Macro 108
If you’ve been following the news the past few days, there has been momentum toward questioning how long this lockdown is going to last, and asking for some sort of plan to move forward. We have moved from indignant stories covering individuals breaking social distancing guidelines to stories conveying shock and disbelief when governments try to enforce those same guidelines. It’s a tough time to be a leader, as I wrote about a few weeks ago. Leaders often have to choose between two bad options, and with a media that relies on views and clicks, breaking from the pack makes you a target. The media has basically stopped pretending they are rooting for good outcomes, at this point—they feed on chaos and fear.
[side note: I don’t resent the media for following the rules. There are only two rules you need to know to understand our current media: 1) human nature is more interested in bad stories (exciting!) than good (boring.), and 2) media is funded primarily by advertisers who pay based on how many people see their ads. The rest follows naturally… don’t hate the player, hate the game]
The Governor of Michigan, Gretchen Whitmer, has gotten a lot of attention the past few days. She banned things including traveling to in-state vacation homes and operating a boat, and she shut down stores selling garden and home improvement products.
Song recommendation for the Michigan protestors:
The lines we cross in search of change
But all they see is treason
…
(Break out) I won’t be left here
Behind closed doors
Meanwhile, the Governor of Florida, Ron DeSantis, has gotten attention for including “professional wrestling” on his list of essential activities during the lockdown.
President Trump made waves by saying he had “total authority” over how and when lockdowns are lifted, which seems to contradict the Constitution. He walked it back today.
Who is right, and who is wrong? Who is reaching too far, and who isn’t doing enough?
I don’t know, but I think it’s helpful to start by thinking about the logical extremes. What are the absolute smallest and largest roles of government? I think the largest role is fairly obviously bad—a world where everything is centrally controlled by government “experts” and regular citizens have no freedom to make choices for themselves.
So, what is the smallest role government can have—the starting point? I mean, there are plenty of people who would argue against government entirely and argue for anarchy, seriously. Anarchy is the extreme end of the “free market” spectrum. That seems fairly obviously bad, too. What is reasonable?
Speaking of anarchy, here’s another song recommendation:
Single file like soldiers on a mission
If there’s no war outside our heads
Why are we losing?
Adam Smith popularized the idea of The Invisible Hand. Quoting from his magnum opus, The Wealth of Nations, published in 1776: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.” Basically, society works best when we let individuals do what they think is best for them and let everything else fall into place. You don’t really think about the market forces that bring you your dinner, and in a commercial society, the process is more complicated than any single person is capable of understanding anyway, in most cases.
Shoutout to LuAnn Edwards, who recently sent me this article detailing why toilet paper shortages still exist, weeks after the initial shift in demand. Back in 1964, Leonard Read wrote an article from the first-person perspective of a No. 2 pencil, to the same effect. The market is like a hive mind, and government intervention only gets in the way.
If the Invisible Hand solved everything, there would be no need for government or central planning. So, it must have weaknesses. Holes. Where?
Think about areas where the cost/benefit analysis of individuals may not line up with the collective, i.e. where individuals acting according to their expected costs and benefits to themselves may cause society to miss out on significant benefits, or worse.
There are whole semesters of upper level college courses on that question alone—scratch that—entire political and economic theories. Where does free market capitalism fall short?
[Song recommendation for the “unskilled” essential laborers / proletariat:
We are the angry and the desperate
The hungry and the cold
We are the ones who kept quiet
And always did what we were told]
Pure public goods. Let’s start there.
A public good is defined as something that is non-rivalrous and non-excludable. The classic example is a lighthouse, but you have to imagine the original purpose of lighthouses. So, you have a treacherous coast next to a trade route. At night and during storms, it is immensely helpful to have a lighthouse on the coast to give ships their bearing and avoid running aground or wrecking on the rocks. That light can be the difference between life and death, riches and rags. High stakes.
Everyone could agree lighthouses are good, because they not only save lives, but also help shipping and trade, which creates wealth in the community, But no one wants to pay for the lighthouse! Despite the potential benefit to ships specifically and the community generally, no individual person or company had incentive to finance the venture. There are undeniable costs and no reliable source of revenue. Think about it. If a storm comes up in the night, you can’t exactly track down every ship that sailed by and demand payment. Even if you did, they could claim your light didn’t help them at all, and even if they admit they benefitted, there is no way to put a dollar amount on how helpful it was. Lastly, if you represent a certain company, there is no way to shine your light for your company ships and not competitors.
In other words, a lighthouse is both non-rivalrous (one ship benefitting from the light doesn’t prevent another ship from benefitting as well), and non-excludable (there is no way to choose which ships see the light).
This blog is a pure public good, too 😀
So, knowledge qualifies! Maybe that’s why libraries are public, not private?
[Backtracking a little, just to make sure we have the basics. Things that are “publicly-funded” means they are paid for out of tax revenue. Take public schools. In Texas, they are funded primarily (64%) through local property taxes (the state government provides the rest via other tax revenue), with the lowest rate being $1 per $1,000. If the average single family home in Texas is worth $263,000, then that average family pays $2,630 in taxes which go directly to the local public school district. The rate doesn’t change based on whether you have kids or how many kids you have or if your kids even attend the public school. Same thing with public libraries, parks, etc. These things aren’t “free”, the cost is just hidden, and you pay taxes for them whether you use them or not, so it really matters what we decide should be publicly funded! For example, this system means families who send their children to private school are essentially paying double: their taxes support the public school and their tuition supports the private school]
What else?
The big one is national defense. Depending on where you stand, the short list typically also includes things like national highway systems…national parks… you see the theme.
If we focus on national defense, you’ll see why it is the starting point. If the government passes around an offering basket to fund the national defense, it would be easy for me to say “I have no international enemies, I’ll pass”. But, it turns out, my neighbor does. And it’s pretty difficult to protect him without also protecting me, so the government has to protect us both. Even in a country where no individual person has international enemies, if your country is defenseless, it will get taken advantage of. Opting out is a losing strategy.
You can’t really argue for privatization of national defense, either, and the logic against it is simple: if you have a private company big enough and with enough firepower to defend a nation, whoever runs the company could become an absolute dictator at any time.
So, what is the necessary solution to funding things like lighthouses and national defense? We could try politely asking for donations, but that would only get you so far. Ad campaigns? A little further, but ultimately, persuasion won’t suffice. The solution? Coercion. Every ship that sails past the lighthouse pays a tax (or else), every citizen helps finance the national defense (or else), and we use those funds to pay for pure public goods.
Government is the only entity that has the legal power to coerce, and it’s a power we voluntarily give it. Part of the social contract. That being said, it’s our responsibility to carefully monitor when and how this power is used, and hold public officials responsible: “People should not be afraid of their governments, governments should be afraid of their people.” [I just got distracted at length by watching V for Vendetta clips, and even though it’s not “movie Monday” I’m going to officially recommend it as a great example of a dystopian future we want to avoid..]
If we are all on the same page so far, then the only debate is what else qualifies as public goods, right? Bathhouses? Fireworks shows? This is typically where people start fighting over education and healthcare, and the current debate is whether the government should coerce individuals to quarantine for the public good, but I’m going to skirt those questions entirely, and give you a sportsy question to ponder (I highly recommend saying the words “non-rivalrous” and “non-excludable” as many times as possible when you discuss this over dinner).
Did you know that billionaire professional sports team owners often (successfully!) make the case that their giant stadium is a public good and should be financed by taxpayers money? In short, they claim the existence of the stadium stimulates the economy, legitimizes the city, etc. This is part of the game behind the game, and a primary reason why sports franchises change cities. The owners basically pull the “if you don’t pay for my stadium I’m going to take my ball and leave” stunt, and it’s been effective—over the last 20 years, American taxpayers have funded $7,000,000,000 (7B) of stadium construction and renovation, 46% of the total cost of those projects. That being said, times may be changing, as the new L.A. Rams stadium is a $5,000,000,000 (5B) project that was entirely privately financed. I bet they are hoping people still want to go to live sporting events with massive crowds when this is all over, huh?
Public goods lead to the free rider problem, which is one of my favorite subjects, but I’m going to save it for a later post.
In the meantime, I will leave you with a fourth song by Rise Against, whose music is generally fitting when you’ve been in quarantined in your house for a month…
