Saturday, October 8, 2011

Bastiat's Nightmare

Winter is coming, and with it a new labor strikes season commences in France, a lively symbol of what's wrong with Europe. But differently from what many people think, unions and strikes by themselves are not the problem, as so brilliantly explained Bastiat in his historical defense of freedom of association and right to unionize.

We hear about how Europe is in trouble because of not being an "optimal currency area," or because of excessive debt, or because of bailouts.

Rubbish. The US, Brazil and China shouldn't qualify as optimal currency areas and won't disappear in a ground hole because of that. The Soviet Union didn't end because it wasn't an optimal currency area.

Excessive government debt is a big problem, but Japan is not burning in Third World hell because of excessive debt. The speed of debt accumulation in the US after the misadministrations of the dynamic duo Bush & Obama is probably more significant than in most European countries (hard to be sure due to skeletons in the closets here and there), but the US will not go "puff" because of debt.

Bailouts create moral hazard and injustice for sure. But bailouts are as old as the creation of the very first human government, and repeat themselves with amazing regularity throughout history. Humanity progressed everywhere despite bailouts.

So, why is Europe in trouble then? It's because of the deeply entrenched entitlement culture of its citizens. This is the real problem behind European strikes, bailouts and debt. It beats bad governance, it beats corruption, it beats silly monetary theories. It represents the rejection of Bastiat's hope:
I want not so much free trade as the spirit of free trade for my country. Free trade means a little more wealth; the spirit of free trade is a reform of the mind itself, that is to say, the source of all reforms.
Europe is in trouble because it lives Bastiat's nightmare. As simple as that.


Xerographica said...

So what do you think would happen if taxpayers were allowed to directly allocate their individual taxes among the various government organizations? Would Bastiat's nightmare turn into a sweet dream?

Pedro H. Albuquerque said...

I'm in favor of any descentralization of power. But what you propose isn't a new idea, pay-per-service has always been one of the most efficient ways of providing public goods, it's even more efficient than doing it by contingent taxation.
Unfortunately however your proposal doesn't work well for all kinds of public goods and services because of externalities, which may lead to under or over provision.

Xerographica said...

Do you think the National Rifle Association is under or over provided for?

Pedro H. Albuquerque said...

I have no clue, but I'm against it receiving public grants for sure.

Xerographica said...

People who donate to the NRA instinctively understand that the money they donate to the NRA can't be spent on all the other goods they value. This is the concept of opportunity cost that Bastiat loved so much.

Every single consumer considering the opportunity costs of their spending decisions leads to the efficient allocation of private goods.

The problem is that taxpayers are not forced to consider the opportunity costs of their individual taxes. So the only way to actually know the optimal level of funding for a government organization is to allow taxpayers to directly allocate their individual taxes. This would guarantee the best possible use of public funds.

With that in mind it should be pretty straightforward to realize that every single tax allocation of congress can be considered a misallocation of public funds.

Pedro H. Albuquerque said...

I'm not questioning the principle of allocation under choice, which may be the most efficient allocation mechanism when externalities and free riding are not particularly relevant. But unfortunately externalities and free riding will lead to less than optimal allocations for the provision of some important categories of public goods. For example, who will pay for the tracking, capture and punishment of the murderer of a loner? The fact that no one would be willing to allocate funds to the task doesn't mean that the task shouldn't be undertaken, not only because it's an ethical matter of justice, but also because it can be defended based on utilitarian principles.

Xerographica said...

I completely understand and appreciate the free-rider problem...which is why I never said that taxpayers should pay less taxes.

My argument is simply that taxpayers should be allowed to directly allocate their taxes among the various government organizations.

Pedro H. Albuquerque said...

I agree that it's a good decentralization mechanism, as long as not leading to the underfunding of goods and services that are mostly seen as essential and prone to free riding and similar problems.