Your Money- Your Choice; E.Pasour, Jr.

T he segment ' 'Your Money-Your Choice" is a recurring feature on ABC's nightly world news program hosted by Peter Jennings. It focuses on "pork barrel" spending such as the honey price-support program or military purchases that even the Pentagon doesn't want. This feature of the news has a laudable objective-to focus public attention on wasteful government spending. Unfortu nately, "Your Money-Your Choice" is marred by two flaws in contributing to the debate over public policy issues. First, it fails to acknowledge problems inherent in the political process or why the public's desire for political reform is likely to be thwarted. Second, the approach taken by ABC News, which considers only alterna tive government spending, is implicitly stat ist. Is It Really Our Choice? Ideas have consequences in economic policy, and public awareness of an existing problem is a necessary first step in bringing about improvements. However, mere pub lic awareness and desire for political action often are not translated into effective polit ical reform. This is no less the case for piece~ meal than for comprehensive planning. InE. C. Pasour, Jr., is Professor of Agricultural and Resource Economics at North Carolina State University.

deed, the idea that smart planners in Wash ington can coercively structure social ar rangements to optimize our well-being was characterized by Nobel Laureate economist F.A. Hayek as the "fatal conceit." Such attempts are doomed to failure because of information and incentive problems that cannot be overcome in the political process. Information Problems Information was the focus of the "eco nomic calculation debate" that occurred more than fifty years ago. This debate pitted Hayek and fellow Austrian economist Lud wig von Mises against Oskar Lange and other economic theorists who advocated socialism and central planning. Mises and Hayek demonstrated that the structure of production cannot adapt efficiently to con sumer demand in the absence of competitive markets and the information and incentives conveyed through market prices. They em phasized that there is no effective substitute for market prices in discovering, coordinat ing, and transmitting information through out the production and marketing system.

Much of the relevant information is special ized to time and place and cannot be ob tained by government officials. This finding, long denied by mainstream economists, is now widely conceded following the breakup of Communism in Eastern Europe and the former Soviet Union. 383 384 THE FREEMAN • OCTOBER 1993 Incentive Problems Even if appointed and elected political decision-makers were omniscient, how ever, they would be unlikely to act to promote the public weal because they face perverse incentives. Government officials do not have the incentives to economize that profit-seeking private entrepreneurs do. In stead, they tend to act to protect their jobs and to expand their power, which is heavily influenced by budget size. As a result, public budgets tend to be treated as "common pool" resources in which there is a disin centive to economize. A "Golden Rule" for the bureaucrat is to have no money left in the budget at the end of the fiscal year!

The incentive problem confronting elected government officials is even more perverse. Government programs may not represent the broad interests of the elector ate because of a short-run bias in the polit ical process. The long run for elected offi cials is the next election. Consequently, they prefer government programs in which the benefits occur in the short run and the costs come due in the long run-after the next election. Thus, it is common to find incumbent politicians voting to increase farm subsidies, Social Security payments, and other government-financed "goodies" before an upcoming election. There is also slack in the political process because those who benefit from government programs have incentives to be better rep resented in Washington. Most government programs are such that a small group ben efits at the expense of the public at large. Consider the sugar price-support program, which raises prices of sugar (and sugar substitutes) to consumers by limiting sugar imports. The program confers huge benefits, averaging more than $200,000per year, on each of the 10,000or so producers of sugar and sugar substitutes. However, a doubling of retail sugar prices amounts to no more than $100 per year to the typical family.

Thus, when Congress debates sugar policy, it isn't surprising that sugar interests carry the day. Sugar policy fundamentally is no different from that affecting other farm products, textiles, steel, and automobiles-or public education. Whileeach special interest might recognize that these programs that "rob Peter to pay Paul" are unwise, there is a "you first" problem. Each group has an incentive to desist in such efforts only if other groups also agree to do so. In reality, each group benefiting by a special dispen sation from the state may favor a reduction in such efforts by others while fighting to retain its own special advantage. What Can Be Done? The preceding analysis suggests that the problem is rooted in the incentives people confront within the current political system. Hayek and fellow Nobel Laureate James Buchanan have shown that the public bid ding may fail in an unlimited or majoritarian democracy in which the ability of groups to benefit through state power is not con strained by constitutional rules.

In short, the public's desire for political reform may be thwarted because of the information and incentive problems de scribed above that are endemic in the polit ical process. There is no way to avoid these problems, but the magnitude of the waste resulting from efforts by individuals and groups to use the state to increase wealth can be reduced. The challenge is to develop an institutional framework that will channel the self-serving behavior of political partic ipants toward the common good in a manner similar to that described by Adam Smith with respect to the economic arena. The problem of "faction," emphasized by James Madison, is rooted in the incen tives that ordinary people confront within the prevailing rules of an unconstrained majoritarian democracy. The best hope lies in the Founding Fathers' attempt to develop institutions that, to the extent pos sible, bring personal self-interest into har mony with political liberty and economic prosperity.

Moreover, the importance of the ideolog ical climate should be recognized. Indeed, it is unlikely that the framework necessary to restrain leviathan can be devised and insti tuted in the absence of a change in attitude of voters concerning the proper role of government in a free society. In short, the expose by ABC News about a particular government boondoggle implies that we the listeners have a choice to make in terms of the activity in question. How ever, no emphasis is given to the problems of the political process that must be over come to effect change. That is, the program focuses on an undesirable result of the political process, with no attention given to the fact that the process itself may be a major part of the problem. In public policy analysis, ignoring problems that are inher ent in the political process is tantamount to a pro-government bias. "It's Your Money" ABC's uncritical view of the political process also is reflected in the program's suggested alternatives to the government activity under scrutiny. "Your Money Your Choice" properly emphasizes the amount of taxpayer money spent on the activity in question and gives examples of various sacrificed alternatives. However, there is yet another statist bias in the ap proach taken by ABC News.

The sacrificed alternatives always are shown in terms of numbers of other govern ment activities-number of public schools, number of schoolteachers, number of gov ernment loans to college students, number of tanks for the Pentagon, and so on. It is noteworthy that the sacrificed activities are always assumed to be other government goods and services. There is no awareness that citizens may prefer to reduce govern ment spending by the indicated amount rather than merely increase spending on some other government project. The implication of "Your Money-Your Choice" is that there is no problem con cerning the overall level of government spending-the only problem is with how the public money is spent. That is, this ABC YOUR MONEY-YOUR CHOICE 385 News approach implicitly defends the present level of government. What is the proper approach? In consid ering the opportunity cost of a current gov ernment program, private sector alternatives also must be taken into account. Consider, for example, the $10 billion annual expenditure by the federal government on farm price supports. A valid opportunity-cost approach in evaluatingfarm price supports would con sider not just other public programs but the number of private autos, number of private houses, number of college tuitions, and so on, that are sacrificed. An analysis of any government program which omits consider ation of the forgone private sector alterna tives has implicitly assumed without justi fication that public sector goods and services, at the margin, are more valuable.

Conclusions Many people today contend that govern ment institutions are unresponsive. Indeed, public opinion polls show that people feel that they are overtaxed and that they do not agree with the spending priorities of gov ernment, especially at the federal level. The "Your Money-Your Choice" ABC News approach fails on two counts to adequately enlighten the public about government spending. On the one hand, no attention is given to the problems that are inherent in the polit ical process-or to the implications for restraining the power of special interests. There is a total lack of constitutional per spective in considering economic issues with little or no consideration given as to why the system is unresponsive. Second, it focuses only on how the pat tern of government spending should be re allocated, implicitly assuming that the size of the public sector is beyond the pale. In failing to consider the sacrificed private opportunities when evaluating government boondoggles, ABC ignores the most impor tant public policyproblem in a free society the appropriate role of government. D THEFREEMAN IDEASON L1BERlY THE TROUBLE WITH KEYNES by Roger W. Garrison T he economics of John Maynard Keynes as taught to university sophomores for the last several decades is now nearly de funct in theory but not in practice. Keynes' 1936 book The General Theory of Employ ment, Interest, and Money portrayed the market as fundamentally unstable and touted government as the stabilizer. The stability that allegedly lay beyond the mar ket's reach was to be supplied by the federal government's macroeconomic policymak ers-the President (with guidance from his Council of Economic Advisers), the Con gress, and the Federal Reserve.