Most everyone realizes there are differences between the
economy’s public and private sectors. However, they may not
appreciate just how great the difference is.
We have an ongoing debate about the size of government,
and by implication the size of the private sector. When choices are
made about what responsibilities and functions to assign to the
government, a crucial consideration should be the relative
competencies of the private vs. the public sectors.
Consider, for example, differences in how the two sectors
take advantage of advances in technology. In the private sector old
products become better and cheaper, and new products flow with
increasing frequency.
My 2009 car is the same make and body style of a 1990 one
I owned years ago. It is significantly better in every way — more
powerful, 25 percent better gas mileage, better brakes, more safety
features, better handling, and more fun. The application of
numerous breakthroughs in technology would be too numerous to
count. The inflation-adjusted sticker price has actually declined.
I have seen similar improvements in virtually every consumer
product I buy and use.
The private sector’s products all around us — food,
shelter, clothing, automobiles, home appliances, entertainment, for
example. The public sector’s products include defense, the justice
system, roads and highways, public schools, income redistribution
(welfare), laws, and regulations.
Many of the government sector’s outputs are more like
anti-products than products. Regulations stifle innovation,
decrease productivity, increase costs, and generally drive people
crazy. Rather than wealth creation, regulations result in wealth
prevention.
In the private sector virtually every product and every
service has been profoundly affected by the technological
revolution. The government sector, on the other hand, seems to have
no learning mechanism. The private sector is responsive and
dynamic; the public sector is almost catatonic. In the private
sector new products are introduced at a dizzying rate of
speed.
The private sector provides ideal growing conditions for
creativity. A striking example of this is the explosion of “apps”
(applications) for “smart phones.” (A smart phone is a cell phone
that connects to the internet.) The two leading providers of apps
are Apple and Google. The current population of available apps is
over 350,000 and still growing. Many of the apps are free or cost
only one or two dollars.
What these apps can do for you is absolutely mind
boggling. The proliferation of the apps is a dramatic example of
R.W. Emerson’s observation, “Invention breeds invention.” The apps’
universe has provided creative opportunities for thousands of
widely dispersed innovators and entrepreneurs. Hundreds of
thousands of innovative people are diligently “finding a need and
filling it.”
The government sector is “so yesterday.” Is there any
example of technology noticeably increasing the efficiency of
government? Does government productivity ever increase? We have
expended trillions of dollars on the “war on poverty” and the
incidence of poverty is as basically unchanged. Public schools
consume a large fraction of state and local budgets. Public schools
have grown progressively more dysfunctional over the past several
decades.
One of the public “products” most of us are forced to
“consume” is the Internal Revenue Code. During the almost hundred
years of its existence its efficiency has consistently grown worse.
Its birth coincided with that of the Model T Ford. Automobiles are
vastly superior to those of the early 20th century, the IRC has
evolved backwards. In terms of resources consumed and the burden on
the economy, the costs of collecting a dollar of revenue has
increased dramatically over the life span of the Internal Revenue
Service. The Model T is a museum piece. The IRC should
be.
The relative shares and importance of the public and
private sectors are only partially a political decision. It isn’t
simply about spending money and passing new laws and regulations.
The public sector is certainly doing enough of that.
There is in effect an undeclared race between the public
and private sectors in regard to satisfying human wants. Who’s
winning that race? Which sector is doing a better job of affecting
peoples’ lives in a positive way? In fulfilling human wants the
private sector is leaving the public sector in the dust. People get
more and more value from the private sector and the same or less
value from government activity even though the cost of government
has increased at an exponential rate.
Why is there so much difference in how the two sectors
function? Two important reasons are incentives and
competition.
The University of Rochester economist, Steven Landsburg,
says, “Most of economics can be summarized in four words: ‘People
respond to incentives.’ The rest is commentary.” Although I think
that’s an exaggeration, there is much truth in it. The private
sector is vastly more effective and efficient than the government
mostly because of the differences in the incentive structures. In
the private sector you can get rich filling needs and solving
problems. The public sector’s incentive structure is totally
dysfunctional.
In a competitive environment, innovation, efficiency, and
product improvement become matters of survival. Apple and Microsoft
spend billions of dollars annually on research and development.
They spend those vast amounts more out of necessity than choice. If
they did not they would fall behind and lose market
share.
President Obama complained recently about the White
House’s obsolete phone system. He said that the White House phones
are “30 years behind,” and “we can’t get our phones to work.” He
said that he was disappointed by the lack of “really cool phones
and stuff.” Does he ever wonder why this happens? I doubt that he
does. I’m pretty sure no major corporation has an obsolete phone
system.
Mr. Obama’s campaign themes were “hope and change.”
Ironically, he is intent on increasing the role of government, the
entity most resistant to and even incapable of change and
innovation, and there is little reason to hope that will change any
time soon.
In light of the stark difference in the effectiveness and
competence between the private and public sectors, it totally
mystifies me that any sentient person would want to transfer more
power and money to the government.
