People adore
government spending precisely because it is inefficient and distorts
the proper allocation of economic resources. The vast majority of
people are rent-seekers. Witness the mass demonstrations that erupt
whenever governments try to slash expenditures, privatize, and
eliminate their gaping deficits. This is one reason the IMF with its
austerity measures is universally unpopular.
Employers and employees, producers and consumers - these are all
instances of the Principal-Agent Problem. Economists would do well to
discard their models and go back to basics. They could start by asking:
Why do shareholders acquiesce with executive malfeasance as long as
share prices are rising?
Why do citizens protest against a smaller government - even though it
means lower taxes?
Could it mean that the interests of shareholders and managers are
identical? Does it imply that people prefer tax-and-spend governments
and pork barrel politics to the Thatcherite alternative?
Nothing happens by accident or by coercion. Shareholders aided and
abetted the current crop of corporate executives enthusiastically. They
knew well what was happening. They may not have been aware of the exact
nature and extent of the rot - but they witnessed approvingly the
public relations antics, insider trading, stock option resetting ,
unwinding, and unloading, share price manipulation, opaque
transactions, and outlandish pay packages.
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