Failure. If asked to boil down the governments multitude of programs and initiatives to one word, I would choose failure. Keynesian economists argue: Markets fail, use government. Free-market economists argue: Governments fail, use markets. Count me among the latter group. Recently, I examined the way that overzealous bureaucracies affect fiscal incentives. From my study a clear pattern emerges: governments discover a potential market failure and develop a potential government solution, and we see unintended consequences and additional failure caused by the proposed government solution.
The problem comes from governments failure to implement policies that serve the best interests of most people. Instead, government often favors measures that benefit narrow special interests. The point is chronicled in the Independent Institute book that I edited,The Pursuit of Justice: Law and Economics of Legal Institutions.
In the American legal system, judges and lawyers represent the small special-interest groups. Along with litigants, these parties respond to the incentives embedded in the system in predictable, selfinterested ways. The results include high incarceration rates, false convictions, poor access to courts, political interference, and corruption. The Supreme Courts decision in Kelo v. City of New London illustrates similar flaws.
In principle, eminent domain can help in a few cases, such as when a homeowner holds out for a price so high it would put a worthwhile project in red ink. Left to themselves, developers are crafty people with lots at stake and a long history of figuring ways to deal with holdouts. But observe what happens when developers enlist the efforts of aggressive government redevelopment agencies.
The redevelopment agency identifies public works projects blocked by stubborn property owners (a potential market failure). The agency then uses the governments power of eminent domain to take the land by force (a potential government solution). Although it takes the property from the original owner for a fair price, the land may remain undeveloped after it is confiscated (as occurred in Kelo). Opportunities to take land cheaply attract investment projects with poor prospects or projects that are politically motivated, such as affordable housing. Eventually governments start to offer property owners below-market prices because doing so is more expedient (an unintended consequence and additional failure).
Affordable-housing mandates offer a similar example. For society in general, the mandates decrease the supply of new housing and increase housing prices, which exacerbates the affordability problem. The familiar pattern repeats:
- We have a potential market failure: a lack of affordable housing.
- We have a potential government solution: laws that mandate below-market housing, so that people with low to moderate incomes can afford to live in the higher-income areas closer to their jobs.
- And we have unintended consequences and additional failure caused by the intended government solution: the mandates decrease the profitability of housing construction, which decreases the supply of housing and increases housing prices overall.
These same patterns can be found in sector after sector.
The Fashion Industry. Some designers lobby to sway policy in a direction that does not necessarily serve the public interest: they seek intellectual property protection from copyists who produce and distribute the same or similar designs much faster and cheaper. They have a point: intellectual property in fashion might incentivize innovation. However, the majority of the public that favors inexpensive fashion knock-offs is unlikely to lobby as effectively as the designers who favor protection.
The American Newspaper Industry. Many in the press seem to believe the government can solve problems associated with a declining readership. Some, including FTC commissioners, have proposed policies that would amount to political favoritism or infringements of free speech. The good news is that news organizations are starting to implement fee-for-service policies that mitigate the free-rider problem.
Each of these casesthe American court system, eminent domain, the fashion industry, and the newspaper businessdisplays a common theme: government failure results from policies that favor narrow special interests, rather than the greater collective good.
As with many medications we take to cure our ailments, the side effects of the treatment can well be worse than the initial cough or head congestion. Some claim that we live in an over-medicated nation. I will leave that for others to debate. However, the evidence of a populace over-regulated by a meddlesome government is irrefutable.