Uwe Reinhardt’s Epiphany

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:

Goodman’s Theorem: Since the conditions for optimality will almost never hold in any political system, optimal government is in principle impossible.

Some examples:

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…

Comments (28)

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  1. Yancey Ward says:

    So, can one assume the US never fought wars when there was conscription? What does the empirical evidence suggest?

    • Uwe Reinhardt says:

      This is a ridiculous counter and you know it. But par for the course.

      No such assertion was made.

  2. bart says:

    The idea that conscription will reduce the tendency to go to war seems to suffer from the same defect as the idea that national deficits will reduce government spending.

  3. Jay says:

    “Economists who are politically left of center almost always ignore public choice theory.”

    Which is unfortunate considering it is the way to apply economic principles to government concepts.

  4. Earl Grinols says:

    It seems that Kane and Reinhardt are talking about two different things:

    Reinhardt explains why the objectives are what they are. I agree with his assessment that moral hazard is present. (It remains to know how important this component of thinking is to overall decision making. It may be present, but be quite small, or it may be present and be quite big.)

    Kane is talking about how the objectives, however they are made, get converted into political decisions.

    Am I missing something?

    • Uwe Reinhardt says:

      In my view, you do not. In my post, I merely tried to explain how economists arrive at their support for the voluntary army, but also warned that they should include considerations of moral hazard into their analysis.

      Period.

      Neither Kane nor John Goodman got the point.

  5. Thomas says:

    While it makes for an interesting argument, I don’t see how conscription would decrease our likelihood of going to war, based on the previous U.S. military conflicts.

    • James M. says:

      He is mostly referring to the perverse incentives in leading to the Iraq War. However, would their decisions had been different if these politicians children been in the line of duty? I would lean towards not so much.

  6. Jackson F, says:

    I believe Rienhardt is up to something. I agree with him that there is a moral hazard problem. If people are not accepted directly, they are more likely to support war. That is one of the main reasons why the United States has had a positive attitude towards war. Especially if we consider that after the 70’s, when the military draft was abandoned, the U.S. became the world watchdog. The United States have been involved in different conflicts abroad since that time, it is interesting to ask if the country would have gotten involved on those conflicts if there was a military draft?

  7. Lucas B, says:

    If Goodman’s theory states that there will never be an optimal government, why we still ask for a government that acts optimally?

    • Walter Q. says:

      Well we are stuck with this government, might as well get it to function as optimally as possible.

  8. Charles T. says:

    The U.S. therefore has a bad government. One that is fueled by lobbyist that are willing to outspend the counter-party to get the benefits they seek. Is there any way to solve this issue? Especially if we have legislators, from both parties, that attach “pork” to key legislations to benefit their interests. If we cannot have a perfect government, what can we do as to try to make it as optimal as possible?

  9. Martin A. says:

    From what Dr. Goodman writes about government failure it can be concluded that in a two party system, each with similar strength, the outcome of public policy will lead to legislation of center views. That means that regardless of for whom we vote, at the end there is no difference?

  10. Andrea G. says:

    There is no perfect market and there is no perfect government. There will always be imperfections in the system. What is important is for us to understand what causes these imperfections, and what consequences do they bring. It is almost impossible to prevent them, it is extremely hard to fix them, what we need to learn is a way to minimize the negative effects.

  11. Lucy says:

    “We get bad government — or if you like, we get government failure — not because of bad leaders.”

    Ehh…Alan Grayson, for example, gives me pause on that one…

  12. Bill Caruth says:

    One of the arguments Patrick Henry had against The Constitution when it was being debated was that the power to declare war should not reside with the same body that levied taxes.

  13. William Hallman says:

    Those of us who refuse to contribute to politicians and who are incredibly amused by the antics of them are, I guess, double free riders. It’s nice to get something from the theft by the IRS.

  14. Uwe Reinhardt says:

    With the hauteur that seems to have become John Goodman’s (almost endearing) trademark, John seeks to educate me on the fact that optimal interference by government in the private economy is impossible. I can imagine why John deems it is own unique insight, and in that spirit thank him for sharing it, even though he told me nothing new.
    I might have been good, though, had John read my New York Times post before commenting on it. Had he done so he would have noticed the following.
    First, in that post I sought to explain what reasoning drives economists to favor the all-volunteer army. Steve Landsburg in his text does the most explicit job of it that I have seen, but I could not link to that text. Steve puts the case clearly and bluntly, in a way likely to make people uncomfortable – certainly Tim Kane, who would have us believe that high-cost people do the serving. So I linked to the lecture I gave in class, which is pretty standard fare and actually leans on Steve’s, because I assign Steve’s chapter.
    Second, I pointed out in my post that a moral hazard issue can arise in this case if those empowered to decide on war are insulated from the blood- and money-cost of that decision, as certainly was the case in the preemptive strike on Iraq. Why is that controversial? That is not an epiphany. It strikes me as pretty straightforward. I merely remarked that it is puzzling that economists, who usually never miss a moral hazard issue when it might occur, generally do not even mention the potential of moral hazard in connection with the all-volunteer army.

  15. Uwe Reinhardt says:

    I should have added in my previous comment that if I wanted to learn something about the merits or demerits of the military draft vs. the all-volunteer army, economists probably would be the last I’d consult.

    I would instead ask military leaders — platoon commanders, company commanders or batallion commanders for their opinion. Theirs really would influence my thinking.

    • Linda Gorman says:

      Last I checked, people in the military who had worked in both systems seemed to prefer volunteers to draftees because they wanted to be there, were more carefully selected, and so were easier to train and easier to work with. That was a long time ago, however.

      At this point, it would probably be difficult to find many serving platoon commanders who have had reasonable experience with both draftee and volunteer troops. The draft ended in 1973.

      An added benefit of relying on volunteers is that having to attract volunteers puts a brake on the political mistreatment of troops. When the environment gets oppressive people stop re-enlisting and don’t sign up. It has also made the military more adept at using differential rewards to attract and retain scarce talent.

      In terms of the moral hazard argument, I think that one should be careful about implicitly assuming that politicians will have their offspring drafted at the same rate as those without power or connections, or that they will end up serving in the same jobs.

      As is the case with waiting lists for healthcare, experience suggests that people with power generally succeed in using it to bend coercive systems to their benefit.

  16. Ron says:

    Are we missing the point that we have in most cases elected presidents of faith and integrity who loathe to send men to die. With the exception of Lyndon Johnson, I think this has been true in my lifetime. We can argue about Bush II and Obama, but I think that devolves into current political ideology.

  17. John Seater says:

    Jackson F argues that the US has gotten involved in wars since 1970, after the draft ended. That’s true, but is it relevant? The US involvement in both Iraq II and Afghanistan were the direct result of 9/11. Did al Qaeda attack the US because the US had an all-volunteer military rather than a conscripted one? Of course not. Jackson F also says the US became the world watchdog at that time. That is not true. The US became the world watchdog after 1945. It also got involved in wars between then and 1970. Does anyone remember Korea? Vietnam? Did the draft stop the US from entering those wars, or even restrain it? Indeed, in Vietnam, virtually no reserve units or National Guard units (which, by the way, were all-volunteer) were activated and sent abroad over the entire course of the war. Virtually all the soldiers sent to Nam were drafted. The volunteers stayed home. Where was the supposed restraint arising from conscription?

    The market failure that Uwe notes is there. The crucial question is whether it is important. My foregoing brief history of post-1945 US wars seems to raise doubts, but it is entirely anecdotal. I know nothing at all about the relevant empirical literature. Indeed, is there any? Has anyone tried to assess the importance of market failures in the market for military personnel in any formal way? It seems an important question. I vaguely recall the debates among economists that framed the decision to abandon conscription, and my recollection is that it was all theoretical. Uwe’s point is that the theoretical debate was and still is incomplete because it ignores a market failure. He’s right. The next step is to figure out if the issue that concerns him is empirically important. Not my department, but it seems non-trivial.

  18. Michael Moran says:

    First, I think this is a point made by someone who is against US military action overseas (and I count myself in that group) and is making arguments based on that belief.
    If you ignore the issue of whether a drafted army reduces the chances of US military action outside the US, and just say is a voluntary military more effective, both from a cost standpoint and in doing the job assigned to the current army, I think the clear answer is yes.
    The truth is we should not use a drafted or a volunteer army to fight petty wars, we should use Blackwater, who get troops from Uganda or a similar country.
    Lots of other issues, such as most troops in volunteer army are from south, so pub knows in war it is his voter’s boys that go, while dems don’t have that concern. The role of the press, and “terms of engagement” are another issue as it creates a major problem in fighting a small war (which is one reason we should just hire Blackwater to do it) .

    • Uwe Reinhardt says:

      “First, I think this is a point made by someone who is against US military action overseas (and I count myself in that group) and is making arguments based on that belief.”

      I think that is a cheap shot, but not uncommon for this blog.

      For what it is worth, I was certainly not against our invasion of Afghanistan, and only wish President Bush had staffed it properly and devoted enough money to it, rather than diverting these resources to Iraq. It was never really made clear to Americans why Iraq had to be invaded. And what we bought for our blood and treasure is certainly an open question.

      You should stick to the argument, my friend.