Public Virtues, Round II

Introduction:

In the first round of the Public Virtues series, I challenged the idea that private corporations are inherently more efficient and productive than the public sector, and the idea that often follows that the private sector should be relied upon for all goods and services and the public sector to remain with the parameters of defense and public safety.  After examining five areas in which the public sector has an advantage over private sector peers – the lack of a profit motive, the longer institutional continuity, the ability to self-fund, the virtues of inherent monopoly, and the government’s rules-making power – our conversation about the proper scope of public economic action can proceed with more

Now in Round II of the Public Virtues series, I will examine six more areas in which public economic can help us think of the public sector as an economic actor in its own right, not merely as a pale copy of the private corporation.

Why It’s Important To Think About the Public Sector:

Policy historians have for a long time studied the importance of vision in the political and policy-making process. The ability to think about what could or should be without being overly restrained by the status quo, to think past the boundaries of the “Overton window” determines, even before the practical calculus of vote-counting begins, the kind and scope of action that legislation can take.

This is most obvious at those rare moments where political actors are called on to design “organic law,” those fundamental pieces of legislation that shape and define the very structure of a political order; constitutions are examples of such organic laws, as are bills of rights. But the same process goes on during the more ordinary day-to-day legislative process. Why, for example, does the United States do so much of its income transfer policy through its tax code, even when direct income transfers would be more equitable and more efficient? Partly, this habit derives from our greater familiarity with enacting social policy through tax cuts, and our historical lack of programs like family allowances.

Hence, by thinking about the public sector in ways that we’re not used to doing, we stretch the muscles of the policy imagination, opening ourselves up to approaches and solutions that never would have occurred to us before.

Going Back to the Well:

While the first round of this series tended to focus on more concrete public sector activities and advantages (the power to coin money or establish regulations, for example), the second round will broaden its focus to consider some of the larger and more abstract categories of economic action, and what they can tell us about the public sector’s role in shaping the economy for good or ill.

• Distributional Fairness:
  

As any economist will tell you, it is in the basic nature of the market that consumers’ demand is only expressed as far as they have money to spend, and at the same time, the standard neoclassical economic model assumes that the individual consumer’s desires are without limits. Which is to say in other words that the basic structure of the market leaves every consumer unsatisfied, which is on the face of it a strange stance to take for the defenders of capitalism. However, economists will argue that in a world of finite resources, no one will be able to get everything they desire, but at least the market distributes what there is in a way that, as they see it, fairly reflects each consumer’s contribution to production.

Where this gets interesting is when we think about those categories of goods where one doesn’t actually want the distribution to be done on the basis of effective demand. If there was a deadly contagious disease which could be warded off only by a particular vaccine, it wouldn’t even do the people who could afford it any good if the vaccine was distributed solely on the basis of ability to pay. In order for herd immunity to kick in, you need virtually the entire population to be vaccinated – and in that kind of situation, you want resources to be divided equally.

And when it comes to distributing resources evenly across a population, the public sector reigns supreme. The market is by its very structure not designed to handle rationing other than by the price mechanism. Thus, one area of inquiry will be to examine the category of goods that by their nature should be spread evenly across a population, which includes but isn’t necessarily limited to public goods like health care or education.

• Public Goods:

As the previous section suggests, public goods are an area where even the most rabid of economist will acknowledge that the state should ne the primary provider (at least until they can figure out a way to price individual use). Now, in the jargon of economics, public goods have to be both non-rivalrous (i.e, one person using the good doesn’t decrease the amount of the good available for other people) and non-excludable (i.e, no one can be stopped from using the good). Within this realm, there’s a huge and under-examined scope  for public economic action.

However, in this section, I want to explore some of the newer areas where public goods might come into play. For example, the provision of public wireless networks, and indeed the use of the radio spectrum for communication, could (with some exceptions in regards to bandwidth use) be seen as a public good – and yet there is an enormous resistance to the idea. On a related track, intellectual property itself is in danger of becoming a public good, in the sense that someone who copies a song doesn’t actually reduce anyone else’s ability to acquire the song. Finally, I want to examine a new category; what might be called “human rights” goods, a minimum amount of which (water, for example) must be distributed to each member of society under the norms of international law.

• Informational Asymmetry

An enormous part of the neoclassical case for laissez faire as perfectly efficient rests on the idea that supply and demand provide the market with perfect information. In other words, every economic actor – every worker, every boss, every producer, and every consumer – knows all relevant information about supply and demand and makes rational decisions accordingly. Perfect information is also the major intellectual justification for neoclassical opposition to state intervention. To take one example, the minimum wage is unnecessary, they argue, because employers could never use their position to depress wages unfairly – workers would know exactly how much the competition was paying and would switch jobs instantly.

And yet if nothing else, recent economic crises (including the dot-com bust, the Enron-era corporate accounting scandals, and the 2007-9 real estate/financial sector collapse) have shown us that  perfect information does not apply to basic sectors of the economy. In the dot-com bust, the major brokers and investment banks of Wall Street were shown to have routinely spread misinformation about the value of new stocks by sponsoring IPOs of companies they knew to be inherently unprofitable, advising customers to buy while short-selling their own accounts. When the Enron scandal blew in 2001, it revealed not just that one particular unscrupulous corporation had been fiddling their books and lying to employees and stockholders but also that many of the largest Fortune 500 companies – including AOL, Bristol-Myers-Squibb, Halliburton, and Merck – had been part of a larger corporate culture of fraud. Our most recent financial collapse showed that trillions of dollars worth of capital was essentially illusory, and that most financial managers didn’t even understand the articles they were dealing with, let alone possess the necessary information to value them correctly.

And yet, the public sector has yet to truly respond to this crippling vulnerability at the heart of our economy. This section will begin the work of re-establishing the “sunshine” role of Federal regulation, especially in the area of rating debt instruments and other areas of corporate reporting.

• Externalities

Externalities are another of those classic cases where economists actually give the state some scope for action. Indeed, if and when the climate change bill actually passes the Senate or the EPA decides to just regulate CO2 directly, the resulting programs will be a massive test of our faith in the ability of the state to regulate externalities, either by pricing them or directly banning them.

However, I think there are areas in which our thinking about externalities could be expanded. For example, it’s widely acknowledged that elements of public health – the provision of vaccination against epidemic diseases – is a case of government action to provide a positive externality or “merit good.” And yet, much of the same arguments that sway economists in the direction of approving of public health also apply to the provision of more ordinary forms of health care: many non-epidemic diseases are contagious, such that treating or curing them benefits not only the patient, but anyone they could come in contact with. Likewise, injury also has an external effect on others – they can reduce an individual’s productivity (and thus harm their employer who gets less production, or their co-workers who have to work harder to make up the difference, and ultimately the collective, who now can enjoy less goods and less tax revenue than otherwise would be the case).

In this section therefore, I’ll examine how we can understand social risks generally as externalities that require public protection.

• Incomplete Markets


More on this section later.

• Macro-Instability

The government’s responsibility or capacity to prevent macro-economic incapacity is at one and the same time the most controversial of areas of public intervention into the economy and the most consequential. As John Quiggin over at Crooked Timber is exploring, for most of the last generation, the dominant voice in economic debates has held that markets are inherently self-correcting, and that only the most minor of central bank corrections is the most public intervention that would be necessary in a crisis.

Well, we now know that the need for government intervention in major economic collapses is greater than we’d ever imagined. Yet at the same time, our mental toolbox for dealing with these crises is disturbingly light. Largely, our approach has been the same monetarist policy that John Maynard Keynes described as inadequate nearly 75 years ago. At our most ambitious, we have followed the same kind of “fiscal Keynesianism” that would have been noncontroversial to the point of boredom in the 1960s.

In this section, I’ll explore ways in which creative thinking about macro-instability can expand our range of options.

Conclusion:

One of the verbal tics that has always annoyed me about Barack Obama – although to be fair, it’s frequently used by other Democratic politicians and activists – is the phrase “we know that government can’t solve every problem.” It’s not that I think he’s necessarily wrong, but the pre-emptive ideological surrender bothers me. Why concede government incapacity off the bat? The very essence of progressive governance in America has been an exuberant experimentalism about the possibilities of public action; in 1932, FDR famously argued that “the country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.”

It is impossible to combine that spirit of freewheeling innovation with an over-eager embrace of the limits of possibility, and I have always been skeptical that trying makes for good politics. It is hard to inspire confidence with the pitch that “government is bad at doing things! Let’s try government for this problem!”

So why not begin with an enthusiastic embrace of the idea that democracies have it in “our power to begin the world over again?”