Chapter 20 - Special Problems in National Economy

Scope of Government:

Some decisions are clearly political, while the government or marketplace could do others. When deciding between the two, “it is necessary not only to decide which particular outcome would be preferred but also which process offers the best prospect of actually reaching that outcome.”
The influence of wealth in the marketplace makes many prefer to move decisions into the political arena, on the assumption that this is a more level playing field, however, among the things that wealth buys is more and better education, as well as more leisure time that can be devoted to political activities and the mastering of legal technicalities.
Too often there has been a tendency to regard government as a monolithic decision-maker or as the public interest personified, but different elements within the government respond to different outside constituencies and are often in opposition to one another for that reason, as well as because of jurisdictional frictions among themselves.
Many things done by government officials in response to the particular incentives and constraints of the situations in which they find themselves may be described as “irrational” by observers but are often more rational than the assumption that these officials represent the public interest personified.
Politicians lack the courage to privatize the huge, loss-making public sector because they are afraid to lose the vote of organized labor.
Moreover, the political process offers “package deal” choices, where one candidate’s whole spectrum of positions on economic, military, environmental, and other issues must be accepted or rejected as a whole, in comparison with another candidate’s spectrum of positions on the same range of issues.

Monetary Policy

A set of tools used by a nation’s central bank to regulate the overall money supply and achieve sustainable growth of the economy
More fundamental than the problems that particular monetary policies may cause is the difficulty of crafting any policies with predictable outcomes in certain circumstances, when the responses of millions of other people to their perception of a policy can have consequences as serious as the policy.
Economic problems that are easy to solve as theoretical exercises can be far more challenging in the real world.
The tensions experienced by those who had the actual responsibility for dealing with the real world problem of inflation were in sharp contrast with the serene self-confidence of many economists in previous years, who believed that economics had reached the point where economists could not merely deal in a general way with recession or inflation problems but could even “fine tune” the economy in normal times.

Government Obligations:

In addition to what the government currently spends, it has various legal obligations to make future expenditures.
These obligations are specified and quantified in the case of government bonds that must be redeemed for various amounts of money at various future dates.
Other open-ended obligations that are difficult to estimate are government “guarantees” of loans made by others to private borrowers or guarantees to those who lend to foreign governments.
These guarantees appear to cost nothing, so long as the loans are repaid—and the fact that these guarantees cost the taxpayers nothing is likely to be trumpeted in the media by the advocates of such guarantees, who can point out how businesses and jobs were saved, without any expense to the government, but at unpredictable times, the loans do not get paid and then huge amounts of the taxpayers’ money get spent to cover one of these supposedly costless guarantees.
Among the largest obligations of many governments are pensions that have been promised to future retirees, these are more predictable, given the size of the aging population and their mortality rates, but the problem here is that very often there is not enough money put aside to cover the promised pensions.
The difference between political incentives and economic incentives is shown by the difference between government-provided pensions and annuities provided by insurance companies.
Government programs may be analogized to the activities of insurance companies by referring to these programs as “social insurance,” but without in fact having either the same incentives, the same legal obligations or the same results as private insurance companies selling annuities.
The illusion of investment is maintained by giving the Social Security trust fund government bonds in exchange for the money that is taken from it and spent on other government programs, but these bonds likewise represent no tangible assets.

Market Failure as Government Failure:

The imperfections of the marketplace have led many to see government interventions as necessary and beneficial, yet these imperfections of the market must be weighed against the imperfections of the government whose interventions are prescribed.
The incentives facing government enterprises tend to result in very different ways of carrying out their functions, compared to the way things are done in a free market economy.
Whatever the merits or demerits of particular government economic policies, the market alternative is very new as history is measured, and the combination of democracy and a free market still newer and rarer.
Where there are elected governments, their officials must be concerned about being re-elected—which is to say that mistakes cannot be admitted and reversed as readily as they must be by a private business operating in a competitive market, in order for the business to survive financially.
In politics, the costs of the government’s mistakes are often paid by the taxpayers, while the costs of admitting mistakes are paid by elected officials.
Although we often speak of “the government” as if it were a single thing, it is not only fragmented into differing and contending interests at any given time, its leadership consists of entirely different people over time.
In a competitive market, by contrast, the costs of mistakes can quickly become so high that there is no choice but to admit one’s own mistakes and change course before bankruptcy looms on the horizon, because the day of reckoning comes earlier in markets than in government, there is not only more pressure to admit mistakes in the private sector, there is more pressure to avoid making mistakes in the first place.

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Chapter 20 - Special Problems in National Economy

Scope of Government:

Some decisions are clearly political, while the government or marketplace could do others. When deciding between the two, “it is necessary not only to decide which particular outcome would be preferred but also which process offers the best prospect of actually reaching that outcome.”
The influence of wealth in the marketplace makes many prefer to move decisions into the political arena, on the assumption that this is a more level playing field, however, among the things that wealth buys is more and better education, as well as more leisure time that can be devoted to political activities and the mastering of legal technicalities.
Too often there has been a tendency to regard government as a monolithic decision-maker or as the public interest personified, but different elements within the government respond to different outside constituencies and are often in opposition to one another for that reason, as well as because of jurisdictional frictions among themselves.
Many things done by government officials in response to the particular incentives and constraints of the situations in which they find themselves may be described as “irrational” by observers but are often more rational than the assumption that these officials represent the public interest personified.
Politicians lack the courage to privatize the huge, loss-making public sector because they are afraid to lose the vote of organized labor.
Moreover, the political process offers “package deal” choices, where one candidate’s whole spectrum of positions on economic, military, environmental, and other issues must be accepted or rejected as a whole, in comparison with another candidate’s spectrum of positions on the same range of issues.

Monetary Policy

A set of tools used by a nation’s central bank to regulate the overall money supply and achieve sustainable growth of the economy
More fundamental than the problems that particular monetary policies may cause is the difficulty of crafting any policies with predictable outcomes in certain circumstances, when the responses of millions of other people to their perception of a policy can have consequences as serious as the policy.
Economic problems that are easy to solve as theoretical exercises can be far more challenging in the real world.
The tensions experienced by those who had the actual responsibility for dealing with the real world problem of inflation were in sharp contrast with the serene self-confidence of many economists in previous years, who believed that economics had reached the point where economists could not merely deal in a general way with recession or inflation problems but could even “fine tune” the economy in normal times.

Government Obligations:

In addition to what the government currently spends, it has various legal obligations to make future expenditures.
These obligations are specified and quantified in the case of government bonds that must be redeemed for various amounts of money at various future dates.
Other open-ended obligations that are difficult to estimate are government “guarantees” of loans made by others to private borrowers or guarantees to those who lend to foreign governments.
These guarantees appear to cost nothing, so long as the loans are repaid—and the fact that these guarantees cost the taxpayers nothing is likely to be trumpeted in the media by the advocates of such guarantees, who can point out how businesses and jobs were saved, without any expense to the government, but at unpredictable times, the loans do not get paid and then huge amounts of the taxpayers’ money get spent to cover one of these supposedly costless guarantees.
Among the largest obligations of many governments are pensions that have been promised to future retirees, these are more predictable, given the size of the aging population and their mortality rates, but the problem here is that very often there is not enough money put aside to cover the promised pensions.
The difference between political incentives and economic incentives is shown by the difference between government-provided pensions and annuities provided by insurance companies.
Government programs may be analogized to the activities of insurance companies by referring to these programs as “social insurance,” but without in fact having either the same incentives, the same legal obligations or the same results as private insurance companies selling annuities.
The illusion of investment is maintained by giving the Social Security trust fund government bonds in exchange for the money that is taken from it and spent on other government programs, but these bonds likewise represent no tangible assets.

Market Failure as Government Failure:

The imperfections of the marketplace have led many to see government interventions as necessary and beneficial, yet these imperfections of the market must be weighed against the imperfections of the government whose interventions are prescribed.
The incentives facing government enterprises tend to result in very different ways of carrying out their functions, compared to the way things are done in a free market economy.
Whatever the merits or demerits of particular government economic policies, the market alternative is very new as history is measured, and the combination of democracy and a free market still newer and rarer.
Where there are elected governments, their officials must be concerned about being re-elected—which is to say that mistakes cannot be admitted and reversed as readily as they must be by a private business operating in a competitive market, in order for the business to survive financially.
In politics, the costs of the government’s mistakes are often paid by the taxpayers, while the costs of admitting mistakes are paid by elected officials.
Although we often speak of “the government” as if it were a single thing, it is not only fragmented into differing and contending interests at any given time, its leadership consists of entirely different people over time.
In a competitive market, by contrast, the costs of mistakes can quickly become so high that there is no choice but to admit one’s own mistakes and change course before bankruptcy looms on the horizon, because the day of reckoning comes earlier in markets than in government, there is not only more pressure to admit mistakes in the private sector, there is more pressure to avoid making mistakes in the first place.