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Posted 11:10 PM by Mark Kleiman
Policy Studies 10a spring 2003
LECTURE 2
THINKING THROUGH A PUBLIC CHOICE

Where we left our hero:

[Slide]
We want to make choices in the public interest

That means comparing options or alternatives
in terms of their (probability distribution of) outcomes or results,
and choosing the action
– the option – the alternative
with the best results
– best consequences – best outcome

Even assuming that outcomes
are all we do or should care about,
that’s harder than it sounds.

Once again, here’s a checklist
of how that process would look.
[Slide]

Today’s topics are
deciding whether something
calls for public action at all
and
the range of possible interventions
if public action is called for.

[Slide]

What suggests that
this situation calls
for a specific policy intervention?

Here are a few famous ideas
about that:

[slide]
Lincoln’s principle is the one
that appeals most to me.

[slide]
Bentham thought we could add up happiness,
which sounds like a good idea
if you know how to do it.

[slide]
Jefferson had a more limited view.

[slide]
Ronald Reagan had a more negative view.

One view characteristic of activists:
If there’s something I dislike, it’s out of whack
if something is out of whack,
the government ought to do something about it.

Alternative view:
There are lots of forces
that lead people to do the right thing:
sometimes called “social controls.”

[slide]
They include:
Individual self-control
Conscience
Social norms
Families
Neighborhoods
Non-public institutions
Voluntary groups
Churches
Markets

In addition, we have
Civil laws
Ordinary criminal laws

These are governmental,
but operate more or less automatically
even if we don’t decide to intervene
in some specific matter.

All of these operate
To protect individuals
from their own bad decisions
or the bad decisions of other people
and to encourage cooperation
to take advantage
of opportunities for mutual gain.

Formal social control –
coercive intervention by the government –
has as an alternative
reliance on these informal social controls.

So the question shouldn’t start out as:
“What should the government do
to deal with Problem X?”

but

“Is X a problem the government
needs to deal with at all?”

Remember that government intervention
always means coercion:
if only the coercion of taxation
to pay for the programs involved;
if people just want to cooperate,
they don’t need to involve
the power of the state.

Eugene Bardach repeats
what is commonly said:
That the primary
– some would say the only –
Justification for public intervention
is market failure.

Adam Smith and the “Invisible hand.”
Government
--creates property rights,
--enforces contracts
--fixes market failures
--and gets out of the way of private transactions.

What are market failures?
[slide]
Undefined property rights
Public goods
External costs
Market power (monopoly/oligopoly)
Distributional issues

The general concept
seems like a good one,
but it also seems too narrow.
Markets aren’t
the only noncoercive measures we rely on.
And the other ones can also fail:

--Child abuse
--Noise and litter in a neighborhood
(market failure but also failure of norms)
--Drug addiction
--Psychosis or dementia
I would say that the right formulation
is not “intervene to fix market failure”
but “intervene when informal social controls fail.”
In either case, identifying a problem—
a failure in markets
or other informal social controls –
doesn’t mean that intervention is desirable.

Governmental activity always has costs,
Because coercion always has costs.
Moreover, the processes of political choice
and public administration have problems
of their own.
These are sometimes
called “government failures,”
a reminder that it’s not only markets that can fail.

[slide]

As a wise man once said,

The chief cause of problems
is solutions.

Government failures can be divided
Into problems with deciding –
political problems –
and problems with delivering –
administrative problems,
or problems of public management.

Both categories relate to a principle
first laid down by Aristotle:
in general, people are less careful
with what belongs to others
than with what belongs to themselves.

[slide]

One form of political government failure
is what is called “rent-seeking.”
(This isn’t the time to go into
the economic theory behind the term “rent.”
But in this context it means unearned income.)

One way to get money
is to produce what someone else wants to buy,
or to work for a company
that produces what someone else wants to buy.

Another way is to take it by force or threat,
as a robber does.

A third way is to get the government
to take someone else’s money
and give it to you,
usually under some plausible disguise
of deservingness or public purpose.

That third approach is what
political scientists call rent-seeking.
And a lot of political maneuvering is little more
than an organized struggle to secure rents.
Since the transfer itself is always costly,
And the political maneuvering
also takes time and energy,
rent-seeking creates social deadweight loss.
The society as a whole winds up poorer for it.

When the political process
is consumed with rent-seeking,
you have a country that looks like
Indonesia or Nigeria or Russia,
with very poor citizens
and very rich rulers,
and a business sector
where companies are more concerned
with exploiting their government connections
than producing goods and services.

The other major source
of political government failure is free-riding.
That has the same source
as the market failure called “public goods”:
people who will work hard to benefit themselves
may not work hard to benefit everybody,
so everybody’s business
becomes nobody’s business.

If I make a bad decision for myself,
I pay for it.
If the government of Los Angeles County
makes a bad decision
because I as a citizen wasn’t vigilant,
I pay for one seven-millionth of it.

That leads to “rational apathy”
and “rational ignorance”:
a person who was completely rational
(in the limited sense of that term
used in economics)
and completely selfish
would invest almost no effort in politics,
not even enough to decide who to vote for.

Those of you who are Angelenos
can test yourselves on this question:
We just had elections for
the LA Community College Board,
which runs a very large set
of educational institutions
and spends a lot of money.

How many people in this room
can name a single candidate
or a single issue
in that election?
No? Me neither.
See? Rational ignorance;
we all had other stuff to worry about.

The combination of rent-seeking
and free-riding
makes politics vulnerable
to what Madison calls “faction”:
[slide]

By a faction, I understand a number of citizens,
whether amounting to a majority
or a minority of the whole,
who are united and actuated
by some common impulse of passion, or of interest,
adverse to the rights of other citizens,
or to the permanent and aggregate interests
of the community.

That’s all at the political level.
At the managerial level,
we run into a different set of problems,
which come in pairs:
One item of each pair
is a way
people can try to take public resources
for private gain,
and the other item
is the extra costs imposed
by rules designed to prevent that.
[slide]

It’s all based on the principle
that the people spending public money
aren’t spending their own.

Since it’s not my money,
If I’m a government manager
I might hire my brother-in-law,
Or my political patron’s brother-in-law,
Instead of the best person for the job.
That’s called “patronage.”

So to prevent that, we have lots of rules
that make it hard to hire people
in public jobs
and also mean that, if I’m a public manager,
I can’t hire the person I think will do the job best
But have to pick off some list
Made by the personnel management agency.
That’s called “civil service.”

All that makes public programs hard to run.

So even if we assume
that we’ve identified a failure --
a market failure, a norm failure,
a neighborhood failure, a family failure,
a failure in individual self-control –
we’re still going to need to ask whether
coercive intervention
is going to make it better rather than worse,
after we take government failure
into account.
But there’s another reason
to be cautious
about public intervention:

We want it to support
informal social control
and not supplant it.

Individual
Family
Neighborhood

Since informal controls and institutions
do most of the work of running a free society,
we don’t want to break them down.

Now assume that we have identified a failure
And are thinking about an intervention.
What are our options?
[slide]

I don’t think I can improve
on O’Hare’s exposition.
But I’d like to stress the importance
Of his point about the difficulty
of actually requiring things.

It would be nice
if there were more high-wage jobs around
for low-skilled workers,
and more good apartments around
at affordable rents.

Why can’t we just solve those problems
With a “living wage” law
Requiring empoyers to pay better wages
And a rent control law
Requiring landlords to rent for less money?

Because a “living wage” law
doesn’t actually require an employer
to employ anybody at a high wage:
it merely forbids an employer
to employ anybody
at a low wage.

The same with rent control.
So because what looks like obliging
is really forbidding,
we may wind up
with fewer jobs and fewer apartments.

Okay, a couple of administrative items.
The assignment for Monday is on the website.
Here are the new email addresses
to send your work or questions to.
Emailing me isn’t really a good idea,
though I suggested it.
Remember to post
substantive questions and comments
to the “message board.”

There will probably still be a course reader,
But we ran into one of those “policy-manual”
Policies, and it turns out it can’t be sold in class.
So bear with us while we regroup.