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4.1.0 Preamble:
Economics of Democracy
Keynes believed that the business cycle reflected the
fickle 'animal spirits' of investors alternating between Fear & Greed.
He called on Government to compensate for these mood swings relying on
'the multiplier'. But how stable is the mood of Government?
Can it be relied upon to make sober, sensible decisions? Is it, in
turn, subject to 'animal spirits'?
There are three actors in the economics of democracy:
voters, politicians and bureaucrats. Each has its own 'objective
function' which its strives to maximize subject to constraint.
Ideologically every polity can be characterized by colours in two
dimensions. Horizontally, there are Blues - conservatives,
monarchists, fascists, etc. and then there are Reds - liberals, social
democrats, communists, etc.. Vertically there are Browns -
techies, engineers, mechanists, etc. and, then there are Greens -
ecologists, nature lovers, romantics, etc. One can thus have Red
Greens (Green Peace) as well as Blue Greens (Sierra Club); Red Browns
(Communist apparatchiks and nomenclatura) and Blue Browns (Nazis
technicians 'just following orders'). At the extreme, one can also
have Blue Reds when far Left (e.g., the Party as vanguard of the
revolution) turns into far Right (e.g., the dictatorship of the
proletariat) or vice versa.
Voters are subject to 'rational apathy'.
Politicians are subject to 'the impossibility theorem'.
Bureaucrats are subject to the three laws of Technocracy:
1st Law: Confuse & Conquer!
2nd Law: What we don't know won't hurt us!
3rd Law: When in doubt, privatize!
(a) Purpose
Until
the Keynesian Revolution of the 1930’s (put into motion by the
political impact of the Great Depression), the almost exclusive fiscal
concern of Government in ‘liberal democracies’ of the West was
financing and fulfilling ‘political’ objectives – domestic and
geopolitical. Overall, or ‘macroeconomic’ performance was a given,
not an end or objective to be pursued. The market would
‘self-adjust’ and Government would hold on as ‘bust’ turned into
‘boom’ and then into ‘bust’ again riding the tail of the dragon.
People would suffer or prosper according to the timing and dictates of
market prices with little if any assistance from Government
The Classical and Neo-Classical Periods of economic
history thus reversed Mercantilism that had preceded them. From an
economy as a Crown Privilege to be used, regulated and controlled by the
whim and passion of a moody Prince, the economy became forbidden
territory into which a democratic, liberal government dare not tread. In
summary, the progress of Classical and Neoclassical Political Economy
was the withdrawal of the State from the economy with the notable
exception at the beginning of the 20th century of anti-trust or
anti-combines policy – breaking up trusts and monopolies that, like
Government itself, could corrupt perfect competition and foreclose a
‘just price’ in individual markets. As for the economy as a whole,
the rationale was governmental non-interference.
An important political boost to this rationale was
provided by the rise of socialist and communist political power. With
the defeat of Napoleon III in 1870 by Germany, civil war broke out in
France between liberal democrats (Republicans) and the Paris Commune
(Communists). Socialist and communist thought argued that the answer to
the arbitrariness of both Princes and Prices was - more or less - public
ownership of the economy in the name of the people. Paris burned and
laissez-faire capitalism, more or less, triumphed. France remains,
however, much more prone to Government economic interference than
Anglo-American cultures. This fear of public ownership was re-ignited
and then made real with the Russian Revolution of 1917 and the
subsequent Civil War that ending 1921 with ‘Communist’ victory.
Since Keynes, however, macroeconomic performance
(including economic growth and price stability) has become an essential,
if still secondary, policy objective of the modern State. The business
cycle has, to a degree, been usurped by a public policy cycle. Enormous
deficit spending during the 1960’s through 1970s was followed by
increasingly strict ‘deficit and debt’ reduction, downsizing of the
public sector during the 1980s and 1990s with ‘surplus’ spending
beginning a new public policy phase in the early 2000s.
It can, however, be argued that the hard lessons learned
in the 1930s were not forgotten even at the height of the
‘neo-conservative’ (so-called in the English speaking world) or
‘neo-liberal' (so-called in France and most of continental Europe)
political movement of the 1980s and early to late 1990s. The ship of
state continued its course towards a ‘welfare state’ in which
Government has a legitimate role to play in the social and economic
development of the nation (see:
Government
by Moonlight). The difference is that many functions assumed by
Government between the 1930s and 1970s have been downloaded to smaller
‘private’ or semi-private vessels. Overall culture, education,
employment, the environment, health care and welfare (or ‘workfare’)
of society and its members as well as economic growth and price
stability remain responsibilities of the post-modern Nation State. Such
responsibilities are, if anything, taking on even greater importance as
‘competitive factors’ in the emerging global economy emerges. The
only questions remaining are: who should deliver such services –
Government, the profit or the nonprofit sector and how should delivery
be monitored? The services, however, must be delivered in an equitable
manner with citizens protected by a ‘social safety net’ that varies
between States but is present, nonetheless, in all, even the most
capitalist – the United States of America.
One of the ironies accompanying the ascendance of
macroeconomic objectives by politically elected Government is that until
the 1970s most universities in North America, and the English-speaking
world in general, did not have ‘departments of economics’. Rather,
the more usual disciplinary designation was “political economics”.
But just as the legitimacy of Government’s role in macroeconomics
affairs reached a zenith not seen since the Mercantilist Period of
economic history, such departments split into separate and distinct
Departments of Economics and Political Science.
The fiscal policy process is as much cultural as
economic, that is, it is a cultural economic phenomenon. The USA
budgeting process (dominated by the legislative branch) is very
different from that of Canada that is different from the United Kingdom
(both dominated by the Executive Branch) that is different from France
that is different from Germany, etc. Each country even has its own
distinct rituals and traditions associated with the fiscal policy
process. For example, in Canada the Minister of Finance is expected to
wear a pair of new shoes while in Britain the Chancellor of the
Exchequer is to use an old beaten up briefcase to present the budget to
the British House of Commons. Accordingly, what follows applies
only in Canada. It is extracted from my longer paper:
A
Radical Analysis of 'Personal' Taxation.
(i) Assumptions
I
begin with five assumptions about the Canadian budgetary purpose. First,
there are two sides to the coin of fiscal policy – pleasure and pain.
The pleasure (including relief from pain) flows from spending public
monies – fiscal policy. Pain flows from collecting private
monies to pay for public spending – tax policy. Like carrot and stick,
a democratic government-of-the-day uses public finance to adjust, adapt
and evolve society and the economy towards its ‘ideological’ goals
and objectives that extend above and beyond macroeconomic growth and
price stability.
Second, the only way
to gain more pleasure without more pain is through a growing economy.
In the long run, however, a growing economy can be maintained only if
public finance does not “kill the goose that lays the golden egg”.
Third, rational
citizens will do their best – in or out of a growing economy - to
minimize their pain and maximize their pleasure through lobbying,
protests and voting.
Fourth, in their
annual budgets, federal, provincial and local governments flip the coin
seeking a politically workable, socially desirable, balance between the
‘heads-I-win’ and ‘tails-you-lose’ of public finance.
Fifth,
the game of public finance is worth playing, at a minimum, because of
‘market failure’, that is:
·
there are some
goods and services (public goods) essential to modern life that cannot
be produced by the private sector, e.g. municipal bridges and roads,
compulsory mass education, contagious disease immunization, national
defense, etc.; and,
·
perfect
competition is not common in the ‘real world’. Usually some players
in the economy (typically a small group or oligopoly) exercise market
power over the price and quantity of goods and services available to
consumers. The existence of such ‘market power’ justifies a public
response including spending, e.g. funding anti-combines agencies, and,
taxation.
(ii) Ground Rules
Beyond
the constitutional reality that public finance is conducted in the name
of Her Majesty in right of Canada and in Her right of each of the ten
Provinces, there are five ‘ground rules’ for this annual coin toss:
(i) the Constitution establishes, in broad terms - subject to varying
interpretation:
·
on what federal and
provincial governments can spend;
·
by what means they can
raise public monies; and, · in subordinating local to provincial
government;
(ii)
three legal systems interactively define persons, property and taxation
in Canada:
·
criminal law, the
prerogative of the federal government but with administration shared by
the Provinces; ·
·
civil law, essentially
the responsibility of the Provinces with Quebec being the extreme case
governed by a variation of the European Civil Code rather than
Anglo-American Common Law as in other Provinces, e.g. torts
(non-contractual damages) based on precedent (Common Law) rather than
principle (Civil Code); and,
·
tax law, a shared
responsibility of the federal and provincial governments;
(iii) the federal government ‘owns’ the coin through
the Bank of Canada and influences its value through exclusive control of
monetary policy;
(iv) the federal government can define and redefine what
are legitimate sources of public monies, e.g. income tax introduced
during WWI as a ‘temporary’ war measures act, and, the 1970
amendment to the Criminal Code permitting lotteries (gaming in general
including ‘video lottery terminals’ or slot machines) to become an
increasingly significant source of public monies for the Provinces; and,
(v)
the federal government indirectly influences settlement of public
finance disputes with citizens and the Provinces through its prerogative
of appointment to the Federal (formerly the Exchequer Court) and the
Supreme Courts of Canada.
(iii) Putting the Question
Subject
to these ground rules, each senior level of government (federal and
provincial governments) annually put the following ‘pleasure’
questions to the people:
·
who or what will enjoy
public funding: the poor and needy; the average citizen; the corporate
citizen; city or rural dwellers; foreigners, i.e. foreign aid; and/or,
abstract policy categories such as education, the environment, health
care, protection of persons and property, etc;
·
what pleasures will they
enjoy, e.g. direct dollars in the pocket (grants in aid), civil service
employment, public infrastructure and essential services, investment
and/or loans in support of private and/or semi-private ventures, and/or
relief from taxation e.g. tax expenditures including refundable and
nonrefundable tax credits;
·
how much pleasure will be
allowed, e.g. marginal or significant to the life of citizens –
corporate or individual; and,
·
when will the pleasure be
provided, e.g. weekly, monthly, quarterly, annually?
Similarly,
each government annually puts the following questions about the pain of
public finance - direct and indirect, ‘near’ and ‘voluntary’
taxes - to the people:
·
who will suffer so they
and/or others may ultimately enjoy the pleasures of public spending;
·
what forms of pain must
citizens endure, e.g. corporate, excise, income, near taxes (e.g.
fees-for-service), sales and/or voluntary (e.g. lotteries) taxes;
·
how much pain from any
one and/or all taxes - should one person or any ‘class’ of taxpayers
bare (tax burden);
·
when and by what means should they suffer, e.g., monthly,
point-of-sale, quarterly and/or withholding-at-source; and,
·
at what threshold should the quality and/or quantity of pain
change or stop, i.e. what are the tax brackets?
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