Tag Archives: political economy

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.

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.

Climate Change: Deconstructing Conservative Fatalism

Photo Credit: Thinkstock
Photo Credit: Thinkstock

Recent comments about climate change policy from conservative world leaders Stephen Harper and Tony Abbott suggest an important shift in conservative thinking about climate, science, and the role of country governments in tackling the problems of climate change.  Having lost the public relations fight about climate knowledge, conservatives now either vacate the field or adopt a discourse of what Stephen Colbert might call ‘truthiness’.

Like the child in Hans Christian Anderson’s tale of the Emperor’s New Clothes, the conservatives under Stephen Harper have ‘called out’ the world over inaction on climate change.  This strategy has had some success.  Harper stated recently that “no country is going to take actions that are going to deliberately destroy jobs and growth in their country. We are just a little more frank about that, but that is the approach that every country is seeking.”

In this way, conservatives can claim to be the real ‘truth tellers’ who can then freely take the low ground of inaction.  By doing this, they make common cause with critics of climate politics while also maintaining a distance from the more extremist deniers [who quite frankly are starting to look rather foolish]. This discursive strategy is nothing new to the Harper conservatives, who have had some success in using it to justify pulling out of the international effort to negotiate a new agreement.

In Hans Christian Anderson’s tale, a child is the only one who sees that the Emperor is not wearing rich clothes but is indeed wearing nothing.  The child has done what none of the Emperor’s advisors dared to do, and so has credibility because of his/her relative freedom from social constraints.  These constraints restrict what subordinates may say to the Emperor, and so make it difficult to oppose his views.  The child, unrestricted by expectations, has the ability to speak their own mind without fear of the consequences.

Much is forgiven when a speaker can be said to be ignorant and unsophisticated, and the moral of the story is that wisdom and social value can come from the mouths of innocents not captured by the oppressive dictates of social expectations.

Peaceful and productive international relations thrive on the mushiness of language in describing aspirations and expectations.

However, taking a ‘truth teller’ role in international relations has many more risks and is far more complicated.  Peaceful and productive international relations thrive on the mushiness of language in describing aspirations and expectations.  Norms are built in the space created by uncertain statements, blurry commitments and nondescript agreements.

Social expectations and norms in other settings can become a straightjacket of nakedness, as the moral of the Emperor’s New Clothes suggests.  But international relations is different.  In IR, social expectations and common norms are flimsy and weak.  The risk of defection from any common enterprise is so high that the appearance alone of cooperation (nakedness) is often the only thing carrying the projects of climate change agreements forward, and making progress possible.  Bravery means a willingness to be at least a little bit naked, and aware of one’s own vulnerability.

For this reason, Conservative ‘truth telling’ should be seen for what it is:  first, it is an unabashed instrumental rationalist strategy for defecting from a common effort to address climate change.  It is not a cowboy-esque statement of independence worthy of respect for its pluck and grit.  It is not brave.  It is not radical.  It is not inspirational.

78806802Second, using ‘truth telling’ as a political tactic obscures the fact that defection imposes costs on all of the other countries seeking a means of fairly distributing the disastrous effects of adaptation to climate change.   Defection means cheating.  Any common benefits that come from an agreement, such as a reduction in emissions, will be enjoyed by all, whether they have paid any part of the cost of adjustment.

Conservative ‘truth telling’ is not brave.  It is not radical.  It is not inspirational.

Canada and Australia, as wealthy developed economies, will be enjoying the benefits of the economic adjustments imposed on poorer, less developed economies.  Canada is not the weak ‘child’ calling out the powerful Emperor, but rather, Canada is like the Emperor exploiting the helplessness of his subjects for his own vanity.

Any real effort to ‘tell the truth’ about climate change needs to demonstrate a willingness to pay a price for the achievement of real emissions reductions.  No one is saying that countries aren’t reluctant to take on that price.  To say so is not ‘truth telling’ but a recognition of the difficulty of achieving agreement.

To recognize the difficulty and then back away from it reveals a self-serving policy that celebrates weakness and apathy, not strength and independence.  Conservatives are banking that their celebration of ‘do-nothing’ policies will play on peoples’ fatalism and fear about climate change.  Let’s not let the Emperor succeed in this vain pretense.

 

The Sources of Inequality: Why Globalization Matters

1Photo Credit: Rangan Halder 500px “Materialism Versus Materialistic Capture” http://500px.com/photo/8540236

In his speech to the Rock ‘n Roll Hall of Fame, Chairman of the Council of Economic Advisers Alan Krueger offered up some food for thought regarding the sources of inequality in American society, and globally. Krueger focused on four factors that help to explain income inequality: technology, scale, luck, and the erosion of social pressures for fairness. In this post, I want to focus on scale, and I’m going to also refer to the Atlantic’s reprint of the key points of Krueger’s talk to expand on a factor that Krueger mentions but does not develop in enough detail, in my view: globalization.

The authors discuss the music industry as an example. As they point out, the music industry creates a ‘star economy’ focused on a few ‘winners’ or ‘stars’ who are able to drive growth in the system. The ‘star economy’ in music has produced a skewed income curve. If you look at incomes across the industry, the greater benefits are concentrated at the top. However, if one considers not just the artists (who are essentially the workers producing the product) but the entire ecosystem of label CEOs, CFOs, managers, R & R people, the marketing department, etc. then one gets a better idea of the scope of the real economy of music. In fact, music industry bloggers and observers have been criticizing the inequality in the music industry for a long time: As Bob Lefsentz points out in a recent post, the corporate labels, the entertainment mega-giants like Sony and Universal, are the real structural beneficiaries of the sharper inequalities imposed upon all musicians, just as the fat cats in the garment or manufacturing industry are the real beneficiaries of inequality in those economies.

The power of the music industry has grown in lock-step with globalization, offering command of larger and larger shares of music consumption. The incomes of the music industry managers have survived the recent purge caused by the technological challenges. They have survived for a reason: it is their machines that generate the wealth, rather than the luck or talent of the artists. Ultimately, as Krueger suggests, ‘luck’ and the perception of popularity have a huge impact on success in the music industry, but ‘luck’ is not some impartial uncertain or random arbiter of fortunes, since success comes through the perception of popularity, which is heavily influenced by these industrial complexes.

As Salganik et. al. have discovered through experimenting with a controlled ‘music market’, social perceptions of the popularity of songs increase the degree of inequality among them (although they don’t make it any easier to predict success). Frankly, no matter the uncertainty caused by the internet or disruption of the industry by downloading, any artist that can command the attention of the marketing machine and the vast resources of a label can succeed beyond their wildest dreams through these social effects. Many high-quality and deserving artists don’t succeed, while a few poor quality and undeserving artists succeed beyond their wildest dreams. Youtube doesn’t ‘make’ you a star, but the attention that Youtube brings can make you popular. Attention from the music elite (increasingly, from successful artists) or from a label with a hyper-marketing machine behind it makes you a star, since you can then marshal the resources necessary to maintain that attention.

Globalization has had one important impact on the 1% that should not be downplayed: it has vastly expanded the freedom to disengage from local economies and impose conditions upon all other economic activities. What matters is the decisions made by the elite to affect the market, and these decisions are not based on luck, fairness, or even on quality. In political science this is termed ‘structural power’: the ability to not only win the game, but to affect the rules of the game for all other players. The inequality of today arises from specific decisions made by earlier masters of the universe in the 1980s to protect the interests of their class. Krueger hints at some of these decisions in his article: the demise of labour unions, the deliberate erosion of the minimum wage policy, and changes to taxation. These factors cannot be explained by the impartial workings of a global market or by luck, rather, these are conscious government policies aimed at expanding the scope and freedom of movement for the wealthy.

I would allow that there is some room in this analysis for what might be termed ‘unexpected’ consequences in the form of a severe recession and political backlash against perceived unfairness. Krueger’s analysis seems to suggest that the erosion of a social commitment to fairness in income distribution is some kind of ephemeral byproduct of historical forces and global and cultural change. However, I would argue that society has always appreciated the importance of fairness. Indeed, when elites overreached in their efforts to influence the public’s perception of fairness, it created the present global backlash and protests against inequality.

Given the true nature and extent of the cultural power that elites have garnered over the last 50 years, their expectation of being able to manage the change to a more unequal society was not unrealistic. And they may still succeed! Leaving out the element of cultural power, and the broader impact of corporate globalization and the effects of structure, neglects one of the key explanations for the continuation of inequality. The perception that success comes from luck or from effort, and not from the structure, is central to the perception of inherent fairness in the system that allows inequality to persist.

So, Krueger’s piece gives us much to think about: technology, scale, luck and the erosion of fairness have played their parts in the rise in inequality. I would put the focus on scale and the rise of globalization, which has fundamentally altered not only the rules for economic acquisition, but also the rules for social, political, and technological relationships. The change in these rules has helped to produce the profound social and economic inequalities we see today.


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.

Public Service: A Paradigm Shift in the Heart of Government

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It is easy to complain about public employees: are they not a privileged, elite, sheltered group?  It seems that public employees and the cost of public payrolls are, yet again, in the sights of critics from the right.  In particular, attacking the ‘burden’ on taxpayers of ‘excessive’ pensions, benefits, and salaries is an easy and simple way to short-circuit a serious political discussion.  In Canada, such attacks do not tend to have the racist overtones they have in the US, where a growing segment of public employees come from black, Latino or other racial and ethnic minority groups.  Nevertheless, such attacks can be scathing. 

One thing about these criticisms is that they essentially miss the point.  The purpose of government is not the same as that of business, nor would taxpayers truly want their government to be run like a private for-profit enterprise.  Imagine peoples’ reaction if the prices of government services truly followed the laws of supply and demand: the price of healthcare, prescriptions, surgeries, education, road and infrastructure construction, and a whole host of other high-demand items and services would be so high that it would quickly render many private businesses uneconomic.  Imagine if every individual had to pay directly for their own education, health care, road use, sewers, personal protection, water, etc.? 

IfQYvThe whole idea of having government deliver these services is the general recognition that these common goods are most efficiently (and cheaply!) delivered at collective cost, and by extension, that their operation and administration should be overseen by publicly-appointed administrators who are accountable for the expenses that are taxpayer-funded.  You only need to spend a short amount of time in a country with a broken or absent public service to realize the importance of it. 

While there is room for debating the extent and scope of public administration, there should also be acknowledgement within the debate that public service is not only legitimate and necessary, but beneficial.  In the interests of shifting the discussion and possibly even changing the paradigm for public service, here are some ideas for thinking differently about public service:

Outcomes matter more than efficiency

When patients get better, when special needs adults are able to live independently, and when kids master a new skill, real social goods have been accomplished that save taxpayers money in the long run.  Such a calculation simply cannot be reduced to a yardstick that trades off today’s revenues and expenditures.  When these outcomes are compromised by budget cuts, not only do individuals pay a price, but the social costs are borne by everyone in society.

Incentives erode the soul of motivation

Talk of ‘rewarding excellence’ and ‘reducing the redundant’ does NOT improve performance.  Competition is not the point of public service.  Trying to incentivize outcomes increases stress and makes people resistant to change.  Companies are discovering this on their own in recent years, but they are also discovering that a decent level of compensation is a prerequisite to a motivated, creative, and productive employee in any enterprise.

Bureaucracy means fairness

This may be a hard sell, but next time you’re waiting in line for a drivers’ license or filling out a passport application, consider the effort and expense required to ensure that all of those who use public services are treated consistently and fairly.   Then consider what happens when those services are cut or reduced.    How much is fairness worth to you?

Cutting services is self-defeating

In the open market, fraud and deceit flourish because businesses lack the ability to police themselves and are highly motivated to abuse their power and superior knowledge. The cost to legitimate businesses in restoring confidence when violations occur is significant. A large part of what government provides is trust and confidence when the market fails, which allows businesses to be profitable.  If business is less profitable, economic activity slows and tax revenue falls.  Beyond the purely instrumental argument that austerity directly reduces economic growth, austerity is self-defeating because it increases the hidden costs of doing business in hard times. 93442034

Public servants create wealth, and create the conditions that enable private businesses to create wealth.  Of course governments should be accountable for costs, especially since the disciplining competition of the market is less sharp and the high demand for public goods and services can tend to push prices up.  However, the solution is not to heighten competition but to recognize and account for the benefits that public service provides, and not just to focus on its costs.  A truly balanced account would show that taxpayers are investing their resources very efficiently indeed.

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. 

Upside Down: A Post-Modern World System

In 1974, Immanuel Wallerstein argued that the world was composed of three types of economies: a core, a semi-periphery, and a periphery.  In the core countries, capital-intensive manufactured products with high levels of complexity and value-added were the primary source of national wealth.  In the periphery, labour-intensive primary resource industries were the main source of wealth.  The semi-periphery countries mediated between the twroller coastero, but all countries acted in accordance with the principles of the global capitalist system. What characterized the relationship between the three regions was the terms of trade among them: core countries accumulated wealth by extracting resources and labour from the periphery.  In the outskirts, raw materials were traded for machinery and technology. The semi-periphery managed the relationship between the other two, with a mixed economy based on trade.

Even though Wallerstein’s analysis was applied primarily to Western and Eastern Europe, no one had any illusions at that time about who constituted the core, and who the periphery.  At the commanding height of the world economy, the US was unrivalled as a trading powerhouse, the most efficient and competitive economy in the world, the driver and reference point for development for all countries (including the Soviet Union, the ostensible rival).  Americans were the world’s consumers, traders, thinkers, workers, and investors.  America defined the ‘core’ of the world economy.

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Today, Asia is the world’s factory and an exporting powerhouse, sucking in raw materials from abroad at a ferocious rate.  China is becoming the world’s braintrust, transforming trade goods into high-end tradable commodities and changing their workforce using technical and business knowledge to ‘reverse innovate’ new products and services. Today, Hollywood movies are released in China and India a full month before anyone in the US can see them.   Australia, Canada, the Middle East, and South Africa, formerly the nimble trading members of the semi-periphery, are now repositioning themselves as raw materials and commoditiesproducers, supplying the forests, minerals, food, and fuel for the new core countries.

In this post-modern world-system, unrecognizable as it is fromwinners and losersthat of 50 years ago, the core and periphery have switched places.  It is not so much ‘flat’ (as claimed by Thomas Friedman) as ‘bumpy’; with hills and valleys defined by the underlying forces of finance and production.  Sometimes the ‘bumps’ create stranged bedfellows, as Greece and Germany are discovering.   It is highly intermingled, more like a ‘neo-Medieval’ system of interlocking interdependencies coupled with rigid underlying hierarchies.

But as Wallerstein recognized, exactly which country plays which role is irrelevant. All of the things that are often deemed to make civilizations unique, like values, culture, soft power, technology, and even military prowess, are less important than the underlying patterns of wealth and exchange that dictate the range of motion that a country has.   Assuming, as America and Canada have recently, that one is immune to the disciplining forces of capitalism, and that capitalism will only ever  work in your own interests and against those of your competitors and partners; is a myopic failure of vision.  It assumes that only one vantage point exists or even matters, and neglects the realities of the new post-modern topsy turvy world.