Academics can become frustrated by government policies captured by political considerations. Proposals can get floated by policymakers with evident shortcomings, and yet they get implemented anyway either because of interest group lobbying, horse trading, or private interests. Why do we often get second- and third-best policies from the government even when domain-experts readily agree on what would be the first-best design?
Of course, sometimes the first-best is not feasible, or people cannot agree on what it is. In the case of optimal taxation, reallocation of resources towards those most deserving is constrained by citizens’ ability to inefficiently adjust their behavior to avoid taxes. People can move their income towards uses that avoid taxes, or adjust the amount they work and invest. The government can only do so much to limit these distortions because it lacks information about people’s true abilities and preferences. While the aim may be to redistribute resources to those disadvantaged by conditions of their birth or other turns of bad luck, the government can only observe proxies for disadvantage like income. Since income is a consequence of disadvantage, preferences, and choices such as effort and distortionary adjustments, redistributive taxation faces a tradeoff between supporting those disadvantaged through bad luck and encouraging inefficient transfers and adjustments. Economists who study optimal taxation consider the problem of redistribution and revenue generation subject to these costs from distortion caused by limited information and enforcement.
However, few people would argue that the tax system in countries like the United States comes close to approximating the best system subject to these constraints, even if they disagree on the appropriate levels of redistribution. The question is why governments cannot institute efficient policies given known constraints on citizens’ economic behavior–the policies that academic economists may choose if given license to design them themselves, the “technocratic solutions.” The above discussion of optimal tax rates subject to distortionary behavior of citizens ignores another constraint that is less frequently modeled in technocratic solutions–checks on distortionary behavior of a policymaker acting without society’s legitimacy. Giving a policymaker free reign to implement technocratic solutions risks future abuses of power for self-enrichment and personal inclinations. Optimal policymaking should recognize the incentive constraints of both the citizens and the policy maker. Even a benevolent policymaker acting unchecked can miscalculate and create policies the citizens do not want. Without checks on policymaking by society, governments may be slow to realize mistakes.
Balancing the state’s capacity to institute technocratic solutions versus capture by politicians that have too much unchecked power might present a tradeoff. Nondemocratic states have fewer checks imposed by society. On the one hand this may enable technocratic elites to impose large-scale policies without excessive deliberation and delay. Examples include the industrial and scientific advances of the USSR in the mid-20th century, such as in space exploration. However, there are countless examples of unchecked state power leading to disastrous consequences, either because of corrupt pilfering of revenues, elite infighting, or crazed technocracy and despotic subjugation. Excessive discretion over provision of social services can lead to widespread corruption, as in South Africa under Jacob Zuma; it can also lead to widespread famine, as in China during the Great Leap Forward or in colonial states prior to independence. Constant power struggles between elites can lead to instability and inefficient zero-sum competition. One example is in Stalin’s Soviet Russia, where over half of the Politburo members appointed between 1919 and 1952 were murdered or committed suicide. The most crazed and despotic states commit genocidal acts even against their citizens. While limited checks on the government can lead to faster and more ambitious policy-making, such benefits do not arise in many social and historical contexts, with capacity either hobbled by elite capture or used for devious ends.
Distributing power broadly in society, such as by guaranteeing rights to protest and criticize the government, can limit such excesses. So can fundamental rights that protect minority groups from subjugation. However, catering to the needs of various interest groups can force undesirable tradeoffs and dysfunction in governance. In recent years democratic elections in some countries have led to the rise of incompetent leaders fomenting zero sum games between segments of the electorate, limiting the ability for consensus and sensible technocratic policymaking. Convincing a majority of society to consent to policy changes, especially when they have disparate interests or may not be well-informed, is a daunting task and can lead to deviations from first-best policies. Indeed, interest groups may reject technocratic solutions precisely because they want to limit the capacity of the state in order to protect their own privileges and rights from future encroachment, lest politicians gain too much discretion. Issues where this seems practically relevant in the US include taxation and guns on the right, and policing and surveillance on the Left. While social deliberation and electoral incentives can limit the capacity of the state to implement optimal policies, they distribute power away from technocrats and politicians and towards citizens. The policies the society is left with may not seem very good relative to the optimal subject to constraints on the behavior of citizens, but they may be better relative to the optimal subject to constraints on behavior of both the citizens and the state.1 Limiting the power of the state prevents it from exerting arbitrary control over citizens.
The correct tradeoff between technocratic capacity and checks on arbitrary power depend on the social and cultural conditions of a society. Often state capacity and empowerment of society can grow in tandem over time, as happened in the early 20th century as many countries extended the franchise and extended social programs.2 With a well-functioning society holding the state in check, policies that deviate from the first-best may be better than they appear.
- This argument has a close analog to credible auctions, in which the auction design both ensures the good is allocated correctly and that the auctioneer cannot cheat.
- See The Narrow Corridor, which includes many of the ideas in this post.