Concluding Thoughts

Growing government role and growing complexity over the years led to growth of crony capitalism, abuses and inequality. This in turn has been leading to growth of populism. Need for simplicity in policies?

The Elusive Harmony between Government and Market Roles

At any moment in time there ought to be some harmony between the intervention of the state that the market requires (to correct its market failures), and that citizens demand (to promote equity and a desirable income distribution) and the actual government intervention. This chapter argues that such harmony may have existed in the years when laissez faire was in place and was broadly accepted by those who had political power. The harmony became less and less evident in the later decades of the nineteenth century and during the Great Depression. There seemed to have been greater harmony in the 1960s. That harmony went down in the late 1970s and in the 1980s. It might have been partly restored in the 1990s, with a different conception of the role of the state, with less state and more market, at least in some countries. The harmony broke down again with the Great Recession in 2008–10, There is now, once again, a search for a new paradigm that would indicate the existence of a new harmony.

Complexity, Corruption, and Tax Evasion

This chapter explores the various links that exist between growing complexity, corruption, and tax evasion. Over the past three decades corruption and tax evasion seem to have increased in many countries. The growing complexity of tax systems that now require thousands of pages of laws and regulations has clearly been a determining factor. Tax laws have become increasingly difficult to interpret and to comply with. This has created an important asymmetry between clever and rich individuals who have the means to hire tax experts to prepare their tax returns and the rest. This asymmetry has also convinced many taxpayers, especially in Anglo-Saxon countries, that their taxes are higher than they actually are. The complexity and its impact on the taxpayers is likely to have been a contributing factors to the growing income inequality that has characterized recent years.

Why the Normative and Positive Roles of Governments Differ

Policies can aim at results that are good for the whole population or policies can be directed at special groups. General policies may help overall but hurt some subsectors, for example free trade that is now under attack because it has hurt some sectors even though it has promoted a higher growth. Economic theory has increasingly moved from policies that help overall to policies that help or hurt particular groups (the elite, the rich, industrial workers). Policies are frequently promoted by the groups that have the greatest political power, often accompaniedby economic power. Policies have become progressively more complex and less easy to understand for average citizens. Smaller groups, especially those with greater economic power find it easier to organize and to push their agenda and policy responds to such pressure. Various kinds of what could be called “termites” have entered the policymaking process. They include the length and the complexity of many laws, making them less transparent to normal citizens and easier to manipulate.

Introduction

This more theoretical chapter focuses on the normative role of the government, in democratic countries with a market economy, and how that role has been tied to the prevalent view of the assumed relationship between individual citizens and their government. That view has been different in different countries. The chapter stresses the difference between choices made in and by the free market and those made through the political market. In the former, income distribution and individual liberty are important. In the political market, with one person one vote, the income of the voters should be less important. However, it often is important. Some societies place a lot of importance on individual liberty. Others give more weight to community goals. These attitudes influence government policies.

Systemic Failure, Complexity, and Public Policies

This chapter addresses the issue of systemic failure and the role that complexity often plays. While the quality of life has risen in the modern world, many daily operations are not as simple as they used to be. The chapter describes several examples of failures (a) in the technological world; (b) in the financial world; and (c) in the economic world. To say that a market economy is self regulating has been proven to be an illusion. The growth of complexity has affected market economies in various ways. Governments’ pursuit of multiple objectives has been one of the major contributors to the complexity: tax systems have become increasingly opaque, open to different interpretation and abuses, as have several public programs. The results of fiscal policy and monetary policy have become more difficult to determine. Complexity has influenced the income distribution by creating asymmetric opportunities for manipulating systems.

From the Keynesian to the Supply-Side Revolution

This chapter considers the impact of the Great Depression, Keynes’ countercyclical policies, and the Keynesian Revolution. It also looks at the growth of welfare states and of taxes, increasing levels of marginal tax rates and the increasing power of labor unions. This chapter deals with the beginnings of a conservative counter-revolution. New theories, such as growing influence of. the Ricardian Equivalence Hypothesis, Rational Expectations theory, and the Laffer Curve were having a growing influence. Several countries experienced stagflation in the late 1970s. The 1970s included the rise of conservative politicians the arrival of the supply-side revolution and an attempted return to some laissez faire policies. This in turn led to attacks on regulations and on high marginal tax rates. Finally, the chapter heralds the growth of globalization.

The Design of Social Policy and Welfare Systems

Most advanced countries over the past eight decades have created various social programs which have become fully-fledged welfare systems. Many countries developed means-tested programs aimed at assisting specific “deserving” individuals and families. Some accompanied these programs with “tax expenditures” designed to reduce the cost of buying particular “meritorious” goods and services. Other countries focused more on providing universal programs aimed at and available to everyone and also tried to avoid the use of tax expenditures, utilizing more broad-based taxes that could finance their higher public spending. The former group (mostly Anglo-Saxon countries) ended up with lower spending and tax levels but with more complicated systems. The other group (Scandinavian and some other European countries) ended up with higher spending and tax levels but with simpler systems. For these latter countries, high taxes and spending programs do not seem to have been the “road to serfdom” or to have led to the economic stagnation predicted.

The Political Economy of Fiscal Deficit Reductions

Do policymakers learn from the past mistakes of previous governments or from mistakes made by other countries? Probably not. They mostly learn from their own mistakes. Governments often end up with fiscal deficits and a public debt that are too large. They regularly make pronouncements that they find difficult to satisfy, thus losing credibility. The loss of that credibility makes it difficult for them to introduce the necessary policies. The chapter provides some real life examples. Governments’ control over policymaking is often limited, as is their control over policy instruments. This is an area where principal–agent problems frequently exist.

Hayek, Keynes, and the Economic Role of the State

The chapter considers how two economic giants of the twentieth century saw the economic role of the market, comparing Hayek’s trust in the market with Keynes’ growing doubts about its role. There are areas where they strongly disagreed but also many areas of convergence. The greatest divergence in their positions was in the role of government in stabilizing policies. It can be said that these two economists actually had less extreme views that many assume they did. Keynes’ views were less socialist than many assume while Hayek’s views were less conservative. Hayek theorized a government role in regulations vis-à-vis the environment and vis-à-vis guaranteeing a low income for the poor; Keynes was against high taxes and was relatively indifferent to welfare policies.