Part III Ten Elements of Clear Thinking About Economic Progress and the Role of Government

Overview The role of government and how it has changed over the years The ten elements of clear thinking about economic progress and the role of government, which includes concepts such as: Public goods and free-riding User charges Special Interest Effect Short-sightedness Effect Log-rolling and Pork-barrel Legislation

How has Government Grown Over the Years?

The government should… #1 Government Promotes Economic Progress by Protecting the Rights of Individuals and Supplying Goods that Cannot be Provided Through Markets The government should… 1. Protect individuals and their property rights 2. Provide goods that cannot be easily provided by the market (overcome market failure)

Public goods have two characteristics: #1 Government promotes Economic Progress by Protecting the Rights of Individuals and Supplying Goods that Cannot be Provided Through Markets Public goods have two characteristics: 1. Non-rival in consumption: making the good available to one consumer does not reduce its availability to others. 2. Non-excludable: it is impossible (or incredibly costly) to exclude nonpaying customers from receiving the good.

#1 Government promotes Economic Progress by Protecting the Rights of Individuals and Supplying Goods that Cannot be Provided Through Markets Free-rider: A person who receives the benefit of a good without paying for it This will cause the good to become under- supplied

#2 Government Is Not a Corrective Device There is no assurance that a policy favored by a majority will promote economic progress If voters do not pay in proportion to the benefits received, then the majority could pass unproductive projects.

#2 Government Is Not a Corrective Device However, when voters pay in proportion to the benefits they receive, then productive projects will be passed and unproductive projects will not. User charges: requires people who use a service more to pay a larger share of the cost. Ex. Gasoline tax goes to pay for road construction and maintenance.

#2 Government Is Not a Corrective Device Many economists believe that government programs should only pass if: People pay in proportion to the benefits that they receive. or…. 2. A supermajority (80 or 90%) of the voters supported the program.

#3 The Costs of Government Are Not Only Taxes The cost of government action goes beyond just taxes, but also involves… The opportunity cost of private-sector output that could have been produced with the resources that are now employed producing the goods supplied by the government.

#3 The Costs of Government Are Not Only Taxes The cost of resources expended in the collection of taxes and the enforcement of government mandates.

#3 The Costs of Government Are Not Only Taxes The cost of price distortions resulting from taxes and borrowing. …. Remember Deadweight Loss!

#4 Unless Restrained by Constitutional Rules, Special-Interest Groups Will Use the Democratic Political Process to Fleece Taxpayers and Consumers Special interest effect: An issue that generates substantial benefits for a small group by generating minimal costs to a large group. (in aggregate, losses may exceed benefits). Ex. Make me rich tax Ex. Charleston’s $1 city payroll tax

#5 Unless Restrained by Constitutional Rules, Legislators Will Run Budget Deficits and Spend Excessively Shortsightedness Effect: politicians will favor programs that generate current visible benefits, even if long-term costs of the project outweighs the benefits. Government officials have little incentive to control spending

#6 Government Slows Economic Progress When It Becomes Heavily Involved in Trying to Help Some People at the Expense of Others There are two ways people can acquire wealth: production and plunder… Production involves making the economic pie bigger, plunder involves taking someone else’s piece.

#6 Government Slows Economic Progress When It Becomes Heavily Involved in Trying to Help Some People at the Expense of Others The government is often used as an agent for plunder. People use lobbying, political campaigns, and other forms of favor-seeking to take the wealth of others.

#7 The Costs of Government Income Transfers Are Far Greater Than the Net Gain to the Intended Beneficiaries There are three major factors that undermine the effectiveness of income transfers A. An increase in government transfers will reduce the incentive of both taxpayers (donors) and the transfer recipient to earn income.

#7 The Costs of Government Income Transfers Are Far Greater Than the Net Gain to the Intended Beneficiaries Competition for transfers will erode most of the long-term gain from the intended beneficiaries.

#7 The Costs of Government Income Transfers Are Far Greater Than the Net Gain to the Intended Beneficiaries Programs that protect potential recipients against adversity arising from imprudent decisions encourage them to make choices that increase the likelihood of the adversity. Ex. Unemployment Compensation

#7 The Costs of Government Income Transfers Are Far Greater Than the Net Gain to the Intended Beneficiaries Finally, government transfers tend to crowd out private charitable efforts, which are usually more effective.

#8 Central Planning Replaces Markets with Politics, Which Wastes Resources and Retards Economic Progress There are four major reasons why central planning will almost surely do more damage then good… Central planning merely substitutes politics for market verdicts a. logrolling b. pork-barrel legislation

#8 Central Planning Replaces Markets with Politics, Which Wastes Resources and Retards Economic Progress The incentive of government-operated firms to keep costs low, be innovative, and efficiently supply goods is weak. The government does not face the profit motive that keeps private companies operating efficiently

Lack of Profit Motive

#8 Central Planning Replaces Markets with Politics, Which Wastes Resources and Retards Economic Progress Investors risking their own money will make better investment choices than central planners spending the money of taxpayers.

#8 Central Planning Replaces Markets with Politics, Which Wastes Resources and Retards Economic Progress There is no way that central planners can acquire enough information to create, maintain, and constantly update a plan that makes sense.

#9 Competition is just as important in Government as in Markets The government operates most efficiently when it has to compete against the private sector and / or other governments. Decentralized governments are better at serving its citizens than larger, more centralized governments.

#10 Constitutional Rules That Bring the Political Process and Sound Economics into Harmony Will Promote Economic Progress In giving the government the power to protect our rights, we also give it the ability to violate our rights The constitution is the citizens’ way to constrain the government.

Review Know the role of government and how it has changed over the years. Know the ten elements of economic progress and the role of government Protect individuals rights and supply public goods. Government is not a corrective device The costs of government are not only taxes Special interest groups can use the democratic process to fleece taxpayers

Review Know the ten elements of economic progress and the role of government (continued) legislators will run budget deficits and spend excessively Government has trouble helping some people at the expense of others The cost of income transfers are greater than the net gain to the intended beneficiaries Central Planning wastes resources and retards economic progress Competition is just as important in government as in markets Constitutional rules can constrain government and promote economic progress

Thank You!