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The “right” and the “left” – Shaping the debate

18 September 2008 251 views 22 Comments

Pl. read this in the context of the on-going discussion re. governments, economy, market intervention and liberal policies…Below is a great summary of the positions on the “right” and “left” of the economic spectrum by Prof Greg Mankiw:

  • The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
  • The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
  • The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
  • The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
  • The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
  • There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

Hopefully this will help us clarify our thinking…

I am guessing (and I may have to eat my words here!) that most readers of this blog will fall on the “left”…which would be somewhat of a paradox as their political leanings are (I’m guessing again) mostly towards the “right”.

I am tempted to write a separate post on the “right” and “left” of the political spectrum.

***

Mahesh and Patriot: I would request you to please get the ball rolling on this discussion (and I should not forget Sanjeev) … Thanks.

Related Posts:

With one eye firmly on polls…

Time to dump some anachronisms?

India vs. Bharat

“China Could Learn From India’s Slow and Quiet Rise”

22 Comments »

  • 1. B Shantanu (author) said:

    Mahesh: I am picking up from the various points you made in your comments to this post (starting from comment #28, July 5th ’08).

    1. You put a large portion of the current economic woes facing the US on the collapse of the family-based value system..
    The arguument you make – if I have understood you correctly – is that because US has become more individualistic (and less family-oriented), people are living beyond their means and spending more than what they earn.

    I find it hard to find evidence for such an argument.

    While the US is no doubt living beyond its means, I am not sure that the level of personal debt is more in case of singles (or divorcees) than in case of families. Do you have any data around that?

    2. Personal debt is just one (although a big one) of the problems facing the US. The roots of US’ economic troubles lie elesewhere too.

    3. You also say that the reason for US’ attack on Iraq was that Saddam Hussein was only trading oil in Euros. Even if this was one of the reasons, I am sure you would agree that there were many other factors involved as well.

    As for Iran and North Korea, US has so far attacked neither.

    4. You also make a point re. strengths of currencies. As I am sure you know, the strength of a currency is determined by a large number of factors (and a complex inter-play between them). The Rupee may someday become an international currency of choice but that is very unlikely to happen in the near term.

    5. You say that you are a strong advocate of government run businesses…and then you mention Sovereign Wealth Funds (SWFs). Actually there is a big difference between government run businesses and SWFs. Please think about it.
    And even if the government has the money to buy Microsoft, Yahoo etc, can the government really run these companies? Do you think that privatisation is a bad thing?

    6. In your comment # 30, you mention that you would like the Indian VadaPav to compete with the burger and Indian products competing with western products.
    I agree with that….but the way to do that is for the government to step aside and help Indian businesses become competitive…As long as the right policies are in place, Indian businesses can (and will) produce world-class products…Think of the recent M&A transactions by Indian companies.

    Your comment #44 was more about American cultural values etc so I will respond to it separately..

    7. As for your final point in comment #51 re. the value of the dollar, many people, experts and even the legendary Warren Buffet (if I remember correctly) believe that the dollar is over-valued…But that does not mean it is worthless…

    A huge amount of global trade still happens in dollars and for that reason alone, it makes sense to have some reserves…and as far as I know there are no “hurdles” for Indian companies to buy US assets…Do you have something particular in mind?

    Look forward to your thoughts,

    P.S. I think you will find this “Must Read” post by Prof Mankiw interesting.

  • 2. Patriot said:

    I do not know about “right” or “left” – I find these labels become misleading after a while, but I see the issue as individuals vs governments.

    I am firmly on the side of individuals, rich or poor, educated or illiterate, entrepreneurial or salaried.

    I distrust *all* governments but tolerate them as a necessary evil for certain aspects of our collective lives.

    Springing from the latter statement, I firmly believe that governments should be small in size and do only “core” activities. I believe that every individual should resist the expansion of govt and govt services, as paradoxically these services harm those people most whom they actually seek to protect.

    Core activities of any government:
    1. Protection from external threats
    2. Protection from internal threats
    3. Creation of certain commons – like roads and power supply (but this is debatable)
    4. Providing primary education and healthcare (again very, very debatable)

    But, that is it. The govt should not be running telcos, flying planes, making turbines, acting as a land broker for powerful interests, running trains or making fertilisers. This is, of course, a very short list and I can go on.

    For funding of the core activities, it gets to collect reasonable amount of taxes from the citizens that it protects. And, that is the crux of the contract between a citizen and his government. Unfortunately, our government is a great example of what not to do.

    Whenever you want the government to do something, carefully think about why you want the govt to do it and why a private service provider will not do it better, for lesser money.

    It is a question of incentives. The government has no incentive to do anything well, except probably the defence of our borders – this is because, if it fails in this job, it ceases to exist.

    As Shantanu mentioned, this is just to set the ball rolling.

    Cheers

  • 3. Mahesh Patil said:

    @ Shantanu .. for my opening line on this discussion and to answer most of the questions which you have put. please watch the 56min video link i have posted.

    rest
    1) Yes there is data but it is scattered over in multiple links. One needs to compile it .. American economy and their spending habits or for that any countrys economy is based on family based value systems.

    2)Yes i agree there are other problems which are further compunding american probs.

    3)U’l find the answer in the video link, but still i’l answer, the day Tehran builts an Oil exchange and starts trading directly with countries… it will be attacked.
    (rest i mentioned the name of tehran and Nkorea in terms
    of verbal attacks)

    5)PSU’s is also state owned as SWF (so in that context i meant to used a comma instead of a full stop in that line)


    A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.

    Whether govt can run Microsoft or not.. could be a debate in itself, which is like should govt be in business or no..
    but i think if ONGC and other navratna can.. why not microsoft. As i already said i personally feal govt should be in profit making business so i oppose privatisation of profit making PSU… but yes sell or form PPP in profit making PSU’s… we dont want imperalism to take front step.

    i am not saying not neccessary to to buy microsoft, citibank, cola.. through SWF own a controlling stake in form of stocks.


    (I was very happy today when i heard GOVT of MAharashtra today gave the prestigious work of building shiwri – nhava seva 22km sea link to MMRDA and not to either of AMbani bros)

    4&6)I agree with your both the points.

    7)Yes i agree, and thats exactly what i am saying before in turns in tissue paper, keep the comman minimum treasury bills required rest.. reinvest in US other assets itself (like i mentioned in #53), and keep the 200billion exposure of Indian portfolio in US. no problem in that. but dont keep all 200billion as treasury bills

    No meant to say, about soverign funds .. which india has still not created and further IF created whether US will allow INdian SWF to own something in US .. has to be seen.
    As the AMerican govt debates in their house of reps whether a country is allowed to own an american asset or no.


    जय हिंद ! जय महाराष्ट्र !!

  • 4. v.c.krishnan said:

    Dear Shantanu,
    It is very clear that the US economy appears to be in a downturn. If one views it objectively the economy of the US has not busted up but the greedy little MBA’s and the Leveraged managers are a broken lot.
    The basic US economy will survive and come out stronger. If the facts are right the US economy has been powerful not because of these greed merchants, but because of the basic values of the US people. They are innovative and resilient, willing to face up to challenges.
    They do not stand before the respective governments for free TV’s, free one Kg rice, free education, free medical care, free transport, free water, free electricity, free money!
    If one percieves it, one will notice that the best part of many new innovative products have come from the US.
    The windows, the MAC, the Iphone,the products of 3M etc.
    The current tragedy took place, in a way I have to agree with Shri. Mahesh here, because the core value system of family and hard work was deserted by the ordinary millions of the US. They fell for the greedy and gullible talk of these death merchants.
    I think Shri. Mahesh had a point when he says that we should create a soverign wealth fund and invest in the US.
    It is the right time. We can get maybe a Goldman Sachs with the Lehman brothers thrown in as a bonus if we enter the market now.
    To get a foothold into that market today is the time. Indians are known for the acumen in business. I am sure there must be a few more Tata’s and Wipro’s to lead this SWF.
    I am sure that in a short time the US economy will make a turnaround and if we get our act together India can make it happen.
    To make it easier,one has to understand that it is only the Greedy Invesment Banks and their heady advisers that have gone broke. No single proffessional Commercial Bank has gone under.
    To conclude fundamentals have not gone wrong, but greed has. It is time to use our &200 billions to enter the US in a wave and give it an Indian way of economic life.
    We are capable of doing it. Tata Tetley, Arecelor Mittal, Tata Corus and Vedanta have shown what mettle Indian businessmen are made of.
    Let’s go in for the kill.
    Regards,
    vck

  • 5. Prakash said:

    Relating the collapse of the US economy to family values does not make any sense. The collapse has to do with greedy financial executives selling high-risk products as low-risk investments. This whole area of derivatives and debt swaps are pretty much new terms to most ordinary people. The collapse has been attributed to faults in the regulatory system (or a lack of it for financial services). The government is likely to start regulating the banking sector. Western countries have been calling for deregulation of the financial services sector in India and I hope the RBI takes the lessons from the collapse in the US.

    As for the left versus right issue, I think the government should be a service-enabler and not a service-provider. It is not fair if the authority that sets up the rules of the game also runs a business.

  • 6. B Shantanu (author) said:

    Patriot, Mahesh, vck and Prakash: Thank you for your comments and thoughts…

    Mahesh: I must really see the link you had provided before I comment further… I will do this over the weekend…and then add my thoughts.

    Thanks.

    P.S. Many of you must be aware of this site: http://indianeconomy.org/ If not it is worth a look…

  • 7. Sanjeev Sabhlok said:

    Sorry folks, I haven’t gone through this very interesting discussion but I’d like Mahesh Patil to clarify the theory behind his statement that “i personally feal govt should be in profit making business”.

    May I know what theory underpins this belief? How does human nature, human incentives, the role of individual freedom, the role the government, etc., – how does that empower in any way a government to be a businessman? Were the lessons of the destruction of wealth by Indian PSUs over the past 60 years not sufficient? Do you intend to sink India back into socialist madness? What is the reason why a bureaucrat is well-qualified to be a businessman? What is his incentive? Why is he to do things which citizens can do themselves???

    I’d appreciate your response also being sent to me at sabhlok AT yahoo DOT com so I can know when a response to this basic question has been posted.

    Regards
    Sanjeev

  • 8. Mahesh Patil said:


    An interview of Bharat Punarnirman Dal’s Uttar Pradesh
    President, Shri Omendra Bharat. (Mtech IIT Kanpur).

    A audio visual insight on how Bharat Punarnirman Dal wish to awaken and rebuild a new India .

    http://video.google.com/videoplay?docid=7943767028592106153

    Jai Hind Jai Maharashtra

  • 9. B Shantanu (author) said:

    Mahesh, As promised, I watched the video you had sent me (unfortunately I only had 30mins or so…so the observations below are based on the first 30-odd minutes of this video:

    M R Venkatesh is thought-provoking but sometimes makes simplistic statements to buttress his argument(s).

    1. E.g. he says that the “seeming success of globalization is the US”…I dont think that is entirely true…While the US is no doubt a beneficiary of globalization, it is by no means the sole or even the biggest gainer…
    A huge number of countries in Asia and Latin Amaerica have benfitted from the opening up of markets and inter-connected world trade…including India and China.

    This growth has resulted in visible reduction in poverty i these countries and rising standards of living (as in India too)

    2. US is a rich country not because of the perceived strength of the dollar but because of its per-capital income, standard of living and natural resources.

    If coutnries around the world are happy lending money to the US, either they are collectively behaving like mad men or there is something else behind it…Try and think about it (I have some links for you later in the comment)

    3. The countries that are lending to the US are not “poor” countries (which is what Venkatesh says) but rich coumtries like Japan, Singapore and countries of the Middle East. The debatable exception is China.

    4. US does not have anything other than credit-worthiness…Not true and very simplistic…what about R&D, the big companies that sell their products worldwide? the brands?

    5. US is the only economy that is consumptionled. Not true. India is right behind (with 68% of our GDP coming from consumer consunption) as compared to 70% for US.

    6. The strength of the dollar is already being challenged by the Euro as as you pointed out too, SWFs are incresingly becoming active in buying US assets

    7. I am not sure what this video tells us about your position on the points I have mentioned in my post.

    8. SWFs: I am in favour of them…We (as in Indian government) should seriously consider this. There was a recent issue of “Pragati” (the Indian National Interest magazine) which dealt with this…have alook

    More on this once I have seen the rest.

    ***

    Here are some links that you will find interesting:

    http://economistsview.typepad.com/economistsview/2007/10/a-more-competit.html

    http://www.advisorperspectives.com/newsletters08/newsltr82-1-1.html

    and http://www.humanevents.com/article.php?id=22085

    Finally, there are some “suspect” figures in Venkatesh’s speech e.g. the level fo US debt and Japan’s savings rate..They need to be verified.

  • 10. B Shantanu (author) said:

    @ Mahesh: Here is an article that you may enjoy reading…It suggests that “capitalism” as we know it today – is under threat – thanks to the recent moves by US government…

    ***

    @ Patriot, Sanjeev and others: Food for thought…Comments welcome as always:

    *** Excerpts from Ultimate Cost of Bailout Could Be Capitalism ***

    …Wealth creation isn’t simply the act of signing a check or printing a dollar bill. Creating wealth — the type of wealth that yields new advancements and jobs, and enhances human life — is a result of reason, hard work and long-range planning.

    Wealth isn’t born of a governmental decree or redistribution of wealth. Yet that’s exactly the path down which Dodd, Paulson, President Bush and the rest of the federal government continue to push.

    First the feds nationalized mortgage giants Fannie Mae and Freddie Mac. Then it was AIG, the nation’s largest insurance company. (Curiously, Lehman Brothers, the No. 4 investment bank, was left to file bankruptcy.) Now the government is seeking to start a $400 billion pool to insure money market assets, which investors had previously understood not to be insured.

    It doesn’t end there. Uncle Sam further plans a $700 billion fund to buy, well, whatever types of assets it wants. Originally envisioned as a repository for soured mortgage bets, as late as Sunday night, the Treasury Department reportedly revised plans to include what it terms “troubled assets.” Those could be student loans, credit-card debt, non-U.S. assets, or anything else that happens to strike Paulson’s fancy. You couldn’t design a more inherently corrupt and arbitrary policy if you tried.

    As it now stands, the plan would spend as much as the annual budgets of the Departments of Education, Defense and Health and Human Services combined. Of course, that can and surely will change, quite possibly by the time you get done reading this.

    Already being tacked on are the politically populist measures to keep “struggling homeowners” from losing their houses and limit executive compensation. At all firms or just those participating in the scheme? Nobody knows.

    Nobody knows anything at all. The rules by which honest businessmen attempt to function are now changing on literally an hour-by-hour basis.

    …When laws are made without the benefit of a Constitutional vetting or vote, confusion reigns. Not even the pros know what the heck is going on, which is exactly why the markets are now regularly swinging 400 points a day with little regard to economic fundamentals.

    …Indeed, instead of property rights and the rule of law, the country is now being governed by spur-of-the-moment plans devoid of any long-range thinking. Just listen to our own president: “Look, I’m sure there are some of my friends out there saying, ‘I thought this guy was a market guy. What happened to him?’” Bush told a Washington press conference. “Well, my first instinct wasn’t to lay out a huge government plan. My first instinct was to let the market work until I realized, upon being briefed by the experts, of how significant this problem became.”

    The message is that we believe in free markets until times get tough, at which point capitalism goes out the window and is replaced by Venezuelan-style nationalization and rule-by-decree.

    And make no mistake, that’s exactly what we are witnessing. Without so much as a single vote, the supposedly fiscally conservative Bush administration has achieved an economic coup d’etat, completely abandoning the free-market principles on which this country was built. In its place is crony capitalism in which individual property rights and the proper role of government — as referee, not starring actor — has disappeared altogether.

    ***
    Read the article in full here

  • 11. Patriot said:

    *** COMMENT COMBINED ***

    The Financial Times website is carrying multiple articles on the bailouts – pro and con. http://www.ft.com

    For those interested, this is a great resource for insights into the current US financial services mess.

    Single articles like the above take only one side of the picture and raise questions. It is insufficient knowledge at best, partisanship at worst.

    For those who are unaware, the investment banking industry of the US which created this mess has paid a huge price for their adventure. Most of the firms are either bankrupt or have been taken over. The last two independent firms, Morgan Stanley and Goldman Sachs, asked for “banking licences” from the Fed and essentially became regulated commercial banking entities on Monday. The Investment Banking industry in the US is now DEAD. There are no more independent investment banks left in the US.

    ***

    And, here is an article from Forbes on the demise of the Investment Banks:
    http://www.forbes.com/2008/09/22/goldman-morgan-fed-biz-wall-cx_lm_0922bizgoldman.html?partner=daily_newsletter

  • 12. v.c.krishnan said:

    Dear Sir,
    It is not the demise of capitalism. It is the death knell for all rascals and greedy advisors.
    Capitalism is well, alive and kicking in the US Market. As usual the doomsayers are back at their game. They are seeing all the BS all these years being sprayed all over their face.
    All their high sounding jargon and techie language has proved to be a lot of humbug and the shit has really hit the ceiling.
    The doomsayers, as regards Capitalism are back because they are seeing all the “NICE” and “NASSAU” and exclusive beachfronts and Islands evaporate in front of them.
    No more watches, an equipment which shows the time, costing $400,000. No more caviar at $1000 a plate. No Liquer at $250 a SHOT.
    Yes sir it is a silver lining in the darkness that enshrouded the financial horizon. All hardworking individuals will welcome the demise of these “MAYA” organisations.
    Today all their laptops, their high sounding jargon, their supposed to be infallible scientificlly developed secret software are all in the doghouse.
    The death of these giants only goes to show that technical jargon and cyberspace speeches will lead to nowhere. Cyberspace documentations and empty paper valuations do not deliver; only brick and mortar valuations will endure.
    Goldman Sachs and Morgan Stanley have read the writing on the wall and taken the right decisions.
    It is the true beginning of REAL AND TRUE CAPITALISM, not its death.
    Regards,
    vck

  • 13. tarique (author) said:

    one more point before i conclude. can shantanu please find out for me about the credentials of a man called george soros ? he is a very low key man , keeps a very low profile, very little data about him is available anywhere in the world. he is regarded as a financial mastermind and one of the most powerful market speculators in the world. his financial clout is more powerful than any government in the world.he likes to invest his money in areas with a strong unsuspecting middle class population. he invests mostly in peaceful democratic nations with large middle class earning groups. he is known as the undisputed king of ‘speculations’.his areas of interest and investment are housing , finance, banking, insurance, mutual funds and all areas related to middle class dreams and aspirations. i first heard about him in malaysia during the south east asia financial crisis that wiped out middle class savings and earnings in singapore, malaysia, thailand, south korea and brunei after a long period of boom where small investors were promised ‘heaven’ in future.i m worried for the middle class educated investors now because a few sources have informed me that george soros is right now active in international markets and has a very strong presence in india in companies like DLF. i do not know anything more but would like shantanu and others to find more and educate me.

  • 14. Patriot said:

    @Tarique -

    George Soros is by no means, a “low key” man! He is one of the most famous “traders” of our times.

    Two huge “credits” against his name – he bet US$10 BILLION against the UK Pound when it was part of the European Exchange Rate Mechanism (EERM) because the Bank of England was not raising rates to match its inflation, relative to the other countries in the EERM. The whole point of the EERM was that central banks would be able to “manage” their currencies more efficiently. Soros showed them the error of their ways! The Bank of England was finally forced to remove the UK Pound from the EERM as it crashed against the dollar, making Soros tons of money.

    The other big bet he took was during the Asian Currency crisis in 1987, when he went short against all the Asian currencies, but mainly the Malaysian Ringitt. Say “Soros is back” to Mahathir if you want to give the latter a heart attack. He made a ton of money in 1997 as well on the Thai and Malaysian currencies.

    Here is brief bio of him:
    http://en.wikipedia.org/wiki/George_soros
    You will get tons of information on the net about him, if you google Soros.

    Currently, he is not very active in trading but far more active with his charities.

  • 15. B Shantanu (author) said:

    @ All: For those of who want to understand better what on earth is going on with inter-bank lending, here is a great chart explaining LIBOR.

  • 16. tarique said:

    george soros bet 10 billion dollars on pounds and took another bet on other currencies. we call such people ‘speculators’ or ‘fixers’ and not businessmen.

  • 17. tarique (author) said:

    there is no subprime crisis or economic meltdown as we r blindly believing from media propoganda.there is only a shortage of money flow in the US markets due to presdential elections, where a party for 8 long years in power is expected to lose elections badly.this has created a big panic in the investor confidence and they are pulling their money out in a panic. now the americans are ‘world idols ‘ for other economies all over the world. so when the leader panics , the smaller groups get a shiver in their spines.this is exactly what is happening right now. if germany or france was in place of america then nobody would have panicked. but americans are after all ‘americans’. ‘when they fart the world gets loose motions’.india at present is in the same mode as america. it faces elections in 6 assembly states in november and after that will tighten its belts for the final may 2009 countdown.here too, like america the congress is expected to loose the elections resulting in a slow down mode. investors don’t want to take a risk at this moment in india too.

  • 18. B Shantanu (author) said:

    Spot the populist streak:

    …Calling the current global financial crisis “abnormal”, and admitting that it had impacted the Indian economy, Prime Minister Manmohan Singh Monday asked India companies to refrain from “knee-jerk” reactions like lay-offs.

    “The financial crisis has exacerbated a global downturn that was expected earlier but is now likely to be more severe and prolonged…While every effort needs to be made to cut costs and raise productivity, I hope there will be no knee-jerk reaction such as large scale lay-offs which may lead to a negative spiral,” he said.

  • 19. Patriot said:

    @Tarique:
    “there is no subprime crisis or economic meltdown as we r blindly believing from media propoganda.there is only a shortage of money flow in the US markets due to presdential elections, where a party for 8 long years in power is expected to lose elections badly.this has created a big panic in the investor confidence and they are pulling their money out in a panic.”

    WOW!!! And, here was poor me following the housing mortgage bubble, predatory lending issues, CDS’ and CDO’s, stupid ratings of the rating agencies, etc …. and you have completely clarified the whole situation in a few short sentences.

    Where do you get your wisdom from?

  • 20. Jayadevan said:

    @Shantanu,

    Would not this acquisition of financial enterprises by the US government be a reverse case of selling off the family jewels? I take a profitable venture, skim off all the cash from it, run it into the ground, and Uncle Sam steps in to buy the decaying carcasse off me. This is just an expansion of the Bush doctrine. Another way of transferring taxpayer’s funds into our pockets. What our politicians and their crony businessmen did in the licence-raj, and even after, in the privatisation moves, the Americans do in a much better way. And unlike Cheney’s old friends, the US did not even have to go to war for this. If you will remember, this is not the first time banks have been in a problem, following a lemming-like rush for maximising profits for people like us. The wonder of corporatisation is that it deals the executives a wondrous chance to play around with money that does not belong to them, and with no other consequences than lower back problems from sitting on a fat wallet. In Korea the guys at least have the decency to jump off a cliff or their corporate skyscrapers.

    The common people pay, but they were suckers in the first place, weren’t they, working at low-paying jobs in schools, as cops. The cream, as always, floats to the top

  • 21. B Shantanu (author) said:

    Courtesy BarbarIndian, this excerpt about “Government Fundamentalists”

    What should we call people who seem to regard government as the solution regardless of the evidence? I propose the term “government fundamentalists.” How would you identify a government fundamentalist? One characteristic would be a tendency, after the person points out market failures, to argue for government intervention as the solution.

    Rarely does anyone who proposes a government solution spell out how the incentives will be set up so that the government will actually solve the problem. Even many economists who are strongly committed to free markets will agree that economic freedom can underprovide defense from foreign attackers because of the notorious free-rider problem: Those who refuse to pay will get the same defense as those who pay, giving all an incentive not to pay. The possible result is that national defense is underprovided. But I’ve yet to find an advocate of government provision of defense who can explain how incentives will be set up so that government actually defends us and doesn’t simply engage in national “offense,” picking fights with a dictator in Iraq or a demagogue in Panama, to cite two examples of the U.S. government’s so-called defense.

    But given that even some passionate advocates of economic freedom approve of government solutions to problems caused by market failure, we need another characteristic to distinguish government fundamentalists. Here’s the characteristic I propose: a tendency to advocate government solutions even in the face of evidence that those very solutions have not worked.

    Take the tax on gasoline. The original idea for taxing gasoline was that users of roads would pay for them. Even at its best, though, the gas tax was not a great solution. The revenues were put in a big pool and politically allocated. There was no necessary connection between where people valued having roads and where roads were built, a connection that automatically would have existed had the revenues been collected with tolls. Tolls, after all, are prices not taxes.

    It got worse. In the late 1960s, governments started diverting some gasoline-tax revenues to other uses. The first big diversion was to government-run mass transit that couldn’t survive on its own without subsidies. Later, more funds were diverted for bicycle lanes and lanes on roads and freeways that were dedicated to money-losing bus service. So the whole idea of user-supported roads has been steadily undercut.

    Moreover, in response to higher gasoline prices, people have reduced their driving and shifted towards higher-fuel-economy vehicles. Because the federal tax on gasoline is in cents per gallon, revenues fell slightly, from $21.053 billion in fiscal year 2007 to $20.982 billion in fiscal year 2008, a drop of $71 million. In most years, by contrast, revenue grows as the number of drivers grows.

    What should be done? If you notice how politicized road construction is, if you notice that a gasoline tax that was supposed to be used only for roads is now used for other things, and if you notice that the shift to higher fuel economy is reducing the growth of revenues for road-building, you might consider a market solution. You might consider taking the issue out of politics, allowing private entrepreneurs to build roads and charge tolls for their use. You might realize that doing so would forever free road construction and maintenance from the vicissitudes of gasoline tax revenues and from the politically powerful governments that grab the funds for their money-losing projects.

    More Government Will Fix Failed Government?
    But what do many people advocate when they notice this problem? Higher gasoline taxes. If you assume that government solutions are better than free-market solutions, you would naturally conclude that the gasoline tax should be increased. But if you are to avoid being a government fundamentalist, shouldn’t you actually look at the evidence on how well or badly gasoline taxes and government provision of roads have performed? Shouldn’t you also look at the how well or badly toll roads work?

    …Economist Jeff Hummel recently captured the essence of government fundamentalism this way: If markets don’t work, have government intervene. If government intervention doesn’t work, have government intervene further.

    Notice the irony. Many free-market economists like me are quite willing to admit that markets don’t work perfectly and to examine and accept government solutions if their advocates can show how governments can be motivated to actually carry them out. And yet we are called market fundamentalists. On the other hand, many people who call us that are unwilling to change any of their views about the efficacy of government intervention no matter how badly the intervention works. Who are the fundamentalists here?

  • 22. Ashwin Kumaraswamy said:

    Shantanu, I still maintain i am not dogmatic on any “isms” – be is capitalism and socialism. Indian has been follwoing plurastic/positive liberalism. Where it does recognise the need for wealth creation for the over all development of the country. In the same context when an enviornment needs to be created for wealth creation, it should look at its downsides, strengthen the same so it can withstand any impact of wealth creation process.

    The reason for the need to employ capitalism and socialism put together is because of the diversity of India’s length adn breadth. It is a process of prioritising and timing which is very important.
    Hence, i have a open mind as well as understadn the very importance of taking India and Bharat together the fine balance needs to be worked out on a issue by issue basis along with a global state of affairs.

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