The tragedy of the public budgetary commons.

• Author: Brubaker, Earl R.

Outlays of federal, state, and local governments have risen to approximately 34 percent of the gross domestic product (GDP) over the past several decades. Outlays of the federal government alone have recently amounted to more than 20 percent of the GDP. In the spirit of mainstream academic economics, it would be unremarkable to inquire into how these percentages compare with the optimum. Defining the optimum, however, would be a daunting task, even in principle. Presumably, it would have to reflect many time-and-place-specific variables and to account for a large number of divergent individual preferences regarding tradeoffs in production and consumption, not to speak of people's desires with respect to fairness and individual freedom. The investigator would have to account for divergent judgments about such complex phenomena as the global containment of communism, the Vietnam War, accelerating spending for entitlement programs, and many other things.

Setting aside the search for an optimum, I shall seek the answers to some less complex yet still important questions. I shall inquire into the incentives our political institutions create for participants in federal budgetary decision-making. Can we identify clearly undesirable consequences of the behavior elicited by these institutions? If so, how might decision-making processes be altered to establish incentives for improved behavior? In seeking answers to these questions, I shall employ as my analytical framework the concepts and principles of public-choice analysis.(1)

Budgetary Decision-Making

Public-choice analysis yields useful insights into the political process by focusing on the interactions among three sets of participants in public budgetary decision-making. The first set contains the principals, namely, the general public. Decisions must be made about the allocation of the public's income and wealth among many competing collective and private purposes.

The principals' agents fall into two categories: first, the elected representatives--the president and the Congress--and, second, the employees of the executive branch's administrative departments, in common parlance, the bureaucrats. The representatives play vital roles in obtaining and allocating funding for programs. Political appointees and professional managers in the executive departments have responsibility for overseeing current operations and making public investments.

The decision makers stand in a hierarchy. At the apex are the principals at whose pleasure the elected representatives serve. The president, with the advice and consent of Congress, appoints the top executive-branch managers, who in turn oversee the rest of the management team. Budgetary decisions result from the continuous, complex interactions among all these actors, and reflect basic behavioral tendencies as constrained by the institutional environment. I focus here on the incentives and interactions of the general public and its representatives.

Process

Institutions define the limits of the decision-making roles, responsibilities, and opportunities of individuals and their representatives. Many important decisions are made only infrequently. The electorate, for instance, may engage or dismiss its representatives only at intervals of two to six years. Representatives in turn make final decisions annually about taxation and spending. Decisions about taxes, however, specify the rates applicable to designated income. wealth, sales, and other bases. Congress makes no explicit decision about the aggregate amount of taxation; prospectively, the aggregate can be only an estimate no better than the economic and behavioral assumptions underlying it. Similarly, the representatives make decisions about so-called nondiscretionary outlays in terms of rates to be applied according to personal characteristics such as age, health, occupation, prior earnings, employment status, and so forth. Government officials make decisions about revenues and outlays separately, without firm coordination and without strictly enforced limits.

The budgetary process results in the creation of a common pool of funds from which to finance a large variety of programs, including income transfers to individuals and businesses as well as the direct provision of goods and services. The process converts privately generated income and wealth into common property to be allocated among potentially unlimited alternative uses. Nothing links a particular public program with the private sacrifices required for its operation. Assessing the personal distributions of benefits and costs associated with the various programs is impractical, and likely to remain so.

Consequences

Tragedy of the Commons

The budgetary process just described creates incentives and consequences similar to those associated with the so-called tragedy of the commons. This occurs when the absence of private property rights to a depletable resource creates incentives for potential users to exploit the resource excessively. Exploiters act as they do because each one knows that if he does not exploit the resource, someone else will.

Prominent examples include common property in pastures, ocean fisheries, and crude petroleum pools (Scott 1955, 117ff.). Crude petroleum, for instance, often lies in subsurface pools above layers of water under great hydrostatic pressure. Initially, no one knows much about the size, shape, and extent of the pools; information accumulates as exploration proceeds. In these circumstances, specification and enforcement of private property rights in petroleum have posed great difficulties, and judges called on to adjudicate disputes have declared the petroleum subject to a rule of capture--that is, it would become the property of whoever brings it to the surface and takes possession of it there. Thus, so long as the oil remains under the ground, it remains "up for grabs." Often, numerous candidates for ownership can gain access to the subsurface pools via wells drilled from their surface properties. Each has an incentive to capture the oil as quickly as possible, as otherwise it will be lost to neighbors operating according to the same incentive.

Tragic consequences ensue because the absence of precapture property rights induces producers to remove the resource at rates extremely detrimental to the ultimate amount recoverable, thereby diminishing the present value of net benefits. Excessive rates of removal result in the channeling of water through the petroleum, thereby cutting off large volumes that could have been much more easily recovered with a more gradual release of subterranean pressure, which would permit the water to encroach more slowly and evenly, forcing more of the oil to the wells and through them to the surface.

By converting private property into common property, the public budgetary process creates its own form of tragedy. Mainstream public microeconomics indicates that the common fund should be allocated to the creation of "public goods"--nondepletable goods providing benefits simultaneously to all at no direct charge. In practice, however, the common fund becomes the object of attempted alienation by interest groups striving to secure allocations of benefit mainly to themselves. As a result, the common fund most often finances not pure public goods but the proverbial all-too-depletable pie to be divided among competing claimants.

In short, the budgetary process converts private property into common property "up for grabs." The public treasury becomes an irresistible target for concerted efforts at appropriation under the threat of imminent loss to other claimants. Such threat creates even greater incentives for overstating one's desires for government programs than that normally associated with zero-priced public goods. The fund gives rise to both a ferocious defense of established entitlements and an endless, frenzied scramble for new ones. Thus the tragedy of the commons constitutes an integral and pervasive aspect of the government's budgetary process.

The struggle over allocations from the common fund calls forth a range of strategies and tactics limited only by the ingenuity and huckstering skills of all concerned. Voters employing the franchise to gain command over real resources attempt to elect representatives who will be effective in securing the desired allocations. Rampant hyperbole and crisis-mongering characterize the efforts to establish the superiority of one faction's purposes over those of competing claimants (Higgs 1987, 238). Such exaggerations also provide justification for attempts to increase the size of the common fund.

Overall, the process creates incentives to strive strenuously to avoid contributions to the common pool while striving equally strenuously to make withdrawals from it (Wildavsky 1992, 15). The principals have no incentive to judiciously balance the benefits expected from public programs against the sacrifices of personal opportunities that conduct of the programs requires. The process creates opportunities to benefit at the cost only of other people's lost opportunities. Not surprisingly, this method of fiscal decision-making sets in motion notable tendencies toward inefficiency, inequity, and infringements of personal freedom.

Opportunities for Rent Seeking

Rent seeking is a public-choice concept useful in describing the consequences of established processes of public budgetary decision-making. In general, rent seeking refers to seeking income or wealth by means of legal but unproductive activity such as...