Where's A Cocktail Napkin When You Need One

OJ points us to an AP article on the plummeting federal deficit. I was particularly struck by this passage:

For the year, revenue and spending are both at record levels. Revenue gains are up 8 percent while outlays are up at a slower pace of 2.5 percent, compared to the same period a year ago. Growth in spending has been slower this year in part because of the absence of last year's huge outlays for hurricane relief.

The increase in revenues has been supported by continued strength in corporate profits and low unemployment, which has helped to push individual income taxes higher.

For the 2007 budget year, which ends on Sept. 30, the Congressional Budget Office is projecting a federal deficit of $177 billion. That would be down 28.7 percent from last year's imbalance of $248.2 billion, which had been the lowest deficit in four years.

The federal budget was in surplus for four years from 1998 through 2001 as the long economic expansion helped push revenues higher.

What's weird about this? It completely ignores why the federal government spends money. With strong corporate profits, low unemployment and (although the article doesn't mention this) incomes increasing, not only is there more tax revenue, but there's less need for government handouts. This "float the boats" effect, and welfare reform, are a big reason that the budget has been decreasing, and the deficit has been plummeting, as a percentage of GDP. Now we just need to straighten out social security, and we'll be all set.

Sometimes There Are Simple Answers

If you follow this sort of thing, then you've noticed that one of the hottest policy/environmental/economic questions at the moment has to do with our fisheries, bad regulation and the tragedy of the commons. I assume that you're all familiar with the tragedy of the commons, which teaches us that a scarce resource that is simply there for the taking will be overexploited. In Coasian terms, in the absence of clear property rights, the resource will not move to its highest value use. As a result, we will as a society suffer a dead-weight economic loss.

The fisheries are a perfect example of a common resource that is not exploited optimally rationally because of perverse "tragic" incentives. [A reader makes the good point that the fishermen are acting rationally, given the incentives they face. In this circumstance, however, the unclear property right scheme insures that the resource is not being exploited optimally.] Whoever gets to a fish first, gets that fish and all the gain associated with it. Whoever gets there second (metaphorically) gets nothing. Fisherman therefore feel like they must get the most first, or get nothing. Fish are overfished and a valuable resource is misused. If one person owns a resource, she considers (among other things) its value today versus its value tomorrow. Since she is assured, for economic purposes, of realizing that future value, she will conserve the resource if doing so makes economic sense. She will protect the resource from theft and other depredation and she will reap the benefits of a social utility maximizing exploitation strategy.

If fisheries are commons, on the other hand, fish will just be eaten as fast as they can be caught, because no one can be sure that they will be the ones to profit in the future. As a result, we end up with too much fish on the market, effecting the supply of other foodstuffs that are underexploited. Also, fishing technology is pushed to capture as many fish as possible as fast as possible, whereas a wealth maximizing strategy might allow more differentiation between individual fish (small versus large or young versus old). When the push to take first, fast and completely has resulted in sufficiently advanced technologies, the fisheries start to decline and the resource is wasted.

In steps the government. I am no expert on fishery regulation, but it seems that the government has gone about its work in just about the worst way possible. Regulators have capped the total annual harvest from endangered fisheries except where the fishery has been entirely closed. As a result, the full cost of regulation has fallen on the fishing industry, which was only responding to the incentives it faced. Even worse, where a cap was introduced, the quota was filled on a first come first served basis. Catches were tallied against the cap as they came in and when the annual cap was reached, the fishery was closed. In other words, the government took the worst aspect of the tragedy of the commons -- the incentive to take the most fish first -- and made it even worse. Also, there is some evidence that, by taking steps to protect younger fish at the expense of older fish, on the theory that younger fish would breed more than older fish, the government was exactly wrong. Older fish are survivors who are ready to breed now. Younger fish might well be eaten before they are ready to start breeding sometime in the future. In short, regulation seems to have been a fiasco. As we all know, though, the government only has one response to failed regulation: new and more elaborate regulation.

This is particularly exasperating because there is an obvious, cost-free, permanent solution to this problem. The tragedy of the commons is that they are held in common. There is no single owner of the fisheries with the incentive, derived from clear and secure property rights, to impose a value maximizing exploitation strategy. The obvious solution, therefore, is to give the fisheries to a single owner. Each fishery could have its own owner, or they could all have a single owner. The owner could be chosen almost at random (I think that the fisheries should be given to me, since I came up with the idea) but the best solution would be to auction them off. No one is more serious about maximizing the value of a resource than someone who has just put up a lot of money. The only owner who is right out is any entity set up to hold the fisheries in trust for the peoples of the world. A regulatory bureaucracy by any other name would be as incompetent as the government.

Now, think about what it says about government, about us, that this easy, effective, cheap (indeed, potentially revenue raising) solution is absolutely politically impossible.