Ten Elements of Clear Thinking About Economic Progress and the Role of Government Common Sense Economics James Gwartney, Richard L. Stroup, and Dwight.

Ten Elements of Clear Ten Elements of Clear Thinking About Economic Thinking About Economic Progress and the Role of Progress and the Role of

GovernmentGovernment

Common Sense Economics

James Gwartney, Richard L. Stroup, and Dwight R. Lee

CommonSenseEconomics.com

Some Questions to Consider:

• Why do political results so often differ from what was promised?

• Why do all governments seem to have a tendency to expand?

• What are the secondary effects of government policy?

What Role for Government?

“A wise and frugal government, which shall restrain men from injuring one

another, which shall leave them otherwise free to regulate their own

pursuits of industry and improvements, and shall not take

from the mouth of labor the bread it has earned. This is the sum of good

government.”

-Thomas Jefferson

Clear Thinking Proposition #1

Government promotes economic progress by

protecting the rights of individuals and

supplying goods that cannot be provided through markets.

Protective vs. Productive Functions

• Government’s protective function includes the maintenance of a legal framework.

• Government promotes economic progress by protecting people against loss of their lives, liberties, and properties.

Protective vs. Productive Functions (cont.)

• Government’s productive function includes the provision of public goods.

• Public goods are not easily provided by markets because they are non-rivalrous and characterized by shared consumption.

Clear Thinking Proposition #2

Government is not a corrective

device.

Government as Social Organization

• Policies favored by majorities do not necessarily promote economic progress.

• The benefits and costs faced by voters belonging to different interest groups are often disproportionate.

Markets & DemocracyMarkets & Democracy• The fundamental difference

between democracy and markets is the government’s coercive power to tax.

• When goods and services are financed by coerced payments, there is NO assurance that they are valued more than they cost.

Clear Thinking Proposition #3

The costs of government are not only taxes.

3 Types of Costs Incurred

1. The loss of private sector output that could otherwise be produced

2. The cost of resources expended in tax collection and enforcement of government mandates

3. The cost of price distortions caused by taxes and borrowing

Loss of Private Sector Loss of Private Sector OutputOutput

• All funds have alternative uses.

• Public sector production is not entirely financed by tax collection…

Costs of Collection & Enforcement

• $843 BILLION in 2000

• $8,200 per household

• Total government burden represents more than ½ of GDP.

• Preparation, monitoring and enforcement of tax law and regulatory legislation must be funded.

Price Distortions• Taxes distort

incentives.• Some exchanges will

not occur because the tax makes them no longer advantageous.

• Deadweight loss of taxation adds 9-16% above the costs of compliance and regulation.

Clear Thinking Proposition #4

Unless restrained by constitutional rules,

special-interest groups will use the democratic

process to fleece taxpayers and

consumers.

The Power of Special Interests

• Special interests will help politicians get elected (money and workers).

• While others are harmed, there is little incentive to act in opposition.

• Thus, politicians cater to special interests.

A Sweet Example• $1.9 billion in sugar

subsidies disbursed annually.

• The average consumer pays $20 per year in higher sugar prices.

• $13 million contributed to politics by the sugar lobby in 2000.

• WHO WINS????

Clear Thinking Proposition #5

Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.

Deficits & Reckless Spending

• Remnants of the Keynesian “revolution”

• Spending is much more politically attractive than taxing.

• Debt pushes the visible cost of government into the future…

• Immediate benefits with deferred costs are hard to defeat!

Spending Watchdogs

• Little incentive to be spending “watchdogs” exists.• eg. splitting the bill at

dinner

• Will increased tax revenue control spending inclinations?

Clear Thinking Proposition #6

Government slows economic progress when it becomes

heavily involved in trying to help some

people at the expense of others.

Production or Plunder?

• Only a neutral government can protect its citizenry from plunder.

• “Lost” resources directed at favor-seeking are proportional to their efficacy.

“Counterproductive, favor-seeking activities are a natural outgrowth of unrestrained democracy.”

Clear Thinking Proposition #7

The costs of government income

transfers are far greater than the net

gain to intended beneficiaries.

Wars on Poverty

• Difficult at best to improve people’s well-being through income transfers.

• The unintended consequences of secondary effects get in the way.

Ineffectiveness of Income Transfers

1. Reduced incentive of both taxpayer-donor and transfer recipient to earn income• “Free” income reduces work effort

and innovation.• Increased tax burdens stifle the

incentive to produce and earn more.

2. Competition for transfers erodes most of the long-term gain of the intended beneficiaries.• When qualification requirements

must be met, resources and potential production are wasted as individuals seek to meet them.

Income Transfers (cont.)

3. Protection from adversity arising from imprudent decisions makes people more likely to increase the likelihood of that adversity.• Consequences of adversity become

less severe.• Potential recipients have less

incentive to avoid adversity.4. If you subsidize something, you

get more of it.• Transfers directed toward the poor

unintentionally encourage high-risk lifestyles.

• Charitable efforts are crowded out.

Clear Thinking Proposition #8

Central planning replaces markets

with politics, which wastes resources

and retards economic progress.

The “Man of System”

“The man of system is apt to be very wise to his own conceit. He seems to imagine that he can

arrange the different members of a great society with as much ease as the hand

arranges the different pieces upon a chess-board.”

-Adam Smith

The “Fatal Conceit” of Central Planning

1. Central planning merely substitutes politics for market verdicts.

• Subsidies and investment funds disbursed by planners are still influenced by political considerations.

• “Old” firms tend to be favored over “new”, growth-oriented firms.

• “Pork barrel” projects are still pursued.

2. The incentive of government-operated firms to keep costs low, be innovative, and efficiently supply goods is weak.

• Little is to be gained from efficiency gains and/or lower costs.

• Higher per-unit costs are the norm as budgets expand and efficiency gains are not realized.

The “Fatal Conceit” (cont.)

3. Investors risking their own money will make better investment choices than central planners spending the money of taxpayers.

• Private investors bear the consequences of poor investments directly.

• Since little personal wealth is realized by planners, there exists little incentive to increase productivity and/or conserve resources.

4. There is no way that central planners can acquire enough information to create, maintain, and constantly update a plan that makes sense.

• Markets are most adept at channeling information to both producers and consumers via the price system.

Clear Thinking Proposition #9

Competition is just as important in

government as in markets.

Government & Competition

• Leaders of public sector firms have little incentive to cut costs and/or increase productivity.

• The profit rate is an index of performance for firms in the private sector.

• Poor performance is often an argument for increased state funding instead of the stricture of bankruptcy.

• Citizens hold differing views on appropriate public expenditures; a centralized system cannot accommodate multiple viewpoints.

Clear Thinking Proposition #10

Constitutional rules that bring the

political process and sound economics into

harmony will promote economic

progress.

A Pipe Dream?A Pipe Dream?• The scope of government

must be limited.• An unconstrained

government results in lost productivity as people fight over their “pieces of the pie”…so the pie never gets any bigger.

• Constitutional checks:– 10th Amendment– 5th Amendment