The political economy of public goods: why economists should care.

For many, food safety is a global public good (Unnevehr 2006). This identification is strongly based on the development of technology and the development of international markets. There is a long history in the United States of the public nature of food safety. In the early 20th century, food safety was propelled toward public good status by public concern fuelled by Upton Sinclair's The Jungle (2003) and developments in technology that made centralized public standards and monitoring both increasingly effective in improving health and more cost effective. The long tradition of public service by the institutions responsible, the Food and Drug Administration and the Department of Agriculture, set a perception in the minds of the public about the public nature of the good. This perception and the effectiveness of the institutions affect the efficacy of the process and the public acceptance of when a food is considered safe or not. The actual realization of food safety as a global public good still must overcome the differences in both expectations and standards and create an international regulatory regime coupled with sufficient incentives for the wide range of players in the international food system. Issues abound including the trade-off between benefits from trade at home versus foreign consumer risk and whether harmonization of standards would increase or decrease consumer welfare (and whose consumer welfare). Placing this in a clear, economically defined public goods context without considering a host of other factors is almost impossible. The same dilemmas occur when considering something like scientific knowledge as a global public good (Dalrymple 2003).

Some claim that energy security is a public good. In terms of policy, energy security is being treated to a large extent as a private good, with the exceptions of national defense policy to protect the oil supply and substitute liquid fuels policy to encourage biofuels. In contrast, Senator Lugar (2006) has challenged the current private goods status concerning strategic vulnerability of liquid transportation fuels and emphasized the public goods component: "I do not suggest this lightly, but my observation of the post-Katrina response by car companies, oil companies and consumers is that, in the short run, the evolution of market forces won't be capable of producing the progress that we need to achieve our national security goals." He then suggested the need for legislation requiring annual improvements in vehicle efficiency and set this in the overall context of energy security as a political problem, not a market problem.

All of the examples above are fertile areas for analysis. For energy security the paper by Greene and Leiby (2007) on energy independence is a superb example of a timely analysis that better defines the parameters of the problem and gives initial guidance on what aspects of the problem are likely to be most important for public intervention or support. They first implicitly subsume energy independence into energy security. By setting a target for acceptable levels of economic damage based on the risk of liquid fuel disruptions, they simulate where consumption needs to be in 2030, and what different supplies and uses of liquid fuels will have to be to meet this target. They show that to meet the energy security target, there cannot be growth from current consumption levels. They also show that the largest potential factor to hold consumption constant has to be reductions in potential demand rather than increases in supply This provides a much clearer focus as to where analysis of energy security should focus and where government involvement might be appropriate.

This discussion of public goods has really been in aid of supporting the economic analysis of public concerns and involvement of government in its citizens' lives through something like Robbins' approach of Political Economy (1981). Public goods in this discussion have been couched in terms that reflect their political economy characteristics. We appear to be entering a period where there will be more questioning of economic orthodoxy and expanded exploration of different touchstones for economic analysis. Certainly Alan Blinder's comments earlier this year on the potential negative impacts of free trade drew heated discussion in the economics profession. His rejoinder that there is too much ideology in economics today and that economics is "often a triumph of theory over fact" has not quieted his critics (Cohen 2007).

Actions taken by government within prevailing perceptions and trends for public goods probably do not receive the analysis of tradeoffs and consequences that should be given to them. The political rush to centralize and extend government involvement during the Great Depression was often accepted on its political face value. Today, Indiana's and Illinois' sale of their toll roads to private operators do not appear to have been preceded by much thought about the long-term generational impacts or short-term windfalls. Sales of formerly regulated electric power plants at fire sale prices now raise a different kind of customer generational equity concern when the power is sold back to original ratepayers at much higher prices. Any current perspective on public goods, e.g., which are appropriate and how are they provided (whether this be expansionist or contractionist), should not limit the economic analysis of policy alternatives.

As another example, the public perceptions and the politics of environmental goods as public goods are extremely difficult to sort out. If ecosystem services at a given moment are not considered a public good, do we solve this by valuing them so that they can compete on a private goods basis? Robbins (1981) makes a point that even the construction of indices is not value free--what about valuations by contingent valuation for market transactions? How do we look at things like a Genuine Progress Indicator, which led to the quip that if GDP is up, why is America down? (Cobb and Cobb 1994). Why has Costanza's and his coauthors' (1997) valuation of the world's ecosystem services not resonated much in decision making? Will the current effort by government agencies and others to value ecosystem services (as a good category of its own) make a meaningful difference in policy formulation? If it is achieved, which side will it end up favoring?

Where does this discussion leave us? Historically and by definition, it is very hard to determine a stable range and extent of public goods. Operationally, democratic societies do determine what goods and services the public should support or be involved in providing. How economists approach this very real world depends on them. The view expressed here is that economists should take an approach along the lines of political economy, declaring values rather than pretending complete independence from them and being aware of the objective implications of the values on which a policy rests. The process of politics is critical to choice (Crick 1962). Both Leontief (1971) and Robbins (1981) declare that the perspective and knowledge that can be gained from other disciplines is essential. In addition, particularly Leontief (1971) would ask that we take a careful look at how we are conducting analysis today and ensure that agricultural and similar applied economists are actually meeting the necessary standards of internal validity. Are we giving enough attention to the observable reality of the economic phenomenon under consideration? Are our data and methods the most appropriate to address the problem at hand in a way that reflects reality? If we are doing this well, the field of appropriate analysis of the public/private interface is wide open.

Why should economists care? Individuals and nations reflect and are shaped by their choice of heroes (Riis 1915). Likewise, the decisions a society makes about the provision of public goods--which goods are deemed to be public or quasi-public and which goods are private--reflect and shape the values and attitudes of a society. At any given moment there may appear to be some natural balance between public and private goods, but this balance is the product of conscious public decisions. For example, a society's unwillingness to pay collectively to repair or extend existing public infrastructure provided by past generations says something about that society. One concern is that in the debate about the provision of public goods and services, who speaks for public goods? While it may not be the role of a policy economist to advocate one policy over another, the role of alerting citizens to opportunity costs, trade-offs, and generational impacts of policies is critically important for society. Economists can focus and sharpen the public debate about the provision of public goods and services and in so doing may wean a society away from bad habits like socializing losses and privatizing gains. Public goods may have a critically important role both socially and economically in a winner-take-all society. The public/private goods continuum is where the real action is and will be in coming years. Economists should be there.

References

Baumol, P., and A. Blinder. 2000. Economics, Principles and Policy. New York: Harcourt Colleges Publishers.

Cobb, C., and J. Cobb Jr. 1994. The Green National Product. Lanham, MD: University Press of America.

Cohen, P. 2007. "In Economics Departments, a Growing Will to Debate Fundamental Assumptions." New York Times, July 11th, Section B, p. 6.