Government Spending is a systematic problem- Not a lack of leadership

            On January 9, 2013 economist and Nobel Prize recipient James Buchanan passed away. Buchanan was best known for pioneering ‘public choice theory’ in modern political economy. Buchanan developed what we call the ‘benevolence’ critique of government: regardless of the knowledge that government has when crafting policy, there is no reason we should expect them to be any more benevolent than ordinary economic actors interested in satisfying their own wants. Buchanan’s idea is not complex; in fact, I once heard that after winning the Nobel, Buchanan told a reporter that his main idea is that in government you ‘don’t let the fox guard the chicken coop.’

            Though Buchanan’s first insight might seem relatively simple, the implications of his work are profound; especially given our current fiscal crisis. The U.S is in its fourth year of trillion dollar plus deficits, and we are due for yet another debt ceiling increase. The debate about our fiscal and spending problems extends beyond the halls of congress. These debates cause uncertainty that leads to stalled investment, hardened partisan lines and ultimately an erosion of government legitimacy.

            Countless columns and television commentators look at this re-occurring problem and call it a lack of leadership, but students of Buchanan might not be so quick to agree.  Once we internalize that politicians are vote maximizes and respond to the incentives surrounding them, just like non-politicians, it’s easier to understand why government spending seems to be an ever-present headline.

            Congressmen receive praise directly from their constituents for spending money. Sometimes that praise of from the elderly who wanted extended Medicare/Medicaid benefits. Sometimes that praise is from a local government contractor who happens to live in that congressman’s district. However, once the bill comes due for all the spending there is no one person to blame for the large deficit we are all responsible for. Because politicians are insulated from the negative consequences of spending, yet not insulated from the votes that spending could get them, they have an incentive to overspend; they do just that- regardless of political party affiliation.

            Calls for more bipartisan collaboration and stronger ‘leadership’ are not bad things to demand, they’re just empty. Napoleon Bonaparte said that leaders “define reality and give hope.”  Buchanan helped us understand reality- government spending is a systematic problem, not a lack of leadership. Hope for eliminating the next series of government spending related crisis requires changes the incentives that politicians face. 

It's hard to say if the FAA is making us safer

After lithium-ion batteries burned on 2 separate Boeing 787’s, the Federal Aviation Administration launched a large investigation and grounded all 787 planes. The FAA is certainly doing its job in reviewing 787’s and trying to keep air passengers safe, but there is little reason to think that the FAA is helping and many reasons to conclude that they are overreacting.

            If the FAA fails to react to a potential safety threat, their bureaucrats will quickly find themselves being scrutinized before congress. However, by taking on risk and letting an aircraft continue to operate, the FAA stands to gain nothing. This incentive structure biases the agency towards more safety inspections.

            While an overly cautious ‘airplane-safety-inspector’ doesn’t sound like a bad idea, without having to consider the costs of their actions the FAA could easily leave us worse off. FAA inspections require consumers to contribute tax dollars to fund the agency, and require airline corporations to divert time and resources to comply with the safety rules, which require airlines to raise ticket prices, yet FAA doesn’t have an incentive to consider any of these costs when deciding to launch a safety inspection that grounds a fleet of airplanes.

            Certainly safety inspections are a good thing. Air travel consumers simply do not have all the information necessary to decide whether or not an aircraft is safe. Slightly increased prices might be worth added safety, but the costs of grounding a fleet of airplanes for a small technical problem might not be worth it. There is some optimal amount of safety regulation, but what that amount is, is not knowledge that exists in any single individual.

            Just because the optimal amount of safety regulation doesn’t exist in one person does not mean the knowledge is unobtainable. In fact, lots of dispersed knowledge about costs, benefits, and consumers’ preferences is constantly communicated via the price system. Unfortunately, the FAA doesn’t have any kind of ‘prices’ to look at when determining the costs and benefits of their decisions.

            Private safety inspectors or insurance companies could easily provide safety inspection services to airlines just like the FAA does. An airline could contract with an insurance company that would only agree to insure its planes and put its stamp of approval on that airline’s services if the airline met all the insurance company’s requirements. The scrutiny of one’s insurance company could be something airlines could use to brag about to customers. Plus, private companies seeking to maximize profits would seek to innovate new ways to ensure safety while cutting costs. If the safety requirements imposed by one insurance company were so rigorous that the cost of the insurance raised the price of the tickets beyond what consumers were willing to pay, consumers would choose a different airline; ultimately competition would allow us to discover the optimal amount of safety precaution that consumers want airlines to take.

            There is no distinctive feature of the FAA’s safety inspections that necessitates it be a government action. While private inspections done by insurance companies could contain errors, it is less likely because as a private company their existence depends on their effectiveness. It’s unclear if its worth grounding all 787’s and passing along all the costs of doing so to American citizens just because of problems in two batteries, but the incentives that FAA bureaucrats face show us that this is almost certainly a sub-optimal decision. However, we can say with certainty that public, monopolized safety inspections of airplanes will be more costly and lead to less safety than safety services provided by a private market.