Monday, January 12, 2009

Sachs on "The Case for Bigger Government"

Over in TIME, Jeff Sachs argues that the time has come for the US to go Euro and fully embrace high taxes and large governments. In his parting statement, he argues that "Obama's long-term success will depend on his ability to lead Americans to a new, even revolutionary consensus that the U.S. government can offer value for money." Most people, even those on the libertarian fringe of the libertarian movement, are probably willing to accept larger government and increased taxes if the government can indeed "offer value for money." The fundamental nature of government, however, is that this goal will always be elusory.

The nature of private production is quite simple. Entrepreneurs put their own assets at risk in an attempt to create a product that people want. If they are correct, and the product they create is a hit, then they will reap profits. Why? Because the product they have created has offered value for money. If they are incorrect, and their product flops, they will lose money. In this case, they have not offered value for money. Absent $700B bailouts, there is no opportunity to pass the buck and make someone else bear the losses. This continual process of earning profits and realizing losses send feedback to the entrepreneur that informs their production decisions. In the private sector, value for money is the norm, because the entrepreneur only gets paid if consumers like their product, and entrepreneurs making products consumers do not like are weeded out of the market.

In the public sector, these mechanisms simply cannot work. Politicians, and especially the bureaucrats who implement the selected policies, have very few assets staked in any project. At best they have their reputations to worry about, and opportunities to pass the buck (i.e. blame the othe party) for bad outcomes abound. At the same time, private citizens do not have the option not to purchase the product being offered if they do not like it. They have the option not to use it, but are compelled under threat of criminal prosecution to pay for it nonetheless. The combination of these elements means that the feedback mechanisms present in the private sector that tend to lead to value for money are significantly weaker, if not conspicuously absent, in the public sector.

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