“…a key harm resulting from many programs is “government-promoted moral hazard,” in which public policies encourage people to engage in risky behavior, often causing immense collateral damage. The federal government’s promotion of home-ownership via Fannie Mae (ticker: FNMA) and Freddie Mac (FMCC), essentially government agencies, helped bring “catastrophic damage to the larger economy”…

… in the Great Recession of 2008-09. And lest we expect government to learn from such egregious mistakes, Schuck reports that “more than five years later—and even with all the benefits of hindsight—the Federal Housing Administration (FHA) is following those agencies’ catastrophic examples.” The italics are Schuck’s. There is also moral hazard from the $1.2 trillion federal program that guarantees student loans. Its “debt overhang,” born of risky behavior, “threatens to retard the recovery,” a situation that has been likened to “the subprime mortgage disaster.” And yet the program is empowered by Congress to calculate its risks according to a formula that equates the chance of student default with the chance that the U.S. Treasury will default on its debt. “This absurdity,” reports Schuck, “enabled Senator Elizabeth Warren and some colleagues to erroneously claim, with straight faces, that the student-loan program is highly profitable—despite the huge default losses.””, Gene Epstein’s Review of “Why Government Fails So Often…”, Barrons, May 3, 2014

BALANCING THE BOOKS

A Liberal Indictment of Government

Peter Schuck’s new book, Why Government Fails So Often, finds many costly programs bring harm that greatly offsets the benefits. Examining ethanol, the war on drugs, Fannie, Freddie, and other “unmitigated disasters.”

By GENE EPSTEIN

May 3, 2014

Reviewed by Gene Epstein

This lively and authoritative account of government failure deserves to be read by advocates of all political persuasions. In particular, fervent supporters of proactive government will find Yale Law School Professor Peter Schuck to be a sympathetic guide. A former official under President Jimmy Carter in what was then called the Department of Health, Education, and Welfare, Schuck reveals that he voted both times for Barack Obama, and declares in the book’s first chapter, “I support many public programs, and as a citizen I take no pleasure (indeed, I am dismayed) in finding how often my government fails, as I dutifully report in the chapters that follow.”

Dismayed and dutiful the author certainly is, to the point that his book will also appeal to those of us who would drastically downsize government. Focusing on the staggering array of federal spending on domestic programs, Schuck insists on judging them not by their stated intentions but by the metric of cost-benefit analysis. He doesn’t need to delve very deeply into this analysis, it turns out, because so many costly programs bring enormous harm that greatly offsets the benefits.

Why Government Fails So Often: And How It Can Do Better

by Peter H. Schuck
Princeton University Press
488 pages, $27.95

By Schuck’s reckoning, “unmitigated disasters” include the war on drugs and the ethanol program. As he also points out, a key harm resulting from many programs is “government-promoted moral hazard,” in which public policies encourage people to engage in risky behavior, often causing immense collateral damage. The federal government’s promotion of home-ownership via Fannie Mae (ticker: FNMA) and Freddie Mac (FMCC), essentially government agencies, helped bring “catastrophic damage to the larger economy” in the Great Recession of 2008-09. And lest we expect government to learn from such egregious mistakes, Schuck reports that “more than five years later—and even with all the benefits of hindsight—the Federal Housing Administration (FHA) is following those agencies’ catastrophic examples.” The italics are Schuck’s.

There is also moral hazard from the $1.2 trillion federal program that guarantees student loans. Its “debt overhang,” born of risky behavior, “threatens to retard the recovery,” a situation that has been likened to “the subprime mortgage disaster.” And yet the program is empowered by Congress to calculate its risks according to a formula that equates the chance of student default with the chance that the U.S. Treasury will default on its debt. “This absurdity,” reports Schuck, “enabled Senator Elizabeth Warren and some colleagues to erroneously claim, with straight faces, that the student-loan program is highly profitable—despite the huge default losses.”

As for why government fails so often, the author cites public choice theory. Appropriately dubbed “politics without romance,” public choice theory posits that people in politics are about as self-interested as people in business or in nonprofits. So, for example, politicians motivated by the desire to get re-elected can please their constituents by spending borrowed money that won’t have to be paid back until long after they leave office. Taxpayers who might be hurt by those policies have little or no incentive to inform themselves and get politically active, given their limited chance of affecting the outcome. By contrast, the private sector has the lash of profit and loss to channel self-interested behavior into productive ends.

In a nuanced discussion, Schuck points out that the tenets of public choice theory do not always apply. Politicians sometimes do act out of idealistic motives, a tendency that may have its own problems; and citizens often get deeply involved with politics. But as he readily concedes, public choice theory does explain “most political behavior most of the time.”

Since the author claims to support many public programs, he devotes a chapter to “policy successes.” But among the nine he covers, a few strike an ironic note since they tend to be reversals of past policy failures, as in the case of the Airline Deregulation Act of 1978, the Immigration and Nationality Act of 1965, and the Welfare Reform Act of 1996.

Social Security’s program of support for retirees is another policy initiative that Schuck rates a success. But even this most bedrock of popular programs is open to challenge. For one thing, it faces insolvency, a crisis that can be potentially addressed only because the burden of old people’s medical bills has been assumed by Medicare, a program the author specifically states is not a success. Second, Shuck himself objects to the fact that so many of Social Security’s retirees are rich to begin with. That is one reason why Milton Friedman proposed that the program be abolished and be replaced by a negative income tax.

Note the subtitle of Why Government Fails So OftenAnd How It Can Do Better. This admirable work offers compelling evidence that government might do far better by doing far less.

Posted on June 2, 2014, in Postings. Bookmark the permalink. Leave a comment.

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