- The Roots of Governments' Budget Crises / Artikel mises.org - - Elli -, 24.11.2003, 23:38
The Roots of Governments' Budget Crises / Artikel mises.org
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<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=1376</font>
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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>The Roots of Governments' Budget Crises</strong></font>
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<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana" size="2"><font size="4">by
Tibor R. Machan</font>
</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">[Posted
November 24, 2003]</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana"><img alt src="http://www.mises.org/images3/cashregister.gif" align="right" border="0" width="229" height="210">Budget
crises—at the federal, state, county and municipal levels of government—are
routine these days. Although there may be one or two years of surpluses, in
most regions they are followed by many years of deficits. If governments were
judged by the standards of private firms, most of them would be bankrupt.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">However,
because they can use the tax collector to obtain funds, or in the case of the
federal governments, to print money, governments are nearly immune to the
serious adverse consequences of financial mismanagement.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">Why do
governments get into bad situations so often? The real problem
is not usually out and out corruption. The problem is systemic.
Essentially, governments lack the needed basis for assessing the relationship
between their resources and their expenses. They are unavoidably ill informed
because the means by which that relationship is best understood is plainly
unavailable for governments.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<b style="mso-bidi-font-weight: normal"><font face="Verdana">The calculation
problem</font>[/b]
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana">Ludwig von Mises, the leading economist of the
"Austrian School," established as long ago as </font><font face="Verdana">1920</font><font face="Verdana">
that for there to be meaningful and useful </font><font face="Verdana">economic
calculation</font><font face="Verdana">, there must be a free marketplace
where people—for whom governments work—can allocate their resources for
whatever they deem worthwhile. When they do this, their millions of purchasing
decisions communicate to producers in the marketplace what is in demand, what
customers will buy, and the relative priorities of various lines of production.
Prices provide essential data for assessing the successes and failures of past
production decisions, making wise choices during current production schedules,
and speculating with sound judgment about future needs.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">The
system that best communicates this information between buyers and sellers is
capitalism. What makes that possible is that people in a capitalist system
have a reasonably clear idea of what belongs to them, through the institution
of private property rights. So, they know what they can spend and what would
break their budgets. Even buying on credit is adjusted to their capacity to
carry debts. So, they have a very clear signal warning them about overspending.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">When
an economic system has this advantage, it is less likely to experience major
inefficiencies and vacillations because, on average, people will balance their
economic purchases with their available resources. Put that in terms of
several hundred million transactions in the marketplace, and you get a very
complicated yet smoothly functioning system.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">Mises,
and his most famous student, Nobel Laureate F.A. Hayek, presented these ideas
in the great debate about whether socialist economies can function. As one of
the most famous American socialist economists put it:"Ludwig von Mises.
.. had written of the 'impossibility' of socialism, arguing that no Central
Planning Board could ever gather the enormous amount of information needed to
create a workable economic system.... It turns out, of course, that Mises
was right...." </font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">That
admission by Heilbroner, made in the pages of <i style="mso-bidi-font-style: normal">The
New Yorker[/i], came, however, only after the collapse of Soviet style
socialism. And the fact that the point applies also to welfare states—the
system of government where the state assumes many production and distribution
functions that under capitalism would remain in the private sector—was not
noticed even by those who saw its relevance to socialist systems. Yet Mises
himself, as well as many of his students, realized that any attempt at top
down calculation of economic relations would be futile.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">The
bottom line, then, is that governments have no ability to gauge what they need
and what they must deliver, certainly not when it comes to such essentially
private sector goods and services as insurance, housing, medical care,
transportation, schooling and the like. Whatever reasons might be given for
why governments ought to provide such goods and services, there is one that
will never be convincing, namely, that they will deal with the economic issues
successfully. They just cannot.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">The
reason is relatively simple: When you deal with funds that aren't yours but
rather are collected at gunpoint from others, you never really know what there
is for you to spend, on what you should spend it, or what the best means is to
do so. This is, essentially, both an economic and moral problem. Those who do
not own the resources, and have no access to the signals of profit and loss,
have no clear way to know what they ought to do with the resources even
if they are in their legal possession. For example, a reporter for
the <i style="mso-bidi-font-style: normal">New York Times[/i] recently asked a
manager for a nationalized Iraqi shoe plant whether the plant was profitable.
His answer was that he had no idea. Precisely. Government is in that position
all the time.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">That
isn't all. Another group of economists, lead by Nobel Laureate Jim Buchanan
who teaches at George Mason University in Virginia, and his colleague Gordon
Tullock, produced a theory know by the name"public choice." The
purpose of this theory is to gain a clear understanding of the economic
elements of government bureaucracies. Buchanan and Tullock, in their book <i style="mso-bidi-font-style: normal">The
Calculus of Consent[/i] (University of Michigan Press, 1962), argued that
bureaucrats are not unlike agents in a capitalist marketplace, in that they
seek to advance their economic objectives.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana">However, because they do not have the feedback mechanism
of the market, nor the budget constraints of market agents, their"profit
maximization" procedures are far more unruly than are those of private
market agents. Accordingly, government bureaucracies are nearly always
mismanaged.<span style="mso-spacerun: yes"> </span> People always spend
more than they have, lacking the natural constraints that most of us face as
we go shopping.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana">Perhaps both of these theories will leave many wondering
just what impact they have in real life. A couple of examples from my own
experience in government service will help answer them.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana">When I was in the U.S. Air Force, I worked as a civil
engineering draftsman. After Christmas each year I suddenly had to work
overtime.<span style="mso-spacerun: yes"> </span> There was not an increase
in the amount of work and most people just sat around during the day but then
went to work from 6-9 p.m., when the overtime would have to be put in. I
just didn't understand this—soldiers didn't receive any money from this
extra work, so perhaps my curiosity was understandable.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">So I
asked one of the civilian engineers—some G-14 or such—what's up and got
the low-down rather candidly. They needed the overtime income to pay for their
Christmas purchases.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<font face="Verdana">There was another thing I noticed. Each time a new budget
had to be submitted, suddenly we had to do several rush jobs. Let's build a
little flower garden by the main gate or some such thing—never anything very
important. Upon inquiring I was told that we needed to spend all the
money in our budget so that we could ask for more money for the next fiscal
period.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">When
the issue of state fiscal mismanagement comes up, many look for bits and
pieces of evidence of wrongdoing and even corruption. But that is not what
makes sense of this recurrent phenomenon. It is the fact that governments as a
rule are very bad at economic calculation. They are ill composed for that
purpose. All the incentives are wrong and there are no constraints that guide
people to be rational about how to spend their resources.</font>
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt">
<p class="MsoBodyText" style="MARGIN: 0in 0in 0pt"><font face="Verdana">This
is why so many countries around the globe are experimenting with privatization—which
is the shifting of these kinds of responsibilities from the public sector,
which is blind to public needs, to the private sector, which actually
possesses the means to be attentive to public needs.</font>
<p class="MsoBodyText"><font face="Verdana"><span class="883040214-24112003">_________________________</span></font>
<font face="Verdana">Tibor Machan, adjunct scholar of the Mises Institute,
teaches at the Argyros School of Business and Economics at Chapman University.
You may send him </font><font face="Verdana">MAIL</font><font face="Verdana"> and
view his Mises.org </font><font face="Verdana">Daily
Articles Archive</font><font face="Verdana">.
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