Maxwell Newton, “Controls curb war on waste,”
The Australian, June 30, 1981, p. 13.
America’s resources are being wasted on a grand scale by government controls on markets.
Agriculture has been grossly subsidised over the last 50 years through the operation of “parity price” policies, which have led to the production of burdensome surpluses.
US oil and gas production has been distorted and twisted by government price and output controls.
Huge payments to the Organisation of Petroleum Exporting Countries could have been avoided, had US oil and gas been free of price controls. More American oil and gas would have been produced and less OPEC oil consumed.
Environmental controls imposed on US industry are not subject to any cost-effectiveness tests. It is deemed to be a “good thing” to clean up the water and the air. This is achieved by a mass of regulations.
But those imposing the regulations are free to increase the cost up to any limit without have to trade off against those costs, the benefits deemed to be achieved by the policy in question.
The banking industry has been put into a straitjacket of controls. Savings banks may not charge more than a certain fixed maximum rate of interest. Commercial banks may not trade interstate.
The Federal Reserve continually inflates the money supply above what is required to meet the needs of a steadily growing non-inflationary economy.
Hence, money market funds grow up to rip off the business of the commercial and savings banks. The Fed, which does not have to take the huge losses it inflicts on the nation into its own profit and loss account, is subject to no built-in limit on its inflation-promoting activities.
RATIONAL
All these examples can be summarised, as they were last week at the Bozeman, Montana conference of the Montana State University Centre for Political Economy and Natural Resources in the example of the 10-person one-time dinner affair with strangers.
The rational diner will reason as follows: “If we all order a $10 dinner, the total check will come to $100. But if I order a $20 dinner, while the other nine order the $10 dinner, the total check will be $110 and we will each pay $11. Thus I will get a $20 dinner for $11.”
If we extend the logic the next step, since each diner has an incentive to splurge, there can be little doubt the amount of money spent will be greater under the “equal share” arrangement, than under an arrangement where each diner pays his or her own check.
This is exactly how government activity keeps expanding. Each special interest group will lobby to increase the activity level of its own projects on the rational expectation that the bulk of the costs will be passed on to the larger taxpaying public.
In recognition of these fantastic costs of government, both direct and indirect, there is an urgent need to devise ways of “sheeting home” the costs of controls and spending.
Under the present system, we are simply saddled with a system which must lead to more government and more waste.
Various tentative steps are being made to stop this frightful process of ever-escalating waste. General deregulation of the market is one means, as in aviation (where prices have dropped sharply as a result).
The resistance to deregulation of railroads (by the railroads), of slurry pipelines (by the railroads), of banking (by the small banks) and of trucking (by the Teamsters) all point to the huge sectional vested interests tied up in the present medieval apparatus of controls on markets.
The growth of the transfer society is one of the more horrendous examples of what goes on. Each sectional group is able to exert extreme pressure on legislatures and on bureaucrats to promote its own needs. In the process, the government budget expands, because each individual gain can be argued a “special case” whose costs will be loaded off to the taxpayers.
PRIVILEGES
Institutions are failing to identify the total cost of individual controls and government handouts of money or privileges.
One broad measure of reform, in addition to deregulation and the establishment of built-in controls on bureaucratic expansion, is the establishment of the rule that user charges be made for all government-produced goods.
The cost of environmental protection would have to be sheeted home by requiring all firms subject to environmental controls to pay standard effluent charges, based on the amount of pollutant material released.
While requiring much more development, this notion would give all companies a standard of cost against which to measure performance, while giving them a direct cost incentive to act. A cost limit would thus be placed on environmental protection and a measurable direct incentive to the group to stop polluting.
In the case of the Fed, there would be the implementation of the institutional reform proposed by the Shadow Open Market Committee. If the Fed fails to hit its annual money growth target by more than 1 per cent, all the members of the Fed board must offer their resignations.
These are all ideas, many of them primitive at this stage, directed towards dealing with the massive waste and inefficiency in the economy, resulting from the basic desire of each and every one of us to improve our own benefits, while pushing most of the cost off on to the rest of the community. In the process, all costs are increased and all additional benefits fail to meet the costs.
The Montana State University work, where these ideas have been used to identify the huge waste in the use of our natural resources and in many other areas, represents part of a big new forward thrust in economists’ thinking which will eventually have a major impact on policies.
*****
Maxwell Newton, “Bureaucrats need a trim,”
The Australian, July 1, 1981, p. 34.
Concluding a two-part series on government control of United States industry and the resultant wasting of the nation’s resources.
I had the opportunity last week of attending a very special conference in Montana.
It was a conference of economists aimed at finding specific means for countering modern diseases such as the limitless growth of government, the unrestricted expansion of bureaucracy, the persistent success of special interest groups in raiding the nation’s economy and its Treasury, the rape of the nation’s natural resources by government controls and government subsidies and spending programs and the spread of government intervention in all markets, including energy and food. All these lead to massive waste.
At this conference, organised by John Baden, and Richard L. Stroup, respectively director and co-director of the Montana State University Centre for Political Economy and Natural Resources, we rediscovered the idea that private actions lead to costs which fall on others.
Factories pollute the air and the water, because to the factories concerned, the air and water are free.
Central Park is filthy because it is a common resource, while Disney World is spotless, because the owners know that allowing their park to become filthy will cost them.
In fancy jargon, the users of Central Park do not have “specific property rights”, while owners of Disney World do. Disney World is clean because the owners have to suffer themselves the cost of allowing it to become filthy, but anyone feels free to desecrate Central Park, because he knows he will not have to suffer the costs he is creating.
There is always a constituency for raiding the nation’s economy or the Federal Treasury on behalf of some special interest group.
The benefits accrue to the group concerned — the wheat farmers, Montana’s subsidised sugar beet growers, the gas retailing companies, the poor blacks of the nation’s cities, the wealthy grain farmers of the Middle West, Chrysler, Lockheeed, synthetic fuels producers, wealthy middle class families wanting to tax-deduct mortgage interest on million-dollar homes.
For every one of these special interests, support can always be obtained because the costs of the benefit given are spread over a whole multitude of taxpayers, while the benefits are very specifically gained by a tiny group.
This is called “the tragedy of the commons”. Thousands of special cases rape the nation’s common economy and the Federal Treasury.
But we all bear the cost. Hence it is virtually impossible to get an individual American interested in the name of his Congressman, yet he knows precisely where to get 5c off petrol. He knows that nothing he individually can do will alter the outcome of the big national debts. But he knows very well that if he takes the trouble to find petrol at 5c cheaper, he will gain the benefit from the costs he outlays in finding it.
We are wasting resources massively because our institutions are giving us the wrong answers. Changing institutions could be an answer.
Here is one example. Bureaucrats are derided by us all, because they keep on spending more and more and more.
Is this because they are bad people? Probably not. Most of them are very conscientious. They are usually honest — no more dishonest than the rest of us.
Much more importantly — and much more credibly — they are self-interested (just like the rest of us). Their self-interest lies in increasing the size of their budgets. There is no cost to them in doing so. If they do not try to increase the size of their budgets, they know others will not practice such self-denial. Hence, increasing their budgets — raiding the Treasury — is a one-way option.
The individual bureaucrat gets all the benefit from the raid (more staff, a bigger budget) but suffers none of the cost, which is spread over the millions of taxpayers, who cannot combine in any effective way to stop the raid.
John Baden, director of the MSU Centre for Political Economy, has advanced a possible solution. We should introduce “predators” into the bureaucracy, to counteract the virus of ever-expanding bureaucracies. Such a predator would be the Bureau of Budget Control. This bureau would be given a one-time appropriation that would carry it for two-years.
It would then have to find its own funds in the following way. The Bureau would oppose other bureaucrat’s spending plans. For every appropriation it got knocked out, it would receive 1 per cent of the failed appropriation (to be used for its own sustenance and expansion). The losing agency would have 1 per cent of the amount rejected knocked off its existing budget.
In this way, the costs of attempting to raid the Treasury would be sheeted home directly to the agency seeking more funds.
This is a tiny example of proposed institutional reforms urgently needed to stop the nation’s economy and its Federal Treasury from being wrecked through the unrestricted growth of public spending, controls and regulations, under which costs and benefits do not accrue to the same party.
