Government solutions can't solve America's financial problems.

• Author: Asmus, Barry

LET'S PLAY a "what if" game about public spending. What if American politicians had said back in 1965: "We won't spend a dime on welfare for the next three decades, but in the early 1990s, we will take the money we would have spent and buy every Fortune 500 company and every piece of farmland in America. Then we will deed these companies and farms over to the poor."? That is exactly what politicians could have done with the money--about $3.5 trillion--spent on welfare since 1965. If they had, what would the problem of poverty be like today? Would there be tens of thousands of Americans who are members of a permanent underclass and millions more who qualify as working poor?

What if the politicians had said back then: "Instead of spending 14% of the Gross Domestic Product (GDP)--about $840,000,000,000 in 1992--on health care, much of it subsidized government spending, we will promote free market solutions"--that is, health care costs paid by the consumer instead of government and other third parties? Would there be any support today for socialized medicine, price controls on provider fees and charges, or adopting what is basically a Third World model for U.S. health care?

What if they also had said: "Instead of spending more money than any nation on Earth on centralized, government-run primary and secondary education--currently more than $200,000,000,000 a year or almost $6,000 per pupil--we will strengthen the private, locally supported schools that were once the backbone of education in the country."? Would 40% of all U.S. high schoolers today be functionally illiterate or reading below the eighth-grade level? Would one-quarter of them be dropping out?

This "game" has a very serious purpose: It shows how much dependence on politicians and public-sector solutions has cost the nation and how little it has achieved. Schemes of top-down economic coordination are a hopeless absurdity, whether tried by the U.S. or the former Soviet Union.

The "public choice" school of economics explains why government solutions to financial problems inevitably fail. First, politicians don't spend taxpayers' money as carefully as if it were their own. Second, in contrast to the private business firm, the public agency has no bottom line. Prices, wages, interest, and profits are not a part of the government calculus. The politician has all sorts of incentives to spend more to "do good." (There is no end to what do-gooders will do with other people's money.) It is important that they "care" about a perceived public crisis and "bring home the bacon" to constituents, so as to increase their own political power and influence.

Finally, politicians are motivated to localize benefits and defuse costs. For instance, a few Congressmen can get together in...