Friday, August 23, 2013

Why Government Needs to be Rationed - Government Over Spending

In business, a company’s actions are constantly rationalised to the dynamics of the market in the pursuit of profit. The expansion of administrative costs in a company sees an almost immediate effect on profit and ownership seeks to rectify the situation. The time span of realization of error is crisp, the line of accountability clear this generates a circumstance where the organisation responds quickly and effectively to frivolous and extraneous costs - the larger the organisation the more muted this response becomes.

The nature of our political system generates a circumstance where the three contributing factors in favour of private enterprise, work against government. In a company when an error in spending is made, the reporting structure sends information immediately to a concentrated entity - management and ownership, which responds. In government when an error in spending occurs, the time it takes for the people affected (the taxpayer) to realize it, events have extended beyond effective response. Worse, there is every incentive for the people who made the decision to conceal the event, as the individuals executing the error are financially unharmed by the event and can only be negatively affected by the public knowing. Further exacerbating the situation is that the reporting structure of government is arcane which mutes resolution of the event in the context of accounting. It is in this atmosphere that poor practices and waste continue in government, increasing the cost of services and exacting a greater and greater toll on the taxpayer. This phenomenon is attributable to the size of an organisation and in equal measure to the nature of government having an inherent challenge in this regard.

All matters of human exchange involve a transaction. Contemplate your daily life and count the number of transactions you make through the course of your day. If for every $10 purchase a $10 bank charge was levied on the transaction, you would have half as much money to pursue life. This is the exact circumstance most of us living in Canada, where for every $1 we make the government takes $1. As government burgeons there is an exponential increase in cost to the taxpayer. As government grows, so too does its involvement in all exchange. Transaction costs that emanate from government mandated requirements to utilise other services, the $1000 conveyance fee to transfer a house, the airport fee, the list is frighteningly immense. These represent transaction costs that serve as a drag on the actions of the population – retarding citizen’s ability to provide for themselves and retarding the ability for people to utilise resources for enterprise, leaving the government with a smaller, heavier taxed tax base. This is the vicious downward spiral that causes government to cave in on itself.

As government grows and extends greater control over human exchange policy requiring licensing comes in to play. A driver’s licence is a document that indicates competency around the operation of a motor vehicle, and is relatively benign as its access is determined by the ability to pay and competency alone. There are other cases however, where government licensing has other motivation and unintended consequences. In the case of licensing of frequency for broadcasting, licensing was originally required for the management of frequency – to avoid one broadcaster interfering with another. As time progressed licensing progressed under other motivations. Naturally an incumbent broadcaster wants less, rather than more competition and would lobby government to preclude new entrants. Government itself openly admits in it’s literature that it uses licensing to restrict supply of broadcasting services. When government takes actions which distort the natural ebb and flow of business, the consequences are almost always negative. In the case of broadcasting, lower numbers of people restricted the supply of advertising raising the cost of businesses to promote themselves – ultimately increasing the cost of goods and services as the media spectrum of offering was limited. People have been forced to consume media content of inferior quality and interest. While it is appropriate for government to seek to offer strategic direction- meddling with distorting micro policy is most inhibiting. The government in this case should seek harmonious utilisation of the airways and allow the market to work.                   

Tax policy in Canada is very complex so there is extreme cost to the citizenry, firstly in negotiating the maze of tax policy to minimise payment and secondly in the actual paying of the tax. Complex taxation policy, in and of itself, increases transaction costs, and worse, is the waste of human capital taken in administering taxes. The complexity of the system takes some of our best minds away from productive contribution to society to attend to the analysis of complex policy to determine the most beneficial “interpretation” of tax legislation, while some more of our other best minds at Revenue Canada are taken away from productive pursuits to devise ways to respond to the interpretations of the first group. All this intellectual capacity is wasted; it is hard to imagine a more destructive way for government to conduct itself. By simplifying the tax system, this waste is reduced, government requirement for enforcement is reduced and a retraction in government operating costs effects a positive situation by reducing tax requirements – a positive cycle is initiated. Opportunities abound to reduce the complexity of government and hence the cost of government. This is just the tax system; contemplate the legal system and any of the other multitude of government services. Government is too important to allow actions that serve to damage its own long term standing.

Canada is a resource rich country, unimaginable wealth is ours to use to build the most advantaged society on earth. An occurrence of grave concern is the liquidation of assets to fund government operations. This is the equivalent of a farmer selling his/her land to buy fertilizer, soon the farmer will run out of land to fertilize. The federal and provincial governments are presiding over the liquidation of non renewable resources as fast as the market will purchase them. This is fine as long as the revenues this generates go to the establishment of other capital assets, but it is presently going to fund the operations of government. Sell a million barrels of oil, build a hospital – ok, sell a million barrels of oil and pick up the garbage – not ok. Inherent in this reality are massive structural deficits. Take government revenues from taxation ONLY and if operating expenses exceed that, you've got a structural deficit – presently most governments in Canada see royalties from the sale of raw resources as a legitimate source of funds for funding operations. The funds from royalties should be going toward long term infrastructure and the development and enhancement of human capital.

There needs to be an apolitical rationing mechanism that limits the growth of government, so that government and economy are optimally matched. The challenge we face now is that governments are strongly incentivised to spend more, more as a percentage of GDP, in the quest for public approval. We elect government on how best to administer public resources and choices related to this task need to reside with elected officials. There are objective means to assess the optimal size of government, within reasonable variance. Size of government is determined by the size of the budget at any given point in time. In the same way that the central bank has a narrow set of parameters to set interbank rates at arm’s length from government, so to could a “Budgetary Review” official have a narrow set of parameters and function at arm’s length from government to set the size of the budget.

As stated before, there is a point where government is an organ supported by the people as an entity unto itself – rather than being the facilitator of human exchange, it becomes the focus of national endeavour. It is then like the proverbial snake eating its tail – a circumstance that is clearly unsustainable. Canada has a productivity deficit; perhaps we need look no further than the overall transaction cost that is government to find the key contributing factor.