A Libertarian Perspective on Economic and Social Policy

Lecture 24

Libertarian Land

©2007 Jeffrey A. Miron

Introduction

• This course has presented a libertarian perspective on economic and social policy.

• The nature of the libertarian approach is always the same:– Consider the full range of costs and benefits generated by each

feasible policy – including laissez-faire – and choose the one that has the best combination of benefits relative to costs.

• It is difficult to argue with this principle; the tough questions are what costs and benefits are relevant and which are substantial in practice.

• The claim of the course has been that in all but a few cases, careful evaluation of all the costs and benefits suggests laissez-faire as the best approach.

Introduction, continued

• This lecture attempts to tie together the broad range of issues raised by the analyses of specific policies presented in the course.

• The lecture sets aside the question of whether the libertarian perspective is “right” or “wrong,” on specific issues, or more generally.

• Instead, the goal is to address broader issues that put all the details and specific issues in perspective.

Outline

• Do I Believe What I Have Taught?• What Do I Hope You Take Away from the

Course?• A Description of Libertarian Land• If Government is So Bad, Why Do We Have So

Much?• If We Adopted Libertarianism, Would It Last?• Partial vs. Complete Libertarianism• Practical Libertarianism• Final Thoughts

Do I Believe the Conclusions of the Analysis?

• Yes.• Does this mean I am equally confident of every

conclusion?– No.

• Are there some current interventions that are much worse than others?– Absolutely.

• Does it bother me that lots of really smart people disagree with me?– Yes (although lots of really smart people agree).

• But overall, I would bet my net worth, if not my life, that adopting libertarianism would produce broad and substantial improvements in wealth and happiness for a high percentage of the population.

What Do I Hope You Take Away from the Course?

• First: It is never a sufficient defense of government intervention to identify a “market” failure:– The question must always be whether the net harms

from the market failure are worse than the net harms from government intervention.

– No economist would ever disagree with this view in principle.

– But economic models, textbooks, and academic articles often sweep this point under the rug and focus solely on whether there is a market failure.

– This is undeniably incomplete in principle, and in my view also seriously incomplete in practice.

Take Aways, continued

• Second: There is a defense of libertarian policy views that derives in a reasonable way from standard economics.– It is not necessary to rely on arguments about “rights” or

“freedom”; – Instead, one can simply employ cost-benefit analysis, broadly

interpreted.– This does not mean the “rights” approach is “wrong;” after all, it

produces similar conclusions to the cost-benefit approach.– The claim here is merely that the framework and language of

cost-benefit analysis are more persuasive, and that they facilitate thinking in a consistent way about a broad range of issues, relative to the “individual rights” or “property rights” approach to libertarianism.

Take Aways, continued

• Third: Libertarianism is consistent in its approach to a broad range of policies:– Most other “isms,” especially (modern) liberalism and

conservatism, are not.

• Of course, being consistent is not much good if one is consistently wrong!

• But the kinds of inconsistencies that the course has highlighted in liberalism and conservatism should trouble any honest person.

Take Aways, continued

• So, the overall hope is that, whether you agree or disagree with any or all of the views presented here, you will in future analyze all policy questions using the approach advocated in this course:– Determine exactly what the problem is for which a government

intervention is allegedly the solution.– Ask in a scientific way whether this problem is likely to be

substantial – i.e., a situation where the market does things really badly – or relatively modest – i.e., a situation where the market, while not perfect, plausibly does a reasonable job.

– In those cases where the evidence suggests there might be a non-trivial market failure, ask in a scientific way about all the likely consequences of the proposed intervention

– Then choose the policy that has the best combination of benefits relative to costs.

Take Aways, continued

• Analyzing policy in this manner might not make you a libertarian; – That has not been the goal of course.

• But analyzing policy in this way will make you more skeptical about government intervention and less trusting of politicians on both side of the aisle.

• In my view, that’s a good thing.

A Description of Libertarian Land

• Most lectures throughout the course have focused on individual policies or groups of policies.

• For the moment, assume all of the analysis is correct, and that we have conducted similar analyses, with similar conclusions, for all policies.

• Then it is interesting to think about what the overall economy would look like if we actually adopted the broad range of libertarian policies.

The Federal Government in Libertarian Land

• There would be one substantial federal government activity under libertarianism:– National Defense.– In terms of dollars spent, persons employed, or any other metric,

this would swamp everything else.

• There would be a few other federal government activities:– Collecting federal taxes.– Prosecuting “federal” crimes like treason, kidnapping, piracy.– Staffing embassies, consulates– Negotiating treaties.– Enforcing patents (maybe).

Cabinet DepartmentsUnder Libertarianism

Eliminate:• Agriculture• Commerce• Education• Energy • Health & Human Services • Homeland Security • Housing• Interior• Labor• Transportation• Veterans Affairs

Keep:• Defense• Justice• State• Treasury

Government Agencies that Would Not Exist Under Libertarianism

• SEC• FTC• FEC• CPSC• FCC• EPA• CIA

• NASA• NIH• NSF• NLRB• FEMA• ICC• NRC

The Current Size of Federal Government (2006, billions)

Defense $536 Health $269Int’l Affairs $35 Medicare $343Science $24 Inc.Sec. $361Energy $3 Soc.Sec. $555Nat’l Res. $33 Veterans $71Agric. $27 Courts $41Com.&House Credit $9 Gen. Gov. $19Transport. $72 Interest $220Com.Dev. $52 Offsets -$72Educ/Train $110

Total: $2,709 = 20.4 % of GDP

Federal Government inLibertarian Land

Defense $350 Health $0Int’l Affairs $0 Medicare $0Science $0 Inc.Sec. $0Energy $0 Soc.Sec. $0Nat’l Res. $0 Veterans $0Agric. $0 Courts $10Commerce $0 Gen. Gov. $15Transport. $0 Interest $0Com.Dev. $0 Offsets $0Educ/Train $0

Total: $375 = 2.8% of GDP

State Government in Libertarian Land

• There would be one substantial state government activity under libertarianism:– Operating a criminal justice system and enforcing property

rights.– This activity would be similar to what occurs now, but smaller

(e.g., no laws against drugs, gambling, prostitution).

• There might be a few other state government activities:– Fire protection.– Alleviating poverty via a negative income tax.– Subsidizing education via means-tested vouchers.– Building and maintaining highways.

The Current Size of State and Local Government (2003, billions)

Education $621 Sewerage $33Welfare $306 Solid Waste $19Hospitals $93 Housing $35Health $62 Administration $99Highways $118 Parks and Rec $32Police $67 Interest $77Fire $28 Utility $146Corrections $55 Liquor Store $4Natural Res $23 Insurance Trust $193

Total: $2,164 = 20.0% of GDP

State and Local Government Expenditure in Libertarian Land

Education $100 Sewerage $15Welfare $100 Solid Waste $15Hospitals $0 Housing $0Health $0 Administration $40Highways $100 Parks and Rec $0Police $40 Interest $0Fire $20 Utility $50Corrections $30 Liquor Store $0Natural Res $10 Insurance Trust $0

Total: $520 = 4.8% of GDP

Criminal Law in Libertarian Land

• A different way to compare libertarianism policy with current policy is to ask what would be legal in libertarian land.

• At the federal level, there would almost no criminal law:– Just a few exceptions such as tax fraud, treason, kidnapping,

and miscellaneous others.• At the state level, there would still be substantial criminal

law:– Murder, assault, rape, robbery, theft, burglary, arson.

• But there would be much less than now:– No laws against drugs, sex, gambling, weapons, drunkenness,

vagrancy.– Possibly also reductions in other areas, especially white collar

crime like fraud or embezzlement.

Regulation in Libertarian Land• No protections for unions• No anti-trust laws• No anti-discrimination law• No prohibitions on insider trading• No federal environmental regulation• No workers compensation• No health and safety regulation• No regulation of insurance• No regulation of financial markets• No entry barriers: licensing, fees, certification, …• No building codes• No standards for energy efficiency• No “unconstitutional” takings• No minimum wages, rent controls, price controls• Etc., etc., etc., …

Libertarian Land: Summary

• Relative to modern society, libertarian land might sound bizarre:– Critics believe libertarian land would be chaotic, violent, and

disease infested, with a few rich elites enjoying the good life and masses of desperately poor “workers” slaving away in sweatshops and the like.

• In fact, the U.S. was fairly libertarian in its policies until the first quarter of the 20th century:– Life was not perfect, but during this period the U.S. grew from

nothing to become the leading economic power in the world.• More generally, the evidence from cross-country and

time-series comparisons consistently shows that less government is associated with greater wealth:– That is exactly the prediction of libertarianism.

If Government is So Bad, Why Is There So Much of It?

• The course has argued that minimal government is better than current policy, yet relatively few people in most economies advocate minimal government, and in many countries government is growing, not shrinking.

• An important question, therefore, is why, if the arguments presented here are correct, there is such a divergence between libertarian views and real world practice.

• One possibility is that libertarians are wrong (shudder!):– Leave that aside.

• A second possibility is that the political process is biased toward big government.

If Government is So Bad, Why Is There So Much of It?, continued

• A standard view about the political process is the following:– There are many policies that benefit certain sub-groups, even if

they harm society overall.– In a Coasian world, this would not produce inefficient policies;

the losers could bribe the winners to forgo bad policies, but in practice transaction costs are substantial.

– In particular, the groups that benefit from intervention are small and well-defined, while the groups that lose are large and diffuse (e.g., big agribusiness versus consumers).

– Thus, the groups that benefit from interventions can more easily lobby on behalf of these policies than the losers can lobby in opposition.

• This view is almost certainly right in many cases.– Plus, there are the tendencies for government, once in place, to

expand, as discussed earlier.

If Government is So Bad, Why Is There So Much of It?, continued

• Whether or not these explanations for big government are “correct” in all instances, they are certainly plausible and likely play some role.

• In particular, almost everyone, of any political persuasion, dislikes many aspects of current government:– So, everyone should be open to the possibility that the political

process does not produce the “optimal” kind or amount of government.

• Thus, there are reasonable answers to the question above.– Nothing about the political process guarantees we get the “right”

outcomes, given the presence of transactions costs.

Say We Adopted Libertarianism: Would Big Government Return?

• Unfortunately, the answer is probably “yes.”– U.S. policies were libertarian once;– They evolved into big government.

• The only thing that would prevent re-emergence, or that might constrain further growth of existing government, is increased understanding of the costs of government intervention.

• Institutional fixes (“independent” central banks, balanced budget amendments) do not work well:– The institutional approach tries to fix bad government

with more government, which is problematic at best.

Partial vs. Complete Libertarianism

• In practice, any policy changes in the direction of libertarianism are likely to be modest in the foreseeable future.

• This raises three questions:– Do the individual policy changes advocated above

stand on their own, or do they only make sense if they are all adopted together?

– Is moving in the direction of libertarian policies beneficial, or do libertarian policies only make sense if they are adopted wholesale?

– Are there some policy changes that are substantially more important than others?

Adopting Individual Libertarian Policies vs. Adopting Them All

• In many cases the, case for libertarian policies increases as the range of libertarian policies expands.– Legal use of risky goods and reduced subsidization of health

care.– Reduced expenditure and elimination of certain taxes.– Elimination of anti-trust policies and free trade.

• Nevertheless, it is difficult to think of libertarian policy changes that are sensible only if accompanied by all other libertarian policies:– Most stand on their own;

• Increased immigration, given existing welfare policies, is a possible exception, although even that case is not clear. Increased immigration might create support for curtailing welfare spending.

Does It Make Sense to Adopt “Partial” Libertarian Policies?

• There are myriad cases where compromise is far better than nothing at all:– Reducing, even if not eliminating, Social Security.– Legalizing some drugs, or reducing enforcement.– Fewer state universities, or higher tuition w/ means-testing;– Increased co-pays in Medicare;– Charters and vouchers, even if the public schools continue to exist.

• The key feature, however, is that these compromises are genuinely in the direction of the libertarian approach, i.e., they are less government.– Some policies that are allegedly “compromises” are really more

government;– For example, mandatory accounts, high-stakes testing; federal “reform”

of the state tort systems; balanced budgets amendments.• My assessment is that these do not work; the economy ends up with

both the old bad government and the new bad government.

Should Libertarians Be Practical?

• My answer is NO!!!!!!!!!.

• There is undoubtedly a role for practical considerations, i.e., intelligent compromise.

• But the world is full of “compromisers:” – There is not much value-added in joining

those ranks.

Should Libertarians Be Practical?, continued

• What is missing, in my view, is people who can explain in a calm, rational way that there are alternatives to liberalism or conservatism.

• Unless libertarians do this, no one will:– The libertarian niche is to keep both sides

honest;– Too many people, especially in politics, think

that what matters is getting things done as opposed to getting things right.

Should Libertarians Be Practical?, continued

• So, libertarians should stop trying to be “political” or practical:– They’re no good at it; they end up being bad

politicians and bad libertarians.

• What libertarians can do is educate:– Push people of all political views to re-think

their assumptions.

Final Thoughts

• Teaching this class is great fun:– I get to talk to smart, motivated students;– I get to “corrupt” young minds when they are

still malleable (I hope);– I get to promote ideas that I believe in;– And I get paid too!

• So, thanks for taking the class;

• Good luck, and all the best.