By Marcus Hutchins
Our doctors and nurse practitioners monitor the pulse of our hearts, as well as other vital signs. I happily report that my heart is in excellent physical shape. The Pew Research Center monitors the pulse of the planet, and more specifically our nation, through a plethora of interesting polls and surveys.
One such survey, released on Nov. 23, bears the title, “Beyond Distrust: How Americans View Their Government.” I found this one to be especially interesting in that most of the topics covered relate directly to economics.
This latest Pew study reveals how Americans view several issues which have been resolved by the science of economics, but are still debated by politicians.
In this particular survey, Pew tested respondents’ views regarding government involvement in many diverse areas of activity. The study published differences between those identifying with the Republican party and those linked to the Democratic party.
I found some of the survey’s results to be obvious and others illuminating. One particular sentence jumped out at me: “Fully 80 percent of Republicans and Republican-leaning independents say they prefer a smaller government with fewer services, compared with just 31 percent of Democrats and Democratic leaners.”
Does the science of economics offer any advice with regard to the optimal size of government? Yes and no. How’s that for an economist’s answer?
Modern economics, as taught in the advanced democracies, does not focus much attention directly on the question, “how large should the public sector be?” Neither is the science of economics concerned with party politics. Politicians can debate about this or that, but science moves on.
Rather, the focus of attention in macro economics rests on addressing the question, “what goods and services are most efficiently produced by the private sector and which by the public sector?” Once those two issues are resolved, a society can choose how much of each good or service it would like.
The Pew survey indicated the majority of Americans feel the government should have an active role in 12 areas, namely, keeping the country safe from terrorism, responding to natural disasters, ensuring safe food and medicine, managing the immigration system, maintaining infrastructure, protecting the environment, strengthening the economy, ensuring access to quality education, ensuring basic income for citizens aged 65 and older, setting workplace standards, ensuring access to healthcare, and helping people to get out of poverty.
While the majority of Americans surveyed felt these were important roles of the public sector, their commitment to these were asymmetrically supported by Democrats and Republicans.
As one would expect, Republicans were less supportive than Democrats for most of these. However, of the list mentioned above, a majority of Republicans favored government involvement in all but the last two areas, namely, ensuring access to healthcare, and helping people to get out of poverty. A large majority of Democrats favored government involvement in all 12 areas.
How does this match up with both economic theory as well as international economic experience? Many goods and services are by their very nature “public goods.” As we have discussed in past editions of this column, a “public good” is a product or service which is most efficiently produced through the government.
Some of the most extreme ideologues will argue that no good or service is effectively and efficiently produced by the government. People that hold such views are usually referred to within the economics literature as “market liberals.” Mainstream economics will not support this position.
Devotion to rigid dogma has the appeal of simplicity of thoughts and decisions. Immoderate ideals eliminate the necessity of further consideration and challenging choices, but they rarely if ever advance the human circumstances.
The evolution of a modern economy with its complex technologies makes the “market liberal” position obsolete. Some goods and services would not exist without government intervention. Some goods and services would be under or over produced without government involvement, and some goods and services would be much more expensive without government interaction.
Public finance, a branch of economics, includes a few categories of public goods, the first of which being “non-exclusive.” A good or service is considered “non-exclusive” if it is impossible to exclude someone from participating in that product. For example, once we put into place a system of national defense, it is impractical, if not impossible to exclude someone from enjoying that service. This is an example of a public good.
The private sector charges a fee for a service. It relies on the assumption that a person who pays no fee receives no service. Thus, if a client wants the service, he or she must pay. This is enterprise, as opposed to a service which is “non-exclusive,” i.e. shared by all. Once one person has been given the service, all people have received it.
This brings to the forefront the so-called “free-rider” problem. When a good or service is “non-exclusive,” a person will feel no obligation to pay for it, since he or she can “ride free of charge.” The private sector will not produce such goods since it cannot charge effectively so as to pay for the cost of production.
As we look at the list of 12 up above, we see that keeping the country safe from terrorism, and responding to natural disasters both fall into this category of “non-exclusive” goods. To make some people safe from terrorism, is to make all people safe.
As for relief from natural disasters, it is very difficult to distinguish between those who have paid into the system and those who have not. Although this service is not perfectly “non-exclusive,” it is, for practical purposes, a public good. In the midst of earthquake relief, for example, it would be a harsh, heartless, and horrific headache to verify each aid recipient’s disaster insurance card to see if he or she is deserving of rescue.
Protecting the environment also falls into this category of “non-exclusive” goods and services. If a few people get together to ensure that a local river is cleaned up and safe for swimming and drinking, everyone else, who failed to help, still get the benefit.
We might conclude that this category of public goods could be called the anti-Little-Red-Hen products. As you might recall, the Little Red Hen did all of the work to produce some delicious almond croissants (the modern version). Since no one else helped, the Little Red Hen excluded others from eating the croissants.
In our world of non-exclusive goods, the Little Red Hen could exercise no such dominion over her peers. Once produced, no one could be left out. Now you know why we get our croissants at a private bakery.
We have now explained why at least three of the goods and services mentioned in the Pew survey should be in the public domain of production. What do we say about the other nine? What we say will be said next week. In the mean time, why do you think they should or should not be there?
(Marcus Hutchins, MA, M. Phil, Economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at email@example.com.)