Posts Tagged ‘public choice insights’

Public choice insights for the GOP

January 18, 2013

The Founding Fathers crafted well to establish a nation blessed with a limited federal government. By enumerating powers and by separation of powers they determined to the best of their abilities that the United States federal government would remain strong but limited, leaving maximum liberties to the people.

They had good reason to be confident in this endeavor. The people whom they represented in Philadelphia had demonstrated that they were, for the most part, self-reliant, courageous and lovers of liberty. Only influential minorities could disturb that spirit, and the Constitution was designed specifically to limit the influence of such aggressive minorities.

Unfortunately, as the population has expanded and as its composition has significantly changed, a slim majority of Americans are no longer self-reliant, courageous and lovers of liberty. That slim majority – that expresses its voice through the progressive movement – seeks to live off the produce of others, rather than itself, is risk-averse to an extreme degree,desiring government protection from the cradle to the grave, and worships at the altar of order rather than individual liberty. In a short sentence, the nation has gone to the dogs.

No constitution, other one of dictatorship, can protect a country in such circumstances. The 2012 elections has confirmed that a majority of Americans prefer big government to small government, prefer to receive transfers rather than to earn their own bread, and welcome the controlling influence of coercive government. That will be the inevitable path over the coming four years.

The key public choice insight that the GOP should recognize, if it is to bend rather than to break, under the onslaught of progressive politics between now and 2016, is that it cannot govern the country from the single leg of the House of Representatives. That leg is surely sturdy, but it is dwarfed by the huge leg of the imperial presidency, especially when supported by the third leg of the Senate. Newt Gingrich bloodied his own nose and weakened the House during the Clinton administration when he shut down the government. Rightly or wrongly, American-majorities support the president in such encounters, especially when the president can focus fiscal damage onto the most vulnerable sectors of the population.

So, if the GOP refuses to increase the debt ceiling in a month or so’s time, allowing President Obama to shut down social security checks, medicare payments, and military pay, while the stock market crashes, the GOP will lose the House in 2014, will lose its filibuster-minority in the Senate, and fiscal mayhem will ensue. No fiscal conservative should endorse such an outcome.

A second public choice insight is that the House of Representatives can limit damage by blunting but not blocking progressive policies. The approach should be one of aiming for small losses while retaining public support to the extent possible.

For example, the House should offer Obama a limited debt increase, lasting say one year, in return for the Senate writing out its first budget in several years. The offer would be difficult to reject by a president who seeks to build a reputation, and yet would force Democrats to disclose their own policy preferences. That is is smart policy.

A smart response to the upcoming fiscal cliff resolution, would be for the House to reformulate the spending cuts, to ameliorate the severe impact on the defense budget, by offering small phased-in increases in the age of eligibility for medicare and social security, while endorsing changes in inflation-linking. Since tax revenues must eventually rise as a percentage of gross domestic product in order to achieve sustainable budget balance, sweeten the pill by recommending cuts in corporate tax expenditures while lowering the rate of corporation tax. The tax recommendations would not be tax neutral but would be designed to increase total revenues. Again, a reputation-conscious president would reject such an offer at a significant political cost to his party.

Think smart and recognize temporary weakness. That is the recipe for political recovery with respect to the budget. On other matters, especially where over-reaching progressives are pushing the popularity envelope, use the veto power provided to the House. Keep an eye always on 2016. By then Obamacare will have shown its enormous structural weaknesses, and the machinery of government will be up for grabs by a well-organized conservative party.


Words of public choice wisdom for British Chancellor of the Exchequer

March 13, 2012

Readers of this blog will be aware that I have reduced the number of my columns over the past several days. The reason for my reduction in force was my attendance at the Second World Congress of the Public Choice Society in Miami, Florida. This Congress was called to honor the 50th anniversary of the publication of The Calculus of Consent by my two erstwhile colleagues, James M. Buchanan and Gordon Tullock.

Upon my return to Fairfax, Virginia I read that George Osborne, Britain’s Chancellor of the Exchequer and , arguably, the brains behind the revival of the Conservative Party, has placed himself on the horns of a dilemma. His budget is seriously constrained and he wants to give a significant income tax exemption at the lower end of the scale while withdrawing a top penal income tax rate that is stifling economic growth.

What is a Chancellor to do in such circumstances?  He dare not cut spending more than is already scheduled because of risking a double-dip recession. What to do, what to do?

Let me offer some words of wisdom drawn directly from the thinking behind Buchanan and Tullock’s great book.  It is truly important for any republic (in Britain’s case read constitutional monarchy) to ensure that all citizens have skin in the political game. If they have no skin in the game, then they will vote themselves spending benefits without any thought for the financing of such benefits. Rational choice advises us where that leads. Those who pay no income taxes effectively vote for policies that take them right down their demand curves for public services. Satiation, not optimization, becomes the self-interested goal.

Politicians always have their eyes on buying votes by releasing portions of the electorate from their tax responsibilities. Sometimes it works in the short run. In the long run it is disastrous for limited government and the rule of law. Public spending choices must be constrained by opportunity costs if a free market system is to prevail.

So my words of public choice wisdom  for George Osborne are these: keep as many voters as you can under the income tax constraint. Lower the top rate in order to prevent a capital  and an entrepreneurial outflow from Britain to less progressively taxed countries. And explain exactly what is at risk for any nation that exempts a majority of its electorate from the income tax.

 When a majority of the electorate senses that it can raid the Treasury to support its lifestyle, the future of any republic, constitutional monarchy or plain democracy is exceedingly dim. Remember Greece!

Cave Ides Martiae,  Osbornius Georgus!

Health Care Reform in a Public Choice Perspective

March 25, 2010

The health care legislation has not yet been finalized through the reconciliation process, nor has it been tested in the courts. For the purpose of this column, I am going to assume that the reconciliation process succeeds and that the final legislation withstands judicial challenges. I am going to make some stylized assumptions about the nature of the outcome for the health care mixed economy in the United States over the coming decade.

First, I assume that some additional 32 million Americans will participate as health care  ‘customers’, through medicaid expansion and the subsidized health care exchanges. Second, I assume that changes in incentives will lead to some 9 million Americans to lose employment health coverage and to enter  the subsidized exchanges. Third, I assume that some 10 million Americans will pay fines rather than submit to political coercion to consume health care at the point of a government gun. Fourth, I assume that the legislation’s tax impositions on the rich, for the time being, exhaust its taxation capacity. Fifth, I assume that The People’s Republic of China will reduce its appetite for American debt, forcing the United States to fund 70 per cent of its additional debt domestically (up from 55 per cent in the mid-2000s and up from 62 per cent in 2010). Fifth, I assume that the private savings rate will not increase from its present elevated rate of 4.6 per cent of private disposable income, even should real interest rates on government notes rise significantly.  Sixth, I assume that the 10 year deficit arising from the health care reforms in fact will be approximately double that projected by the false accounting of the CBO (i.e., $2 trillion). Sixth, I assume that supply elasticities of physicians and nurses are near zero within the decade under consideration, in the absence of significant increases in incomes.  Seventh, I assume that such income increases will not occur because of government subsidy constraints and constrained private sector budgets.

With these assumptions in mind, let us now take an observant walk through the health care commons.  The first observation is that medical reimbursement rates will differ significantly across the commons. The highest reimbursement rates will emanate from the Cadillac employer plans, followed, on a sliding scale, by the regular employment plans, followed by Medicare, followed by the private exchanges, and finally wound up  by the hapless Medicaid programs. The second observation is that, with an increase in quantity demanded against a fixed quantity supplied, there will be potential congestion on the commons.

How will this congestion be resolved?  Well, even under socialism, markets do not disappear. The Cadillacs and the better-endowed employer programs will skim the cream and largely self-protect against the erosion of service. Medicare will operate with significantly lowered access, lengthening queues and access to second tier medical practitioners, who will work for reduced returns. The private exchanges will operate at spartan access levels, with long access queues, providing minimalist coverage. Medicaid patients will be the lepers of the system, squeezed by the private exchanges and suffocated by the expansion in their numbers. Their ‘custom’ will be dreaded rather than welcomed by  overwhelmed suppliers. Hospitals that take them in in siginificant numbers will be quickly bankrupted (20 per cent of all United States  hospital capacity, if the projected  Medicare cuts also hold).

Of course, some of the individuals on the commons have the opportunity to vote (i.e., have access to the political commons). Children and felons, do not have such access, so we know what will happen to them, should they fall under Medicaid. The poor typically do not vote as frequently as the better off.  And the oldies vote most frequently of all, even if some of them are less than fully aware of what levers they are pulling, or what chads they are or are not puncturing.  So the prediction is that the Medicare contingent will bat above its numerical strength. The implication of that prediction  is that the Medicare cuts required in the legislation will not be upheld.  If the fiscal constraints traced out above apply, this means that subsidies to the private exchanges will decline in real terms;  and that Medicaid patients will be right back into the emergency wards.

Our walk through the commons does not seem to have detected much in the way of observed change, does it?  Certainly no reason to suppose that this legislation will be revered down the road, as the United States returns to stagflation under an unsustainable burden of public debt, and an enervating burden of progressive socialism. Of course, the commons will clear a little, as the more enterprising US citizens migrate to more welcoming shores.  But that exodus will simply drain the commons of its most productive inhabitants.


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