Ending the Welfare State in Wyoming, Part 2

As I recently explained, about two thirds of state government spending in Wyoming is dedicated to core welfare-state programs within education, health care and human services (broadly known as "welfare"). With a likely revenue crisis on the horizon, and with the causes of that revenue crisis being structural, it is necessary for the Wyoming state legislature to structurally reform its spending program. Inevitably, that means reforms that permanently lower - or preferably eliminate - the entitlement programs that consume two thirds of state revenue.

Yesterday I explained what the first, necessary step toward such reforms would be: an amendment to the Wyoming constitution that protects economic freedom. It is worth noting that neither our state constitution nor the constitution of the United States provides explicit protection of economic freedom. Without getting into a debate about constitutional history - a field I am unfamiliar with - it is worth noting that the credible threats to, and infringements on, economic freedom that we see today were invented long after the U.S. and Wyoming constitutions were written.

Simply put: the Founding Fathers could not in their wildest dreams imagine that people, a quarter millennium later, would be obssessed with forcefully redistributing income, property and consumption between each other.

Nevertheless - here we are. But passing a constitutional economic-freedom amendment is only the first step toward reforming way the welfare state. The big, next challenge is to reform away the welfare-state programs we actually have today.

To do so takes more than just shutting off the tax-revenue faucet. A sudden disruption of that magnitude would have major, adverse effects on the state economy: it would be like closing every hotel, restaurant, utility and construction company in the state. And we have not even counted local government spending.

This is no reason to despair, though. We would just have to acknowledge that reform, done right, takes time. Therefore, to get welfare-state reform right on its first try, the legislature will have to find the right answers to the following three questions:

1. Is there liquidity in the market? In other words, is it reasonable to expect that citizens will have enough money to buy the product, now provided by government, on a free market? This question is not as discouraging as it may seem. In next week's blogs I will discuss actual examples of how reforms can be designed to answer this question affirmatively.

2. Is there volume in the market? In order to guarantee that the free market replaces a government monopoly, a reform effort must make credible that the privatized activity - such as K-12 education - will be characterized by free competition. This means, essentially, that no seller can become so dominant on the market that they can set the price of the product. If one seller, such as one school company, would become big enough to be a price setter, then the reform would effectively have turned a government monopoly into a private monopoly. That does not make things much better for the citizens of Wyoming.

3. Do scale economies dominate the cost structure? One reason why it is so difficult to privatize the entire chain from construction to operation of highways is that the cost structure is dominated by fixed costs. This creates a "natural" barrier toward competition - it would be hard to imagine five competing and profitable interstate highway systems in our state - which also puts a big barrier in the way of free-market reform. However, the cost structure varies significantly between current government spending programs. While health care to some degree has a fixed-cost problem, education does not.

Next week's blogs will look at examples of reforms in view of these three questions. Stay tuned.