in these countries.”
As Paul says, powerful government often inhibits a country’s ability to prosper and improve public health. The ebola epidemic offers a case in point, not simply with respect to controlling the spread of the disease in Western Africa, but in the counterproductive calls for government bans on travel to and from the region. Shikha Dalmia lays out the case against such a ban, which include its questionable efficacy in preventing the disease from traveling, the insurmountable obstacle the ban would present to private relief efforts, and the instability it would create in the region. Dalmia calls out Republicans for their hypocrisy in this regard:
“Republicans would do themselves and everyone else a big favor by suspending their calls for a travel ban and sticking to their alleged opposition to heavy-handed government intervention.“
Every time someone says “the government should …,” ask them to replace the “G word” with “politicians I actually know, running in electoral systems with voters and interest groups that actually exist.” Does the speaker still think “the government should?” It’s a good test suggested by Michael Munger in his article “Unicorn Governance.” His point is that nearly all calls for state intervention really profess a kind of belief in unicorns. So let’s remove the unicorn from the argument. He says:
My friends generally dislike politicians, find democracy messy and distasteful, and object to the brutality and coercive excesses of foreign wars, the war on drugs, and the spying of the NSA.
But their solution is, without exception, to expand the power of “the State.” That seems literally insane to me—a non sequitur of such monstrous proportions that I had trouble taking it seriously.
Along the same lines, Don Boudreaux at Cafe Hayek offers a quote from Matt Ridley’s book, The Rational Optimist:
Economists are quick to speak of ‘market failure’, and rightly so, but a greater threat comes from ‘government failure‘. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with agencies to extract more money from taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.
Finally, Boudreaux has a recent piece in which he proposes a little Platitude Test. Is the speaker offering up a platitude? Well, “ask yourself if you can imagine a normal human adult believing the opposite.” If so, then there is truly something of substance at issue. Boudreaux notes that this is usually not the case when the word “sustainability” is trotted out:
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p style=”padding-left:30px;”>You’ll discover, of course, that you can’t imagine anyone seriously supporting ‘unsustainability.’ Therefore, you should conclude that mere expressions of support for ‘sustainability’ are empty. And they can be downright harmful if they mislead people into supporting counterproductive government policies. Substantive issues involving sustainability invoke questions that have non-obvious answers. For example: At what rate must the supply of a resource fall before we conclude that continued use of that resource is unsustainable?
Ultimately, market mechanisms are fabulous guardians of real sustainability, since they price scarce resources so as to allocate them efficiently across time and space, providing incentives for conservation, to bring forth new supplies of the resource, and to develop rational substitutes. Unicorns and the state don’t do nearly as well.
NOTE: I apologize for the haphazard formatting in this post. I cannot seem to get the editor to cooperate tonight. I had similar problems last night but resolved them, though not in a fully satisfactory way. Tonight the issues seem worse.
In advanced civilizations the period loosely called Alexandrian is usually associated with flexible morals, perfunctory religion, populist standards and cosmopolitan tastes, feminism, exotic cults, and the rapid turnover of high and low fads---in short, a falling away (which is all that decadence means) from the strictness of traditional rules, embodied in character and inforced from within. -- Jacques Barzun
Sacred Cow Chips 
