Thursday, January 21, 2021

Change in Government Means Winners and Losers

While the fact is obvious that changes in regime leadership imply winners and losers, there are subtle, deeper truths that remain underappreciated. 

Government is costly in two very important ways: it wastes resources (cronyism, corruption, inefficient Rube-Goldberg processes, rent seeking, etc.) and it prevents what could otherwise be (the unseen, gains from trades foregone, etc.). I think the former is most important in the short run while the latter is so in the long run. How a government process will lower trend growth rates is insignificant in any one year but dramatically important in the compounded long run. In contrast the effects on those directly impacted by government actions are quite meaningful in the short run but largely avoidable (if avoidance is desired) in the long run. 

Essentially by definition there are losers in all government actions. This is true even if a given government action is socially beneficial as a perfect correction to a true market failure--if not, then why must it be government (aka, force) that is taking the action? Government is not a magical machine able to create or even simply discover existing free lunches. The market is a magical machine that potentially can create a relaxed notion of "free lunch" whereby an action leaves everyone a party to it better off. 

Mutually-beneficial trades are exactly this despite the fact that resources are used in the process. There might be negative/positive externalities (costs/benefits not borne/enjoyed by those engaging in the trade and therefore a theoretical opportunity for government action to make all of society better off by making parties to the original trade worse off). Just don't be so certain about how easily these can be identified much less corrected.

Those who are benefiting from the status quo (winners) are obviously incentivized to perpetuate the status quo while those who are losers are incentivized to change it. This is true before and after government action. A government action that will create winners and losers comes about because the winners stand to gain more eventually than the losers, and this action will be perpetuated by this same inertia. This is an extension of the public choice lesson of concentrated benefits and diffuse (dispersed) costs. If the losers can see a light at the end of the tunnel via eventual avoidance, they can put up with short-term acute pain knowing they will someday disperse those costs. 

Government's incentives are very poor at best, and it creates strong incentives for bad (socially negative, resource destroying, innocent harming) behavior in others. Its inability or persistent resistance to do the better thing (holding it to a lower bar than the "best" thing) is not for lack of power but for lack of will. This is the major reason why I agree with Caplan on the question of state capacity [here and here].

2020 was sadly the lesson we neither deserved nor will ultimately use to understand this.

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