Governmental Perversity

People are sometimes by harmed natural events such as earthquakes, hurricanes, tornadoes, and floods. Though such events may be exogenous to human activity,they are somewhat predictable, in that people can know (or learn) where and (sometimes) approximately when such events are likely to occur. That knowledge, in turn, allows people to cope with natural events in three ways:

  • Move away from or avoid areas prone to natural disasters, at least during times of heightened risk.
  • Taking physical measures to reduce the damage caused by natural events.
  • Buying insurance to help defray the costs resulting a natural disaster.

Moral hazard enters the picture when government intervenes to encourage people to live in high-risk areas by insuring risks that private insurers will not insure (e.g., floods), by underwriting certain physical measures (e.g., the installation of bulkheads and pumping systems), and by reimbursing losses sustained by persons who insist on living in high-risk areas — as if to do so were a God-given right. Through such actions, government encourages unremunerative risk-taking, and transfers most of the resulting losses to those citizens who choose not to put themselves in harm’s way.

Now, egregious as it is, the moral hazard created by government with respect to natural disasters is nothing compared with the moral hazard created by government with respect to financial disasters. The recent financial crisis-cum-deep recession is but the latest in a long string of government-caused and government-aided economic messes.

In the recent case, the Federal Reserve and pseudo-private arms of the federal government (Freddie Mac and Fannie Mae) loosened the money supply and encouraged lenders to grant loans to marginal borrowers. Financial institutions were further encouraged to take undue risks by having seen, in times past, that there were bailouts at the end of the tunnel. Not all troubled firms were bailed out during the recent financial crisis, but enough of them were to ensure that the hope of being bailed out still shines brightly. Nor were bailouts limited to financial institutions; troubled companies like General Motors, which should have been put out of their misery, were given new life, at a high cost to taxpayers.

And so, thanks to government, people and businesses continue to take undue risks at the expense of their fellow citizens. Meanwhile — through taxes and regulations — government continues to discourage privately financed risk-taking (entrepreneurship) that is essential to economic growth.

Perversity, thy name is government.

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Related posts:
The Stagnation Thesis
Taxing the Rich
More about Taxing the Rich
Money, Credit, and Economic Fluctuations
A Keynesian Fantasy Land
The Keynesian Fallacy and Regime Uncertainty
Regime Uncertainty and the Great Recession
Regulation as Wishful Thinking
In Defense of the 1%
Lay My (Regulatory) Burden Down
Economic Growth Since World War II
The Capitalist Paradox Meets the Interest-Group Paradox
Government in Macroeconomic Perspective
The 80-20 Rule, Illustrated
Economics: A Survey (also here)
Why Are Interest Rates So Low?
Vulgar Keynesianism and Capitalism
Estimating the Rahn Curve: Or, How Government Spending Inhibits Economic Growth
America’s Financial Crisis Is Now
Progressive Taxation Is Alive and Well in the U.S. of A.
Some Inconvenient Facts about Income Inequality
Mass (Economic) Hysteria: Income Inequality and Related Themes
The Criminality and Psychopathy of Statism

Bootleggers, Baptists, and Pornography

Bruce Yandle’s “Bootleggers and Baptists–The Education of a Regulatory Economist” appeared 28 years ago in Cato Institute’s Regulation (vol 7, no. 3). Yandle explains how he came to the evocative phrase “Bootleggers and Baptists”:

I joined the Council on Wage and Price Stability in 1976. There my assignment was to review proposed regulations from the Environmental Protection Agency (EPA), the Federal Trade Commission (FTC), the Department of Transportation (DOT), and parts of the Department of Health, Education, and Welfare (HEW)…. I was ready to educate the regulators. But then I began to talk with some of them, and I began to hear from people in the industries affected by the rules. To my surprise, many regulators knew quite a bit about economics. Even more surprising was that industry representatives were not always opposed to the costly rules and occasionally were even fearful that we would succeed in getting rid of some of them. It was in considerable confusion that I returned later to my university post, still unable to explain what I had observed and square it with the economics I thought I understood.

That marked the beginning of a new approach to my research on regulation. First, instead of assuming that regulators really intended to minimize costs but somehow proceeded to make crazy mistakes, I began to assume that they were not trying to minimize costs at all — at least not the costs I had been concerned with. They were trying to minimize their costs, just as most sensible people do….

Second, I asked myself, what do industry and labor want from the regulators? They want protection from competition, from technological change, and from losses that threaten profits and jobs. A carefully constructed regulation can accomplish all kinds of anticompetitive goals of this sort, while giving the citizenry the impression that the only goal is to serve the public interest.

Indeed, the pages of history are full of episodes best explained by a theory of regulation I call “bootleggers and Baptists.” Bootleggers, you will remember, support Sunday closing laws that shut down all the local bars and liquor stores. Baptists support the same laws and lobby vigorously for them. Both parties gain, while the regulators are content because the law is easy to administer. Of course, this theory is not new. In a democratic society, economic forces will always play through the political mechanism in ways determined by the voting mechanism employed. Politicians need resources in order to get elected. Selected members of the public can gain resources through the political process, and highly organized groups can do that quite handily. The most successful ventures of this sort occur where there is an overarching public concern to be addressed (like the problem of alcohol) whose “solution” allows resources to be distributed from the public purse to particular groups or from one group to another (as from bartenders to bootleggers).-

Where does pornography come in? For a long time, pornography was prohibited, just as alcoholic beverages were (for the most part) during Prohibition. That didn’t stop the production of pornography, of course, but it did reduce the flow of output, making pornography more lucrative  — for those willing to buck the law —  than it would have been in the absence of prohibition.

It should come as no surprise that — even in this day of government-approved licentiousness — there are members of the port industry who are critical of the approval of the .xxx domain. According to NewsLime.com,

Internet Corp. for Assigned Names and Numbers (ICNN), the group that supervises the naming system of the Internet, approved .xxx domain for use in pornographic sites. This decision was made amid opposition from porn stars and other people in the industry who contended that the approval will just lead to censorship.

Religious groups also argued that web content of pornographic sites will be legitimized when they are given their own corner of the Internet….

Critics that [sic] include Vivid Entertainment, producer of adult video, and Free Speech Coalition contended that the triple x suffix of the domain would make a virtual section of the Internet that would undermine speech and would eventually lead to censorship.

What the “bootleggers” in the porn industry mean, of course, is that their commercial products will lose value because the .xxx domain will encourage entry into the porn market. Some of the entrants undoubtedly will provide “free samples” in the hope of getting viewers to pay for the more “tantalizing” material that is locked behind paywalls.

The  “Baptists” are the religious groups, of course. And they are sincere in their opposition to .xxx, whereas the “bootleggers” are merely cynical in their opposition.

So, there you have it. Another case study in “Bootleggers and Baptists.” For more, read Yandle’s article in its entirety. Also, read Yandle’s “Bootleggers and Baptists in Retrospect (Regulation, vol. 22, no. 3),” which appeared 15 years later.

Build It and They Will Pay

Michael Messner, an investment-fund manager, writes:

More than 150 years ago, America’s greatest landscape architect, Frederick Law Olmsted, created Central Park and changed New York forever. He went on to transform dozens more cities, leaving a priceless legacy of vibrant, beautiful cityscapes. And, in the process, he increased property values.

Olmsted discovered this himself when he tracked the value of land around Central Park and found that the city’s $13 million investment had led to an astounding $209 million increase in just 17 years. The architect recognized what many planners still fail to grasp: Parks and managed green space are vital pieces of urban infrastructure that not only improve the quality of life for millions of people but also drive economic growth….

We don’t have the luxury of vacant land that Olmsted often started with, so we must bulldoze underperforming and underused property, put people to work creating parks on some of the land and “bank” the rest until the economy recovers.

Beginning with Atlanta, Georgia Tech is researching what is needed to accomplish this in 12 major cities. The project is known as Red Fields to Green Fields. Under this plan, some of the abandoned or underutilized property would be acquired by a parks agency or by public-private partnerships, which would then begin demolition, park design and construction, putting people to work immediately. More jobs would come as the improved areas attracted development….

The banking system and the federal government could play an important role in this effort. Rather than backstop bad real estate paper, the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department could help finance the acquisition of excess commercial real estate through a land bank fund. Instead of buying mortgage-backed securities, why couldn’t the Fed buy excess developed real estate to be held as green space through “land-backed securities”? Why couldn’t the FDIC give some of the useless properties it obtains through bank closures to land banks or nonprofit organizations? With the right financing structure, philanthropic entrepreneurs could use leverage to remake America just as some of our bad developers used easy bank financing to help create the excesses. (“Olmsted’s ideas could help solve our real estate mess,” The Washington Post, January 6, 2011)

In other words, why not bestow parks and green spaces on selected urban areas at the expense of every taxpayer in the United States?

What’s wrong with that idea? Plenty. Let’s start with Messner’s financing scheme. The money for a land bank fund has to come from somewhere, and that somewhere, when you get down to it, is taxpayers’ pockets. The Fed’s purchase of “excess” real estate probably would be accomplished by, in effect, printing money, thus burdening taxpayers (and others) with the hidden tax of inflation. Regarding the idea of an FDIC giveaway, it’s evident that Messner thinks that developed properties have no market value just because they’ve been abandoned. But that’s not so, and any market value that they do have is owed to the taxpayers of the United States, for which the FDIC is merely an agent. I don’t know how the Treasury could help to finance the purchase of “excess commercial real estate” (whatever that is) without imposing a tax burden (or its Ricardian equivalent) on Americans. (Perhaps Messner believes that the money in the Treasury is a gift from the Tooth Fairy.) Finally, Messner’s superficially reasonable proposal is bound to be used as justification for efforts to spend tax dollars, at the State and local levels, if not at the federal level.

Let’s turn to the supposed benefits of Messner’s proposal. His essential claim is that the cost of beautification is returned many-fold in the form of higher property values (for the owners of neighboring properties) and vague promises of economic growth and a better quality of life. I’ve blogged elsewhere (here and here) about the fundamental flaw of cost-benefit analysis, as it is applied to government projects. The flaw is this: Most of the benefits don’t accrue to those who bear the costs. So the creation of a park causes a rise in the value of the land around it? So what? If I don’t own some of that land, all I get out of it, except for an occasional visit to the park if it’s close to me, is a higher tax bill.

Messner’s proposal, if adopted, would be a classic case of collusion between “bootleggers and Baptists.” How does that work? The bootleggers (those with a vested financial interest) are the owners of properties near the proposed site of a park or green space. The Baptists (the do-gooders) are the politicians, planners, and others who think it would be nice if the people of city X have access to a new park or green space. (Messner, in this instance, may be a bootlegger and a Baptist.)

In the case of Messner’s scheme the bootleggers and Baptists would be getting richer and feeling better about themselves, while they victimize the vast majority of individuals who would (a) pay for the creation of parks and green spaces but (b) derive little or no benefit from them. There’s an exact analogy with tax-funded venues for professional sports teams. Such venues benefit owners and bring satisfaction to “civic minded” leaders, the small minority of citizens who actually attend games, and the somewhat larger minority of citizens who gain psychic income from having (or retaining) a local team. But, as many studies have shown, tax-funded sports venues don’t create jobs or spur economic growth (for reasons I discuss below).

It may be true, as Messner asserts, that the creation of parks and green spaces would “improve the quality of life for millions.” But it would be true only for those millions who are getting more than their tax-money’s worth of enjoyment from the parks and green spaces that they helped to pay for. Many more millions would not get their tax-money’s worth of enjoyment from those parks and green spaces. Moreover, taking money from me to improve my “quality of life” signifies rank presumption about my values and preferences.

What about economic growth, which Messner also invokes? Well, the creation of parks and green spaces, in addition to requiring land, also requires the use of various types and quantities of labor and capital. If Messner is implying that economic growth would result from the use of unemployed labor and capital, he’s relying on a discredited Keynesian theory. A piece of land is removed from a potentially productive use; the associated labor and capital are devoted to the creation of something (a park or green space) that doesn’t result in greater productive capacity. And as the economy recovers while the land, labor, and capital are diverted to the creation of parks and green spaces, the land, labor, and capital are unavailable for use in the production of consumer goods and productivity-enhancing capital goods. I’m at a loss to understand how the creation of a park or green space contributes more to economic growth than the alternative uses of the same resources by the private sector. It seems to me that the tax-subsidized creation of parks and green spaces can only reduce the rate of economic growth. (Perhaps the productivity of workers is enhanced greatly, and magically, by the knowledge that there is now a part or green space to which they can repair for rest and relaxation. Hah!)

In summary, there’s no free lunch. When tax money is used to raise property values and improve the “quality of life” in one place (or a bunch of places), those higher property values and improved lives are paid for by lower property values and economic deprivations elsewhere — and by reduced economic growth for almost everyone, except the “bootleggers.”