A useful theory for any toolkit
The usefulness of public choice theory in explaining all manner of bad government policies has been known for many years. So could I cynically ask if this may be why it is not being taught? One of the originators of this theory was 1986 Nobel Prize winner James Buchanan. I was fortunate enough to be with him on the 40 person, Cato Transition to Freedom team sent to Moscow and St Petersburg for several weeks in September 1990. Our task was to show the Russians how to handle free-enterprise, because it was arriving the following month.
Our audience consisted of high ranking government officials and Communist Party operatives, intellectuals and sundry dissidents. Some of the audiences were more than 1000 in number, all leaning forward eagerly with their translating devices to their ears. James Buchanan was telling any Russian who cared to listen that one of the greatest dangers they faced was to have their economy captured by special interest groups. As a result, of this, they could end up with a catastrophe that would bear no resemblance to a free-market economy, one that would deliver them absolutely none of the anticipated benefits.
He explained that a study of public choice theory would explain how political decision-making quite often results in outcomes that conflict with the preferences of the general public. Advocacy groups, with their pork-barrel projects, could be the end result of the painful revolution they were currently experiencing. He painstakingly explained to them the extreme effort to which those receiving the ‘concentrated benefits’ would go to bring about their objectives at the expense of all those millions shouldering the costs. Those bystanders would not make any effort to resist strenuously and, in fact, be unaware of what was happening.
Bad government policies
Looking back 25 years later, it is plain for all to see that this is exactly what transpired and why so many Russians yearn for the return of Communism. Unfortunately, our Australian experience is not much different (apart from the lack of physical violence) as we can see the detrimental effect, capably explained by public choice theory, as we observe the constant stream of news reports drawing attention to bad government policy forever coming out of Canberra or Perth, delivered as from a conveyor belt with no off button.
Let me give you three examples from here in Perth.
1. The Potato Board made Western Australia an international joke. Those benefiting from the existence of the Potato Marketing Corporation of Western Australia received benefits, concentrated and focused on them and them alone. The rest of us shared the burden of the cost of all this as well as reduced choice of potato varieties.
2. Another example is the extortionate rate of credit card interchange fees applying in Australia, resulting in travel industry downgrades to Australia.
The attention to these issues by the travel industry should bring this taxi/airline game to an end shortly. Recently, our state government announced that they have reduced the maximum Interchange Fee for taxis permitted, down from 10 per cent (plus GST) to 5 per cent (plus GST). However a reasonable rate should be ‘zero percent’, as is charged by the new competitor, Uber.
The 10 per cent or 5 per cent does not go to the taxi drivers or to the credit card companies; it mainly goes to Cabcharge who pad their lobbying justification with all sorts of ‘administrative fees’. The minuscule credit card fee is normally absorbed by most businesses, simply as a cost of doing business. Meanwhile, it’s best to pay for taxi rides or air tickets with cash, as recommended by overseas travel agents.
3. Another example of the public choice theory explaining some government expenditure mysteries, could be the forest of solar-operated speed signs popping up all around Perth’s schools. This could be a solution in search of a problem as it appears to solve a non-epidemic of student deaths near schools. The schools already have clearly visible speed signs, but the new solar contraptions are a tribute to supreme salesmanship.
Yes, it will be us again picking up the invoice, $160,000 per school and WA has 1113 schools, so that’s potentially between $36m and $178m neatly spread over all of us. All this at a time when the state’s finances are stretched and Perth is already known as the ‘sign capital of the world’ with signs everywhere proclaiming what we can and can’t do. I won’t even start on federal affairs, but will leave it to you to apply this public choice theory to our Foreign Affairs Department who are currently spending hundreds of millions of our dollars searching for someone else’s plane, in an area where there is absolutely no evidence of the plane disappearing.
Shortly we will have another example put before us. This week’s announcement about major reforms to your superannuation arrangements, is alerting us to the fact that our federal government, in deep trouble financially, has noticed that prudent Australians share $2 trillion in their superannuation funds. That’s greater than the entire value of Australia’s Stock Exchange and 30 per cent more than Australia’s entire GDP.
If these private assets could be seized, or diverted to infrastructure, it is plain to see who will benefit. It has happened before, in Australia and elsewhere. Perhaps this is why some investment managers are suggesting that a portion of our superannuation funds should be allocated into more secure investments.
Watch out whenever governments knock on your door (or your TV screen) with offers to help. It could be that we have learnt from history and know all this already. Is that why Australians usually vote against any amendments to the Australian Constitution? Those pushing hardest for those amendments will be those receiving the concentrated benefits. Please enjoy your search for bad government policies and the driving forces behind them.