Liberland Fiscal Governance by Dan Mitchell
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Cato is a libertarian think tank and I work on fiscal policy
at the Cato institute which means I have the responsibility of trying to convince
American politicians, including the Trump administration
that they should have less power over the economy
I've been doing that for 30 years and I keep failing
so maybe if I come over and try to help Liberland
maybe I'll have good success story, finally in my life.
Are you gonna hit the button? I've never had a president run my powerpoint.
This is such a high honor.
The first thing we want to do is to figure how do you actually
define a government. Usually, libertarians and those of us who are libertarian minded
we're very skeptical of the idea of the governement
and underline theory by Max Weber
is that State is an entity on the monopoly of so called legitimate use of force.
That's said well, but libertarians argue that this relies on circular logic
State defines what's legitimate, in some sense, in Nazi Germany that was legitimate
action, because the state we're gonna kill people
who's gonna say that's illegal?
because government defines what's legal. so, certain problems with the
conventional view have always existed with libertarians
so when you look at the Libertarian theory
I think Mancur Olson is probably the person who offers the most insight
because he said that the states really did evolve
was as much as that stationary bandits
historically of back before government will use a tribe and they would attack
each other kill each other the notion was if you are a powerful
tribe or a war lord something like that you
you would just go into a neighboring territory and completely pillage it
it you would just take away everything of value
and eventually the people who were doing the pillaging
figured out-hold on a second! if we go in and get everything of value
the people die they starve
and we have nothing to steal that year
and so the stationary bandits theory is that you want to take from
your neighbors but you don't want to take so much
that they stopped producing or they starve again or something like that
you want them to be sort of like a like
a herd of cows that's producing milk uh
okay you can kill them and drain the milk from their otters
that you won't have milk the next day
and so in other words what what defines
the origin of the modern state was
entity that was a bandit but wanted to maximize
its take, its collection
this cartoon sort of sums it up, a couple of vikings who would
normally just come in and just just raize and pillage
or destroy a town and take away everything but they said well
what if you plunder them just a little bit on a regular basis and call it
taxation. I mean that that sort ofdefined
what the modern state is now now
here's the more elegant way of looking at it
I do a lot of work on Laffer curve issues
what's the theory on Laffer curve? well at a zero percent tax rate the
government gets up they add a 100 percent tax rate the government gets
nothing just who's going to produceanything with the government steals everything
what do politicians want to do? they want to be at revenue maximized point.
that is the theory of the stationary bandit
the old-fashioned roaming bandit would impose a 100 percent tax rate but
again there would be nothing to steal the following year the revenue
maximizing tax rate is where they steal as much as possible while still keeping
the herd of cows alive so they can steal more and out of course for those of you
who are thinking of LAffer curve in a modern context
with tax rates and modern government
I hate that point! by the way I would rather be at the growth maximizing place
where you only collect enough money
to finance the truly legitimate functions of government
and of course what we're going to be talking about here is
well how do you define what's legitimate and then in some sense
you get to this theoretical issue of well you have a minimal state and it's really
defined by private contracts instead of by government coercion it is really
still a state or are we talking about incorporation and those are some of the
issues that are very relevant for Liberland.
now I suppose the biggest thing to focus on what you're talking
about the theoretical construction
of the state does voting legitimize it? I don't think so
libertarians have never been big fans of majoritarianism
because what's majoritarianism it's two wolves and a sheep voted what to have for lunch
what are the big problems that we see in modern economies
all across the world now is that you have so many people that
become dependent on government that once you get a majority of the voting age
population in that in that position where they see government as their
source of livelihood what's going to happen they're going to go out and
they're going to vote for more and more government to the street as we're seeing
in that nations like Greece where the whole thing collapses upon itself
think about Greece for a second and this is a warning for however you define a
new modern corporation / state however you want to think about Liberland
hopefully I assume you would want competitors Liberland and because the more the merrier
well think about Greece as a warning sign because when you add together the
number of people getting government pensions and by the way you can retire
as early as age 48 in Greece if you're in a hazardous profession like
hairdressing so add all the people on pensions and all the people scamming
the welfare and disability system and my favorite story from Greece about that is
the guy who was getting 700 euros a month as a disability benefit for
blindness and it turns out he was working off the books of course as a
tour guide for bird watchers so I know he was't really blind
you have pensioners, the welfare of disability collectors and then you have
all the government bureaucrats. Government workers aren't doing much of work, but that's actually fine with me
I don't want them busy regulating but when you add together the pensioners the
welfare disability collectors and the government bureaucrats you have almost
60 percent of the Greek population voting age population now think about
that for a second is Greece ever going to elect a Margaret Thatcher or a Ronald Reagan
now in theory the answer should be yes because if you're the flea or a tick
and the dog you're on dies, that's not good for you
parasites should want to help the healthy host
just like a stationary bandit once that herd of cows to continue to produce so
we can steal more and more, but at some point with democracy
the majority and you actually vote a country into economic destruction
that's what's happening to Greece you want to make sure what you're setting up
your new country you don't make that kind of mistake.
here's just a couple of quotes from from two of America's ounding fathers about why they did not
like democracy. what the United States set up with our Constitution at least in
theory and our Supreme Court sort of did a good job defending it up until the
1930s but what was set up in the United States was a system that explicitly
limited majoritarianism and it explicitly limited the power of democracy by
saying here's a constitution this constitution in article 1 section 8
defined the legitimate powers of the central government and they were very
limited there were no Department of Agriculture there were no Department of
Housing and Urban Development there were those Social Security system or Medicare
system. the idea was that our central
government was going to be very tightly bound handcuffed by rules that the
central government only has very limited powers
such as national defense. now within
those few limited powers we had a democratic form of government for
deciding how you want your national defense but the idea was you did not have 51% of
the people with the free under the ability to rape and pillage 49% of the
people and these are just two of the founding fathers it's all throughout the
Federalist Papers America's founding documents that they very explicitly they
they obviously do not want dictatorship or royalty but they also did not want pure
democracy here because I thought oh and throw in this cartoon about the evolution of government
it's always been based on coercion and this in some sense
brings us to what the promise of Liberland is all about how can you develop a
system that is free that is open that is liberal classical liberal
so you guys know that in the United States I always
hate the fact that liberals are the status, there want more governement power
more coersion, so they totally bastardized and destroy the meaning of a
very good word. now we already have in
most of our countries examples of private governense and there's a difference between governance and
government. in the United States we have all sorts of what i call gated communities
now they don't always have gates
but well we're simply talking about is you have oftentimes very very
large communities that are built by developers where the roads are private
the infrastructures private there's private security there's all these
things Internet is a private government or private governance within a territory
controlled by a government and then this is not only just you development for
those of you have been in New York City almost every building has co-opted
boards which is private governments and they have their own private security
oftentimes something more than a doorman but it's basically contractual
arrangements for private governance for the peaceful cooperation of people
what's wrong with that notion? it works very very well where it's allowed
we also have shopping malls in the United States which is in some sense
another example of private governance or legally autonomous I mean one thing I
didn't realize until I was a playing some sports was a friend of mine who's a
police officer he's in a shopping center you can't be pulled over for speeding so
maybe that's something for your future DMV about how you would set these rules up
the infrastructure and a major shopping center
is private it's private contracts governing the relationships of stores
and management as they also of course have private security for basic law and order
obviously if you go to a shopping center in the United States and you go
to shoot someone or something like that you're going to get turned over to the government
that the cops are going to commit and things like that
so it's not it's not again it's private governance within a territory
controlled by government. there's also something that you see that that's we
don't really have these in the United States but you have them in many places
around the world which are called special economic zones. these range from very trivial exercises such as
okay within a certain geographic territory the taxes and regulations won't be as motorists that's sort of
just like they're still government but government's not gonna step on you a
so I don't really count those as private governance but you do have these
other cases where you've got completely autonomous and in some cases
self-governing a territories were were again it's just like having a shopping
mall or a gated community inside that territory they finance their own
infrastructure their own security they set up their own rules and these are
areas designed to promote more economic growth and job creation and economic
activity and of course it always frustrates me as an economist well if
the politicians at a government are setting up a special economic zone which
is going to be very very little official cover just private governance why don't they
understand that lesson and apply it to the whole country
but of course the problem is that the politicians just never let me give up full
power and someday because they even set up a special economic zone for reasons
we don't like that you'll have developers come to the government they
hear politicians will give you a bunch of money some of us might call it a
bribe and you give us a autonomous special economic zone so the end result
is something that we like an example of private governance and less oppression
on a day to day basis by government but sometimes it's created because of
special interests deal-making in the political process which happens
all the time and what other example I want to talk about think about British
colonialism. a lot of the American colonies were actually set up as
charters granted by the crown to private actors. the British East India Company
was a stockholder own private company
that in effect ran India. it was true
enough none of these things especially East india company were libertarian it's
bet you were an Indian they treat you like a slave or serf
but nonetheless the principle was oh okay private governance, ineffective British governement
quasi privatize its colonial expansion. So, the point i'm making
that private governance has existed throughout history it exists
till today in the more limited you know sort of shopping mall residential
development sense of a word so so private governance is nothing new nothing surprising
we're getting to sort of an interesting theoretical question what's the
difference between a private government or private governance and a state
remember what Max Weber said this is get the conventional definition
that most people use a state is something with a monopoly on the
legitimate use of force well Liberland will be set up
hopefully have its territory that will have sovereign control over and
will be a set of private contractual rules of accelerating everything but
those private contractual rules like in all contracts will have penalties for
people who don't live up to their side to contract now I don't think you're
going to be pulling you'll just switch on an electric chair or anything like
that, but nonetheless they're there if you go out whether it's in a in a if you start
a fight in the shopping wall or whether or not you're killing someone in Liberland
someone is going to stop you they're going to use legitimate force to
stop you from infringing upon the rights of other people.
these are interesting theoretical questions and I'm just a practical policy wonk
so I don't pretend to know about these where you draw the lines on these things
and who's making decisions on how the legitimate use of course will be
imposed in a place like Liberland, is its shareholders or is it voters or in a
case like Liberland what's the difference?
are the shareholders the voters in the sense that my persons in most countries are
there are traditionally restrictions on the franchise of suffrage so for
instance in the United States originally it was white male property owners were
the ones who had to vote so why is that more legitimate than having shareholders
make decisions. shareholders are people who are voluntarily buying into the
system that strategy is a lot more legitimate than a system that
arbitrarily excludes some people or even if you have universal suffrage like most
Western countries have now well we go back to that question I was asking
before why do 51 percent of the people get to
rape and pillage the other forty nine percent of the people?
why is that legitimate as opposed to a system where you voluntarily buy in
and you have shareholder ability to have your voice heard through that matter
so I like the idea of having a more shareholder of base
the notion is that people are voluntarily coming into it that's really
what's key so we just get now the practical questions which is okay
whether you have private governance whether you have minimal government you
have interview system however however these types of systems evolve you have a
question how do you do public goods? now public goods for those of you who have
not studied public finance economists and if you have't you're very lucky
bacause it's very boring but public goods are are things that theoretically
provide value get everyone and are let's pause non-excludable the
classic examples are things like national defenses rules of law okay so
so Liberland have sovereign control and all of a sudden you hear these
rumors that these troublemaking Macedonians are going to come up from
the south with an army and so what do you do? okay look you're going to have some
sort of defense system and so say all the shareholders of Liberland decide
ok we're all going to take in money to hire a military force to defend us from
this external aggression. well if it's voluntary
well what if half of this room says ok we're going to take in money for this
private defense system to stop those more warmongering Macedonians from overrunnig
Liberland but the other half of the room desides they're Free Riders
heck you know these guys over here are paying for the National defense if Liberland
then I don't have to and that was called non excludable because if you're paying
for the national defense they're still benefiting from it, and so the theory of
public goods is something that everyone has to pay for, you can have free
riders and that's one of the rationales above and beyond the Max Weber
definition that's one of the rationales for an official government ID state with
taxing powers we have these valuable things protecting ourselves either
protecting ourselves from external aggression national defense or whether
you're protecting yourself from internal aggression robbers murderers rapists
burglars and stuff like that those are the underlying theories that the
minarchists use to say okay well you can't
really have a pure anarcho-capitalist system you have to have some sort of
structure now again there's no reason why that structure has to be official
state government as opposed to private governance but nonetheless we're
talking about public good however you're going to structure it how you provide
those things in a reasonable and sensible way. by the way in the modern world
governments have radically expanded the definition of public goods in ways that
I think are completely unjustifiable there's no reason why education
infrastructure and things like that are public does and you can ...
I mentioned already that we have this system in America where we had
a constitution that very strictly limited the federal government to a few
limited responsibilities well now we have all these departments handling all
sorts of things in the United States and politicians...first of all
politicians don't even know the definitions of these things but if
you had a very smart politician and you press the model....
education is a public good we all benefit from it no that's not true
because it's something that is completely excludable infrastructure is
something that is completely excludable there are lots of private roads are lots
of private airports lots of private sewer systems or lots of private schools
private colleges you name it there's no reason why things like that have to be
in the government's hands so let's zoom out for a second and think about
whether or not is private governance or minimal official state government now
could the government be and what should be doing in the academic literature
there's something called the Rahn curve and what the Rahn curve does is on the
horizontal axis and looks at the burden of government spending or I suppose in
this case governance spending as a share of economic output
and on the vertical axis it has economic performance usually the
economic growth rate but sometimes it's a per capita GDP but some positive
measure of something that we want more we want work growth income
things like that now what the Rahn curve research shows is that well
generally it shows that you want government at least in theory to be
consuming 20% of economic output but if government gets bigger than that
there's a negative relationship so sort of think of it this way
Hong Kong Singapore here the u.s. , switzerland here
France, Greece and Italy are here
there's this negative relationship as government gets bigger economic
performance weakens but you'll notice that I have a dashed line here why do I
have a dashed line because I've read this academic research and think about
if you're an academic and you're assigning your research assistants okay
I want to do this in-depth study of the relationship between the size of
government and economic performance you're going to send your intern
your research assistant out and you're going to say okay collect all this data
well the only really good data you have for statistical work is basically
the end of world war two before that maybe the u.s. or UK, or few
Western countries at semi-decent data but only really comprehensive data that
can be used for academic research it is its own world war two error what do we
know about the post-world War two ERA there aren't there were no minimal governments
basically started in the Western world in the 1930 with great depression which by the way was caused by government
but nonetheless government's used a Great Depression as an excuse to rightly expand their powers
but basically between the great depression of World War two governments
increased in size as you got to the end of World War two and you have
governments at a minimum of about twenty percent of GDP and of course as they
started putting in value-added taxes and additional taxes they figured out ways
especially because of untrammeled authoritarianism they figured out later
to write up the increase or size of scope so now the average burden of
government spending in Europe is about forty five percent of GDP again in some
places like Switzerland more reasonable other places like France are
whatnot are more unreasonable but the point is if you're an academic
researcher and you're looking at this research all you're really doing is
measuring the downward sloping part the Rahn curve just because Hong Kong and
Singapore are here that doesn't mean that's the peak of the curve I want to
show you another slide right here Vigo Dunsey of the European Central Bank
and one of those colleagues they did some research that
attempted to piece together and I'm sure if you a little bit hazy because the
data isn't that good but they piece together for six western nations Sweden UK US Japan Germany and France the size of government spending going back
into history and they estimated that in 1870 the average size of government
spending was about 9% of GDP and even as recently as 1913 the size of government
spending was about 12% of GDP so this modern academic research on the Rahn curve
that says Oh economic performance is maximized for governments consuming
20% of GDP well hold on a second that means that these countries all sure that
at least doubled the burden of government spending packages, that makes sense?
the United States or the United Kingdom or Germany or whatever
with those countries that grown faster if government was much much bigger when
you think about the proper definition of what is a genuine public good again
private governance or state government a genuine public good is something like
natural defensive rule of law you no need to have government consume 20% of
your economy to finance those things those things is theory can be financed
with five percent of GDP now whether that five percent of GDP is achieved
through shareholder subscriptions into a private governance model or whether it
achieve as you saw in these countries with a handful of trade taxes and excise
taxes on things like rum and tobaco, the point is you can finance as a
legitimate proper governing structure again governance or government you can
finance it legitimate proper governance at a very very low aggregate fiscal burden
it could even be if you have a shareholder model of government it can
even be a totally voluntary and non coersive form of financing I want
to show you a table from a study by the Joint Economic Committee on the US congress
that gives you an idea of how sadly we run in the wrong direction of
the United States and looks at the historical data on based on decades
every 10 year period for population GDP growth revenue and spending as a share
f GDP non-interest spending public debt etcetera etc and here's the thing that
should really strength because this is looking at these federal government or
central government in Washington all during the late seventeen hundreds all
the way from differently nineteen hundred's our central government I mean
there was an exception for our Civil War where they got five point six three
percent of GDP but for the most part our central government was entirely financed
with about two percent of GDP and so the notion is that you have to be at 20
percent of GDP to max economic output like the modern academic
research of the Rahn curve oh no that's just simply not true a legitimate proper
well-functioning governing system requires a tiny amount
of money that's it now obviously when we have a central government doing
this much we had state local governments probably doing about twice that much so
historically throughout the 1800s and again it gets very hard to measure these
things when you're looking back on time when there was a comprehensive
collection of statistics of things like that but the consensus seems to be that
we very successfully operated a fast growing economy that was very peaceful
for less than 10% of GDP now think about it this way when you started trying to
envision a voluntary non coersive models of governance. wouldn't most private investor
be more than happy in exchange for a stable low government intelligent system
to in effect pay for the rule of law equivalent to the great minor cost
that you can see that exist in a system so in other words this is a fiscal
theory of Liberland I think it's eminently sensible because
those legitimate functions that enable the system to be governed properly
against doesn't matter what the private governance state government did the
actual cost of legitimate government are very very low and then of course you
when you're thinking about those legitimate costs that are very very low
are you financing them with a membership fee is it some sort of contractual system
like the uber ization of government services ok you want the rule of law
your company you're signing a contract there's a fee to register your contract
because you are in effect bonds a rule of law for any future disputes or
something like that so you uberize services in your economy could it be
voluntary payments I imagine a lot of Europeans facing the kind of fiscatorial
and oppressive taxe would very happily voluntarily pay to be under a Liberland
type system rather than kicking in 75% so Francois Ollande try to find
votes to look more like France, or actually oppose real taxes over you know
okay what do tobacco and alcohol those are filthy bad things that we're
going to tax people but the point is is even if you're doing actual coersive
taxes that are collected under the threat of force if your government is
very very very small for the most part those are levies that people are doing
up they might not like them but they're going to shrug their shoulders it might
violate some anarcho-capitalists theoretical ideal but compared to what
the options are in the rest of the world people going to look at that as there is
that's just fine with me and again the moral of the story if your government
quote-unquote is very very small it's very very simple to finance things like
that and so with that i'll stop and then and be happy then I don't know
whether right what over time or under time but I'm happy to answer questions
and until there's some imperialistic executive authority taking
me off the stage. thank you very much!