03 October 2008

What is government for?

The current turmoil in the financial markets and the reaction of our ruling politicians to it reveal something about the way we make policy. Simply: it’s haphazard. There’s little sense of where we should be going. The United States Government didn’t set out to bail out reckless lenders, but that is what it is going to do. Its rescue package is another, and probably the most disastrous, in the long line of perverse subsidies that have done so much to waste scarce resources, divert taxpayer and consumer funds from the poor to the rich, and devastate the social and physical environment. From agriculture to fisheries, road transport to energy, these perverse subsidies invariably favour the large and global at the expense of the small and local; and corporations and abstract economic variables at the expense of ordinary people.

How does it come about that government ends up subsidising the forces that have done so much to make live miserable for the average citizen? Its interventions start out as well intended, and even apparently necessary. Take agriculture: after the Second World War, food availability was critical and governments – disastrously - identified that with local food production. So government intervened: imposing trade barriers, price controls, and giving open-ended guarantees to farmers. That logic led to structural surpluses to be dumped onto the third world, undermining developing countries' own food production. It also bid up the price of farmland at home, intensifying agriculture at great cost to the environment and animal welfare, and making it difficult for ordinary people to enter farming, unless they were lucky enough to inherit land.

Worse, the bidding up of asset values made it very difficult for government to contemplate withdrawing its support. Like a drug habit, subsidies were easy to start, difficult to end. And of course, the subsidies created a whole new set of lobbyists whose entire raison d'etre is to oppose their withdrawal.It's a similar story with the other sectors. Government begins its intervention for well-intentioned but short-term reasons. The sector becomes dependent on government for its survival, and ends up, in effect, a nationalised industry. When the sector is small, the financial burden is perhaps bearable, though its subsidies still represent a diversion of scarce resources from things that are valuable - education, health care etc - into things that are worse than useless: massively overcapitalized farming and fishing, and grotesque overinvestment in road transport – all of which, note, entrench an absolute dependence on fossil fuels.

But the latest perverse subsidy - to the financial sector - is bigger than all of these. How it will play out is difficult to foresee. But it seems that institutions that were 'too big to fail' are to be replaced by even bigger institutions. And if the history of previous perverse subsidies is anything to go by, the US financial sector will become another ward of state for a long, long time.

The root cause of this tragic misallocation of resources is the lack of clarity at the highest levels about what government is actually for. It's not there to prop up ailing sectors. It's not there to save particular corporations. And it's not there to bolster asset values or abstract economic variables like the rate of growth or GDP per capita. Government's purpose is to supply public goods and services, and beyond that to provide a basic minimum level of health, education and welfare for all. Once it starts trying to work out how to achieve these things it goes awry. Government is a centralized, top-down decision-making body. It does not and cannot do adaptation or diversity - and it is precisely adaptation and diversity that a vibrant, prosperous market economy needs. With its massive intervention and bailout of the finance sector the US will throttle its creativity, institutionalize the corrupt incentives that led to the crisis in the first place, and deny disadvantaged Americans the help they need.

What the US Government should do is to work on the basis that:

  • Our financial and economic systems are means not ends.

  • The ends, for government, are law and order, minimal standards of good health for all, basic health and education, a decent social and physical environment, and the provision of a tightly woven safety net for everyone.

  • The health or otherwise of any particular sector are of interest to the government only insofar as they affect the ends.

    Instead of spending taxpayer funds on avoiding a catastrophe it should have clearly and unambiguously channelled society’s scarce resources into avoiding the consequences of that catastrophe on those who most need help. Government targets should be inextricably linked to the well-being of ordinary people – as distinct from government agencies, economists or corporations. Its failure to realize this wouldn’t matter if government were small, and diversity and adaptation could flourish outside its restricted confines. But of course government isn’t small at all.

    The US Government cannot now back away from supporting the finance sector any more than western governments can suddenly withdraw support from its other wards of state. But it can put a definite time limit on such support. More generally, governments must clarify what their goals are. They have a crucial role to play in limiting the impacts of any sort of catastrophe on ordinary people – but not to foresee and try to prevent the catastrophe itself. There must be no expectation that government will bail out any sector for any reason. Our governments should do something they should have done a long time ago: realign their policy to serve ordinary citizens. All their policies and interventions should be subordinated to the provision of public goods and services, the maintenance of a decent social and physical environment, and help to those who most need it. Sadly, the bailout of the finance sector, like the persisting perverse subsidies in other policy areas, looks like taking our governments further away from those guiding principles.
  • ■ George Monbiot writes about US subsidies to big business here.

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