Sunday, 17 July 2011

Response To Editorial On Coming "Budget Crisis"

Sunday's unsigned editorial in the Taipei Times takes a look at the government's budget cuts for next year's public works projects in Taiwan:
"The announcement by the Council for Economic Planning and Development on Monday that it approved a NT$216.6 billion (US$7.5 billion) budget for major public construction projects next year is an issue that deserves far more attention than it has so far received.

That number represents the lowest level in 10 years — and therefore a lower public spending contribution to the nation’s economy."
There seem to be two fallacies intertwined here: the first is the implicit premise that public goods can only be, or ought to be, provided by government whilst the second seems to be the Keynesian proposition that government spending per se is somehow a "contribution" to the economy. Here they are expressed perhaps a little more clearly:
"The importance of investing in infrastructure is self-evident: It creates jobs and drives up domestic investment in the short term, while developing opportunities for economic growth in the long term."
On the public goods problem, there are several reasons to reject the proposition that it can only be solved by government. First, there is the non-aggression principle: government provision of a public good also necessitates a "public bad", i.e. the forcible extraction of value via taxation and the wider market consequences this must necessarily have. Everybody will make his or her own judgement as to whether the public good cancels out the public bad, but nobody should be under any delusion that there is anything like free choice in the matter. Second, there are numerous cases across several industries of private production of public goods occuring due to producers figuring out ways to restructure the incentives available to them (e.g. the use of advertising in radio). Third, when governments spend money to provide public goods they may thereby deincentivize private production of the good in the economic sense (i.e. a private producer would not then be able to profit from finding a solution to producing it, e.g. toll-roads) and perhaps also in the legal sense (i.e. the government may legally prohibit private production of this public good, e.g. juridicial and policing services).

The Keynesian proposition that government spending per se somehow "contributes" to the economy is a fallacy on several counts. First, government spending can only "contribute" to the economy if the money is first forcibly extracted from the people who make up that economy - whether by current or future taxation. Since there is no sure way to know how that money would otherwise have been spent had it remained in private hands rather than stolen by the government, any empirical comparison of the distributed consequences is obviously mute. It is the classic example of Bastiat's "broken window" fallacy, or of costs that are "unseen". Second, the efficiency of government spending tends to be derailed to a considerable extent by the attentions of rent-seeking groups - particularly in a democracy. In Taiwan for example, the construction and maintenance of roads tends to be particularly poor not due to a lack of technical knowledge or lack of resources, but because existing regulations governing the material composition and procedural construction of roads tends to benefit particular suppliers and contractors.
"If the budget cut were to reflect an effort to implement conservative and prudent policies while maintaining fiscal discipline, then that would constitute a step in right direction, but the government needs to proceed cautiously.

However, if the true reason for such a big cut in the public works budget is that the government needs to fund its pay hike for civil servants amid rising public debt and declining tax revenues, the obvious answer would be to cancel the pay raise for civil servants and increase taxes on the wealthy."
It might well be the case that the cash is being redirected to fund lavish benefits for civil servants, which, we must remember, are themselves a rent-seeking group whom the governing administration must reward in order either to maintain (KMT) or curry (DPP) favour with them at the ballot box. Yet raising taxes on the wealthy is a stupidity on several counts: in the first place it is simply another repetition of the State's predatory reflex; it will likely obviate the need for even further spending cuts and a greater impetus toward the liberalization of certain markets from State control (e.g. education and healthcare); it will do nothing to reduce the rent-seeking power and well known political bias of the beurobots in the civil service; and finally, being exposed to a government intent on tax hikes may act as a general disincentive to all manner of prospective private investments.
"The government could take different approaches to fill the funding gap... but a fundamental solution to the problem ultimately depends on the much needed reforms of the nation’s distorted tax and fiscal system — which needs real action now, not cosmetic change designed to cover up political imperatives."
Advocating tax increases on the wealthy does not amount to a "fundamental solution"; rather, it would amount only to a retraining of the reach and grasp of the State's predatory reflex - a retraining that will simply perpetuate the problem of what conservatives call "fiscal irresponsibility".

A "fundamental" solution would be to stop feeding the growth of government.


  1. I'm going to take a wild guess here, Mike, and say they probably won't come anywhere near publishing this. That takes nothing away from the merit of the overall argument. Indeed, the merit of the overall argument is the exact reason why it will not be published.

  2. Actually Nathan, the reason it will not be published is because I have not sent it to them!

    If I was to send an editorial type piece it would be more substantial and detailed than this. For instance, of the public works budget of NT$216 billion mentioned, only 69% of where this money will go is accounted for in the article:

    "Of the NT$216.6 billion budget for next year, transportation infrastructure projects account for about 53 percent, followed by agricultural projects at 9.3 percent and flood control and drainage plans at 6.7 percent, according to the council’s figures."

    Where is the other 31% going to?

    In any case once I got hold of the details of the transport projects, I would imagine that much of them would turn out to include repairs to mountain roads serving remote little villages out in the counties.

    Could such roads (and their maintenance) be privately produced? I'm not sure, because although in some instances such villages happen to be quite close to quarries meaning that the large construction companies could be expected to foot some of the bill for the roads, in other cases this is not so and in those cases the village economies are so small that there is likely no way they could possibly pay for anything more than a dirt track.

    It's also not just a case of building the mere road - in order not to make it a wasted effort, the road construction must be complemented by the construction and maintenance of drainage systems, river weirs and other measures to mitigate wind erosion of cliff faces and mountainsides. To produce these things privately requires a lot more input than a tiny little economy of mango and taro growers can possibly afford on their own. Those facts don't necessarily mean such roads could not be privately produced, but they do render the argument that they could be rather more difficult to make.

  3. "Actually Nathan, the reason it will not be published is because I have not sent it to them!"

    --Ah, yes. That, too. Apologies for assuming a response as a response to the publisher.

    There certainly are problems with private road construction and maintenance, especially when it comes to roads in rural areas. Then again, the same issue holds true for publicly funded projects. I don't see any way around it unless we do our own bit of "great [socioeconomic] leveling"--which will cause other, and probably even greater, economic, social, and political problems. Then again, much of the romanticization of farming has far more to do with its traditional roots and almost nothing at all to do with its economic viability. But I suppose that's beside the point, although producers and sellers of such agricultural products could also arguably see the importance of keeping transportation to rural areas on the up and up. Moreover, the above romanticism might encourage private charity-like contributions in order to keep such communities alive. I do realize both of these may be stretches, but neither is more of a stretch than the continuous push for agricultural subsidies and any form of justification for such subsidies on their "economic merit."

  4. "I don't see any way around it..."

    Well you or I might not, but that's not to say somebody else can't. If the State was to cut off adequate funding of roads into the mountainous areas for the long term, then one obvious response people might choose is to move down into the lowlands.

    However, it's unlikely that the government would do that, not least because they don't want to repeat the Typhoon Morakot experience all over again, but also because the construction industry requires a viable transport network into the mountains. I sometimes wonder about the viability of alternative transport means such as hybrid-airships (now that helium is cheap). Of course costs (including insurance costs) might be the chief problem and at best they could only ever be a partial answer, but the redevelopment of the zeppelin into something capable of heavy lifting could result in all sorts of interesting consequences.


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