The War of Doctrines
There has emerged in the last few decades of debate two basic doctrines for Government involvement in the economy. The first of these comes from the Keynsian camp, which advocates a high-intervention approach. Spending to boost demand, price-control boards and so on are all proposals that have ultimately come from the idea that a pure market economy will not run itself very well.
On the other hand is the low-intervention or zero-intervention camp, which bears many labels - "Monetarism" in the US and economics circles; "Neoliberalism" or "Neoclassicism" in Europe and Latin America; "Economic Rationalism" in Australia. The argument runs that Government intervention, while well-meant, has no deeply beneficial effect. Indeed, rationalists argue, intervention can be positively harmful to a market economy.
This is the field of play onto which the Government finds itself thrust as an unwitting pawn of the two doctrines. As these doctrines go in and out of fashion, Governments make and unmake whole structures, policies and programs. Politicians face the daunting task of delivering low inflation, strong employment, vibrant profits, healthy trade figures and oh, by the way, providing lots of services along the way.
Sound impossible? Arguably, and according to the orthodoxy, it is. Flummoxed and flustered, our leaders will understandably turn to those high priests who promise to guide them to economic and political nirvana. These men and women, with all their esoteric theories and formulae, are the spiritual descendents of Kabbalists and Hermeticists. Their trade is of magic numbers - of right alignment of economic stars and prognostication of the future. Understandably, the various houses of magic hold deep disagreements - even grudges - in themselves and between each other. It is no wonder then that Government is deployed as a beefy footsoldier in this war of minds.
Currently, monetarism is the ascendant star of economics.
Thatcher, Clinton & Bush Jr, Keating & Howard - all these leaders have preached the neoclassical gospel of free trade, free markets, privatised services and minimal Government. For these men and women, there is no God but Market, and Friedman is Its Prophet.
But it's not really working as promised, so far. The neoliberals say "just wait awhile. It'll be good before too long. Just wait and see". But they said that in the Great Depression, when Keynes stepped in and said "No. Failure to intervene here is failure to save the economy from its own inability to break the Depression".
But what alternative is there, if Keynsian theory won't cut it?
I think that there really is another way for the Government to work with the economy to help make things better. I'd call it the "Third Way", but that term has been hijacked by monetarism married to wishful thinking. Instead I call this approach Strategic Government. Strategic, because the Government ceases to worry about the day-to-day things, instead taking the long view.
There are four basic pillars of Strategic Government. These are, in approximate order of execution: the Service Maintainence Fund; Autonomous Funding; Appropriate, Pragmatic Intervention and Longview Government.
The Service Maintainence Fund
Governments provide services. Despite the monetarist admonition to allow the market to provide all possible services, there nevertheless remains a legacy of Governmental provision of a whole range of services. Typically, in boomtimes, Governments created lavish, extensive welfare states. However, when the economy has turned down, and as welfare and other services have grown relatively more expensive to support, it's come to pass that during downturns Governments have been unable to fund these services from general revenue - that is, taxes.
At this point, a Government has faced a stark and ugly choice: either cut the service (and thus face new hardships and political trouble), raise taxes (same again), or to borrow the difference. Many Governments have in the past elected to borrow, leaving modern Governments with a debt burden that is only now being lifted. The question has then become, "What shall we do with all this new money?"
Some have advocated tax cuts, others new spending, but none have examined the circumstances that brought them there in the first place.
The idea of the SMF is very simple. When the economy is down, you will be running deficit budgets. When it is up, you will run surplus budgets. Rather than borrowing when down and paying back when up, save during the good times to soften the hard times. In a sense, the SMF is little more than a giant rainy day account for the Government.
The broader idea is to smooth out the bumps of Governmental spending. This means that the Government has more room to move when thinking longterm. It does not need to be so much in fearful awe of the future. It knows that it is better equipped to ride out the ups and downs of the economy, moving more gently across the waves of time. Thus the Government can grant itself the luxury of true strategic vision, unconcerned that today's Grand Program will be scrapped for funding reasons tomorrow. Thus health, education and welfare can be preserved at high levels during the downswings, when they are most needed, without incurring debts that will compound and suck up resources in the upswings.
There are details for an SMF, typically political. One is to tamperproof the Fund from the hands of vote-hungry, pork-barelling politicians. This is most especially true in the US, whose Governmental design makes pork-barelling a better-than-even bet. This may involve the elevation of the SMF to the kind of untouchable sanctity that Reserve Banks enjoy around the world, possibly even subsuming the SMF to be part of the bank's role.
Another detail is to define where the money is spent. As the name suggests, the Service Maintainence Fund is meant only to fund Services - not to pay for new capital works. Whereas services are a kind of
/dev/null for cash, as a generalisation, capital works such as highways and railroads and new fiber are good for the economy. Their benefit begins as soon as they are built, so it makes sense that money is loaned for their construction. Compare and contrast with business practise - firms will pay workers from revenue and for machinery with loans. A firm that pays for workers with loaned money is not following good practise.
Governments are typically used as a kind of funding clearinghouse for everything from roadworks to modern dance theatre. All of this costs money which must be sourced every year in taxes. The problem is that not everyone agrees on where that money should be spent. In particular, spending disputes at lower levels tend to be bumped up to higher levels of Government. The leadership behaviour in democratically-led bureaucracies quickly devolves to shotgun micromanagement. Today it is the curriculum in schools, tomorrow it is the funding of shock-tactic artworks. The binding thread in all of these bushfire engagements is money - the money floweth down, and the bullshit riseth up.
If seperate parts of Government have independent, autonomous sources of cash, they are less able to try and distract the leaders from the ideal of strategic foresight. When the Arts Council (whatever it is called in each place) has its own, non-revenue funding, then it will have nobody to blame for its idiocies but itself. The vicious little art-world catfights can be firmly sealed within the art community, far less able to distract upper leadership.
But how is this miracle to be achieved? Surely modern art, defence, schools and so on must be subsidised, cannot turn a profit, need the support of General Revenue? Yes, and no.
The answer is to endow Government bodies with investment capital. The centre of this approach - Government owning Capital - is held in common with the SMF and constitutes a radical departure from most theories about how Governments should relate to the rest of the economy.
When this is put, it is often argued that extracting profits and rents is no different from extracting taxes. Superficially this seems to be the case. The difference, however, is that investment capital has a positive function as well - the profits were generated because there was already money in the economy doing work. Taxes, on the other hand, must be extracted by legal force and held in escrow until a budget is handed down (the details vary from country to country). In short, if there is a choice between extracting legitimate profits or taking taxes, it may be more reasonable for the Government to favour profits.
When there are downturns in the economy, and the returns from funds are reduced, then the various autonomous agencies can petition the Government to allocate them a share of the money being released from the Service Maintainence Fund - another example of the smoothing-out design of the SMF system. Indeed, the SMF can fund far more programs if they are already partly self-funded, or can be much smaller.
Again, there are details of execution which would need to be more precisely involved. Primarily, this of the schedule of shifting Government agencies from general revenue to autonomous funds. Obviously, this would be difficult to do in one swift movement. The Government would need to embark on a long program of building funds. As a general rule, select 10% as your 20-year rate of return, and factor in inflation, and you find you will need somewhere between 10 and 30 times as much capital as you will receive revenue. For the Australian Government, a budget of $90 billion dollars (this is not an accurate figure) would represent somewhere between $900 and $1.8 trillion dollars of capital. Obviously this cannot be accrued in one year, or even ten years.
The good news is that there are compounding returns to scale. Once 3-5 years of cash have been placed into the SMF, surpluses can then be invested steadily into the various autonomous funding bodies established by the Government. As the amount of funding from autonomous funds increases, the funding from general revenue decreases. This spare cash can then be invested in speeding up the establishment of other autonomous funds.
Autonomous funding leads to a more market-like kind of Government. The great beauty of the market is that - with its stringent trial mechanisms - it tends to be "close to the metal" on many issues. Certainly, it can be distorted by mass hysteria, demand-generating advertising and several other mechanisms well-known to its critics, but on the whole it is less vulnerable to the gross errors and maladaptive behaviours which bureacracies breed so easily.
When the Government spends more time looking outward to its audience, it might become a better Government. Most importantly, however, autonomous funding will help to slow the deluge of minutiae which gushes upwards to take time away from the business of strategic vision. In short, it helps to restore Leadership where currently there is only Management.
Appropriate, Pragmatic Intervention
One of the hottest points of contention in the War of Doctrines is as to when - or even if the Government should intervene in the market. It is on this issue that we have seen the most dramatic expressions of doctrine from politicians. Privatisation, deregulation and free trade policies are all sons and daughters of the rationalist approach of minimising Government.
Like the previous doctrine of nationalised firms and broad Governmental strictures controlling industries, there have been problems. Privatisation of public utilities has been nortoriously troublesome almost everywhere in the world it has been tried. Deregulation has led to rapid rises in prices, reduction of services and outbreaks of dodgy corporate behaviour. Free trade has led to the infamous "race to the bottom".
Please understand that I do not view the market as somehow intrinsically evil - nor do I see Governments as somehow magically endowed to more perfectly protect us from the market's excesses. Instead, I view that markets are such as they are. It is important for any Government seriously concerned with serving its constituency to remove the blinkers of this doctrine and that theory and to bluntly, frankly appraise the situation.
When deciding on intervention, the Government must first decide what it wants to happen. Does it want prices to fall? Consumer or worker exploitation to be stamped out?
Next the Government must select a program of involvement which lets the market do the heavy lifting. The best way to do this is to use "Horses for Courses". If a pure market will best meet your goal, go for the pure market. If a state-subsidised welfare-maximising monopoly meets your goals, do that instead. Do not sacrifice effectiveness and appropriateness for some shining doctrine.
A lot can be said on this particular issue, but I won't explore the details here. Suffice it to say that there are far more options than a free market advocate would have you believe. Hybrid monopoly-market approaches, externality feedback, social policy bonds and suchlike are methods which reduce Government intervention to a minimum, instead allowing the market to do the work.
This is the final pillar of Strategic Government. Of the decision of what to include in Strategic Government, Longview Government represents the most subjective choice. Really, it is an extension of Appropriate Intervention with sprinklings of good old fashioned Nationalism.
Longview Government is where the Government takes part in bootstrapping new industries. Marx, while wrong on some things, correctly pointed out that new industries are more profitable than old ones. It makes sense that economies should try to reach out for the new just as much as they cling to the past.
Alas, while markets are excellent in working in the here and now, they are infamously reluctant to look beyond that (except when they go diametrically the other way and anticipate the impossible). In short, markets are good optimisers, but poor strategists. And as Abrash observed: "Premature optimisation is the root of all evil".
The idea is to take on strategic tasks that the market will do as much by itself. Infrastructure and R&D are the two major categories of work where the market is happy to use by not to establish. Australia enjoys an excellent phone network which helps Australian business to prosper - but no business would have built it.
Longview Government involves establishing a Basic Research Fund (physics and so forth)and a Radical Technology Fund (space, nanotech and so forth). Allied to these two basic funds is a collection of social goal bonds and Government-insured demand for technologies. The same group of policies would necessarily include a tax structure favourable to research.
All Together Now
Where does this leave us?
Strategic Government really is about re-engineering the business of Government so that it can focus on the big picture rather than the minor details. It seeks to reduce reliance on tax revenue, provide a buffer against economic uncertainty and to prevent management details from cutting into leadership time. Over time the Government can follow up these programs by gently cutting back taxes. Reducing taxes while maintaining spending is pretty much unassailable as a positive policy step. In particular it means that Joe and Jill Taxpayer spend less of their working hours working for the Government and more working for themselves and each other.
In summary, Strategic Government tries to:
Cynically, I do not expect too much of this package to be implemented now or in the near future. It's a shame, really. Imagine a Government whose focus is long-term and whose vision really is a Vision. Imagine a democracy where we talk about the future as what we'd like to see, rather than what we are afraid of. Imagine it, take a deep breath, and think about what you might do to help make it happen.
- Smooth out funding
- Provide buffer security for planning
- Reduces the flow of irrelevant minutiae to leadership
- Reduces reliance on taxes, and
- Provides nation-building, strategic direction for the Government as a whole.
Thankyou for reading.