The extent of government’s ability to act effectively is rather limited. It is not that government as a concept is inherently flawed or unable to function at any level. Instead, it is the expectations of its constituents that are the drivers of its inevitable failure in many of the tasks it endeavors upon.
For example, government can effectively reduce the opportunity cost of a choice for its citizens, but it cannot cure social problems stemming from the choices people make. An opportunity cost is a concept from economics which basically states that for every task a person engages in there is something else they cannot be doing with their time. For example, if you mow grass for an hour, the opportunity cost of that choice might be an hour writing the great American novel (assuming you are capable of such a accomplishment). Let us estimate that your novel would take 100 hours to produce, then for each hour you mow grass you effectively “pay” 1/100th of the value of your novel. If said novel would net you $500,000 in profits, then your cost to mow grass (outside of fuel and equipment) would be $5,000. So, you would be much better off paying the little kid down the street $25 to mow your grass.
Now, let’s apply this concept to regulatory government action. I will concede that, from a theoretical standpoint, it is much less costly to society if we “hire” an agency of people to check, for example, the solvency of financial companies. This agency could compile and publish information as to their effectiveness. They can be specialists that understand the industry and have an aptitude in their selected field. This agency would relieve us of the opportunity cost of having to learn the “ins and outs” of finance and researching every company when making any financial choice. Overall productivity rises because people can more easily determine which companies and products are relatively “better” and thus spend more time maximizing their own output based on their individual aptitudes.
The problem with this is that humans hardly apply things within the constraints of theoretical effectiveness. Where government fails is that people want government to solve societal “problems,” instead of merely making information more accessible. They want government to keep companies from compensating certain employees too much or selling products that they (voters) think are too risky. Of course, they like the return while the products are on the upside; they just deplore the downside risk that affects them on the backend of the transaction.
Additionally, there is a selection problem where people who wish to be politicians or government officials can often fancy themselves equalizers. Exacting what they deem to be justice from one entity for the “benefit” of the consumers or voters. Whether it is the voters or the employees of agencies driving these irrational expectations of government makes no real difference. Government is simply not up to the task without eliminating the human component of every decision. They cannot control the supply side of these transactions they deem dangerous or too risky, they must also impact the demand side of the equation. In essence, they must attempt to stop people from “hurting themselves.” Human desires and the balancing of risk and safety vary greatly from one person to the next and it is this which causes government to be ineffective. And, be certain, it is America’s risk tolerance mixed with liberty which has enabled us to be as prosperous as we are.
Government cannot protect people from themselves or eliminate every risk inherent in life. Government can be a conduit of information, but can never (nor should it) eliminate the desire of people to make choices or engage in risk. We benefit much more from the risk tolerance of humans than we suffer from it. If risk aversion was the default human position, humans would have starved long ago in caves; paralyzed from the fear of predators.
Over time, government becomes a haven for the risk adverse; both in employment and in voting. Those people on both sides of the proverbial aisle are driven by risk aversion and politicians motivate their voters by highlighting risk and danger. If you are on the right, the risk that someone may do something you do not think is “right” engenders the fear that society will suffer because your moral code was deviated from. On the left, if people are not nannied continuously throughout life, they will be unable to find happiness or will inevitably become victims. Incidentally, both situations are premised on adherence to some subjective moral code.
Essentially, many people vote on the premise that government will not merely be an efficiency enhancer; instead, government will be an enactor of some “justice” where the only thing they can be sure of is they will be the beneficiary and society will somehow be improved because people are constrained in the fashion they know is best. People have often restated the phrase that government is a “necessary evil,” but lack perspective of why this was originally said. Government is a necessary evil because of the principle of the opportunity cost. Anytime we assume government can solve our individual or societal problems, we set it up for failure and us up for disappointment. Not to mention we yield to it the essential liberty that has enabled us to improve the overall human condition through technological and economic progress.