Which are worse governments or markets? The answer to this question might help you understand what political party you agree with, and how to solve the current US debt and debt ceiling problems.

1776 was the year the Declaration of Independence was signed, and the year Adam Smith published his famed “Wealth of Nations” (the book that popularized the study of economics).  Smith argued that pursing personal interests causes market to reach the most efficient outcome; thus free markets where citizens can pursue their interests are the key to a wealthy nation.  Some government is necessary to maintain order, but the government, Smith argues, should be limited.

Despite Smith’s thorough explanation of markets, he failed to address market failures, monopolies, externalities, and public goods beings the most common examples. Market failures result when citizens pursue their own interests and markets produce an inefficient social outcome that could have been prevented through some type of intervention.

Intervention agencies exist – we know them as government – whose role in the market is to identify market failures and prescribe specific laws or regulations that fix the problem.  Sound easy? Here is the problem: governments.

The solution to the problem is itself a problem. If you do not think government agencies are flawed, renew your passport or driver’s license, and let me know about your experience. (Despite the failures of government agencies, their circumstances do not help their situation. If there is no other place to renew a passport, all customers are going to come back, so customer service is not important for passport agencies.)

So the question arises again: which are worse, market or government failures? The answer you give to this question is a good indicator of which political party’s fiscal policy you agree with. If you prefer government failures you might agree with Democrats and if you prefer market failures you might agree with Republicans. Hopefully both parties try to find the perfect balance of government and market, but Democrats tend to believe in more government intervention and Republicans tend to prefer more market freedom.

Why is it important to know the difference?

Right now the talk of the town is what should be done with the debt ceiling, and how the US can reduce its debt. To cut down on debt, the government has two basic options: cut government spending or increase taxes. Cutting spending reduces government and allows the market to take over where the government has stopped operating, while raising taxes expands government and allows it to create more programs and enhance current ones.

Recent policy has attempted to achieve the best of both worlds: cut taxes and increase spending. This has been the trend for the past few years and is causing the increase in debt, and the need to raise the debt ceiling.

If we want debt to grow, the path we are on is perfect. If we want a change, we need to do something different. Either option of raising taxes or cutting spending most likely will cause temporary economic pain, but it will help in the long run. We face a dilemma and the question Shakespeare asked years ago is still relevant: “Who buys a minute’s mirth to wail a week?” Something must be done, so think about which you prefer: governments or markets? We will see what the president thinks, if he comes out with a budget.