Sunday, June 13, 2010

State Bailouts: The Tragedy of the Commons

Readers may be familiar with Garret Harden's Tragedy of the Commons.  As Wikipedia describes it:

"Central to Hardin's article is an example (first sketched in an 1833 pamphlet by William Forster Lloyd), of a hypothetical and simplified situation based on medieval land tenure in Europe, of herders sharing a common parcel of land, on which they are each entitled to let their cows graze. In Hardin's example, it is in each herder's interest to put the next (and succeeding) cows he acquires onto the land, even if the carrying capacity of the common is exceeded and it is temporarily or permanently damaged for all as a result. The herder receives all of the benefits from an additional cow, while the damage to the common is shared by the entire group. If all herders make this individually rational economic decision, the common will be depleted or even destroyed to the detriment of all."

Simply: each individual has incentive to do the exact action which, if everyone does it, will result in a pareto-inferior (aka: worse) result for everyone.  It's not entirely unlike the Prisoner's Dilemma.

I've been using the Tragedy of the Commons to describe the downward spiral which I think will result if the Federal Government starts bailing out cities and states from their failed budgetary decision.  Today, in the NY Times, I read the article "Obama Presses for Aid to Cities and States," and could only think: and so it begins. {tangent:  this post has nothing to do with Obama - this piece would be identical if you changed all the "Obamas" to "Bush," "Palin," "Clinton," or anyone else - so please save your partisan rantings for another blog}

The NYT says: 

"President Obama on Saturday implored Congress to provide more aid to states and cities to blunt “the devastating economic impact of budget cuts” by local governments that imperil the jobs of teachers, the police, firefighters and other public employees."

Now, the House and Senate have thus far resisted this aid, and my home state Senator Judd Gregg even tried to insert a clause into the financial reform bill which would have prevented the Federal Government from bailing out individual states.  His amendment failed.

The NYT article continues, clarifying:

"Unlike the federal government, all but one state and most local governments are required by their laws to balance their annual budgets, and they continue to struggle against the increased costs of relief programs and lost revenues from high unemployment and home foreclosures."

I do take issue with the argument used by the President:
"Making the economic case for helping the states, Mr. Obama said that if teachers and others are laid off — his education secretary, Arne Duncan, has said that without federal aid, up to 300,000 fewer teachers would be in classrooms this fall — “it will mean more costs helping these Americans look for new work, while their lost paychecks will mean less tax revenues and less demand for the products and services provided by other workers.” 

Now, I love teachers.  I think education is immensely important, and it's one of the main problems we have in our country.  My father was a teacher for over 30 years.  My mother was a teacher for over thirty years.  My sister is a teacher.  My brother-in-law is a teacher.  I am certainly in favor of teachers keeping their jobs and getting paid - and I think most people think similarly - which is why I hate the "we have to give the States all this money or the teachers will lose their jobs and your kids will wallow in their own ignorance" manipulative argument.  What next?  Will the next batch of money go to help save starving puppies and kittens?  After all - we all love puppies and kittens.  It's somewhat disingenuous to suggest that merely because people agree that we need something that the Government has to bail out the decisions of those who failed to adequately provide it.

I live in a town with good schools.  I don't have kids, and the majority of the residents in town also don't have school aged children.  Still, each year, we vote for massive property taxes  (mine are nearly 3% of my home's assessed value!) which go largely to support our schools, because the community values it.

Of course, teachers weren't the only emotional appeal.  In the opening paragraph I quoted, firefighters were also thrown in there.  Who doesn't love firefighters?  I love firefighters - I think they're heroes, and I absolutely want them to be there if my house burns down (although I'm told, slightly tongue-in-cheek,  that out here in the woods, in the Land Without Fire Hydrants, if you call the fire department their main job is to come and watch your house burn).  But wait - THERE'S MORE!  If teachers and firefighters isn't enough for you:

"Mr. Obama had supported about $50 billion in aid initially — $25 billion for public employees, $23 billion of which would go for teachers’ salaries, and $25 billion to offset states’ increased costs for their share of Medicaid, the public health program for the poor, people with disabilities and many nursing home residents....Mr. Obama warned that if Republicans blocked a vote, it would “undoubtedly force some doctors to stop seeing Medicare patients altogether.” 

So now we have teachers, firefighters, poor people, disabled people, nursing home residents, and Medicare patients - you'd have to be Satan Incarnate to vote against this money! (this is starting to remind me of the SnL classic: Steve Martin's Christmas Wish)

Look - we all want all this stuff.  No one wants teachers to lose their jobs, or for doctors to stop seeing Medicare patients.  But States are required by law to balance their budgets.  There are other solutions, and I don't just mean "hoping that the stock market comes back,"  which, horrifyingly,  has been suggested on more than one occasion recently.   Debts must be restructured, benefits must be scaled back, belts must be tightened, and, simply, spending must be less than revenues.  

If, instead, we just resort to Federal bailouts for every state who fails to balance their budget, the result can quickly spiral downward into a Tragedy of the Commons nightmare - where each state lacks the incentive to exercise fiscal prudence, knowing that Uncle Sam will be there to pick up the tab.

No - we're not there yet - this article was about, specifically, teachers and medicare - but once you open Pandora's Box of Bailout Bucks, it can be very hard to close.


p.s.: I wrote, two weeks ago, an analogy: " Greece : European Union :: Troubled States (CA, NJ, MI, NY) : United States.   Greece is a model for the pending budgetary crises in our respective municipalities, who cannot print their own currencies."


brendo said...

Hey KD,

Little off topic but up your alley (Gambling). What do you think of Paulson investing in Vegas? I always enjoy your take on Wynnn. Paulson seems to clash with Wynn on his views of vegas (China is much better he thinks) Thanks,

golfdude said...

I agree completely with your argument. They are all needed. But at what price. I read that the average gov employee makes 120k while a private employee makes 59k. I assume this is considering the pension etc. How valuable is a gov employee when compared to a private enterprise employee. It is a tricky question, but everyone has to take the cut. Or increase taxes. Which will just kill the system further. I hear about private employees being offered 20-30% lesser salary in the Bay Area. Then why not the gov employees ?

Kid Dynamite said...

golfdude - i think you're agreeing with me.

brendo - Paulson's MGM stock position flat out shocks me. i was trying to figure out if it's a hedge for some other position he has elsewhere in MGM's capital structure. Who knows. I think Paulson is not an idiot, and i think Vegas is DEAD....

Transor Z said...

This would be a more valid point if not for the extent to which Congress has coopted state legislatures and made them dependent upon continued federal funding. So in state budget areas like healthcare, transportation, law enforcement, UI extensions -- okay, pretty much everything state gov't does -- Congress has been keeping 'em hooked through block grants and state appropriations for quite a while now. In exchange, Congress usually dictates statutory/regulatory templates each state legislature must enact to remain eligible for funds.

This came out in the Globe this week:

Basically, the feds give Massachusetts $800 million a year. They don't know what's going to happen with that this year.

Yangabanga said...

Golfdude - govt salaries are the farthest thing from efficient because they are completely political. and what happens when a company pays way more for the same work than its peers? they go under. Only difference is here the company exists only on our tax dollars so going under just means they have to suck more $ from you and on and on.

as for the tragedy of the commons I'm in complete agreement. when everything is important and special and therefore must be saved, nothing will be.

Kid Dynamite said...

TZ - i think that's kinda my point! bailouts, stimulus, etc, don't solve anything... UI is the perfect example... all extending it does is make us need more UI extensions... with the HOPE that eventually the jobs situation will just somehow, miraculously, "recover" - kinda like how pension funds are just hoping that the stock market recovers.

stimulus begets the need for more stimulus. bailouts beget the need for more bailouts... BECAUSE: the bad debt still hasn't been written off, the losses haven't been taken, etc...

Transor Z said...

Not talking stimulus, though. It's become part of states' "baseline" budgets. Symbiotic-like.

Downtown Josh Brown said...

This is an important point. How do you see this Commons conundrum in the context of the moral hazard discussions during the corporate bailout era?

Are these two concepts entirely distinct or intertwined?

great post Kid


Kid Dynamite said...

yes jb - the concept of moral hazard (which i think is very much intertwined) was voiced many times during the bank bailouts - which are no better.

call me ahab said...

its a great idea-

make the civil servants happy- where would we be without them?

the private sector- who gives a shit? What are they good for?

government jobs for everyone- like Marion Barry use to say-

better on the payrolls than on the welfare rolls-

my only hope is that hope the next initiative is to feed all the hungry children- who could oppose that noble cause?

Kid Dynamite said...

Ahab - that reminds me of Boiler Room - "Farrow Tech - they make products to help premature babies!!!" something like that...

getyourselfconnected said...

They always go for crying tears with cuts that is why firefighters and teachers are the first to get hit. Its an old game really. Just like in your last article I fail to see why states cannot just loan themselves all the cash they need and pay themselves back later when the S&P hits 2000, but thats just me.

getyourselfconnected said...

I really do not want to write this but I cannot help it.....
For all time we keep hearing that education needs more funding but I think it schools had all the coin they wanted they results would stll be the same. Kids in India and Chian can do Calculus on a stone slate using chalk at age 13 now and the lack of funding does not seem to be hurting them too much.

scharfy said...

I don't understand why all this bailout discussion has to be so "binary"

Either you write them a blank check with no structural changes, or the kids don't go to school - is a "BULLSHIT" argument.

Some reasonable haircuts, pay freezes, forced retirements for school board execs pullin 200k (which could hire 5 new teachers) and then you get some money from Uncle Sam.

Uncle Sam must incentivize them to do some house cleaning. Then the localities can play bad cop and force some deals to get done.

Ya know. Attach a few strings to the money?

When you loaned your friend money cuz he got clipped from work, didn't you make him stop the steak dinners and gambling?

You show me how you are gonna sacrifice, I'd ill be more than happy to help.

@GYSC noted our inefficiency: we spend 3 times more per capita than other industrialized nations on education and get less results. NOT sure more $$$$ answers it.

scharfy said...

Great post Kid.

Yangabanga said...

@GYSC - money definitely doesn't help. like Kid I've got lots of teachers in the family and when the big showy grants come through what they do is buy a whole mess of stuff (laptops, soccer balls, whatever) and then drop it off, no instructions, no nothing. the pols declare victory in getting schools funded then look surprised when years later all the stuff is broken and nothing has changed. even worse because the school got all sorts of money they end up getting their local budget cut (as per Tensor's point) but what happens next year??

money can't change our fundamental attitudes towards education, teachers and the role of parents in education. that's why asia is owning us in this.

Transor Z said...

But when Congress made states dependent on appropriations that were rubber-stamped for renewal for decades (and please, spare me the "states didn't have to accept the money" nonsense), and then pulls the funding, the federal gov't has some responsibility for the existence of giant funding gaps in state budgets.

What's not being said here is that there are gaps to be bailed out BECAUSE of the withdrawal/slashing of federal funds.

I honestly don't have any axe to grind on the moral hazard/fiscal responsibility political thing here. I'm just a pain-in-the-ass stickler about providing an accurate background as to how we got to this point.

You want to put the onus on states to close gaps when there's a shortfall in state tax/lottery revenue? Cool. But it's a different story when gov't at the federal level has basically committed open-ended support for entitlements and even routine state police-powers funding as the carrot used in degrading state autonomy.

Just saying I think it's more complicated than bashing the political bozos who refuse to live within a budget.

Kid Dynamite said...

Transor - when did the government provide open ended entitlement promises? that's a pipe dream. UI was never supposed to be for a year.. or a year and a half.. or the TWO YEARS it now is...

where is the "rubber stamp for renewal for decades" ???

there was actually the story of one Governor who did EXACTLY what you describe - he declined the money because he knew his state would get addicted to it and not be able to afford it on their own. i'm sure you can find it via Google if you really want to.

anyway, i hear your point.

Transor Z said...


Medicaid, child care assistance, Head Start, food stamps/TANF (Temporary Assistance to Needy Families), Section 8 housing vouchers, Low-Income Home Energy Assistance, State Revolving Funds (under Clean Water Act), Centers for Disease Control (Ryan White HIV, influenza, TB, substance abuse to departments of public health), Homeland Security (terror/bioterror preparedness, domestic violence prevention grants to law enforcement), low-income housing block grants via HUD, highway appropriations...

And it goes on and on and on and on.

Extended UI is late to the party!

Sensei said...

Potholes are the price we pay for freedom from our Federal overlords!

Or something like that.

Anonymous said...

Not to spoil your party, but let me quote a bit from James Boyle's "The Public Domain":
The big point about the enclosure movement is that it worked; this innovation in property systems allowed an unparalleled expansion of productive possibilities.5 By transferring inefficiently managed common land into the hands of a single owner, enclosure escaped the aptly named “tragedy of the commons.” It gave incentives for large-scale investment, allowed control over exploitation, and in general ensured that resources could be put to their most efficient use. Before the enclosure movement, the feudal lord would not invest in drainage systems, sheep purchases, or crop rotation that might increase yields from the common—he knew all too well that the fruits of his labor could be appropriated by others. The strong private property rights and single-entity control that were introduced in the enclosure movement avoid the tragedies of overuse and underinvestment: more grain will be grown, more sheep raised, consumers will benefit, and fewer people will starve in the long run.6
It is worth noting, however, that while earlier scholarship extolled enclosure’s beneficial effects, some more recent empirical work has indicated that it had few, if any, effects in increasing agricultural production. The tragedies predicted in articles such as Hardin’s Tragedy of the Commons did not occur. In fact, the commons frequently may have been well-run, though the restraints on its depletion and the incentives for investment in it may have been “softer” than the hard-edged norms of private property.11 Thus, while enclosure produced significant distributional changes of the kind that so incensed an earlier generation of critical historians, there are significant questions about whether it led to greater efficiency or innovation. These results are little known, however, outside of the world of economic historians. “Everyone” knows that a commons is by definition tragic, and that the logic of enclosure is as true today as it was in the fifteenth century. Private property saves lives.

Skeptic said...

Just saw a commercial where a dejcted looking employee of a struggling hospital says something to the effect of "everyone else is getting a bailout, why cant we?"

We are sliding down the slippery slope fast. Where does this end? Many fiscally conservative governments coming into power in this a harbinger of things to come in November elections in the US?

bb said...

if the state law requires a balanced budget and it isn't such, hold accountable the elected officials for 1) not observing the law, 2) not changing the law.