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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!

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Posted by: on May 15, 2017

Liberland Fiscal Governance by Dan Mitchell

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