Russ Roberts and The Rat Hole Fallacy
by Eric Kramer
Russ Roberts and The Rat Hole Fallacy
Liberals believe that unregulated markets do not adequately supply public goods like roads, parks, and scientific research, and that government should use its taxing and spending powers to provide these goods. Conservatives agree that markets fail to provide ideal quantities of public goods, but they emphasize that government spending is often wasteful and inefficient, and they argue that waste and inefficiency justifies limiting government spending. Market failure is real a problem, but so is government failure, and nothing is gained by shoveling tax dollars down a rat hole.
The belief that government inefficiency justifies reducing the size of government is one of the most common and influential arguments for limited government. Here is a version of this argument being made by Russ Roberts in a recent episode of his EconTalk podcast:
I have no problem with government taxing at relatively high rates if I thought they would spend the money well . . . I oppose high tax rates not because of market inefficiencies or slowing of rates of growth. Because I don’t think that government allocates that money well. And I think that argument–again, it’s not much of a winner [politically] –but that’s the right way, I think, to think about those things.
The point Roberts is making is intuitively plausible. The idea that government waste justifies spending cuts is also emotionally appealing, because people deeply resent the idea that their tax money is misspent by incompetent or corrupt public officials. Not surprisingly, the belief that government is wasteful reduces public support for government programs. But the claim that government inefficiency justifies limited government is a fallacy. We can call it the Rat Hole Fallacy.
To see the problem, let’s focus on road spending. Suppose that government road building and maintenance is unnecessarily costly. Perhaps the contracting process is not competitive, or too much is spent on new roads relative to maintenance, or there is a prevailing wage law that raises construction costs, or the government sometimes wastes money on “bridges to nowhere“.
One response to wasteful road spending is simply to argue for reforms that would make spending more efficient. We could advocate for a more professional and competitive contracting process, for a reallocation of spending to maintenance, against prevailing wage laws, or for reforms to the process by which road building projects are selected. (Whether paying construction workers a premium over a competitive market wage is wasteful is debatable, but put this aside.) This type of advocacy is, arguably, the right response to concerns about government inefficiency, but this is not what Roberts does. Roberts’ response to government waste is (apparently) to support lower taxes.
Now, supporting lower taxes might seem like a second-best response to government waste. Voters can’t be expected to force government officials to make the road building process more efficient, because they don’t understand how it works. Public choice theory – the application of economic reasoning to politics – suggests that advocating for reform is pointless, because the existing inefficient road building process is (apparently) a stable political equilibrium. But even if fixing the nuts and bolts of the road building process is impossible, it may be possible to get voters to insist on lower taxes, or to overturn the existing political equilibrium by voting for lower taxes in a referendum.
Let’s assume that this is what Roberts has in mind. (I can’t imagine what else he thinks arguing for lower taxes while complaining about government inefficiency in a very nonspecific way can accomplish, other than making his listeners more receptive to tax and spending cuts.)
Suppose Roberts persuades voters to insist on lower taxes, perhaps by supporting a referendum that caps spending on roads. Is this likely to raise the public welfare? The answer is, not necessarily. It could be that spending on roads is already too low, even if it is somewhat wasteful, and that cutting spending will just make this problem worse.
Roberts does not even try to justify his opposition to taxes by showing that current spending is too high. Instead of trying to answer the relevant questions – Is current spending too high? Will cutting spending promote the public welfare? – he simply trades on the intuitively plausible idea that government inefficiency justifies lower spending. In effect, Roberts is substituting a theoretical claim about the optimal level of government spending – that the optimal level of spending is lower if government is more wasteful – for a careful empirical argument that shows that actual spending is too high, given the existing level of wastefulness of government spending.
It is conceivable that this theoretical point about the relationship between waste and the optimal size of government is a useful heuristic for thinking about whether actual spending levels are high or low. For example, if spending is generally set at levels that would be about right if government were not wasteful, then perhaps the claim that government is wasteful and should be cut down to size is a useful rule of thumb for thinking about the level of spending. Obviously, to make this argument persuasive, Roberts would have to provide some evidence that spending is generally set at a level that would be sensible if government were not wasteful, and he does not do this. But it turns out that there is another problem. The theoretical argument is wrong. It is simply not true that the optimal level of spending goes down when inefficiency goes up.
To see this, assume that we start with efficient road building, and the cost of road construction then goes up 20% due to increased inefficiency. This increase in the cost of roads has two effects on the optimal level of spending: 1) fewer roads should be built, because fewer will pass a cost/benefit test when costs are higher, and 2) the cost of roads that are built will be higher. These effects work in opposite directions, and it is not clear whether optimal spending goes up or down.
So, is Roberts right to claim that government spending is too high in some nonspecific, overall sense? Maybe. But that claim can’t be evaluated by pointing to the indisputable fact that government is sometimes wasteful. The only way to show that government spending is too high (or too low) is to look in detail at actual government spending. If spending is not actually too high, persuading people to cut taxes can lead to harmful cuts in essential government services.
The claim that tax cuts are justified because government is inefficient is intuitively plausible, emotionally appealing, and wrong. It should be recognized for what it is, a potentially destructive fallacy that diverts our attention from thinking about the important issues in public finance.
He could be right that government spending may be inefficient, BUT WE KNOW that marginal spending by the very rich gives very low marginal utility for the buck (because otherwise it wouldn’t be marginal), That argument is not complicated at all. Even if the government doesn’t spend well we can tax the rich buggers and give it to poor.
Stranded costs.
For example, suddenly discovering that 4 trillion in military spending has to be written off because there is no current defense against cheap drones.
Discovering that Obamacare does not scale over all the states and leads to collapse of small rural states.
Finding our that a Texas S/L bailout 40 years ago was an inside job.
One ends up paying interest charges forever on stranded losses. What happens when AOC gets elected and asks, what is this 100 billion in interests costs for? Someone tells her it is something the boomers did 35 years go before she was born.
Underneath we have investors hedging the what ifs here. Investors who have seen the FDR shock, the Nixon shock an begin to plan for the Trump shock. Liquidity dries up and the rebalance gets forced on government, or worse, we end up in a hundred years of mild deflation and government real rates skyrocket.
Of course it depends on what you believe is wasteful.
For conservatives, transfer payment to a welfare queen is wasteful by definition.
For liberals increased military spending is just as wasteful even though much of military spending is just another form of welfare.
In both cases people are given the resources to consume without having to earn the resources in the market.
I agree that liberals and conservatives often have different views about what it is appropriate for government to do. But when conservatives talk about waste they are trying to appeal to the values of liberals. They are saying, “even if helping the poor or building roads is a legitimate activity of government, you should favor limited government because in practice government is inefficient and wasteful”. Conservative economists (Hayek, Friedman) are aware that most people are not natural libertarians, and they focus on the the problem of government failure to justify limited government to people with liberal values. That’s the type of argument I am criticizing in this post.
But Spencer welfare queens waste is a lower percentage waste than trust fund baby waste.
I have seen several governors elected on a “trim the fat” platform for government spending. If we haven’t found the wasteful government spending in the last 40 years of trying, maybe it just isn’t there.
As for roads, I throw in the towel. Even resurrecting Eisenhower wouldn’t be enough to get the roads maintained properly.
Eliminating governmental funding won’t just result in poor road maintenance; it will result in the disappearance of roads. Inefficient road maintenance is better than no maintenance.
Jack:
Rather than let our roads in Green Oak Township go from a fair condition to a poor condition, we passed a millage and started repaving them. A county responsibility and they refuse to suggest a millage to do it. Republicans . . . and they will boast about low taxes.
Speaking of roads, here is a great old post from Economists View:
https://economistsview.typepad.com/economistsview/2010/08/the-unpaved-road-to-serfdom.html
There is a tacit argument about rat holes that goes something like this.
Behind public works efforts are closet Jacobins who will vote themselves and theirs lavish salaries, perks and pensions for featherbed or no-show jobs and will tell you what to do and how to behave. Scary, huh!
On the other hand, this being an econ blog, there are towns and cities with responsible citizens who really care about paving and maintenance and their fellow human beings.
I guess the “private” sector is completely immune from “waste”? Is that because, in theory, it is “disciplined” by the market? But how do you explain the ability of extremely rich people to engage in pet projects? I guess if you assume that they are rich because they are “smarter” than the rest of us they therefore have some “right” to engage in such wasteful spending? Plus what is “waste”? I am sure that someone looking at ARPANET back before the “internet” would have thought that spending on infrastructure to enable government contractors too send things to each other might be “wasteful”. After all we have a perfectly good mail system.
The private sector is notoriously inefficient. There is little or no competition and monopolists dictate the prices and wages. If you don’t like it, make like Elon Musk and move to Mars. The difference is that top executives and major investors capture most private sector waste while employees and contractors capture public sector waste. There is a whole pornography of private sector inefficiency. People love to hear about private jets, fancy estates and penthouse apartments. They don’t get the same kick from an age 62 retirement and a 16′ fishing boat.