Posts Tagged ‘High taxes’

How Do You Make Governments Behave?

May 19, 2010 1 comment

Business vs. Government

Just like there are diseases of the rich, there are economic malaises peculiar to wealthy countries. One of these is a high level of government involvement in the economy. In the UK for example, government spending is set to become half of GDP. Similar numbers characterize much of Europe and the OECD.

The implications of this are interesting. It means that our notion of how economies work- firms produce goods and services, consumers buy them, and efficiency is guaranteed by the forces of competition- is only 50% of how rich countries’ capital stock is being deployed.

The biggest player in the economy is a gigantic monolith with the power to tax. It has no incentive to be efficient, because it cannot go bankrupt. It has no competition. When it spends too much, it can simply raise taxes. When these built-in incentives to fiscal profligacy result in massive government debt and deficits, it simply waits for its neighbours to bail it out.

The frightening reality is, there is no-one to regulate the regulator, to watch the watcher and prevent him from dragging the whole economy down in a sea of red ink. This is why the IMF is now plaintively begging the world’s governments to behave.

Of course, we need more than begging. Rich countries have got used to gigantic governments and high taxes. This is unlikely to reverse. The next best thing is to devise rigid mechanisms for regulating the fiscal behavior of governments. Elections clearly don’t work. The answer to this mighty challenge will be the big economic question of our time.