On revising state constitutions, the shorter the better?

An interesting post at Marginal Revolution:

Using public choice economics, how might we redesign the Constitution of California? Lawmakers from both parties have proposed this idea, plus there were (failed) attempts to call a new constitutional convention through a referendum. Did you know that the operative constitution from 1879 is the third longest in the world, after Alabama and India?

I see a few options on the table:

1. Eliminate the 2/3 legislative majority required to pass a new budget.

2. Eliminate popular referenda.

3. Move closer to a Swiss-like "veto only" system for referenda.

4. Eliminate the power of referenda to authorize state-level expenditures.

5. Cap state-level expenditures.

6. Regulate state treatment of pensions more strictly, to encourage fiscal responsibility.

7. Amend the constitution to make it harder to...amend the constitution.

As Tyler notes California has the third longest constitution in the world. Reformers should aim for shorter, distinct Constitutions that affirm limited government. I think California needs to eliminate popular referenda that mandate the legislature to spend on specific programs.

Bush Crowding Out

President Bush does like to stick by his word, as we have seen.

“I've abandoned free-market principles to save the free-market system ... I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis,"

Less then a week after making this statement to CNN, the Bush administration offered $17.4 billion in taxpayer earnings to GM and Chrysler, in order to prop up companies that are producing items that currently no consumers wants, and have not wanted for some time.

In April 2008, before the government begin handing out money, Honda's sales were up 4.2% and Nissan's were up 3.6% yet Detroit's big three car companies sale's were down 10.4% (HT: International Herald Tribune)

The opportunity cost here is seen in two major areas. First, that $17.4 billion could still be in the hands of taxpayers, encouraging spending. Secondly, these companies are putting capital to use in inefficient ways. Should they be allowed to go bankrupt, the capital would be allocated, by the invisible hand of the market, to much more efficient sources. This would in-turn create more jobs then are being protected.

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers,"

Too bad President Bush did not see this quote as a good thing.
(minus "disorderly," but bankruptcy is a government regulation, if it was "disorderly" would a better fix be to adjust the regulation, as opposed to throwing money at companies?)

How Much Would You Pay?

Governor Blagojevich stands accused of attempting to sell President-Elect Obama's vacant seat in the U.S. Senate. Among other things, he asked for a very plum position at a non-profit or union job. His wife was part of any prospective deal.

Obviously a U.S. Senate seat has its value to each person and, in the case of Blagojevich, his spouse. Andrew Roth takes a crack at calculating the value of this open seat and comes out with a NPV (Net Present Value) of $6.2 million. However, this number is underestimates the what can be termed as the going price, considering in the 2004 election candidates for Illinois senate seat collectively spent $17.25 million.

There's another problem with this estimate. In accounting for only possible benefits, Mr. Roth makes a mistake similar to those made by environmentalists touting the economic returns of green power such as the number of jobs. If jobs were a benefit employees would pay their employers for them. For me the costs of a political career (including the deal-making with high-maintenance peers on a daily basis) would signal that the costs are much higher than the benefits.

This might be one of the many reasons that I was not asked to place a bid on the senate seat.

I, Pencil

Not many short stories can claim an introduction written by Milton Friedman that mentions both Adam Smith's thoughts on the invisible hand and Friedrich Hayek's thoughts on the importance of dispersed knowledge, but Leonard E. Read's short story I, Pencil is able too claim just that. Few other authors can bring the making of a pencil and the free market together in such a basic and understandable way.

~Leave all creative energies uninhibited

Bailouts and Moral Hazard III

First it was Bear Stearns, Fannie Mae, and Freddie Mac.

Then it was the Massachusetts Turnpike Authority.

Now it's the MBTA.

Given the nature of moral hazard, this could be quite a long series of blog posts.

The Health Care "Market"

Paul Levy, the President and CEO of Beth Israel Deaconess Medical Center, has some great insights to problems facing health care:

The problem with the health care "marketplace" is that it is not a real market. There are so many intermediaries that the usual connection between buyer and seller that we see in other fields does not exist. Thus, the incentives for suppliers (doctors and hospitals) to engage in efficiency improvements and value enhancement are extremely slow to emerge. Also, the incentives for consumers to seek greater quality and lower costs likewise are very weak in this field. (This is aggravated, of course, by the lack of transparency about relative quality of providers.)

Then, we overlay on that the fact that government sponsored programs, Medicare and Medicaid and other state subsidized insurance plans, are ruled by administrative fiat and competing political agendas, and we see that over 40% of the delivery of health care is not subject to market influences at all. One result there is the focus on quick fixes that have headline value (not allowing payment for "never" events, for example) that only cover an infinitesimally small portion of the problem but do not address underlying structural problems. Another result is political battles focused on splitting the pie differently but not making the pie the right size or more tasty.

The whole post is worth a read.

Prononents of socialized medicine love to frame health care as a market failure. As Levy points out though, we hardly have a free market in the health care industry. Before we go on adding even more regulations, it would be best to examine the effects of the ones we have in place now.

An actually move toward a free market in health care, like the utilization of market forces in just about every other industry, would bring us much better services at much lower costs.

Moral Hazard and Bailouts II

Governor Patrick is proposing a bailout of the Massachusetts Turnpike Authority.

The House, acting swiftly at the administration's request, gave initial approval yesterday to legislation that would allow the Turnpike Authority to use the state's higher credit rating to refinance its debt to lower its interest costs. The move means taxpayers would be responsible for the turnpike's debt if the agency defaults.

Putting aside the history of mismanagement by the Massachusetts Turnpike Authority and the sorry history of the Big Dig, what incentive do the members of the Turnpike Authority have to make sure taxpayers don't end up shouldering the risk?

Unlike the private sector, where shareholders keep management close to the vest, the overseers of public agencies are long gone after making critical decisions. Such political appointees to the turnpike board will not be around 10 years from now. There isn't an incentive to think long-term.

The debate over financing public infrastructure is not exclusively a political problem to pin upon Democrats or Republicans but a public choice problem. The question is "what is the proper institutional setting to prevent the creation of moral hazards in the first place?"

The Politics of Bailouts

Yesterday, I had discussed one economic aspect (moral hazard) posed by the bailout of Fannie Mae and Freddie Mac, government-sponsored enterprises.

Today, our friends at the Heritage Foundation offer a public choice perspective by explaining why so many politicians are interested in a bailout.

A snippet:

When Fannie’s accounting scandal came to light in 2004, conservatives pushed hard for reforms to phase out Fannie and Freddie. Led by former Walter Mondale and Barack Obama campaign adviser James Johnson, Fannie and Freddie pushed back hard, raising millions of dollars for members of the relevant oversight committees and opening up “Partnership Offices” that funneled money into various housing projects in districts of key members of Congress.

This problem, with some attention, could have been solved years ago. But, as always with politics, it's worth asking, "Cui bono?" The answer is politicians who think they can always effectively address "market failure" without engendering "government failure."