Bryan Caplan  

Opting Out: Do Efficiency and Liberty Really Conflict?

Two Educational Heresies: Abil... Mankiw's Got Class...
As a corollary to the proposition that all institutions must be subordinated to the law of equal freedom, we cannot choose but admit the right of the citizen to adopt a condition of voluntary outlawry. If every man has freedom to do all that he wills, provided he infringes not the equal freedom of any other man, then he is free to drop connection with the state—to relinquish its protection, and to refuse paying towards its support.

Herbert Spencer, "The Right to Ignore the State," Social Statics

If I don't want a government service, why can't I stop paying for it if I stop consuming it? In a phrase, why can't I opt out? It's a question libertarians like Herbert Spencer have been asking for quite a while, and it's got a lot of intuitive appeal. If I don't send my kids to public school, why can't I get a refund of the fraction of my property taxes devoted to education?

Economists usually view this question as the height of naivete. "Of course you can't opt out! Government provision wouldn't work if people could stop paying taxes for services they say they don't want."

On reflection, though, there are at least three distinct reasons why opting out would kill government provision:

1. Strategic reasons. Due to externalities, people continue to enjoy most or all of the benefits of the government service after they officially opt out. So there would be an incentive to opt out even if you did prefer (having the good + paying the associated taxes) to (not having the good + not paying the associated taxes).

2. Redistribution. Some people are paying more than they are getting; others are getting more than they are paying. So there would be an incentive for all net losers to opt out, making redistribution unsustainable.

3. Wasteful spending. People genuinely value the good at less than its cost. End of story.

Now notice that only (1) has anything to do with economic efficiency. If opting out is purely strategic, then opting out leads government to stop providing goods that people value at more than their cost. The honest libertarian could still say that liberty is more important than economic efficiency, but he'd have to admit that there's a conflict.

However, in cases (2) and (3), matters are different.

In case (2), opting out would make redistribution unsustainable. But that's not an efficiency problem. In fact, since redistribution almost always has some deadweight costs, letting people opt out would increase efficiency. The libertarian policy leads to marginally greater economic efficiency.

In case (3), the situation is even more stark. If people opt out simply because people value a good at less than its cost, then economic efficiency demands opting out by definition. The libertarian policy is required for economic efficiency.

During my time in economics, I've noticed is that mainstream economists are very quick to assume that all opting out is strategic. But that's not true even in the "clearest" cases. Take national defense. These days, many leftists would clearly like to opt out - and put scare quotes around "defense"! We can fairly say that most of this is NOT strategic. Not only do they value e.g. U.S. policy in Iraq at less than its cost; they would probably pay to reverse U.S. policy in Iraq.

And if that's true for national defense, it's even more clearly true for things like public education. We can pretend that opting out is strategic. But the real reasons are that's it's redistributive (from families that don't use the public schools to those that do), and wasteful (even families that do use the schools often value the services at less than the cost in taxes).

Bottom line: Libertarians should admit that there are special circumstances where opting out leads to economically inefficient outcomes. But economists should admit that these are special circumstances that actual government spending often fails to satisfy. The economist who points out the splinter of naivete in the libertarian's eye ought to look at the beam of naivete in his own.

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COMMENTS (13 to date)

(1) works against efficiency only if the aim is a Social Welfare Function and, true, that's what most/all economists discuss, but in this case, and with the issue of the free rider in general, standard welfare economics accounts don't really capture the entire situation. A game-theoretic approach helps. The jump from welfare analysis to policy seems tricky on this one, at least to me.

Matt McIntosh writes:

(1) is assuredly bogus in the case of education, at least. Nearly all of the benefit of education accrues to the person getting it and to their parents (i.e. having wealthier kids to take care of you in old age, plus status), so it's quite a stretch to argue that there's a significant public good/externality problem here.

paul writes:

Bryan, since all trades entail positive and negative externalities, why are you singling out strategic reasons as a special pricing consideration? I find it amusing when economists say they can measure true “efficiency” and point out with confidence all the market failures that coercive action is correcting.

Bob Knaus writes:

I have long advocated adding a small table at the end of the 1040 form where taxpayers could indicate which areas of the federal budget they would like their taxes to fund.

It would be simple, no more than 5 or 10 categories; things like national defense, education, welfare, environment, etc. The taxpayer would fill in the percentage for each category. You could opt out of the areas you didn't want to fund... but your taxes would still have to go somewhere.

To avoid the need for a constituional amendment, Congress would still have the final say on approving the budget. The IRS would simply publish the data, including enough information so that it could be analyzed by region, income, age, or other relevant socio-economic indicators. Congress could still choose to allocate the budget as they presently do, but it would be hard to ignore an exercise in direct democracy with such a rich data set.

MjrMjr writes:

Great post. As soon as I started reading this, I thought about positive externalities and how 99% of libertarians I talk to *never* address it or acknowledge its existence. But you covered it in point #1. Nice.

Matt McIntosh:I strongly disagree, and in fact I think that education is a gov't service with some of the highest positive externalities. I believe that the externalities manifest themselves primarily in the form of lower crime rates and higher property values.

If all the public schools in Great Falls, VA closed tomorrow it might not be that big a deal. With a median family income of over $100k/yr, the folks living there could and probably would just send their kids to private school. However, if all public schools were to close in Washington, DC tomorrow I think that the result would be disastrous. If you take a bunch of poor kids who were feeling pretty marginalized to begin with out of school and put them out in the streets all day long year round I don't see how crime doesn't shoot way up. There's a large % of kids who's parents have no alternative to public education. Take public education away from them and you're all but guaranteeing that they have no shot at economic prosperity. The resulting increase in crime would make property values in any marginal/bad area plummet, imo. If I'm a homeowner and a taxpayer, even if I loathe the idea of public education with every fibre of my being, I just don't see how eliminating it is an option. I'd rather pay somewhat high/wasteful taxes than see my house lose 50% of its value overnight. Lesser of two evils, if nothing else.

paul writes:

MjrMjr, you're kidding... right?

Spencer Scholar writes:

I would like to point for the record that (sadly) Herbert Spencer repudiated this view later in his life and that it was ommitted for later editions of Social Statics starting in the 1880s.

Steve writes:

If you take a bunch of poor kids who were feeling pretty marginalized to begin with out of school and put them out in the streets all day long year round I don't see how crime doesn't shoot way up

During a large part of the 19th Century, schools were not publicly funded. Crime rates were lower than they are now.

In Hong Kong, education is largely a matter of private choice. Crime there is lower and performance there is better than it is here.

MjrMjr writes:

Yes, this is all an elaborate hoax.

I think that for most of the 19th century our economy was largely based on agriculture. Kids were often put to work on the family farm. The economy was not the one we have today, where a higher level of education and often specialized training are required. I'm not sure that comparing an agricultural economy to an information economy and making direct comparisons between educational requirements and services the gov't provides is valid. I could say that there wasn't a national highway system in the 19th century and there were less traffic jams back then. It's a true statement but probably not a great comparison.

Hong Kong is an interesting case. Do they have the large underclass that the United States does? Do they have the racial and cultural diversity that the United States does? (I don't know the answer) These factors may make the U.S. unique.

I'm no fan of public education as it's currently implemented-off the top of my head, Milton Friedman's voucher proposal in Capitalism and Freedom seems infinitely preferrable to how we do things now-but if the choice is what we have now or *no* public education system then I favor what we have now. By a mile.

MjrMjr writes:

Bob Knaus:
That's a very interesting idea. Presuming such a system were implemented, how do you predict federal spending would change? Also, I'm presuming that interest on the national debt would be the one thing no one could opt out of?

Nathan Smith writes:

Bryan describes public schools as largely a redistributive government service; you emphasize externalities.

Let me submit that you are both right. The positive externalities from education are a result of its being redistributive. Why would uneducated DC young people resort to crime? Is it because the schools inculcate morality? I find that proposition hard to believe: if anything, bad inner-city public schools probably undermine the morality that is to some extent inculcated by parents and churches.

Schools do, however, provide at least limited skills and credentials, which pay off in the long run, but which children can't borrow to buy. This equalizes the distribution of wealth, which, in turn, makes the rewards to crime less appealing. Moreover, public schooling shores up the legitimacy of market outcomes. It becomes plausible to say: "Rich people are rich because they worked hard in school and succeeded through hard work and talent." As opposed to: "Rich people were rich because they were born into rich families that could give them good educations." If the latter statement is plausible-- and in particular, if it's true-- then the lower classes will be more inclined to think of property as illegitimate, and have less of a problem with taking it.

A more cynical way of putting this is that public schooling co-opts the most effective of the low-born, and thus deprives the poorest classes of potential leaders. However you look at it, public schooling, by being redistributive, ultimately shores up the legitimacy of property rights and in this way strengthens capitalism.

Bob Knaus writes:

MjrMjr - yes, interest would be obligatory. It has mostly been in the 10% to 15% of budget range for the past half century. This percentage should decline, if recent trends hold. Having it noted as obligatory on the 1040 form ought to have educational value.

As for how federal spending would change, that's hard for me to say. I am far from typical in my views, so introspection is no help to me in guessing the collective will. If I had to hazard a guess, I'd say less SS/Medicare/Medicaid and more environmental/infrastructure spending. But I could be totally wrong.

MjrMjr writes:

Bob Knaus:
I'm not at all in favor of what you're proposing, however, I do agree that informing people of what we pay for interest on the national debt would have educational value.

What trends do you forsee that will reduce either the absolute amount of the national debt or the interest that we pay on it? The amount of debt is only going up, and with the Fed raising interest rates to fight inflation and protect the dollar I'm not sure how we'd up end paying less in interest.

Maybe what I fear most about your plan is Republicans adding a "Pat Robertson" box to the checklist of options.

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