“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”
― Milton Friedman

“Human beings are born with different capacities. If they are free, they are not equal. And if they are equal, they are not free.”
― Aleksandr Solzhenitsyn

Sunday, May 06, 2007

Why Government is the Problem

...concentrated benefits and diffused costs.

Two recent articles at Tech Central Station reminded me of a pamphlet available from the Hoover Institution. It is titled "Why Government is the Problem," and is based on a speech given by Milton Friedman at The Manhattan Institute in 1991. An unedited transcript of the Wriston Lecture can be found here.

Following are excerpts from all three of these articles. All are worth reading in full. First, Friedman:

One of our major social problems is clearly the deterioration of our educational system. Next to the military, education is the largest socialist industry in the United States. Total government spending on schooling—I call it schooling rather than education because not all schooling is education, and conversely—comes close to total government spending on defense. With the so-called peace dividend, it may already exceed it. The amount spent per pupil in the past thirty years has tripled in real terms after allowing for inflation. Input has tripled and output has been going down. Schools have been deteriorating. That problem is unquestionably produced by government.

...Government has played an increasingly large role in medical care. For decades, total spending on medical care was about 3 to 5 percent of national income. It is now 12 or 13 percent, and the acceleration of spending dates from the introduction of Medicare and Medicaid in 1965. Some of you may have seen an article published in that excellent journal of opinion, the Wall Street Journal, in which I cited figures on hospital cost per patient day, adjusted for inflation. The cost was 26 times as high in 1989 as it had been in 1946; personnel per hospital bed was seven times as high, while the number of hospital beds had been cut in half. Great advances in medical care have certainly occurred, but they did so before 1965 as well as after. Those seven times as many people per hospital bed are clearly not people who are attending to patients; they are mostly people who are filling in forms to satisfy government requirements for payment.

...The people who run our private enterprises have the same incentive as the people who are involved in our government enterprises. In all cases the incentive is the same: to promote their own interest. My old friend Armen Alchian, who is a professor at the University of California in Los Angeles, once put this point in a very straightforward way. There is one thing, he said, that you can depend on everybody to do, and that is to put his interest above yours. The people who run our private enterprises are the same kind of people as those who run our public enterprises, just as the Chinese in Hong Kong are no different from the Chinese in Mainland China, yet the results are vastly different; just as the West Germans and the East Germans were not different people, yet the results were vastly different.

The point is that the actions that serve self-interest are very different in the private sphere than they are in the public sphere. The bottom line is different. If a group of people start an enterprise in the private sphere, it may be a success or it may be a failure. Most new enterprises are failures. If the enterprise were an obvious success, it would probably already be in existence. If the enterprise is a failure, that means it loses money. The people who own it have a very clear bottom line. To keep it going, they would have to dig into their own pockets. They are reluctant to do that, so they have a strong incentive either to make the enterprise work or to shut it down.

Suppose the same group of people have the same idea, start the same enterprise in the government sector, and the initial results are the same. It is a failure; it does not work. They have a very different bottom line. Nobody likes to admit that he has made a mistake, and they do not have to. They can argue that the initial failure was only because the enterprise was not on a large enough scale. More important, they have a much different and deeper pocket to draw on. With the best intentions in the world, they can try to persuade the people who hold the purse strings to finance the enterprise on a larger scale, to dig deeper into the pockets of the taxpayers in order to keep it going. That explains what is a very general rule: if a private enterprise is a failure, it is closed down—unless it can get a government subsidy to keep it going; if a government enterprise is a failure, it is expanded. I challenge you to find exceptions.

...Let me take a very different example in the United States. At the end of World War II, we had wage and price control. Under the inflationary conditions, many employers were finding it difficult to recruit employees. They were trying to find ways to get around the limitations of wage control. They began to offer health care as a fringe benefit to attract workers and succeeded in having it treated as a nontaxable fringe benefit. The excuse disappeared once wage and price controls were eliminated, but the tax exemption of health benefits did not disappear; it continued. Nobody was spending any money on it personally; it was at other taxpayers' expense. It created a medical system in which it came to be taken for granted that employees would get their health benefits through their employers, because that way they could get them in a tax-exempt form. As a result, it has become a major propellant of the drive for socialized medicine. It is why you have a large part of the business community fostering socialized medicine.

...The problem is not that government is spending too little but that it is spending too much. The problem in schooling is that government is spending too much on schooling for the wrong things. The problem in health care is that government is spending too much on health care for the wrong things. The end result has been that government has become a self-generating monstrosity. Abraham Lincoln talked about a government of the people, by the people, for the people. What we now have is a government of the people, by the bureaucrats, including the legislators who have become bureaucrats, for the bureaucrats. That is what we have in fact.

Again, let me emphasize, the problem is not that bureaucrats are bad people. The problem is, as the Marxists would say, with the system not the people. The self-interest of people in government tends to lead them to behave in a way that is against the self-interest of the rest of us.

...Heretical though it may seem, it would be nice to get back to the spoils system instead of the civil service. That would debureaucratize the administration of laws.
What Healthcare and Higher Education Have in Common - Jon Hall
Assured payment results in waste and fraud. It has caused an explosion in medically unnecessary tests and procedures. It is why universities can provide their professors with cushy sinecures for precious little work. (How else could the University of Colorado afford a 6-digit compensation package for the likes of a Ward Churchill?) The hospitals and universities don't have to economize and prioritize; they can have it all. The money will be there for them.
The Real Solution to Poverty - Arnold Kling
The point of this essay is to simply state the obvious. If you look at poverty from the broad perspective of international and historical comparisons, the solution to poverty is decentralized entrepreneurial activity under capitalism.

The capitalist solution to poverty is unsatisfying to many people, because it is not planned or intended. Policymakers and anti-poverty programs per se are not involved.

...How can advocates like the Center for American Progress persist in proposing centralized, planned solutions for poverty? I think that the key to maintaining faith in these ideas is to focus only on intentions. If a program is intended to reduce poverty, then it is an anti-poverty program. Instead, I believe that anyone who sincerely wants to do something about poverty needs to focus on outcomes.

...Sometimes, I wonder if the anti-poverty crusaders even care about the outcomes of the policies that they propose. For example, do food stamps reduce poverty? If so, then one would think that those concerned with poverty would count food stamps when they measure people's income. Instead, they rely for the most part on data on family incomes that exclude government assistance of any kind. That is, the crusaders make policy pronouncements as if poverty reduction depends entirely on government assistance, and yet they measure poverty as if government assistance has no effect whatsoever.

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