June 14, 2024 

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REAL INTEREST RATE: The market, or nominal interest rate, after adjusting for inflation. This is the interest rate lenders receive and borrowers pay expressed in real dollars. There two ways to think about the real interest rate, (1) the historical, after-the-fact, interest rate and (2) the desired interest rate lenders and borrowers have in mind when entering into a loan. The first one tells us the purchasing power of any interest payments received or paid. The second way of looking at the real interest rate is based on expectations of the future.

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Fact 5: Our Necessary Evil

It's time to give up our attempts to enter the Merciless Monolithic Media Masters Cable Television Company, Inc. office and take care of other pressing business -- taxes. The next stop on our excursion through the economy is the Shady Valley City Hall, where we need to momentarily, and begrudgingly, pause so that I may pay my semi-annual property tax bill. This is the least enjoyable stop -- at least for me -- on our journey. Grumble. Grumble. Grumble.

Of course I hate to pay taxes! But, then again, who doesn't? Taxes are one of those annoying and evil necessities of life that simply can't be avoided.

Or can they? Do we have to pay taxes? A quick visit to a bookstore will produce dozens of books telling you how to avoid taxes by investing here or buying this or doing that. Better yet, if we could rid ourselves of the inefficient, bloated, incompetent, do-nothing government, then you and I wouldn't have to pay taxes. Right? We could use our hard-earned income to buy stuff that we want, rather than letting the inefficient, bloated, incompetent, do-nothing government spend it on stuff that we don't want, don't know anything about, and will never need. Right?

My disgruntled disposition on the subject of taxes and government gives rise to the fifth basic fact of economic life:

FACT 5 GOVERNMENT IS A PUBLIC GOOD -- A number of highly valued activities that benefit the public are best produced with the coercive powers of the government.

Here's the bottom line: As members of society, we involuntarily pay taxes to the government because the government provides us with stuff that we can't get in any other way. In particular, the voluntary actions that make markets work sort of okay most of the time, don't work for all goods at all times. We want goods that can only be produced by the government. Therefore we are willing (and let me stress the willing part) to allow the government to force us to pay taxes so that we get the stuff we want.

If, bright and early today, we decided to completely eliminate the government -- state, local, and federal -- wiping out all traces of the concept of government from our collective memories, then by early tomorrow morning we would reinvent government. (Although we might call it something else -- like plothgim.) This is a sure bet, because government -- as incompetent and inefficient as it may be -- is the only thing we've got that can provide us with some really, really necessary stuff.

So, what is this really, really necessary stuff that government, and only government, can do?

What the Government Does

Here's a short list of well-known activities that we wouldn't have without government.

  • National Defense. One of the best reasons (that comes to my mind) for government is defense. The centralized, coercive powers of government are the only way to effectively protect the entire country from foreign attack. A private business could not do what is needed to defend the nation.

  • Legal System. The government also needs to be in charge of our system of laws -- including writing the laws and enforcing punishment for those who don't abide. This is also pretty important if we want markets to operate efficiently. It's very difficult to exchange stuff voluntarily without laws against property theft, assault, murder, etc. You can probably make up your own story in which a market exchange is disrupted because one party bludgeoned the other with a baseball bat -- my personal favorite involves an annoying vinyl siding salesman.

  • Transportation. One of the more important, but sometimes overlooked, functions of the government is transportation -- including city streets, interstate highways, airports, and municipal bus service. Because resources and products are geographical concentrated and thus not evenly distributed, we need transportation to move stuff to where it will do the most good. For example, a ripe, juicy pineapple in Hawaii provides very little satisfaction if you're in Topeka, Kansas.

  • Education. Government also tends to be very big on education, ranging from local grade schools up through state-supported universities. The federal government has a hand in education at all levels -- even for private schools -- through various policies, such as scholarships, research grants, and lunch subsidies.

Most of what government does falls into one of these categories, or something very close. However, we can probably bet donuts to dollars that anything the government does draws criticism from someone. Some people say that the government shouldn't do education or transportation at all. Others strongly suggest that much of the government can and should be privatized -- letting private businesses take over. (I hope this sets off some warning lights in your head about unhealthy cooperation between the first and second estates.)

To see if these critics of government are right or wrong, let's see if we can figure out why government does what it does, and whether or not it's overstepping it's bounds by doing things it shouldn't.

Not All Goods are Created Equal

One nice thing about being a human, as opposed to a kumquat or other such vegetable, is that we derived satisfaction from a variety of different goods and services. Least I resort to a litany of television commercials ("sometimes you feel like a nut, sometimes you don't"), suffice it to say that we have a multitude of different wants and needs that can be satisfied in a number of ways. If we didn't, then this discussion would be a heck of a lot shorter, millions of government workers would be employed elsewhere, and a gadzillion critics of government would have to find other pressing social problems to debate.

Here's the line on goods that we, as consumers, would like to have because they satisfy a few of our unlimited wants and needs: The stuff we consume has two features that can be mixed and matched to give us four different sorts of goods.

The first is what we call excludability -- which is how easily you can keep people from consuming a good. If you can keep people away, then you can also charge them for consuming. If you can't exclude them, then you can't charge them.

For example, if you don't pay for a candy bar, shirt, or airline ticket, then you can't eat it, wear it, or fly. Or if you try to eat it, wear it, or fly without paying, then the sellers of the candy bar, shirt, or airline ticket, will be able to seek redress through the legal system -- that is, have you tail thrown in jail.

Alternatively, if you don't pay for a good like national defense you can still benefit. Once a country is protected against aggressive foreign parties through the procurement of weapons and the deployment of a military force, then all parties -- let me reiterate, all parties -- within the nation are protected. Those who pay for the defense are no more protected than those who don't. You can imagine how much anguish right-wing, military hawks go through knowing that left-wing, anti-military, peace-nik doves are also protected. But, that's the way national defense works -- nonpayers cannot be excluded from enjoying the benefits of the good.

Of course, like much of life, this is a matter of degree. Those who don't pay could be excluded if they're deported to another country. Moreover, if the citizens of, say, the state of Nebraska don't pay for defense, then they could be refused protection against missile attacks, enemy invasions, or whatever. The bottom line is that excludability ultimately depends on the difficulty of excluding those who don't pay.

The second feature is rival consumption -- which is whether consumption by one imposes an opportunity cost on others. A rival good can only be consumed by one person at a time. A nonrival good, in contrast, can provide benefits to several people simultaneously. For efficiency, consumers of rival goods should be charged, but consumers of nonrival goods should not.

Candy bars are a good example of a rival good. If you eat a candy bar (an Almond Joy), then I can't eat it, too (but I really, really wanted it). When the price of the candy bar -- the value to buyers -- is equal to the opportunity cost imposed on others, we have achieved efficiency.

Alternatively a star-filled night sky that can be gazed upon in wonderment by a billion separate pairs of eyes gives us an example of a nonrival good. The view enjoyed by one pair of eyes does not hinder the view enjoyed by the other 999,999,999 pairs. Total satisfaction for our economy is greater when more people view this twinkling wonderment. If we charge anyone for the view, and they don't consume, then total satisfaction is less and efficiency is diminished.

Two by Two Gives Us Four

If we mix and match excludability and rival consumption, we have four different sorts of goods. They are:

Private Goods -- exclusion is easy; consumption is rival. Let's see... we have a good that can only be consumed by one person at a time, and we can charge people who want it. Hey, we could trade this thing in a market. Anyone who wants the good badly enough would have to pay to get it. In fact, private goods, such as candy bars and shirts, are exactly that -- privately owned, controlled, and traded through markets. Moreover, competitive markets do a pretty fair job of efficiently producing and exchanging these goods, if participants don't gain market control.

Public Goods -- exclusion is hard; consumption is nonrival. Here we have the exact opposite of private goods -- any number of people can consume the good simultaneously, and we can't charge any of them. We might find if very difficult to trade these goods in the market. In fact, they are called public goods because they are publicly (read that as by government) produced and made available to the public. National defense is the penultimate example of a public good. We've already noted that nonpayers -- including left-wing, anti-military, peace-nik doves -- can't be excluded from national defense protection. Moreover, safety of left-wing, anti-military, peace-nik doves doesn't keep right-wing, pro-military, hawks from being protected.

Near-Public Goods -- exclusion is easy, consumption is nonrival. Our third sort of good is almost a public good, but not quite. Any number of people can benefit from it at the same time, yet consumers can be charged. Television broadcasting offers us a very good example. Microwave television signals indiscriminately reach all households as they bound from overhead satellites. My reception doesn't prevent your reception. I can enjoy the same signals that you do and neither one of us loses anything. Yet, broadcasters can scrambled their signals such that only those who pay get a coherent picture. It's really a waste when you have to pay for a near-public good.

Common-Property Goods -- exclusion is hard; consumption is rival. Here we have a group of goods that's free to all comers, yet the use by some prevents the use by others. This sounds like it could be a potential problem. A common-property good can be "used up," like a candy bar, but you can't charge anyone for it and you can't keep anyone from getting it. The best examples of common-property goods are lakes, oceans, the atmosphere, and other similar natural resources. While everyone can use the air, some uses impose an opportunity cost on others. For example, dumping pollution into the air tends to keep people from breathing.

With the exception of private goods, the other three cry out for government. The first primitive governments were undoubtedly formed among our primate ancestors to: (a) provide common protection from saber toothed tigers, agitated mastodons, and neighboring clans who had just invented spears and (b) ensure that no member of the clan took more than their fair share of berries from the nearby forest or dumped decaying, unwanted mastodon remains into the communal watering hole. I'll even go as far as to say that if it were not for public goods, near-public goods, and common-property goods, then we wouldn't need anything called plothgim -- that is, government.

Our modern governments produce a lot of different goods, some they should and others, perhaps they shouldn't. When you're in the voting booth, trying to decide between candidates, public-spending referendums, bond issues, or other such democratic muscle-flexing, there are a few things that you might want to consider:

Voting Tips for Government Goods

  • First, consider the inherent nature of any government function under debate. Based on excludability and rival consumption, how are the functions best classified?

  • If the government is trying to get involved in a private good, then just vote NO! (Or YES, depending on how the ballot is worded.) We are best served as a voting public by letting private businesses produce private goods for private consumption. You should raise series questions if the state government wants to get in the business of selling candy bars.

  • If someone is trying to get the government out of the production of a public good, then we're on a quick route to disaster. I'm sure foreign powers would favor private provision of our national defense -- because we would have none. Thoroughly question the ulterior motives of anyone wanting to privatize public goods. Perhaps they just don't want the good produced -- period.

  • Near-public goods are the most controversial, because they can be privately or publicly produced. Private producers can charge a price for the goods, even though efficiency suffers when they do. Here you have to balance efficiency with other things that private or public provision would do. For example, the government needs to fund education, but is private education better? Unfortunately, there are no one-time answers all for near-public goods. Each is unique.

  • We must also consider common-property goods, especially most of what goes on with the natural environment. The question is: How do you keep people from using too much? Government can pass laws, but often the lack excludability prevents control even by government. How do you keep people from using the oceans, streams, and atmosphere as a waste depository? Like near-public goods, there are many options because each common-property good is different.

How the Government Gets its Money

Because we need the government to collectively do the things that can't be done individually, we have to pay for it. How? Obviously through taxes -- those involuntarily, coercive payments that we make as taxpayers. There are, however, some tricks to getting taxes about which most shrewd leaders of the past and present are aware. You too need to be aware.

  • Tax the goods that everyone needs. Any city commissioner, IRS auditor, state legislator, or millionaire Senator knows that the best way to fill the government's coffers is to place taxes on goods that people can't do without. That's why you tend to see taxes on such goods as cigarettes, gasoline, alcohol, and food. Face it, if you're addicted to smoking, driving, drinking, or eating, a tax of a few extra pennies (or perhaps dollars) isn't going to change you behavior much. You're likely to grumble a lot, but you'll buy the good and pay the tax.

  • Keep the taxes hidden from voters. Because voters don't like to pay taxes (grumble, grumble, grumble), it's best for the political careers of those doing the taxing to keep them as hidden as possible. The government makes it appear that someone else is paying the taxes. For example, businesses often play a major role in the collection of obvious consumer income taxes and sales taxes. Sure, your grocery receipt has that sales tax entry between the subtotal and total amounts, but you don't actually write a check to government. You pay the store and the store pays the government. Likewise, you're probably more concerned with the difference between your W-2 withholdings and your tax liability come April 15th, than you are with you're total tax liability. While you're paying $43 gadzillion in income taxes, you're actually pleased because you're employer withheld $97.12 more than your tax liability -- so you get a refund.

There are also a few things that government should -- and occasionally does -- consider to make the collection of taxes as fair as possible.

  • Horizontal equity. The first of these is the idea that everyone who has the same ability to pay taxes should pay the same amount of taxes. This seems incredibly fair and sometimes actually happens. For example, if I make $20,000 a year and pay $5,000 in taxes, and you make $20,000, then it's only fair that you also contribute $5,000 to the operation of government.

  • Vertical equity. The second idea is that people with different abilities to pay taxes should pay correspondingly different taxes. Going back to my $20,000 income and $5,000 taxes, it would be very unfair if your income was $40,000, but you also paid a mere $5,000 in taxes. A $10,000 tax would be more in line with fairness. The lack of vertical equity is often a source of political revolutions. This is especially true when the first and second estates have more income than the third, but pay the same or less in taxes. OFF WITH THEIR HEADS!

Here are a few tax tips to consider in the voting booth:

Tax-Related Voting Tips

  • Be wary of politicians who promise lower taxes and more government services. In spite of what you think about the waste in government, the provision of government services carries a price tag. While we would all dearly love to have the government do its job without taxes, it just can't happen. If a politician promises to lower your taxes ask yourself, or the politician, whether services will be reduced and if so, which ones. By the same token, if a politician promises more government services, better find out who's going to pay.

  • Be wary of hidden taxes. Some of the taxes we pay are obvious, others, however, are buried in layers of business production. Businesses "pay" the taxes, but pass along the extra cost to consumers as higher prices.

  • Be wary of the vertical and horizontal equity and fairness of a tax. Does the burden of a tax fall equally on people with equal incomes? Do people with more income pay more or less in taxes?

Necessary, But Imperfect

While we can't get along without government and the stuff only it can provide -- that doesn't mean it's the answer to all problems. Like everything in our imperfect world, our government is imperfect.

This fact would not be such a bad thing if we recognized it fully. Unfortunately, many of us look to the government to solve all of our problems. How many times has a small town passed a law making it "illegal" to rain during the "Founder's Day" picnic. Sometimes we ask government to do more than it can or should.

Here's some reasons why government screws up.

Those Faceless Bureaucrats

Unresponsive, monstrous bureaucracies that have taken on lives of their own tend to come to the top of most lists of government problems. Because government workers and government agencies are protected by layers of legal mumbo-jumbo, they often lack the incentive to satisfy their consuming public. Government employees don't have to appease each individual complaining customer, because their jobs don't depend on appeasing each individual complaining customer.

Yet, government is not the only victim of monstrous bureaucracies. Profit-motivated corporations also have large, unresponsive bureaucracies. You might have as much trouble getting the defective disk drive in your brand new Omni Conglomerate, Inc., OmniTurbo 6000 computer satisfactorily repaired as you are getting a straight answer about your income tax from the Internal Revenue Service (IRS). Each has layers of protection for individual workers that can make efficiency an unreachable goal.

This is a problem of government, no doubt, but it's really more of a problem of bigness and a complex economy. The only real solution is to eliminate about 90 percent of the economy -- an unappealing option.

Those Ignorant Voters

Most voters are basically ignorant when in comes to politics -- and I mean that in the nicest way possible. There's a great deal of information floating around during an election about the candidates, their ideologies, their positions on major issues, their clandestine affairs, etc. The problem is that voters just don't have the time to find out everything there is to know about each of the 10 gadzillion candidates on a ballot during an election. How does the Democratic candidate for state auditor feel about NATO? And do you really care? Like most voters, probably not. In other words, voters choose rational ignorance, they choose not to learn about the candidates because they have better things to do with their time. As we'll see in Fact 6, Our Unknown Economy, this is occurs in all parts of the economy.

Our decision to remain ignorant, as reasonable as it may be for us individually, often leads to the election of candidates whom we might not necessary want in office. If we really knew all of the facts, we would have voted for the other candidate. Consequently, some candidates, perhaps most candidates, who are elected don't represent those who voted for them. This is why you tend to see candidates hedge and waffle as much as they can on the issues before the election. They have to be careful that voters don't find out who they are and what they really want to do.

Those Special Interest Groups

Although some voters lack interest, others might be very, very interested. You might personally care little about how candidates for the state auditor position feel about NATO, your next door neighbor, whose son is stationed at a NATO base in Germany, might be very interested. In fact, your neighbor might get together with others who have a similar interest in NATO and form a group that solicits the NATO-related positions of every candidate on the ballot -- just to make sure they don't vote for a state auditor with the wrong view.

This is how and why special interest groups are formed. Not only do some people choose to remain ignorant about candidates and elections, others choose to become very, very informed and even to seek active participation in hopes of influencing the outcome. They do this because they have a great deal to gain or lose and, unlike others, really don't have anything better to do with their time. (Not that they don't have anything to do, they just don't have anything better to do. The issues are just that important.)

Special interest groups have seemingly come out of the woodwork in recent decades to lobby the government about everything it does. These groups pour gadzillions of dollars into the election and re-election campaigns of every politician, tugging and pulling them in every way except what the voters apparently want. If the politicians want to be elected to office -- which requires gadzillions of campaign dollars -- they need the money and support of special interest groups. This is bad, right? There are two sides to the story.

  • Side one is the potential good that special interest groups can do. Whether actively involved or not, virtually everyone is a member of one special interest group or another. Most of our varied interests are represented by a special interest group. If you're a female, gun-toting teacher, who runs a dairy farm on the side, then you're interests are represented by the National Organization of Women, the National Rifle Association, the National Education Association, and the National Dairy Council -- although you're a member of none. There are so many different interests in our modern complex economy that almost every interest has an association that lobbies the government for favorable treatment. If you're pro-this or anti-that, then someone is likely to be on your side. This is good. This lets your feelings be known.

  • Side two is the potential harm created when these groups try to get government to pour money into their own special causes (read that as: "personal bank accounts"). And, while there are a large number of special interest groups, not all are equally powerful. Recall if you will that resources, income, production, and wealth are not equally distributed. The most influential special interest groups are backed by those who have the greatest share of the economic pie. The economic pie talks and politicians listen. As such, special interest groups are prone to enhance our already unequal distribution of economic pie.
Those Greedy Politicians

If the problems of incompetent workers, ignorant voters, and powerful special interest groups, aren't bad enough, we also have politicians trying to line their own pockets at the public's expense.

Now before I get too many nasty letters from our elected officials, or have my taxes audited for the last 20 years, let me state that many seek government office to serve the public. However, the goals and aspirations of even the most public-spirited elected officials, need not be the same as those of the voting public. The number one reason for this difference is that elected officials are elected officials only if they get elected. Their over-riding goal is to get elected and then to get re-elected, a task that can only be accomplished with a majority of the voters casting ballots. This translates into one voter more than 50 percent.

Clearly then an elected official can have an extended career at the public trough, excuse me, in public service, by satisfying only 50 percent (plus one) of those who vote. The remaining 50 percent (minus one) might be completely unrepresented.

Considering that voters tend to remain ignorant when there's no immediate indication that an elected official's actions have any direct bearing on their lives, it's in the elected official's best interest to remain pretty quiet about some of the things he or she is actually doing. If you, as an elected official, can sneak off on a fact-finding junket to the vacation mecca of Cancun, Mexico during the bitter cold winter months, then it's best that voters remain uninformed

Voting Tips on Fighting Government Inefficiency

  • First, note that government will never be flawless, efficient, and free of imperfections. The critics of government who've made a comfortable living pointing out government flaws, will always be able to pursue their chosen career path.

  • Improvements, however, can be achieved. Humans are imperfect, too, but we can improve. The same is true of government.

  • A few ways to improve government include reducing the complexities of the bureaucracies, giving voters more information about issues and candidates, reigning in the unrepresentative power of special interest groups, and making politicians re-election more attuned to voters' interests.

  • As a member of the third estate, be wary of any unification between the first and second estates. The marriage of wealth and power is invariably the death toll for those who have neither.

What Does It All Mean?

Like it or not, government is with us and will be for a long time to come. I can't even imagine a society that would not involve some form of government (or plothgim). In that numerous needs-satisfying goods are produced only by government, we have no choice but to keep it around. And because we have it, we have to pay taxes. The question then is whether our taxes dollars are spent wisely. The simple answer is: NO they aren't and they never will be, because government is incredibly inefficient and incompetent! Whatever the government seeks to do, it's probably going to screw it up because bureaucracies are unresponsive to the public, voters don't care, special interest groups have too much influence, and politicians pursue their own agendas. The problem is that if the government doesn't perform it's duties badly, then they aren't performed at all.

There are some things, however, that the government (the first estate) does badly, that it should not be doing, and that could be done better by businesses (second estate) or consumers (third estate). One of the problems with government is that it tends to perpetuate itself. Once a government agency is created to address a pressing problem, it never seems to die -- even when the problem has been solved. To justify its existence an agency looks for other problems to solve. In some cases, the problem falls within the domain of what the government can do better than the markets. In other cases, its simply a matter of the agency feeding upon the economy, like any B-movie monster run amuck.

The message for pedestrians of the third estate is to keep a close eye on government. We need it, but as many peasants of the middle ages, citizens of the former Soviet Union, and other members of the third estate can fully confirm, the potential abuses of the government are many. Government can do a lot of good things for the economy, but it has tendency to oppress the people, confiscate resources, and abuse power for the benefit of the few who are in charge. Like fire, government is a tool that can be beneficial or deadly destructive.

Okay, let me sign the check for my property taxes so that we can be on our way. Our next stop is a mini-mall next to city hall. While we're in the area, I thought I might stop off and pay a visit to my dentist, Dr. Nova Cain. She wanted to talk to me -- something about a ROOT CANAL!

Fact 4: Our Monopolized Marketsxxx Fact 6: Our Unknown Economy


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