Tuesday, October 20, 2009

The failure of democracy

Democracy is usually associated with many positive features - in particular it provides a greater degree of protection to civil liberties, rights of private property ownership and imposes a degree of accountability on our political leaders which is higher than other forms of government.

However, one area where democracy has demonstrably failed is fiscal accountability. The basic problem is this:

1. politicians must keep enough voters happy in order to be (re) elected

2. politicians must promise more than the other candidates (up to the point of sounding stupid) in order to be (re) elected

3. short term benefits are perceived as being of greater value than longer term costs (refer to numerous papers on behavioral economics and/or psychology). In effect the value of a hand out today is perceived as being greater than the cost of repaying the loan used to fund that hand out tomorrow

4. benefits are specific. Taxation is general. Borrowing is general. Voters and politicians alike focus on the specific benefits which they will derive rather than the costs which all taxpayers must bear

5. there is a misalignment of beneficiaries of government hand outs and the persons funding those handouts. It is very easy for people to want benefits which someone else is paying for. I'd be happy to vote for someone else to subsidise my lifestyle too

6. often the persons bearing the cost of a government hand out (e.g. promises of benefits in the future, debt issuance) have no say in the matter because they are either too young to vote or have not been born yet. In effect, democracy encourages taxation without representation

7. the number of people taking money from the common pot exceeds the number of people contributing to that pot - usually by a wide margin. Politicians will always seek the support of the majority who take from the pot rather than the minority who contribute to it. With a one vote per person electoral system, the ballot box gets to play Robin Hood

The combined effect of the seven factors listed above is that governments, politicians and a majority of voters alike all have incentives to create and perpetuate a system which keeps promising more than the system can sustain and lacks constraints to prevent it doing so. Historically, the result for societies which perpetually live beyond their means is economic stagnation or decline. Always. Look at California - one of the wealthiest places in the world and it still managed to spend its way to the point of bankruptcy. It is also one of the most expensive places in America to live in or do business. Even with its people fully aware of the impossibility of taxing its way out of its deficit hole, the state continues to spend more than it can afford. In adopting the politically expedient approach of soaking the rich though higher taxes, the state is going to drive a lot of people and businesses (i.e. taxpayers) out of state, making a bad situation worse.

Quite frankly, I am happy to live in a place which has only a very limited form of democracy. The taxes are low. I have all the civil and commercial freedoms I could wish for (with the notable exception of clean air in which to exercise my right to freedom of speech).

I also need have no concerns about my eventual retirement being ruined by the government being forced to raise taxes to cover the costs of electoral bribes and voter/civil servant greed. Given the chance, I will vote against any proposals to introduce greater democracy here.

The only obvious solution is to prohibit governments from borrowing (other than for national emergencies such as war, natural disaster or similar). If funding is needed for capital intensive projects like highways, airports and the like, it should be on a non-recourse basis, BOT or other arrangement which has the effect of capping the taxpayer contribution. Put differently, the message to the voters should be a simple one: if you want something you pay for it.

1 comment:

Anonymous said...

I think it all comes back to morality. No matter what economic or political system, if the person(s) lacks character and morals, it is bound to fail. Whoever controls the message, such as through media or truth, then they control what really matters and can undermine any law, expectation, ect. I don't think this has been a failure of democracy, it is the failure of the leaders of this country and the people who support them due to the previous explanation.