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Two Cheers for Governor Daniels

D. Eric Schansberg

Professor of Economics

Indiana University Southeast

Emerging from a stint as the first budget director in the Bush administration-- a group both fiscally liberal and quite willing to use public policy to score political points at the expense of the economy-- it wasn't clear how Mitch Daniels would approach policy decisions as governor. When he faced such a choice, would he craft good economic policy or try to please political constituents? His most famous proposal has been to (temporarily) increase taxes on those with relatively high incomes. Although it'd be difficult to describe a tax increase as good economic policy, it's an interesting proposal because it would seem to irritate one of his stronger constituencies. Since then, Daniels' comments in two smaller areas continue to signal his willingness to forsake political gain-- this time, by embracing good economic policy.

First, Governor Daniels has insisted on competitive bidding for licenses to operate slot machines-- if the legislature approves the expansion of gambling. His stance on this issue is nuanced and impressive. Daniels is not advocating an expansion of gambling and even seems to be signaling mild opposition-- whether out of economic or moral concerns. But he also recognizes that the legislature could insist on additional gambling over his veto. So, he is wisely seeking to shape policy in this area by encouraging a competitive bidding process rather than automatically awarding lucrative gambling licenses to existing providers in the horse racing industry.

Second, Governor Daniels recently announced that he will not support a continued federal subsidy for Amtrak, in line with the recent Bush budget that proposes its elimination. The inefficient train line has enjoyed public subsidies of $29 billion since its inception 34 years ago--taking the average family of four for a $400 ride in higher taxes over that time period. But eliminating this welfare program would risk 640 Amtrak jobs in Beech Grove (a suburb of Indianapolis). Support for the subsidy is nearly universal within both major political parties. But Daniels has distanced himself from the political pack, embracing good economic policy while alienating a local constituency.

Not surprisingly, Governor Daniels' two policy proposals are not popular with the relevant interest groups or their politicians. Mike Brown, a spokesman for the horse-racing industry, said they're "not big fans of the [competitive bidding] concept". Likewise, Lawrence Buell (R-Indianapolis) said, "Over the years, I've worked pretty hard to keep Amtrak afloat. Some subsidy is really necessary." Although enhancing competition and eliminating subsidies of inefficient enterprises are clearly good for the economy as a whole, special interest groups are especially interested in what serves their own interests. Likewise, the two policy proposals benefit consumers (in the case of gambling) and taxpayers (in the case of Amtrak). But the benefits to them are difficult-to-see-- whereas the benefits of opposition to the Daniels proposals are obvious for the interest groups and their politicians. This is the nature of much government activism: impose small-per-person, subtle costs on the general public and society as a whole while enhancing the wealth of a politically-connected special interest group. The interest group passionately pursues the policy while the general public is "rationally ignorant and apathetic" of that which costs them relatively little per person and hurts the economy overall.

On these two policy matters, Governor Daniels can expect the support of Libertarians and fiscal conservatives. Because this is only a small subset of the population, impassioned interest groups are likely to trump a largely-indifferent general public. In any case, the governor has taken a principled but difficult political stand. At the least, he deserves kudos for his courage.

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