No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fourteen: Decision-making in Democracy: Public Choice 327 competing ends. Scarcity is always with us; bureaucrats do not turn stones into bread, nor can they provide us a free lunch (although they can seemingly give us a free lunch by forcing others to pay for it). If a good is scarce, we call that an economic good, since there is not as much of the good available as people would like at zero price . So scarce goods require some form of rationing to allocate the good amongst competing uses. Markets allocate through prices; people that value a good most highly as evidenced by their willingness to pay gain control of a resource by their purchase. As we discussed in chapter 2, that is not the only way goods can be allocated. We could say first come, first served; then, goods would be assigned to whoever valued them most highly by how much time they would be willing to give up to wait in line—rationing by queue. A form of this rationing happens every “Black Friday” with Christmas shopping specials of only a few items set at ridiculously low prices; people often camp out for days waiting for those great deals! Alternatively, we could allocate by “might makes right:” whoever is the strongest could take whatever he or she wanted. Or, we could allocate the goods “socially” through the political process. We don’t think about allocating goods politically as if that process isn’t subject to scarcity—it is. Further, we fully understand that market incentives aren’t present in politics, but are there other incentives in play? How do these incentives shape the outcome of goods allocated through a political process? That’s what we will talk about in this chapter. SIZE OF GOVERNMENT Why are we even concerned about the public sector? Aren’t private markets what economics is all about? Well, for good or for ill, government at all levels directly consumes over 40% of our national output with its spending priorities. As you can see in Figure 14.1 , government spending has grown dramatically in the last 60 years, with a sharp upsurge since the recent financial crisis. In addition, government regulations of private markets consume resources; businesses face both direct implementation costs (the cost of doing whatever the government tells you to do) and compliance costs (the time and resources associated with both designing and implementing the internal corporate controls to ensure the business doesn’t break the law). Several studies suggest that the costs of federal government regulations are approximately 10% of national output, and the number of pages of the federal register (which documents all federal regulations we are supposed to comply with) continues to grow dramatically . In addition to regulatory costs , the cost of tax compliance is also non-trivial, with one estimate of 22 cents for every dollar of tax revenue. Since the total cost of government is thus over 50% of total U.S. economic SOCIAL ALLOCATION Allocation of goods “socially” through the political process in no way means we socially decide. At the end of the day, an individual decision maker approves or authorizes the decision to do whatever the majority empowers him/her to do—but there is no group mind. Only individuals choose, albeit they can be influenced to conform to their perceptions of a social consensus. Implementation costs: the cost of doing whatever the government tells you to do. Compliance costs: the time and resources associated with both designing and implementing the internal corporate controls to ensure the business doesn’t break the law. Regulatory costs: the sum of the compliance costs and the implementation costs associated with any regulation.