16 December 2008

What is government for?

With unemployment in the west soaring and millions of people likely to lose their savings and even their homes, it’s time to ask a very basic question: what is government for?

Governments have reacted in their instinctive way to the current financial crisis: they are either printing more money, or they are borrowing money to prop up the wobbly structures and sectors whose tactics created the crisis in the first place. In essence, they will rip off the older generation - those with savings - by inflating. And they will rip off the next generation, by borrowing.

This is smoke and mirrors – and cardboard and sellotape. It might or might not suffice to stave off an immediate and precipitous collapse, but either way the western financial and economic system is looking very precarious. That system depends on confidence and trust, and people believing that their lives or their children's have a good chance of getting better. That faith is evaporating. There is now a real danger of social collapse and blood in the streets. History tells us that bloody revolutions are not single events, but processes that can mean years of instability at best, and terror at worst. The riots we are seeing in Greece right now could portend the beginning of the end of democratic liberalism

The danger is that western governments’ bailout commitments to financial and corporates will turn out to be something like their farm support policies. These programmes have functioned as a tax on food bought by consumers in the rich countries. But the bigger victims are the landscape and wildlife in those countries, which suffer grievously from intensive farming; and farmers in the food-rich developing countries who depend on exports for a decent standard of living. The waste, inequity and environmental depredations of the rich countries’ corrupt and irrational agricultural policies have been known about for decades, but their governments have found it very difficult to stop them. They have created a sector entirely dependent on government; one that, thanks to government largesse, can spend significant sums on lobbying against the withdrawal of that largesse and a return to rationality.

But the latest subsidies - to the financial and automobile sectors – are bigger still. If the history of previous perverse subsidies is anything to go by, the US financial sector and its auto industry will become another ward of state for a long, long time. And where do ordinary members of the public feature in all this? In a crisis of this dimension, appearance is reality. And it looks very much as though millions of people are losing their jobs, homes and savings, while their government is bailing out the fat cats.

What is government for?

The western governments’ Pavlovian response to the financial crisis is probably all we could expect in the short run. But in the longer term we need a totally new basis on which to formulate government policy. We need to ask, and keep asking, the question ‘What is government for?’ Western governments, let’s not forget, spend about a third of national income, create statutes and regulations, and have a monopoly on legitimate violence. They have the potential to do a lot better than subsidise inefficient, parasitic or downright destructive, sector groups. And they have the potential, if they act quickly and wisely, to restore our faith in democratic liberalism.

Let’s be blunt: the purpose of government is not to prop up ailing industries. It's not to save particular corporations. And it's not to bolster asset values or abstract economic variables like the rate of growth or Gross Domestic Product 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. In short, government should be looking after ordinary people.

Without this clear sense of purpose, it goes awry. Instead of helping people, it gets seduced by the ever more turgid lobbying industry, who are experts at convincing government that the best use of its powers and tax revenues is to support - surprise, surprise - the groups they are paid to represent.

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 liberal market economy needs. With its massive intervention and bailout of the US finance sector and the dinosaurs of Detroit the American Government is institutionalizing the corrupt incentives that led to the crisis in the first place while denying disadvantaged Americans the help they need. The US bureaucracy is like a supertanker: it’s going to take years to change this mentality.

Policy as if outcomes mattered

We need to realign government on the basis that our financial and economic systems are not ends in themselves, but means to ends, and those ends, first and foremost are about looking after ordinary people. The outcomes government needs to ensure are law and order, minimal standards of good healthcare for all, basic education and housing, a decent social and physical environment, and the provision of a tightly woven safety net for everyone.

Instead of spending taxpayer funds on bailouts government should clearly and unambiguously channel society’s scarce resources into avoiding the consequences of financial and economic crises for those who most need help. Government targets need to be inextricably linked to the well-being of ordinary people – as distinct from those of economists, bureaucrats or corporations.

But with a bit of imagination, this crisis of casino capitalism could mark the staring point for an improved policymaking process. One in which:

--Government targets outcomes that are meaningful to ordinary people,
--Government rewards people who achieve these outcomes, however they do so.

Government is good at articulating society’s concerns and raising revenue for their achievement. It is not so good at keeping to its core remit. As a big organisation itself, it spends far too time and treasure on its chums in big business at the expense of small enterprises, ordinary people and the environment. What is needed is a government that focuses on rewarding outcomes that are meaningful to ordinary people – rather than activities, institutions or large corporations.

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