Monday, March 21, 2011

The future of the state...

Text from a Special Report by the Economist:

"The shape of the state could be the main issue in America’s presidential election next year. Even left-wing governments are increasingly looking at the spending side of the ledger.

Globalisation is another. Commerce has proved stickier than the proponents of borderless capitalism proclaimed in the 1990s, but it is less sticky than it was. The mobility of talent, technology and capital surely puts some limit on governments’ ability to keep on raising taxes. Government is becoming a more competitive business, not just in terms of lower spending but also in what it offers for the money.

Above all, the incremental benefits of ever bigger government, even assuming it was somehow affordable, become ever smaller. Decent-sized government can reduce inequality and poverty, but most of the evidence is that gargantuan government merely gets in the way of social progress. A state that takes up more than half the economy begins to deliver an ever worse deal to ever more people in the middle: the extra benefits become harder to detect, the extra costs harder to hide.

Guessing when this penny will eventually drop is a little like speculating when an investment bubble will burst or a dictator will fall. There are always reasons for delay but, once things begin to move, they do so quickly. A revolution in government would come in three stages.

The first, which this special report has concentrated on, might simply be described as good management. Purely by copying what other countries (or bits of their own system) do well, governments could save a huge amount of money. The path forward is pretty clear—towards a small central state buying in services from a variety of different providers. Technology could speed things up. A huge quantity of information about just how poorly bits of government are doing is becoming available—and, thanks to Facebook and other new media, shareable. Transparency will also affect demand. Too many voters are “Californians”: they think they can enjoy ever more services without paying for them. When they see the true cost of government, they may change their minds.

Within the public sector, mayors and senior civil servants could play a pre-eminent role. Not only do many public services, such as education and the police, work best at city level; cities are natural test-tubes for experimentation. In the urban West, mayors can still change things visibly: think of what Rudy Giuliani did for crime in New York. As for senior civil servants, most feel despised, underpaid and deeply frustrated. More than anybody else, they stand to gain from a world where government works.

Good management sounds a little worthy, but it could achieve a lot. Imagine, for instance, that Mr Cameron succeeds in creating a “post-bureaucratic” state in Britain. You might end up with a government that delivered the same range of services—defence, justice, education, health care and so on—but consumed perhaps 40% of GDP, roughly ten points less than it does now.

Could it go further? The second stage is more difficult: limiting the scope of those services, especially the universal benefits enjoyed by most Western voters. Social transfers have accounted for a large part of the growth in the state: they also explain why even a well-run version of Britain’s all-you-can-eat “buffet” state would be twice the size of Singapore’s. Unless Western governments start to reform entitlements, the state will swell again in line with their ageing populations.

Some universal benefits can be trimmed across the board. State pension ages, for instance, are on the rise. But governments also need to start redirecting social programmes at the truly needy.

Persuading middle-class voters to give up their perks will be extremely hard. One possible avenue is to hand them greater control over their own benefits, perhaps by switching pay-as-you-go systems to individual savings accounts (like Singapore’s Central Provident Fund). That has not had much success yet—in part because most people, especially the young, are in the dark about how much the current system is really costing them. Tax simplification would help. A bipartisan commission on fiscal reform last year said that if the American government abolished all tax breaks (including middle-class ones like mortgage-interest relief), it could reduce the top individual tax rate from 35% to 23% and still generate $80 billion more revenue. Again, limiting benefits will be a colossal struggle.

Rules not OK

The final stage—untangling the web of rules—would on the face of it be less controversial. Everybody agrees that there are too many regulations. But in practice it could be the most fiddly to sort out. The European Parliament does not cost much to run, but it litters the continent with expensive rules. One in five American workers needs a licence to do his job. Sunset clauses to make laws expire in the absence of political reapproval would help.

This special report has tried to be pragmatic, focusing on what works. At the moment it is hard to see that society would gain much from even larger government, and easy to spot the gains in productivity, efficiency and personal freedom that would come from smaller government. States exist not only to lead society towards common goals; they must also provide people with the liberty to live their own lives. Over the past century government has moved too far towards the former. Now is the time to turn the dial back. Nothing would add more to the sum of human happiness in the West than a smaller, better state."

Text pulled from the Special Report "The future of the state" by the Economist.
Other articles in the report are:

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