Knowledge And Decisions

The growth of administrative agencies is not merely the growth of an arm of government performing assigned tasks. It is the growth of a sector with its own political initiatives and its own external constituencies developed as a result of its initial mandate, constantly pushing for an expansion of its activities and benefits. It is the creation of an external constituency that is politically crucial, and this means that one segment of the electorate receives — in addition to whatever current direct benefits are involved — the enduring advantage of mutual knowledge of who constitutes the beneficiaries at a lower cost than the average citizen’s cost of knowledge of who pays in money and in other ways. The net result is that programs whose costs exceed their benefits may not only continue but expand, due to different costs of knowledge between the created constituency and the general public. In the light of these different knowledge costs, it is understandable that between 1950 and 1970 government payments to farmers increased tenfold, even though the number of farms was reduced about 50 percent,⁵⁴ that heavily criticized programs like Urban Renewal had their appropriations tripled in less than a decade,⁵⁵ or that expenditures on elementary and secondary education have risen exponentially while both the numbers and performances of students have been declining.⁵⁶ It is difficult to imagine any of these things happening in a world of zero knowledge cost or even of equal knowledge cost as between bureaucratic constituencies and the voting public.

The knowledge cost differential is exploited in various ways. One is the “entering wedge” approach to political innovation, in which the initial stakes are so low as to cause opposition fears to seem so exaggerated as to be discredited as outlandish. Later, the scope of the innovation can manifest itself in growing sums of money and/or burgeoning powers, after public interest has waned or turned to other things. For example, HEW began with less than a six billion dollar appropriation, which has since increased to more than thirty times that amount. The income tax began in 1913 with a maximum tax rate of 6 percent on incomes of a million dollars per year and over; now higher rates than that are paid on incomes of two thousand dollars per year.⁵⁷ Temporary concealment pays big political dividends because of the high cost — and differential costs per unit of benefit — to the public of trying to continuously monitor all ongoing programs. Building subsidies in various government housing programs are routinely understated at the outset, even though it will obviously be impossible to conceal them indefinitely, because, as one federal official said (in justification), “if you put these huge capital contributions up front there’s no way any administration would propose it or any Congress would approve it.”⁵⁸ In other words, the voters would never stand for it if they knew. That it will eventually become “public knowledge” in some sense means little in practical political decision-making terms, if “eventually” lies beyond the time horizon of political incumbents and/or if the “public” which eventually knows the facts is substantially less than the electorate.

Many economic devices and accounting tricks which do nothing more than postpone the transmission of financial knowledge to the public depend for their political effectiveness on knowledge cost differentials between the public and “insiders.” One such device is simply mislabeling as “loans” expenditures which no one expects to be repaid. These may be “loans” to individuals, businesses, municipalities, other nations, or international organizations. Even better for concealment purposes are “loan guarantees” in which both the federal government and the recipient can boldly state (without fear of immediate demonstrable contradiction) that there is “no handout” involved but only federal good offices used in obtaining private loans from banks. Everyone directly involved may know — as in the case of federal loan guarantees to New York City — that there is no rational hope that the private loans will ever be repaid, and that the banks will collect from the U.S. Treasury, eventually. In the meantime, it is not carried on the books as an expenditure or as a liability (economically or politically) of the incumbent administration. This is not a new phenomenon historically. It has long been commonplace in the deficit financing of Italian cities by the central government in Rome.⁵⁹ Its political acceptance in America is relatively new because previously there was a strong but generalized and largely unarticulated suspicion of subsidies in any form. With the emergence of an onus of articulated rationality for all positions taken, such low-cost political protection was no longer available to the public.