April 29, 2009
Freedom Department
How Much Government Should We Have?
Jamie Spencer has a question about the size of government:
But the big "L" libertarians often use a certain phrase that I just don't understand. For example, my friend and Dallas criminal defense lawyer Robert Guest uses it in a post about tea parties:
As a libertarian I'm for anything that reduces the size and scope of government.
You're for anything that reduces the size and scope of government? How about...
- Closing down all the public schools?
- Doing away with the fire stations?
- Reneging on our promises and cutting off Medicare for the elderly?
- Shutting down all the prisons (not just the 50% filled with drug war victims)?
... anything that reduces government? Isn't that going too far?
Literally speaking, of course it's going too far, which is why most of us small-government folks don't mean it literally.
As is often the case these days, my own answer to this kind of question is based in economics. The free market can solve many problems, but sometimes it fails, and that's where government can and should step in.
Many common market failures involve externalities, where either the social cost or the social benefit of some activity affects people other than the person who controls the activity. This screws up the incentives, which leads to inefficient results.
Consider, for example, what happens when you throw a piece of litter from your car. The benefit to you is that your car is cleaner now, without having to wait until you stop someplace that has garbage cans. The cost is that the road you drive on is slightly less attractive. Multiply that slight unnattractiveness by the thousands of people who will pass the place you littered, and the resulting aggregate cost is probably much higher than the benefit of your cleaner car.
However, you don't pay the aggregate cost. You just pay the cost to you. Chances are, having one less piece of litter in your car is better for you than having one less piece of litter on the highway. So the selfishly rational act is to throw your trash out the window. In fact, that's the selfishly rational thing for everyone to do. The result is that we all end up driving clean cars down filthy roads littered with debris.
Remember, however, that we said the cost of dirty roads is greater than the benefit of not having to wait until we stop to clean out our cars. So we would all be better off if people didn't throw litter out the window. Personally, we have an incentive to throw trash out the window, but collectively, we're better off not doing it. Our incentives are not aligned with our interests.
This is where government can help, by outlawing littering. Essentially, the fine for littering raises the personal cost of littering and re-aligns our incentives with our interests.
Similar logic applies to other activities such as crime and air pollution, and government can increase the personal costs of these activities to bring them in line with the average social costs.
The opposite situation is also a problem. Suppose you and nine of your neighbors are worried about crime, so you consider hiring a night watchman to patrol the neighborhood. Let's say a watchman would be worth $6000 per year for each of you, so that the combined value of the watchman is $60,000. If the guard service only charges $45,000 a year, you'll each pay $4500 per year for a service that's worth $6000, a net surplus of $1500 each, and a total surplus to the neighborhood of $15,000.
The catch is that you don't have to pay. If your nine neighbors each kick in $5000, that will cover the cost of the guard, and they will still receive $6000 in protection, so it's still a good deal for them. But it's probably an even better deal for you: The guard they hire will scare theives out of the neighborhood, which will protect you too, even though you aren't paying for it. You might not get as much protection---maybe only $3000---but since you pay nothing, it's all surplus, and a $3000 surplus is better than the $1500 surplus you'd get if you paid.
Disaster strikes, again, when more neighbors begin to think this way. If everyone tries to seize the advantages of not paying, there won't be enough money to hire the guard, and without the guard, the entire $15,000 surplus will vanish.
This is, again, where government can step in, by forcing everyone to pay the cost of the guard: This is also known as using taxes to pay for a police force.
There are lots of other examples of this effect, the most prominent of which is national security---it's hard to protect just the people willing to pay when the enemy troops arive at our shores, so it makes sense to tax everyone to protect everyone.
Flu shots are another example of this effect. If you're innoculated against the current strains of influenza, that protects you and everyone who would have caught it from you. If you're young and healthy, the full cost of the vaccine might be more than you're willing to pay yourself---you'll get over a little flu. But more vulnerable people who could catch it from you might benefit a lot if you get vaccinated, and the combined benefit might be more than the cost of the shot. You don't get everyone's benefits, however, just your own, so you might not want to buy the vaccine, even though the social benefits would be worth it. Government can change your incentives by subsidizing the vaccine to make it worth your while.
There are other cases like this---although not as many as some would have you believe---but this is the general idea. Government should be large enough to improve the general welfare when the people can't do it themselves through the free market. But no larger.
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