The government can't do anything right

[Essence]

http://underdesign.files.wordpress.com/2010/03/590ev.png

'nuff said.

[OldTrees]

Deadweight loss (aka Destroying Wealth) = doing it wrong.

A "C" is a passing grade but it indicates the student got 21% or more incorrect answers.


Please provide an argument in your OPs instead of a link. (your constant steam of links does get annoying if not supplemented with a logical argument in the OP)

[Essence]

Argument Number 1
Deadweight loss isn't "doing it wrong"; it's unavoidable.  Every single government, business, and individual in the world creates deadweight loss.  Pareto optimization is an abstraction that might occur in a few transactions in a given entity's existence, but it's literally impossible to achieve in practice. 

Conservatives like to talk about how inefficient the government is, but they always assume that businesses are magically free of deadweight loss -- which is, bluntly, a pile of crap.  Neither any individual business nor the market taken as a whole is ever actually Pareto optimized.

If the government is doing it wrong, so is everyone else.  You can claim the market generates less deadweight loss than the government, but that's actually debatable because of Argument #2


Argument #2
Deadweight loss in the form of tax burdens isn't actually deadweight loss.  Oodles of conservatives would like everyone to think it is, because when you look at any single transaction, it looks like deadweight loss.  But tax burdens aren't simple penalties that you have to pay and see no benefit from.  Tax burdens are distributed payments that everyone makes to the government in exchange for distributed services like the ones mentioned in the link in the OP.

Conservatives don't like that because they can't track whether or not they personally benefit from their own distributed payments, and being the fear-driven (http://micmn.com/10057/science-says-conservative-brains-are-wired-against-tier-5-unemployment-extension/) types of people that they are, they're desperately afraid that someone else might be using "their" money in order to live without work. 

They are falling victim to the tragedy of the public goods game (http://youarenotsosmart.com/2009/10/13/the-public-goods-game/), which demonstrates that humans are entirely irrational when it comes to other people getting a free ride on your dime.  Because of their attitude about money, we as a people aren't solving problems like homelessness and poverty, which Million Dollar Murray (http://www.gladwell.com/pdf/murray.pdf) demonstrates are perfectly solvable if people were simply willing to play the public goods game rationally.  That would involve willingly giving the government money in order to let it solve the problem in the most rational manner possible, even if that meant giving some individuals a free ride.

Which leads us to Argument #3.


The government does a LOT of things right.
The entire premise of the "the government does it wrong" argument is based on a couple of fallacies.  The first is that, because you can find examples of egregious government inefficiency, all government is inefficient.  I can find examples of egregious corporate inefficiency with ease. (http://www.longislandfirearms.com/forum/m-1308057886.62347/)  Inefficiency is inherent in human enterprise, not in governmental enterprise.

The second was Argument #2.  Deadweight loss isn't dead weight -- it's a distributed cost for a distributed effect.  The impact it has on any given transaction is negative to that transaction, but the impact on that transaction is negligable compared to the transaction-enabling effect of the framework the government provides (i.e. everything mentioned in the link in the OP plus more basic things like creating the currency with which transactions occur in the first place.)  Any one individual might not like how certain specific 'distributed effects' are distributed, but that's hardly sufficient reason to make a claim that giving the government money is innately bad for the economy.

Because the government does a lot of things right, it creates a solid framework on which the marketplace functions.  There are problems therein, but without a governmental framework, there would be no market, end of story.  We would be bartering with our neighbors and making our own shoes because Nike wouldn't have the infrastructure to get them from China to our nearest Payless Shoe Source.

tl;dr: http://underdesign.files.wordpress.com/2010/03/590ev.png

[YoungSot]

The reason I want the government doing only what it is absolutely necessary, is because government is somewhat insulated from the effects of many basic market forces such as competition. Normally those market forces would encourage efficiency by causing a company with lots of inefficiencies to weaken, and if not corrected, eventually collapse. For example, if a company offers a product/service that is of mediocre quality and not enough people buy to justify it's creation, that company will be forced to improve their product or suffer the consequences. If a government offers a similar product/service, they can support it through taxation, effectively forcing the consumers to buy the product whether they want it or not.

This does not mean that the government doesn't ever do something efficiently, merely that on a basic level governments can get away with more inefficiency than businesses can, so it makes sense to only have government doing what it absolutely must do, and leave the rest to the naturally slightly more efficient private sector.

And of course, the same authority which makes government less efficient at providing services is quite necessary in other tasks, such as enforcing moral laws and protecting human rights.

[OldTrees]

Thank you Essence.

Argument 1
I do not see deadweight loss at the level of individual trade. (please enlighten me as to what deadweight loss you see)
However I would agree that Government can only opperate through deadweight loss and most businesses try to distort the market thus causing dead weight loss.

Argument 2
In the USA most taxation is a tax on Trades. (even the Income Tax is a tax on the Trade of Labor for Income)
Trades occur with standard Supply and Demand curves. Taxation of Trades shifts the Demand Curve down (taxation on the Consumer) or shifts the Supply curve up (taxation on the Producer). Either of these distortions moves the market equilibrium removing a chunk from the Trade Surplus. (try it yourself to see the lost wealth)



The lost wealth will look like a pentagon. This is made of the wealth taken through taxation (rectangular) and the wealth lost from forsaken trades (triangular). The wealth taken by taxation is not deadweight loss because it is used again. However the wealth loss from forsaken trades is dead weight loss.

Argument 3
1) Laws and precedents like "Corporations are people" that protect corporations from market influences distort the market. Hence the effects of these not free market policies are not a good example of the free market to criticize. (I am sure you have other examples of business inefficiency though)
2) Taxation does cause real deadweight loss as seen above. Government needs to tax to have revenue to spend.

[Essence]

I do not see deadweight loss at the level of individual trade. (please enlighten me as to what deadweight loss you see)

Deadweight loss is defined as the difference between the number of transactions that should occur at the Pareto-optimized price of a good or service and the actual amount of transactions for that good or service that occur at the current price of that good or service.  What that means is that any time you decide to not buy something even though it's at fair market price and you need it, you create deadweight loss.  This happens every day -- businesses and people do it constantly.

The lost wealth will look like a pentagon. This is made of the wealth taken through taxation (rectangular) and the wealth lost from forsaken trades (triangular). The wealth taken by taxation is not deadweight loss because it is used again. However the wealth loss from forsaken trades is dead weight loss.

Ah, I see -- none of the other graphs I'd looked at laid out the difference between those two areas.  So yes, taxes create deadweight loss above and beyond the amount used to provide services.  Thanks for the insight!

However, let's think about this in a physical perspective.  Deadweight loss might reduce the number of transactions that occur, but they don't reduce the amount of money within the economy.  If customers buy $1 billion less in goods each year because of taxes, that doesn't mean that there's a net loss of $1 billion to the economy -- it simply stays in the hands of the consumers rather than moving into the hands of business owners.  Thus, your idea that deadweight loss "destroys wealth" is flawed from the get-go.

The problem is that we've been trained to measure an economy's wealth in terms of GDP -- the sum of all transactions within an economy over a given year -- but that's not the same as the sum of all wealth within an economy at the beginning and end of that year. 

On another, note, it would be very interesting to note which causes a greater reduction in transactions: the deadweight loss created by the government, or the absorption of money from the liquid economy by major corporations and the superrich who "park" money in long-term financial instruments and don't allow it to participate in the creation of further transactions.


And YoungSot, I actually agree that the government should be smaller than it is today -- I'm just not sure that I agree with "as small as possible".  I think that there are many things that the private sector COULD do that it SHOULD not, thus the "as small as possible" idea doesn't quite sit right with me.  Moral laws and human rights aside, the private sector might be able to accomplish specific tasks (like constructing one commonly-desired roadway) more effectively, but driven strictly my market forces, many thousands of roads not commonly used would go unbuilt because the market is designed from the ground up to leave a significant group of people 'wanting'.  Those things that people should never be left wanting should never be left to the market to provide.

The biggest question in politics today is what items should be on the list of "things people should never be left wanting".  The left wing thinks that things like food should be on that list.  The right wing doesn't.  The left wing thinks that things like housing should be on that list, and the right wing doesn't.  Where do you draw the line?

[maverixk]

Argument Number 1
Deadweight loss isn't "doing it wrong"; it's unavoidable.  Every single government, business, and individual in the world creates deadweight loss.  Pareto optimization is an abstraction that might occur in a few transactions in a given entity's existence, but it's literally impossible to achieve in practice. 

Just because "everybody's doing it" doesn't make it any more or less right or wrong, it simply means "everyone's doing it."

[OldTrees]

Deadweight loss is defined as the difference between the number of transactions that should occur at the Pareto-optimized price of a good or service and the actual amount of transactions for that good or service that occur at the current price of that good or service.  What that means is that any time you decide to not buy something even though it's at fair market price and you need it, you create deadweight loss.  This happens every day -- businesses and people do it constantly.

In economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product.

If person A values the purchasing power of their money more than the object then they should not buy.
If person A values the purchasing power of their money less than the object then they should buy.
If person A prefers object C to object B then they should not buy object B at the opportunity cost of object C.
Economics are based of Wants and Desires. Needs are usually defined as a subset of these but sometimes something undesired is defined as a need. Fulfilling such a "need" would be another form of deadweight loss. ("people who have more marginal cost than marginal benefit are buying the product")

With this more accurate definition can you still discover examples of deadweight loss in individual trades?

The lost wealth will look like a pentagon. This is made of the wealth taken through taxation (rectangular) and the wealth lost from forsaken trades (triangular). The wealth taken by taxation is not deadweight loss because it is used again. However the wealth loss from forsaken trades is dead weight loss.

Ah, I see -- none of the other graphs I'd looked at laid out the difference between those two areas.  So yes, taxes create deadweight loss above and beyond the amount used to provide services.  Thanks for the insight!

However, let's think about this in a physical perspective.  Deadweight loss might reduce the number of transactions that occur, but they don't reduce the amount of money within the economy.  If customers buy $1 billion less in goods each year because of taxes, that doesn't mean that there's a net loss of $1 billion to the economy -- it simply stays in the hands of the consumers rather than moving into the hands of business owners.  Thus, your idea that deadweight loss "destroys wealth" is flawed from the get-go.

Voluntary trade is not a zero sum game. Rather it is a positive sum game that generates wealth. Voluntary trades increase the amount of wealth and will cause a natural deflation in the currency if the supply of currency is not similarly increased.

Is Currency ---> Is Wealth
but Is Wealth --/-> Is Currency

Note: If you need evidence of Voluntary trades being a positive sum game, I can provide it.

On another, note, it would be very interesting to note which causes a greater reduction in transactions: the deadweight loss created by the government, or the absorption of money from the liquid economy by major corporations and the superrich who "park" money in long-term financial instruments and don't allow it to participate in the creation of further transactions.

IIRC as the liquid money pool shrinks a form of deflation would occur causing no net effect in the long term.

PS: Your welcome about the better graph/explanation.

[Belthus]

If customers buy $1 billion less in goods each year because of taxes, that doesn't mean that there's a net loss of $1 billion to the economy -- it simply stays in the hands of the consumers rather than moving into the hands of business owners.

Ever heard of the paradox of thrift and the Great Depression? It matters a great deal how many times money changes hands. Too little and you have a recession and unemployment. Too much and you have inflation.

[YoungSot]

And YoungSot, I actually agree that the government should be smaller than it is today -- I'm just not sure that I agree with "as small as possible".  I think that there are many things that the private sector COULD do that it SHOULD not, thus the "as small as possible" idea doesn't quite sit right with me.  Moral laws and human rights aside, the private sector might be able to accomplish specific tasks (like constructing one commonly-desired roadway) more effectively, but driven strictly my market forces, many thousands of roads not commonly used would go unbuilt because the market is designed from the ground up to leave a significant group of people 'wanting'.  Those things that people should never be left wanting should never be left to the market to provide.

The biggest question in politics today is what items should be on the list of "things people should never be left wanting".  The left wing thinks that things like food should be on that list.  The right wing doesn't.  The left wing thinks that things like housing should be on that list, and the right wing doesn't.  Where do you draw the line?

The market is not "designed from the ground up to leave a significant group of people wanting". If you study entrepreneurship, one of the first things you learn is that the more needs/wants your business meets, the more money you'll make. Any "significant group of people wanting" is also a significant opportunity to make money, and the more a society moves toward a free market entrepreneurial system, the more people are out actively looking for such needs.

As for "things people should never be left wanting", I believe it is the responsibility of the individual to provide each for themselves. (There's another whole discussion there, regarding freedom and natural rights.)

[Essence]

If you study entrepreneurship, one of the first things you learn is that the more needs/wants your business meets, the more money you'll make.

This tells me you're talking out your ass, for a couple of reasons.

First, if you're a startup, the more needs/wants your business meets, the more expenses it accrues.  Those expenses can rapidly kill your fledgling business if you don't have old wrinkly white people money backing you up and/or the best advertising campaign in the world driving customers into your doors.

Second, if you're a mid-sized business, you can't position yourself in the marketplace if you're trying to do too many things at once.  Let me ask you something: what is a Coke?  It's a brand name, but its also a specific product, because Coca-cola has does a magnificent job of NOT muddying the waters regarding their brand, "New Coke" notwithstanding.

Now, let me ask you something else: what is a 3M?  You have no idea, and that's why when you go to the store to buy Scotch Tape, you're just as likely to walk out with a generic as you are with the original Scotch Tape, the 3M Scotch Tape.  Meeting only a very specific need is an AMAZING way to make more money than meeting a bunch of separate needs, because specificity breeds brand awareness and market position.

Any "significant group of people wanting" is also a significant opportunity to make money,

Not if the significant group is "poor people", which is exactly the group that the market is DESIGNED to leave wanting.  You can't make money fulfilling the needs of the poor because they don't have any money to give you.  Pareto optimized prices absolutely guarantee a class of people that cannot afford a particular good or service -- which is why you MUST have a government present to force the issue if you want to guarantee that product or service's universal availability.

The two choices you have here are Social Darwinism or Government Regulation -- either you accept the need for a centralized power to regulate the availability of certain goods, or you justify the fact that some people are starving by saying that they don't deserve to live.  Which leads us back to the Just World Fallacy (http://youarenotsosmart.com/2010/06/07/the-just-world-fallacy/) and a whole series of disprovable neo-conservative talking points.

As for "things people should never be left wanting", I believe it is the responsibility of the individual to provide each for themselves.

Then you have no problem with people stealing things they strictly need, like food and water?

[OldTrees]

Pareto optimized prices absolutely guarantee a class of people that cannot afford a particular good or service.

Incorrect.
Counterexample: A market with a sufficiently elastic and low Supply curve. (the market for Air on Earth)

Scarcity of a good OR the cost of production being too high for everyone to afford are the 2 factors that absolutely guarantee a class of people that cannot afford a particular good or service.

Unfortunately while the Supply Curve for Food and Water is sufficiently elastic, transportation costs result in the Supply curve being too high for some groups of people.

This problem is a primary argument for why people have an inherent Negative Right from Murder rather than a Positive Right to be provided with life.