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.