Is competition healthy for governments?

I enjoy reading economist Greg Mankiw because he often makes conservative political views understandable for me — even if rarely agreeable. He misses the mark completely in a recent NYTimes opinion on competition between governments. I am especially astounded how the counter-arguments are right there in his own article, but he fails to notice them. Let me start with his main statement:

For much the same reason [as Paul Krugman making Mankiw write a better textbook], competition among governments leads to better governance. In choosing where to live, people can compare public services and taxes. They are attracted to towns that use tax dollars wisely. Competition keeps town managers alert. It prevents governments from exerting substantial monopoly power over residents. If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.

The absurdity jumps immediately to my mind — why vote with my feet if I can vote with my vote?! Why settle for the hassle of having to move to another town, state or even country just to get what I want from a democratic system?! Maybe if I perceive that old-fashioned „one person one vote“ thing as disadvantageous?

The argument applies not only to people but also to capital. Because capital is more mobile than labor, competition among governments significantly constrains how capital is taxed. Corporations benefit from various government services, including infrastructure, the protection of property rights and the enforcement of contracts. But if taxes vastly exceed these benefits, businesses can — and often do — move to places offering a better mix of taxes and services.

This is seriously what Mankiw writes himself. And goes on to explain how the international race to the bottom forces countries to lower corporate tax. I wonder if he truly thinks that this is what people want. My impression is that the majority of voters feel blackmailed by corporations threatening to relocate.

To be fair, despite the FAIL in his main argument, he has a point and a half in two of his sidelines. The first is the issue of federalism. He’s right that if actual people (as opposed to corporations) are to have any realistic chance to vote with their feet, the whole country is too big a unit for policies. But I think that experimenting with different policies and then learning from each other is the much bigger reason why federalism can advance progress.

I give him a full point for his argument that redistribution policies need more centralized government:

Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.

Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

Sounds like we should have some sort of global corporate tax after all?

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Datum: Mittwoch, 18. April 2012 20:31
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