Government Budget Crises
by Tibor R. Machan

Geopolitics, History, and International Relations

Volume 8(1), 2016, pp. 169–176, ISSN 1948-9145

Tibor R. Machan & James Chesher*

            In a recent New York Times opinion piece (August 21, 2015), Nobel Laureate economist Paul Krugman repeated his astonishing claim that “Debt is Good”, referring to national debt, offering for our consideration that, since interest rates are so low, the U.S. government could borrow more money and take care of our collapsing infrastructure, giving the economy a boost to boot! (Never mind that the national debt is now over 18 trillion dollars and growing like an aggressive tumor).          

         Despite Krugman’s claim that the debt is “owed to ourselves” and thus not to be taken seriously, budget crises – at the international, national/federal, state, county and municipal levels of government – are routine and disconcerting.  The recent history of Greece is a good – and very troublesome – case in point, not to mention Puerto Rico, closer to home. Notwithstanding occasional and sporadic surpluses of one or two years, in most regions these respites are followed by many years of debt financing. If governments were held to the standards of private firms, a great many of them would have to declare bankruptcy.  However, since governments can tax their citizens to raise funds – or, in the case of the federal governments of most countries, print money – governments can delay those consequences for a future generation of citizens and a different administration to confront the inevitable.

         Why do governments get into such straps so often? Only rarely is it due to corruption: rather, the problem is systemic. 

Essentially, governments lack the requisite basis (information source) for assessing the relationship between their resources and their expenses.  In other words, since the means by which that relationship is most effectively understood is unavailable to governments, they are unavoidably ill informed, seriously undermining financial planning. Let us see how this is so .

The Calculation Problem

         Ludwig von Mises, the leading economist of the “Austrian School,” established as far back as 1922 (in his book Socialism) that meaningful and useful economic and financial calculation requires a free market place where people – for whom governments work – can allocate their resources by selling and/or buying as they deem fit. These millions of purchasing instances communicate to producers in the market place what is in demand, what customers are likely to buy, as well as what they will leave sitting on shelves or dispose of otherwise.  This information is vital for producers in estimating what they need to do.  Inventories and production quotas, among other things, will be adjusted, very closely, to what people who shop are likely to purchase. 

         The system that best communicates this information between millions of buyers and sellers is free market capitalism.  Further, people in such a 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. In short, a free market provides a very clear warning signal about overspending. 

         An economic system with this advantage is less likely to experience major vacillations, including financial crises, because, on average, people will balance their economic purchases with their available resources.  Put that in terms of several hundred million transactions in the market place, and a very complex yet largely smoothly functioning system results.

         Von 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 (Marxist) socialist economists put it recently, “…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....”

         That admission by Robert Heilbroner came, however, only after the collapse of Soviet style socialism.  But the point applies, as well, to welfare states , that is, to states wherein the government assumes many production and distribution functions that under free market capitalism would remain in the private sector. This went largely unnoticed even by those who saw its relevance to socialist systems.  Yet von Mises himself, as many of his students like F. A. Hayek, warned that any attempt at top-down calculation of economic relations is futile. His path-breaking book, The Road to Serfdom (1949), made this very clear. Governments gauge what they need and what they must deliver, especially when it comes to such essentially private goods and services as insurance, housing, medical care, transportation, schooling and the like. In a free market, these needs are “prioritized” variously by the decisions of countless individuals. Those administering the governments have no way of knowing in advance of market decisions, how to prioritize among these competing needs. Whatever reasons might be given for why governments ought to provide such goods and services, one reason will never be convincing, namely, that they will deal with the economic issues effectively. They just cannot.

         The reason is relatively simple: In addition to governments lacking the requisite information for effective financial planning, when governments deal with funds that are taken coercively from citizens, government officials never really know how much they should spend and on what they should spend it since the demand for funding so called public projects is unrestrained and distorted. Lobbyists and their political representatives in Congress are constantly adding to what “needs” to be funded.  This is, essentially, both an economic and a moral problem – involving what economists have come to call moral hazards.  Those who do not know the extent and limits of available resources have no clear way to know how much they ought to spend and on what projects. Usually, in more or less democratic systems, there is a race by special interests and administrators of public projects to obtain funding and budgetary constraints tend to be ignored in favor of debt financing and printing of money, which has become rampant.

“Public Choice” Obstacles

         Another group of economists, led by the late Nobel Laureate Jim Buchanan and his co-author Gordon Tullock, produced public choice theory. This theory seeks to gain a clear understanding of the economic elements of government bureaucracies.  Buchanan and Tullock argued[6] that bureaucrats , much like agents in a capitalist market place, seek to advance their economic interests.  However, since they lack the feedback mechanism of the market, or the budget constraints of market agents, their “profit maximization” procedures are far more undisciplined and less guided by market realities than are those of private market agents. 

         Accordingly, government bureaucracies are nearly always mismanaged and tend to spend more than they have, lacking the natural constraints that most of us face as we go shopping.

Some Concrete Cases in Point

         Perhaps both of these theories will leave many wondering just how they apply in day-to-day, real life circumstances.  Some examples will help to answer this.

         When one of the authors of this article (Tibor Machan) was in the US Air Force, he worked as a civil engineering draftsman.  After Christmas each year suddenly he had to work overtime.  There was no increase of workload – most people just sat around during the day but then went to work from 6-9 PM, when the overtime would have to be put in. Soldiers did not receive overtime pay but the engineering staff, comprised of government employees, did.  Upon inquiring why the overtime was necessary, a G-14 explained that they all needed the overtime income to pay for their Christmas purchases!  

         Adding insult to injury, each time a new budget had to be submitted, suddenly several rush jobs had to be done, such as building a little flower garden by the main gate.  It was never anything very important.  Upon inquiring it turned out that we needed to spend all the money in our budget so that more money for the next fiscal period could be requested.

         Yet another occasion helps us see the way public choice theory, specifically, manifests itself.  As a member of a Department of Education panel that developed and administered a fellowship program in Washington , Machan experienced the application of the theory. 

         After two years of going through all the work to set up the fellowship program and get it off the ground, some of the panelists decided they wanted to apply to Congress for more money for this program.  Why?  They wanted to do it better and get more things done with it.  When it was pointed out that this wasn’t really our job, few of them cared. What prevented the letter of request for additional funding from being sent is that the day the panel met to consider the idea, the Nobel committee in Sweden announced the Prize in economic science for Professor James Buchanan and Machan explained to everyone what occasioned the event, namely, Buchanan’s development of public choice theory, a theory that explained why people are trying to get more money from Congress, as was about to happen for this project.

        Now, these anecdotes are merely illustrative and may strike some as a bit too homespun for something as complicated and erudite as economic theory, but anyone familiar with bureaucracies, especially governmental, can attest that such cases as illustrated abound, and are repeated throughout the nearly countless agencies and departments of the various branches and levels of government. The cumulative effect is clearly enormous.

The Tragedy of the Commons

Yet another cause of government financial mishandling can be attributed to an insight of Aristotle’s, going by the modern name, “The tragedy of the commons”. As Aristotle observed, a good or resource commonly owned – for example, a pasture owned jointly by 10 individual shepherds – is more likely to be over-used and abused, than if the same land were privately owned in one-tenth parcels. The larger the resource is, and the greater the number of “common owners”, the more likely and greater the over-use and abuse.  Replenishing is going to be minimal, too.  (Consider how citizens resist taxation.)

In the case of government spending, consider that the federal treasury is a commons, an immense resource (“owned” in common by the citizens), from which countless groups and millions of individuals desire to benefit in the form of subsidies, bail-outs, grants, varieties of welfare, etc. An entire industry, lobbying, has nearly a stranglehold on Congress as lobbyists compete for special consideration. On top of that, senators and congressmen are doing their best to tap into the treasury to benefit their states and districts, as well as to keep certain lobbying and voter groups happy, increasing the chances of re-election.

Now, in the case of a commons such as a pasture, abuse and overuse can be restrained and contained by independent oversight, according to strict enforcement of rules or laws, but no such constraints apply to the federal treasury, not even so-called “spending limits” which, as we have seen time and again, can simply be raised by the very same people who violated those “debt ceilings” to begin with!

Conclusion

         When the issue of state fiscal mismanagement comes up, many look for evidence of wrongdoing and even corruption.  But that is not what makes sense of this recurrent phenomenon.  What explains it is that governments, unless they are autocratic, authoritarian regimes governed like a private corporation, cannot engage in rational economic calculation. They are ill suited for that purpose.  All the incentives are wrong and the constraints that guide people to be rational about how to spend their resources are missing.

There is yet something else to be considered. The development by John Locke of the theory of individual, especially private property rights, may be taken as solving the problem posed by the tragedy of the commons. With individual human beings or voluntary groups of them owning valued items, these items tend to be taken better care of than when they are collectively owned.  That was demonstrated clearly enough by how badly the Soviet socialist system fared at managing the economy. Yet, although we can grasp the general need for the system of private property rights, we still face the task of learning how to establish ownership in a proper fashion, justly.

Clearly, there is a lot of material in the world, stuff that can be turned into valuable products that we want and need, products for which others will be willing to exchange other valuables (or media of exchange such as money). How do we determine ownership of these products?

The private property rights system, when it operates with legal, official protection, needs some way of establishing what belongs to whom, as well as why some property belongs to some person and not to another, to some company or corporation but not to another.

Here is where we are reminded of John Locke’s famous labor theory of property acquisition, whereby “mixing one's labor” with something is supposed to be the way to tell who owns what. Such mixing, of course, includes buying something in the marketplace, with honestly obtained income. It's a very broad concept. It's quite sophisticated. But is it really sound?

It may not be enough. But here we can only hint at the kind of improvement the Lockean theory needs to make it applicable in today’s more complex financial world. Relevant to this, Professor James Sadowsky seems to have spelled out the principle of property assignment most clearly.  His view is also implicit in a more general position on the nature of virtue, one spelled out by the Russian born novelist-philosopher Ayn Rand. In line with this view the primary moral virtue is rationality, conceptual attention or clear thinking – the use of human reason in a consistent and sustained fashion. This position implies Sadowsky’s (as well as Israel Kirzner’s) entrepreneurial view of property acquisition which is that something becomes someone’s private property when he or she first assesses it as valuable and, accordingly, places borders around it in more or less complex ways.

Another way to put this is that when someone has made a prudent judgment and acted on it in the wild or the market place, and has thus insightfully engaged with that part of reality that can have value, that person then appropriates the thing in question. Among contemporary members of communities that kind of acquisition arises via voluntary exchange. It includes even harmful exchange, exchange that is intentional but ultimately misguided, because the connecting act is the choice to treat or regard something as valuable, never mind whether this choice is correct.

The fundamental principle is that when someone has made and acted on the judgment that something is of value, before anyone else, whether this amounted to buying 1,050 stocks in IBM or buying a toilet seat for your house, it's the judgment that leads to private ownership, the judgment that this item will matter, that it has value for people. When one makes the judgment, and does what is necessary to act on that judgment, that's how we tell that something is that person’s.

The institution of private property rights, then, which is the fundamental basis of market transactions, lies in the ethically significant (if not always successful) act of judging what is best for someone to do, which is the exercise of the virtue of prudence.It is also this that explains the close linkage between free markets and individual human responsibility, sovereignty or human dignity. Without the concrete stuff private property rights can secure for us, there would be no determinate sphere of personal jurisdiction. Only with the aid of such jurisdiction is there a clear enough opportunity to establish wherein a person’s responsibility lies and what falls outside it. We might call this avoiding the moral tragedy of the commons.

In short, yet another way to escape or ease out of the budgetary crises faced worldwide is to carry out, persistently and consistently, the policy of privatization – the shifting of many kinds of responsibilities from the public to the private sector – one that had been started only halfheartedly here and there following the collapse of the Soviet socialist system.  It needs also to be done in all the welfare states ; otherwise , the confusions that precipitate financial meltdowns via the budgetary crises will persist. To use the popular analogy – the can cannot be kicked down the road for eternity.

If there is one systemic cause of the world wide budgetary crises , it could well be what the late Nobel Laureate F. A. Hayek called "the fatal conceit," which is to say statism or top down government management of many countries' economies.

        A final note: If Paul Krugman is right that “debt is good”, then we have little to worry about since, as our brief discussion has shown, governments are ideally suited for doing just that, going into debt!

*Tibor R. Machan is Professor Emeritus at the Department of Philosophy, Auburn University (AL) and Chapman University (CA); James Chesher is Professor Emeritus at Santa Barbara City College. (CA).

Endnotes:

[1] Ludwig von Mises, Socialism; an economic and sociological analysis, translated by J. Kahane (London: Jonathan J. Cape, 1936).

[2] The idea that capitalism created the Great Depression and other market upheavals is a dangerous myth, as the works of Milton Friedman and Anna Schwartz, Great Contraction, 1929-1933 (Chicago: University of Chicago Press, 1962) and others have shown.

[3] F. A. Hayek, ed., Collectivist economic planning: critical studies on the possibilities of socialism [with essays by N.G. Pierson, Ludwig von Mises, Georg Halm, and Erico Barone] (London: George Routledge & Sons, 1938).

[4] Robert Heilbroner, “After Communism,” The New Yorker (September 10, 1990), p.  92. In his book, Marxism: For and Against (New York: W. W. Norton & Company, 1980). Heilborner also noted that for socialists/communists the means of production that is owned by society and administered by government is human labor.  Accordingly, those who were jumping the Berlin Wall were properly considered thieves – they were stealing their labor from East Germany’s socialist society.

[5] Arguably when it comes to essentially public goods and services, such as military defense, police protection, and judicial systems, government can assess cost and benefits within the framework of constitutional restraints (e.g., balanced budget provisions).  See, Tibor R. Machan, Private Rights and Public Illusions (New Brunswick, NJ: Transaction Books, 1995). The fiasco that’s known as Obamacare illustrates this clearly.

[6] James M. Buchanan and Gordon Tullock, The Calculus of Consent (University of Michigan Press, 1962).

[7] This occurred in October of 1985, in Washington, D.C., at the meeting of the board of the Jacob J. Javits Graduate Fellowship Program.

[8] James Sadowsky, "Private Property Rights and Collective Ownership" in T. R. Machan, ed., The Libertarian Alternative (Chicago: Nelson-Hall Co., Inc., 1971), pp. 119-133.

[9] Yet another theory bears on this issue, also the product of the work of a Nobel Laureate in economics.  See, Kenneth J. Arrow, Social Choice and Individual Values (New York: John Wiley, 1963). Arrow shows that the rational ranking of collective or social priorities is impossible in democratic societies. That, too, contributes to fiscal mismanagement and, of course, everyone’s dissatisfaction with what government does.

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