Wrong First Step

Kevin points to an article that argues that there were a great many things the government did that helped the economy. To a large extent there is truth to the claim. Information can be costly to obtain. You go into a store and want to buy some aspirin for your headache. How do you know that the various remedies on the shelf will do what they claim to do, and are not just a variant of snake oil? Are you going to buy a bottle of pills, send them to a lab, and then sit around waiting for the lab report? Will you understand the lab report?

In some respects information is very much like public goods. If I consume the information (i.e., I read it or listen to it) it does not prevent others from consuming the information. Hence the government provision of this kind of good could very easily help the economy function more efficiently.

Similarly for the articles other example, the internet. The internet is a commodity that exhibits network externalities.1

My problem is not with this view. My problem is with Kevin’s policy prescription,

Instead, of course, we’ve gotten an initiative to go to Mars. So I’d add to Ben’s recommendations one more: the first step is to elect people to office who believe that government has a serious role in the economy in the first place. We liberals need to work on that.

No. The first step is to get people to understand that there is a role for government, but that it is a limited role. The government spends quite a bit of money compared to the good ol’ progressive days of the 1930’s and 1940’s. Yet we probably don’t get nearly the kind of benefits Kevin is talking about. Instead of government working to make markets more efficient we have calls for the government to provide private goods (health care, retirement savings, and prescription drugs). We have the government passing more restrictive intellectual property laws. We have the government running huge programs that subsidize the consumption of goods (Medicare).

Now with respect to health care there are some external benefits. For example, immunizations can help reduce the number of people with a given communicable disease making any outbreak that much less of a problem. However, a blanket subsidy on any and all medical care is unwarranted by the very principles that Kevin is pointing to for liberals to get to work on. Basically, the point of the Wallace-Wells article that markets aren’t perfect and that government can go someway to fixing these shortcomings. But addressing these shortcomings would likely result in a far smaller form of government than we see today, a minarchist form of government to some extent. If liberals did take Kevin’s suggestion seriously they’d start to look quite a bit more like libertarians. Not that I’d complain about that (hell I’d even consider voting for a Democrat that espoused this kind of ideal…of course, this is what makes me skeptical and that no Democrat would espouse this kind of ideal), but somehow I don’t think this is what Kevin means.

As for the specific recomendations from the article that Kevin points too, namely,

Instead, of course, we’ve gotten an initiative to go to Mars. So I’d add to Ben’s recommendations one more: the first step is to elect people to office who believe that government has a serious role in the economy in the first place. We liberals need to work on that.

I don’t have a problem with these, but my question is what are we going to cut to fund it? Oh…how silly of me, lets use that wonderful tool for (generally) impeding economic activity: (higher) taxes!
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1What good is the internet with one person? Are you going to send e-mail to yourself? The more people who use goods that have network externalities the more valuable the good becomes. Think of facsimile machines. The first machine was worthless in terms of sending facsimilies as there was no second machine to recieve the data. Once a second machine is in use the first machine becomes more valuable. Each successive machine adds value to the existing machines.

FILED UNDER: Economics and Business, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dispenser of BitterMedicine says:

    I read the entire article on Kevin’s blog, and the comments posted thereafter. If any of those comments were posted from a rural area – Colby, Kansas or Dalhart, Texas or Willard, New Mexico or any other little spot on a map, they were able to make that post because of government interference. As chagrinned as it makes conservatives, they are able to reach their masses in the rural red states via conservative talk-radio because of the WPA, the TVA, and most importantly, the REA which electrified the countryside. Government grants funded the research that let us eliminate smallpox and polio. Government does have a role. Granted they do manage to piss away phenomenal amounts of money, I wish they spent it better, but I like the fact that I can drive from coast-to-coast and have a flush-toilet every 45 minutes. That luxury was provided by tax dollars, and I think rest-stops are money well spent.

    I am a research scientist by profession, and the lack of resources devoted to math and science in this country over the last twenty years, and the corresponding backlash against intellectualism and science is frightening. I am afraid that it will soon bite us in the ass.

  2. Dave Schuler says:

    I think you’re off base on one particular. Intellectual property laws are purely, repeat, purely acts of government. Moving towards less restrictive intellectual property laws (or no intellectual property at all) would be libertarian.

  3. Dave Schuler says:

    And WRT to health care the pharmaceuticals are patented. Drugs are regulated by the FDA. Physicians are licensed by the state and have a state-granted monopoly on prescribing pharmaceuticals. These are all interferences in the marketplace. And they’re reasonable and rational interferences. But all of this interference raises the costs of health care. Remediating the adverse effects of other acts of government is a perfectly reasonable act of government. So it’s not unreasonable for the government to give a hand to people who are genuinely in need.

    Our health care system is not a bunch of completely separate things. It’s a bunch of interrelated things. So want to eliminate the subsidies to consumers? Fine. Eliminate the subsidies to producers, too. Or keep ’em both.

  4. Dispenser of BitterMedicine says:

    Dave Schuler is correct in his assessment of health care. I worked in that system for over a decade, and say unequivocally that the system we have today is not the one we would have if any design process had taken place. We need an entire overhaul, top to bottom. In the meantime, my advice to everyone is to STAY HEALTHY!!!

  5. The “without the government all the Aspirin would be replaced with sugar pills” argument, is easily disproved by counter example: there’s no government agency monitoring the safety of consumer electronics devices, yet we do not live in a world where such devices are generally unsafe or poorly made.

    This is largely due to the fact that private organizations such as Underwriters Laboratory, Consumer Reports, etc. have formed to do this testing.

    And I trust the UL’s seal of approval a lot more than I trust the FDA’s, which tends to be more determined by politics than actual safety.

  6. Dispenser of BitterMedicine says:

    Without the USDA do you think that meat producers would voluntarily recall millions of pounds of e-coli tainted hamburger? No, they would slap a sticker on there about cooking to a certain temperature and send it on out. Dead children would be a cost of doing business.

  7. Steve says:

    Dave,

    I think you misunderstand, I am not a fan of the current system of intellectual property laws and protections.

    As for ending all subsidies or none, I’m sorry that is not logical. The fact that one subsisdy is bad does not mean all subsidies are bad. We might very well want to subsidize some things.

    Stormy,

    Sorry check out your blow dryer, your microwave, or any other appliance and you’ll see all kinds of warnings…some that will make you wonder if somebody was really that stupid.

    Finally, I didn’t say that all aspirin would be replaced by sugar pills, but that some might be and you wont know until you aquire the information, either via trial and error or by lab results.

    Dispenser,

    I don’t thin a “top to bottom overhaul” will do anything. Government, in this case, I fear, is the problem not the answer.

  8. herostratus says:

    Now with respect to health care there are some external benefits…

    Damned white of you, old boy.

  9. neologic says:

    Government exists to keep the strong from exploiting the weak in every possible sense. If you dont level the playing field with external authority, thats just what happens within a few generations- thats human nature.

    Infrastructure and institutions that serve beyond a single lifetime would almost never occur (beyond religious works devoted to an afterlife) without the hand of government to establish and maintiain public goods.

    The power of the US could never have risen without its world leading central government. No market would have produced a Manhatten project or most of its antecendants like colleges, utilities, damns, roads, scaled mining, aero-research, and many others.

    Markets won’t do it, period. If you want to debate the need or value of public goods or maybe you dont even believe in them, thats fine, but its a perfectly self-contained example of why they must exist.

  10. Clint Lovell says:

    To those who believe that history can provide constructive examples of what works and what doesn’t, this discussion is for you.

    What have we learned with the American experiment in command economic structures such as the federal entitlement programs we have created that, to one extent or another, serve to redistribute wealth?

    We have learned that they do not function efficiently because these programs are deprived of the benefits that only the free market can offer – efficient capital utilization, efficient operating constructions that provide cost controls and economies-of-scale that provide built-in protections for consumers and result in an ever-increasing quality of product and/or service.

    So, one answer to this question is to look where goverment intervention has worked.

    I would submit that the government works best where it acts as a priming influence on a given market by taking advantage of being the lowest cost-of-capital provider in the market and creating the condition precedents (money sources) that allow the free market to step in and make a market grow and prosper.

    Failure has occurred where we have tried to overlay a quasi-social-ist/command economic structure on top of the free market that we find the government to be not a resource (public education, healthcare, welfare, etc.).

    The only question is when will Congress finally realize this reality and change the programs so that they CAN become economically self-sufficient and no longer create a drag on the economy.