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FUBARNOMICSA LIGHTHEARTED, SERIOUS LOOK AT AMERICA'S ECONOMIC ILLS
By ROBERT E. WRIGHT
Prometheus BooksCopyright © 2010 Robert E. Wright
All right reserved.
Chapter OneFUBAR, FUBAR EVERYWHERE
Ever wonder why so many college students spend more time working and partying than studying? Why we allow six guys in hardhats to stand around doing nothing while traffic snarls? Why you have to pay thousands of dollars for "title insurance" if you buy a house that's not located in Iowa? Why you can't refinance your home mortgage because other people stopped paying on theirs? Why our forebears enslaved millions of people for a couple of centuries, then to end the institution fought a war so costly and bloody it would have been far cheaper to buy and free the slaves instead? How in the early 1930s one out of four adults went hungry as they searched for work while the government destroyed large quantities of food? Why ever since then young people in lousy jobs with small children are forced to pay a large percentage of their incomes to people who had decades to work and save? How healthcare and health insurance got so damn expensive? If you've asked yourself any of these or similar questions, or gotten queasy contemplating what passes for economic analysis in the media, this book is for you.
In terms of the actual value of stuff and services that the average American produces in a year (in the language of economists, real per capita gross domestic product), the US economy is among the best in the world and has been for two centuries. Since World War II, American labor productivity (the inflation-adjusted value of output per hour worked) has more than trebled. It may seem strange to call such an economy FUBAR, an acronym apparently coined by the salty tongues of GIs during World War II that stands for fouled (ahem!) up beyond all recognition. Compared to most other national economies, the US economy is a clear winner. But its success is relative, not absolute, because even the American juggernaut finds itself weighted down by inefficient institutions and sagging sectors. This book discusses some of those ugly spots and, in the final chapter, proffers some tentative guidelines for their eradication or amelioration. If we bring lagging industries, such as construction, higher education, healthcare, and social insurance, up to speed, we will prosper as never before and free up resources to tackle other pressing problems, such as global climate change, predatory government, and terrorism.
Unfortunately, at present, the United States appears headed down a much less happy path. The late, great University of Maryland economist Mancur Olson argued that as nations age, their economies become inflexible due to the accumulated weight from special-interest legislation, from the ever-increasing number of laws enacted to aid the few at the expense of the many. The American economy is no exception. From Washington, DC, Congressman John Murtha ensured that "pork," in the form of government contracts, poured into his district in western Pennsylvania. Many of the federal contracts that Murtha's favorite Johnstown-area firms won were "no-bid" deals. In other words, the companies faced no competition, virtually ensuring that they would reap large profits, ill-gotten gains sucked straight out of the taxpayers' pockets. And it gets worse, believe it or not. Many of those contracts were for goods or services that no branch of the military or government agency actually wanted or requested. If one of Murtha's favored firms made it, the government got it, whether it wanted it or not.
Meanwhile, with the post-Katrina cleanup still far from finished, Senator Ted Stevens of Alaska tried to divert over $200 million to build a bridge to connect a small Alaskan town to a tiny island inhabited by about fifty people. The notorious "Bridge to Nowhere," as critics dubbed it, was snubbed even by locals who had gotten around quite well for generations by boat and airplane, thank you. (Small, private planes are ubiquitous in Alaska.) If Murtha and Stevens were some sort of renegade exceptions to the rule, we would have little to worry about. Unfortunately, almost everyone in Congress relishes pork projects, or "earmarks" as they have come to be known.
Unelected bureaucrats, from the recalcitrant clerk at the department of motor vehicles to a GS-15 Step 10—the top of the federal government's "general schedule" of pay for bureaucrats—are also major contributors to FUBAR. Governments fail, or create FUBAR conditions, for a variety of reasons. Foremost, reality is a real bitch to understand. Only with considerable effort can the best and the brightest barely fathom its shadowy depths. Information about how the world works is scarce and imperfect, so trying to envision the future is daunting. Systems are chaotic, in the sense that small changes in initial conditions can lead to large differences in outcomes. (Watch The Butterfly Effect for an inkling.) A seemingly small policy change can ripple through the economy, destroying equilibrium the way a tossed pebble wreaks havoc on the surface of a placid pond. Unlike the pond, however, the economy doesn't necessarily return to its former state. Rather, like a human face, it may forever bear the scar created by the ill-conceived shock of a rock.
Governments also fail because they are composed of fallible people. Sometimes their foibles induce them to make very well-intentioned mistakes. More often, though, their flaws lead them to satisfy their own wishes and purses, instead of those of the people they ostensibly serve. In some countries, including the United States, private interestedness is checked by elections or other parts of the government—you know, the three branches of government, the bicameral legislature, federalism, and all that. Self-interested behavior still pervades public life, but it is more muted than in Joe Stalin's Soviet Union or Bobby Mugabe's Zimbabwe. Instead of outright theft, American politicians and bureaucrats must engage in more oblique, and hence in some ways more insidious, self-serving activities. Earmarks, campaign contributions, vote swapping, work slowdowns, extra-long lunches, Luddite-like resistance to technology, and regulatory forbearance are only a few such behaviors.
I mean no disrespect to government employees who are, after all, only responding to incentives, or more usually the lack thereof. An anonymous author circa 1835 put it best: "I especially disclaim any allusion to the present incumbents; my business is with institutions, not individuals." As Milton Friedman once pointed out, critics of government usually mean nothing personal. The savviest, most efficient private sector manager or worker will morph into a bumbling idiot soon after taking up employment in the public sector. If you've no idea what I mean, read some Kafka, or at least his Wikipedia entry. Visiting the government office nearest you usually will do the trick, too.
The root problem is that governments need not worry about output, or actual outcomes. Whether the government succeeds or fails, its tax-collecting minions are still going to knock on your door and take their due. In fact, if the government fails it may well ask for yet higher taxes! Johnny will be able to read or Mary won't get accosted or Widow Smith won't perish cold and hungry or al Qaeda will be defeated if only the taxman digs a little deeper into citizens' pockets, or so politicians often claim. There are limits, of course. A government that exacts high taxes and provides little in return faces a higher chance of a coup, rebellion, or revolution. But bad governments do not always face negative repercussions. Consider Cuba and North Korea, which for decades have groaned under authoritarian poverty but persist nevertheless.
Unlike for-profit enterprises, governments face no immediate sanctions for profligacy or inefficiency. George S. in accounts is deadwood, agency W hasn't served a purpose since World War I, bureaucracy Z is riddled with corruption, and X and Y do exactly the same thing, but it is easier to retain them than to rock the boat. (Some redundancies, like those built into the Constitution, are necessary to prevent the government from behaving in a predatory manner. Most redundancies, however, are just plain dumb.) The ship of state is therefore sinking, but its demise is so slow that its doomed passengers barely notice. We're like a colony of frogs in a big, old pot, resting quietly while the water around us slowly comes to a boil.
Also unlike private enterprises, parts of the government work at cross purposes with other parts of it for extended periods of time. Such discrepancies are usually unplanned, arising from conflicting special interests and the remnants of piecemeal policy prescriptions enacted over decades or centuries. For example, the US government long subsidized tobacco farmers and simultaneously tried to reduce cigarette consumption through taxes, bans, and public education. Government-sponsored agricultural R&D increased output and hence depressed prices at the same time that other government programs sought to increase agricultural prices. Programs that paid farmers not to grow crops decreased farm employment, forcing itinerant workers onto the dole or worse. Even more tragic, during the Depression some parts of the government burned crops (to raise agricultural prices to help farmers) while other parts struggled to obtain enough food to nourish the unemployed. And you thought your boss sent mixed signals!
Because the government does not have to worry very much about outcomes, it provides employees with salaries based on their test scores, experience, and the like—not on how well they service taxpayers. Lifetime employment is almost guaranteed. (Only tenured college professors have a better deal.) Nobody receives a bonus for saving taxpayers' money. A bureaucrat who suggests radical changes will end up earning not laurels but a one-way ticket to a dead-end position in a cold, dangerous, or faraway post.
That is the way things are, but must they always remain so? The long-lived late-night comedy show Saturday Night Live once joked its way into an interesting idea. In 1991 and 1992, it relentlessly parodied presidential candidate Ross Perot. It was easy to do. Perot had an odd campaign strategy; strange mannerisms; big, comical ears; and a laughable running mate. His extensive business experience also made him suspect. In one skit, Perot, played by Dana Carvey, argued that his salary as president should be a function of the economy's rate of growth. Shy of 3 percent growth, Perot wanted no pay or even expenses because a "chimpanzee could run this country" and do as well, and Perot had "$3 billion back at home," the fruits of his business career. At 3 percent GDP growth, though, Perot wanted a payment of $1 billion. "Now, think about it," he implored, "that's a bargain! You're up $119 billion." At 4 percent, Perot's bonus jumped to $20 billion, another great deal, he argued, because "this isn't the President of G[eneral] M[otors] giving himself a big bonus when the company's losing money sending jobs to Mexico. I get my money if and when you get yours" [emphasis in original].
Viewers laughed their asses off and commented on the absurdity of the notion. But why is performance-based pay for government officials absurd? Working out the details would be tricky—people generally do precisely what they are given incentives to do—but government would finally begin to concentrate on outcomes. Until that day, government inefficiencies and failures will persist because no one has an incentive to make the government more efficient, to maximize its output or minimize its input.
More is at stake here than just efficiency, though. When governments fail, the results are often spectacularly horrifying. Governments are among the leading causes of war, famine, and pestilence. (Organized religions are close behind, especially when they assume the trappings of government, as in medieval Europe and other theocracies.) Like any powerful tool, government can unleash great good but also great evil. It sometimes fixes the FUBAR parts of the economy, but more often it exacerbates existing problems and sows the seeds of future calamities.
* * *
If the government was the only cause of FUBAR, our course of action would be clear. Throw the bums out, reduce taxes, make it difficult for the government to borrow except in response to emergencies, deregulate everything, and stop redistributing so much wealth across classes and generations. Unfortunately, the world is not so simple, not by a long shot. Just as governments can fail, so too can markets.
When the Creator cast us mere mortals out of paradise, It created two horrible devils, scarcity and asymmetric information. The former means that we cannot have our cake and eat it too. Doing A necessitates forgoing B. To buy guns (military protection) we must give up butter (consumer goods) and vice versa. Economists call that "opportunity costs." Scarcity makes markets possible, nay, necessary. We cannot have everything we desire, so we must have some way of rationing goods—physical things and services that people want.
In their purest form, as described in words by Adam Smith and in mathematics by Kenneth Arrow and others, markets are elegant ways of coping with scarcity. We still do not have everything that we want, but we do have ways of efficiently deciding what, where, when, and how much to produce and ways of distributing those goods in an ostensibly fair manner, with those who produce the most receiving the most in return. Were scarcity humanity's only punishment for our Fall, life would be pretty darn good indeed. Your relationship with your in-laws might still be FUBAR, but the economy would run like a fine Swiss watch.
But then the second devil, the true bane of our existence, blindsides us. Asymmetric information, the possession of superior information by one party to a contract or transaction, smashes Smith's words and Arrow's equations to bits. When people complain about markets, they are really almost always complaining about asymmetric information, or, to be more precise, its negative effects on the way the markets function. In the Smith-world, everyone knows everything, or at least everything he or she needs to know in order to avoid getting cheated by others. Markets, not firms, establish prices at just the point where businesses recoup their costs of production and earn enough profit to keep them producing. Consumers know what those prices are and can tell high-quality goods from lowquality ones. Workers' wages equal their marginal productivity, so no one is under- or overpaid and nobody shirks and gets away with it. As I said, if we had only to worry about scarcity, life would be pretty nice, not a paradise but not nearly as hellish as it is.
In the real world, the one suffused with asymmetric information, the pretty Smith-Arrow outcomes rarely occur. Consumers pay too much for crappy products, some workers earn more than they produce, others earn much less than they produce, and companies come to have market power—the ability to make prices rather than to take them from the market, as in perfectly competitive systems. With asymmetric information comes power, the ability to lie, cheat, and steal one's way to outsized profits. It's a two-way street, too. Sometimes businesses sucker investors into buying overpriced financial securities (stocks, bonds, mortgage-backed securities) or products (like eighty-five-dollar bottles of acai berry pills). Sometimes consumers trick banks into lending them money that they will never repay or insurers into paying fraudulent claims. Bob Seger was far too optimistic in his song "The Fire Down Below." It's more like everywhere there ain't nobody treating anybody right. Just remember this isn't the fault of markets per se. If we are to fix all that is FUBAR, we must cast blame on the real culprit, the devilish asymmetric information. Like the hellhound Cerberus, asymmetric information has three ugly heads: adverse selection, moral hazard, and the principal-agent problem.
Excerpted from FUBARNOMICS by ROBERT E. WRIGHT Copyright © 2010 by Robert E. Wright. Excerpted by permission of Prometheus Books. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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