Tuesday, August 24, 2010

A Funny Thing Happened on the Way to the Fiscal Crisis

Because of the Great Recession many towns and cities are facing rather bleak financial circumstances. Researchers at the Center on Budget and Policy Priorities estimate that states could face budget deficits totaling $260 billion for fiscal years 2011 and 2012 combined. Many municipalities are similarly up against it financially.

Now there are howls warning of massive job losses and service stoppages and pleas for subsidies from the national government to help fix these problems. President Obama recently signed into law $26 billion in aid to states ostensibly to save "hundreds of thousands of jobs."

Have you ever noticed, however, that whenever there is a municipal fiscal crisis, the first things to go are the services that allegedly justify the very existence of government? The most popular argument for the state amongst economists is that it is necessary to produce public goods. Greg Mankiw provides a rather standard explanation  of a public good as one in which there is jointness in consumption and producers are unable to exclude users. Theoretically this creates a free-rider problem so that people are able to use the good without paying for it. Because the producer cannot cover the costs of production for these people, a less than efficient quantity of such goods are produced in the free market. Therefore the state must step in and provide such services. Examples of such alleged public goods include things like national defense and local police service, education, fire protection, road production and maintenance, and light houses.

Hans-Hermann Hoppe, however, has provided an excellent critique of the public goods theory of the state. He shows theoretically and historically that such "public goods," even if they exist as defined, can in fact be satisfactorily produced by private entrepreneurs in a free society.

Micheal Snyder has prepared a slide show featuring "18 Signs of Decay in a Cash-Starved America." His presentation is noteworthy for the types of cutbacks taking place. Government school budgets are being slashed to the point where in one school district students are asked to bring their own soap and toilet paper. Cities are reducing road and bridge maintenance and shutting off street lights. Municipally owned electric companies are cutting back to the point of generating brown outs. In some towns police have stopped responding to minor crimes. Sheriff and police forces are being reduced.

Now one would think if the reason for the existence of the state is to provide such public goods, when budgetary push comes to fiscal shove these items would be the last things to go not the first. Perhaps we are being shown that what people think are the state's main priorities are not its main priorities after all.

Randall G. Holcombe, economist at Florida State University, has a good article arguing that this is indeed the case. He concludes by saying "The theory of public goods does not do a very good job of explaining what the government actually does, or should do, but can be better understood as a tool that the government employs for its own benefit."

Notice also, as Kid Dynamite points out, no one is forcing municipal governments to cut back. If their citizens really wanted those services, the cities could raise taxes to pay for them. If the citizenry are not willing to pay for them, perhaps they do not really want them that bad.

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