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Sep
23

The Tragedy of the Commons Credit Card

The tragedy of the commons is an old economic story. When property is held communally, individuals have little incentive to preserve and protect the property while they have great incentive to use said property for their personal gain.

As many other economists have noted, live bison were collectively owned on the western frontier, but dead bison were privately owned. Therefore people had an incentive to kill as many bison as they could and bison were hunted to near extinction. The same problem exists for any commonly held resource. It will be overused and destroyed.

I submit that the runaway national debt / unfunded liability problems faced by the US government too result from the tragedy of the commons problem. We have communal ownership of the nation’s credit card. If I, through my Congressman, can secure $1 million for my pet project, then I benefit, but the cost is shared with the other 300 million Americans (and their descendants). Everyone has this same incentive to overuse the national credit card. As a result the national debt continues to spiral to cataclysmic levels.

The bright side is that we know how to solve the tragedy of the commons. It is solved by clearly defining and enforcing private property rights. In this case, one solution is to say that no one has the right to run up unpaid balances on the nation’s credit card. A balanced budget amendment to the US Constitution would do the trick.

A more rigorous definition of property rights would require that each Congressional district’s share of government spending equaled their share of taxes paid. That way each Congressperson would know that their district had to pay for all of the spending they received. They couldn’t stick other people with the bill. As a result, we would quickly see a fall in government spending since congresspersosns would be spending money from people in their own district.

An even more rigorous definition of property rights would require that each person’s share of government spending equaled their share of taxes paid. Such a definition would imply that people would only advocate government spending that was indeed worth the money it took to make it happen. Realistically, it would be impossible to determine exactly how much each person benefits from government spending. The only way to accomplish this would be to allow individuals the right to voluntary transactions in the private market without government coercion, i.e. no government spending. That is, after all the benefit of private property. Each person would have take responsibility for their own spending decisions.

I find it interesting that the founding fathers did, in a limited sense, establish property rights to the national credit card. Revenues collected were apportioned to the states. If your state had more people, you had to pay more taxes. This precluded income redistribution via the tax system between states. The 16th Amendment, of course, did away with such a rule.

At the bare minimum, rule based restraints need to be put in place to restrict government deficits/ debt to keep the tragedy of the commons’ damage in check. Perhaps there could be a rule that debt/GDP could not exceed 100%. Or, like the Maastricht Treaty, budget deficits could not exceed 3% of GDP.

What we do know is that in absence of properly defined and enforced property rights, the commons will get overused and society will suffer. This is as true for the national credit card as it was for bison, and that is no bull.

Permanent link to this article: http://wkubbtcenter.com/2010/09/23/the-tragedy-of-the-commons-credit-card/