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Thursday, May 21, 2009

Government Fundamentalism

In the last year or so, when I have advocated free-market solutions to specific problems, I’ve more and more frequently been dismissed as a “market fundamentalist.” By hiding behind that term, the person on the other side deftly avoids actually addressing the specific case I’m making.

But an even bigger problem is the use of the term “fundamentalist.” I understand Christian fundamentalists to be people who, as Bryan Caplan writes in The Myth of the Rational Voter, “ignore or twist the facts of geology and biology to match their prejudices.” So wouldn’t a market fundamentalist be someone who distorted facts to make the case for markets? We can certainly imagine such a person, but I’m not one—nor are many of the people who are strong advocates of free markets. It’s not that I think markets will always work perfectly. It’s just that they work so much better than the coercive solutions that are proposed by those who call me a “market fundamentalist.” Of course, there are times when standard free markets might not work well, but in many of those cases, voluntary charitable activity and simple fellow feeling fill the gap. We don’t think of it as a market transaction, for example, when a stranger in a strange city gives me directions to my hotel. But it certainly is an exercise of his freedom, and it generally works pretty well.

Government Fundamentalists

What should we call people who seem to regard government as the solution regardless of the evidence? I propose the term “government fundamentalists.” How would you identify a government fundamentalist? One characteristic would be a tendency, after the person points out market failures, to argue for government intervention as the solution. Rarely does anyone who proposes a government solution spell out how the incentives will be set up so that the government will actually solve the problem. Even many economists who are strongly committed to free markets will agree that economic freedom can underprovide defense from foreign attackers because of the notorious free-rider problem: Those who refuse to pay will get the same defense as those who pay, giving all an incentive not to pay. The possible result is that national defense is underprovided. But I’ve yet to find an advocate of government provision of defense who can explain how incentives will be set up so that government actually defends us and doesn’t simply engage in national “offense,” picking fights with a dictator in Iraq or a demagogue in Panama, to cite two examples of the U.S. government’s so-called defense.

But given that even some passionate advocates of economic freedom approve of government solutions to problems caused by market failure, we need another characteristic to distinguish government fundamentalists. Here’s the characteristic I propose: a tendency to advocate government solutions even in the face of evidence that those very solutions have not worked.

Take the tax on gasoline. The original idea for taxing gasoline was that users of roads would pay for them. Even at its best, though, the gas tax was not a great solution. The revenues were put in a big pool and politically allocated. There was no necessary connection between where people valued having roads and where roads were built, a connection that automatically would have existed had the revenues been collected with tolls. Tolls, after all, are prices not taxes.

It got worse. In the late 1960s, governments started diverting some gasoline-tax revenues to other uses. The first big diversion was to government-run mass transit that couldn’t survive on its own without subsidies. Later, more funds were diverted for bicycle lanes and lanes on roads and freeways that were dedicated to money-losing bus service. So the whole idea of user-supported roads has been steadily undercut.

Moreover, in response to higher gasoline prices, people have reduced their driving and shifted towards higher-fuel-economy vehicles. Because the federal tax on gasoline is in cents per gallon, revenues fell slightly, from $21.053 billion in fiscal year 2007 to $20.982 billion in fiscal year 2008, a drop of $71 million. In most years, by contrast, revenue grows as the number of drivers grows.

What should be done? If you notice how politicized road construction is, if you notice that a gasoline tax that was supposed to be used only for roads is now used for other things, and if you notice that the shift to higher fuel economy is reducing the growth of revenues for road-building, you might consider a market solution. You might consider taking the issue out of politics, allowing private entrepreneurs to build roads and charge tolls for their use. You might realize that doing so would forever free road construction and maintenance from the vicissitudes of gasoline tax revenues and from the politically powerful governments that grab the funds for their money-losing projects.

More Government Will Fix Failed Government?

But what do many people advocate when they notice this problem? Higher gasoline taxes. If you assume that government solutions are better than free-market solutions, you would naturally conclude that the gasoline tax should be increased. But if you are to avoid being a government fundamentalist, shouldn’t you actually look at the evidence on how well or badly gasoline taxes and government provision of roads have performed? Shouldn’t you also look at the how well or badly toll roads work?

That’s not what many people have done. Take political writer Thomas Frank. In a January 28 article in the Wall Street Journal, “Toll Roads Are Paved with Bad Intentions,” Frank wrote that few state governments “are willing to raise the gasoline taxes which pay for the repairs” to government-owned roads. In other words, Frank sees that there is no necessary connection between the need for repairs and the willingness to raise gasoline taxes. Isn’t this failure to fund roads a strike against government-funded roads? Not in Frank’s mind. He points out a problem with an incomplete system of toll roads: Tolls will price some drivers out, and some of these drivers will then spill over to nontoll roads. But this wouldn’t be a problem if all roads were toll roads. Frank, though, does not consider such a system.

Economist Jeff Hummel recently captured the essence of government fundamentalism this way: If markets don’t work, have government intervene. If government intervention doesn’t work, have government intervene further.

Notice the irony. Many free-market economists like me are quite willing to admit that markets don’t work perfectly and to examine and accept government solutions if their advocates can show how governments can be motivated to actually carry them out. And yet we are called market fundamentalists. On the other hand, many people who call us that are unwilling to change any of their views about the efficacy of government intervention no matter how badly the intervention works. Who are the fundamentalists here?