Rethinking Government

A good many Americans, including myself, can commonly be heard complaining about the size of government, the tax burden, mindless regulation, and the burgeoning bureaucracy. At the same time, a student of modern history could readily tell you that growth in government is essentially a modern phenomenon. Until the 1920s the government’s share of GDP (Gross Domestic Product) in most of the world’s industrialized economies was about six percent. From that time on, and particularly since the 1950s, we’ve seen a massive increase in government’s “take” of the GDP, which has increased in some places to as much as 35 to 45 percent. (In Sweden it reached nearly 65 percent, and Sweden almost self-destructed as a result.) Can this insane growth of government be stopped or perhaps even reversed? In my view, the answer is “yes”, but it will require a lot of high level transparency in government, and severe consequences for bad decisions, something nearly unknown in government circles today.

The idea held by government is that money should be spent in accordance with appropriations. The new ideas on government spending are based on, “What do we get in return for our tax dollars?” This has always been considered by private business, but not by governments. The few governments that are asking that question today are showing some interesting results.

Several years ago, New Zealand elected a reform government that apparently took the term “accountability” seriously. Their per capita income in the period prior to the late 1950s was right around number three in the world, slightly behind the United States and Canada. But by 1984, per capita income had sunk to 27th in the world, alongside Portugal and Turkey, the unemployment rate was 11.6 percent, and they had lived with 23 successive years of deficits (sometimes ranging as high as 40 percent of GDP). The debt had grown to 65 percent of GDP, and the government credit ratings were continually being downgraded. Spending was 44 percent of GDP, investment capital was leaving the country in huge quantities, with government controls and micromanagement felt at all levels of the economy. Foreign exchange controls were so severe that a Kiwi couldn’t buy stock in a foreign company without surrendering his citizenship. There were price controls, wage controls, wage freezes, import controls, and massive subsidies to industry to keep them viable. Young people were leaving the country in droves.

When the new government took office it identified three problems: too much spending, too much taxing and too much government. The question was how to cut spending and taxes, and how to diminish government’s role in the economy. The first thing they had to do was to figure out what they’re getting for their tax dollars. With this, they implemented a new policy where money wouldn’t simply be handed to various agencies; instead, there would be a “purchase contract” with the senior executives of those agencies that clearly stated what was expected in return for the money. And with that kind of incentive, agency heads (like CEOs in the private sector) made certain that the next tier of employees had very clear objectives that they were expected to achieve.

First they asked every agency for policy advice. That advice was meant to produce a debate between the cabinet and agency heads about how to achieve goals like reducing hunger and homelessness. This didn’t mean how government could feed or house more people—that’s not important. What’s important is the extent to which hunger and homelessness are actually reduced. They made it clear that it’s not how many people are on welfare, but how many people get off welfare and into independent living. As they started through this process they also asked some questions of the agencies. The first was “What are you doing?” and the second was, “What should you be doing?” Based on the answers, they then said, “Eliminate what you shouldn’t be doing”—that is, if you are doing something that clearly is not a responsibility of the government, stop doing it. Then they asked: “Who should be paying—the taxpayer, the user, the consumer, or the industry?” This because, in many instances the taxpayers were subsidizing things that did not benefit them. And if you take the cost of services away from actual consumers and users, you promote overuse and devalue whatever it is you’re doing.

When they started with the Department of Transportation, it had 5,600 employees. When they finished, it had 53. The Forest Service had 17,000 employees, and when finished had 17. The Ministry of Works had 28,000 employees, and wound up with one! In this last case most of what the department did was construction and engineering, and there are plenty of people who can do that without government involvement. But, if you say, “You eliminated all those jobs!” well, they didn’t. The government stopped hiring people to fill those positions, but those jobs didn’t evaporate, they were privatized. Forestry workers some months after they’d lost their government jobs were quite happy. They were earning much more than what they used to earn, and had learned that they could accomplish much more than they had previously. The same lesson applies to other government jobs. They achieved a reduction of 66 percent in the size of government, measured by the number of employees. The government’s share of GDP dropped from 44 to 27 percent. Now they use most of the surplus to pay off debt, and debt went from 63 percent down to 17 percent of GDP.

When the Kiwi’s looked at their tax system, they found it extremely complicated (somewhat like the US tax system). They decided to have only two mechanisms for taxation, an income tax and a sales tax, and to lower the rates as much as they could. The high income tax rate dropped from 66 to 33 percent, and that became a flat rate for high-income earners. Then they brought the low end down from 38 to 19 percent, and set that as the flat rate for low-income earners. Finally they set a 10 percent sales tax, and eliminated all other taxes. The system was designed to produce the same revenue as previously, but what actually happened was that they got 20 percent more revenue than before, as they hadn’t allowed for increased voluntary compliance. If tax rates are low, it seems that taxpayers don’t employ high priced lawyers and accountants to find loopholes.

What about government regulations? Regulatory power is usually delegated to non-elected officials who then limit the people’s liberties, with no accountability. Regulations are also extremely difficult to eliminate once they’re in place. But the Kiwi’s simply rewrote the laws on which those regulations were based, effectively repealing the old, which meant that all existing regulations died, having no further legal basis.

I say “Good for the New Zealanders”! Apparently they could get a less intrusive and less expensive government, rather painlessly. If Americans are so smart, why can’t we do that?