Public Sector Economics

Special interests, rent-seekers and public employee unions

GEORGE NOGA
NOV 12, 2023

My blog frequently refers to public sector economics and it is time for a full post on that topic. There is a branch of economics dedicated to the public sector and Nobel Prizes have been won for pithy analysis of public choice economies.

Many people, particularly the young and progressives, have an infatuation with government. They view elected officials as benevolent, dispassionate actors seeking the best possible social outcomes. In contrast, they view private sector actors as self-interested and greedy. They are half right: private sector decision makers do indeed pursue self interest; however, public sector workers just as shamelessly pursue self interest even when that means throwing the public under the bus.

Public sector economics at work

• The goal of politicians, to the exclusion of all else, is winning the next election. They focus single-mindedly on that goal – no other objective comes close.
• Their focus is very short term, i.e. the next election. They make disastrous decisions knowing full well they harm the public in the long run. That explains deficits in 57 of the last 62 years. They enact immediate unfunded pensions and other benefits while pushing off the costs as far into the future as possible.
• Special interest groups, rent-seekers and unions seek to extract value from government without giving value in return. Unionized public sector workers get 25% more than their private sector peers for comparable work. In exchange, unions donate money, campaign workers and votes and the process repeats.
• Politicians understand they can significantly benefit special interests even when clearly contrary to the public because the benefits are huge in relation to the costs when spread over 330 million taxpayers. For example, sugar subsidies, to a very small number of growers, cost taxpayers $4 billion per year, but that is only $50 per American family – not enough for them to strenuously object.
• Central planning leads to bad decisions. It ignores real world preferences of real people, creates perverse incentives and results in unintended consequences.
• The private sector is quick to recognize and to cut losses; for the public sector the incentive is to deny anything is wrong and continue to throw money at it.
• The incentives and disincentives in government are horribly misaligned such that they reward behavior that is not in the public interest.
• Politicians get feedback only infrequently during election years. Even then, that feedback is bundled with numerous other issues making it difficult to isolate issues individually. Moreover, in many jurisdictions elections are decided based on identity politics and voting blocks with the issues being an afterthought.
• Politicians always choose borrowing over raising taxes and go to extreme lengths to make taxes as opaque as possible. In the words of one solon, the goal is to get the most feathers off the goose with the least amount of hissing.
• In recent years, with interest rates near zero, politicians borrowed short-term instead of locking in historically low long-term rates. They committed this malpractice purely for political reasons so deficits would appear less. Both political parties were culpable as public sector economics applies universally.

Why government fails

Public sector economics demonstrates why government failure is systemic, structural, deeply rooted and incapable of reform. Waste, fraud, abuse and corruption are ingrained and rampant. Government is not based on markets; it is top-down, highly coercive, ignores consumer preferences and artificially creates winners and losers.

Government cannot be fixed and it is futile to try because basic human nature, which is highly responsive to risks, rewards and incentives, is unchanging. Business succeeds, where government fails, precisely because it properly aligns personal rewards and incentives with the goals of the business. Hence, the value proposition offered by the public sector does not attract talented hard working people.

How to reduce public sector pathologies

There is one way – and only one way – to reduce the pathologies inherent in the public sector – they cannot be eliminated – only reduced. The answer is to drastically shrink the size and scope of government. Even then, the public sector will fail, but it will be less of a failure; absolutely nothing else will work.

Americans do not need more government, better government, wiser government or even more frugal government. America needs less government!

© 2023 George Noga
More Liberty – Less Government, Post Office Box 916381
Longwood, FL 32791-6381, Email: mllg@cfl.rr.com