Tuesday, October 15, 2013

How does 'democratic failure' threaten progress?

In Chapter 8 of my book, Free to Flourish, I suggested that the greatest threat to human progress over the next few decades is that democratic governments will not be able to cope with their expanding responsibilities. I noted that increased public disorder is already evident in Europe and is likely to become more widespread as people become increasingly aware that governments cannot deliver on the promises they have made.

There is a risk that failing democracies will be replaced by authoritarian regimes that have little regard for human rights. Even if democracy limps on, however, over-expansion of the responsibilities of government seems likely to bring progress to an end in many societies.
Progress ends at the point where societies cease to be able to offer expanding opportunities for individual human flourishing.

From an economic perspective, the most obvious threat to progress posed by expansion of the responsibilities of government has to do with the economic costs of high levels of government spending, high taxation and excessive regulation. Government spending has to be paid for sooner or later by collecting revenue from citizens and (as every economist should know) the economic cost of taxation rise disproportionately with tax revenue. There are also economic costs associated with forms of government spending and regulations that divert resources to less productive activities or weaken incentives for efficient resource use. As a general rule, the further the activities of government extend beyond core functions in which government has a comparative advantage, the more likely it is that progress will be stifled.

However, that kind of analysis understates the threat to progress posed by expansion of government responsibilities because it assumes that governments act in the interests of the broader community and that all governments have competence in taxing, spending and regulating to pursue agreed objectives. Democratic processes may reduce some of the problems of such government failure, but democracy doesn’t provide much assurance that governments will pursue objectives that are in the interests of the vast majority of citizens, or that the activities of government will be undertaken efficiently. Democracy doesn’t prevent voters from developing inflated expectations of what governments can do – politicians often encourage inflated expectations in competing for votes. Democracy doesn’t ensure that individuals have the opportunity to discover and pursue whatever it is that enhances their own wellbeing and the responsibility to manage their own lives; it doesn’t prevent people from being relieved of important responsibilities – such as education, health care, saving for retirement. Democracy doesn’t prevent governments from becoming captive to interest groups in industry, the community and the public sector, and to pursue the interests of those groups at the expense of the rest of the community. The absence of market disciplines in the public sector makes public sector activities particular prone to corruption and inefficiency, even in democracies.

As a consequence of such democratic failure there is a tendency for the responsibilities of government to expand until economic disaster threatens. The point at which this occurs differs greatly between countries, depending on the extent of corruption and inefficiency. For example, Greece was well on the way to an economic crisis before its government spending as a percentage of GDP reached levels comparable to those in Sweden, which is often held up as a prime example of a country with big government.

Another symptom of democratic failure is difficulty in changing course when disaster threatens. Again, a comparison between Sweden and Greece is appropriate. When disaster threatened in the early 1990s, Sweden was able to introduce reforms to contain the growth of government spending, reduce marginal tax rates and regulate more efficiently. Despite the high level of government spending in Sweden - still around 50 per cent of GDP – there is some prospect that opportunities for individuals to flourish will expand over time in that country. Gallup poll data suggest some increase in average life satisfaction in Sweden over the period from 2005-07 to 2010-12 and that Swedes are optimistic that their lives will improve further over the next five years.

By contrast, Greece has shown much less ability to introduce the reforms needed to avert economic disaster, even though successive governments in that country have known that public debt problems were looming since before 2001, when Greece joined the Eurozone. The consequence has been a fall of about 20 per cent in Greece’s GDP since 2008. The average unemployment rate in Greece has been about 28 per cent this year and youth unemployment over 60 per cent. Over the period from 2005-07 to 2010-12, average life satisfaction in Greece declined from 6.3 to 5.4 (on the Cantril scale in which the ‘best possible life’ is given a value of 10 and the worst possible life a value of zero). Greeks have become pessimistic about the future – the average Greek expects life to get worse over the next five years.

It would be nice to be able to contrast the experiences of both Sweden and Greece with those of a country that can be held up as a model of ideal democratic governance. Unfortunately, no country comes to mind. Institutional innovations have resulted in improved policy outcomes in some countries, but I don’t think any one country deserves to be held up as a model of ideal governance.

The growth of inflated expectations of what governments can do seems to be a common pattern throughout the democratic world. It is also common for responsibilities of government to expand until crisis threatens.

As we have seen, what happens at that point is of critical importance. If policy reforms are introduced to contract the responsibilities of government, that enables opportunities for individual human flourishing to expand over the longer term. If reform is too little and too late there is the prospect of following Greece down the path toward widespread misery. Unfortunately, a Greek tragedy may await many countries, particularly in Europe, where democratic failure seems to have become too deeply entrenched for substantial reforms to be implemented.


Me-Me King said...

You had me at John Stuart Mill. I've always found your writing spot on! Freedom & liberty!

Procrustes said...

I agree

Winston, you don't attract a lot of comments but from my perspective, i usually find myself in strong agreement with your posts

Winton Bates said...

Me-Me: Thanks and welcome back! I have a post scheduled in a few weeks discussing how John Stuart Mill went to visit William Wordsworth (inspired by my visit to the Lakes District in England during August).

Procrustes: I appreciate your encouragement.