The Role of the State: the Couchiching Panel
This past Friday at Couchiching, Tom Flanagan, Armine Yalnizyan and I discussed what the financial meltdown can tell us about the role of the state. Better than my trying to capture the nuance of each of the speakers, and recognizing my predisposition to favour some views at the expense of others, I strongly urge you to check out the videos made available here on the Couchiching site. But a bit of a summary is in order.
Tom described the last 30 years as “a party”, a period of great optimism in which “a rising tide lifted all boats”: market friendly policies of reduced taxes, deregulation and privatization created great prosperity, lifted many out of poverty and brought down “the wall” and the communist alternative it represented. For Tom, this is the right path and we should get back on it as quickly as possible. He cited Adam Smith on the role of the state to protect us from external threat, to create the lawful conditions for a market, and to deliver public goods that the market cannot or will not deliver, but all of this within the framework of limiting government as much as possible so as not to interfere with the workings of the market.
The crisis was, according to Tom, just part of the inevitable waxing and waning of market economies, made worse by government interference. In Canada, said Tom, we did pretty well because our governments did not try to promote easier mortgages and because our fiscal situation was pretty good. He added that he was pleased that our government had a restrained and time-limited stimulus to match the relatively smaller size of our crisis.
Armine started by setting out government’s fundamental role of protection of its citizens not only from external threats but from internal threats as well. Not surprisingly, she did not share Tom’s views of the past thirty years or of the crisis. This was no routine recession; in the opening six months job losses were greater than we had seen for seventy years and those thrown out of work had a harder time than in the past to find the income and social support they needed. While Canadians may have not gone quite as far as our neighbours towards free market liberalism, we have been moving in the same direction and that means, despite the recovery of corporate profits, the triggers of the crisis remain: we are over-leveraged including huge household debt, we have weak and ineffective regulation and the fraying of our social safety net is shifting risk to ordinary citizens.
Most important, she argued, we do not have the foundations in place to manage the economy for the betterment of all Canadians especially given the challenges of an aging population, climate change and growing inequality. In the face of these challenges, she expressed concern about the government’s short sightedness and the contradictions in its focus simultaneously on austerity and increased military and security spending.
I talked a bit about the politics of crisis. Crudely speaking, the financial meltdown was caused by greed and deregulation, not by government intervention, as Tom suggests, but by government’s blind faith in the efficient market. As many have said, crises open up the possibility of fundamental change inconceivable in normal times but that’s highly threatening to those who benefit most from the current arrangements. In the U.S, the embattled government continues to drive for change in the face of relentless opposition and it’s not at all clear how this will all play out. The dominant Canadian narrative, however, is quite different, much quieter: the consensus here seems to be that as we did less badly than our friends, there’s no need for big change, and we need focus primarily on fiscal consolidation.
We did less badly in large measure because we had never fully swallowed the “Washington consensus” pro-market, anti-government strategy, at least not with respect to our financial institutions. Past governments resisted the constant pressure to open up our banks to mergers and foreign capital. And yes our fiscal performance made us more resilient but here again this is because at least in the 90s we rejected the Republicans’ “supply side” argument that tax cuts are self-financing, allowing Republican politicians to offer voters a mythical free lunch, low taxes with, supposedly, no consequences on services or debt. This may be good politics but it is lousy economics, witness the soaring debt and erosion of services.
We have been moving in the same direction as the U.S. – away from government and towards the market through ever lower taxes and deregulation – but more slowly and cautiously and so our crisis was smaller. The U.S. is debating a shift in direction. Here, we drift. The combination of drift, complacency and fiscal consolidation, however, does not add up to a plan for the future. How will continued erosion of the state help us address the challenges of a hyper-competitive global economy, huge provincial and household debt, an aging population, weak productivity, climate change and environmental degradation, and a widening gap between rich and poor, with too many Canadians being excluded from productive lives?
So what does all this say about the role of the state? Before we can answer the question we have to decide what kind of Canada we want. If only the deficit is important, you’ll have one view. If social cohesion and social justice are important, you’ll have a different view. Martin Wolf, in yesterday’s Financial Times, sets out the issues as I wish I had. I would have happily stolen from his piece had he had the foresight to publish it earlier. Let me end with some key excerpts:
The core purpose of the state is protection. This view would be shared by everybody, except anarchists, who believe that the protective role of the state is unnecessary or, more precisely, that people can rely on purely voluntary arrangements. Most people accept that protection against predators, both external and internal, is a natural monopoly: the presence of more than one such organisation within a given territory is a recipe for unbridled lawlessness, civil war, or both.
Contemporary Somalia shows the horrors that can befall a stateless society. Yet horrors can also befall a society with an over-mighty state. It is evident, because it is the story of post-tribal humanity that the powers of the state can be abused for the benefit of those who control it….
There exists a strand in classical liberal or, in contemporary US parlance, libertarian thought which believes the answer is to define the role of the state so narrowly and the rights of individuals so broadly that many political choices (the income tax or universal health care, for example) would be ruled out a priori….
I view this as a hopeless strategy, both intellectually and politically….
So what ought the protective role of the state to include? Again, in such a discussion, classical liberals would argue for the “night-watchman” role. The government’s responsibilities are limited to protecting individuals from coercion, fraud and theft and to defending the country from foreign aggression.
Yet once one has accepted the legitimacy of using coercion (taxation) to provide the goods listed above, there is no reason in principle why one should not accept it for the provision of other goods that cannot be provided as well, or at all, by non-political means.
Those other measures would include addressing a range of externalities (e.g. pollution), providing information and supplying insurance against otherwise uninsurable risks, such as unemployment, spousal abandonment and so forth. The subsidisation or public provision of childcare and education is a way to promote equality of opportunity. The subsidisation or public provision of health insurance is a way to preserve life, unquestionably one of the purposes of the state. Safety standards are a way to protect people against the carelessness or malevolence of others or (more controversially) themselves. All these, then, are legitimate protective measures. The more complex the society and economy, the greater the range of the protections that will be sought….
The ancient Athenians called someone who had a purely private life “idiotes”. This is, of course, the origin of our word “idiot”. Individual liberty does indeed matter. But it is not the only thing that matters. The market is a remarkable social institution. But it is far from perfect. Democratic politics can be destructive. But it is much better than the alternatives. Each of us has an obligation, as a citizen, to make politics work as well as he (or she) can and to embrace the debate over a wide range of difficult choices that this entails.
Individual freedom matters but it is not the only thing. Fiscal prudence matters too but it cannot be the only thing. As for Tom’s contention that the last thirty years were the good times, yes, a rising tide may lift all boats, but far too many people were not allowed aboard and the tide waters were polluted. A strong economy needs a cohesive society. A strong market needs a strong state, seeking to manage the economy for the well-being of all its citizens and looking out for those most in need. The best way to protect people from exploitation by the state is to have independent courts and strong democratic institutions, to strengthen the relationship between government and civil society, to make parliament work, to promote greater engagement by citizens who are given the information necessary to hold their government to account, to have an electoral system that ensures that our votes count, to give public service the room and trust it needs to reinvent itself as it has in the past.
Erosion of the state through drift or design reduces choice and undermines freedom. Letting this happen in barely perceptible increments, without a real debate about the Canada we want and the role of the state, undermines democracy. Rather than sterile ideological debates about big government or small government, we should be turning our attention to making government work better as measured not just by GDP but by the well-being of all its citizens and the health of the commons. As Wolf says, the purpose and role of the state – that’s what our politics should be all about.