So, Heidi opposes state involvement in promoting virtue, but she favors state intervention in the functioning of markets for the purpose of advancing what she regards as public welfare. I wish she were more sincere about the former and less sincere about the latter. I’ll discuss the insincerity of Heidi’s ostensible opposition to state promotion of virtue in the next post. In this post, I’ll discuss the costs of the kind of state intervention in markets that Heidi favors.
I’m no anarchist. Let’s agree at the outset that it is most efficient for the state to provide security against crime and external threats, to enforce contracts and compensation for damages, and to ensure the supply of certain public goods that the market might otherwise fail to produce. But Heidi’s preferences for state intervention go well beyond these instances. Some of the roles Heidi is happy for the state to play are simply superfluous and harmful since markets would do fine without them; others are better left to civil society. Let’s consider some examples of each.
Heidi likes regulation, especially the kind that appears to protect the weak from the predations of the powerful. Minimum wage laws, affirmative action, consumer protection laws, occupational licensure, rent control, it’s all good. What, after all, could be bad about looking out for the modest laborer, the innocent consumer and the oppressed minority?
As it turns out, the attractiveness of all these sorts of regulation relies on a sleight of hand: their benefits are more easily seen than their costs. The benefits of minimum wage laws for those who would otherwise earn less are more conspicuous than the harm to those whom they cause to remain, or become, unemployed and to the companies that close, or never open, due to higher labor costs. The benefit of affirmative action for the hired minority worker is more evident than the harm it causes to the non-minority worker who is not hired, to the qualified minority worker who is wrongly presumed to have been given a break and to the shareholders and consumers of the company that must manage with a sub-optimal labor force. The benefits to consumers of onerous regulation on businesses are more visible than the costs those same consumers will incur when the increased expense of doing business is passed on to them and when potential competitors are deterred from entering the market by additional compliance costs.
Occupational licensure is a particularly instructive example. The power the state gives to professional guilds to create barriers to entering a profession are ostensibly designed to protect consumers. But somehow, it’s never consumers who clamor for such barriers, but rather those already in the profession. Isn’t it odd, for example, that only taxi drivers are convinced that Uber drivers are potential kidnappers, but Uber passengers seem blithely unconcerned? The competition that would result from lower barriers to entry into a profession harms those already in the guild but benefits consumers by bringing down prices and increasing the availability and accessibility of the provided service. Why then do politicians so often favor the kind of regulation that keeps barriers high? The answer is “concentrated benefits, dispersed costs”: the benefits of such regulation to licensed cosmetologists, barbers, undertakers and what-have-you are worth enough to them to finance political pressure, but the costs of that regulation to somebody with fingernails, hair or deceased relatives will never be high enough to get them to march on the capitol.
Sometimes the costs of state regulation are not just unseen but unanticipated. Like many West Siders who don’t own real estate, Heidi is fond of rent control. Are we seriously going to allow some rapacious landlord to take 7000 bucks a month for that crappy apartment? That would just be so wrong. A reasonable cap on rent would level the playing field and couldn’t possibly do anyone any harm, right? Well, this has been tried in dozens of places, so let’s see how it plays out.
Since the price is held below the natural market price, the supply will go down as landlords take apartments off the market and builders postpone building projects. As the supply of rent-controlled apartments goes down, the prices of non-controlled apartments go up. Since rents are fixed, landlords have no financial incentive to raise the values of their properties, so they neglect them. Yankel would like to move out of his apartment but fears he won’t find another one so he’s locked into a sub-optimal situation, which locks out Berel who’d prefer to move into Yankel’s apartment – and so on. Given the diminished supply of available apartments along with artificially low prices, potential tenants compete for available apartments; landlords, who would ordinarily rent to the highest bidder, now must choose among them arbitrarily. Often a landlord will simply prefer the ones whose racial or ethnic profile or family structure makes him most comfortable. Of course, a landlord might also prefer the potential tenant who offers to make side payments under the table above the maximum rent allowed by law. The authorities, cottoning on to this, will send around inspectors to catch such scofflaws and will encourage snitching and lawsuits.
So, what have we got? Heidi’s innocent plan for creating affordable housing has led to shortages, higher rents, lock-ins, slums, discrimination, bribery, ratting and litigation. Not a bad day’s work.
Now let’s consider two important examples where civil society can solve problems better than states can. Let’s start with the problem of “the commons”, resources like grazing pastures, fishing sites, and water reservoirs that are easily accessible to some community of potential users but subject to short-term overuse that will result in long-term damage to all the users. The theory is that agreements among players not to over-use the resource can’t hold without state enforcement because cheating pays. Thus, we want the state involved in legislating and enforcing limitations on exploitation of such resources. Recall, however, our earlier discussion about the repeated prisoners’ dilemma. We found that cooperation in such repeated games is possible in the long run if players can successfully signal each other that they have low discount rates. The problem of the commons is simply an example of a repeated prisoners’ dilemma with many players, so that cooperation can develop under analogous circumstances. Participants can cooperate and self-police without state intervention provided they develop trust based on shared social norms.
In fact, this is borne out in real-life. The political economist Elinor Ostrom found many examples of communities successfully sharing pooled resources, including Swiss farming villages sharing grazing meadows and Turkish fisherman sharing fishing sites. The key features that characterize successful self-policing communities include that the rules reflect local conditions and mores and are established by the members themselves, that the communities establish clear markers of membership and that the state doesn’t interfere. In short, these solutions tend to have developed bottom-up over long periods, respecting time-tested traditions.
I’m not suggesting that all common-pool resources can be self-administered by communities, but merely that, contrary to Heidi’s assumption, state intervention is not always necessary or even helpful. States are too centralized to permit local solutions, too populous to manage direct involvement of citizens in making rules, too heterogeneous to develop the necessary degree of trust, too dependent on experts to respect traditions. But they have the advantage of power and sometimes that does the trick.
Let’s move on to another better-known example of state overreach in communal business: redistribution and entitlements. Shimen’s community takes care of its own. When the need arises, a loan or gift for a community member on hard times is discreetly arranged. In addition, there is a communal fund administered by trusted members of the community who are generally personally familiar with both donors and recipients. They can establish criteria of eligibility that don’t encourage those who could be self-reliant to become dependent on handouts. Charity within Shimen’s community is regarded by both donors and recipients as a form of good fellowship that might in the future be flowing in the reverse direction. It strengthens communal bonds and increases aggregate social capital.
Heidi will correctly counter that communal funds are narrow in scope, that some people don’t belong to any such community and that some communities lack the resources to take care of their own. Entitlements administered by the state out of taxpayer money don’t leave anyone out. Moreover, they are distributed according to transparent and objective criteria. In addition, states have tools for coordinating and tracking disbursements to avoid duplication and waste, as well as enforcement mechanisms to punish and deter fraud.
All that is true and explains why the safety net provided by the state cannot be dismantled altogether. Nevertheless, what Heidi fails to see is the devastating social costs of government handouts. Let’s consider some of these.
Unlike communal charities, state entitlements are distributed by bureaucrats with no incentive to execute their jobs in an efficient or friendly manner. These bureaucracies quickly become bloated and unresponsive to the faceless masses seeking their aid. Furthermore, bureaucracies are committed to rigid rules that are easily gamed, thus giving maximal rewards to cheaters and free-riders. Often, even perfectly honest people who would otherwise seek gainful employment are disincentivized from doing so by the prospect of easy money. The welfare state undermines self-reliance and, even more, our very appreciation of the value of self-reliance.
Most of all, the welfare state diminishes social capital. By encouraging reliance on entitlements for economic security, the welfare state undoes the bonds of dependence within families and communities. To Heidi, this is a feature not a bug. But here is where Heidi misses the main point. As many lonely people discover far too late, the reliance of children on their parents and, subsequently, of parents on their children, and the reliance of members of communities on each other, are what fill our lives with meaning, our social bonds with substance and warmth, and our futures with hope.
Sadly, the bureaucratic regulatory welfare state has been so successful at destroying families and communities that it has rendered itself necessary.