Uwe Reinhardt argued against the volunteer army at The New York Times economics blog the other day and I think his post is remarkable for reasons that have nothing to do with the military draft.
But first things first. Uwe acknowledges that the weight of economic reasoning about conscription is traditionally thought to be on the other side. For example, he refers to a recent post by Casey Mulligan, who in turn refers us to David Henderson, Stephen Landsberg, Gary Becker, Walter Oi and Martin Anderson. But, he says, here is what these economists forget:
The dictionary defines moral hazard as “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost,” or as Investopedia puts it, as the “idea that a party that is protected in some way from risk will act differently than if they didn’t have that protection.”
This is a well-known concept when analyzing economic markets. What about applying the same concept to government?
Economists can wax quite stern when exposing moral hazard in the context of health insurance, environmental pollution or tax-financed bailouts of banks. Amazingly, though, not in connection with decisions to go to war…
In the context of war, moral hazard crops up when the socioeconomic class empowered to declare war is largely insulated from the lethal risks faced by those sent to the battlefield because neither they nor their offspring are likely to be thrust into harm’s way by the war…It raises the probability of a nation going to war, especially if huge profits can be made off a war by those bearing little personal risk in that war but with powerful sway over government.
Tim Kane takes Uwe to task for getting some of his facts wrong and I think Tim has the better argument. But I am more interested in the broader principle.
“Moral hazard” is generally regarded as a market imperfection — one that leads to less than optimal outcomes. Uwe is making the case that there can be a similar imperfection in the political process.
Alert readers will recall that this kind of analysis is what economists call “public choice” theory and for a very good explanation of it I recommend (surprise) my own post. But here is something you may not know. Economists who are politically left of center almost always ignore public choice theory. And if forced to confront it, they usually reveal that they detest the whole idea.
It’s easy to see why. Public choice theory greatly undermines the case for activist government.
This is from my own explanation:
Optimal government is government that gives us a set of policies for which marginal social benefit equals marginal social cost. But that can happen only if the political prices various groups of people are willing to pay are exactly equal on both sides of every issue.
What is a “political price”? By that I mean the sum total of all the efforts a group is willing to make (per dollar of expected benefit) to support the election of the candidate it prefers. These include votes, campaign contributions, get out the vote efforts, etc. Now it might seem that just about everybody would be willing to make a dollar’s worth of effort to gain a dollar from the political system. However, the election of a candidate or the passage of a law is a public good for all those who prefer it and a public bad for all who are opposed. Every political change, therefore, has a free rider problem.
Since people who benefit from a change will realize benefits whether or not they help bring it about, their incentive is to contribute nothing and become free riders on everyone else’s efforts. In politics, therefore, people inevitably understate their preferences and in most cases they understate them a great deal. That by itself does not create a problem. The problem arises because the degree to which preferences are understated is not the same for every group.
Here is the coup de grace:
The condition for optimality requires that political prices be the same on both sides of every issue…And since that condition will almost never hold in any political system…that leads to:
If the political price milk producers are willing to pay is greater than the political price offered by the consumers of milk, we will get milk price supports. If the price sugar growers are willing to pay is higher than the one offered by sugar consumers, we will get sugar quotas. We get bad government — or if you like, we get government failure — not because of bad leaders. We get bad government because of inequality in the pressures put on elected officials.
Bottom line: I am delighted to see public choice theory getting a foothold in the economics department at Princeton University. Now, if only Uwe could teach some of these concepts to Paul Krugman…