Getting Greed Out of Government

This article originally appeared in the Raleigh News & Observer.

Greed. It’s a dirty word (a deadly sin, even). Some think only government can protect us from ourselves. But this view is mistaken.

Maybe it comes from that helpless reflex-thought: "Somebody should do something about this!" We’ve all had it — especially recently. And government, like God, comes into our thoughts almost as second nature whenever we want to explain something inexplicable, or fix something unfixable. But we must stand before our own natures with humility and acknowledge that we, as a species, are greedy.

Nobel Laureate James Buchanan put it best. He argued that you can’t assume that under certain circumstances (markets) people are greedy and in other circumstances (government) they are angels. In whatever circumstances, people pursue their own interests.

To think otherwise is to go against human nature’s grain. But in their pursuit of self-interest, people will respond to the incentive systems they’re operating within. As Buchanan reminds us,

"Much of the growth of the bureaucratic or regulatory sector of government can best be explained in terms of the competition between political agents for constituency support through the use of promises of discriminatory transfers of wealth."

Or risky loans. Or carbon credits. Or bailouts. There is nothing that suddenly changes the human being when the system changes. Only the incentive structure changes. To expect people to rise out of said system with a halo, wings and a moral birds-eye view is not just unrealistic, it’s impossible. Greed and government mix. And the mixture is combustible.

This is the lesson of Buchanan’s "politics without romance." With it, we can "understand why pork-barrel politics dominated the attention of legislators; why there seems to be a direct relationship between the overall size of government and the investment in efforts to secure special concessions from government (rent seeking); why the tax system is described by the increasing number of special credits, exemptions, and loopholes; why balanced budgets are so hard to secure; and why strategically placed industries secure tariff protection."

SO WHENEVER YOU HEAR SOMEONE SAY SOMETHING ABOUT GOVERNMENT INTERVENING IN ANYTHING, remember politics without romance. (You might also ask if government was already there.) It is a lesson we must tattoo on our brains: from global warming policy to mortgage-backed securities, greed goes unchecked when it is shielded (or perversely incentivized) by politics.

No matter what our good intentions may be at the outset, government-plus-greed is a deadly combination. As we stand in eerie silence before an approaching economic Tsunami, we must remember that government catalyzed greed in this situation, too, allowing it to grow beyond sustainability.

Whether we look at the Community Reinvestment Act and other federal housing regulations, which forced banks to loosen their lending practices for the sake of "underserved communities," (read: high risk borrowers) or to government-sponsored enterprises like the insolvent Freddie Mac, we can find the combustible combination of greed and government. The now-common phrase "socialized risk and privatized profit" should have been upon our lips way back in 1999, when a New York Times headline read: "Fannie Mae Eases Credit To Aid Mortgage Lending."

The very same organization, operating with the promise of a bailout and pressure from HUD, had changed the risk calculation forever. The change was predictably perverse. The distortion grew. One small series of perturbations — government caused — was set on a trajectory toward 2008. By the time it got here, it was a tidal wave.

Greed is best checked by the distributed forces of market reward and punishment (based firmly in the rule of law). By rule of law, I don’t mean capricious legislation cranked out either by venal men or do-gooders. I mean a basic, unchanging set of institutions that ensures predictability, transparency and equality before the law. These rules should be simple: Protect people from force, theft and fraud.

There are those who think that if we can just build the right program, add enough resources, or find the right angels, we’ll somehow find an optimum point of public welfare. They are mistaken. Repeated mistakes and bitter experience should remind us otherwise. Government and greed ought never to mix.

And it will not mix well with a big bailout, either. Washington is now involved in a vicious cycle. As leaders go about cleaning up the mess they helped to create, remember the words of James Madison: "If angels were to govern men, neither external nor internal controls on government would be necessary."