Public Choice Economics Explains Government Failure

 By: George Noga – July 1, 2013
       The science of economics, far from being dismal, can be truly exciting; it offers much more than arcane supply and demand curves. In recent years economists have captured the public imagination with books such as Freakonomics, Super Freakonomics, More Guns – Less Crime and More Sex is Safer Sex. They are popular because they use the tools of economics, including rigorous logic and analysis, to reach what often are counter intuitive, but valid, conclusions.
     So it is with public choice economics. In the private sector, theoretically correct economic solutions usually are positively correlated with real world decisions In the public sector however, there is a huge chasm between the correct theoretical (economic) solutions and the choices made by decision makers, i.e. politicians. Public choice economics explains this chasm.
      Many citizens, particularly young people and liberals, have an infatuation with government. They see elected officials as benevolent, dispassionate planners looking out for ideal social outcomes as contrasted with self-interested actors in the private sector. Yet we constantly are bumfuzzled by political decisions contrary to all logic and national self interest.
“We constantly are bumfuzzled by politicians acting illogically.”
     Why is private sector decision making far superior to government? Business ownership and governance do a much better job of aligning business and personal objectives and incentives so that decision makers choose the economically (theoretically) correct decision. In government there is a wide gulf between self interest and public interest.
      In both government and business, decision makers usually decide on the basis of personal risks, rewards and incentives; this is embedded in human nature and is immutable. The private sector understands this. The founders of our country understood this, hence our constitutional system of federalism, limited government and checks and balances. Public choice economics explains why government fails us; consider five tenets from public choice economics.
  1. This comes as no surprise but politicians are far more interested in winning the next election than in doing the right thing. Their desire to win elections far outstrips their duty to the country. Their personal incentives are grossly misaligned with the public interest.

  2. Politics is extremely shortsighted, favoring debt financing over taxes; that explains why we have had deficits in 47 of the last 52 years. Politicians love to make unfunded  promises such as unsustainable pensions and benefits. They want to provide immediate benefits while borrowing, hiding or deferring the costs as far into the future as possible.

  3. Special interest groups and rent seekers (those who extract value from government without giving value in return – such as public sector unions) dominate the process. Politicians always favor highly concentrated and organized groups (that return the favor in various ways) at the public expense and contrary to the public interest. A great example is sugar subsidies where a few growers share nearly $1 billion a year in added profits while all 310 million of us Americans pay $30 too much for sugar each year.

  4. There is a myth that central planning leads to good decisions. This ignores the real world preferences of real people, creates perverse incentives and disincentives and inevitably creates a myriad of unintended consequences. The real world is far more complex and dynamic than any central planner or computer model can ever simulate.

  5. Whereas in business the culture is to quickly recognize and to cut losses, the incentive in government is to deny anything is a blunder and continue to throw more money at it.
      Public choice economics can lead to better decisions if we give it heed. We must recognize  economic science is just as applicable to government as it is to business. We must understand  human nature has not changed since the dawn of time. People are people and they do not suddenly become benighted when they enter public service. We need to return to the system  envisioned by the founders where government is so limited as to minimize the harm it wreaks. Failing that, we must closely align the risks, rewards and incentives of public officials with the long-term public interest – just as the private sector has done so successfully.