Harmful attempts to plan and regulate the global economy

Over-taxation, over-regulation and misallocation of resources have been hurting economic growth, innovation and competitiveness in many parts of the world, including Europe. Now, officials are discussing novel ways to introduce such disastrous practices on the global level.

A cartoon that shows the devastating tools of mismanagement by governments: taxes, regulations and subsidies
Governments’ traditional economic mismanagement may be elevated to an all new, global level. © GIS

In a nutshell

  • Governments spend too much and overregulate the economy
  • In their never-ending quest for more revenue, they now want to impose global taxation rules 
  • Global centralization would lead to global mismanagement

Recently, a G20 summit of finance ministers was held in Riyadh, Saudi Arabia. The main concern of the summiteers was not the condition of the global economy, but two other issues: taxing the digital economy and taming digital and cryptocurrencies with overarching global regulations.

In a famous and, unfortunately, still pertinent quip, late United States President Ronald Reagan described the underlying problem this way: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Governments’ excessive spending and oversized bureaucracies have created staggering public deficits. The unduly elevated role of public administration sucks talent away from the productive sectors of manufacturing and services into deadweight bureaucratic overhead. Lately, one can hardly avoid the impression that many regulations serve to justify public jobs rather than aid society. This amounts to a massive burden on the economy, especially in Europe, vastly contributing to the declining competitiveness on the continent. 

How systems degenerate

Public administration should be a service organization for the citizen. Any good service organization should be lean, efficient and cost-effective. Taxes should be fair compensation for the services rendered, not a system for feeding an increasingly greedy administration and its redistribution schemes. In fact, social redistribution has degenerated to a tool used to satisfy the clientele of political parties.

It is a false cure that promises economic and financial stability with no effort.

The burden of taxes and contributions to welfare systems that offer declining benefits at increasing costs pose a growing problem. Citizens have to contribute to public retirement schemes and medical care, even though mathematics shows they will not receive proportional benefits in the future.

 It has been proven empirically that high public debt harms economic growth, in quality and quantity. But enter Modern Monetary Theory, or MMT, developed and supported by some intrepid economists and which has gained traction lately in academia and among politicians. MMT posits that high public debt is not damaging and prescribes still more public spending as a remedy to the economic and social ills of today. This is intellectual fraud, an equivalent of a Ponzi scheme or Bernard Madoff’s criminal enterprise in the public policy realm – a false cure that promises economic and financial stability with no effort, reform or sacrifice. The theory lets  profligate governments off the hook, so, naturally, they are bent to continue business as usual. The price to pay for this fallacy will only grow.

Bogeys and scapegoats

The main reason – at least in Europe – for the economy’s sluggishness is overregulation, which kills efficiency and innovation. Also, businesses must carry hefty reporting and compliance costs to comply with the ballooning regulations. The main pretext for this governmental abuse is “consumer protection.” The result is a hypocritical feel-good atmosphere coupled with economic stagnation.

A typical case is genetically modified organisms, or GMOs. The issue is complicated, but instead of allowing a scientific debate on what is positive and what could be damaging, the solution in Europe has been to ban the technology altogether. Worse, even technologies improving resistance in plants, which are not genetic modifications and reduce the need for the use of herbicides and pesticides, have been condemned and thrown in the same bin as GMOs.

This eliminates healthy regional competition and invites a cozy – or rather crony – global mediocrity.

Unfortunately, there is no shortage of convenient scapegoats to support the claims that our economic problems are due to something other than fiscal irresponsibility and populist economic and regulatory policies. Brexit and the U.S.-China “trade war” are cast in the role of the main culprits. This allows governments to duck their responsibility for the problems mentioned above and kick the can down the road.

Knee-jerk policies

Since the time of Ronald Reagan, governments’ approach to the economy remains unchanged. Only the packaging is different.

“If it moves, tax it.” Unfortunately, the global economy does not move much. However, its digital part, especially the American giants like Microsoft, Alphabet, Amazon, Facebook, Apple, etc., is developing robustly. “Great, let’s tax them,” goes the logic. The problem has been that the targeted firms are denizens of the cyber world, so to ensnare them, national fiscal restrictions need to be elevated to a global level. 

This eliminates healthy regional competition and invites a cozy – or rather crony – global mediocrity. The plans for digital tax (strongly supported by France and a priority for Germany’s Minister of Finance Olaf Scholz) have all the ingredients necessary for stunting the growth of the digital economy in Europe. OECD Secretary-General Angel Gurria argues that global regulation is necessary, because differences in taxation could cause trade wars. It looks like in the push for central planning, Mr. Gurria confuses a healthy competition – which limits excessive taxes – with a cause of trade conflicts. 

“If it keeps moving, regulate it.” Because of overregulation and lack of innovation in the finance industry, combined with dubious monetary policies, the market is looking for alternative, more efficient and trustworthy, payment systems. These alternatives are no longer based on the central bank fiat money. Digital currencies issued by businesses are one case: they are backed either by central bank money or use a basket of central bank money as a reference. The other group is cryptocurrencies, where the blockchain technology guarantees reliability. This is still a small sector, but it moves. “So, regulate it!” The global political and administrative cartel does not want to lose its privileged position

“If it stops moving, subsidize it.” Governments no longer have enough funds to subsidize. But there is a remedy: printing money. Quantitative easing and central banks’ purchases of sovereign debt amount to subsidizing governments. Low-to-negative interest rates, as well as inflation (even at a low level), are hidden taxes on savers. These days, they are used to push consumption – and even that, with diminishing results. This is also a hidden subsidy.

Making things worse

News from the Riyadh summit is typical. The real problems are ignored, the officials’ ingenuity is focused on how to cover the innovative areas of the economy with new taxes and new regulations.

President Reagan, a common-sense man, saw the shortcomings of governments’ economic policies and also the economic theories. He rightly believed that a healthy economy is based on entrepreneurship, competition and innovation – with little government involvement.

Until recently, the failures of governments were limited to national boundaries. Unfortunately, today’s supranational organizations, such as the G20, G7 and OECD, are pushing bad economic policies to the global level. This will lead to global centralization, which, as history has proven, results in mismanagement.

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