Monday, March 21, 2005


V.O. Key Redux

"Man is by nature a political animal." Aristotle.

The economist V.O. Key posed the question, "On what basis shall it be decided to allocate X dollars to Activity A instead of allocating them to Activity B, or instead of allowing the taxpayer to use the money for his individual purposes?" This question bedevils finance students today, six decades after he first asked it.

Politics are not only the actual method for allocation of resources; in a democratic republic, political considerations are the proper basis of allocation decisions.

First principles, the most basic ideas and concepts of any field of study, must always be kept firmly in mind when climbing the ladder of abstraction. Indeed, the need for a solid foundation only increases as the air becomes more and more rarified.

So, with budget policy analysis, and asking the V. O. Key question, we must start by securing a ground level base of politics and policy concepts.

In our democratic republic, the legitimacy of the government derives from the "consent of the governed," to use Jefferson’s phrase. So too, do the resources consumed by that government derive from "the governed." The decision makers who allocate those resources risk losing legitimacy if they stray too far from these foundational principles.

It follows from the two elemental ideas that public funds should be spent in accordance with the "will of the people." The problem then becomes one of discerning the will of the people; not only the expressed will, but what the people would want if they were fully informed of all the facts and circumstances surrounding a specific claim on the public purse. The expressed will of the people often issues forth as sweeping generalities and sometimes cross-purposes.

The people wish to "provide for the common defense" and "take care of the elderly" and "protect free markets" and provide cost-effective health care; all the while reducing taxes.

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, assistance to foreign lands should be curtailed lest Rome become bankrupt, the mobs should be forced to work and not depend on government for subsistence." Marcus Tullius Cicero.

How can these contrary aims be reconciled rationally? How can the competing values each receive their due? Simply put, they cannot be reconciled rationally; logic does not allow simultaneously holding contradictory theses. And yet, choices must be made.

Studies have shown that if people are well informed of the choices to be made, they will accede to the public interest and chose the greater good. Voters do not look out only for their own narrow self interest, neither do they necessarily vote their pocketbooks. Citizens generally are simply not informed of the choices before them. Who can blame them? Reading a budget is deadly dull, and beyond what is thought of as a civic duty. The point should be made better and more often -- the information is available, the public budget is, well, public, and people who complain should be encouraged to become involved.

The founding fathers, in their wisdom, created a system of politics and representative government that does resolve these conflicts peacefully. The people ratify this system, which we call "American government" with every vote in every election, and with each tax payment made to the tens of thousands of tax authorities each day.

Incrementalism describes the day-to-day and year-to-year operation of governments, as far as it goes, and does a fairly accurate job of accounting for some of what we observe. It is the idea that budget decisions mostly consist of incremental changes to existing authority; relatively small changes from year-to-year to account for inflation, improved efficiency, and so forth. The theory of incrementalism is most clearly seen in the writings of Wildavsky. Moreover, as a theory, it appears to represent the "first principles" of our system. But it fails to answer the V. O. Key question.

"A budget takes the fun out of money." Mason Cooley.

In creating a budget for a new program or agency, the administrator is keenly aware he is producing the template for succeeding generations. And in that process, the V. O. Key question is asked and answered many times. Any executive considers the precedents he sets as he goes about his work. With a new program, the people have usually spoken as clearly and as well as they ever will. The solons who pass the law and appropriate the funds reflect the collective wills of their constituencies; if the executive needs to, he can look at legislative history for clues about decisions he faces and the precise nature of the public interest.

"The most powerful force possessed by the individual citizen is her own government. ... Government is the only organized mechanism that makes possible that level of shared disinterest known as the public good." John Ralston Saul.

The executive can also consider similar programs in other jurisdictions; in fact, he is likely to be aware of what is reputed to be effective and what is said to have been a mistake. Obviously, efficiency in carrying out the public's program is in the public interest.

It goes without saying that the goals and objectives set for the program by the authorizing statute control. Problems arise when the language is vague or contradictory. Mindful of these problems, the executive or decision making group does the best as they can, create the budget, and nature takes its course.

Norman Mailer wrote, "A modern democracy is a tyranny whose borders are undefined; one discovers how far one can go only by traveling in a straight line until one is stopped."

Politics, properly understood, is the legitimate conduct of government. Calvin Coolidge said it best:

"Politics is not an end, but a means. It is not a product, but a process. It is the art of government. Like other values it has its counterfeits. So much emphasis has been placed upon the false that the significance of the true has been obscured and politics has come to convey the meaning of crafty and cunning selfishness, instead of candid and sincere service."

Voters can always vote the rascals who misspent their money out of office. The city council can fire the manager. Political processes, checks and balances, the will of the people; somehow, despite the irreducible inherent irrationality of the democratic process, it works.

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