The Transitional Gains Trap

Recently, I read for the first time Gordon Tullock’s masterpiece The Transitional Gains Trap, first published in 1975.  In the piece, Tullock talks about a tragedy that often results from government regulation or spending.  The government takes an action that initially benefits a particular group, although at the expense of imposing an inefficient policy on the public.  But over time, even that special interest group will not benefit from the government program.  Yet that group will fight hard to prevent the program from being eliminated, since eliminating it will make that group worse off.

For example, a city government may establish a taxi medallion system that, by restricting entry into the taxi business, will provide large benefits to the initial generation of taxi cabs. This medallion, of course, will harm the public, since it restricts competition.  But over time, those who purchase the medallions will pay the market rate for them and therefore will not receive any special rents.  Yet, they will fight to prevent the medallion system from being eliminated, since these owners will be harmed by such elimination.  Thus, the city will be stuck with an inefficient medallion system that will be difficult to eliminate.  Eliminating the medallion program will harm existing taxis, many of whom did not lobby for the system in the first place and do not receive supercompetitive profits.

Tullock’s basic recommendation is not to get into these traps, because they are very hard to get out of.

One program that perfectly fits the transitional gains trap, but that Tullock does not mention, is the social security pension program.  Under the pay as you go system, the first generation receives excessive benefits, since they receive pensions, but do not (fully) pay taxes into the system.  Later generations do pay full taxes and will often receive less than adequate returns (because of the inefficiencies of the system).  One way to keep the program popular is to increase benefits.  Then, the generation that is receiving benefits will once again get a transitional gain that they would not have paid for, but future generations will again be harmed.  This, of course, has happened time and time again under the social security program.

Sadly, there is no easy way out of the transitional gains trap of social security.  To move to any type of fully funded system — private or governmental — would require taxing the existing generation twice (even though the existing generation will not receive supercompetitive returns if no changes are made to the existing system). So we are largely stuck with the existing system.

This aspect of social security is not merely a problem of government inefficiency.  It is also a problem of democracy.  An assumption of democracy is that ordinary legislation can be repealed. But with social security, and other programs involving the transitional gains trap, there is no easy way to repeal the system.   To the extent possible, this type of program ought to be unconstitutional.

Professor Rappaport is Darling Foundation Professor of Law at the University of San Diego, where he also serves as the Director of the Center for the Study of Constitutional Originalism. Professor Rappaport is the author of numerous law review articles in journals such as the Yale Law Journal, the Virginia Law Review, the Georgetown Law Review, and the University of Pennsylvania Law Review.  His book, Originalism and the Good Constitution, which is co-authored with John McGinnis, was published by the Harvard University Press in 2013.  Professor Rappaport is a graduate of the Yale Law School, where he received a JD and a DCL (Law and Political Theory).

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Comments

  1. libertarian jerry says

    Your thesis Prof.Rappaport is true. It is the classic example of the unintended consequences of politicians buying votes today to be paid for down the road when that politician is probably out of office. Once “special” legislation that benefits a few or “entitlement” programs are begun it is very difficult to close down or even to phase out this directed legislation. Usually what happens is that the laws of economics take over. Either when a monopoly system,such as the old telephone or airline monopolies, overprice their services complaints from consumers or potential competitors will force the closing down of the monopolies. When it comes to “entitlement” programs inflation, caused by the overprinting of fiat currency to pay for the entitlements or high taxes to pay for it will create a backlash from taxpayers that will cause the system to bankrupt itself. We see this happening today.

  2. gabe says

    Let’s substitute Obamacare for Social Security in the above narrative and EVERY SINGLE WORD WOULD STILL BE TRUE! (perhaps, truer).

  3. R Richard Schweitzer says

    “But with social security, and other programs involving the transitional gains trap, there is no easy way to repeal the system. To the extent possible, this type of program ought to be unconstitutional.”

    The FICA is probably a “constitutional” as a tax.
    So too may be Medicare as a tax.

    The “ought to be unconstitutional” becomes more obvious upon examination of the appropriation of funds from the treasury (purportedly, but questionably, derived from those taxes) to provide benefits – not – for the – “General Welfare” – but for specifically discriminate segments of the population (by age or physical condition).

    But does the electorate really care about the “Constitutionality” of those appropriations; or are they simply determined to get their turn at the “trough?”
    Does it not seem that the attitude of the citizenry toward the Constitution or its applications matter only when they sense a direct loss of something tangible or intangible, rather than a potential benefit?

    Does it not seem that the citizenry has abandoned those principles of the Constitution which delineate the functions of the federal government in a transformation of the citizenry seeking to attain benefits & services from, and the transfers of responsibilities to, that government?

    Is it not strange that those two particular appropriations (FICA and Medicare) are the principal sources of impending fiscal impasse? Neither is a constitutional function of the federal government. But, “constitutionality” has nothing to do with the creation, nor continued existence, of either.

    Ultimately, probably not until the final stages of an impasse, those two programs will be phased out from the functions of the federal government. The rise of private provisions has largely displaced a major portion of the practical use of Social Security disbursements (despite their enormity).

    Absent a more totalitarian system, Medicare will drift into insignificance as it fails to meet the levels of compensation required for the services provided. That trend is well-established.

    Politically there are no efforts yet to begin establishing procedures that will ease the adverse impacts of the needed phase-out of those two programs. The citizenry is not yet prepared to abandon unreasonable expectations and thus generate a different political climate.

    Cases like the taxi medallions are much simpler. Those are simple monopoly carve-outs. They are already being eroded by the development of more efficient forms of communication technology. However the political value of controlling regulations over specific services will impede the rate of change.

  4. Kevin R. Hardwick says

    Tullock’s thesis presumes rational decision making. But isn’t part of the public benefit of programs like social security that it protects society collectively from irrational but nonetheless predictable decisions by individuals, in this case to privilege short term outcomes over long term responsibilities?

    Since elderly indigent people become wards of the state, doesn’t Soc Sec protect society, at least in this limited sense?

  5. Kevin R. Hardwick says

    Clarification–I am not writing here to defend social security, but rather to suggest that if we wish to critique it, we should not neglect the best and strongest arguments of its advocates.

  6. R Richard Schweitzer says

    Just as it has become difficult for many to accept that their required disbursements from the Treasury lack any constitutional authorization, it is probably difficult for many to accept that Social Security and Medicare have become institutions that carry a very large deadweight loss to our “society” as evidenced by their fiscal effects. It is probably equally difficult for many to accept that something that can’t go on forever will end, even if it is not “abolished” by political action.

    “Granted the omnipresence of institutions of this sort and their very large deadweight loss it is conceivable that simultaneously abolishing all of them would lead to a net gain for almost everyone. The individual would lose his particular privilege, but would gain from the loss of privileges of other people. It is doubtful that such change would be truly Pareto optimal, but it might come close. As to its political practicality I take it I do not have to explain why I think it is low.”

    Gordon Tullock,” The Transitional Gains Trap” (p. 221, Virginia Political Economy, Vol. 1 “The Selected Works of Gordon Tullock” Liberty Fund- 2004)

    True, Gordon Tullock finds human actions in seeking their own self-interests to obtain benefits and avoid losses, rational. Extended reading into his selected works may not support the conclusion that he regards all human decisions as rational. But they are what they are, regardless of stated judgments. As noted in the prior comment, there is recognition of irrational decisions by individuals (an essence of the nature of freedom?).

    An answer to the question “doesn’t Social Security **protect** society” because “elderly indigent people become wards of the state,” is “probably not;” subject to clarification of what is meant by “protect” (against what and how) and of the concept of “society” as something more than the interests of the individuals making up a social order.

    The other concept that individuals in any particular categories become “wards of the state,” particularly taking “the state” as the mechanisms of the federal government, takes us into another line of inquiry concerning the transfers of responsibilities for the care of the disabled, the destitute, the defenseless and the abandoned from the cooperative efforts of individuals to politically determined activities conducted through the mechanisms of governments.

    What happens to human relationships when we accept that individuals are to be relegated to “wards of the state?” Are we then insulated or buffered from the realities of our common vulnerabilities? Has a burden been lifted from our shoulders? Are we truly “emancipated” from responsibilities?

    Do we do so through using the mechanisms of government in direct contravention to the provisions of our Constitution?

  7. Kevin R. Hardwick says

    Richard–

    I do not have a theoretical answer for your question “what happens to human relationships when we accept that individuals are to be wards of the state,” but I can offer some historical facts. At no point in American history, either prior to the Revolution or afterwards, have the people who exercise public power and authority in our various governments accepted the idea that it is OK to allow indigent elderly people to freeze to death in the snow. Similarly, at no point in our history have these persons accepted the idea that it is OK for indigent elderly people to starve to death. At every point in American history, we have determined that it is an obligation of government to prevent either of these things from happening.

    So one answer to your question is “we do not know, because there has never been a time in which elderly indigent people were NOT the responsibility of the state, at least in last resort.” Indeed, it is historically correct to say that one of the aspirations of the people who set up social security was to permit indigent elderly people to live independently of state supervision for as long as possible. So if I read your comment above, you have it exactly backwards.

    Note I am talking here about aspirations, not about outcomes. I think it is entirely legitimate to ask whether or not Soc Sec has lived up to the aspirations of the people who created it. And similarly, I think it is also entirely appropriate to ask whether or not it is possible to achieve those aspirations by some more effective system.

    It seems to me that we need to be realistic about a.) the intent of the programs we are discussing; and b.) the opportunity cost of the programs. There has never at any time in our history been a moment in time in which Americans did not understand one of the fundamental purposes of government to provide for the poor. So when we evaluate Social Security, or any other program, from an historical perspective, we need to ask what it is that the program replaced. And what it replaced was direct welfare, which many people quite properly found demeaning, with an insurance/pension program administered by the Federal Government.

    There are undoubted and real costs for doing that. But I have never yet encountered a serious argument that the program as instituted did not beat the socks off the programs that it replaced.

    Again–if we wish to argue in such a fashion that we try to persuade people, as opposed merely to reaffirm our confidence in our own correctness by talking only with people who agree with us, then we need to engage seriously with the BEST arguments of those who advocate for the position with which we disagree,

    So–a challenge for you. What is the strongest ethical, economic, or political argument you can make for Social Security? What is the very best you can come up with?

  8. R Richard Schweitzer says

    Professor,

    Beginning with the “challenge” at the end of those several ideas, the strongest arguments of the types you mention for a particular social order would be TINA (There is no alternative). Pragmatic as it might be, it fails in the case of the U S. The next strongest (political), which does *not* fail in the U S is “It is popular and satisfies a widely held view (or feeling) that it is *needed*. ” The strongest “economic” argument would be that it can be made to “work” in the fiscal sense; we just haven’t solved that problem yet (though we have stretched out finding a solution). Ethically, an argument can be made that the mechanisms of governments (coercions) *can* be used as facilities for cooperation amongst individuals and groups, despite lack of evidence that will be the result of transfers of responsibilities..

    “At every point in American history, **we** have determined that it is an obligation of government to prevent either of these things from happening. ”
    emphasis added

    The two of us are probably talking past one another. In my view governments do *not* have obligations. Individuals (humans) have obligations; governments have functions. Individuals may accede to. even transfer, the undertaking of the performance of their obligations to the mechanisms of governments.

    Governments are not organic entities with sensitivities to human distress, other humans have those sensitivities and sentiments. The citizenry did not always turn to those “who exercise public power and authority” for means to meet the obligations raised by their moral sentiments. We obviously have different views of how the American social order has been organized in its past, and the ways previously found to care for one another, examples of which are constantly recurrent in times of disasters.

    “At no point in American history, either prior to the Revolution or afterwards, have the **people** who exercise public power and authority in our various governments accepted the idea that it is OK to allow indigent elderly people to freeze to death in the snow. Similarly, at no point in our history have these persons accepted the idea that it is OK for indigent elderly people to starve to death.”

    The “people” to whom you refer did not differ greatly in moral sentiments from the citizenry; nor did they differ greatly from the citizenry in their regard to the manner in which human relations (particularly those derived from the spiritual aspects of their lives) should determine the performance of obligations. But, our views of history and the examples it gives of how humans regarded one another and the values they placed on their relationships may differ.

    • Kevin R. Hardwick says

      Richard:

      You write: “The citizenry did not always turn to those “who exercise public power and authority” for means to meet the obligations raised by their moral sentiments.”

      In this we are 100% in agreement. However, it is true that, to the extent that we can recover our history, the citizenry *did* at every point in time for which we have records, all the way back to 1776 (before that year, there was no “citizenry” to do the turning to), assign to their governments as a basic function of government, responsibility for ensuring that elderly people did not freeze to death in winter or starve to death. Poor relief has been a function of government at some level from the start of the American republics, across the entire duration of their existence.

      So while it really is the case that there are many moral obligations that the citizenry have not assigned to government, poor relief, especially for the elderly, has never been one of them.

      I should add that at no point in our history have the American citizenry assigned this function to government exclusively. At every point in history, the American citizenry have also reserved a role for private or individual charity.

    • Kevin R. Hardwick says

      Richard–

      I would propose that the strongest political argument to make in favor of government in some fashion functioning to perform poor relief would be that, absent such action, the republic will fail, and we will be left with some less desirable form of government.

      This is, by the way, the same argument that Americans made originally for most forms of progressivism. Thus, for example, Theodore Roosevelt: “Hoy sh**, Batman! If we don’t do something to break up the trusts, and to protect consumers from unhealthful contaminants in their food, Eugene Debs is going to win an election someday, and that would be very bad for the republic.”

      Recall that in the analysis of the founders, the most common way for a democratic republic to die was to elect to office an influential demagogue.

      And recall too that when James Madison worried about the tyranny of the majority, the minority he was afraid would be exploited was the minority of Americans who possessed property.

  9. Kevin R. Hardwick says

    Richard–

    You and I do not disagree that, in the final analysis, what we are talking about are the choices of individuals. You will note that in the email we are discussing, I was careful to frame my sentences to make that clear. At no point did I talk about the government exerting agency independent of the people who comprise it.

    And yet there are several things worth noting. People do not make decisions entirely as free individuals. Norms exist, that shape the thoughts of most people subject to them. Culture is real, and it constrains and shapes and modifies the collective decisions of a people. Some of those norms pertain to (in your language) the functions that a people collectively assign to their various governments .

    At no point in our history have those norms not included poor relief, at least for some level of government. For most of our history this function has been assigned at a fairly low level–in Virginia, that of the Church of England parish, or later, the County. More recently, Virginians collectively have assigned that function to the State government, and more recently still to the Federal government.

  10. Kevin R. Hardwick says

    Richard–

    Are you familiar with the work of political scientist Graham Allison? I mentioned this in an earlier post. Allison pointed out that, as a matter of discursive shorthand, we very often use metaphors to useful effect. When we talk about public affairs, some of those metaphors have to do with government, and how we talk about it. Allison distinguished two useful kinds of metaphor here: government as agent (eg. the United States government did [verb]); and bureaucracy as metaphor (eg. the CIA did [verb]). Both of these are tropes–figures of speech. No one who talks this way seriously believes that either the United States government or the CIA has actual agency independent of the people who comprise them. And yet, Allison maintains, it is still very useful to talk this way, and we learn useful information from conducting analysis this way.

    You have posted frequently to argue against Allison’s conclusions. Here, however, I wish to point out that there is a big difference between using a word metaphorically, as a kind of analytic short hand, and using it in an non-metaphorical way. I agree with you that when use these terms non-metaphorically, we are committing an error. But I also think that there is real analytic value in using them metaphorically–which is what I have been doing in those of my posts that use these terms in this fashion.

    • Kevin R. Hardwick says

      Richard–

      Of course. But “too often” is not the same thing as “always,” or even “frequently.” And it certainly has not been the case in my language–I have written consistently with this in mind. Read Allison–the case he studied to was the Cuban Missile Crisis.

  11. R Richard Schweitzer says

    Instead of a diversion into a third person’s view of the use of metaphors, why not state what the “metaphor” used is intended to represent – analytically?

    “. . . an obligation of government . . .”

    Is “government” used as a metaphor. If so as a metaphor for what?
    Is “of” a metaphor. If so a metaphor for what relation; or, if not a relation, then what?

  12. gabe says

    Presented for your consideration:

    The amount of charitable endeavors performed by, and indeed philosophically required by, church and other local organizations prior to the advent of the New Deal and Great Society, was considerably larger than the textbooks may indicate.

    From my own experience as a young lad growing up in a large metro area in the 50′s and 60′s, I can attest to the countless acts of support for the disadvantaged, misbegotten and or wayward souls in the community that were provided by the local churches and civic organizations. You will find none of this in textbooks – but rather in the oral histories that have yet to be collected.
    Ranging from shelter, food support, medical aid / care, substance abuse and even free or dramatically reduced tuition to parochial schools, the efforts of the churches and civic organizations made life bearable for countless tens of thousands in the community. This phenomena was, of course, repeated throughout the US.
    But it was not just the action of these organizations that warrants consideration. More importantly, the participation and active involvement of the citizenry is what is crucial here. There was, in fact, a sense of responsibility to our fellow citizens – a moral sensibility that is, post-Great Society, somewhat lacking, if indeed present at all.
    Be that as it may, I do not believe that today, such organizations would be able to provide a similar level of support. I would attribute this to a confluence of two factors – Great Society arrogation of charitable support to itself and the consequent breakdown in family structure resulting from certain policy changes wrought by the modern welfare programs.
    So yes, people do, nowadays, look to the “guvmint” to take care of their fellow citizens; and yes, the “guvmint” is composed of fellow citizens; but somehow we depersonalize it in, perhaps, the same manner that we have depersonalized our own responsibility for charitable works. In so doing, we depersonalize ourselves and ignore the significant infringement on the liberties of those who unfortunately subsist on public assistance as well as the effect on our own pocketbooks as “the guvmint” ain’t too efficient.

    take care
    gabe

  13. gabe says

    I would add:

    “I would attribute this to a confluence of two factors – Great Society arrogation of charitable support to itself and the consequent breakdown in family structure resulting from certain policy changes wrought by the modern welfare programs.”

    The numbers are simply too great. As Moynihan and others have demonstrated the breakdown in family structure from welfare programs that incentivize such breakdowns has been far too significant and are now beyond the means of faith based organizations (with their own declining memberships) to handle.

    Boy, it could not have worked out better fot the big government types if they had so planned it.

    take care
    gabe

    • R Richard Schweitzer says

      Gabe,

      You have returned to a point of Professor Rappaport’s observations (as taken from Tullock)

      The “transitional” phase of “gains” (to specific interests) from expansion of the functions of the mechanisms of governments may have ended (as was noted in 1995); but, the reduction or elimination of those expanded functions does not appear politically feasible. You raise the issue that the lack of adequate alternative capacities (such as existed previously) may constitute another obstacle.

      That is a salient point, directly linked to the concept of “phasing out” of former “gains” (benefits) or “transitioning” to alternatives to allow for generation of their adequacies. We are all aware that every suggestion for even minimal movements toward such transitions has been a political anathema.

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