All countries are developing countries - the core functions of the state

I have been blogging - and thinking about stuff - for so long, that I can contrast my current thinking with my own post of nearly eleven years ago. Back in the day, I took the narrow/small government view on which few areas truly are core functions of a state. Now I'm not so sure.

First, think about the policies you would recommend to a newly formed/newly independent poor/developing country.

Well, in no particular order, here's a possible and non-exhaustive top ten...

1. Make sure you can defend your external borders (Ukraine messed up badly there a few years ago, they were so busy bickering over who should be in charge that the Russians just marched in and occupied the eastern half).

2. Eliminate corruption and have stable financial and legal systems, meaning private/contract law as well as public order (defence against internal enemies and protection of minorities, fire brigade). Separation of religion and state (OK, that's most of the Middle East buggered).

3. Try and instil a sense of democracy, which only works if there is some sort of single national identity - democracy doesn't work if a country is divided on tribal lines. You only have to look as far as Northern Ireland to see that, let alone the third world, which is why the Japanese took to democracy like a duck to water after 1945.

4. Get the infrastructure (roads, railways, airports, telephones, electricity and water supply) up and running.

5. Universal education up to a certain age, making sure that girls get equal treatment.

6. Public health - immunisation programmes, clean water and functioning sewage/refuse collection, pregnancy and natal care, free condoms. Cap prices that doctors and drugs companies can charge patients (it's largely rent).

7. Make country open for foreign investment and trade but DO NOT let multinational corporations come in and rape the place. Tariffs and protectionism where absolutely necessary but they are to be phased out ASAP.

8. Decent housing for the poorest - meaning slum clearances and building state-owned affordable housing with electricity and running water etc.

9. Don't let income inequality get out of hand. A stable society won't thrive if a small business and political 'elite' are multi millionaires and the masses are struggling by on a dollar a day. Earned income is always the best kind of income, but having universal welfare/a basic income to patch up the survivors has always worked far better than expected.

10. As far as possible, fund government out of taxes on land values, natural resources and other monopolies. Whenever and wherever it's been tried it has doubled the rate of progress.
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Now, having nodded along to all of that, where is the dividing line between developing and developed countries?

There isn't one, it's just that some are a few centuries ahead of others. If we were to come back in another millennium, most African countries will be miles ahead of where European countries are today (hopefully), and equally hopefully, European countries will be far ahead of where they are now.

All of which means, a country doesn't just need to do steps 1 to 10 for a few decades until it is up and running and then decide to 'leave everything to the markets'. It is a constant process that will go on forever. Take your eye off the ball for a few years and you can lose decades of progress.

For sure, the government/state-controlled bodies don't necessarily need to do all the day-to-day stuff, a lot of it can be done by private businesses under state oversight/regulation, or by private providers competing for people to spend their health, education or housing vouchers with them, that's details.

Steven Pinker: The Better Angels of Our Nature

My son borrowed this from the school library and I have started reading it.

It's a splendid book. It's basically a really detailed and expanded version of one chapter of "Guns, Germs and Steel", but with more charts, statistics, tables and illustrations.

My favourite bit so far:

It's not that any early state was (as Hobbes theorized) a commonwealth vested with power by a social contract that had been negotiated by its citizens. Early states were more like protection rackets, in which powerful Mafiosi extorted resources from the locals and offered them safety from their neighbours and each other.

Any ensuing reduction in violence benefited the overlords as much as the protectees. Just as a farmer tries to prevent his animals from killing one another, so a ruler will try to keep his subjects from cycles of raiding and feuding that just shuffle resources or settle scores among them but from his point of view are a dead loss.

I don't think much as changed so far.

Home Office Fun

Two stories from today's Metro remind us that the country is run by idiots.

Page 1: Making meow meow, BZP and spice illegal will not stop people from trying them but will put them at risk from dealers who mix them with dangerous cutting agents, according to a report from the UK Drug Policy Commission.

In 2008 and 2009, when the now-banned meow meow was growing in popularity, cocaine-related deaths dropped by 28 per cent. The relaxation and subsequent re-introduction of controls on cannabis use also had no impact on the general decline in the drug’s use, the report claims...

However, the Home Office said it had no plans to change drug law. "We believe the Misuse of Drugs Act works and continues to protect the public from the serious harms caused by illicit drug use," it added.

Page 2: The article is a nice bit of shroud waving by The Police Federation. Yes of course the police force could be put to better use or cut costs a bit, that's not the point; the relevant bit is right at the end:

A Home Office spokesman said: "As a service spending £14 billion a year of public money, the police can and must make their fair share of the savings."

Yup, that £14 billion is about one per cent of GDP, or about two per cent of total UK government spending (prisons is another £4 billion or so on top of that). Seeing as maintaining law and order is the corest of the core functions of state and only makes up two per cent of total spending anyway, I don't think this is the right place to start if you're trying to save money.

Would it not make more sense to look at the £14 billion we send to the EU each year, or the £10 billion which the Department of (for?) Work & Pensions spends on administration costs each year?

No, that's not "astronomical".

From The Daily Mail:

England's litter problem has not improved in the past year and may get worse as public spending cuts bite, a report has suggested. A survey by Keep Britain Tidy found sweet wrappers, drinks, fast food and smoking-related rubbish had all increased in the last 12 months.

It found eight out of 10 places are blighted with cigarette butts - an increase of 5 per cent...

A spokesman added: "We know that for a lot of people, local environment quality is very important to them and £858 million was what it cost last year to clean England's streets. We are spending an astronomical amount of money on it and if that was to reduce considerably, it could lead to worsening litter."

Sweeping the streets is a perfectly legitimate core function of the state, but divide that £858 million by a population of 52 million (assuming he really means 'England', even though his organisation calls itself 'Keep Britain Tidy') and that works out at £17 per person per year (money well spent IMHO).

The net cash transfer from smokers to each non-smoker is in the order of £150 a year, so even if the entire cost of litter collection were down to cigarette butts (which it quite clearly isn't), yer average non-smoker is still better off to the tune of £133 per year.

And the fact that a large proportion of the extra cigarette stubs in the street is down to the smoking ban probably escapes them.

Killer arguments against LVT, not (58)

I haven't done one of these for a couple of weeks, but Adam Collyer has delivered us another wheel barrow load, so let's get on with it (Part 1/3):

"From an economic point of view, I actually agree that LVT would be less damaging than VAT, NIC’s, income tax etc. (I have other objections to LVT though.) But it would still be damaging. The State taking money out of the private sector and spending it reduces economic output. (Obviously we do need some State spending, and the negative economic effects of that are a price we have to pay.)"

That started well but fizzled out badly! Anti-Citizen One then beat me to it with this "But money raised via Government created monopolies is just a form of privatised taxation."

Anyway, I am an economist, not a politician, if one tax is less economically damaging than another, then we should choose the former, end of. If there are real hardship cases, we can invent relieving provisions later on, like exemptions or deferments for pensioners; capping LVT demanded at a certain per cent of an owner-occupier's cash income etc.

Real life evidence, as well as logic, leads us to the rather surprising conclusion that taxation of land values or any other government-protected monopoly actually boosts the economy*, and that reducing taxes on land values (in a UK context, Business Rates or fuel duty) has no overall positive effect. Even if LVT has no positive effects, and is merely less damaging than other taxes, that still leaves us with the inevitable conclusion that raising less taxes from VAT, NICs etc and more from current taxes on land values (as distinct from taxes on property transactions, like Stamp Duty or Capital Gains Tax which are in themselves very damaging) would have an overall positive effect.

To be fair, Adam conceded that "In one sense [land ownership] is privatised taxation. However, the proceeds don’t go to the State. Which is a pretty big difference."

Why does it make a difference? What is the big difference between a landlord spending it on restaurants and sports cars or, worst case, politicians doing so (Category 5 spending in my previous post)? We know that however greedy politicians are, they only siphon off a bit for themselves, that is the least of our worries.

The idea that all government spending has negative economic effects is hokum as well - Category 1 spending on 'core functions' adds an enormous amount of value for little cost. Just imagine the state stopped providing defence, law and order (in the wider sense), public health (in the very narrow sense), road maintenance, refuse collection, fire brigade etc. These cost an alarmingly small amount of money, perhaps five per cent of GDP or a tenth of government spending. Does anybody seriously imagine we'd be wealthier overall if the government stopped paying for all this and released all the criminals from our jails (which cost less than £3 billion a year to run, i.e. 0.2% of GDP)?

Government spending only causes economic damage (as opposed to the dead weight costs of the taxes used to raise the money) if it is in Categories 3 to 7. And I'm quite happy to admit that well over half of government spending falls into these categories, so the key is to have 'enough' in Category 1, a lot more in Category 2 and as little as possible in the others (and to replace Category 4 with cash vouchers). Finally, however taxes are raised, I will always rail against spending in Categories 3 to 7, this is an entirely separate issue.

* Examples of such positive effects are: dampening property price bubbles and hence credit bubbles, thus keeping the economy on a stable course (this is probably the most important one) and encouraging more efficient use of existing land and buildings (thus protecting The Hallowed Green Belt and reducing the number of vacant and derelict properties).

Killer arguments against LVT, not (15)

From the comments in in part 14...

Sobers:

I think the answer to that is that people make their decisions based on the system we have now, not one that we might have in the future. It is unfair in my view to propose that the whole basis of the tax system is removed and replaced with a totally different one that will undoubtedly put many people at a disadvantage through no fault of their own. Changing tax rates is one thing, changing what is taxed entirely is a different matter.

Its like the old Irish joke, how do you get to Limerick; well, I would start from here! Given the current political, tax and planning systems, and the history involved, there is no way in hell that any govt is ever going to implement such a scheme, not least because it would involve a massive reduction in State power and tax revenue. If you were designing a tax system from new, for a new country, then LVT would make sense. But we aren't, so it doesn't (for us).

Good points, of course. Which is why my original plan of three years ago was to replace all property or wealth-related taxes (Council Tax, Stamp Duty Land Tax, TV licence fee, Inheritance Tax, Capital Gains Tax, VAT on domestic fuel and improvements, Insurance Premium Tax, Home Information Packs etc) and all property related subsidies (VAT zero-rating for new builds, Housing and Council Tax benefit for privately-owned properties) with a flat rate tax on residential property values (averaged out a bit over postcode sectors so that we don't need to value every single property), like they introduced in Northern Ireland in 2006 (where the flat rate is 0.78%, but it only replaced Domestic Rates, not all the other rubbish).

The fiscally neutral rate, at today's property values, would be about 1% per annum. Even if we only compare this with existing annual taxes (Council Tax & TV Licence Fee) a third of households would be better off, a third would notice no difference and a third would pay more. But even this third aren't worse off in the long run, as they save the 4% Stamp Duty Land Tax hit when they buy/sell and they don't need to worry about Capital Gains Tax (which in itself leads to misallocation of resources) or Inheritance Tax (which generates as much income for the tax-planning profession as it raises in tax) any more. If a pensioner owns a home where the LVT bill is significantly higher than the Council Tax, then they can ask their heirs to pay it or just roll it up to be repaid on death.

So that's how we get to Limerick from here. It's a massive simplification (with corresponding cull of civil servants), with more winners than losers, and worst case it would be no more disastrous than a 1% increase in mortgage interest rates - or do readers really thing that the base rate will stay at 0.5% for ever? From there on in it's just a question of cutting taxes on incomes and production; higher net incomes will automatically feed through into high property values and hence higher property tax receipts, even if the property tax rate were kept constant.

Anonymous said...

The current system penalises people, and so it's ok if LVT penalises people. Uh?

As I have explained at length before, the existing land-use-restriction system and the fact that income taxpayers subsidise property owners, penalises people who aren't on the ladder. And the only way for them to get on the ladder is to take on an extortionate amount of debt; it is a massive Ponzi scheme that has led to successive booms and busts over the past forty years.

LVT is like a user charge*; core functions of the state have to be paid for somehow, and it only seems fair to make property owners pay for those functions that enhance property values. By all means, argue that these costs should be divided by the number of adults and argue for a Poll Tax (which bears absolutely no relation to 'ability to pay') but we tried that and it was a disaster; and seeing as richer people live in nicer houses and vice versa, surely LVT is far more closely related to 'ability to pay', but without being a tax on income (hence having none of the deadweight costs of taxes on income, natch).

Peter, what externalities do you mean? You have to clarify. I thought I'd covered those, like the deadweight costs of land-use-restrictions, the lack of deadweight costs of property taxation compared to taxation of incomes.

Finally, DBC Reed nails it. Maybe people would be so repulsed by the idea of paying an ear-marked tax that property prices would remain so low and stable that the tax wouldn't raise much. That counts as a storming result in my book.

* Think about taxpayer-funded, State provided education. It's a disaster. The income taxpayer, the parent and the schoolchild are all being penalised. What would happen to net incomes and education standards if we scrapped it all, cut taxes and left everybody to fend for themselves? Would you count that as 'penalising sub-standard teachers, paper pushers, meddlers and conscientious parents on low incomes'? Probably yes, so what? You have to look at the sum total happiness of the largest number of people.

"Foreign worker limits introduced"

The BBC describe the (largely unenforceable) proposals in detail.

What really hacks me off are the hugely expensive adverts on prime time telly (the ones with the chap running the hurdles) reminding employers that they'll need to be registered to be able to employ overseas workers, and threatening them with large fines.

Now, correct me if I'm wrong, but isn't immigration control (along with defence) one of the two inalienable core functions of the State? Isn't that what we are all paying The State to do?

If The State lets somebody in (whether or not they should have done), then they are in AFAIAC; and I don't see why somebody who happens to employ them (unless they have been complicit in people smuggling, kidnap etc) is any more guilty than a landlord from whom they rent somewhere to live* or the supermarket where they buy life's essentials.

* Oops. I shouldn't have said that. In theory, if you get caught smoking cannabis in the place you rent, your landlord can be prosecuted as well (I can't track down the exact statutory reference). So why not extend this to landlords who aren't licensed to house migrant workers?

The core functions of the State

Before we argue about stuff like taxation, MPs' expenses, the European Union, Iraq/Afghanistan and the like, the first thing that we ought to agree on is "What things can we only do collectively; by force if necessary and which have to be paid out of taxes?"

To my mind, it's a fairly short list:
1. Police, prisons, law and order, legal system (i.e. enforcing private contracts where one party is taking the piss);
2. Defence (not 'attack' - I am a pacifist-libertarian), border controls, immigration and anti-terrorism;
3. Public health (in the narrow sense);
4. Flood defences, fire service, coastguard;
5. Road maintenance and street lighting;
6. Supervising (not 'regulating' - I mean supervising) banks and utility companies (sure these are private, but too important to be ignored - without these nothing else functions).
7. For some reason, Greenies and NIMBYs think it's important that The State strictly limits planning permission and land use to suit their narrow interests, so I'll chuck that in the pot for now (this is a potential source of tax income rather than a cost, but we'll come to that later).

Apart from that I can't think of much.

Then the next decision is "Which of these things can be dealt with at local level?", remembering that there are economies and diseconomies of scale to all these things.

I would suggest that the basic rules of legal system; defence etc and banking supervision has to be at national level. Everything else should be at local level.

Now, having accepted that these are core functions (i.e. stuff that 'adds value' but which free markets cannot provide, or, even if free markets would provide them, there would be too many 'free riders') the question is who is going to run them? I'm afraid that the only answer can be 'democratically elected representatives' aka politicians.

(Finally, there is stuff that is not a 'core function', like redistribution (whether in cash, or as health or education vouchers) on which everybody has their own view, whether we have this (paid out of taxation, and if so, taxes on what) ought to be subject to some sort of referendum. And there is local stuff that is not a core function either - but which is clearly a public service - like public libraries, free museums or subsidised post offices, which can be decided locally by referendum and paid out of local taxes).
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Nearly eleven years later, an update to this.