The More Government Does, The Bigger The Failures

Government is increasingly exerting control over all sorts of markets, business actions, and personal behavior. People will soon be required to purchase health insurance, businesses need government approval to merge, an ever-lengthening list of businesses and professions cannot operate without a license from some government agency or sanctioning body. While the government is trying to improve things with all its programs and regulations, the problem lies in the intelligence and information necessary to achieve the desired goals.

Free markets work by coordinating the actions of millions of buyers and sellers through the incredible simplicity of price signals. All the parties involved in a market adjust their behavior in response to prices. Those adjustments in supply and demand cause prices to change and this back-and-forth continues until the market settles into equilibrium. Markets work without anybody knowing anything except information about his own business (for sellers) or tastes and preferences (for buyers).

For government to make a market work by exerting control it needs to know everything: the cost structure of every seller and the willingness to pay of every buyer. Without all this information, the government cannot obtain its desired result. Certainly government can try to adjust as it goes and might eventually get it right, but, unfortunately, since business costs change and people's preferences are fickle, the government has to hit a moving target.

When you factor in not just the amount of information required but also the intelligence, the problem gets even worse. The politicians and the bureaucrats in all the government agencies think they are very smart. After all, it takes at least intellectual confidence if not arrogance to believe you know enough to legislate and regulate the economy to where you want it to go.

Unfortunately for the government, an important lesson to learn is that the people are smarter than the government.

That is one of the central lessons in my macroeconomic classes. Obviously, not all people outside government are smarter than all or even the average person in government. However, there are almost 300 million people in the U.S. that don't work for a government and some of them are very smart. At least one will figure out how to outsmart, outwit, or outmaneuver the government's laws and regulations. Then she will tell other people what she knows (perhaps even selling the information).

Politicians think that once they pass legislation the problem is solved. In reality, nothing has been solved. The legislation must be implemented, often through regulations not even written at the time the law is enacted. Before and after the government legislates, people respond to the legislation; they think, they plan, and they react in order to gain the maximum advantage for themselves.

In the area of farm policy, the government has repeatedly tried to limit subsidy payments to higher income farmers. Farmers have just as repeatedly outsmarted the government regulations. For example, past payment limits were often defeated by splitting a farm so that different family members or combinations of relatives each owned "individual" farms even though the only separation of the businesses was on paper. Clearly farmers are smarter than the government.

President Clinton and the Republican Congress passed welfare reform in 1996, instituting a limit for how long a person could remain on welfare. As soon as the legislation was signed into law, Social Security Disability rolls began to increase. With the 2007-2009 recession, that process accelerated. Disability has become the new, permanent welfare. Apparently people who don't want to work are smarter than the government.

Government has tried a myriad of approaches to lower what it spends on health care, mostly trying to restrict payments to doctors and hospitals. Of course hospitals and medical offices are full of smart people who just as continually find multiple ways to avoid all the attempts to lower their billings. The trend in health care spending over time makes clear that doctors and hospital administrators are much, much smarter than the government.

The income tax code is approaching 75,000 pages, all designed by the government to exert control over businesses and our private lives not just by taxing people but also by rewarding or penalizing a dizzying array of different behaviors. People and businesses respond in ways that they hope will minimize their tax liability. An entire industry of tax accountants and lawyers exists to find and exploit tax loopholes. As has been in the news recently, Apple has managed to lower its tax burden considerably below the rates stated in corporate income tax law. Apple clearly demonstrates that corporations are smarter than not just our government, but governments all over the world.

As an ever larger segment of society becomes dependent on government and government simultaneously attempts to control more and more of our behaviors and our economy, the prospect of failed policies automatically grows larger. The more a government tries to do, the more chances for it to fail. With all the interrelationships in an economy, the more a government intervenes, the more complicated policy must become. Each new government action may upset other areas that the government is also trying to control. For example, higher mileage cars mean fewer gas tax dollars to repair our roads.

If the past is any guide, government is not smart enough to succeed at a task that it makes harder with every expansion of government power. The more government does, the surer it is to fail.