Nicholas Eberstadt The Demographic Future
Government and Its Role
The Demographic Future by Nicholas Eberstadt (Foreign Affairs, Nov/Dec 2010)
Submitted For: International Business Environments Professor Andrew R. Thomas
Submitted By: Joe F. Dolder
October 2, 2012
Joe F. Dolder
October 2, 2012
Article Overview3
Utilizing current population statistics, mortality rates, and fertility rates, Nicholas Eberstadt projects the global demographic future for the next 20 years and what this future portends is a series of social and economic problems relating to a contracting work-force and an aging population. The century leading up to the Baby Boom generation saw an explosion in population stemming largely from medical and nutritional improvements. While birthrates …show more content…
during this period remained fairly constant, and even declined in the latter part of the century, life expectancy doubled. This meant an increasingly younger and more innovative work-force that fueled one of the most economically prosperous periods in history. However, by the advent of the Baby Boom generation in the US, widespread use of increasingly more effective forms of birth control and later the increased use and cultural acceptability of feticide fueled a global, sustained fertility rate decline.
What is striking about the global decline in fertility rates is that they are not confined to the developed world. While virtually the entire developed world has fertility rates that are at or below replacement levels, this accounts for less than 20% of the world’s population. The vast majority of countries with sub-replacement fertility rates are in low-income countries such as China. This lack of socioeconomic correlation with fertility rates makes it difficult to predict when a country will enter such a state and how long it will last. This lack of socioeconomic correlation may be due to the developed world’s intervention in low-income and third world nations, both culturally and in the subsidized distribution of birth-control, abortifacients, and abortion services. A shrinking population due to reduced fertility rates invariably means an aging population. These two factors adumbrate a host of problems. An older workforce generally means a less healthy, less educated, and less tech-savvy workforce. Additionally, a dwindling working age population will mean that inefficiencies in …show more content…
the use of human capital will be more keenly felt as human capital growth will no longer act to balance it. Finally, smaller workforce/retiree ratios will put tremendous pressure on successive generations and their governments to keep in place entitlement programs and tend to the needs of the aging.
Government and Its Role
1
International Business Environments
Joe F. Dolder
October 2, 2012
Eberstadt states that the economic profile of the world will depend largely on the economies of the six major economies: China, India, Japan, Russia, Western Europe, and the United States. Each of these countries faces unique demographic challenges. China is particularly affected by demographic changes because it has such a large population, is a lowincome country, and its coercive population-control measures have exacerbated their demographic problems, both in terms of an aging population and skewed male/female ratios. Since 1992, Russia’s deaths have outnumbered its births by 50% and average life expectancy is less now than it was half a century ago. Additionally, the surplus of mortalities that it is experiencing seems concentrated in its working-age population (20-50 year olds). India’s population is set to grow by 1% per year over the next 20 years, but regional disparities mean that its surplus population will be located in the rural, less educated north where it is less likely to fuel economic prosperity for the country. Currently, India lacks the educational infrastructure necessary to take full advantage of this population boon in the north. Japan stands to be one of the most heavily burdened countries by the demographic shift. It has the steepest and longest fertility rate decline in modern history and the longest life-spans of any country. This amounts to a perfect storm for burdening the working age population in the coming years. Western Europe can anticipate population stagnation. Currently the culture appears resistant to both assimilating immigrants and prolonging individual’s working lives: the two most obvious solutions to a stagnating and graying workforce. The US is the demographic exception in the developed world. It possesses a fertility rate that is close to replacement level and will likely continue to see an influx of immigrants. However, there are elements which may yet hamper its growth. Firstly, results of its education system are not consistent. Also, an inability or unwillingness to assimilate new immigrants into the workforce may mean inefficient use of its human capital. Finally, a problem
Government and Its Role
2
International Business Environments
Joe F. Dolder
October 2, 2012
the US shares with both Japan and Western Europe is its public debt obligations. In particular, the entitlements it has promised for its retirees, but has failed to fund for the last half-century. Eberstadt does offer some suggestions for curbing these demographic issues, but offers little in the way of specifics. To wit, he suggests increasing the quality and availability of educational opportunities and tending to the health of individuals to increase the span of their working lives. Finally, he suggests that the indefatigable spirit of human innovation in the realms of knowledge production and technological improvement will be the world’s saving attribute.
Government and Its Role: Recommendations
Eberstadt’s facts are not in dispute and his analysis is preponderantly correct: the coming demographic crisis will herald a series of difficult economic, political, and social problems.
While the particulars of each country’s demographic situation are varied, in all cases the pervading problems can be distilled into two questions: how to make the most efficient use of available human capital and how to manage government entitlements without sinking the public sector into onerous debt. Government is in a unique position to tackle these issues or at least give strong assistance, but in addressing them there are also several pitfalls that it must be wary of. In light of these concerns, five suggestions are submitted: 1. Encourage the aging workforce to keep contributing/working. 2. Gradually move to eliminate defined benefit plans in favor of defined contribution plans for retirement, especially in the public sector. 3. Move away from state capitalism. 4. Work to achieve a commonsense, progressive tax code. 5. Invest in infrastructure, not cronyism. This list is by no means exhaustive nor will all of the nuances of each item be discussed, as both of these would be beyond the scope of this
paper.
Government and Its Role 3 International Business Environments
Joe F. Dolder
October 2, 2012
Keep Working, Keep Contributing Encouraging an aging workforce to continue working and/or contributing has a myriad of benefits. It decreases the support ratio, increases the labor participation rate, and mitigates the effects of “brain drain” (i.e. the loss of knowledge that occurs when an experienced worker retires). Government can encourage this by removing incentives to retire early and providing incentives to keep working. Examples include raising the retirement age and providing additional tax breaks or benefits to those who continue to work into their twilight years. Currently the support ratios for most of the developed world hover between 3.0 and 5.0, but with the impending demographic crisis, those numbers will shrink to between 1.0 and 3.0 by 20502. This means that by 2050, every couple will be supporting a retired individual. This is unsustainable, especially when the after-tax care of children and the elderly many families face are factored in. Indeed, a cogent argument could be made that this is an incentive to limit one’s number of children – the root of this crisis. With the declining number of children, there are two logical places to seek out additional labor within a country’s native population: younger and older. Going younger has obvious drawbacks as it limits educational opportunities for those individuals and there are many jobs that require maturity and experience that simply cannot be had in members of a society under a certain age. On the other hand, convincing older members of a society to continue working has several advantages. They generally will have already achieved the necessary level of education for a given occupation and will have a lifetime of experience to bring to their chosen vocation. Additionally, the longer an individual works, the fewer years he/she will spend in idle retirement: draining their own and potentially the taxpayers’ resources. Finally, if a country is to vest its hopes in the knowledge production that Eberstadt advocates3, part of that must be preserving and passing on the knowledge already obtained. Keeping those members of a society with the most experience in a contributory role, whether that be working, mentoring, or publishing papers/books to pass on their knowledge, is invaluable for harnessing innovation.
Government and Its Role 4 International Business Environments
Joe F. Dolder
October 2, 2012
Defined Benefit versus Defined Contribution In the United States GAAP standards regarding defined benefit pensions were changed in the 1980’s and companies began to open their eyes to the unsustainability of such plans. As a consequence, the private sector abandoned such plans in droves and now only 7% offer such plans2. However, government has failed to follow suit and it has put an unnecessary and cumbersome burden on the taxpayer, particularly the younger generations. Because government made promises to Baby Boomers that were quixotic - in hindsight certainly, but even then simple demographic analysis and realistic future valuations would have revealed the absurdity of its projections - and because a tech boom in the 1990’s and some accounting voodoo (e.g. using bogus discount rates) concealed the issue, Baby Boomers failed to take responsibility for their own retirements2. As a result, an entire generation is in its twilight years with little to no savings and a sense of entitlement for those same unrealistic promises. Generations X and Y can either bear the burden of their retirement and their parents’ or postpone in the hopes that the Millennials will be willing to fund their retirement. Government is in a position to stop handing out empty defined benefit pensions both in terms of its employees and programs like social security. It is clear that government cannot be trusted to manage these benefits and moving to defined contribution plans has several advantages. By forcing individuals to take responsibility for their own retirement, the government would be growing personal freedom, encouraging the population to educate themselves in matters of personal finance and economics, encouraging them to reinvest their money back into the economy (as opposed to only fueling it through ever-increasing consumption), and (hopefully) beginning to change the culture of entitlement that was so prevalent in the Baby Boom generation (referred to more apropos in this context as Generation Jones). Government will need to provide strong incentives or even punitive measures to ensure that its citizens save enough. Additionally, those in the lowest income brackets, the disabled, and the unemployed may still need to be subsidized. But as Schumpeter so aptly stated, “The real tragedy is not unemployment itself, but unemployment
Government and Its Role 5 International Business Environments
Joe F. Dolder
October 2, 2012
accompanying the impossibility of sufficiently providing for the unemployed without impairing the conditions of further economic development5.” Schumpeter spoke only of the unemployed, but his analysis is equally valid for other classes in need of support. Also, some rules and regulations will need to be implemented so that reckless investment decisions by individuals are mitigated. But ultimately, a stronger, better educated population will be wrought and a fiscally healthier government will result.
Move Away from State Capitalism While state capitalism is arguably an efficient method for playing catch-up, witness China and Russia, it is not the best method for ensuring continued dominance or pushing for continuous innovation6. This is because when a country is attempting to mimic the success of another, the strategy is clear and the innovations already readily available to be copied. A strong central authority can eliminate inefficiencies, focus capital, and take advantage of economies of scale more readily than an agglomeration of competitors can. However, a strong central authority has only itself to rely upon for innovation, because it must choose who it will support. Even in instances where the government backs national champions instead of owning the companies outright, it may still be stifling potentially more innovative upstarts. An agglomeration of competitors are not necessarily moving toward the same goal the way a centralized authority can, but they are harnessing their human capital in an effort to outdo one another, and that provides the greatest potential for innovation. One need only examine how little has changed in the US education system in the last 100 years to see how prolonged government involvement is stifling to innovation. An important caveat must be mentioned in advocating against state capitalism. In a government’s haste to not interfere with the market, the importance of national defense, compelling state interests, and commonsense regulation should not be overlooked. There are instances where government “interference” can be justified, such as the Jones Act to facilitate a strong Navy/Merchant Marine or requiring auto insurance to protect its human
Government and Its Role
6
International Business Environments
Joe F. Dolder
October 2, 2012
capital. However, regulatory zeal may also transmute into protectionism, social engineering, or cronyism and it is therefore important that a balance be struck.
Progressive, Commonsense Taxation While superficially the US appears to have one of the most progressive tax codes in the world, an examination of the nuances and complexities of the tax code reveal that this is far from the truth1. Unfortunately, there is little incentive to change this. The wealthy, as all of us, prefer to pay as little tax as possible and eliminating the complexity of the tax code precludes the possibility of using tax law punitively by the political class. However, simplification would ultimately make government leaner and therefore less burdensome on the taxpayer. Additionally, when the intent behind certain deductions is examined, it becomes clear that commonsense changes can be made without affecting intent or appreciably damaging the country’s economic prospects. For example, the intent of the mortgage interest deduction is to encourage home ownership and make it more affordable, but it would be difficult to argue that the affluent need this incentive to purchase a home. There has been little correlation between higher tax rates and slowdowns in the economy1, though one could always argue that growth may have been stronger had the tax rates been lower. However, creating a more progressive tax system would help heal class division, would generate more tax revenue (though this increase would be more conciliatory than substantive), and mollify class-warfare political rhetoric. An increased partitioning of incomes for this purpose (which by itself would blur the lines between class divisions) is assuredly necessary to differentiate between the super-rich and the simply well-off, but with the reduction of loopholes and deductions, tax assessment could still be a simple and straightforward computation. The caveat is that a progressive tax system should not be used for the purpose of income redistribution. This would discourage innovation and entrepreneurial risk-taking. Additionally, it has a high probability of instilling laziness and/or a sense of entitlement into the culture. Instead, policies should be engineered to provide a safety
Government and Its Role
7
International Business Environments
Joe F. Dolder
October 2, 2012
net for those who fall on hard times and to provide opportunity for those who come from more humble beginnings, i.e. the objective should be readily achievable class mobility, not class equality.
Infrastructure Sans Cronyism When the Eisenhower administration built the national highway system in the US, it not only had a compelling state interest to do so (recall that the highway system was built to facilitate military transport in the event the US was invaded), it also built it for use by all market participants. This is the difference between legitimate government infrastructure spending and state capitalism and a compelling initial litmus test for any government spending. Too often governments spend in an attempt to social engineer or for the benefit of one market segment or company. This is crony capitalism and the results are comparative to state capitalism or worse. Either the political class is picking the winners or companies are competing in bribery and the legal arena rather than growing and developing their constituent businesses. Either scenario diverts resources and stifles innovation. Government spending as a percent of GDP has been steadily rising over the last 150 years in virtually every developed country4. The role of government should be focused primarily on preserving individual rights, providing for the common defense, and providing infrastructure that fuels innovation and grows the economy. Ideally, any spending should meet at least two of these goals, as in the Eisenhower example above, and spending that meets none of these criteria is, as a rule, wasteful. Safeguards should be implemented that ensure that these are the areas focused on by legislative bodies, if only until the public debts that threaten to overtake them are brought back under control. Convincing politicians to pass legislation to restrain themselves promises to be an arduous task, but in a democracy with a populous that takes a sufficiently long-view, it is achievable.
Government and Its Role
8
International Business Environments
Joe F. Dolder
October 2, 2012
References
1. Campbell, Andrea Louis. “America the Undertaxed.” Foreign Affairs; September/October 2012. 2. Coggan, Philip. “Pensions: Falling Short.” The Economist; April 9, 2011. 3. Eberstadt, Nicholas. “The Demographic Future.” Foreign Affairs; November/December 2010. 4. Micklethwait, John. “The Future of the State: Taming Leviathan.” The Economist; March 19, 2011. 5. Schumpeter, Joseph. Capitalism, Socialism, and Democracy, Third Edition. Harper Perennial Modern Thought 2008. 6. Woolridge, Adrian. “State Capitalism: The Visible Hand.” The Economist; January 21, 2012.
Government and Its Role
9
International Business Environments
The Demographic Future by Nicholas Eberstadt (Foreign Affairs, Nov/Dec 2010)
Submitted For: International Business Environments Professor Andrew R. Thomas
Submitted By: Joe F. Dolder
October 2, 2012
Joe F. Dolder
October 2, 2012
Article Overview3
Utilizing current population statistics, mortality rates, and fertility rates, Nicholas Eberstadt projects the global demographic future for the next 20 years and what this future portends is a series of social and economic problems relating to a contracting work-force and an aging population. The century leading up to the Baby Boom generation saw an explosion in population stemming largely from medical and nutritional improvements. While birthrates …show more content…
during this period remained fairly constant, and even declined in the latter part of the century, life expectancy doubled. This meant an increasingly younger and more innovative work-force that fueled one of the most economically prosperous periods in history. However, by the advent of the Baby Boom generation in the US, widespread use of increasingly more effective forms of birth control and later the increased use and cultural acceptability of feticide fueled a global, sustained fertility rate decline.
What is striking about the global decline in fertility rates is that they are not confined to the developed world. While virtually the entire developed world has fertility rates that are at or below replacement levels, this accounts for less than 20% of the world’s population. The vast majority of countries with sub-replacement fertility rates are in low-income countries such as China. This lack of socioeconomic correlation with fertility rates makes it difficult to predict when a country will enter such a state and how long it will last. This lack of socioeconomic correlation may be due to the developed world’s intervention in low-income and third world nations, both culturally and in the subsidized distribution of birth-control, abortifacients, and abortion services. A shrinking population due to reduced fertility rates invariably means an aging population. These two factors adumbrate a host of problems. An older workforce generally means a less healthy, less educated, and less tech-savvy workforce. Additionally, a dwindling working age population will mean that inefficiencies in …show more content…
the use of human capital will be more keenly felt as human capital growth will no longer act to balance it. Finally, smaller workforce/retiree ratios will put tremendous pressure on successive generations and their governments to keep in place entitlement programs and tend to the needs of the aging.
Government and Its Role
1
International Business Environments
Joe F. Dolder
October 2, 2012
Eberstadt states that the economic profile of the world will depend largely on the economies of the six major economies: China, India, Japan, Russia, Western Europe, and the United States. Each of these countries faces unique demographic challenges. China is particularly affected by demographic changes because it has such a large population, is a lowincome country, and its coercive population-control measures have exacerbated their demographic problems, both in terms of an aging population and skewed male/female ratios. Since 1992, Russia’s deaths have outnumbered its births by 50% and average life expectancy is less now than it was half a century ago. Additionally, the surplus of mortalities that it is experiencing seems concentrated in its working-age population (20-50 year olds). India’s population is set to grow by 1% per year over the next 20 years, but regional disparities mean that its surplus population will be located in the rural, less educated north where it is less likely to fuel economic prosperity for the country. Currently, India lacks the educational infrastructure necessary to take full advantage of this population boon in the north. Japan stands to be one of the most heavily burdened countries by the demographic shift. It has the steepest and longest fertility rate decline in modern history and the longest life-spans of any country. This amounts to a perfect storm for burdening the working age population in the coming years. Western Europe can anticipate population stagnation. Currently the culture appears resistant to both assimilating immigrants and prolonging individual’s working lives: the two most obvious solutions to a stagnating and graying workforce. The US is the demographic exception in the developed world. It possesses a fertility rate that is close to replacement level and will likely continue to see an influx of immigrants. However, there are elements which may yet hamper its growth. Firstly, results of its education system are not consistent. Also, an inability or unwillingness to assimilate new immigrants into the workforce may mean inefficient use of its human capital. Finally, a problem
Government and Its Role
2
International Business Environments
Joe F. Dolder
October 2, 2012
the US shares with both Japan and Western Europe is its public debt obligations. In particular, the entitlements it has promised for its retirees, but has failed to fund for the last half-century. Eberstadt does offer some suggestions for curbing these demographic issues, but offers little in the way of specifics. To wit, he suggests increasing the quality and availability of educational opportunities and tending to the health of individuals to increase the span of their working lives. Finally, he suggests that the indefatigable spirit of human innovation in the realms of knowledge production and technological improvement will be the world’s saving attribute.
Government and Its Role: Recommendations
Eberstadt’s facts are not in dispute and his analysis is preponderantly correct: the coming demographic crisis will herald a series of difficult economic, political, and social problems.
While the particulars of each country’s demographic situation are varied, in all cases the pervading problems can be distilled into two questions: how to make the most efficient use of available human capital and how to manage government entitlements without sinking the public sector into onerous debt. Government is in a unique position to tackle these issues or at least give strong assistance, but in addressing them there are also several pitfalls that it must be wary of. In light of these concerns, five suggestions are submitted: 1. Encourage the aging workforce to keep contributing/working. 2. Gradually move to eliminate defined benefit plans in favor of defined contribution plans for retirement, especially in the public sector. 3. Move away from state capitalism. 4. Work to achieve a commonsense, progressive tax code. 5. Invest in infrastructure, not cronyism. This list is by no means exhaustive nor will all of the nuances of each item be discussed, as both of these would be beyond the scope of this
paper.
Government and Its Role 3 International Business Environments
Joe F. Dolder
October 2, 2012
Keep Working, Keep Contributing Encouraging an aging workforce to continue working and/or contributing has a myriad of benefits. It decreases the support ratio, increases the labor participation rate, and mitigates the effects of “brain drain” (i.e. the loss of knowledge that occurs when an experienced worker retires). Government can encourage this by removing incentives to retire early and providing incentives to keep working. Examples include raising the retirement age and providing additional tax breaks or benefits to those who continue to work into their twilight years. Currently the support ratios for most of the developed world hover between 3.0 and 5.0, but with the impending demographic crisis, those numbers will shrink to between 1.0 and 3.0 by 20502. This means that by 2050, every couple will be supporting a retired individual. This is unsustainable, especially when the after-tax care of children and the elderly many families face are factored in. Indeed, a cogent argument could be made that this is an incentive to limit one’s number of children – the root of this crisis. With the declining number of children, there are two logical places to seek out additional labor within a country’s native population: younger and older. Going younger has obvious drawbacks as it limits educational opportunities for those individuals and there are many jobs that require maturity and experience that simply cannot be had in members of a society under a certain age. On the other hand, convincing older members of a society to continue working has several advantages. They generally will have already achieved the necessary level of education for a given occupation and will have a lifetime of experience to bring to their chosen vocation. Additionally, the longer an individual works, the fewer years he/she will spend in idle retirement: draining their own and potentially the taxpayers’ resources. Finally, if a country is to vest its hopes in the knowledge production that Eberstadt advocates3, part of that must be preserving and passing on the knowledge already obtained. Keeping those members of a society with the most experience in a contributory role, whether that be working, mentoring, or publishing papers/books to pass on their knowledge, is invaluable for harnessing innovation.
Government and Its Role 4 International Business Environments
Joe F. Dolder
October 2, 2012
Defined Benefit versus Defined Contribution In the United States GAAP standards regarding defined benefit pensions were changed in the 1980’s and companies began to open their eyes to the unsustainability of such plans. As a consequence, the private sector abandoned such plans in droves and now only 7% offer such plans2. However, government has failed to follow suit and it has put an unnecessary and cumbersome burden on the taxpayer, particularly the younger generations. Because government made promises to Baby Boomers that were quixotic - in hindsight certainly, but even then simple demographic analysis and realistic future valuations would have revealed the absurdity of its projections - and because a tech boom in the 1990’s and some accounting voodoo (e.g. using bogus discount rates) concealed the issue, Baby Boomers failed to take responsibility for their own retirements2. As a result, an entire generation is in its twilight years with little to no savings and a sense of entitlement for those same unrealistic promises. Generations X and Y can either bear the burden of their retirement and their parents’ or postpone in the hopes that the Millennials will be willing to fund their retirement. Government is in a position to stop handing out empty defined benefit pensions both in terms of its employees and programs like social security. It is clear that government cannot be trusted to manage these benefits and moving to defined contribution plans has several advantages. By forcing individuals to take responsibility for their own retirement, the government would be growing personal freedom, encouraging the population to educate themselves in matters of personal finance and economics, encouraging them to reinvest their money back into the economy (as opposed to only fueling it through ever-increasing consumption), and (hopefully) beginning to change the culture of entitlement that was so prevalent in the Baby Boom generation (referred to more apropos in this context as Generation Jones). Government will need to provide strong incentives or even punitive measures to ensure that its citizens save enough. Additionally, those in the lowest income brackets, the disabled, and the unemployed may still need to be subsidized. But as Schumpeter so aptly stated, “The real tragedy is not unemployment itself, but unemployment
Government and Its Role 5 International Business Environments
Joe F. Dolder
October 2, 2012
accompanying the impossibility of sufficiently providing for the unemployed without impairing the conditions of further economic development5.” Schumpeter spoke only of the unemployed, but his analysis is equally valid for other classes in need of support. Also, some rules and regulations will need to be implemented so that reckless investment decisions by individuals are mitigated. But ultimately, a stronger, better educated population will be wrought and a fiscally healthier government will result.
Move Away from State Capitalism While state capitalism is arguably an efficient method for playing catch-up, witness China and Russia, it is not the best method for ensuring continued dominance or pushing for continuous innovation6. This is because when a country is attempting to mimic the success of another, the strategy is clear and the innovations already readily available to be copied. A strong central authority can eliminate inefficiencies, focus capital, and take advantage of economies of scale more readily than an agglomeration of competitors can. However, a strong central authority has only itself to rely upon for innovation, because it must choose who it will support. Even in instances where the government backs national champions instead of owning the companies outright, it may still be stifling potentially more innovative upstarts. An agglomeration of competitors are not necessarily moving toward the same goal the way a centralized authority can, but they are harnessing their human capital in an effort to outdo one another, and that provides the greatest potential for innovation. One need only examine how little has changed in the US education system in the last 100 years to see how prolonged government involvement is stifling to innovation. An important caveat must be mentioned in advocating against state capitalism. In a government’s haste to not interfere with the market, the importance of national defense, compelling state interests, and commonsense regulation should not be overlooked. There are instances where government “interference” can be justified, such as the Jones Act to facilitate a strong Navy/Merchant Marine or requiring auto insurance to protect its human
Government and Its Role
6
International Business Environments
Joe F. Dolder
October 2, 2012
capital. However, regulatory zeal may also transmute into protectionism, social engineering, or cronyism and it is therefore important that a balance be struck.
Progressive, Commonsense Taxation While superficially the US appears to have one of the most progressive tax codes in the world, an examination of the nuances and complexities of the tax code reveal that this is far from the truth1. Unfortunately, there is little incentive to change this. The wealthy, as all of us, prefer to pay as little tax as possible and eliminating the complexity of the tax code precludes the possibility of using tax law punitively by the political class. However, simplification would ultimately make government leaner and therefore less burdensome on the taxpayer. Additionally, when the intent behind certain deductions is examined, it becomes clear that commonsense changes can be made without affecting intent or appreciably damaging the country’s economic prospects. For example, the intent of the mortgage interest deduction is to encourage home ownership and make it more affordable, but it would be difficult to argue that the affluent need this incentive to purchase a home. There has been little correlation between higher tax rates and slowdowns in the economy1, though one could always argue that growth may have been stronger had the tax rates been lower. However, creating a more progressive tax system would help heal class division, would generate more tax revenue (though this increase would be more conciliatory than substantive), and mollify class-warfare political rhetoric. An increased partitioning of incomes for this purpose (which by itself would blur the lines between class divisions) is assuredly necessary to differentiate between the super-rich and the simply well-off, but with the reduction of loopholes and deductions, tax assessment could still be a simple and straightforward computation. The caveat is that a progressive tax system should not be used for the purpose of income redistribution. This would discourage innovation and entrepreneurial risk-taking. Additionally, it has a high probability of instilling laziness and/or a sense of entitlement into the culture. Instead, policies should be engineered to provide a safety
Government and Its Role
7
International Business Environments
Joe F. Dolder
October 2, 2012
net for those who fall on hard times and to provide opportunity for those who come from more humble beginnings, i.e. the objective should be readily achievable class mobility, not class equality.
Infrastructure Sans Cronyism When the Eisenhower administration built the national highway system in the US, it not only had a compelling state interest to do so (recall that the highway system was built to facilitate military transport in the event the US was invaded), it also built it for use by all market participants. This is the difference between legitimate government infrastructure spending and state capitalism and a compelling initial litmus test for any government spending. Too often governments spend in an attempt to social engineer or for the benefit of one market segment or company. This is crony capitalism and the results are comparative to state capitalism or worse. Either the political class is picking the winners or companies are competing in bribery and the legal arena rather than growing and developing their constituent businesses. Either scenario diverts resources and stifles innovation. Government spending as a percent of GDP has been steadily rising over the last 150 years in virtually every developed country4. The role of government should be focused primarily on preserving individual rights, providing for the common defense, and providing infrastructure that fuels innovation and grows the economy. Ideally, any spending should meet at least two of these goals, as in the Eisenhower example above, and spending that meets none of these criteria is, as a rule, wasteful. Safeguards should be implemented that ensure that these are the areas focused on by legislative bodies, if only until the public debts that threaten to overtake them are brought back under control. Convincing politicians to pass legislation to restrain themselves promises to be an arduous task, but in a democracy with a populous that takes a sufficiently long-view, it is achievable.
Government and Its Role
8
International Business Environments
Joe F. Dolder
October 2, 2012
References
1. Campbell, Andrea Louis. “America the Undertaxed.” Foreign Affairs; September/October 2012. 2. Coggan, Philip. “Pensions: Falling Short.” The Economist; April 9, 2011. 3. Eberstadt, Nicholas. “The Demographic Future.” Foreign Affairs; November/December 2010. 4. Micklethwait, John. “The Future of the State: Taming Leviathan.” The Economist; March 19, 2011. 5. Schumpeter, Joseph. Capitalism, Socialism, and Democracy, Third Edition. Harper Perennial Modern Thought 2008. 6. Woolridge, Adrian. “State Capitalism: The Visible Hand.” The Economist; January 21, 2012.
Government and Its Role
9
International Business Environments