Skin in the game: Stake in outcome crucial for wise governmental decisions



It is universally recognized that enterprises unencumbered by government regulations, and administered by individuals with their own fortunes at risk, make wiser decisions, more efficient allocations of resources and incur less risk than government decision makers.

Critics immediately pounce on this concept by pointing to the recent housing mortgage-market scandal that involved billions of dollars of bad-mortgage losses made by private financial institutions. This argument must constitute the biggest red herring of recent political history, because these organizations were subject to extreme regulatory pressure to make weak, dubious and bad loans. They were not free to pursue their own objectives.


AND GOVERNMENT continues to adhere to this odious practice by not only compelling such loans, but adding to the regulations
that mandate such practices through the unsound Dodd-Frank Act.

Put bluntly, we have a socialist, authoritarian government. To satisfy the definition of socialism, it is not necessary that resources be owned by the government; government control of private resources through growing government programs does the trick as well. And this insidious process has expanded in our nation like an unfettered malignancy. Indeed, we share a hospice state.

We can slow the demise of the state and enjoy the threads of personal freedom that remain. One way is through understanding the dimensions of this unfortunate transformation. This stranglehold of unchecked control has been attained through a century of unbelievable growth in regulations, both judicially and legislatively inspired. Making the populace aware of this atrocity is the first step in bringing this action to a halt, or even a rollback.


PRIVATE INVESTMENT (new equipment and machinery, working capital) plays a crucial role in the growth of gross domestic product and employment in a competitive, free-market economy. Capital investors provide the dollars for investment – the skin in the game. To enhance private investment, rewards must be forthcoming to those who invest and risk their capital.

These rewards are facilitated by low taxes and minimal government regulations, and the absence of threats for future increases in these burdens. When this capital is combined with management and employee skills, the rewards are distributed to those with skin in the game.

It is extremely difficult for governments to duplicate this decision process. Here the decision to invest is, by its nature, a political one, with taxpayer interests being smothered by a complex process of special interests. The foregoing implies that for taxpayers to obtain the wisest and most efficient use of their resources to the greatest extent possible, all current government ventures should be privatized.

For empirical support of this approach, witness the recent Solyndra, Fisker Automotive and A123 Systems’ scandals, in which neither politicians nor bureaucratic managers of the Department of Energy had any skin in the game.

Our Founding Fathers were more aware of this incentive problem than they are given credit. Signers of the Declaration of Independence declared to “mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.” Citizens of limited resources could offer only their lives, while those with greater wealth could offer both. They invested their fortunes for the benefit of future generations.


THIS UNHERALDED act has been virtually lost among historians. For example, the eminent scholar Charles A. Beard, in his famous book An Economic Interpretation of the Constitution of the United States, suggests that the Constitution was drafted to serve the economic interests of the wealthy, overlooking the financial risks they had assumed through the pledging of their fortunes at the outset of the Revolutionary War. Beard’s interpretation, while of dubious merit, has been widely, though basically uncritically, accepted by generations of historians.

There is another aspect to the skin-in-the game story: All voters should pay some taxes to enable them to act as responsible citizens. It is difficult enough to expect voters to be concerned with the wisdom of government policies, both fiscal and regulatory. But when the voter has no skin in the game, what incentive is there for voter concern over frugal fiscal policies, wise expenditures and the added national debt that politicians selfishly impose on future generations?


IN SHORT, TO BE alarmed at how private resources, through taxation and borrowing, are spent, except when such expenditures benefit them. As expected, their voting records correlate almost perfectly with their unconcerned, irresponsible instincts.

People are aware of the current absurdity that allows about 48 percent of federal income tax filers to skip paying federal income taxes, and that virtually all such filers are eligible voters. Such citizens, along with kindred voters, currently have the voting strength
to increase public benefits for themselves, decrease benefits to others, increase taxes to current taxpayers and reduce, or even eliminate, taxes to other favored groups.

That is not all. Many people who are non-filers potentially are eligible voters with no skin in the game. Their uncounted number lies in murky statistics, but grows unchecked.

Passage of the 16th Amendment to the Constitution, which authorized the income tax, enabled the shift of political power to a non-income-taxpaying group, allied with similarly sympathetic taxpayers. This has occurred under the watchful eyes of vigilant politicians, political scientists, editorial writers and other scrupulous observers of the passing scene. Achieved through a majority vote, it represents another example of the “tyranny of the majority” through democratic rule.

Further supporting the need for voters to have some skin in the game, an early Congress provided for a nominal poll tax. However, it was quickly repealed. This was a big mistake. A voter tax with the crucial skin in the game would have gone a long way toward preventing the recent $4 trillion debt increase, which has been immorally and cowardly shifted to future generations.


THIS NON-SKIN-IN-THE-GAME voting bloc is allied with members of the academic, media, labor union and entertainment complex – a liberal left-wing group that provides articulate leadership. The no-skin voters have the power, with their kindred supporters, to grow their voting base, resulting in grave threats to our economic growth and well-being and personal freedoms.

This is the crux of a not-well-recognized dilemma: How do you slow, or halt, the expansion of the non-taxpaying group of voters?


(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)



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