Thursday, 5 July 2012

Government as a Tool.

Government is not inherently evil. Indeed it is necessary - anarchy is not a happy state of affairs. This is the difference between Anarchism, and Libertarianism: Somalia is not a standing retort to the principles of the latter. Nor are things like progressive taxes, welfare states or redistribution necessarily bad.

Even (or even especially) in meritocratic societies, much of one's station in life is overwhelmingly predicted by what your parents do. If they're smack-addled self-arguers, you're unlikely to become Prime-Minister. So, redistribution fulfils a fairness function - mitigating the gross dice-roll of fate which decided which womb bore you. Redistribution also reduces the risk of starting businesses - if you fail, you're not going to starve, so  as a minimum standard of living can be guaranteed, people can on take more entrepreneurial risks. And as much business success is down to luck, this too is fair. There is an economic function to welfare. Welfare can also be seen as an insurance policy, preventing the rich ending up on a gibbet when the revolution comes.

The trick is to help the needy and unlucky while not damaging the incentive to work. Unfortunately, the British welfare state, with its vast bureaucracy of 72 separate benefits is a massive disincentive to work. Simplifying the benefits system, and aligning it with the tax system and make it simpler to claim, reducing the risk of lost benefits, when taking on short-term work. The Government's plans for a universal Credit are a step in the right direction. 

Government has a role in infrastructure. It is naive to imagine a comprehensive network of Metalled roads would be provided by the private sector. Paths form naturally, but for them to be in decent condition, this is best provided collectively. A road on its own is worth less than the same road in a network.

The realm must be defended. Most countries don't have a handy English Channel, and whilst Britain Eschewed a standing army long after the rest of Europe had started conscripting, she did always have a big Navy and almost no states do without some form of military, even tiny Lichtenstein has paramilitary police. No-one would argue that private armies are a good idea. This is what made Medieval England so hard to Govern.

Defense morphs into law enforcement. A strong, central state through British history has tended to act as a protector of the peasants against their local potentates. The Royal Boroughs became wealthy for example because their liberties were guaranteed by the crown against the often rapacious demands of local barons. Where monarchies became defenders of the people against the barons in this manner - The UK, Scandinavia and much of Northern Europe, they tended to survive. It's clear therefore enforcing rules, especially on behalf of the weak against the powerful is a key role of the state.

A strong, effective state therefore is good for all except the most powerful. Economically, the benefits of a state listed above are demonstrated in the concept of the Rahn curve. If the state doesn't exist, you don't get much economy, let alone economic growth. But just as libertarians are wont to abuse the Laffer Curve to suggest that tax-cuts always bring more revenue, leftists are currently pretending more state spending will always generate growth. It doesn't, and here's why.

An efficient package of tools
Having got some measure of control of the state, and having used it to deliver a more equitable society, the temptation arises in democracies especially to use this powerful tool called the state to solve problems to which it is not suited. Politicians get called "complacent" if they say "not my problem". A limited state, focused on what it does well is wealth enhancing. Take the state into areas to which it is not suited, the result is a state which takes too much, and as a result gets captured by vested interests in public-sector unions, who agitate for more spending on their priorities (mainly wages for their members) forgetting that this must be paid for out of everyone else's surplus production. The result is a state providing Health, Education and social services, over which the people who are supposed to use them, have no control. You take what you're given and like it. You get substandard services, delivered by people who know they're going to get paid, whatever you think. 

It also means the costs lead to over taxation. The rich are mobile, and while they might enjoy London or Paris' cultural riches, there comes a point when they will bugger off, as Francois Hollande is likely to find out soon. It is tempting to blame 'the rich' because they are few in number and democracy can become the tyranny of the majority. If the rich "avoid" taxes, a problem existing mostly in the fevered minds of left-wing activists, it's because a ridiculously complicated tax-code allows them to. Simple, fair, progressive taxation is rarely avoided. Gordon Brown tried to use the Tax system as a control on the economy. He failed. 

Trying to do too much
The problem causing the ratchet upwards in the cost of government is the costs of state inaction are easy to picture - you've pissed off individuals making noise. But the costs of state over-action are spread equally amongst millions, but it takes a crisis to make people aware of it. 

The answer is to use the state as an enabling tool, funding rather than providing. And this is the key to the success of the Nordic states, despite their high (eye-wateringly so) tax rates. I've no problem with state funded services. I've no problem with progressive taxation, and a welfare safety net. But these have limits. And we're at or beyond them now. The tool of the state has become unwieldy and inefficient because it tries to do too much. 

Few would have a problem paying high taxes if the services delivered were up to scratch. And if they are not up to scratch, if there's a choice between competing providers, you still don't mind paying. You just take your tax-funded business elsewhere. This is why Sweden's state schools are so much better than ours - they aren't run by the state, and so don't have the bureaucracy to stifle good ideas, and are not completely captured by the producer interest.

Ultimately the standard of living, that we're trying to improve for as many as possible, equates to a measure of free income after tax, non-tax health and education costs, and transport. All of which government can influence. The USA may have low headline federal taxes, and variable state taxes but its citizens are expected to pay out the majority of the difference into a bloated private health system (the US health industry is as obscene as it is in part of ridiculous laws like those banning the sale of insurance across state lines, but that's another subject, for another day). So despite their low taxes, Americans are not greatly better off than western Europeans. It's not just about money. 

It's impossible to live cheek-by-jowl without some collective decision making. So long as this is under democratic control, and uncorrupt, State action can mitigate certain behaviours which only become individually optimal in the absence of a collective alternative. For example, America rejected public transport almost entirely, in favour of the car facilitating (along with a large, underpopulated land-mass) urban sprawl which means Americans spend longer commuting than almost anyone else on the planet, something at the top of the list of misery-making habits. So a rejection of state action in favour of rugged individualism has forced Americans into a sub-optimal status quo and sitting in queues of traffic on the freeway, but feeling like they have no choice.  Monopolies, like the near monopoly of car infrastructure in Los Angeles, are anywhere and always a problem. 

So the idiot 'Libertarian' battle cry of "cut taxes now" is likely to mean people spend the savings from taxes on things that used to be provided by taxes and being forced into sub-optimal behaviour by the abandonment of some collective action. Inevitably taxes would also be spent on subsidising the poor's access to goods and services, so few are really any better off despite lower headline tax rates. 

The trick therefore is to maximise everyone's utiltiy at minimum cost, and to do so whilst increasing everyone's freedom of action. And the best drivers of efficiency are markets. Free schools would create choice, whilst still being free at the point of delivery. There is no reason (apart from producer interest) to oppose privatised bits within the NHS. The internal market was abandoned, then resurrected by Labour, not for ideological reasons, but because it worked. 

I've no problem with health care free (or free-ish) at the point of delivery funded from taxation because no-one has shown me any evidence that private insurance is more efficient. After-all insurance pools risk. Tax-funding pools risk better. However I do not believe the state, or any other monopoly to be any good at delivery. So break the NHS up, and let the patients choose where to be treated, whom to see as their GP, and let the funds follow those choices accordingly. All the regulator (NICE?) needs to do is say which treatments are available for free, and which need to be paid for out of your pocket, and then check they're up to a standard. The market can do the rest.

Where the real cuts need to come is in the vast, expensive bureaucracies managing and regulating our lives. Big business lobbies for tight regulation because this protects incumbents. Look at banking - a ridiculously tightly regulated industry from which innovation has been frozen by a cartel of self-interested Giants. These Giants are egged on by a regulator which encourages scale in the belief that big is better, and who do business according to the regulators idea of risk. And look where that go us. Deregulation cannot be the reason for the crisis because it's never been tried. A free market in banking (with a state guarantee for depositors, but not investors) would let a thousand flowers bloom. Bank failures need not be disruptive and would cause the banking industry to join the 21st century as crappy customer service would be punished by people moving. At present, I can't e-mail my bank and they still take 3 days to clear a cheque.

If you want to cut costs in Government, don't look at the transfer payments of the Education and NHS. The delivery of these is going to improve as markets penetrate industries which were once monopolies. If a state bureaucracy replaces an insurance bureaucracy, is that really worse? Look at the vast regulatory raj, with fingers in big business, local Government and cut that out. Focus remaining regulation on competition, not consumer outcomes (that's what a market's for...)- don't let anyone get a monopoly anywhere. Bust cosy cartels. Enable choices, stop protecting us from ourselves, and leave the results alone.

Ultimately the state needs to stop doing quite a lot of things its got used to doing. Why is there a public bureaucracy around sport? What is the DTI for except a conduit to Government for big business? Why are there laws demanding I wear a helmet on a motorbike or a seat-belt in a car? Why is there a 'War on Drugs'? Why can I not have a cigarette with a pint? Because our elected representatives decided to use an inappropriate tool to solve problems which are none of their business. The result is a state delivering shoddy services, yet which cost 50% of everyone's income. 

This has become unsustainable. Much as I want taxes cut, I still want good public services and we need a balanced budget. However instead of cutting the Army to 82,000, why not cut the bureaucracy of the MoD? Instead of pruning branches, why not cut down the whole tree of the DTI? How about Stopping giving money to "charity" on  our behalf? Why not Roll DfID back into the FCO? The list of unnecessary stuff the Government does is nearly endless. Slash the areas of the state whose sole purpose is to provide jobs for life for Unite members, and create markets in most of the rest. You may not see the tax burden go down much in the short-term, there are too many pensioners for that, but you may get more for your taxes and your children might be rich enough to be taxed less. In final analysis, Gordon Brown's spending splurge wrecked the rest of your economic life. It might not wreck your children's.


Skimmer said...

You'll enjoy this:

Rolling Back Government: Lessons from New Zealand
Maurice P. McTigue

Anonymous said...

You'll enjoy this:

Rolling Back Government: Lessons from New Zealand
Maurice P. McTigue

B.K. said...

You're the type of libertarian I can befriend. Hooray!

John Galt said...

The problem here is that government has become a magic money tree and all of the political parties are captured by it.

Since the measuring stick of political power is what department you are in charge of and how many subordinates does that give you, this makes continual expansion of the state to be guaranteed.

A change of government might affect the rate of expansion (slower under Tories - if there are any left - than under Labour).

It seems that the only thing that will stop this everlasting expansion is a reduction in revenues (i.e. being unable to extract more tax from taxpayers) along with a buyers strike on UK Gilts (again unlikely given the number of pieces of legislation effectively forcing banks and insurance companies to buy UK Gilts.

I keep praying for collapse and default as that is the only thing which will allow us to bring about the necessary changes, but the state (i.e. civil servants, not the politicians) keep managing to keep the plates spinning on their sticks for just a little longer.

Simon Jester said...

A long post, some of which I agree with, some of which I don't. I'd just like to touch on a few outstanding points:

- "This is the difference between Anarchism, and Libertarianism: Somalia is not a standing retort to the principles of the latter." Nor the former; Somalia is a polyarchy, not an anarchy.

- It's the Rahn curve, not the Rahm curve. (At the moment, this blog post is the first result on google for "Rahm Curve", while an article by Tim Worstall for the Bastiat Institute is second.)

- "libertarians are wont to abuse the Laffer Curve to suggest that tax-cuts always bring more revenue" - I have never seen a libertarian do this, although it is a favourite tactic of statists to assert that they do. Many libertarians may assert that tax cuts in modern Western economies will almost always bring more revenue; this is a reflection of the fact that tax rates in such economies are typically higher than the Laffer optimum.

- Those cuts to the Armed Forces: are you still convinced that that nice Mr. Cameron is the wonderful leader you keep on saying he is?

Anonymous said...


Anonymous said...

The rich also are heavily invested in property which theynwould have to unload before 'buggering off. In addition, one can get away to a private island but the lure of one's culture will draw you back. Hence why we see non-doms spending so much time in UK - Belize has its limits it seems.

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