The public choice theory was developed in the United States in 1962 by James M. Buchanan. Its purpose is to explain the ratchet mechanism of the increase in public expenditure in democracies.
The expense creep can go beyond the social optimum. Libertarians think that this threshold is quickly reached. Socialists believe that society is always below this threshold. For this reason, the discipline is libertarian-leaning.
It should not be confused with the social choice theory, which delves into questions of evaluation of collective choices and the ways and procedures of making such choices.
As is typical in an OECD country, healthcare and pensions are wrapped under one “social protection” mega-bucket. This hides the fact that some countries have inept management and gross overspending on pensions (France) and some others on healthcare (USA).
The US “government spending” is easily available. We see below a breakdown between welfare and Medicaid, while Medicare is set aside. This is 9 trillion of spending, but it only corresponds to the federal government. They either don’t have the resources to figure out what state and city taxes are, how much is paid on civil servant pensions, and how it compares with other countries, or, the other possibility is that they don’t want to be accountable.
Who decides what the state does and for what purpose?
The principal-agent relation is central to public affairs administration. The behavior of politicians and civil servants can be seen as that of self-interested rational agents.
According to this theory, it is not the candidate advocating the best policy that will be elected, but the one who will best mobilize the voters, whatever the means. Likewise, it is not the most effective official who will become the most influential, but the one who will obtain the most important budget and the most exorbitant privileges for his administration.
The School of Liberty
Political scientist François Facchini made a presentation on the public choice theory entitled “Why does the State grow”. This libertarian series presents the following themes:
Coalition of the poor against the rich
Dictatorship of the median voter
Impact of globalization on public spending
Lobbies
Politicians and bureaucrats
Public expense and rent search
Tax illusion
Political-economic cycles
Constitutional responses
The judges
Budget federalism
The public choice theory generally leads to recommending a smaller size of the State. We now review two contradictory cases where public choices are better or worse than private choices.
Less State for more pensions
A good example is the choice of funding for PAYG (Pay As You Go) pensions instead of defined contribution plans. This led to the tripling of the cost of pensions in 70 years in France, where they now represent 27 % of French income (a bit below 15% of GDP), instead of 10 % for other countries.
This additional cost is the worst obstacle to the competitiveness of France. No company could bear such a cost, but the decision was socialized throughout the country by administrative fiat.
When the PAYG proved unsustainable based on salary contributions alone, a wider tax on all incomes was introduced.
More State for better health insurance
The reduction of public services is not a panacea: the socialization of health insurance in the United Kingdom has allowed to improve public health outcomes for 5% of GDP, and 10% for France. The United States spends 17% of its GDP despite much higher nominal incomes.
The negotiation with healthcare providers turns out to be better made by a single-payer than by a patient who needs care.
Countries such as Singapore that establish a late social system have the advantage of being able to compare different examples and copy those that work best. However, as development economists explain, the implementation of an effective system requires above all a desire for efficiency from state agents. It is not a problem of knowledge but one of alignment of interests.
A relevant theory, invisible in public debate
This question becomes all the more relevant as the weight of the state on the nation increases.
Despite public spending that increased from 11 % to 60 % over 100 years in France, public service quality seems to degrade while the cost increases. There is no debate about reducing the weight of the state. Opinions seem to be polarized according to two lines of social choice:
eliminate immigration, over-consumer of social services and source of criminal violence
Expropriate the rich, who are otiose parasites and class enemies of the people in the name of social justice
In both cases, the politician advocates an increase in state prerogatives on an out-group (immigrants, the rich) to solve the problems of the median voter.
For a politician to suggest that public choices are the source of problems would evoke a mise en abyme worthy of baroque tragedy. In their sermons, the politicians stick to the rules of classical theater.
This article was first published in French on this blog in Jun 2019, I added the US federal budget for 2023, which surprised because defense spending became 1.3 trillion instead of 800 billions.