Monday, March 25, 2013

The Cyprus Story ... A Tale of Why Small Government Can Work for Free People but Big Government Doesn't

The problem with any system of big government is both ideological and practical. The Cyprus story teaches us that. {NOTE: See Cyprus Gets New Bailout Deal for the broader story behind the latest bailout.}

Ideologically the problem is that the bigger the role of the government plays in our lives, the fewer the God given individual freedoms we retain to ourselves. On the other hand, as a society we need a strong government for such vital necessities as national security, of course, as well as the few things that can be better done collectively than individually, such as environmental protection.

But when it comes to most other things, we're better left to our own devices and there are very practical reasons for why that's true. A political system that's too big and intrusive simply doesn't function well and more importantly, isn't able to act on behalf of all of We the People.

Accordingly, the Founding Fathers gave us a system of limited government. And for very good reason, too. They correctly decided that a nation with three million citizens and thirteen individual states would best be centered locally with a small central government. And of course, the three hundred million plus citizens and fifty states that make up the U.S. today were impossible to even imagine at the time of our nation's beginning.

Over the course of 300 plus years, the times do change, but the fundamentals of good governance don't. Big government isn't practical, because government invariably becomes centered on politics and not governance.

Let's turn to Europe and Cyprus for why this is so.

Sympathy for the Devil Named Angela is revealing in many instructive ways:

"Good policy is not good policy if it can't be put into effect democratically.

To get a Cyprus bailout past German voters, European politicians included a tax on Cypriot bank deposits, a big chunk of which are held by Russians. They didn't reckon on the Cypriot parliament, in response to public outrage, refusing to approve the deal. What was supposed to be a rescue of tiny Cyprus and its two big troubled banks has blown up into fresh doubts about the survival of the euro itself.

John Makin of the American Enterprise Institute touches on the important question of sanity: "Why would Europe's leaders that have spent trillions of Euros protecting the confidence in Europe's shaky banks risk a collapse for the sake of saving €10 billion in aid to Cyprus?"

Answer: German Chancellor Angela Merkel faces an election in September and bailouts are not popular with German voters.
German Chancellor Angela Merkel

Policy makers will always seem idiots and knaves if the political constraints on their actions are ignored. This makes life easy for pundits but for real wisdom Thomas Sargent, in words spoken as he collected his 2011 Nobel Prize, is your man.

Mr. Sargent spoke at the time of the U.S. need for good long-run reform plans that didn't impose severe fiscal stringency in the short-run, but he might as well have been speaking of Europe too.

"These are not very original ideas," he added. "I think 80% of the economics profession would agree. The problem is to figure out how in the real world to get these things done."

Ah, the real world. The challenge has been hard enough for U.S. institutions, with their serial production of fiscal cliffs. Europe's institutions have been catastrophically incompetent. Europe's institutions have consistently turned wise advice on its head, delivering short-term fiscal stringency and no long-run reform. This ought to tell us something.

There are no "Europeans." The problems of sovereignty and democracy intrude. Germans don't like bailing out Greeks etc., and Greeks etc. don't like taking orders from Germans. Plus, most European countries are parliamentary societies. To embark on a policy not supported by domestic voters is to risk a "no confidence" vote followed by a new government committed, by definition, to blowing up whatever is the latest scheme to save the euro.

The result has been Merkelism, frantic improvisation aimed at keeping the euro zone together for another day, with the Cyprus improvisation being an especially ignominious example. By the lights of almost everyone involved, at least when talking out of the hearing of domestic voters, the policies followed never even pretended to be optimal or desirable. They were the best that could pass political muster.

It just so happens that two economists, Luigi Zingales and Paola Sapienza, have lately asked why the gap is so wide between what economists think is good policy and what the public will support. Their surveys find that the more economists agree with each other, the more they're out of sync with the general public.

It's easy to imagine reasons. Voters may believe the optimal policy is suboptimal for them. The problem may be the visible versus the invisible: Jobs that would be lost through useful reforms are easier to identify than jobs that might eventually be gained. Optimal policy may offend against justice: Why should hardworking Germans bail out Russian tax evaders?

But, as authors Zingales and Sapienza conclude, the generalizations that appeal to economists simply are not very helpful to politicians when they go about the job of trying to reconcile the demands of the electorate.

The argument for limited government is really an argument for not overburdening politicians. Leave as much as possible to the market, to the law of contracts, to the courts. Don't pile up on politicians more and more impossible choices they have to make on our behalf.

Though it won't please some to hear it, this is why the euro has been a failure. France's government is 56% of GDP. Italy's is 50%. Germany's is 47%. Greece's is 50%. It requires too much of politics.

Look at Europe's paralysis, in its hour of need, to exploit the shale bounty at its feet because Europe's mineral rights are controlled not by landowners but by politicians.

Look at Europe's inability to cut spending, so governments raise taxes instead, driving their private sectors deeper into depression. Look at its vast opportunity to make its workers competitive through "fiscal devaluation"—not by cutting wages but by cutting wage taxes and costly labor regulations.

Yet governments have been unable to move.

Most Europeans, even today, probably would be better off if over-indebted governments were allowed to default in accordance with the relevant bankruptcy precepts. But it can't happen in societies so trained to look to politicians to overrule the laws of arithmetic and economics whenever those laws are inconvenient."

Summing Up

Government officials and politics combine to give us the lowest common denominator in governance on a large scale.

Not good government and not efficient or effective government. And certainly not government which prioritizes individual freedoms.

The need for small and limited government is both a practical and moral issue for free people.

Freedom necessarily mandates that individual 'self rule' must always be the top priority of self governing societies and receive higher priority than the collectivism of a government knows best approach.

Over the next several years, Cyprus doesn't have a chance, and longer term the Euro probably doesn't either.

Limited government is always the best form of government. So is self government.

The Founding Fathers had it right.

That's all there is to it.

Thanks. Bob,

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