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Monday, July 27, 2009

I Changed My Mind (I'm Back). "The Problem with Public Institutionalism."

First off, I've decided to cut my 'hiatus' short. I just can't stay away ;).

Ok, let's dive right in. Those who follow my blog probably know that I lean slightly liberal, though much less so on the fiscal side of the spectrum than it may seem at a distance. To this point, I've been thinking about the hazards of public ownership and operation of institutions that are pivotal to a healthy economy (things like health care, education - one of which is going to become more public, the other already is largely public).

In a world where public institutions are prevalent and perhaps even dominate a society (not in the US, but hypothetically speaking), there is a serious problem when major recessions happen. As most introductory econ students learn, according to mainstream econ, recessions eventually end due to lower price expectations in the future (etc.).

But, I read the news today, and 5 of the top 10 local headlines are about how various major public schools (Purdue, Ball State, Vincennes....) are all hiking tuition (by almost 4%). In a world where short-term inflation is essentially 0%, that is scary. They are forced, nevertheless, to hike prices (as most all public schools are forced to do short of teacher layoffs) because they receive the bulk of their funding from government (State, etc.). But in recessions, States get less revenue, so less money flows to schools (or to public funded health care, or whatever service you can think of). And unlike private industry, the level of many services 'demanded' by the public is forced to be roughly constant (ie. the public expects such services to be maintained even in recession). It is only logical, therefore, to predict that, contrary to the private market adjustment, prices (and price expectations) will RISE for public-funded goods. So, while private industries (motor vehicles etc.) are slashing prices, public funded institutions are 'fighting' the recovery by raising prices.

In a largely public-funded world where the self adjusting properties of aggregate supply/demand breakdown, what is the solution? The only solution is government intervention --- which furthers the problem.

What this means is not that certain institutions (like health care etc) shouldn't be at least partially public ran/funded. What it suggests is that, in aggregate, there is a limit by which we take on more and more risk of destroying market mechanisms with our meddling.

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