Zero Sum and the Government

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While discussing progressive "solutions" the other day, someone said my problem was that I saw government as a zero sum game. Where every dollar you used to help one person, came from the pocket of someone else, so there could never be a net win for society. I explained that it is much worse than that: when government is involved, because there's overhead, waste, fraud, work rules, politics, and other things that dissolve efficiency, freedom, pride and value, as part of the transaction, it is always a negative-sum (lose-lose) game. That isn't to say there aren't winners, there's just always far more losers: because of how the system works.

Summary

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In many agreements there are 4 basic quadrants. Both win (upper right), both lose (lower right), and the zero-sum upper left and lower right: where one person wins and another loses.

When a baker sells a cake to you (for a profit), it's win-win. You got a cake for a good value (below the level where you would just make the cake yourself). And the baker sold a cake for his cost of goods and labor value (his profit).

When government makes a law, that's generally win-lose (zero-sum). If the law says the baker MUST bake that cake for a gay wedding (for example), the baker loses his liberty, while the government/recipient got to force them. The legislators and voters that won, got to feel self important. The victims and voters that loss, get to feel stepped on and enslaved. So there's a win and a loss component.

But when a government does a social program, like many things government does it is negative-sum (less than zero sum), and both sides lose. This is common in things like any prisoner's dilemma, wars or fist fights (where both sides hurt people and break things), gambling (for the players) due to the house rake, financial trading (for the investors) due to commissions, and so on. You can win in-spite of the system -- but the system itself was always a drag on the participant.

Zero-sum implies that what I take from X, gets delivered to Y.

Because government can only get money by taxing, printing or borrowing, it can only take away. Any of those burden businesses and individuals with either direct taxes, inflation, or debt. So any reward to one group, comes at the expense to everyone else: which is why government is zero sum.

But it's worse than that, because there's an overhead.

Government works that they take from X (taking freedom), and waste a bunch in overhead for doing the redistribution, then they let a bunch of unworthy people lie to get some of it (encourage fraud, that they don't stop effectively), then they give a small fraction to Y with a bunch of restrictions and stipulations (that make their fraction even less performant than it would otherwise be). Politics guarantees that X resents being stolen from and Y resents that it wasn't more -- so we get divided, resentful, and money is wasted. Everyone comes out behind.

NOTE: In theory the government can invest in infrastructure that gets you net returns in the long run. There's very very few exceptions where government might "invest" in infrastructure, which lasts long enough to eventually get a return. Bridges, dams, roads, and so on.

But it only works in theory.... as long as you don't look at two things:

  1. Treasury View of economics. That government jobs usually displace private sector jobs, just less efficiently -- so it would have been much cheaper for government to buy that same infrastructure via the private sector (that to build it themselves).
  2. That the government often builds capacity you don't need. Roads to nowhere, bridges that are rarely used, and replacing smaller things with bigger (under the theory that more is better). But under-used items are just a burden on the economy (stealing opportunity costs, and costing us in maintenance). These costs usually outweigh the few things that actually return more than they cost.

This isn't made up, I used an Economist article, and their data, to show an example of exactly how much this happens.

New Jersey and the Economist

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For each $1.00 New Jersey gets back from the fed, they have to give the fed $1.64, they have to pay $.18 in compliance costs, and the government borrows about $.81 of that dollar, and sticks New Jersey with the debt obligation. On top of that, federal work-rules and controls means that dollar is actually only about as effective as $.60 would be if it was under local or private hiring practices.

Progressives see the $.60 of real value as a net win. Anyone else, can see that you paid about $2.63 to get it.

Progressives think you can make it up in volume: if you just continued to lose $2.00 for each $.60 of value you get out of the system, you'd eventually come out ahead. Non-progressives recognize the seen versus the unseen (The Broken Window Fallacy) and the $2.00 of hurt you did, for each $.60 in help.

Conclusion

I wish there was a magic button that made centralized command economies work. But in recorded history, they rarely start out better than the alternative... and always end up worse. The larger the federal government gets, the more it displaces the more efficient state and local governments, and the even more efficient private sector -- so you get the opposite of economies of scale.

Robbing Peter to pay Paul, and keeping a cut for yourself is what progressive governments do.

  • In the micro-economists view, it's great if you're the government -- but it sure sucks to be Peter.
  • Some think that Paul is coming out ahead -- but not really. It often robs him of self-esteem and holds him down from being productive and self-reliant. A net loss for his character, self esteem, and certainly for the economy, since it turns him from producer to moocher.
  • More than that, in the macro-economics view, there's no way to come out ahead. You lose money in every transaction: you can't make that up in volume.

Socially: everyone loses:

  • Peter is resentful that he was stolen from (and was robbed the chance to learn voluntary charity)
  • Paul is resentful, because it's never enough (and he was robbed self-esteem)
  • Everyone else saw that Peter has less to invest (because it was taken from him) and grow the economy, Paul turned from being forced to work/produce into being more a moocher, and government took it's waste and cut and grew to be a bigger burden on everyone

No one comes out ahead.

This problem is obvious in all of recorded history. If it wasn't centralized command economies like Communists USSR or China, would have outperformed the western democratic ones. North Korea would be the industrialized utopia compared to South Korea (not the other way around). Cuba, Venezuela, Vietnam and a hundred other countries that tries socialism, would be outperforming their more free market neighbors or the world: yet the opposite is always the case. This was discussed and proven by Hayek (who got the nobel prize in Economics) for his work on Dispersed Knowledge, and the inefficiencies of larger and more command economies. He basically showed how more layers in a bureaucracy create inefficiency (and waste), and the more things required to go through the bureaucracy, the worse things get overall.

NOTE: This doesn't mean there isn't waste or corruption at State and Local level. They're often both embarrassingly bad. But at least at local level it takes far less attention and momentum to throw the bums out and fix it. And the size of potential corruption or abuse is smaller. With smaller incentives, you get less of it. With it being easier to fix, the abuse lasts less long. It doesn't hold up in every case, but on average, it certainly does.

The same with private sector. Things are often bad in private companies. But it takes less attention to get change, it's easier to gain momentum against problems (the population is smaller, as is the number of people required to notice and fix a problem). So on scale and scope, the largest business is a fraction the size of government (and there's better rules for transparency) -- so it's harder to hide corruption, there's less scale of the corruption, it's easier to find, and easier to fix. Statistically.

More

Why can't Keynesianism work?

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The idea of Keynesian spending boosting a crashing economy requires 4 things: (1) an information vacuum (no information that spending and thus taxes are going up), (2) you have to cut spending/programs as the economy gets better (3) you need to be replacing like jobs (4) you have to have near equal efficiency between government and private sector. Since none of those things happens, Keynesian promises are never realized.

Treasury View

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The general definition is "government spending crowds out private investment" and is widely accepted. The Keynesian version is that it all has to be perfectly efficient and instantaneous, and since it isn't, they mock their re-definition of it. Keynesians prefer to see those lags, overreactions and inefficiencies in corrections (recessions/depressions) as opportunities for government to step in and spend (stimulate) to where "things should have been", to smooth out the downturns.

Dispersed Knowledge

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There was an economics battle between Keynes and Hayek fought generations ago. But History proved Hayek the winner: things he predicted came true. Keynes scored a few microeconomic points, but history broke his macroeconomics models: the boom economy after WWI, stagflation in the 1970's, Japan's lost decades and the failure of Abenomics, China and Russia's growth after abandoning command economies, all proved Keynes wrong. And Hayek won the noble prize for explaining why: Dispersed Knowledge. If the leaders don't know more than everyone else combined, then the more decisions you make from the top, the less efficient those decisions will be, and planned economics will underperform ones where the decisions can be made closer to the problem.

Keynesian failures

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It would be great if Keynesianism worked, governments could manipulate economies, and our lives would be better. But history shows us the opposite: it has failed every time it has been tried. Examples: the new deal, the new new deal, after WWII (Keynesians predicted a depression cutting all those military jobs, instead we had huge growth), 1970's Stagflation broke their models completely, Japan's lost decades (Abenomics) all went the opposite of Keynes predictions. Every country that converted from centralized planning and communism to free'er economies (Russia, China, Vietnam, East Germany, etc), should have had a depression, instead of massive growth. The history of central planned economies like North Korea, Venezuela, Cuba, should have all outgrown places like South Korea, Brazil or Hong Kong: but the opposite happened. Heck, if it would have worked, then Obamanomics would have given us the highest labor participation rates in our history, instead of the lowest since the Great Depression. So what did we learn? Keynesians learned nothing because reality doesn't fit their desires. But the rest of us learned that Keynes was wrong.

References