Pork or Bags of Cash?

I’ve been noodling through a government reform thought experiment, but can’t seem to reach a conclusion. See what you think…

The reform would address that most nefarious dynamic: When the benefits of government spending are concentrated and the costs are dispersed, government will grow and spending will increase.

Mancur Olson described this dynamic more than 40 years ago in The Logic of Collective Action. Steve Slivinski, in his new book Buck Wild, summarizes Olson’s idea as follows:

Olson pointed out that the disparity in incentives between taxpayers and what we now call “special interests” results from an inherent disadvantage of the larger group (i.e., taxpayers) compared to the smaller group (i.e., recipients of public dollars) in its ability to organize to defend its interests. It is this inherent bias in favor of the small special interest groups that provides a very robust explanation of why we still have Big Government, even though many taxpayers would prefer smaller government. “It would be in the best interest of those groups who are organizing to increase their own gains by whatever means possible,” writes Olson. “This would include choosing policies that, though inefficient for the society as a whole, were advantageous for the organized groups because the costs of the policies fell disproportionately on the unorganized.”

To borrow an example from Steve’s book, the National Endowment for the Arts had a 2004 grant budget of $47.4 million — equal to about 0.01% of income taxes. The NEA awarded 1,970 grants that year, so the average grant amount was $24,000. Grant recipients would thus have considerably more financial incentive to lobby for continuing the NEA than individual taxpayers, who on average contribute less than a buck per year to the program, would have to lobby for discontinuing it.

This dynamic is made worse by the common belief that if a government program is cut, its money will be rerouted to some other program instead of returned to taxpayers. Consider, for instance, the lightly-trafficked regional airport in my hometown, which is using a forthcoming, large federal grant to finance a major expansion of its runway. When local residents complained that the expansion was a waste of taxpayers’ money, project defenders responded that the federal government would spend it in some wasteful fashion anyway, so why not do so locally?

The “organized group” that gains the most from Olson’s dynamic is politicians. Because they control the public fisc, they receive the entreaties and gratitude of special interests, and they parlay that gratitude into campaign contributions and electoral support. The result is that politicians and special interests mutually benefit from this dynamic while taxpayers are stuck with the bill.

Nor does the dynamic require bad actors. Special interests can act on the sincere belief that their causes benefit society, and politicians can share that belief or else be brought to embrace it by the quasi-Darwinian forces of elections. In short, Olson’s dynamic appears to be a natural part of the political system.

Unfortunately, it’s a very costly part, as Duke University’s Mike Munger described earlier this summer in an essay on econlib.org. (Will Wilkinson discusses Munger’s essay here, and Munger chats about it on Russ Roberts’ EconTalk here.) Special interests — whether units of government or private entities — will invest resources in lobbying and other efforts to gain the government money. Those investments, in aggregate, may pay off for the special interest (because the government money received offsets the cost of the successful and unsuccessful lobbying efforts), but significant resources are wasted from the perspective of society.

To understand this, suppose a special interest spends L dollars a year on lobbying, and that lobbying yields G dollars in government money. If L < G, the special interest will continue its lobbying, because the cost is offset by the government money received. But the cost to society for the special interest obtaining G is G + L (because society ultimately funds the special interest) + various deadweight losses D from taxation.

 Hopefully, the benefit purchased by the grant will outweigh G + L + D. But there are many cases where that appears not to be the case — consider Ted Stevens’ $231 million “Bridge to Nowhere” for the 50 people of Gravina Island, Alaska. So, society is stuck with paying G + L + D for a benefit that sometimes isn’t even worth G.

Government spending, in theory, is supposed to be for public goods — goods for the benefit of the general public that are not sufficiently provided through private markets because they are neither rivalrous nor exclusive. (There are all sorts of fights over how to understand “sufficiently,” but we need not worry with that here.) However, projects like the Bridge to Nowhere and other instances of pork-barrel spending are better understood as either club goods (goods that are exclusive) or private goods (goods that are rivalrous and exclusive).Neither of those latter two categories of goods seems an appropriate candidate for government provision — or, at least, for federal government provision. Yet it is those two groups of goods for which special interests are willing to spend L in order to gain G.

Can we somehow break up this dynamic, reduce L, and increase the likelihood that public spending goes to true public goods instead of dubious club and private goods?

To do so, we would have to overcome Olson’s dynamic. That would require:

  1. assuring that the money saved from foregone spending is returned to taxpayers (or, at least, to the public),
  2. reshaping the budget system so that politicians are politically rewarded for the money they save, and
  3. aggregating special interest “pork” spending so that taxpayers will have greater incentive to organize.

Hence, my thought experiment: What if individual politicians were given the choice between spending the money allocated to pork barrel spending on actual projects, or handing that money directly to their constituents?

Think about this on the federal level. In essence, each congressional district has its own pork fund (funded in accordance with the congressman seniority, party affiliation, political favors, etc.) that it divvies up among local and national special interests. What would happen if each congressman were given the choice of, instead of simply funding pork, handing out some or all of the money to his constituents?

Public choice analysis asserts that the congressman would follow whichever course of action is most likely to get him reelected. If the politician’s laundry list includes some meritorious public goods that would benefit his community (and thus earn his constituents’ gratitude), he would direct some of the money to those goods. He may also continue to fund some of the club and private goods, if he believes enough voters have a strong-enough preference for them.

But, I suspect, the congressman would detect a strong voter preference for receiving bags of cash instead of dubious-value government goods and services. And that intense preference, I think, would reduce pork barrel spending. That, in turn, would reduce special interests’ incentives to pursue that money, which would reduce L.

But is my suspicion wrong? Would politicians prefer to hand out cash to large numbers of constituents or cut the ribbon for Bridges to Nowhere (after handing out cash to construction companies)?

Moreover, if I am right that handing out cash to constituents is more appealing, would the unintended consequences of this reform (e.g., politicians using the handouts to redistribute wealth to the median voter) be worse than its benefits?

Thoughts?

Health Policy Straw Man

In today’s Wall Street Journal, David Wessel writes:

It’s fashionable these days, particularly in Washington, to argue that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.

It’s also fashionable for opponents of free-market health care to caricature the case for market-based reform. 

I don’t know where Wessel comes down in that debate.  But he does employ a favorite straw man of those who oppose market-based reforms: that the case for markets “rests on the belief that health care is – in most respects – like any other product.” In fact, the case for markets does not rest on that assumption. 

That assumption is obviously false.  As Charles Phelps writes in his leading textbook Health Economics, health care markets face challenges such as extensive government intervention, uncertainty, asymmetries of information, and externalities.  Also, health care is scary, involving life-and-death decisions.  Of course, each of these dynamics is present in many markets.  What makes health care unique is how many of these factors converge in one place.

The case for markets is that markets do the best job of dealing with all those sticky wickets.  Take asymmetric information.  Critics say that the knowledge gap between doctor and patient is so great that consumers cannot be assured of quality.  But information asymmetries occur everywhere; every day, I am positively besieged by them.  I don’t know how to sew, much less build a car or a computer.  But those information asymmetries between me and a seamstress or Subaru or IBM do not prevent me from driving to work fully clothed and blogging about health policy.  Markets thrive on informational asymmetries, which are an essential part of specialization. 

So why is it that when consumers need to close that knowledge gap, or at least obtain assurance that they’re getting a quality product, they have an easier time doing so when it comes to Subaru than their doctor? 

Part of the reason is probably medical professionals’ traditional reluctance to compete with one another on the basis of price and quality.  But the larger problem is that government has insulated patients from the costs of their medical decisions.  With patients asking fewer questions about cost and cost-effectiveness (i.e., value), the rewards for generating that information are smaller.  (And herein lies an irony:  Opponents of market-based reforms argue that information asymmetries are an enormous problem, and then turn around and support further cost insulation, which exacerbates that problem.) 

That largely explains the interesting study Wessel cites, which found that patient satisfaction does not necessarily correlate with what the experts deem high-quality medical care.  It should be noted that measures of patient satisfaction and recommended care should not correlate perfectly; patients often have good reasons for not wanting what the experts consider “the best” care.  But excessive insulation at once contributes both to patient ignorance and to providers being able to get away with delivering sub-optimal care.

Divided Government May Help Restore the Republican Party

For the moment, the Democrats are expected to win control of one or both houses of Congress in the congressional election this fall.  That may have two strongly beneficial effects on the Republican Party:

  1. More congressional Republicans will rediscover their commitment to fiscal responsibility when most of the proposals for increased spending originate in a house of Congress controlled by the Democrats.  For the past five years, in contrast, congressional Republicans approved almost all proposals for increased spending by the Republican president or their party colleagues. 
  2. More social conservatives will rediscover their commitment to federalism in order to protect the authority to address value issues by state governments when it becomes clear that there is no political opportunity for federal decisions on these issues.  With the first unified Republican federal government in 50 years, in contrast, social conservatives have been motivated to propose federal political decisions on these issues for which there is no national consensus.

The combination of a long unnecessary war, the fiscal excesses disguised as compassionate conservatism, and an intolerant social agenda has almost destroyed the traditional Republican political coalition, leaving many of us without any enthusiasm for the candidates and policies of either party.  The first step to restoring the Republican Party, ironically, may be a Democratic victory in the congressional election this fall.

Several years in the political wilderness may do much to clear the mind.

Federalism This Ain’t

According to Kaisernetwork.org:

Reps. Tom Price (R-Ga.) and Tammy Baldwin (D-Wis.) on Wednesday at a joint event by the Brookings Institution and Heritage Foundation encouraged lawmakers to back a bill (HR 5864) that would “allow states to act as laboratories where lawmakers could test methods to reduce the number of uninsured Americans,” CQ HealthBeat reports.

In an online debate with Stuart Butler of the Heritage Foundation (here, here, and here), I argued that this approach would favor government-expanding health care proposals.

Those in search of a free-market health care agenda should look elsewhere.

Chief of Pentagon Joint Staff Wary of “War” Rhetoric

President Bush likes to remind the country as often as possible that “we are at war.”  (Last night, though, he acknowledged, without irony, that “one of the hardest parts of my job is to connect Iraq to the war on terror.”)  The few people who have balked at the rhetoric of “war” as the response to terrorism often have been derided as “unserious” about the threat of terrorism.  But it’s interesting to see that the latest person to reject Bush’s war rhetoric is Army Col. Gary Cheek, the chief of the Pentagon’s Joint Staff:

What is needed, said Army Col. Gary Cheek, is to recast terrorists as the criminals they are.

“It makes sense for us to find another name for the GWOT,” said Cheek. “It merits rethinking. I know our European allies are more comfortable articulating issues of terrorism as criminal threats, rather than war … It ought to be our goal to partner better with the European allies so we can migrate this from a war to something other than a war.”

The “war” moniker elevates al-Qaida and other transnational terrorists, giving them legitimacy as an opposition force to the United States. It also tends to alienate Muslim populations in other countries, who see the war as a war on Islam, and feel they need to support al-Qaida as a matter of defending their faith.

It also tends to frame the fight as one in which the Defense Department has the primary role, when it is becoming increasingly clear that the “long war” against global terrorism is going to be won on other fronts – economic, political, diplomatic, financial. Other government agencies and departments must become more engaged; only they have the expertise to help other countries take the actions necessary to defeat terrorists.

Whole story here.

College Aid Calculations Don’t Measure Up

Every other year, the National Center for Public Policy and Higher Education (NCPPHE) – an organization run almost exclusively by politicians and higher education insiders – issues a report called Measuring Up, which typically declares that as a nation we provide far too little aid to students to help them afford college. Measuring Up 2006, released today, is no different.

Now, to be fair, the 2006 edition of the biennial woe-fest does make a good point about government-funded student aid, noting that it has increasingly targeted middle and even upper-class – rather than low-income - students. Of course, it fails to note the inevitability of that outcome given that aid to the poor must be accompanied by aid to the middle class to be politically viable.

Where Measuring Up 2006 deserves scorn, though – as have previous Measuring Up reports – is in how it calculates federal student aid, a critical part of the report’s determination of college affordability.

A reasonable person would, of course, consider federal aid to be any kind of financial assistance provided to students by the federal government. That would be both federal and aid, after all. But the folks at NCPPHE don’t see it that way. No, for them, only Pell grants count as federal aid. Why? Because, according to the Measuring UpTechnical Guide” – which is separate from the main report – “Pell grants are by far the largest component of federal grant aid.”

Oh, come on! According to data from the College Board, while it is true that Pell grants provide more aid than any other federal grant programs, Pell is still far from the only federal grant initiative, and not even close to the only federal aid program.

Here are the numbers: In the 2004-05 academic year, while the federal government doled out $13.1 billion in Pell grants, it provided an additional $6.3 billion through work study and grant programs other than Pell. Add to that the $8.0 billion that people received through federal higher education tax benefits, and the non-Pell total surpasses the Pell amount, hitting $14.3 billion. And then there are federal loans, which even when not technically subsidized (the feds pay the interest on the loans for a given amount of time) are still in reality subsidized because they are backed with taxpayer dollars, which helps keep their interest rates artificially low. Add those loans – a total of $62.4 billion – to the student aid pot and Pell grants are absolutely dwarfed, coming in at just 14 percent of all federal aid.

And so, the higher education establishment has struck again. Absurdly defining all federal student aid as just Pell grants, Measuring Up 2006 has ignored the vast majority of aid furnished by federal taxpayers and cried out for more money. It’s just the kind of accounting that could only measure up in a report intended to further rip off taxpayers and enrich the ivory tower.

So Should We Go Dutch, or Not?!?

A while back, Reason Magazine’s Julian Sanchez blogged about what he saw as an inconsistency in my position on the Dutch national school voucher program. Though I missed his post at the time, it’s worth responding to.

Julian pointed out that I have bemoaned the stifling regulatory encroachment  besetting private voucher schools in the Netherlands, while also touting the superior academic outcomes of those schools.

What gives?

The answer is relativity. While Dutch academic performance is among the best in the world, that does not mean it is anywhere near as good as it would be under actual market conditions. The Netherlands competes with nations (like our own) suffering from morbidly obese government school monopolies. Their own system, with its modicum of parental choice and competition, is merely fat and out of shape by comparison. When they race, the Netherlands invariably comes out at or near the front of the pack. That does not mean it is the Carl Lewis of school systems.

The same can be said of the Dutch school system’s impact on social harmony. While it has advantages in this area over state school monopolies, it still has shortcomings when compared to market systems that do not rely on government funding of private schools to ensure universal access.

So, when I talk about the Dutch voucher program, I try to point out its shortcomings while also noting that – even though it falls short of a true market – it outperforms our calcified centrally planned school systems.

As Julian no doubt saw, I wrapped-up my earlier piece trumpeting the academic superiority of the Dutch system with the following caveat:

All this might sound like a sales pitch for introducing a Dutch-style voucher program. It isn’t. As it happens, research suggests that there are even better ways to reintroduce the benefits of parental choice and competition in education.

When everyone else is moving backwards, the guy who’s standing still seems like a high-achiever.