Thursday, May 19, 2011

Externalities and the State

If you hang out in Intellectual Pin-Head places like I do (err, so you don't have to), you'll pretty quickly run across the idea of "externalities".  Wikipedia has a decent-ish article on the issue:
In economics, an externality (or transaction spillover) is a cost or benefit, not transmitted through prices,[1] incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.
Not many discussions on positive externalities, because quite frankly you don't see many of them.  But Progressives love negative externalities, and will tiresomely roll them out as examples of failures of the market system and justification for an ever expanding Government Sector.

And in all honesty, the market economy doesn't do a good job of factoring in non-price signals.  Pollution is a good example of this - it's nasty and unpleasant, but has often been a sign of cost avoidance where the polluter benefits at the expense of people who have to put up with the yuckiness he leaves behind.

Fair enough.  However, Progressives never consider the two word argument that cuts the heart out of their argument for expanded Government:

Sovereign Immunity.

It's hard to sue the Government, by intent.  The argument is that nuisance suits would interfere with the legitimate functioning of the Apparatus of the State.  Imagine someone bring suit because, say, the Government held Enemy Non-Combatants without trial at a location outside the United States.  Err, or something.  You get the idea.

But here's where the externality rubber meets the road: if the Government cannot be held liable for even gross misfeasance, who bears the cost of that misfeasance?  The answer, of course, is us:

The personal financial information of up to 210,000 unemployed Massachusetts residents may have been stolen in a data breach caused by a virus discovered in state labor department computers four weeks ago, officials said yesterday.

Names, addresses, and Social Security numbers, among other data, may have been taken, said John Glennon, chief information officer for the Massachusetts Executive Office of Labor and Workforce Development.

It raises a few questions: Why did it take the Department of Labor FOUR WEEKS to report this? I would imagine that anyone that had their information stolen has already found out about it - because their identities are now trashed. How did the virus get into the database? Is it a case of incompetent employees opening files they shouldn't? Holes in security that should have been patched?
About right, there.  Who knows - maybe someone at the Office of Labor and Workforce Development surfed to the wrong pr0n site and got some nanst malware which swiped the data.

Now riddle me this: if this had been a private company - say a hospital - not only would it be liable for a class action tort, but possibly some of the folks would be looking a prosecution for violation of the Health Insurance Portability and Accountability Act of 1996.  The cost of settling this - or of paying the judgement - would result in a price signal to the market, resulting in (long term) better security of the organization.

In other words, liability ensures that there is no externality. 

What about the Government?  What liability do they have?  In a word, none.  Go ahead and try to sue, this will be bounced from the Commonwealth's courthouses faster than you can say "pwned".  So who pays the costs of the breach?

The people whose information was compromised, that's who.  They're the ones that bear the full cost of information theft, frozen accounts, cleaning up a damaged credit history.  The State skates away scott free, courtesy of Sovereign Immunity.

And note to Progressives everywhere: the people bearing the full cost of dealing with the Government's incompetence are unemployed.  That means that probably they're poor.
So Sovereign Immunity screws the poor, by passing the full cost of incompetence-related externalities on to them in their moment of maximum financial need.  That's one righteous "progressive" vision there, Scooter.

But yeah I know, somewhere in Texas, a village is missing its idiot.  Or something.

Rational public policy theory thus says that most government functions should be outsourced, so as not to be protected by Sovereign Immunity.  Companies will bid on the contracts, pricing in the externalities.  Social Welfare will be maximized by minimizing the number of Government Functionaries.  Q. E. D.

So the take away from this (overly long) post is that 99% of all jabber you hear about "externalities" is precisely that - jabber.  The speaker is either ignorant of the externalities associated with their proposed Governmental Power Grab (and it's always about increasing Government power, isn't it?), or they're ignorant. 

In which case, they're a credentialed (but not educated) idiot.

And before you go thinking about how I'm being so mean to the Democrats, what makes you think that I'm not including Republicans, too?


Aretae said...


I think it's even stronger than you suggest (but you knew I thought that). Specifically, public choice theory suggests that lobbying almost universally moves to protect power groups that get money from the state.

McArdle today suggests that private prison activity is not winning.

ONLY the full separation of government from activities (NOT the separation of government from the delivery) will work. For instance, Separation of school and state is viable, while vouchers are FAR less so.

Outsourced is wrong...exited is correct.

Alan said...

Negative externalities are almost always a result of improperly allocated property rights.

Pollution being the most common negative externality, it's almost exclusively seen on "public" land (and air and waterways) that no one owns. It's really just corollary of the tragedy of the commons.

I can think of one appropriate positive externality. Society benefits from lower crime that is a result of some people carrying guns for self defense.

Chris said...

Alan beat me to this. Adding to his (excellent) point, if all land is owned privately, pollution would be a trespass. A polluter's crap (solid, liquid, or gas) coming onto or into a private owner's property is an infringement of that owner's property rights.

Two obvious solutions can be pursued. Either the polluter must stop or be hauled before an adjudicator for the trespass, or the polluter can negotiate an annual (or one-time lump sum) payment to the owner to allow the polluting trespass.

With public lands, the only remedy is more politics, sort of like having more sexual intercourse to reduce unwanted pregnancies.

BS Footprint said...

Thanks for pointing out the dangers of sovereign immunity combined with a large and growing government.

I am often frustrated by the lack of understanding so many people have about the nature of government, while they scheme their grand schemes of making a better world through the illusion of the benevolent state. Except the state isn't always so benevolent or benign, and, as you pointed out, puts some rather severe limits on your ability to gain redress when it harms you.

I think things have to get a lot worse before it gets better, because average people have been conditioned to view government as their helpful friend, when in reality it's an instrument of force, and some of us know what instruments of force do best.