The Big Public Failures

I’ve been adjacent to two literatures for much of my academic career: public choice and govt efficiency. The public choice literature tries to use econ theory to explain govt choice of policies, while the govt efficiency literature tries to evaluate govt policies by standard econ efficiency criteria.

To my eye, the govt efficiency lit finds huge inefficiencies, so bad as to be usually worse than the govt doing nothing. And while the public choice literature has found several ways in which we should expect govt policy to be inefficient, it seems to me overall pretty inadequate to explain our actual huge levels of govt inefficiency.

In his book The Myth of the Rational Voter, my colleague Bryan Caplan tried to explain govt inefficiency in terms of voters having very weak incentives, and also being afflicted by four key biases: anti-market, anti-foreign, make-work, and pessimism. While this seems to me an improvement on the prior public choice lit, it still seems to me inadequate to explain typical govt inefficiency levels, and also seems itself inadequately explained by deeper considerations.

In a new book, a draft of which I’ve seen, Caplan gives a best-yet overview of govt inefficiency, wherein he finds govt to be quite inefficient. He proposes to explain that via this “social desirability bias” (my paraphrase):

There’s a low correlation between policies being and sounding good. Govt tends to do stuff that sounds good but is bad, while markets tend to do stuff that sounds bad but is good.

Ok, yes, this second sentence makes sense given the first, and seems better than his prior four biases, but we should be quite puzzled over that first sentence. Why exactly are voters typically so very wrong about which policies are good? In fact, the correlation between what is good and what sounds good to voters may actually be negative. And if scholars are able to see which policies are inefficient, why can’t they communicate what they know to voters?

To help us search for explanations, in this post I will review twenty of our big public policy errors, focusing on the US. I’m aware that many disagree on how inefficient are these, and there are big political correlations on such opinions. Even so, to think about this I gotta use my best estimates here. Also, since the core problem seems to be voter opinions on policy, not govt per se, I’ve added in a few problems due to bad public opinions that aren’t mainly mediated by government.

TOO MUCH:

Medicine - Medicine is on average quite ineffective at improving health. And yet govt greatly subsides & regulates it, and sometimes directly provides it. Incentive contracts could make med spending much more efficient. US spends ~18% of GDP on medicine, ~58% of that due to govt.

Education - School helps students, but mostly to signal smarts, conscientiousness and conformity. Such signaling is mostly a waste, yet govt greatly subsides & regulates it, and often directly provides it. Over half of govt employees in US work in education.

Random Welfare - While poverty insurance makes some sense, relative to sensible versions govt versions induce big moral hazards and inefficiently give arbitrary and poorly-targeted benefits. E.g. 73% of US means-tested benefits are medicine.

Licensed Workers - About 22% of US workers have a govt issued professional license, and 90% of those need it to do their job. Certifications are sufficient to inform employers and customers regarding worker quality.

Military - US with 26% of world GDP does ~37% of all world military spending, even though its neighbors are especially unthreatening. If world wants US as world police, they should pay us for that. US % of GDP on war is now 3.3%, averaged 5.3% over last 70yrs, while nations with few credible threats spend ~1%.

Govt Land - Govt can’t use land nearly as flexibly and productively as private actors can. Govt owns ~36% of all U.S. land by area.

Prison - Nice prison is the most expensive, and thus least efficient, known form of punishment, worse than mean prison, torture, exile, death, or fines. Yet it is our most common. And we don’t let convicts pick cheaper options, nor require legal liability insurance to enable fines, the most efficient form. US now spends ~$200B/yr on jails.

Govt Police - Helps to have workers to patrol and investigate crime, but bounty hunters (and blackmailers) are more efficient than govt employees. Govt spends ~$200B/yr on folks to patrol public spaces & investigate crimes, ~98% are govt employees. There’s a similar total number of private security guards.

TOO LITTLE:

Nuclear Power - By prior standards, nuclear is literally a superpower, and much safer than other sources. Yet we’ve strongly regulated it into near uselessness.

Immigrants - Immigrants themselves gain greatly, and they grow the economy when chosen by quality or price. But we heavily restrict immigration, and when allowed use criteria weakly related to quality.

Construction - Development is good, especially when dense. Yet we strongly regulate construction and land use, making them slow and expensive, and inducing less density.

Congestion Fees - Most roads let anyone drive on them for free. But optimal road fees would be higher to cut traffic congestion. And such fees could pay for more roads. Optimal congestion road fees would raise ~$200B/yr in US.

Hostile Takeovers - Businesses can be much more efficient when inefficient ones can easily be bought and remade. Yet govt rules make this way too hard.\

Career Agents - Few get quality advice or promotion re their jobs, careers, and training. Turning tax payments into assets can make such a quality career agent. Incomes could plausibly be ~10% higher with better advice and promotion.

Parent Tax Shares - Market solution to fertility is for parents to endow kids w/ debt or equity obligations. But most folks hate that. Yet govts already endow kids with national debt share. So just give parents transferable right to % of kid future tax revenue.

Growth Foundations - If we let foundations just invest all their assets tax-free, they’d grow to hold most assets, greatly increase total capital, and drive average rates of return down to econ growth rates, making markets care more about the future.

For-Profit Govts - As for-profit form dominates most small practical orgs, tis an obvious candidate for govt orgs, yet is almost never tried there. Would probably work better for a wide range of types of govt org.

Financial Assets - Prediction and decision markets might have remade the world long ago if financial regulations hadn’t suppressed them so hard for so long.

AI Insurance - Plausibly sometime in next century or so, AI will make most lose their jobs w/in a few years. Planning to tax local economy to support humans will fail if AI economy isn’t local there. Robots-took-most-jobs insurance tied to global assets could work. But no one is setting this up.

Brain Preservations - Human brains can be preserved for ~$3K ea., stored in permafrost, to get >10% chance to be revived within millennia as brain emulations. Crazy huge benefit to cost ratio, yet almost never done.