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Governments Thrive on Low Expectations

August 7, 2003

You have achieved a level of notoriety in economics when a line or law is named after you. Say what you want to say about Say's Law, but most of us at least know the pithy five-word version, "Supply creates its own demand"—which constitutes a considerable abridgment from J.B. Say's original exposition, which turned 200 years old this year.

Gresham's Law is also well known, although its popularity has declined in our fiat era. The notion that bad money (overvalued by the government) drives out good money was more obvious among the masses in the 19th century, because good money was still legal tender in those days. It was paper but it could actually be redeemed for an existing commodity. The addition of money backed by nothing into an economy was acknowledged to be a despicable attempt to transfer wealth from the productive to the unproductive and as the cause of the business cycle. Today, even though the addition of such money has the same effects, it is standard policy, courtesy of the Federal Reserve.

In general, the naming of laws after individuals is much better than the naming of lines. When a curve is named for someone in economics, it usually highlights some trite math truth that does not add much to our understanding of the world. For instance, Engel curves are a staple of most intermediate microeconomics texts. They merely depict the relationship between income and consumption for various types of goods. Unfortunately for Engel, the idea that we buy more SUVs and less Yugos as our income increases enlightens no one. What is shocking is that someone decided to graph this relationship.

And who can forget the famous Laffer curve showing how workers work less as tax rates increase?  This unoriginal idea formed much of the intellectual support for 1980s-era supply-side policies, and was sold to greedy politicians on its ability to explain a way to increase revenues and grow the government. Thanks to Arthur Laffer, an entire generation's philosophical opposition to taxes is based solely on the idea that the only bad tax rate is the one that is not revenue-maximizing. His notoriety is well earned.

But mine is not. As a young economist, I still have time to perform some professional act that will gain notoriety for myself. Of course, I would prefer notoriety of the good kind, so the creation of a Westley curve is out of the question. My own Law of Political Economy is in order. For it to catch on as a generally accepted truth, both in the economics profession and in the culture at large, it must, like Say's and Gresham's Laws, be simple, obvious to everyone, and (as-of-yet) unstated.

Thankfully, I have devised such a law that meets these requirements. Westley's Law states that government grows on low expectations. That's my ticket to notoriety: an emperor-has-no-clothes statement that everyone knows is true but, in the age of the Leviathan state, no one wants to hear. It means that consumers apply much lower standards to government output, no matter what it is, than they do to the output that results from private markets. As a result, life is more costly, dangerous, and short.

Examples of my Law in action abound. One simply has to pick out a local newspaper to see it playing out. Read about the latest public school scandal here, or the latest national debt figures there. It is not simply that governments fail, which is a little too obvious of a statement to be formulated into a Law (and would be true whether or not governments achieved balanced budgets).

My Law highlights the dichotomy that governments fail because individuals allow them to, while at the same time markets do not because individuals refuse to offer them the same slack.[1]  It follows that the government must maintain low expectations in order for its activities to continue, and that the larger the government, the greater the degree that low expectations permeate the culture.

This is why government apologists work overtime to demonize markets. They make sure that high expectations are placed elsewhere by arguing that relative differences in the private and public sectors are not great. Consider a recent front-page story in the Washington Post, excoriating Wall Street for the collapse of the Argentine economy one and a half years ago. That devastating financial collapse, the story goes, was due to the overselling of Argentina by investment and money managers throughout the 1990s in search of short-term financial gain.[2] 

Needless to say, the Post indicted Barclays Capital, Goldman Sachs, Morgan Stanley, Credit Suisse First Boston, Merrill Lynch, and others for fueling the bubble that burst and ruined the economy, and not the Argentine political class, central bankers in Washington and Buenos Aires, and multi-billion dollar taxpayer-supported World Bank and IMF loans that provided the liquidity and the moral hazard necessary to sell Argentina as a too-big-to-fail investment vehicle. While no one denies that firms promoted Argentina as an emerging economy worthy of capital investment, the very fact that private sector actors are assuming responsibility for the economic collapse, and not public sector actors that played a much greater role, illustrates my Law in action.[3]

The Law was also evident (and unstated) earlier this year when the ill-fated space shuttle Columbia burst into pieces during reentry. Anyone with any idea of how NASA is organized was not surprised by the tragedy, but the space agency's apologists worked overtime to assure the public that such events were the exception, not the rule. Technically, this is true, in that since the space shuttle has been in operation, more flights have landed safely (111) than have crashed (2). But if the percentage of shuttle takeoffs to crashes were applied to, say, airline travel, we'd see well over 20 crashes a day at New York's La Guardia airport alone (according to David Owen in Slate). The reason, of course, is that we expect more from private sector airlines than from public sector NASA. If the public's expectations for NASA were to rise, then support for NASA's monopoly on space travel would diminish.

As government failures go, NASA's are more important than others because of the role that its bureaucracy plays in providing positive public relations for all government activity. When it puts a man on the moon, it sends the message that government can indeed achieve great things, even though this is much more the exception than the rule. But when it fails in public, the impulse is to wonder whether the expectation level for all government activity should be reevaluated.

Such a reevaluation is long overdue in American society. The short-run costs for allowing it, however, would be great for the millions of Americans whose livelihoods are dependent on the public sector. Government grows on low expectations because it keeps tax dollars coming in and paychecks going out, and as a result, it simply does not pay for many to question its efficacy. There is, in fact, an inverse relationship between expectations and government funding. If Engel were alive, he would probably graph it.

But I won't. I am not interested in achieving his notoriety. I'd prefer that of J.B. Say and Thomas Gresham.

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Christopher Westley, Ph.D., teaches economics at Jacksonville State University.


[1] One can hear the snickering from the leftist and neoconservative camps (who differ not in philosophy, but in degree):  "What do you mean markets don’t fail?  Ever heard of Enron?"  Well, yes. But market forces have shut down Enron, an action that suggests a healthy and functioning market. Enron’s case proves my Law. The idea of allowing the same standards that effectively shut down Enron to apply to any government program would end Washington as we know it.

[2] "In those days," writes the Post, "Wall Street firms touted Argentina as one of the world’s hottest economies as they raked in fat fees for marketing the country’s stocks and bonds. Thus were sown the seeds of one of the most spectacular economic collapses in modern history, a debacle in which Wall Street played a major role."  One would think that next to global warming, the most evil act a money manager could engage in is the talking up of investment vehicles.

[3] "The time has come to do our mea culpa," Hans-Joerg Rudloff, chairman of the executive committee at Barclays Capital, said at a conference of bank and brokerage executives in London a few months ago (quoted in the Washington Post). "Argentina obviously stands as much as Enron" in showing that "things have been done and said by our industry which were realized at the time to be wrong, to be self-serving."


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