Category Archives: US Politics

The ‘Myth’ of Taxpayers’ Rights

In April, US Representative Markwayne Mullin (R-OK) had a tough town hall.   Upset about the Trump legislative agenda, constituents called Mullin to task as a public employee.  His unscripted response was to complain about their questions and to argue that the idea that taxpayers pay his salary was ‘bullcrap’.   He went on: “I pay for myself…I pay enough taxes where before [sic] I ever got there, and continue to for [sic] my company and pay my own salary.” Mullin further claimed that his job as a public servant was an ‘honor’ and that his wealth and position as a business leader gave him a special freedom and independence from government.  This independence from financial ties, in turn, bolsters his credibility as a critic of government encroachment.

Is Public Service a Contract?

His argument opens an intriguing window on the way that public service (and, by extension, government) is being recast.   While there is a striking & stark contradiction between claiming to both represent taxpayers and to be free from accountability to them, Mullin kind of had a point—–Do ‘taxpayers’ (as a group, and aside from ‘citizens’) actually have rights? Is public service a kind of contract of service, in which representatives agree to provide a necessary ‘good’ in exchange for a fee (salary paid by taxpayers)?

I want to say no, that is not the essence of public service. Public service should not be reduced to little more than a commercial exchange or contractual relationship, it is also a relationship of trust.  Logically, then, to some extent I (gulp) agree with Mullin that it is a service and a privilege.  This is not to say that there is no contractual dimension to public service, however.  Ever since Rousseau wrote about the Social Contract in the 18th century, governments and citizens have expected a relationship of mutual accountability.  For Rousseau, however, the social contract was a metaphor for the larger relationship of mutual obligation that government rested upon; in particular the obligation of the state to its citizens. Therefore, the relationship between the public and public servants does have a contractual dimension. So, if it is not only a contract, what else is it?

The Origins of Taxpayers’ Rights

Prior to the widespread institution of income taxes as a primary revenue source for modern administrative governments, most governments gained the vast majority of their revenue from taxes on trade.  The famous Boston Tea Party protest was against the unfair tax rate on a commodity (tea) and the legitimacy of the Crown’s right to tax commerce without accountability to traders.   Eventually, of  ourse, taxes became imposed on other dimensions of economic activity, include labour and capital gains.  What drove governments to reach beyond trade to enrich their treasuries was war. War required governments to raise funds to field military forces at a competitive level to other states.  War also brought conscription, wherein the sons of the poor were required to invest their lives in the security of the state.  Conscription without representation was just as untenable as taxation without representation, however. With new demands from the state, the state also had to provide new opportunities for returning veterans, which in turn necessitated higher taxes to provide housing, care, education and a safety net.  In truth, the extension of the tax base to all income earners relieved business of the bulk of the tax burden, and business benefited from the security provided by the state.  Security provided great opportunity for economies to grow and globalize.

Paying taxes does and should produce a set of obligations on the part of the government to respect the public interest

Asking the people to expend blood and treasure on war meant that there was an implied responsibility on the part of the state to provide social services to the people.  Taxpayers could expect that public servants would expend public treasure for the public good, not for the interests of business alone.  Underlying the arrangement was a semi-contractual kind of language: taxpayers could expect to be able to exercise their democratic rights to ‘check’ irresponsible governments; and governments could expect citizens to be devoted to the support of the state in war, and in peace.

Clearly, this calculus has changed.  The reasons for this are numerous, not least that conscription has been eliminated and war is fought very differently, but it is still undeniably the case today that paying taxes does and should produce a set of obligations on the part of the government to respect the public interest.

Taxpayer Rights Versus Taxpayer Interests

Paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life.

This is not, however, the same as saying that taxpayers per se have rights, over and above their interests as members of the public.   A ‘right’ implies a claim to greater respect and recognition over and above the interests of other groups.  A ‘right’ is a trump card that all other interests, and government, must respect.   Taxpayers as a group are entitled to a voice and to express their interest as a group.  An ‘interest’ implies a competition in the marketplace of ideas in which any one group’s desires may reasonably and fairly be considered over and above others, within the framework of laws that otherwise encourage respect for fundamental rights. Taxpayers, like retirees, patients, business owners, students, workers, and other groups, have interests, but not rights. Ethnic minorities, religious minorities, the disabled, the press, and the public, on the other hand, have rights that may override taxpayers’ interests, and that may necessitate that government prioritize these considerations over others.

The Recasting of Government in the New Agenda

What the new agenda overlooks is that paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life. This is what makes Mullin’s position so problematic. Mullin is not making his defence from the standpoint of a citizen with a common stake in the public good, nor even as a servant (despite his calming words about ‘service’ and ‘honor’). His defence is one of a taxpayer, and more particularly, as a business owner.  Ultimately the whole conversation ends up being an argument between taxpayers, not citizens.  Arguing that taxpayers have unique contractual rights essentially gives them permission to disengage from the social contract as a whole, especially those parts of it that don’t directly serve their interests.  In turn, and by extension, governments are then relieved of their obligations to the public, including the provision of security and welfare.  While taxpayers have the democratic right to defend their interests, they do not have the right to disrupt the social contract to this degree. When The Fraser Institute and the Canadian Taxpayer’s Federation argue that taxpayers either work for themselves or for the govenment, they feed in to the idea that taxpayers have special rights.

When citizens at the Town Hall demand that governments should respect taxpayers, then decision makers should listen. However, taxpayers should not have a louder voice than citizens.  Taxpayers ‘rights’ should not be extended to the degree they disrupt the larger social contract.  If they do, then the democracy is at risk of eliminating itself by undermining the contract of service and trust, and, incidentally, by bankrupting the state.  There is some evidence that the US has already begun to do this.  Since the language of taxpayers’ rights essentially marginalizes any public interest from the conversation, it is incapable of constructing a new social contract.  The language of taxpayers’ rights then becomes essentially self-destructive, since taxpayers will end up undermining, in the end, their own claims to the rights and benefits of citizenship.

UNPRESIDENTED: A World View of the US Election 2016 (Talk)

The US presidential election results will have an impact worldwide for years to come. In this talk, Dr. Rosalind Warner will look beyond the personalities and ‘fake news’ to explore the deeper social, political and economic origins of the 2016 election result. Participants will discover what made 2016 different and why it matters to the world what happens next.

6 Questions for the Social Academic Disciplines after the US Election

Its been a tough time for practitioners of what I’ll call the Social Arts & Sciences, and for analysts  of political affairs. For example, reputable pollsters were totally wrong in predicting the election of 2016, pretty much destroying any confidence in the utility of analytical methods like survey research. Of course, most consumers of polling data can’t be expected to know the difference between the use and interpretation of quantitative data for research, and the kinds of reckless extrapolation that posed as expert and authoritative analysis leading up to the election.  So, it seems that social scientists have some tasks to do. As a community of thinkers and teachers about social affairs, the Social Arts & Sciences have a unique set of tools for understanding world events that can shed light on important questions. Like any tool, the value of analytical methods is only as good as the use they are put to.

Illuminating who we are as social beings, and why we do what we do, can bring improvements to our shared experience by enabling changes in social behaviour through learning, but only if done carefully and deliberately, and with a great deal of humility and caution.  I’d suggest these following lines of inquiry, but what I can’t do is help sounding like a stuffy, elitist, out of touch intellectal to some.  This is an occupational hazard, but one I’ll have to live with. Sorry about that. Here are some lines of inquiry suggested by recent events:

1. Political Science

Ok this one’s mine.  Please, political scientists, explain clearly the difference between democracy and liberal democracy.  Liberal democracy is a paradox, since the rule of law and constitutional protection of human rights necessarily limits democratic rule. Another way to think about it is that minority protections make democracy possible by ensuring that the people do not abuse their power, and in the process, potentially vote themselves out of power.  Law needs democracy and democracy needs law. They are inextricably bound together.  The rights of minorities are integral to the maintenance of democracy, not an add-on that can be jettisoned in the name of the majority or for the sake of convenience. Protecting minority rights is what enables democracy to function, and to sustain itself. Compromising minority rights inevitably compromises democracy itself.  Protecting minority rights protects everyone.

While we’re at it, please explain what polls actually measure, what they don’t measure, and what their limitations are (and I don’t mean margin of error). Everyone: (yes that means you)…I’m sorry, but you have to take statistics.  We all did it, so you have to too. There.

I’m throwing questions about the Electoral College to the historians.  It makes no sense.

A bonus suggestion for Philosophy:  help everyone understand paradoxes better.

2. Gender and Womens’ Studies

I would like to understand better the dynamics of ‘alpha male’ social behaviour.  I don’t even know if that’s a thing, but it kind of looks like what we’ve been observing. If I’m wrong, can you please school me in another way of understanding why so many thinking, otherwise respectful people (men and women both) willfully compromise themselves and their values when faced with powerful but flawed male figures?  An extra job for sociologists: help us truly understand the centrality of identity to pretty much everything.

3. Psychology

Following the 2008 economic crisis, a new subfield of Economic Psychology flourished to help explain why otherwise rational actors made irrational decisions, even against their own interest, and under what circumstances.  I think we need more of that.  Can psychology help us understand  more about the dynamics of voter decision making,  the processes of skapegoating, and the emergence of in-group and out-group division?  What is the role of emotion as a motivation for decision making?   We know that strong emotion can interfere with rational decision making,  but how might this dynamic work at a community level?

4. History

Please keep telling analogous stories from the past to help give context to the problems of the day.  Each generation still generates its own version of problems and solutions, but if people saw their issues as common and not unique, they might be better able to think creatively about how to apply the wisdom of the past to the present.  Also, please focus as well on the peaceful, constructive periods of history where nothing much happened.   The boring bits are what we can learn from.   As well, can you please help us understand better what happens during times of accelerating and rapid change so societies can learn to be more adaptive?  I have a feeling we’re going to need that.

5. Communications

Ok so you’ve got lots of work ahead…..propaganda has gone viral, driven not by large organizations but by individual users.  Consumers are now transmitters.  Conversations are immediate and global.  Has the speed of communication outpaced democracy?   Please talk to the psychologists about the effects of this on thinking, can we know more about how our social lives and worlds create our  reality?

6. Artists and Writers

Please keep reminding us what it’s like to be someone else.  Touch our hearts with stories of people and places different from our own experiences, so that we can develop empathy and awareness, even for a minute.  Teach the teachers how to convey this effectively. Educate all of the social scientists about the importance of empathy to learning and growing and advancing knowledge about the world and ourselves.  Ultimately, this is the only way humans truly learn.

The Psychology of Wealth and the Social Contract

Credit: Flickr User Philip Taylor
Credit: Flickr User Philip Taylor

Social science is telling us that morality and generosity decline among the most well-off.   Ever since I heard about this study at UC Berkeley I’ve been curious to imagine how these findings might apply to political systems.  It seems that material wealth, or even the feeling of wealth, has a greater impact on one’s attitudes towards others than previously believed; possibly even a greater impact than previous political ideology, upbringing, or education!   Studies have shown for some time already that generosity is more marked among those who have fewer resources compared to those with more, but now it seems we’re starting to get results that reveal even more about the nature of these differences.  There are intriguing hints at the sources of these really surprising findings.

Nick Powdthavee, an author of a study of the effect of lottery winnings, found that greater wins tend to make people more right-wing and inegalitarian.  He declared:

“We are not sure exactly what goes on inside people’s brains but it seems that having money causes people to favour conservative right-wing ideas. Humans are creatures of flexible ethics.”

Also in this study, the authors speculate about the effect on democracy, arguing that self-interest trumps morality in decision making.

This last point is where I depart a bit in interpreting the meaning of these studies.  Moving to the right may mean supporting an effort to protect one’s own ‘hoard’, but it is only ‘self-interested’ on an individual level, not necessarily on a social level.  Democracy is to some degree about keeping these tendencies in check and allowing a public good to emerge from the apparent conflict of interest created between the rich and the poor.   The paradox, of course, is that the wealthy MUST be on board the project of contributing to the social good at the very point when they are the least motivated to do so (due to their wealth, apparently).   As the wealthy opt out of the social contract that makes things better for everyone, they undermine themselves by eroding the means by which the social fabric is maintained.

 The paradox, of course, is that the wealthy MUST be on board the project of contributing to the social good at the very point when they are the least motivated to do so…

I assume, of course, that the wealthy are still in some way part of that social fabric.  Wealth seems to offer a way out of social obligations and norms [for example, by letting people think they can drive faster with a more expensive car, even if they end up paying a ticket].   But why do people choose to opt out, even if it becomes more expensive, and actually less rational, for them to do so? Why send your kids to private school, pay your taxes to another country, or get your healthcare from a boutique provider, when comparable services can be obtained much more cheaply by paying your fair share to the common pool?  It’s not exactly self-interested in the rational, economic sense, to do this.

I’m wondering if the answer has to do with the psychological need to control the environment, something that money provides unequivocally in a capitalist society.  What one loses in material cost [private school is more expensive than public, paying a ticket is more expensive than driving according to the rules, for example] is made up for in control over the process. If it is about control rather than about wealth, it has implications not only for what the rich do individually, but how they act toward the political system as a group.  For if the tendency to protect one’s own extends to the effort to control the society as a whole, it means the wealthy will make social laws and rules for everyone else that reflect their particular interests.

Fostering empathy in the minds of the wealthy may not be the way to go, as this article in the Atlantic suggests.  A considerable amount of energy is spent in encouraging charity among the wealthy, which has had little impact on the mindset.  Indeed, what is interesting is that most Americans have experienced poverty in their lives, if only temporarily, at one time or another.  This means a significant number of wealthy individuals, and yes, even members of Congress or Parliament, have also experienced poverty.  If the above studies are correct, it seems unlikely that this experience can trump the psychological effects of wealth, and the tendency to be less egalitarian or generous, that goes with wealth. It doesn’t seem likely that human nature will change.

Credit: Flickr User Brent Granby
Credit: Flickr User Brent Granby

Bridging the psychology of the individual with the need for a public good means bolstering institutions that supercede and limit the tendencies of the wealthy to opt out and to control the process. Unfortunately, many democratic institutions have been put in place to do exactly the opposite: to control and limit the worst excesses of the general public [see the Canadian Senate].

Public education, public health care, parental leave, elder care, social services, and even sewers and parks have often been thought of as contingent on ‘affordability’ (Yes I’m looking at you, BC Liberals!)  In fact, by highlighting the idea of the public good, these institutions remind us of the vulnerability of the social contract to the psychology of wealth. Now that we know more about the effects of wealth on our thinking  (and by that I mean everybody’s thinking) social planners should be better equipped to make the case for the defence of that social contract.  That defence should strongly state the need for everyone, but especially the wealthy, to be included in the social project from which we all benefit.

The True Meaning of Differentiated Citizenship

090913_0254_TheTrueMean1.pngSometimes the language that we use as political scientists is regrettable in its implications. For example, the definition of ‘differentiated citizenship’ according to a leading introductory text to Canadian politics reads as follows: “The granting of special group-based legal or constitutional rights to national minorities and ethnic groups” (Mintz, Tossutti and Dunn 89). While accurate, the use of the term ‘special’ has many unintended implications. Who is ‘special’ and who is entitled to ‘different’ treatment by government?
For one thing, to say that a group or individual receives ‘special’ treatment is to imply that every other group is not special. Or, to put it another way, it is to imply that a group is singled out from the otherwise equal treatment that they might be entitled to receive by virtue of being equal members of the community. It assumes that the community at large includes other groups which may be equally entitled to special treatment were it not for the unique qualities which set the ‘special’ group apart. Equality before the law is both an operational concept and an aspirational standard.Using the term ‘special’ to describe a group singled out for differentiated treatment suggests that everyone else is already treated equally under the law, that equal legal treatment is in fact a reality, and not also an aspiration yet to be achieved. Under the assumption of equality, special treatment is, by definition, discriminatory. Discriminatory treatment technically only means the same as ‘special’ treatment, except for the fact that it implies a harmful result for the group being singled out. When the result of special treatment is discrimination, it is rightfully condemned. Discrimination on the basis of race, gender or ethnicity, for example, is condemned in a democracy not primarily because it constitutes special or differential treatment, but rather because of the negative effects of the judgments that tend to be made, most often based on involuntary or ascribed characteristics. The response to ‘special treatment’ is to question the basis for unequal treatment rather than to condemn all forms of harmful discrimination. Why the knee-jerk reaction to ‘special treatment’? After all, governments identify groups for a variety of special programs and services all the time. Groups are defined by age, income levels, geography, occupation, health status, and marital status. Many of these categories are based on involuntary characteristics, or at least, characteristics that are extremely difficult to change. Northerners or people who live in rural areas are entitled to unique job training or assistance for moving expenses. Fishers in the Maritimes are treated distinctly from other occupations with respect to qualification for EI benefits, young people are targeted for special job training and employment programs, and government services like healthcare are often offered in languages other than the two official languages.
090913_0254_TheTrueMean2.jpgIn truth, as discussed in the last two blog posts, equal treatment is as elusive as the abstraction of ‘equality’ itself. One is tempted sometimes to ‘test’ equality by imagining a ‘reverse onus’. In other words, we might try to test the extent of equality by asking ourselves how a given situation might be if the positions were reversed. If a black woman and a white woman are ranked equally on a college entrance application, then ‘all else being equal’, the chances of success should be equally distributed (50/50). If this is indeed true, then the white woman and black woman are being equally treated. In reality, we can more effectively test the presumption of equality by looking at outcomes. If an equal chance of success really does exist, then the number of black successful women should be roughly proportional to the number of black women in the population as a whole, and the same with the number of white women. Success is clearly not distributed proportionally among these racial groups. Because the outcomes do not support the idea that such equal treatment exists, it is unfair to apply the ‘reverse racism’ test. Treatment that might be appropriate for one group would not be appropriate for the privileged group. The two situations are not comparable. Discrimination can still be shown to exist, as the story of Yolanda Spivey reveals. Spivey, a black woman, reportedly modified her online job profile to appear ‘white’, changing her name and racial identification, but keeping all of her other information the same, including qualifications,

experience, and work history. She received many more employment enquiries as a white woman than as a black woman. The experiences of black and white people are not comparable, and so these groups should not be considered as if they were treated equally. Of course, more study and data is needed to determine the extent, nature, and form of discrimination in society. Nevertheless, differential treatment, and even differentiated citizenship, is justifiable in order to move toward equality of opportunity for all. Until equality can be demonstrated in outcomes, it should be seen as an aspirational goal, and not assumed to be already in place.

What Kind of (In)Equality Do We Want?

Photo Credit: Jessica Tam Flickr

When analyzing any phenomena, it helps to have a good idea what we want to achieve. In political science as in life, equality has great significance. Analysts tend to think quite differently from the general public, however, about what constitutes equality and how we should use the term. Let’s consider a thought experiment to sort out the difference between ‘equality of opportunity’ and ‘equality of condition’.

If we imagine that equality of opportunity and equality of condition are kinds of ideal types at opposite poles, with a spectrum of variations in between, then the picture might look something like this: under ‘equality of condition’ everyone would experience the same life outcomes: equal incomes, equal standards of living, and equal levels of education, health care, and work. How would things differ? Likely inequality would creep in through limited means: for example, some may work longer hours, have more or less education, spend more or less time skiing, etc.

What is wrong with this picture? The most common criticisms of this ‘absolute equality’ are:

It reduces the incentive to succeed, and 2. It distorts the value of things, leading to scarcities and gluts in supply.

Society involves differential treatment.

But these are practical criticisms, not questions of justice.   Would absolute equality actually be ‘just’?  Assuming for the moment that such a system could be workable (and I’m not saying it is) then an argument could be made that it actually creates injustice by failing to differentiate among people with ascribed or inherent differences who deserve differential outcomes.  Those who work harder or are more creative or who are disabled or ill should be treated differently.  Some may deserve preferential access to resources either as a result of their extra effort, their accomplishment or contributions, or by virtue of need.  Tellingly, the right more often argues for differential outcomes based on effort and accomplishment, while ‘need’ tends to take second place. It is sometimes said that such a system would be communistic.  However, under Marx’s vision of communism, the ideal form of equality actually allowed for differential rewards focusing on need rather than accomplishment or contribution. Contrary to popular belief, Marx did not advocate absolute equality of condition. Indeed, nobody has, in all seriousness, ever really proposed that large-scale industrial societies impose absolute equality of condition.  This is because serious thinkers would quickly realize that equality of condition, even in its ideal form, would inevitably raise both practical and fairness questions since there would still need to be some argument for different treatment of some people.  Nobody is average.

Now, what about equality of opportunity? That sounds like something we can all get behind: everybody can try or fail equally well, and those with the greatest accomplishments and talents will rise to the top. This is kind of what Paul Summerville argues when he says:

Equality of opportunity is a virtue when it is twinned with unequal outcomes. It is meaningless without it. What is the point of equality opportunity if success is discouraged by custom, law, or taxation?

But, to respond to this, how can we be sure that everyone actually has an equal opportunity to try, and to win? Inequality all by itself is not evidence of equality of opportunity. What if the winners try to ‘kick the ladder out’ from behind them, blocking the upward advance of others? What if they use their newfound positions to favour their heirs and families and friends rather than allow their loved ones to fail? Perhaps when we see that some are able to climb up to the top from the very bottom of the social ladder without artificial assistance from the state, then we can say that equality of opportunity exists. But how many of these examples are sufficient to prove it? One? One in ten? One in a thousand? The fact is there is no natural or inevitable level of inequality that can tell us when everyone truly has an equal chance. We can point to clues: perhaps when the top 1% is as diverse and representative of the entire society, or when every member of the top group can claim to have climbed out of the gutter, but that seems as unlikely as the ideally equal society discussed above. The question of fairness rises again: even in a society in which opportunities are purely equally distributed, there will be unfairness due to the same factors mentioned above: What about those disadvantaged by illness or age or poor upbringing? What about highly talented or accomplished individuals who don’t manage to make it through no fault of their own? why value some talents more than others?

Given differences, how can we be sure that equality of opportunity exists?
Given differences, how can we be sure that equality of opportunity exists?

Again, the argument to treat some people differently in order for equality of opportunity to be realized is present. But, the same question arises: what should be the basis for differential treatment? Here, the differences between the two poles start to disappear: the essential argument is not about equality at all, but about the basis and rationale for differences. Both sides work toward an ideal world that is impractical and unfair, yet both sides argue for ‘differential’ treatment on the basis of different individual characteristics. The right argues that differential treatment should be based on talents or contributions, while the left focuses on compensating for special needs and other (class) disadvantages.

The world we actually live in is of course far more complicated. Equality before the law, which is the dominant discourse of equality in Canada and other Western liberal democracies, is actually a fall-back position avoiding both of the options described above. It doesn’t guarantee equality of opportunity and it doesn’t mitigate inequalities of condition. At most, it provides a measure of our progress toward some compromise on fairness and practicality. It’s not irrelevant, far from it! The legal guarantees of the Voting Rights Act or protections for gay marriage or for equality between religious beliefs do matter, but not for the reasons we think. They matter less because they create equal opportunities, and more because they clarify the legitimate grounds for treating people differently. The fact that people are all, in some way, treated differently by society still needs to be acknowledged by all participants in the equality debate.

The next two blog posts will address the sources of present-day inequality in globalization, and the basis for differential treatment and its centrality to equality.

Further Reading: Tax the Rich (More)!

For those attending the Munk Debate livestream on May 30th:

Munk Debates   The DebatesPaul Summerville, University of Victoria economist, recently wrote a series of blogs on the topic of equality and inequality.  You can find them here:

“Guest Post: A History of Equality” May 14th, 2013 The Inside Agenda Blog 

“Guest Post: The Difference Between Decreasing Inequality and Increasing Equality” May 22nd, 2013 The Inside Agenda Blog 

“Guest Post: Why We Need Winners and Losers” May 28th, 2013 The Inside Agenda Blog 

David Miller responded:

“Guest Post: The Economic and Democratic Harms of Income Inequality” May 29th, 2013 The Inside Agenda Blog 

The Globe and Mail also has run a series of blog articles by debaters, you can find them here: 

Can currency wars lead to real wars?

Are we in a potential inflationary moment?

Imagine the following:  China secretly buys up gold futures in the hopes of stockpiling a war fund to fight inflation caused by US ‘quantitative easing’.  If the US goes too far in trying to fund its stimulus by debasing the dollar, China triggers a crisis by buying up gold.  The ultimate statement of lack of confidence in the US dollar (which is the key currency for all international trade and capital reserves) leads to a catastrophic run on the dollar and a collapse of globalization as each country tries to ‘beggar’ its neighbour with cascading tit for tat devaluations.  In his book Currency Wars: The Making of the Next Global Crisis, Jim Rickards presents several scenarios by which the world could come to the brink of collapse as a result of governments’ efforts to manipulate their currencies, thereby stimulating their economies at the expense of their trading partners.  Indeed, it is not hard to imagine how the monetary underpinnings of globalization could easily come crashing down given the wobbliness of the top currency, the high level of US debt, and the lackluster response of the US consumer, traditionally the world’s growth engine, in recovering from the 2007 recession.  Indeed, one could argue that even a much less complicated scenario might lead to crisis:  what if China simply decided to use it’s so-called ‘nuclear option’ and stop buying US treasuries, triggering a cascading dive of confidence in the world’s reserve currency?  What if politics really did take over economics?

The alarmism over a coming hyperinflationary crisis appears to be growing, and it’s not without some foundation.  Fiscal stimulus appears to have met its match in the global system of monetary exchange, where politics and economics do not just interact, but essentially meld.  However, at least some of the alarmism should be taken with a grain of salt.  The calls for curbing the US fiscal deficit (quite apart from the debt) are at least in part motivated by an ideological discomfort with government’s influence on the market as well as a moral panic over Americans’ dependency and perceived complacency.  This view tends to see the world as a dangerous, zero-sum place where countries await any and every opportunity to force an advantage over their competitors.  However, economic competition is not exactly the same as political rivalry, and should not be equated.  While it is not impossible for countries to mutually try to obliterate each other (see the Great Depression) it is not likely given the availability of much more palatable options.

Economic and political 'wars' should not be equated
Economic and political ‘wars’ should not be equated

It is important to remember that unlike real wars, currency wars that result in hyperinflation are not really deliberate—they result from governments’ fumbling and lack of effort to cooperate or lead rather than from single-minded plans to dominate the world.   They are tragedies (or tragicomedies) rather than evils.  They are not so much caused by politics as by a lack of politics.  Because of the uncertain results of currency manipulation, it is a very blunt and unpredictable instrument of policy indeed.   As with nuclear deterrence, mutual deterrence is more likely than not to push countries to cooperate and to head off crises before they get out of hand.  Indeed, this is exactly what has been happening for the last (almost) 42 years.   The players may change, but the game will remain: keep the poker face on and ensure the world continues to have a world reserve currency with some usefulness to everybody.   The alternative is just too awful to contemplate.

Entanglement: The Enmeshment of the Economy and the Government

In quantum physics, there is the idea that a single particle can have an effect on a different particle many light years away.  Einstein called this ‘spooky action at a distance’.  In today’chicken_or_egg_400_clr_10064s globalized world, economic activity shows similar ‘spooky’ characteristics, indeed, it is virtually a truism to say that what happens in one industry or segment of an economy will inevitably affect others at great distances.   What is often overlooked in ideological debates between the right and the left, however, is the entanglement of the free market economy with the activities of government.  They are separate, just like particles separated by great distances, but they are so closely entangled. Action in one sphere will unavoidably affect the other. arrow_halves_join_400_clr_9621

Take, for example, the encroaching effects of the ‘fiscal cliff’.  An increase in taxes coupled with spending cuts, could potentially cause a drop of as much as 1% of GDP growth in the US.  The resulting reduction in economic activity would then impact government revenues, cutting into revenues just as measures to reduce the deficit kick in.  This makes these measures, therefore, essentially self-defeating.  Even a more measured response to deficit reduction that allows for some spending increase could potentially trigger inflation, since it will unavoidably give the impression that the government will just keep printing money to pay its debt. Inflation could also reduce economic activity and jeopardize growth, although it seems unlikely in the short term, by undermining investor confidence and leading to capital flight.  The result, as with the fiscal cliff, is the same: a hit to government revenues and a self-defeating policy.

The first step to breaking the cycle is to recognize that the favoured solutions of both the right and the left are both inappropriate in the present context.  Reducing taxes to stimulate the economy without accompanying measures to induce spending and investment just doesn’t work, there is no evidence of it ever having worked, and it does severe damage to the government’s ability to raise revenue.  At the same time, government spending does not have the growth-inducing impact as in the past because thuncle_sam_holding_money_pc_400_clr_1727e implied willingness to spend and borrow undermines investor confidence.

The solution lies in the awareness that government is both an economic actor and an economic hedge.  Contrary to the arguments on the right, government cannot just ‘get out of the way’ and let the market grow.  For one thing, it might grow somewhere else.  For another thing, markets need government to backstop their activities and stop them from imploding on themselves.  The sooner that people stop thinking of governments as part of the problem, and realize that free markets require governments to make decisions for the common good, the better off both the economy and the government will be.  Governments and markets are not the same thing, their purposes are different and their instruments are different, but they are irrevocably enmeshed together.