Links 2024-01-22 - Seeing The Unseen Cost
It is much worse than the headline numbers.
One of the best examples of the economic way of thinking is to embrace Frédéric Bastiat’s method of seeing the unseen—looking beyond what is obvious to what is hidden.
Here are four recent pieces that each give good, unique examples specifically in regard to the cost of government.
First, Mike Munger reflects back on his lost battle against Google. The story is about one of the things I spend a consistent bit of effort on—fighting against crony capitalism. In this case specifically it was Google getting offered “incentives” (aka, gifts) from the local government to incite it to locate a data facility there. Munger was the named plaintiff fighting the good fight.
The larger lesson he draws upon is a concise case against and alternative path to a proper role for government:
There are three things that are — together — sufficient, to create substantial and persistent economic growth. Those three are the “right reasons” for businesses to make location decisions. Here they are:
1. Low taxes, little obtrusive regulation, and accommodating site selection
2. An educated workforce, with a substantial cadre of qualified graduate and undergraduate degree-holders
3. A market for housing that allows the building of a wide range of new rental and owner-occupied units, rather than NIMBYist pressures to limit growth
Since these three things together produce growth, isn’t it clear that this relatively simple policy program “should” be implemented by state legislatures? Adam Smith would have thought so, because he (charmingly) thought that the goals of legislators corresponded with the public good.
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So let’s put all that together: Elected officials are no worse, but no better, than the rest of us. They respond to incentives. Given the choice between using the “right reasons” to attract new business and jobs, or using a very public pursuit of BSOs in a way that allows them to claim credit for the “recruitment,” they will go with the bad policy — particularized incentives and targeted recruitment — every time.
As you will see by reading the whole thing, the unseen is both the explicit subsidy paid by the state’s taxpayers in an unseen way along with the implicit encouragement for more such rent seeking to continue. That is the real cost of subsidizing successful businesses. But what about support for unsuccessful businesses? Well . . .
Second, Michael Huemer succinctly works through the case against government bailouts of failing firms:
The general reasons against bailing out failing businesses are clear and powerful: bailouts are unjust both to taxpayers and to competing businesses, they create a moral hazard problem, they perpetuate resource misallocations, they increase long-term systemic risks to the economy, and they exacerbate political corruption.
Again there is a strong unseen element at play. If anything, the unseen problem should be clearer in this case. There is moral hazard—encouraging imprudent risk taking—as well as outright reward for failure. In both of these first two examples we see another lurking unseen cost—government corruption. But that isn’t the only unseen government corruption occurs . . .
Third, Chris Edwards points out that regulation also induces the unseen cost of government corruption detailing several examples at a local level.
Among his many examples are these two:
In Chicago, dozens of aldermen have been found guilty of corruption over the decades. One study found that the crimes typically involved “schemes to extract bribes from builders, developers, business owners or those seeking to do business with the city or state. The bribe‐payers either assumed or were told that payment was necessary to receive zoning changes, building permits, or similar city or state action.… at the heart of most convictions is a payoff for something that is a sweetheart contract or a law or permit necessary to do business. This has been the main pattern of corruption in the city and the state for over 150 years.”
In Dallas, the low‐income housing tax credit (LIHTC) was at the center of the largest public corruption scandal ever in the city. Fourteen people were convicted of bribery, extortion, and related crimes, including developers, a state representative, the Dallas mayor pro tem, and the city planning commissioner. The politicians and bureaucrats would routinely shakedown developers for bribes in return for zoning changes and allocations of limited housing tax credits.
While corruption once identified becomes a seen cost, the unseen is not just the corruption that goes unchecked. It lies in the very nature of a highly regulatory environment. It is what Thornton Melon was correcting the teacher about—something I referenced here. But as Melon’s father and his father before him knew, this goes back a long way . . .
Fourth, Andrew Heaton1 interviews Chris Gannon about how deed restrictions allow dead people to control your house.
Zoning has racism at its historical core. That is a disgraceful heritage, but not necessarily an argument against it today. However, it should give us pause as should all of the many, many good arguments against zoning. It turns out that prior to and concurrent with those origins, deed restrictions also had horrible racism at their start. Those same attempts to control the future from the grave result in (bad) unintended consequences and exclusionary features in general.
So in addition to the seen cost of what was originally a designed benefit (racist policies) we have unseen cost that include lingering effects of racism even after that no longer is an explicit aim and economically costly restraints on development. All of this works to make housing less affordable and less plentiful and less beneficial for all but the select few.
Look beyond the seen to see the true cost of government.
Yes, I earned bonus points on the post by finding a way to connect an old Andrew Heaton link to a new one.